SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Rule 13e-3 Transaction Statement
Amendment No. 2
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934
and Rule 13e-3 (ss.240.13e-3) thereunder)
Tubby's, Inc.
- -----------------------------------------------------------------------------
Name of issuer
Tubby's, Inc., R Corp, Robert M. Paganes, Peter T. Paganes, Vincent J. Tatone
- -----------------------------------------------------------------------------
Name of Person(s) Filing Statement
Common Stock Par Value $0.01
- -----------------------------------------------------------------------------
Title of Class of Securities
898551205
- -----------------------------------------------------------------------------
CUSIP Number of Class of Securities
Kenneth Lango, Bodman, Longley & Dahling LLP,
755 West Big Beaver, Suite 2020, Troy, Michigan 48084,
- -----------------------------------------------------------------------------
(248) 362-2110
- -----------------------------------------------------------------------------
Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement.
Copies to: Vincent J. Tatone, 6029 E. Fourteen Mile Road,
Sterling Heights, MI 48312
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of
1933.
c. [ ] A tender offer
d. [ ] None of the above
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [X]
Calculation of Filing Fee
Transaction Amount: $2,290,131.00
Filing Fee: $458.03
Valuation*
* The filing fee was determined by calculating one-fiftieth of one
percent of the proposed cash payment to shareholders. The
transaction contemplates the payment of $1.10 per share in exchange
for 2,081,938 shares which equals $2,290,131.80.
This Rule 13E-3 Transaction Statement relates to a proposed merger
providing for the merger of R Corp, a Michigan corporation, with Tubby's,
Inc., a New Jersey corporation, with Tubby's to be the surviving corporation.
The principal aspect of the proposed merger is that all shareholders, other
than three current members of Tubby's management who also constitute a
majority of its Board of Directors and all of the shareholders of R Corp,
will receive cash in exchange for their shares at the merger price of $1.10
per share.
The following cross-reference sheet is being supplied pursuant to
General Instruction F to Schedule 13E-3 and shows the location in the
Preliminary Proxy Statement, attached as Exhibit (d), and filed by Tubby's
with the Securities and Exchange Commission on the date hereof of the
information required to be included in response to the items of this
Statement. The information in the Preliminary Proxy Statement, including all
Appendixes thereto, is hereby expressly incorporated by reference and the
responses to each item are qualified in their entirety by the provisions of
the Preliminary Proxy Statement.
CROSS-REFERENCE SHEET
WHERE LOCATED IN
ITEM IN SCHEDULE 13E-3 PRELIMINARY PROXY STATEMENT
- ---------------------- ---------------------------
Item 1 (a)...................... "Introduction"
Item 1 (b)...................... "Introduction"
Item 1 (c)...................... "Market Prices of Tubby's Common Stock"
Item 1 (d)...................... "Market Prices of Tubby's Common Stock"
Item 1 (e)...................... *
Item 1 (f)...................... *
Item 2 ......................... "Introduction"
Item 2 (a) - (g)................ *
Item 3 (a)...................... "Certain Relationships and Related
Transactions of Tubby's and R Corp"
Item 3 (b)...................... "Previous Contacts Between Tubby's
and R Corp"
Item 4 (a) - (b)................ "Description of the Transaction"
Item 5 (a) - (c)................ *
Item 5 (d) - (g)................ "Description of the Transaction"
Item 6 (a) - (d) ............... "Sources and Amounts of Funds and Other
Consideration"
Item 7 (a) - (d)................ "Purposes, Alternatives, Reasons and
Effects"
Item 8 (a) - (b)................ "Fairness of the Transaction"
Reports, Opinion, Appraisals and
Certain Negotiations
Item 9 (a) - (c)................ "Reports, Opinions, Appraisals and
Certain Negotiations"
Item 10 (a)..................... "Security Ownership of Certain Beneficial
Owners and Management"
Item 10 (b)..................... *
Item 11......................... "Interest of Certain Persons in the
Merger"
Item 12 (a)..................... "Vote Required"
Item 12 (b)..................... *
Item 13 (a)..................... "Dissenter's Appraisal Rights"
Item 13 (b) - (c)............... *
Item 14 (a)..................... "Consolidated Selected Financial
Data of Tubby's, Inc.";
"Management's Discussion and
Analysis of Financial Condition and
Results of Operations of Tubby's";
"Financial Statements"
Item 14 (b)..................... *
Item 15......................... *
Item 16......................... *
Item 17 (a)..................... "Sources and Amounts of Funds and Other
Consideration"
Item 17 (b)..................... "Fairness of the Transaction"; "Reports,
Opinions, Appraisals and
Certain Negotiations"
Item 17 (c) .................... "Interests of Certain Persons in the
Merger"
Item 17 (d)..................... "Preliminary Proxy Statement"
* There is no applicable item contained in the Preliminary Proxy Statement.
Item 1. Issuer and Class of Security Subject to the Transaction.
(a) Tubby's, Inc., 6029 E. Fourteen Mile Road, Sterling Heights,
MI 48312.
(b) Common Stock, par value $0.01, 2,584,114 shares
outstanding, held by approximately 7,000 holders of record
at July 30, 1999.
(c) Trades were reported on the NASDAQ Small Cap Market
(symbol: TUBY) until May 5, 1999. On that date, its shares
were delisted for failure to maintain a $1.00 bid price and
trades were automatically reported thereafter on the Over
the Counter Bulletin Board. The information set forth in
the Preliminary Proxy Statement in "Market prices of
Tubby's Common Stock" is hereby incorporated by reference.
(d) The Information set forth in the Preliminary Proxy
Statement in "Market Prices of Tubby's Common Stock" is
hereby incorporated by reference.
(e) Neither Tubby's nor an affiliate has made an underwritten
public offering of securities during the past three years.
(f) Neither Tubby's nor an affiliate has purchased any Tubby's
common stock since the commencement of Tubby's second full
fiscal year proceeding the date of this schedule.
Item 2. Identity and Background
(a)-(b) Tubby's, Inc., is the issuer of the common stock which is the
subject of this transaction. R Corp is a Michigan corporation
whose principal business is limited to participating in the
subject of this transaction, Robert M. Paganes, Peter T.
Paganes, and Vincent J. Tatone are individuals (collectively
the "Filing Persons"). The business address of each of the
Filing Persons is: 6029 E. Fourteen Mile Road, Sterling
Heights, MI 48312.
(c)-(d) Robert M. Paganes is the President and Chief Executive
Officer of Tubby's; he has been the President of Tubby's
continuously since June 12, 1994 and has been its Chief
Executive Officer since August 10, 1994. Peter T. Paganes
is the Chairman and Executive Vice President of Tubby's; he
has continuously held those positions since June 12, 1994.
Vincent J. Tatone is the Secretary and General Counsel of
Tubby's. He has been General Counsel since April 1, 1994
and its Secretary since August 10, 1994.
(e)-(f) None of the Filing Persons have been convicted in a
criminal proceeding (excluding traffic violations or
similar misdemeanors) nor have any of them been a party to
a civil proceeding as a result of which any of them were
subject to a judgment, decree or final order
enjoining further violations of, or prohibiting activities
subject to, federal or state securities laws or finding any
violation of such laws.
(g) All of the Filing Persons are United States citizens.
Item 3. Past Contacts, Transactions or Negotiations
(a), (1)(2) The information set forth in the Preliminary Proxy
Statement in "Certain Relationships and Related
Transactions of Tubby's and R Corp" is hereby incorporated
by reference.
(b) The information set forth in the Preliminary Proxy
Statement in "Interest of Certain Persons in the Merger"
and "Previous Contacts Between Tubby's, Interfoods of
America, Inc., and R Corp" is hereby incorporated by
reference
Item 4. Terms of the Transaction.
(a) - (b) The information set forth in the Preliminary Proxy
Statement in "Description of the Transaction" is hereby
incorporated by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a) - (c) These subsections do not apply.
(d) - (g) If the Merger is approved by its shareholders, Tubby's and the
individual Filing Persons will incur both long term and short
term indebtedness which will be used to complete the Merger;
The information set forth in the Preliminary Proxy Statement in
"Sources and Amounts of Funds and Other Consideration" is
hereby incorporated by reference. Also, Tubby's will terminate
its registration pursuant to Section 12(g)(4) of the Act and
will no longer be a reporting company pursuant to Section 15(d)
of the Act. It will continue to operate but will do so as a
closely held private company with only three shareholders. The
information set forth in the Preliminary Proxy Statement in
"Description of the Transaction" is hereby incorporated by
reference.
Item 6. Source and Amounts of Funds and Other Consideration.
(a) - (d) The information set forth in the Preliminary Proxy
Statement in "Sources and Amounts of Funds and Other
Consideration" is hereby incorporated by reference.
Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) - (d) The information set forth in the Preliminary Proxy
Statement in "Purposes, Alternatives, Reasons and Effects"
is hereby incorporated by reference.
Item 8. Fairness of the Transaction.
(a) - (e) The information set forth in the Preliminary Proxy
Statement in "Fairness of the Transaction" is hereby
incorporated by reference.
(f) Not applicable.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a) - (c) The information set forth in the Preliminary Proxy
Statement in "Reports, Opinions, Appraisals and Certain
Negotiations" is hereby incorporated by reference.
Item 10. Interest in Securities of the Issuer.
(a) The information set forth in the Preliminary Proxy Statement in
"Security Ownership of Certain Beneficial Owners and
Management" is hereby incorporated by reference.
(b) Not applicable.
Item 11. Contracts, Arrangements or Understandings with Respect to the
Issuer's Securities.
The information set forth in the Preliminary Proxy Statement in
"Interest of Certain Persons in the Merger" is hereby incorporated by
reference.
Item 12. Present Intention and Recommendation of Certain Persons with
Regard to the Transaction.
(a) The information set forth in the Preliminary Proxy Statement in
"Vote Required" is hereby incorporated by reference.
(b) No recommendation has been made by the Directors and/or
Officers of Tubby's in their individual capacities. The Board
of Directors of Tubby's is recommending that the security
holders approve the merger.
Item 13. Other Provision of the Transaction.
(a) The information set forth in the Preliminary Proxy Statement in
"Dissenter's Appraisal Rights" is hereby incorporated by
reference.
(b) - (c) These subparagraphs of Item 13 do not apply.
Item 14. Financial Information.
(a) The information set forth in the Preliminary Proxy Statement in
"Consolidated Selected Financial Data of Tubby's, Inc.,"
"Management's Discussion and Analysis of Financial Condition
and Results of Operations of Tubby's," and "Financial
Statements," is hereby incorporated by reference.
(b) Pro forma data disclosing the effect of the merger under this
paragraph is not material.
Item 15. Persons and Assets Employed, Retained or Utilized.
This item does not apply.
Item 16. Additional Information.
This item does not apply.
Item 17. Material to be Filed as Exhibits.
Tubby's is furnishing the following exhibits:
(a) A copy of a loan commitment from Comerica Bank regarding the
loans referred to in the answer to Item 6;
(b) - (1) A copy of the valuation report prepared by Stout, Risuis, Ross,
Inc., referred to in the answers to Items 8 and 9 of this
schedule;
(b) - (2) A copy of the Fairness Opinion prepared by Stout Risius Ross,
Inc.
(c) A copy of the Stock Purchase, Redemption and Shareholders
Agreement referred to in Tubby's answer to Item 11 of this
schedule.
(d) A copy of the Preliminary Proxy Statement.
(e) - (f) Materials referred to in these paragraphs of Item 17 do not
apply.
SIGNATURE
After due inquiry and to the best of our knowledge and belief, we
certify that the information set forth in this statement is true, complete
and correct.
Tubby's, Inc. R Corp
/s/ Robert M. Paganes /s/ Robert M. Paganes
- --------------------- ---------------------
By: Robert M. Paganes, By: Robert M. Paganes
Its: President and CEO Its: President
/s/ Robert M. Paganes /s/ Peter T. Paganes
- --------------------- --------------------
Robert M. Paganes, Individually Peter T. Paganes, Individually
/s/ Vincent J. Tatone
- ---------------------
Vincent J. Tatone, Individually
Dated: November 1, 1999
EXHIBIT A
LOAN COMMITMENT LETTER FROM COMERICA BANK
[OBJECT OMITTED]
Comerica Bank
August 25, 1999
Mr. Robert M. Paganes
President & CEO
Tubby's, Inc.
6029 East Fourteen Mile Rd.
Sterling Heights, Michigan 48312-5801
Re: Provision of Line of Credit, an installment term loan and an
interest only term loan by Comerica Bank to Tubby's, Inc., a
Michigan corporation an installment term loan to Robert Paganes,
Peggy Paganes, Peter Paganes and Vincent Tatone, jointly and
severally
Dear Mr. Paganes:
Comerica Bank ("Bank") has agreed to provide a Line of Credit an
installment term loan ("Term Loan A") and an interest only term loan ("Term
Loan B") to Tubby's, Inc. ("Company") and an installment term loan to Robert
Paganes, Peggy Paganes, Peter Paganes and Vincent Tatone, jointly and
severally (the "Individual Borrowers") ("Term Loan C", collectively, the Line
of Credit, Term Loan A, Term Loan B and Term Loan C shall constitute the
"Loans") subject to the following terms and conditions:
Borrower:
(a) with respect to the Line of Credit, Term Loan A
and Term Loan B, the Company, and
(b) with respect to Term Loan C, the Individual
Borrowers.
Purpose: The Line of Credit shall be available for working
capital needs of the Company and shall replace the
existing line of credit with Bank. Term Loan A, Term
Loan B and Term Loan C will be available to finance
the Company's and the Individual Borrowers'
respective purchases of Company's capital stock
pursuant to a series of transactions resulting in
Guarantor's owning 100% of the capital stock of
Company.
Line of Credit Amount: Advances and readvances under the Line of Credit
shall be available in aggregate amount at any time
outstanding not to exceed lesser of $400,000 or 75%
of 60 day eligible accounts receivable.
Term Loan A: An amount up to $1,000,000.
Term Loan B: An amount up to $500,000.
Term Loan C: An amount up to $250,000.
Term: The balance under the Line of Credit shall be fully
due on April 1, 2000 (the "Maturity Date"). Term Loan
A shall be due and payable sixty (60) months from the
date of execution and delivery of the promissory note
evidencing Term Loan A (the "Due Date"). Term Loan B
shall be due and payable twenty four (24) months from
the date of execution and delivery of the promissory
note evidencing Term Loan B. Term Loan C shall be due
and payable twelve (12) months from the date of
execution and delivery of the promissory note
evidencing Term Loan C ("Expiration Date").
Interest Rate: The Line of Credit Loan shall bear interest at
one-quarter percent (0.25%) above the announced prime
rate of Bank, as in effect from time to time (the
"Prime Rate"). Term Loan A shall bear interest at
one-quarter percent (0.25%) above the Prime Rate or
at a rate fixed (the "Fixed Rate") determined by
Bank, in Bank's sole discretion, to be set at the
time of closing. Term Loan B shall bear interest at
two percent (2%) above the rate for certificates of
deposit issued by Bank in the amount and for
durations similar to the period to the maturity of
Term Loan B. Term Loan C shall bear interest at
one-quarter percent (0.25%) above the Prime Rate. In
the event the Fixed Rate is applicable to Term Loan
A, prepayments of principal thereon shall only be
made together with payment to Bank of prepayment
compensation determined by Bank, in a manner
consistent with ordinary practices for prepayment of
fixed rate obligations.
Payments: Until the Maturity Date, interest only shall be
payable monthly on the Line of Credit, with the
entire outstanding principal balance plus accrued and
unpaid interest due upon the Maturity Date unless
such Maturity Date is extended in Bank's sole
discretion.
Until its maturity, interest only shall be payable
monthly on Term Loan B, at which time the entire
principle balance and accrued unpaid interest shall
be due and payable.
Until the Due Date, level monthly installments of
principal and interest, each in the amount necessary
to fully amortize the principal amount of Term Loan C
over a period of fifteen (15) years, with such
installments due on the first day of each month,
shall be payable on Term Loan C, with the entire
principal balance then outstanding plus accrued and
unpaid interest due upon the Due Date.
Until the Expiration Date, level monthly installments
of principal and interest, each in the amount
necessary to fully amortized the principal amount of
Term Loan C over a period of three (3) years, with
such installments due on the first day of each month,
shall be payable on Term Loan C, with the entire
principal balance then outstanding plus accrued and
unpaid interest due on the Expiration Date.
Security: The Loans will be evidenced by promissory notes in
the full amount thereof and the Line of Credit, Term
Loan A and Term Loan B shall be secured by:
(a) a first mortgage lien on Company's real property
located at 13680 Pennsylvania, Southgate,
Michigan;
(b) a second mortgage lien on Company's real property
located at 4140 Garfield, Clinton Township,
Michigan;
(c) a first security interest in all machinery,
equipment, general intangibles personal property,
inventory and accounts receivable of Company; and
(d) a first security interest in a $500,000
certificate of deposit made by the Bank to
Borrower.
The Loans will be cross-collateralized and
cross-defaulted with one another and with all other
loans from Bank to Company and or the Individual
Borrowers or any of them.
Guarantors: Robert M. Paganes, Peter T. Paganes and Vincent J.
Tatone shall, jointly and severally, fully guaranty
payment of the Line of Credit, Term Loan A and Term
Loan B provided, however, that the guaranties shall
be limited to $300,000 of the principal amount of
such Loans for each Guarantor, plus interest, costs,
fees and expenses incurred in connection with the
collection or enforcement of such Loans.
The guaranty of Robert M. Paganes, and his
obligations as an Individual Borrower with respect to
Term Loan C, shall be secured by second mortgages on
his real property commonly known as 16206 Millar,
Clinton Township, Michigan, 23440 Michigan Avenue,
Dearborn, Michigan and 6026 Peck, Warren, Michigan.
The guaranty of Peter T. Paganes, and his obligations
as an Individual Borrower with respect to Term Loan
C, shall be secured by first mortgages on his real
property commonly known as 2700 W. 14 Mile Road,
Royal Oak, Michigan and 953 Country Club Drive, St.
Clair Shores, Michigan.
The guaranty of Vincent J. Tatone, and his
obligations as an Individual Borrower with respect to
Term Loan C, shall be secured by a second mortgage on
his real property commonly known as 48805
Presidential, Macomb Township, Michigan and a first
mortgage on Unit _____, Pebble Creek Condominium
Building 10-204, Naples, Florida.
Commitment Fee: Company agrees to pay to Bank a Commitment Fee in the
amount Five Thousand Dollars ($5,000), which fee
shall be deemed earned upon acceptance of this
commitment.
Covenants: The Loans will be subject to the terms of a Letter
Agreement containing customary representations,
warranties and covenants, and procedures for the
administering of Loan advances and will include,
among other things, covenants that the Company shall
provide Bank:
(i) within 90 days after the end of its fiscal year,
CPA reviewed financial statements of Company in
form satisfactory to Bank, for the fiscal year of
Company ended immediately preceding the date for
delivery; and
(ii) by April 30th of each year, personal financial
statements of each Guarantor in form satisfactory
to Bank.
Additionally, the Letter Agreement shall include a
covenant of Company requiring it to reduce the
outstanding principal balance of the Line of Credit
to zero for a period of not less than 30 consecutive
days during each 12 month period that the Line of
Credit is in effect.
Special Conditions: The obligation of Bank to close the Loans is subject
to the General Conditions attached hereto as
Exhibit A.
Please indicate your acceptance of this Commitment by signing in
the space provided below and returning this original copy together with the
$5,000 Commitment Fee within seven (7) business days from the date hereof,
after which period this Commitment shall expire and become null and void.
Sincerely,
COMERICA BANK
By: /s/ Anthony Spanke
------------------------------
Anthony Spanke
Its: Vice President
The undersigned hereby accepts the foregoing Commitment under the terms and
conditions set forth therein.
TUBBY'S, INC.
By: /s/ Robert M. Paganes
-------------------------------
Robert M. Paganes
Its: President and CEO
------------------------------
Dated: August 26, 1999
----------------------------
EXHIBIT A
GENERAL CONDITIONS
1. Bank shall receive, prior to initial closing, the following, in
form and content satisfactory to Bank:
(a) The guarantees and mortgages described in the commitment
letter;
(b) A policy of mortgage title insurance for each mortgaged
property, in the most recent ALTA Standard Loan Policy form, without
exceptions, naming Bank as insured, in the full amount of the Loans, issued
by a title insurance company acceptable to Bank;
(c) A current survey for each mortgaged property certified to
Bank and to the title insurer in conformity with Bank's survey requirements;
(d) Such policies of insurance as Bank may request, including
general liability, builder's risk, flood insurance, worker's compensation and
fire and extended coverage, with mortgagee and loss payable clauses in Bank's
favor;
(e) An opinion of counsel to the Borrower to the effect,
among other things, that the loan documents contemplated hereby will be
valid, binding and enforceable in accordance with their terms, that the
property and the use and occupancy thereof comply with all applicable laws,
and ordinances, rules, regulations and restrictions and such other matters as
Bank shall require. The precise wording of the opinion shall be satisfactory
to Bank's counsel;
(f) Entity documentation for Borrower, including partnership
agreement and certificate, articles of incorporation, bylaws, authorizing
resolutions and certificates of good standing;
(g) Appraisals, or in Bank's sole discretion, a Bank
evaluation, in form and substance acceptable to Bank, showing, without
limitation, values for the properties as follows:
(i) $150,000 for 13680 Pennsylvania, Southgate, Michigan;
(ii) $270,000 for 41400 Garfield, Clinton Township,
Michigan;
(iii) $675,000 for 16206 Millar, Clinton Township, Michigan;
(iv) $260,000 for Unit ____, Pebble Creek Condominium
Building 10-204, Naples, Florida; and
(v) $250,000 for 2700 W. 14 Mile Road, Royal Oak,
Michigan;
(h) Such other documents, instruments, opinions and assurances
as Bank may request.
2. All instruments and documents required hereby or affecting the
real properties, or relating to Borrower's capacity and authority to make the
Loans and execute the loan documents
and such other documents, instruments, opinions or assurances as Bank may
request and all procedures in connection therewith shall be subject to
approval, as to form and substance, by Bank and Bank's counsel. All persons
and entities responsible for the preparation and/or execution of the
instruments specifically required hereby, all obligors thereunder and all
persons and entities responsible for the construction of the improvements
shall be satisfactory to Bank.
3. The Loans shall be made without cost to Bank. Borrower shall
pay all costs incidental to this transaction (whether internal or external)
including Bank's costs for audit fees and related due diligence review of
Borrower, and all expenses relating to this transaction, including appraisal
fees, inspection fees, title company charges, survey fees and attorney fees.
Such costs and expenses shall be paid by Borrower on demand. Bank warrants
that it has not contracted with anyone requiring a payment of a brokerage
commission. Brokerage commissions, if any, shall be payable by the Borrower
or the Guarantor and the acceptance of this commitment shall constitute an
undertaking on the part of the Borrower and the guarantors to indemnify Bank
against claims of brokers arising in connection with the commitment by Bank
to make the Loans or the consummation of the Loans contemplated hereby.
4. The initial closing shall be held by a date within 90 days from
the date of this commitment, and shall be held at Bank's offices which are
located at One Detroit Center, 500 Woodward Avenue, Detroit, Michigan 48226,
or at such other place as Bank may designate in a written notice by Bank.
Unless the initial closing is held within such 90 day period, Bank's
obligations hereunder will, at its option, terminate. The portion of the
Commitment Fee paid upon acceptance of this Commitment shall be deemed
earned, however, regardless of whether the Borrower or guarantors ever comply
with all of the conditions of this commitment or the Loans ever close.
5. The interest rate on the Loans shall be computed on the basis
of the actual number of days elapsed over a year of 360 days. In the case of
a variable rate, the prime rate to be used shall be the rate announced from
time to time by Bank as its prime rate. Unless otherwise indicated, interest
shall be due and payable monthly. In the event of a default, interest shall
be due and payable at a rate three percent (3%) above the rate which would
otherwise be in effect.
6. Closing on al Loans shall occur simultaneously and the Bank
shall not be obligated to close the Loans in the event that a default would
exist under the Letter Agreement or any loan document at the time of
execution, or if an event has occurred at such time which, with notice and/or
the passage of time, would constitute such a default.
7. This Commitment is issued for the benefit of Borrower and shall
not be sold, assigned or in any way conveyed without the prior written
approval of Bank.
8. Bank may assign its interest hereunder to any affiliate or
subsidiary of Bank.
9. This Commitment shall supersede all other agreements,
applications and commitments, either written or oral, heretofore entered into
between Borrower and Bank.
10. Borrower and each guarantor warrant that all information
submitted to Bank in connection with the Loans is factual and correct. The
representations made in any material which has been or shall be submitted to
Bank are made to induce Bank to make the Loans to Borrower. Bank shall have
no obligation to close the Loans in the event any such representation is
untrue. In addition, by accepting this commitment, Borrower shall be deemed
to have authorized Bank to conduct such investigations and inquiries as to
credit and collateral as Bank deems necessary or desirable in connection with
the making of the Loans and the monitoring of the Loans.
EXHIBIT B (1)
VALUATION
STOUT RISIUS ROSS, INC.
Valuation of
Tubby's, Inc.
As of May 31, 1999
July 15, 1999
Board of Directors
Tubby's, Inc.
c/o Mr. Robert Paganes
6029 East 14 Mile Road
Sterling Heights, MI 48312-5802
Dear Mr. Paganes:
This letter and accompanying report present our estimation of the Fair Value
of the common equity of Tubby's, Inc. ("Tubby's" or the "Company"), on a per
share basis (2,583,114 shares outstanding) as of May 31, 1999 (the "Valuation
Date"). We understand the results of our analysis will be used, in
conjunction with our separately issued fairness opinion letter, to assist the
Board of Directors in evaluating a merger with R Corp pursuant to which all
shareholders of the Company (the "Shareholders"), other than those
shareholders that are also shareholders of R Corp, will receive cash in
exchange for their shares of Tubby's, Inc. at the price of $1.10 per share.
The aforementioned plan of merger is referred to hereinafter as the
"Transaction."
In performing our valuation, the term "Fair Value" is defined as the price at
which property would exchange between a willing buyer and a willing seller,
when the former is not under any undue compulsion to buy and the latter is
not under any undue compulsion to sell, both having reasonable knowledge of
the relevant facts.
For the purpose of this engagement, we assume the business of Tubby's to be
ongoing.
In general, we considered the following factors in performing our analysis:
o The nature and history of the Company;
o The outlook for the economy and industry in which the Company
operates;
o The book value and financial condition of the Company;
o The earning capacity of the Company;
o The dividend paying capacity of the Company;
o Whether goodwill or other intangible value exists within the
Company;
o Previous sales of the Company's stock and the size of the block
transferred; and
o The market prices of companies in the same or similar industries
that trade in the open market.
Additional procedures employed in the valuation of the Company included, but
were not limited to:
o Discussions with Tubby's management concerning its business,
industry, history, and prospects;
o A site visit to the Company's headquarters located in Sterling
Heights, Michigan; and
o An analysis of other facts and data resulting in our conclusion of
value.
The principal sources of information used in performing our valuation
included, but were not limited to:
o Internally prepared unaudited financial statements for the fiscal
years ended November 30, 1995 through 1998;
o Internally prepared unaudited interim financial statements for the
six month periods ended May 31, 1998 and 1999;
o Tubby's 10-K and 10-Q as of November 30, 1998 and February 28, 1999,
respectively, as filed with the Securities Exchange Commission;
o Tubby's annual reports for the fiscal years ended November 30, 1995
through 1998;
o U.S. Federal Form 1120 income tax returns for the fiscal years ended
November 30, 1993 through 1997;
o Agreement of Plan of Merger between Tubby's, Inc. and R Corp, dated
May 27, 1999;
o The Proxy Statement regarding the announcement and details of the
Transaction; and
o Franchise offering circular produced by Tubby's, Inc. dated March
31, 1998.
A more detailed description of our procedures, methodologies, assumptions,
and conclusions are contained in the accompanying report.
In accordance with the foregoing and as further described in the accompanying
report, we estimate the Fair Value of the common equity of Tubby's, Inc. on a
per share basis (2,583,114 shares outstanding), as of May 31, 1999, to be:
ONE DOLLAR AND TEN CENTS
$1.10
* * * * * * *
In performing our analysis, we used and relied on the accuracy and
completeness of various financial and other information provided to us by
management or obtained from other private and public sources. However, we
have not been engaged to compile, review, or examine such information in
accordance with standards established by the American Institute of Certified
Public Accountants. Accordingly, we do not express an opinion or any other
form of assurance thereon.
In addition, we utilized prospective financial information and other
assumptions conveyed to us by Tubby's management in our analysis. Whether or
not the hypothetical or other assumptions occur, there will usually be
differences between the projected and actual results, because events and
circumstances frequently do not occur as expected and those differences may
be material.
Exhibit E includes a representation letter outlining the Company's
responsibilities as they relate to this engagement.
For the purpose of this engagement and report, we have made no investigation
of, and assume no responsibility for, the titles to, or liabilities against,
the assets or equity of the Company, including but not limited to any
contingent or environmental liabilities. Our conclusion of value assumes the
assets and liabilities presented in the Company's May 31, 1999 balance sheet
were intact as of that date. Any change in the level of assets or liabilities
could cause a change
in the value we estimated. Furthermore, we assume there are no hidden or
unexpected conditions that would adversely affect the value we estimated.
None of our employees who worked on this engagement has any known financial
interest in the assets or equity of the Company or the outcome of this
valuation. Further, our compensation is neither based nor contingent on the
results of our analysis.
Our conclusion of value is applicable for the stated date and purpose only,
and may not be appropriate for any other date or purpose.
Our work is only to be utilized by the Board of Directors of the Company as
one input to consider in the process of analyzing the contemplated
Transaction.
Our analysis will be used solely for the purpose stated herein, and should
not be referred to or distributed, in whole or in part, without our prior
written consent. We understand, however, that our summary fairness opinion
letter (which will be issued separately) may be attached to a proxy
statement.
Reference should be made to our summary fairness opinion letter dated July
15, 1999 for additional assumptions and limiting conditions which apply to
our analysis and engagement.
Yours very truly,
STOUT RISIUS ROSS, INC.
Gregory A. O'Hara
Managing Director
TABLE OF CONTENTS
I. Overview .................................... 1
II History and Nature .......................... 3
III Economic Outlook ............................ 7
IV Industry Outlook ............................ 12
V Valuation Methodology ....................... 17
VI Valuation Analysis .......................... 22
VII Conclusion of Value ......................... 55
EXHIBITS
A Description of Exhibits ..................... 56
B Historical Financial Statements ............. 58
C Discounted Cash Flow Approach ............... 62
D Market Comparable Approach .................. 64
E Management's Letter of Representation ....... 66
F Statement of Qualifications and Certification 68
I. OVERVIEW
This report presents our estimation of the Fair Value of the common equity of
Tubby's, Inc. ("Tubby's" or the "Company"), on a per share basis (2,583,114
shares outstanding) as of May 31, 1999 (the "Valuation Date"). We understand
the results of our analysis will be used, in conjunction with our separately
issued fairness opinion letter, to assist the Board of Directors in
evaluating a merger with R Corp pursuant to which all shareholders of the
Company (the "Shareholders"), other than those shareholders that are also
shareholders of R Corp, will receive cash in exchange for their shares of
Tubby's, Inc. at the price of $1.10 per share. The aforementioned plan of
merger is referred to hereinafter as the "Transaction."
In performing our valuation, the term "Fair Value" is defined as the price at
which property would exchange between a willing buyer and a willing seller,
when the former is not under any undue compulsion to buy and the latter is
not under any undue compulsion to sell, both having reasonable knowledge of
the relevant facts.
A description of the methodologies and procedures used in this valuation and
the principal assumptions made are contained in the following sections of
this report. Based thereon, we estimate the Fair Value of the common equity
of Tubby's, Inc., on a per share basis (2,583,114 shares outstanding), as of
May 31, 1999, to be:
ONE DOLLAR AND TEN CENTS
$1.10
* * * * * * *
-1-
Our conclusion of value is applicable for the stated date and purpose only
and may not be appropriate for any other date or purpose. Reference should be
made to the letter accompanying this report for procedures and various
limiting conditions which apply to this valuation and report.
-2-
II. HISTORY AND NATURE
Tubby's, Inc. develops, operates, franchises, and services Tubby's Sub Shop
restaurants, Tubby's Express, and Stuff Yer Face restaurants. As of May 31,
1999, Tubby's services 90 franchised Tubby's restaurants located in seven
states and Canada, plus four Stuff Yer Face franchised restaurants. In
addition to servicing the aforementioned restaurants, Tubby's owns and
operates three Tubby's restaurants.
Tubby's Sub Shop restaurants ("traditional stores") prepare and serve fresh
grilled submarine sandwiches and other quick service food items. Tubby's Sub
Shop restaurants offer over 20 different types of subs to choose from.
Customers can create made-to-order meals through a variety of meats, cheeses,
and toppings. Tubby's Sub Shop's menu also includes soups, salads, curly
fries, and desserts. Tubby's growth strategy for Tubby's Sub Shop restaurants
is to slowly grow franchises in existing markets (e.g., Detroit, Michigan)
and to develop new markets through development agreements.
Tubby's Express restaurants ("nontraditional stores") employ a concept
similar to that used by Tubby's Sub Shop restaurants in that the menu is the
same; however, Tubby's Express restaurants are different in that they have
unique locations (e.g., gas stations and convenience stores). Given their
unique locations, Tubby's Express restaurants are smaller in terms of square
footage than the traditional freestanding Tubby's Sub Shop restaurants. The
Tubby's Express concept is to place restaurants in convenient locations such
as malls, convenience stores, and gas stations in an attempt to be "where the
customers is," instead of requiring the customer to drive to a traditional
sub shop. Most of Tubby's projected growth in new store franchises is
expected to come from nontraditional stores.
-3-
Stuff Yer Face is a full service restaurant concept specializing in preparing
and serving stromboli sandwiches. The stromboli filling includes combinations
of cheese, meatballs, sausage, pepperoni, veal, steak, chicken, shrimp, and
vegetables. Tubby's has no plans to increase the number of Stuff Yer Face
restaurants.
The first Tubby's Sub Shop was started in 1968 by the Paganes family in St.
Clair Shores, a suburb of Detroit, Michigan. In 1978, Tubby's, Inc. began
franchising the Tubby's Sub Shop concept. In 1988, Tubby's merged with Stuff
Yer Face, a publicly traded NASDAQ company, in an attempt to increase
liquidity for its shareholders. In 1998, Tubby's started SUBperior
Distribution System ("SDS"), a distributor of Tubby's restaurant food and
supplies. Tubby's created SDS under the assumption that SDS would be able to
provide its franchisees with uniform and consistently high quality products
at equivalent or lower prices than other suppliers. SDS is currently the only
approved distributor for Tubby's Sub Shops; however, individual franchises
may choose to purchase their food and supplies from other vendors.
Tubby's business operations are divided into six subsidiaries: Tubby's Inc.,
Tubby's Advertising, Inc. ("Tubby's Advertising"), Tubby's Company Stores,
Inc. ("Tubby's Company Stores"), SubLine Company, Inc. ("SubLine"), and SDS.
Tubby's, Inc. develops and supports franchising operations to individuals or
corporations that wish to open one or more Tubby's sub shops. All revenue
associated with initial franchise fees and monthly franchise royalty fees are
collected and accounted for by Tubby's, Inc. Tubby's Advertising collects
advertising revenue from Tubby's franchisees and markets and promotes the
Tubby's tradename. Tubby's Advertising was created as a support subsidiary to
the franchisees and, as a general rule, it does not expect to earn a profit.
Tubby's Company Stores owns and operates three Tubby's restaurants. Tubby's
management does not anticipate owning or operating any new restaurants and
would like to divest the existing restaurants. SubLine provides equipment and
contracting services for new Tubby's franchises.
-4-
As previously mentioned, SDS buys and distributes food and other related
items to Tubby's franchisees.
Tubby's typical customer is a blue-collar worker who spends, on average, $6
to $7 per visit. Therefore, Tubby's restaurants are located predominately in
less affluent neighborhoods. Management estimates the average traditional
store generates approximately $300,000 per year in sales.
The fees charged by Tubby's to its franchisees depend on which type of
restaurant is purchased. Traditional stores have an initial one-time
franchise fee of $15,000. Additionally, new franchisees pay a franchise
royalty fee of up to 6.0% of net sales. Moreover, additional revenue is
collected when franchisees choose to purchase their store equipment and
supplies from SubLine, one of Tubby's subsidiaries. Franchisees also pay an
advertising fee to Tubby's Advertising based on a certain percentage of net
sales. The advertising fee can vary among restaurants depending on whether
they are in a dominant market or nondominant market area. A dominant market
area, such as Detroit, is a market area with a large ratio of Tubby's
franchises relative to the population. Tubby's will advertise more heavily in
a dominant area because of the greater coverage. Conversely, a nondominant
market has a low ratio of the number of Tubby's franchises relative to the
population. As such, Tubby's Advertising will not advertise as heavily there,
but the franchisee is required to make-up the advertising shortfall on their
own. Franchisees in a dominant market area pay 3.5% of net sales to Tubby's
Advertising and franchisees in nondominant areas pay 1.0% of net sales to
Tubby's Advertising.
Nontraditional stores have a slightly different fee schedule due to the store
concept. Nontraditional stores have an initial franchise fee of $8,000 and a
monthly royalty fee of 6.0% of net sales. Tubby's Express stores are also
slightly cheaper to outfit with equipment due to the smaller size of the
restaurants compared to traditional Tubby's Sub Shop restaurants. Advertising
-5-
fees paid to Tubby's Advertising are based on the same fee structure as
Tubby's Sub Shop restaurants discussed above.
A significant portion of Tubby's growth will come from development agreements
in place as of the Valuation Date. A development agreement confers the right
of an independent agent, on a non-exclusive basis, to develop and service the
Company's franchised stores in a specific geographical area. Typically,
development agreements call for the development agent to open a specified
number of stores in their geographical region within a certain time frame. In
return for their services, the development agent receives a commission for
each new franchise sold. Currently, Tubby's pays development agents a 50%
commission on initial franchise fees and a 40% commission on franchise
royalties.
Tubby's does not intend to pursue any new development agreements outside
existing markets in the near future because the market is too competitive for
development agents. As such, Tubby's management believes its best opportunity
is to continue to develop existing markets. Additionally, management
anticipates higher long-term growth as a result of the benefits associated
with SDS (e.g., higher quality food and lower cost structure to the
franchisees).
-6-
III. ECONOMIC OUTLOOK
The performance of the macroeconomy, individual industries, and firms is
inextricably linked. Although some industries and firms seem to defy the
economic trends, performing well in a downturn and poorly during an upswing,
industrial and economic performance are usually closely related. In our
valuation of the Companies, we considered the following economic trends.
Short-Term Economic Outlook
Overall
The United States economy is currently in the midst of its third longest
expansionary period since World War II. Since 1994, the overall productive
capacity of the economy has continuously increased while unemployment has
decreased to the lowest levels since the 1970's. This current expansion can
be traced to a number of factors, including decreases in the cost of
computers, the strength of the U.S. dollar, and increased corporate profits
and stock prices due to cost-cutting measures taken by businesses, and
stagnant to declining employer healthcare costs. The result of these factors
has been a stable, yet expansionary economy, which has fostered increased
consumer and business confidence. Although few economists think that the
economy's recent robust levels of growth are sustainable over the long run,
the short-term economic outlook is for continued, albeit less aggressive,
growth.
Gross Domestic Product
Growth in the U.S. Gross Domestic Product (or "GDP") over the past three
years was strong, increasing an average of 3.7% per year. Although many
economists had predicted growth of only 3.0% for 1997, the real GDP actually
increased 3.9%. This high level of growth continued in 1998 with the real GDP
increasing 3.8%. However, this rate of growth is not expected to continue for
a number of reasons discussed below. According to projections made by the
Congressional Budget Office (or "CBO"), total growth in real GDP should be
2.8% in 1999, slowing to 1.7% growth in 2000.
-7-
Business Fixed Investment
The increase in business fixed investment (capital spending) has been
dramatic in recent years. Due in part to the lower cost of technological
equipment, such as computers and telecommunications equipment, low interest
rates, and increasing profits, the real purchases of equipment made by
businesses increased 12.1% in 1997. This represents the largest growth in
business purchases in 13 years. In addition, the purchase of commercial
structures increased 7.1% in 1997. The growth in these purchases experienced
since 1995 is the strongest three-year period of growth since 1982. Although
capital spending was strong early in 1998, it is estimated to have fallen at
an annualized rate of 1% in the third quarter. This marked the first decline
in capital spending since the 1990-1991 recession.
In the short term, growth in business spending is expected to slow to less
than 5% annually due to decreasing corporate profits, lower capacity
utilization, and the increasing cost of capital. Corporate profits are
expected to level off due to continued upward pressure on labor costs, weak
foreign demand, and low import prices that will prevent American businesses
from passing through increasing labor costs. The resulting effect on capital
spending is logical since the level of investment is positively correlated
with the overall rate of growth in the economy. That is, when the economy is
growing, a substantial amount of investment is needed. Conversely, when the
economy slows, much less investment is needed. Therefore, if the economic
growth tapers, as it is projected to do, business investment should begin to
slow in the near future.
Residential Investment
Home building is another strong area of the economy. The combination of
growth in household incomes, increases in the stock market, and low interest
rates has lead to increased investment in housing in recent years. According
to the CBO, over the first half of 1998, sales of existing homes increased
18.8%, while sales of new homes increased 20.4%. However, similar to business
spending, as the economy slows so will household incomes; therefore,
residential investment growth should decline.
-8-
Government Spending
Government spending was a modest source of economic growth in 1997. According
to the 1998 Economic Outlook Symposium, the consensus growth rate in
government spending was projected to be 1.1% in 1998 which represents a minor
0.1% increase over 1997 estimated levels.
Consumer Spending
According to the Bureau of Economic Analysis, consumer-spending growth for
1997 was 3.4%, which was significantly faster than the 2.6% growth
experienced in 1996. Given the low unemployment rate, rising wages, and the
stock market's remarkable growth, consumer confidence was very high in 1998.
Factors such as these led to an increase in personal consumption expenditures
of over 5% in 1998. However, projections for 1999 and 2000 are for consumer
spending to increase less than 3% annually due to the slowing economy.
Other Factors
The prime rate is expected to stay relatively stable through 1999 and 2000.
Although the Federal Reserve took aggressive actions late in 1998, lowering
the federal funds rate 75 basis points in response to the global financial
turmoil and then raised the federal funds rate 25 basis point in the early
part of 1999, investors are still cautious amid fears of inflation. Given the
current balance between possible inflationary pressures and the continued
global volatility, the Federal Reserve should be able to refrain from any
further adjustments to interest rates. In addition, inflation is expected to
increase slightly in the near term but generally remain steady and low.
Long-Term Economic Outlook
Overall
It is difficult to predict economic performance with any certainty beyond a
one or two-year forecast period due to the extreme uncertainty surrounding
the cyclical influences on the economy. However, it is possible to project a
long-term trend around which the economy may be expected to fluctuate in
-9-
the short term. The Congressional Budget Office's long-term expectations for
some of the key economic indicators are listed in the table on the following
page.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Nominal GDP (in trillions) 8.5 8.8 9.2 9.6 10.0 10.5 11.0
Real GDP (% growth) 3.7 2.3 1.7 2.2 2.4 2.4 2.4
Consumer Price Index (% growth) 1.6 2.5 2.6 2.6 2.6 2.6 2.6
Unemployment Rate (%) 4.5 4.6 5.1 5.4 5.6 5.7 5.7
</TABLE>
Gross Domestic Product
In figures released by the Congressional Budget Office, real GDP is projected
to grow at an average annual rate of 2.3% during the 2001 to 2009 period.
This rate of growth assumes an average unemployment rate of 5.7% and
inflation of 2.6%. Short-term interest rates are expected to remain near
their current levels. These projections are built on a baseline assumption of
no additional actions by the Federal Reserve or Congress to alter the course
of monetary or fiscal policy during that period. Changes in these policies
would affect the long-term forecast as they occur.
Other Factors
Over the last decade, as the integration of world markets has accelerated, a
truly global economy has emerged. The effect at times has been very
favorable--with reduced trade barriers, a wider variety of goods and
services, and lower prices due to increased competition. However, these same
factors have made it difficult to prevent the economic problems from one
region of the global market from adversely affecting others. Indeed, the
world has recently seen how far reaching the negative effects of the global
economy can be. Therefore, when considering the long-term outlook for the
economy, the economic trends in the rest of the world should not be ignored.
Although the financial panic that gripped Asia in 1997 has subsided, serious
problems remain for many countries. Japan, which has always led the region's
economy and which many expected to be the catalyst for Asian expansion, is
now in the midst of its most serious recession since World War
-10-
II. In Latin America, markets have been turbulent due to the instability of
the Brazilian Real. Russia's default on debt in 1998 added to the panic of
the financial markets and investors in all emerging economies.
While many in the United States do not feel the economy has been affected by
these global crises, it has. The volatility of foreign financial markets has
caused a decrease in foreign debt and equity investments made by the United
States and other economies and an increase in the number of foreign
investments in U.S. Treasury bonds which has pushed the yields extremely low.
In addition, the strength of the U.S. dollar against many of the fluctuating
currencies in Asia and Latin America has depressed import prices. While this
has been good, as it has counteracted inflationary pressures in the economy,
it has also forced American companies to decrease prices in order to remain
competitive. It is the latter trend that is expected to depress corporate
profits over the coming year and begin to slow the growth in the economy. In
addition, the strong dollar has increased the trade deficit, as American
goods abroad are more expensive. Thus, the more unstable other markets become
and the longer these extreme market fluctuations last, the greater the
chances of the United States economy being adversely affected.
The overall domestic economic forecast bodes well for the restaurant industry
due to its sensitivity to disposable personal income. Generally, as economic
growth decreases, individuals decrease expenditures on discretionary items
such as restaurant dining. With the expected soft landing in the economy,
expenditures for quick-service restaurants like Tubby's should remain strong;
however, competition for the dining dollars will continue to be very fierce.
-11-
IV. INDUSTRY OUTLOOK
Dining outside of the home has become a popular alternative for many
Americans. Since 1968 consumers have increased the amount spent on meals and
beverages by 7.0% annually. As a result, the retail food industry grew to
$289 billion in 1997 and total sales attributable solely to fast-food
restaurant chains and bars are expected to have reached approximately $103
billion for the calendar year 1998. Furthermore, "food away from home" now
accounts for 25% to 50% of the household food budget.
Although the restaurant industry is populated with many different types of
restaurants serving a variety of menu choices, those serving sandwiches and
poultry have relatively high market shares. The following graph illustrates
the breakdown of the restaurant industry.
[Restaurant Market Shares -- graphic omitted]
Although the industry has experienced significant growth in the past, it is
not expected to increase at rates above 2.0% annually for the foreseeable
future due to fierce competition, low margins, and the consolidation and
closing of many under-performing establishments. The lower expectations in
this market are due to many factors including the demographics of the
customer
-12-
base and the characteristics of a mature, competitive industry. Those
businesses with the greatest chance for success in the retail food industry
are franchises. Franchises have the capability to capitalize on many savings
and operating efficiencies typically associated with a larger organization.
Demographics of Customer Base
More households are now represented by two wage earners, as compared to the
previous two decades. Almost 60% of all women ages 20 and older were a part
of the workforce in 1996, compared to 43% in 1970. With both adults acting as
wage earners, adults are spending less time in the home and have less time to
prepare meals for themselves or the rest of the family. Therefore, many
households frequent fast-food and chain restaurants on a consistent basis. In
fact, 47% of Americans, as surveyed by Standard & Poor's, stated that they
were cooking fewer meals at home than they cooked only a few years prior.
As a direct result of the increase in the number of wage earners in the
household, disposable income has risen for the average American family
(nearly 5.0% in 1997). As disposable income increases, the frequency of
visits to fast-food and chain restaurants also increases. In addition, while
consumers consider the value of the meals to be a major factor in which
restaurant to patron, having the lowest price menu does not in of itself
translate into the largest customer base. Many restaurants have captured
market share by offering larger portions and/or more visually appealing
meals.
-13-
Characteristics of a Mature, Competitive Industry
The primary characteristics of the restaurant industry closely parallel those
of other mature industries. Margins have decreased, competition is fierce,
and the industry is experiencing a rash of consolidations and divestitures.
Decreased margins have been experienced by nearly every major competitor.
Specifically, many fast-food restaurants have engaged in one form or another
of price wars. While the initial price-cutting may result in short term gains
in volume, the gains do not last when the promotional period ends. Most
importantly however, the gains in volume often do not offset the decreased
margins.
The decreases in margin have led most fast-food and chain restaurants to
place an increased importance on technology as way of lowering administrative
costs. Owners have found that purchasing the hardware and software associated
with scheduling, accounting, payroll, sales analysis, and inventory control
is far more inexpensive and cost effective than hiring additional management
personnel.
As a result of the slim gross and operating margins, many fast-food and chain
restaurants have also been forced to divest businesses or significantly scale
back on planned expansions. For example, in 1996 McDonalds, Inc. reported a
$72 million charge related to the closing of 115 satellite restaurants. And
of the nine restaurant companies comprising the S&P MidCap 400 Index, five
have taken, or announced plans to take, restructuring charges totaling over
$110 million in the past few years due to the closure of underperforming
restaurants.
Analysts expect that the industry will continue to exhibit these
characteristics. In addition, many analysts predict that those fast-food and
chain restaurants which have not developed the best
-14-
business practices will fall victim to the consolidation and restructuring
occurring within the industry in a short time period.
Franchising
Nearly 70% of all restaurant chains are franchises. A large percentage of
retail fast-food restaurants are operated as franchises due to the advantages
for both the franchisee and the franchisor. Specific advantages include
volume purchasing, name recognition, ease of establishment, training and
marketing support, and the steady royalty stream usually associated with
franchises.
The franchisee has several advantages over the small independent operator.
Franchising allows the businessperson to open a restaurant with very little
capital investment, receive immediate large-scale name recognition, and
receive training and technical support from the franchisor.
The franchisor benefits from franchising their business by receiving various
forms of royalties and increasing the name recognition of the restaurant.
Typical royalties include initial fees of approximately $40,000 to $50,000,
3% to 5% of annual sales from the franchisee for the right to franchise,
approximately $25,000 in technical assistance revenue, and approximately 2%
to 5% in fees to cover local and federal taxes.
The fact that both parties reap tremendous benefits is the primary reason
that franchising has been so successful. Since neither party would gain by
dissolving the relationship, it is expected that franchising will continue to
grow within the retail food industry.
-15-
Overall, while the restaurant industry as a whole is not expected to
experience tremendous growth, many franchises are expected to experience
notable growth. For example, from 1995 to 1996, Lone Star Steakhouse grew
41%, Blimpie Subs & Salads grew 16%, and Sonic Drive-In grew 12%. Since 1996,
many chain fast-food restaurants have continued to experience these growth
trends. Therefore, it is expected that the larger franchises will experience
moderate to high growth, while many small independent operators will struggle
to remain competitive.
-16-
V. VALUATION METHODOLOGY
Current valuation theory includes consideration of several valuation
approaches, including an Income Approach, a Market Approach, and an
Underlying Asset Approach. A description of each approach is discussed below.
Discounted Cash Flow Approach
The Discounted Cash Flow Approach, a form of the Income Approach, is a
valuation technique in which the Fair Value of a company is estimated based
on the earning capacity of that company. The earning capacity of a company,
as used in the Discounted Cash Flow Approach, is not necessarily net earnings
or after-tax net income as it appears on its income statement. Rather, it
represents the earnings available for distribution to investors after
consideration of the reinvestment required for a company's future growth.
This measure of earning capacity is referred to as available cash flow.
Available cash flow is the amount that could be paid to the owners of a
business without impairing its operations. This approach implicitly measures
the dividend-paying capacity of a subject company.
The available cash flow that a business can generate is projected into the
future. These future cash flows are comprised of two components, the cash
flows in the projection period and the residual cash flow.
The cash flows in the projection period, typically five to ten years, are
calculated by estimating each year's revenue, expenses, and other items such
as capital expenditures and working capital requirements. Each year's cash
flow is then discounted to the Valuation Date at a rate of return
commensurate with the risk involved in realizing those cash flows.
-17-
The rate of return on an investment, and thus its value, is related to its
perceived risk. An investor would accept a rate of return no lower than that
available from other investments with equivalent risk, and would value the
investment accordingly. Each element of this computed rate is expressed in
terms of current market yields as of the Valuation Date.
The second component of the cash flows is the residual cash flow. The
residual cash flow is the present value of the sum of the cash flows
subsequent to the end of the projection period. The value of the residual
cash flow at the end of the projection period may be derived using the
following formula:
RCF = CFR / CR
where, "RCF" is the residual cash flow, "CFR" is the available cash flow
generated in the first year subsequent to the projection period, and "CR,"
the capitalization rate, is equal to the rate of return on invested capital
minus the expected compound rate of growth in the available cash flows.
The value of the residual cash flow at the end of the projection period is
then discounted to the Valuation Date, resulting in the present value of the
residual cash flow.
The present value of the residual cash flow and the value of any nonoperating
assets are then added to the present value of the cash flows from the
projection period to estimate the Business Enterprise Value of a company.
Finally, to the extent that it exists, debt capital is subtracted from the
Business Enterprise Value to arrive at the value of equity capital.
It should be noted that we performed our Discounted Cash Flow analysis on a
"debt-free" basis. This methodology entails estimating available cash flows
to all investors, both debt and equity. As such, interest expense is removed
from both the historic and projected cash flows. (By not
-18-
subtracting interest expense and principal payments to debt holders, the cash
flow estimated represents that amount which is available to satisfy the
return requirements of both the debt and equity investors.) The present value
of the available operating cash flows is discounted to present value using a
weighted average cost of capital which incorporates a debt cost component and
an equity cost component. The sum of the present value of all future
available operating cash flows, plus the value of nonoperating assets,
represents the value of total capital (often referred to as the Business
Enterprise Value). The value of equity capital is then calculated by
subtracting the value of debt capital from the Business Enterprise Value.
Market Comparable Approach
The Market Comparable Approach, also known as the Guideline Company Valuation
Method, is a valuation technique whereby the value of a company is estimated
by comparing it to similar publicly traded companies. The condition and
prospects of companies in similar lines of business depend on common factors
such as the overall demand for the products or services of the industry
participants. Analysis of companies engaged in similar businesses can provide
insight into investor perceptions of a subject company.
Criteria for comparability in the selection of publicly traded companies
include operational characteristics, growth patterns, relative size, earnings
trends, markets served, and risk characteristics. Each should be within a
reasonable range of a subject company's characteristics to make comparability
relevant.
Once a comparable company has been selected, capitalization multiples are
developed by dividing the market value of equity or total invested capital
(equity plus interest-bearing debt) by appropriate measures of operating
results such as revenue, operating income, or earnings. Adjustments may then
be made to the multiples when comparing a subject company to a publicly
-19-
traded company for differences in growth prospects and size. Finally, the
adjusted multiples are applied to the operating results of a subject company
to obtain the implied market value of its invested capital.
An additional source of comparable information is to examine the terms,
prices, and conditions found in actual sales of companies in the industry.
These transactions often provide further evidence of investor perceptions.
This variation of the Market Approach is known as the Market Transaction
Approach.
Underlying Asset Approach
The Underlying Asset Approach is a technique whereby the value of a company
is estimated by discretely valuing each of the company's tangible and
intangible assets. This approach is typically used in the valuation of
holding companies and sometimes used in the valuation of operating companies
when the value of the underlying assets is greater than the value of the
business as reflected by the cash flows being generated.
One difficulty in performing an Underlying Asset Approach is determining the
value of the company's intangible assets. Frequently, this is accomplished
through use of the Residual Method.
The Residual Method is performed in three steps. First, an Income Approach is
performed to estimate the value of the company's total assets. Second, the
individual tangible assets (such as net working capital, real property,
machinery & equipment, etc.) are valued. Finally, the value of the individual
tangible assets is subtracted from total assets to arrive at the value of the
intangible assets.
If a company generates a total return greater than the return required on
each of its tangible assets, then the company has intangible asset value, and
the Underlying Asset Approach would require
-20-
unnecessary repetition of an Income Approach. However, if the value of the
tangible assets of the company is greater than the value of the company using
the Income Approach, performing the Residual Method is not necessary and the
Underlying Asset Approach is relevant.
-21-
VI. VALUATION ANALYSIS
We considered the Income Approach and the Market Approach in estimating the
Fair Value of the common equity of Tubby's. An Underlying Asset Approach was
not appropriate because it would not capture the Company's intangible value,
which is evidenced by its expected long-term profitability.
Income Approach
We based the Income Approach on a Discounted Cash Flow Analysis of Tubby's,
Inc. (the "Company") as of May 31, 1999. Our projections are based primarily
on an analysis of the Company's historical financial performance, the
Company's budgets, discussions with management, and the overall outlook for
the economy and the industry. The Company's fiscal year-end is November 30th.
The first year of the projection period starts June 1, 1999 and ends May 31,
2000.
The numbers adjacent to the paragraphs in this section correspond to the line
numbers on the Discounted Cash Flow Approach Conclusion of Value page of
Exhibit B.
Store Metrics
The earning capacity of Tubby's is estimated based on Tubby's ability to
maintain and grow its existing franchise base. Tubby's existing franchise
base is composed of a mix of traditional and nontraditional stores in both
dominant and nondominant marketing areas, including some stores that are
under development agreements. The existing store base was analyzed separately
from projected new stores because of the mix of stores in the existing base.
A key factor in our projections for the existing stores is management's
expected rate of store attrition.
-22-
<TABLE>
<CAPTION>
Projected Existing Store Level(1)
- ---------------------------------
Projection Projection Projection Projection Projection Residual
Year 1 Year 2 Year 3 Year 4 Year 5 Year
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning
Store Level 94 90 86 82 78 74
Store Attrition 4 4 4 4 4 4
---------- ----------- ------------ ------------ ------------ ------------
Ending
Store Level 90 86 82 78 74 70
========== =========== ============ ============ ============ ============
(1) Based on discussions with Tubby's management.
</TABLE>
As of the Valuation Date, Tubby's reported 94 Tubby's restaurant franchises
in its system, excluding three Tubby's restaurants owned by Tubby's Company
Stores. Management anticipates an attrition rate of four stores per year for
its existing store base. Based on the foregoing and as presented in the
schedule above, Tubby's existing store base of 94 stores is projected to
decrease by four stores annually throughout the projection period.
As previously discussed, Tubby's has one productive development agreement in
the St. Louis, Missouri market. Currently, Tubby's is not seeking additional
development agreements because the demand for development agents is too
competitive. In addition to expanding the St. Louis market, Tubby's
management intends to further develop the Michigan, Florida, and Nebraska
markets. Management believes the Detroit market can handle an additional 15
stores before it becomes saturated with Tubby's restaurants. Therefore,
Tubby's future store growth will be driven predominantly by both traditional
and nontraditional store growth in the nondominant markets.
-23-
<TABLE>
<CAPTION>
Projected New Store Level(1)
Projection Projection Projection Projection Projection Residual
Year 1 Year 2 Year 3 Year 4 Year 5 Year
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
DA Stores
Traditional 2 2 2 2 1 1
Nontraditional 4 4 4 4 2 2
---------- ----------- ------------ ----------- ------------ ------------
Total DA 6 6 6 6 3 3
DMA Stores
Traditional 1 1 1 1 .5 .5
Nontraditional 2 2 2 2 1 1
---------- ----------- ------------ ----------- ------------ ------------
Total DMA 3 3 3 3 1.5 1.5
Non-DMA
Traditional 1 1 1 1 .5 .5
Nontraditional 3 3 3 3 1 1
---------- ----------- ------------ ----------- ------------ ------------
Total Non-DMA 4 4 4 4 1.5 1.5
Total New Stores 13 13 13 13 6 6
<FN>
(1) Based on discussions with Tubby's management.
DA = Development Agreement
DMA = Dominant Marketing Area
</TABLE>
Management anticipates nontraditional store growth will surpass traditional
store growth because of the recent co-branding trend in the quick-services
restaurant industry. According to management's expectations and as presented
in the above schedule, Tubby's will increase the number of new stores by
thirteen stores per year with an attrition rate of two stores per year (i.e.,
net eleven new stores). The overall effect of the attrition of the new and
existing stores is a net growth in total stores of approximately seven stores
per year (11 net new stores minus four existing stores). After year four,
store growth is projected to equal total store attrition in order to
-24-
[Composition of Revenue As of November 30, 1997 -- GRAPHIC OMITTED]
[Composition of Revenue As of May 31, 1999 -- GRAPHIC OMITTED]
[Composition of Revenue As of May 31, 2005 -- GRAPHIC OMITTED]
reflect Tubby's in a stabilized state and represents management's estimate of
a sustainable franchise base.
Product Composition
Tubby's total revenue through November 30, 1997 was comprised of revenue from
Tubby's, Tubby's Advertising, Tubby's Company Stores, and SubLine (top
graph).
In February 1998, Tubby's created a new strategic business unit, SUBperior
Distribution Systems, Inc. ("SDS"). SDS purchases and distributes food and
other accessories to Tubby's franchises. For the latest twelve-month period
ended May 31, 1999, SDS represented over 66.7% of Tubby's total revenue
(middle graph). For the twelve-month period ending May 31, 2005, SDS is
projected to represent approximately 70.7% of Tubby's total revenue (bottom
graph).
-25-
Revenue
For this analysis, we have explicitly projected revenue for each Tubby's
subsidiary (Tubby, Inc., Tubby's Advertising, Tubby's Company Stores,
SubLine, and SDS).
[GRAPHIC OMITTED]
1. Historical and projected revenue from Tubby's, Inc. franchising operations
is presented in the adjacent graphs.
[GRAPHIC OMITTED]
Revenue related to Tubby's consists of initial franchise fees from new
stores, franchise royalties, and management fees from related subsidiaries.
Franchisees pay a nonrefundable initial franchise fee to Tubby's for every
new store that is opened. The initial franchise fee varies depending on which
type of store is opened. Tubby's charges franchisees an initial franchise fee
of $8,000 for a nontraditional store and $15,000 for a traditional store.
However, under a development agreement with a "subfranchiser," Tubby's, Inc.
will pay the subfranchiser a 50% commission of the initial franchise fee.
Therefore, if a new franchise is opened by a subfranchiser, Tubby's only
collects $4,000 for a nontraditional franchise and $7,500 for a traditional
franchise.
-26-
In addition to collecting initial franchise fees from new stores, Tubby's
also collects franchise royalties from existing stores. Franchisees are
required to pay Tubby's a royalty based on a predetermined percentage of
their adjusted gross sales ("royalty rate"). The royalty rate varies slightly
among different existing stores because of a recent increase in the royalty
rate. Tubby's management increased the royalty rate from 4% to 6% (which will
be implemented over time). Tubby's will also be implementing a new royalty
rate structure that all new franchise agreements (including renewals) are
subject to. The new royalty rate structure requires franchisees to pay a
royalty fee of 4% of sales for the first year, 5% of sales in the second
year, and 6% of sales thereafter.
Subfranchisers who open new franchises under a development agreement receive
a commission based on 40% of the franchise royalties collected by Tubby's. In
other words, Tubby will only receive a net franchise royalty fee of 3.6%
(6.0% * 60%) after commissions are paid to subfranchisers.
Finally, Tubby's collects revenue from related subsidiaries for basic general
and administrative services provided by Tubby's in the form of management
fees. However, management fees from related subsidiaries were eliminated in
order to value Tubby's in aggregate.
Projected revenue for Tubby's is based on projected initial franchise fees
from new stores and ongoing franchise royalties. Initial franchise fees are
calculated based on management's expectations for new store growth multiplied
by an initial franchise fee (e.g., $8,000 for nontraditional stores and
$15,000 for traditional stores or $4,000 for nontraditional stores opened
under a development agreement and $7,500 for traditional stores opened under
a development agreement).
-27-
Franchise royalties are calculated based on expected franchise revenue
multiplied by a blended royalty rate. The blended royalty rate considers the
impact of the average existing stores' royalty rate and projected new stores'
royalty rates.
[GRAPHIC OMITTED]
2. Historical and projected advertising revenue is presented in the adjacent
graphs. Advertising revenue is comprised solely of advertising fees collected
from franchisees. Advertising fees are determined by each individual store's
advertising rate.
[GRAPHIC OMITTED]
Advertising rates are predominately based on each store's location. Tubby's
management focuses a majority of its advertising in areas where there is a
significant number of stores (i.e., dominant market area). Therefore, stores
in a dominant market area (e.g., Detroit) pay a higher advertising rate than
stores in a nondominant market area. Stores in a dominant market area pay
3.5% of their revenue to Tubby's Advertising while stores in a nondominant
market area pay 1.0% of their revenue to Tubby's Advertising. (Stores in a
nondominant area are required to make-up the advertising difference via local
advertising.)
Based on discussions with management, new and existing store locations and
related advertising rates are the most important factors in estimating
advertising revenue. Accordingly, advertising
-28-
revenue is calculated based on the historical advertising rates applied to
existing stores and current advertising rates applied to new stores
(depending on their location). (As previously discussed, all management fees
paid to Tubby's have been eliminated.)
3. As of the Valuation Date, Tubby's owns three company stores. The
associated revenue and expenses are accounted for by Tubby's Company Stores.
Tubby's management believes its core competency is franchising, rather than
operating restaurants. Accordingly, Tubby's management does not anticipate
acquiring any new stores and it would like to divest of the existing stores
it owns.
Projected Tubby's Company Stores revenue is expected to increase, from a base
amount of approximately $782,000, by 5.0% in year one of the projection
period. Thereafter, Tubby's Company Stores revenue growth rate will trend to
3.0% by the residual period.
4. The franchisees are 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 and equipment. Although Tubby's
franchisees are not required to purchase any equipment from SubLine or
utilize SubLine's brokerage services, Tubby's management believes that many
of them do so because the cost 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. While SubLine makes a profit on the equipment it
sells, it does not make a profit in connection with the assistance it offers
regarding leasehold
-29-
improvement. SubLine revenue is projected based on $40,000 per new
traditional franchise and $10,000 per new nontraditional franchise.
[GRAPHIC OMITTED]
5. Historical and projected SDS revenue is presented in the adjacent graphs.
As previously discussed, SDS is a strategic business unit which commenced
operations in February 1998. SDS sells food and other related items
(excluding bread) to Tubby's franchises.
[GRAPHIC OMITTED]
Tubby's franchisees may purchase food and other related items from approved
suppliers other than SDS; however, Tubby's management believes that SDS will
be able to provide its franchisees with uniform and consistently high quality
products at equivalent or lower prices than competitors.
Management estimates costs for food and other related items are 32.0% of
franchise revenue (exclusive of bread purchases). Assuming a $300,000 average
revenue per store, the potential "market" for SDS' products is approximately
$100,0000 per franchised store. However, since franchisees are not required
to purchase from SDS, SDS's market penetration rate will be a significant
factor in determining SDS revenue. Management estimates it will be able to
achieve 71.0% market penetration from its existing franchises in year one of
the projection period, trending up to 76.0% market penetration by the
residual period. Furthermore, management
-30-
anticipates achieving approximately 80.0% market penetration for new stores
in dominant areas, but only 50% penetration from new stores in nondominant
areas. Therefore, as market penetration increases for existing stores and as
new stores are brought online, SDS' revenue will increase as a percentage of
total revenue.
Since a majority of the new franchise growth is projected to come from areas
outside of Tubby's dominant marketing area (i.e., Metro Detroit), SDS
profitability in those areas is projected to be significantly less due to
higher shipping and distribution costs. As such, it is expected that the high
contribution margins earned by SDS of approximately 8% will drop due to
higher service costs as new nondominant store are added. However, as new
franchise levels increase in nondominant areas (i.e., as a market area gets
critical mass of stores), SDS projected profitability is expected to improve,
after the initial decline, as the Company is able to take advantage of
economies of scale in shipping and distribution costs.
-31-
6. Total revenue includes items 1 through 5 and is presented in the
accompanying graphs.
The significant revenue growth projected is a result of new store additions
and obtaining new revenue from existing stores via SDS. (it should be noted
that most of SDS' revenue growth has already taken place over the last 15
months given the high penetration at all the existing stores.)
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
-32-
Cost of Goods Sold
Tubby's Inc. and Tubby's Advertising act as collection companies and,
therefore, there is no corresponding cost of goods sold.
7. Tubby's Company Stores cost of goods sold includes salaries and wages for
food service employees and other cost of goods sold (e.g., food products).
Tubby's Company Stores cost of goods sold, as a percent of Tubby's Company
Stores revenue, ranged from a low of 66.0% in the LTM to a high of 73.9% in
1995. Based on discussions with management, Tubby's Company Stores cost of
goods sold is projected to be more in line with recent performance.
Therefore, we have projected cost of goods sold at 66.0% of Tubby's Company
Stores revenue throughout the projection period.
8. SubLine cost of goods sold includes cost of equipment sales and other cost
of goods sold. SubLine's cost of goods sold, as a percent of SubLine revenue,
ranged from a low of 81.0% in 1997 to a high of 87.7% in 1995. The four-year
average was 86.9%. Based on discussions with management, SubLine cost of
goods sold is projected to be 86.9% of SubLine revenue throughout the
projection period.
9. SDS cost of goods sold includes cost of food, inbound freight, purchase
rebates, and purchase discounts. SDS' cost of goods sold, as a percent of SDS
revenue, was 76.0% for the latest twelve month period. Based on discussions
with management, SDS cost of goods sold is projected to be the same rate
throughout the projection period.
-33-
10. Total cost of goods sold includes items 7 through 9 and is presented in
the accompanying graph.
[GRAPHIC OMITTED]
11. Subtracting cost of goods sold from total revenue yields gross margin.
This significant drop in gross margin as a percent of total revenue since
1997 is due to the comparatively low profitability of SDS vis-a-vis the
combined other operations.
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
-34-
Operating Expenses
The Company's operating expenses are discussed below. Operating expenses
consist of depreciation, Tubby's operating expenses, Tubby's Advertising
operating expenses, Tubby's Company Stores operating expenses, SubLine
operating expenses, and SDS operating expenses.
12. Projected total depreciation is based on future capital equipment
purchases and the historical relationship of depreciation to fixed assets.
During periods of expansion, a company's capital expenditures will usually
exceed its annual depreciation expense. However, over the long term, as a
company's growth slows, it needs only to maintain its fixed asset base rather
than expand it. Additionally, a company's depreciation expense over time
cannot exceed its purchases. As such, depreciation expense is set equal to
capital expenditures in the residual year to reflect this normalized state.
13. Tubby's operating expenses are comprised of salaries and wages and other
operating expenses associated with the operations of Tubby's. Officers'
compensation was increased by slightly over $100,000 in the latest twelve
month period to bring management salaries to market levels given the current
and projected revenue and profitability levels.
Base salaries and wages are projected to increase by 3.0% annually throughout
the projection period. Tubby's management also anticipates hiring new
operations personnel to meet its growth expectations. Finally, other
operating expenses are expected to increase by 3.0% annually throughout the
projection period.
14. Tubby's Advertising operating expenses are expenses incurred by Tubby's
Advertising to promote and market the Tubby's trade name. All funds received
from franchisees are spent for advertising purposes only, except for a
portion that is retained by the Company to cover administrative costs
(approximately $120,000). Therefore, projected Tubby's Advertising
-35-
operating expenses are equal to Tubby's Advertising revenue less $120,000
(i.e., break-even except for a $120,000 administrative profit). The $120,000
administrative profit is increased 3% throughout the projection period to
reflect inflationary adjustments.
15. Tubby's Company Stores operating expenses are comprised of rent and other
operating expenses. Rent and other operating expenses are expected to
increase by 3.0% annually, the expected long-term inflationary growth rate.
16. SubLine operating expenses are composed of salaries and wages and other
operating expenses. Salaries and wages and other operating expenses are
expected to increase by 3.0% annually throughout the projection period, which
is consistent with inflationary expectations.
17. SDS' projected operating expenses are calculated based on management's
anticipated operating profit for SDS less SDS' gross margin. Although SDS
generated an 8% operating profit margin over the last twelve months, most of
SDS' current customers are located in the metro Detroit area where Tubby's
can spread the distribution and shipping costs over a larger number of stores
in a small area. However, over 70% of new franchise growth is projected to
come from nondominant market areas. Tubby's management anticipates SDS to be
a breakeven operation for these stores until critical mass can be built.
Therefore, SDS revenue related to existing franchises and projected new
franchises in the metro Detroit area are projected to continue to generate an
operating profit of 8%. Conversely, SDS' operations related to new franchises
outside the metro Detroit area are projected to break even for the first two
years of the projection period. Thereafter, SDS' operating profit margin
related to new franchises outside the metro Detroit area are projected to
increase steadily to 3.0% by the residual year.
18. Total operating expenses include items 12 through 17 and are presented in
the accompanying graph.
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
19. Adjusted historical and projected income from operations is presented in
the adjacent graphs.
Significant growth in income from operations is attributable to the growth in
SDS, both in nominal terms and profit margin.
[GRAPHIC OMITTED]
-37-
20. Historical other income (expense) includes interest income, rental
income, other income, and gain (loss) on the sale of assets. Gain (loss) on
the sale of assets was removed from the historical results since it is a
noncash item. Rental income was removed from other income and the value
associated with the rental property is captured separately as a nonoperating
asset.
Projected other income was increased from the latest twelve month period base
amount at 3.0% annually, the expected long-term inflationary growth rate.
21. The sum of other income (expense) and income from operations equals
earnings before interest and taxes.
22. Income taxes are calculated based on federal tax rates in effect as of
the Valuation Date less any deferred tax benefits. As of the Valuation Date,
Tubby's had a net operating loss carryforward of approximately $892,000,
which can be used to offset taxes against future income. However, under a
transaction scenario (willing buyer/willing seller) the use of the net
operating loss carryforward may be limited under Section 382 of the Internal
Revenue Code. As such, we limited the annual usage of the NOL to
approximately 5% of the total equity value of the Company.
23. Subtracting income taxes from earnings before taxes results in net
income.
Two types of adjustments are made to net income to convert it from an
accounting-based result to a cash flow-based result. First, noncash income
(expenses) included in the projections above are subtracted (or added) to net
income. Second, items which require cash outflows, but which are not
reflected in net income are subtracted. The specific adjustments are
described below.
24. Depreciation expense is a non-cash expense; therefore, it is added to net
income.
-38-
[GRAPHIC OMITTED]
25. Capital expenditures, which are not immediately deductible from net
income, do require an immediate cash outflow. The Company will incur future
capital expenditures for the purchase of equipment necessary to achieve
projected revenue growth.
Based on management forecasts, we estimate capital expenditures in year one
of the projection period to be $50,000. Thereafter, we project base capital
expenditures to increase at the inflationary growth rate of 3.0% throughout
the projection period. These expenditures will allow the Company to add
additional infrastructure (computers, desk, cubicles, etc.) to support
projected staff growth. Additionally, projected capital expenditures will
allow for technological improvements for both SDS systems and Tubby's in
general.
26. The second cash outflow not reflected in net income is additional working
capital. Working capital represents the amount of current assets in excess of
current liabilities that is required to fund the ongoing operations of a
business. As a company's sales increase, working capital needs increase as
well. The retention of additional working capital represents a decrease in
cash flow, and is therefore subtracted from net income.
Working capital for Tubby's was projected based on a weighted average rate
incorporating the effects of SDS and the other Tubby's subsidiaries.
Historical working capital for Tubby's, after removing current nonoperating
assets from current assets and current interest-bearing debt from current
liabilities, ranged from a low of 6.1% to a high of 14.5% of total revenue
over the last
-39-
four years. The weighted average over this period was 12.1% of total revenue.
(Increases in working capital percentages are a direct result of the greater
demand for working capital from SDS' operations). Projected working capital
is based on a blended rate increasing incrementally every year to reflect the
increase in SDS revenue as a percent of total revenue.
27. The result of the above additions to and subtractions from net income is
the distributable cash flow that could be paid to the shareholders of Tubby's
without impairing its ongoing operations.
28. The discount rate represents the rate of return required by an investor
in the Company. It is directly related to the perceived risk of the
investment. An investor would accept a rate of return no lower than that
available from other investments with equivalent risk, and would value the
investment accordingly.
The distributable cash flow estimated in the projections is estimated on a
"debt-free" basis. That is, interest expense and principal payments on debt
are not subtracted in deriving this cash flow figure. As such, the
distributable cash flow represents the cash flow available to both equity and
debt investors.
For consistency, it is therefore necessary to discount the cash flows to
present value using a rate of return which represents the weighted average
rate of return required by debt and equity investors.
To estimate the equity component of this weighted average rate of return, we
added an equity risk premium to the risk-free rate of return (represented by
U.S. Treasury Bonds) as of the Valuation Date. The equity risk premium is
based primarily on historical return data from the Center for Research in
Securities Prices ("CRSP") at the University of Chicago. As detailed in an
article published by David King in the Business Valuation Review, returns for
companies traded on the New York Stock Exchange from 1963 to 1997 were
calculated. The universe of companies
-40-
included in this study and the related returns were segregated into 25
groupings based on the size of each company. Based thereon, we estimate a
required rate of return on equity capital of 17.00%.
To estimate the debt component of the weighted average rate of return, we
assumed a buyer would be able to borrow at the prime rate. Since our
Discounted Cash Flow Approach analysis is completed on an after-tax basis, we
converted the required rate of return on debt capital to an after-tax return
based on the federal income tax. Based on this analysis, we estimate an
after-tax rate of return on debt capital of 6.22%.
The total weighted average rate of return is calculated based on the
concluded equity capital and debt capital rates of return as well as the
assumed capital structure. We estimated the capital structure of the likely
buyer based on the average of the respective percentage of interest-bearing
debt and market equity for companies classified as patent owners and lessors
as reported in Ibbotson Associates Cost of Capital Quarterly, 1998 Yearbook.
Based on the foregoing, we estimate the weighted average required rate of
return to be 16.5%.
29. Each year's cash flow is discounted using the computed rate of return to
arrive at the present value of distributable cash flow annually.
31 to 38. The residual cash flow was estimated as the equivalent of the
present value of the sum of the cash flows from year six into perpetuity
using the Gordon Growth Model. "Gordon's Model" calculates the value of an
annuity by capitalizing the annual cash flow by the expected rate of return,
less the growth rate in that annual cash flow. This results in the value of
the residual cash flow at the end of the projection period. The annual cash
flow is increased by a rate of 3.0%, which is consistent with long-term
growth expectations of the Company. The residual cash flow is
-41-
divided by the capitalization rate to arrive at the value of the residual
cash flow as of year five. The residual cash flow is then discounted using
the rate of return, resulting in the present value of the residual cash flow.
40. In addition to the value associated with the cash flows, any nonoperating
assets the Company owns should be considered. Nonoperating assets represent
those assets for which the income generating cash flow is not included in our
Discounted Cash Flow analysis and that the asset could be removed from the
Company without impairing its ability to conduct business. As of the
Valuation Date, the Company had four nonoperating assets: (1) excess cash;
(2) rental property; (3) notes receivable-other; and (4) notes receivable.
The sum of total nonoperating assets is $1,543,710.
Tubby's, Inc.
Nonoperating Assets
--------------------
5/31/99
----------
Excess Cash $599,144
Rental Property 600,000
Note Receivable-Other 55,256
Note Receivable 289,310
-----------
Total $1,543,710
-42-
41. The nonoperating assets are added to the total present value of
distributable cash flows from years one to five, and to the present value of
the residual cash flow to arrive at Business Enterprise Value.
42. As of the Valuation Date the Company had interest-bearing debt of
$126,271.
43. Subtracting interest-bearing debt from the Business Enterprise Value
yields the Marketable, Controlling-Interest Value of Equity.
44 & 45. Based on 2,583,114 shares outstanding as of the Valuation Date, we
estimate Tubby's, Inc. value of equity per share to be $1.08.
Market Comparable Approach
Typically, the value of a publicly traded company is the price paid for its
shares in daily transactions in the open market. However, some publicly
traded stocks' values might not be reflective of their true values because of
various factors, including, but not limited to, non-public information, lack
of informed investors, thinly traded stock, etc. One approach in valuing
companies such as these is to look at similar publicly traded companies and
observe the prices paid for their shares in daily transactions in the open
market. Often, the best alternative is to use prices investors are willing to
pay for securities of similar companies that are publicly traded for
guidance.
The first step in employing the Market Comparable Approach is to seek and
identify potential comparable companies. As previously discussed, exact
comparability is not required under this approach to valuation. Rather,
observation of companies subject to similar business and financial risks is
necessary to conduct meaningful comparative analysis.
-43-
To initiate a comparative company search, we first determined the appropriate
Standard Industrial Classification ("SIC") code. After determining the
appropriate SIC code, several services were available from which to obtain a
broad listing of public companies. We primarily searched the industry group
"Patent Owners and Lessors," SIC code 6794. We also searched "Eating and
Drinking Places," SIC code 5812.
To the extent the companies found in our search are subject to the same risks
and market influences and achieve approximately the same margins as Tubby's,
their market multiples may provide insight into the valuation process.
Our preliminary search revealed numerous potentially comparable companies
that franchise trademarks, trade names, and processes. Specifically, we
analyzed the public filings for the following companies: 1) Schlotzsky's,
Inc.; 2) Miami Subs Corporation; 3) the Quizno's Corporation; and 4) Blimpie
International, Inc. Many potential comparable companies were eliminated for
various reasons including, owning numerous company stores relative to
franchised stores, materially different product lines, and distressed or near
bankruptcy.
Following is a brief description of each comparable company that was
considered in our analysis.
Schlotzsky's, Inc.
The Company owns and franchises quick-service restaurants that feature
made-to-order sandwiches with delicatessen-style meats on specialty breads.
The menu also offers sourdough crust pizzas, soups, salads, chips, cookies,
beverages, and other side and dessert items. The Schlotzsky's Deli system
includes 730 franchised locations and company-owned stores that generated
system-wide sales of approximately $348.5 million in fiscal 1998.
-44-
Key characteristics of the Company and its stores include its proprietary
bread recipes, excellent customer service, its Turnkey Program (which
develops new stores); and its strong network of owner-operator franchisees.
Schlotzsky's stock is traded on the National Association of Securities
Dealers Automated Quotation systems (NASDAQ) under the symbol BUNZ.
Schlotzsky's had 7,516,000 shares outstanding on a diluted basis as of March
31, 1999 with an approximate share price of $11.17 on May 31, 1999, yielding
a market value of equity of $84.0 million. However, as of March 31, 1999,
Schlotzsky's had a substantial amount of investments and note receivable.
Therefore, we estimated Schlotzsky's had $17.2 million of nonoperating
assets. Nonoperating assets are removed from the market value of equity in
order to improve comparability to Tubby's in terms of a total capital to
EBITDA multiple, where EBITDA is equal to Earnings before interest, taxes,
depreciation and amortization. Since EBITDA is an operating result, leaving
in the nonoperating assets would artificially distort the multiple.
Therefore, $17.2 million of nonoperating assets are subtracted from the
market value of equity to yield an adjusted market value of equity of $66.8
million.
In addition, Schlotzsky's also had total interest-bearing debt capital of
$19.7 million. Adding the adjusted market value of equity to the total debt
capital yields a total capital value of $86.5 million.
For the twelve months ended March 31, 1999, Schlotzsky's had approximately
$44.0 million in net sales and $10.2 million in earnings before interest and
taxes ("EBIT"). Several adjustments were made to EBIT in order to remove any
noncash transactions or nonrecurring operating expenses. The first adjustment
removed $268,813 associated gain on sale of assets. Next, we removed $2.25
million of finance fees not collected. Finally, a noncash payment of $409,150
related to finance fees was added back to EBIT. The aforementioned
adjustments result in an adjusted EBIT of $8.1 million
-45-
For the twelve months ended March 31, 1999, Schlotzsky's expensed
approximately $2.2 million in depreciation. Adding depreciation to EBIT
yields $10.3 million of EBITDA for Schlotzsky's, which results in a total
capital/EBITDA multiple of 8.42.
Several adjustments were made to the EBITDA multiple to account for the
differences in size, growth outlook, capital structure, and various other
risk factors between Schlotzsky's and Tubby's. Schlotzsky's larger size and
significantly stronger growth outlook required a negative adjustment to the
EBITDA multiple. After considering the various differences between
Schlotzsky's and Tubby's, we concluded on an adjusted EBITDA multiple of
4.30.
Miami Subs Corporation
Miami Subs owns and franchises restaurants under the "Miami Subs" and "Miami
Subs Grill" trade names. The restaurants offer fresh quality food served in a
fast-food environment. Menu items include hot and cold submarine sandwiches,
various ethnic foods (e.g., pitas, greek salads, and gyros), flame grilled
hamburgers and chicken breasts, chicken wings, ice cream, and other desserts.
The system consists of 191 restaurants, of which 174 are operated by
franchisees. The vast majority of the franchises are located in the State of
Florida. (Miami Subs, like Tubby's, has had minimal success outside its home
market.) In the latest fiscal year, Miami Subs has introduced an alternative
menu with lower-priced items in order to mitigate its declining same-store
sales and to respond to increasing industry competition. This program has
resulted in a lower check average and gross margins. Another key strategy
Miami Subs is following is to pursue co-branding licensing opportunities in
which both companies offer each other's products.
-46-
Miami Subs' stock was recently delisted for not meeting minimum NASDAQ share
price and capitalization levels and is currently traded on the
Over-The-Counter Market (OTC) under the symbol SUBS.
Miami had 6,667,000 shares outstanding on a diluted basis as of March 31,
1999 with an approximate share price of $1.75 on May 31, 1999, yielding a
market value of equity of $11.7 million. However, as of the March 31, 1999,
Miami had a substantial amount of cash and note receivables. Therefore, we
estimated Miami had $10.7 million of nonoperating assets. Therefore, $10.7
million of nonoperating assets are subtracted from the market value of equity
to yield an adjusted market value of equity of $980,836.
In addition, Miami also had total interest-bearing debt capital of $5.9
million. Adding the adjusted market value of equity to the total debt capital
yields a total capital value of $6.9 million.
For the twelve months ended March 31, 1999, Miami had approximately $23.7
million in net sales and $1.5 million in EBIT. Several adjustments were made
to EBIT in order to remove any noncash transactions or nonrecurring operating
expenses. The first adjustment removed $641,220 of interest income associated
with nonoperating assets. Next, we removed $71,000 associated with gain on
the sale of a store. Finally, a nonrecurring payment of $144,000 related to
merger costs was added back to EBIT. The aforementioned adjustments result in
an adjusted EBIT of $970,780.
For the twelve months ended March 31, 1999, Miami expensed approximately $1.5
million in depreciation. Adding depreciation to EBIT yields $2.4 million of
EBITDA for Miami, which results in a total capital/EBITDA multiple of 2.83.
Several adjustments were made to the EBITDA multiple to account for the
differences in size, growth outlook, capital structure, and various other
risk factors between Miami and Tubby's. Miami's larger size compared to
Tubby's decreased the EBITDA multiple, while Miami's poorer
-47-
growth outlook and riskier capital structure increased the EBITDA multiple.
After considering the various differences between Miami and Tubby's, we
concluded on an adjusted EBITDA multiple of 4.00.
The Quizno's Corporation
Quizno's is engaged in franchising and operating quick-service restaurants
operating under the "Quizno's" and "Quizno's Classic Subs" trade names. The
Company's menu includes a variety of submarine style sandwiches, soups,
salads, desserts, and beverages.
Key characteristics of the Company's sandwiches are that after the sandwiches
are made, they are run through a conveyor oven that toasts the bread, melts
the cheese, and enhances the flavors of the meats. Additionally, the
ingredients used by each location may only be purchased from approved
suppliers, as they are usually higher in quality than ingredients used by
other sandwich shops.
Quizno's stock is traded on the National Association of Securities Dealers
Automated Quotation systems (NASDAQ) under the symbol QUIZ.
Quizno's had 3,762,000 shares outstanding on a diluted basis as of March 31,
1999 with an approximate share price of $7.14 on May 31, 1999, yielding a
market value of equity of $26.9 million. However, as of the March 31, 1999,
Quizno's had a substantial amount of cash, note receivables, and other
nonoperating assets. We estimated Quizno's to have $7.4 million of
nonoperating assets as of the Valuation Date. Therefore, $7.4 million of
nonoperating assets are subtracted from the market value of equity to yield
an adjusted market value of equity of $19.4 million.
-48-
In addition, Quizno's also had total interest-bearing debt capital of $3.6
million plus $1.7 million of preferred stock. Adding the adjusted market
value of equity to the total debt capital and preferred stock, yields a total
capital value of $24.7 million.
For the twelve months ended March 31, 1999, Quizno's had approximately $21.1
million in net sales and $2.2 million in EBIT. One adjustment was made to
EBIT in order to remove $193,746 related to a noncash transaction. The
aforementioned adjustment results in an adjusted EBIT of $2.4 million.
For the twelve months ended March 31, 1999, Quizno's expensed approximately
$908,359 in depreciation. Adding depreciation to EBIT yields $3.3 million of
EBITDA for Quizno's, which results in a total capital/EBITDA multiple of
7.58.
Several adjustments were made to the EBITDA multiple to account for the
differences in size, growth outlook, capital structure, and various other
risk factors between Quizno's and Tubby's. Quizno's larger size and stronger
growth outlook compared to Tubby's required a negative adjustment to the
EBITDA multiple. After considering the various differences between Quizno's
and Tubby's we concluded on an adjusted EBITDA multiple of 4.10.
Blimpie International, Inc.
The Company franchises and subfranchises trademarks and concepts that are the
basic attributes of the chain of fast-food sandwich restaurants known as
"Blimpie" restaurants. The system includes over 1,900 outlets in 46 states,
Argentina, Canada, Cyprus, Dominican Republic, Jordan, Panama, Peru, Poland,
Saudi Arabia, South Africa, Spain, and Great Britain.
In addition to sandwiches, Blimpie restaurants may also serve a variety of
salads and baked products, including bagels, rolls, cookies, donuts, and
muffins. While each franchisee is required to purchase its raw materials from
approved suppliers, they may or may not adopt the Company's recommended
prices for food products.
-49-
Blimpie's stock is traded on the American Stock Exchange (AMEX) under the
symbol BLM.
Blimpie had 9,451,000 shares outstanding on a diluted basis as of March 31,
1999 with an approximate share price of $2.53 on May 31, 1999, yielding a
market value of equity of $23.9 million. However, as of the March 31, 1999,
Blimpie had a substantial amount of cash/investments and note receivable.
Therefore, we estimated Blimpie to have $10.0 million of nonoperating assets.
Therefore, $10.0 million of nonoperating assets are subtracted from the
market value of equity to yield an adjusted market value of equity of $13.8
million.
In addition, Blimpie also had total interest-bearing debt capital of
$204,000. Adding the adjusted market value of equity to the total debt
capital yields a total capital value of $14.0 million.
For the twelve months ended March 31, 1999, Blimpie had approximately $34.9
million in net sales and $2.9 million in EBIT. Several adjustments were made
to EBIT in order to remove any noncash transactions or nonrecurring operating
expenses. The first adjustment removed $734,000 of interest income associated
with nonoperating assets. Next, a noncash payment of $14,000 related to
incentive stock grant was added back to EBIT. The aforementioned adjustments
result in an adjusted EBIT of $2.2 million.
For the twelve months ended March 31, 1999, Blimpie expensed approximately
$768,000 in depreciation. Adding depreciation to EBIT yields $2.9 million of
EBITDA for Blimpie, which results in a total capital/EBITDA multiple of 4.79.
Several adjustments were made to the EBITDA multiple to account for the
differences in size, growth outlook, capital structure, and various other
risk factors between Blimpie and Tubby's. Blimpie's larger size decreased the
EBITDA multiple, while Blimpie's poorer growth outlook and
-50-
less efficient capital structure increased the EBITDA multiple. After
considering the various differences between Blimpie and Tubby's we concluded
on an adjusted EBITDA multiple of 4.2.
Tubby's, Inc.
Market Comparable Approach
---------------------------
Adjusted EBITDA Multiples
-------------------------
Schlotzsky's 4.30
Miami 4.00
Quizno's 4.10
Blimpie 4.20
-----
Median 4.20
Market Comparable Analysis
The numbers adjacent to the paragraphs in this section correspond to the line
numbers located on the Conclusion of Value page in Exhibit D.
1. We calculated ratios of the comparable companies' adjusted total capital
(equity plus interest-bearing debt) to EBITDA. The use of a total capital to
EBITDA multiple ("Concluded Multiple") eliminates the effects of different
capital structures, special tax situations, and different depreciation
methods between the comparable companies and Tubby's.
-51-
In applying the Market Comparable Approach, we analyzed the comparable
companies' financial statements to determine if any extraordinary or
nonrecurring items were present. As warranted, we made specific adjustments
to remove items that would diminish the comparability of the selected
companies to Tubby's. In addition, we made selected adjustments to the
resulting total capital to EBTIDA multiples to reflect significant
differences between Tubby's and the comparable companies. Specifically, we
made adjustments for size (a proxy for risk), growth, and capital structure.
In general, a company's market multiple ("P/E") is represented by the
following formula:
P0 / E1 = 1 / (k - g)
Where:
P0 = the current stock price
E1 = one year forward earnings
k = required rate of return ("risk")
g = the long-term growth rate
Overall it is evident from the above formula that the P/E ratio (and total
capital to EBITDA multiple) of a company is higher to the extent that the
expected future growth rate ("g") is higher and to the extent that perceived
risk ("k") is lower.
2 & 3. The adjusted multiple is then applied to Tubby's Inc. EBITDA results
to yield the indicated value of invested capital before consideration of
nonoperating assets and other adjustments. Tubby's latest twelve month
adjusted EBITDA amount of $266,452 is taken from the adjusted combined
consolidated income statements in Exhibit B, Line 26.
-52-
4 & 5. The value of invested capital is composed of two components, equity
capital and debt capital. The value of interest-bearing debt is subtracted
from total capital to estimate the operating value of the Company's total
equity before consideration of nonoperating assets.
6 & 7. The value arrived at thus far under the Market Comparable Approach was
derived based on transactions involving minority-interests in publicly-traded
companies. However, the details of the Transaction involve purchasing a
controlling-interest in Tubby's. Therefore, we must estimate a control
premium to apply to the equity value of Tubby's in order to estimate a Fair
Value.
Several sources were analyzed to calculate an appropriate control premium to
apply to Tubby's operating value. These sources include data, as published by
Mergerstat Review, on acquisition premiums offered from 1994 through 1998 for
various companies and industries. After examining the average control
premiums offered over the 1994 through 1998 time period, in addition to more
specific information on control premiums offered within the leisure and
entertainment industry and on specific restaurant companies, we estimate an
average control premium of approximately 35% to be appropriate for Tubby's.
However, most of the transactions involved strategic buyers as opposed to
financial buyers. Strategic buyers typically offer higher control premiums
than financial buyers due to operating and financial synergies that are
obtained (e.g., economies of scale). However, since our definition of Fair
Value precludes special circumstances, such as a strategic fit, and focuses
on a typical willing buyer/willing seller (i.e., a financial buyer in most
circumstances), it is important to differentiate between the portion of the
control premium associated with synergistic value and control value. In other
words, of the above calculated 35% control premium, what portion of that
premium represents a premium for strategic value or synergistic value to the
acquiring company.
-53-
To estimate the portion of the 35% control premium associated with acquiring
a controlling interest (ignoring any strategic value) in Tubby's, we assumed
roughly one-half of the 35% control premium was purely for control from a
financial buyers perspective or 17.5%. This adjusted control premium was then
rounded to 20.0% and applied to the operating value of Tubby's.
8 & 9. The nonoperating assets and the present value of deferred tax assets
(NOL) are added to the operating value of Tubby's in order to calculate the
value of total capital.
10. Adding the net value of the nonoperating assets to the operating value of
Tubby's, yields the indicated value of common stock.
11 & 12. Based on 2,583,114 shares outstanding as of the Valuation Date the
equity value of Tubby's, Inc. under the Market Comparable Approach is $1.12
per share.
Conclusion of Value
In estimating the Fair Value of the common equity of Tubby's, we relied
equally on the results obtained from the Discounted Cash Flow Approach and
the Market Comparable Approach. Accordingly, we conclude the Fair Value of
Tubby's, Inc. on a per share basis as of May 31, 1999 to be $1.10 per share.
-54-
VII. CONCLUSION OF VALUE
As detailed herein, the indicated value per share under the Discounted Cash
Flow Approach and the Market Comparable Approach is $1.08 and $1.12,
respectively. Based on the merits of each approach, we relied on them equally
in determining the conclusion of value.
In accordance with the foregoing, we estimate the Fair Value of the common
equity of Tubby's, Inc., on a per share basis (2,583,114 shares outstanding)
as of May 31, 1999, to be:
ONE DOLLAR AND TEN CENTS
$1.10
* * * * * * *
Our conclusion of value is applicable for the stated date and purpose only
and may not be appropriate for any other date or purpose. Reference should be
made to the letter accompanying this report for procedures and various
limiting conditions which apply to this valuation and report.
EXHIBIT A
Description of Exhibits
-56-
Exhibit A
Description of Exhibits B-H
Exhibit B contains the historical financial statements provided by the
Company. The income statements and balance sheets are taken from the
Company's internally prepared financial statements for the fiscal years ended
November 30, 1995 through 1998 and the six months ended May 31, 1998 and
1999. (The income statement included herein is a consolidated, adjusted
income statement. The subsidiary level income statements and applicable
adjustments are contained in our internal workpapers.)
Each account (row) on the financial statements has been numbered to allow for
easier reference.
Exhibit C presents the Discounted Cash Flow Approach for the Company. The
numbers adjacent to each account correspond to the numbers of the income
statement accounts included in Exhibit B, respectively. These numbers also
correspond to the paragraph numbers in the verbiage of the report.
Exhibit D presents the Market Comparable Approach for the Company. The
numbers adjacent to each account correspond to the paragraph numbers in the
verbiage of the report.
Exhibit E contains management's letter of representation.
Exhibit F contains the letter of certification and the statement of
qualifications.
-57-
EXHIBIT B
Historical Financial Statements
-58-
<TABLE>
<CAPTION>
Tubby's Incorporated
Balance Sheets Exhibit B
As Of
------------------------------------------------------------------
11/30/1995 11/30/1996 11/30/1998 11/30/1998 05/31/1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash 951,144 793,494 864,229 692,196 894,704
Certificates of Deposit 100,000 100,000 105,430 111,199 111,199
Investments 154,590 25,000 25,383 0 25,432
Accounts Receivable-Trade 282,183 245,267 443,810 702,990 703,207
Notes Receivable-Other 126,742 72,091 66,217 59,721 55,256
Notes Receivable-Related Parties 21,918 0 0 0 0
Less: Doubtful Accounts (48,512) 0 0 0 0
Inventories 21,102 102,805 99,419 328,280 357,293
Prepaid Expenses & Other 58,876 110,644 51,449 93,289 54,588
---------- ---------- ---------- ---------- ----------
Total Current Assets 1,668,043 1,449,301 1,655,937 1,987,675 2,201,678
Property and Equipment:
Land 253,623 325,347 325,347 187,684 187,684
Buildings & Improvements 405,358 693,347 663,753 689,514 689,514
Equipment 314,677 440,705 527,265 498,354 499,572
Furniture & Fixtures 118,104 219,464 138,394 140,815 142,649
Vehicles 15,009 15,009 15,009 11,509 11,509
---------- ---------- ---------- ---------- ----------
Gross Property and Equipment 1,106,771 1,693,872 1,669,768 1,527,876 1,530,928
Less: Accumulated Depreciation and Amortization (526,572) (654,255) (773,576) (861,659) (906,917)
---------- ---------- ---------- ---------- ----------
Net Property and Equipment 580,199 1,039,617 896,192 666,217 624,012
Other Assets:
Net Assets held for Disposal 111,193 0 0 0 0
Goodwill 346,675 338,241 229,918 263,666 161,450
Note Receivable 488,318 505,380 543,342 408,733 386,308
Note Receivable - Related Party 75,429 0 0 0 0
Other Assets 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total Other Assets 1,021,615 843,621 773,260 672,399 547,758
---------- ---------- ---------- ---------- ----------
Total Assets 3,269,857 3,332,539 3,325,389 3,326,291 3,373,449
========== ========== ========== ========== ==========
Liabilities & Stockholders' Equity
Current Liabilities:
Accounts Payable 163,472 189,929 106,407 379,176 314,960
Accrued Liabilities-Compensation 36,127 21,075 19,887 20,738 41,623
Accrued Liabilities-Other 7,597 13,305 16,153 24,695 32,988
Joint Venture, Boli's 10,000 0 0 0 0
Deferred Revenue 77,000 87,000 115,489 114,954 76,348
Long-Term Debt Due within One Year 270,427 266,825 220,520 11,455 11,988
---------- ---------- ---------- ---------- ----------
Total Current Liabilities 564,623 578,134 478,456 551,018 477,907
Long-Term Liabilities:
Deferred Revenue 94,000 40,000 60,867 40,000 0
Long-Term Debt 246,206 175,770 139,932 120,346 114,282
---------- ---------- ---------- ---------- ----------
Total Long-Term Liabilities 340,206 215,770 200,799 160,346 114,282
---------- ---------- ---------- ---------- ----------
Total Liabilities 904,829 793,904 679,255 711,364 592,189
Stockholders' Equity:
Common Stock 25,382 25,832 25,832 25,832 25,832
Additional Paid in Capital 3,430,044 3,485,844 3,485,844 3,485,844 3,485,844
Retained Earnings (1,090,398) (973,041) (865,542) (896,749) (730,416)
---------- ---------- ---------- ---------- ----------
Total Stockholders' Equity 2,365,028 2,538,635 2,646,134 2,614,927 2,781,260
---------- ---------- ---------- ---------- ----------
Total Liabilities & Stockholders' Equity 3,269,857 3,332,539 3,325,389 3,326,291 3,373,449
========== ========== ========== ========== ==========
</TABLE>
-59-
Tubby's, Inc.
Adjusted Combined Consolidated Income Statements
<TABLE>
<CAPTION>
For the Fiscal Year Ended
--------------------------------------------------
11/30/1995 11/30/1996 11/30/1997 11/30/1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Tubby's Incorporated 1,162,877 1,102,699 1,334,109 1,077,859
Tubby's Advertising 574,402 570,152 650,909 667,007
Tubby's Company Stores 1,284,708 801,543 964,518 779,917
SubLine 603,679 612,336 580,278 391,311
SDS 0 0 0 4,397,578
---------- ---------- ---------- ----------
Total Revenue 3,625,667 3,086,730 3,529,814 7,313,672
Cost of Goods Sold
Tubby's Company Stores 949,454 588,257 662,002 531,732
SubLine 529,252 527,005 470,315 341,197
SDS 0 0 0 3,402,997
---------- ---------- ---------- ----------
Total Cost of Good Sold 1,478,706 1,115,262 1,132,317 4,275,926
---------- ---------- ---------- ----------
Gross Margin 2,146,962 1,971,468 2,397,497 3,037,747
Operating Expenses
Depreciation 124,655 104,550 131,806 136,704
Tubby's Incorporated 903,133 1,002,266 1,182,067 1,332,911
Tubby's Advertising 614,594 467,631 541,611 576,403
Tubby's Company Stores 291,006 261,916 257,663 189,951
SubLine 12,836 10,280 20,144 76,173
SDS 0 0 0 780,437
---------- ---------- ---------- ----------
Total Operating Expenses 1,946,225 1,846,643 2,133,291 3,092,580
---------- ---------- ---------- ----------
Income from Operations 200,736 124,825 264,205 (54,833)
Other Income (Expense) 15,696 3,644 5,429 34,019
---------- ---------- ---------- ----------
Earnings Before Interest and Taxes 216,432 128,468 269,634 (20,814)
Interest Expense 0 0 0 0
---------- ---------- ---------- ----------
Earnings Before Income Taxes 216,432 128,468 269,634 (20,814)
========== ========== ========== ==========
Net Capital Expenditures
EBIT 216,432 128,468 269,634 (20,814)
EBITDA 341,088 233,018 401,441 115,890
</TABLE>
-60-
<TABLE>
<CAPTION>
Tubby's, Inc.
Adjusted Common Size Combined Consolidated Income Statements Exhibit B
(As A Percentage of Revenue)
For the Fiscal Year Ended
---------------------------------------------- 12 Months 95 to 98
Ended 95 to 98 Weighted
11/30/1995 11/30/1996 11/30/1997 11/30/1998 05/31/1999 Average Average
---------- ---------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Tubby's Incorporated 32.1% 35.7% 37.8% 14.7% 13.6% 30.1% 23.5%
Tubby's Advertising 15.8% 18.5% 18.4% 9.1% 8.3% 15.5% 12.8%
Tubby's Company Stores 35.4% 26.0% 27.3% 10.7% 9.1% 24.8% 17.9%
SubLine 16.7% 19.8% 16.4% 5.4% 2.3% 14.6% 10.3%
SDS 0.0% 0.0% 0.0% 60.1% 66.7% 15.0% 35.4%
----- ----- ----- ----- ----- ----- -----
Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold
Tubby's Company Stores 26.2% 19.1% 18.8% 7.3% 6.0% 17.8% 12.6%
SubLine 14.6% 17.1% 13.3% 4.7% 2.2% 12.4% 8.8%
SDS 0.0% 0.0% 0.0% 46.5% 50.7% 11.6% 27.4%
----- ----- ----- ----- ----- ----- -----
Total Cost of Good Sold 40.8% 36.1% 32.1% 58.5% 58.9% 41.9% 48.8%
----- ----- ----- ----- ----- ----- -----
Gross Margin 59.2% 63.9% 67.9% 41.5% 41.1% 58.1% 51.2%
Operating Expenses
Depreciation 3.4% 3.4% 3.7% 1.9% 1.4% 3.1% 2.6%
Tubby's Incorporated 24.9% 32.5% 33.5% 18.2% 17.3% 27.3% 23.7%
Tubby's Advertising 17.0% 15.1% 15.3% 7.9% 7.5% 13.8% 11.0%
Tubby's Company Stores 8.0% 8.5% 7.3% 2.6% 2.4% 6.6% 4.7%
SubLine 0.4% 0.3% 0.6% 1.0% 0.5% 0.6% 0.8%
SDS 0.0% 0.0% 0.0% 10.7% 10.7% 2.7% 6.3%
----- ----- ----- ----- ----- ----- -----
Total Operating Expenses 53.7% 59.8% 60.4% 42.3% 39.9% 54.1% 49.2%
----- ----- ----- ----- ----- ----- -----
Income from Operations 5.5% 4.0% 7.5% (0.7)% 1.3% 4.1% 2.1%
Other Income (Expense) 0.4% 0.1% 0.2% 0.5% 0.4% 0.3% 0.4%
----- ----- ----- ----- ----- ----- -----
Earnings Before Interest and Taxes 6.0% 4.2% 7.6% (0.3)% 1.7% 4.4% 2.4%
Interest Expense 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- ----- ----- -----
Earnings Before Income Taxes 6.0% 4.2% 7.6% (0.3)% 1.7% 4.4% 2.4%
===== ===== ===== ===== ===== ===== =====
Net Capital Expenditures 0.0% 0.0% 0.0% 0.0% NA 0.0% 0.0%
EBIT 6.0% 4.2% 7.6% (0.3)% 1.7% 4.4% 2.4%
EBITDA 9.4% 7.5% 11.4% 1.6% 3.1% 7.5% 5.0%
</TABLE>
-61-
EXHIBIT C
Discounted Cash Flow Approach
-62-
Tubby's, Inc.
Discounted Cash Flow Approach Exhibit C
<TABLE>
<CAPTION>
For the Year Ending
-------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Year 4 Year 5 Residual
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Tubby's Incorporated $ 1,249,738 $ 1,380,999 $ 1,516,041 $ 1,653,479 $ 1,701,269 $ 1,762,998
Tubby's Advertising 768,894 814,074 857,746 899,376 928,160 942,410
Tubby's Company Stores 821,338 862,347 901,108 937,121 974,574 1,013,524
SubLine 250,000 255,000 260,100 265,302 125,292 127,797
SDS 6,522,236 7,171,420 7,823,191 8,469,442 8,956,450 9,262,503
------------ ------------ ------------ ------------ ------------ ------------
Total Revenue 9,612,206 10,483,839 11,358,185 12,224,720 12,685,744 13,109,233
Cost of Goods Sold
Tubby's Company Stores 541,919 568,976 594,550 618,312 643,024 668,723
SubLine 217,357 221,704 226,138 230,661 108,932 111,111
SDS 4,953,772 5,446,840 5,941,873 6,432,714 6,802,607 7,035,060
------------ ------------ ------------ ------------ ------------ ------------
Total Cost of Good Sold 5,713,047 6,237,520 6,762,562 7,281,687 7,554,562 7,814,894
------------ ------------ ------------ ------------ ------------ ------------
Gross Margin 3,899,159 4,246,319 4,595,623 4,943,033 5,131,182 5,294,339
Operating Expenses
Depreciation 109,069 99,753 92,195 86,117 81,288 67,739
Tubby's Incorporated 1,639,304 1,787,276 1,935,910 2,049,094 2,122,858 2,199,326
Tubby's Advertising 648,894 690,474 730,438 768,249 793,099 803,297
Tubby's Company Stores 215,053 221,504 228,149 234,994 242,044 249,305
SubLine 47,618 49,046 50,517 52,033 10,407 10,719
SDS 1,061,278 1,192,117 1,316,889 1,435,065 1,515,585 1,574,749
------------ ------------ ------------ ------------ ------------ ------------
Total Operating Expenses 3,721,214 4,040,170 4,354,098 4,625,551 4,765,280 4,905,135
------------ ------------ ------------ ------------ ------------ ------------
Income from Operations 177,945 206,149 241,525 317,481 365,902 389,204
Other Income (Expense) 23,000 23,690 24,401 25,133 25,887 26,663
------------ ------------ ------------ ------------ ------------ ------------
Income Before Taxes 200,945 229,839 265,925 342,614 391,788 415,867
Income Taxes (10,362) (18,967) (32,557) (62,466) (81,644) (141,395)
------------ ------------ ------------ ------------ ------------ ------------
Net Income 190,583 210,872 233,368 280,148 310,144 274,472
Adjustments:
Add: Depreciation 109,069 99,753 92,195 86,117 81,288 67,739
Less: Capital Expenditures (50,000) (51,500) (53,045) (54,636) (56,275) (67,739)
Less: Additional Working Capital (121,150) (113,402) (118,126) (121,404) (66,896) (63,567)
------------ ------------ ------------ ------------ ------------ ------------
Distributable Cash Flow 128,502 145,724 154,391 190,225 268,261 210,906
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Present Value Factor 16.5% 0.9265 0.7953 0.6826 0.5859 0.5030
------------ ------------ ------------ ------------ ------------
Present Value of Distributable
Cash Flow $ 119,054 $ 115,889 $ 105,392 $ 111,462 $ 134,925
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C>
Total Present Value of Cash Flows
(Years 1 to 5) 586,722
Present Value of Residual Cash Flow 785,756 Residual Cash Flow $ 210,906
------------
Total Operating Value 1,372,478
Residual Capitalization Rate:
Plus: Nonoperating Assets 1,543,710 Discount Rate 16.5%
------------
Less: Residual Growth Rate (3.0)%
------------
Business Enterprise Value 2,916,189 Capitalization Rate 13.5%
Less: Interest-Bearing Debt (126,271) Gross Residual Cash Flow Value 1,562,264
------------
Marketable, Controlling-Interest
Value of Equity 2,789,918 Present Value Factor 0.5030
------------
------------
Number of Shares Outstanding 2,583,114 Present Value of Residual Cash Flow $ 785,756
------------ ------------
Value of Equity per Share $ 1.08
============
</TABLE>
-63-
EXHIBIT D
Market Comparable Approach
-64-
Tubby's, Inc. Exhibit D
Market Comparable Approach
Conclusion of Value
Adjusted
Total Capital
to EBITDA
--------------
Concluded Multiple 4.20
Tubby's, Inc. Results Adjusted (LTM) $ 266,452
-----------
Indicated Value of Invested Capital 1,119,099
Less: Interest-Bearing Debt (126,271)
-----------
Operating Value (Marketable,
Minority-Interest Basis) 992,829
-----------
Plus: Control Premium 20% 198,566
-----------
Operating Value 1,191,394
Plus: Nonoperating Assets 1,543,710
Plus: Present Value of Deferred Tax Assets (NOL) 170,000
-----------
Indicated Value of Common Stock $ 2,905,105
Shares Outstanding 2,583,114
===========
Equity Value per Share $ 1.12
===========
- ---------
LTM = Latest Twelve Months
EBITDA = Earnings before Interest, Taxes, Depreciation, and Amortization
-65-
EXHIBIT E
Letter of Representation
-66-
[ TUBBY'S LOGO ] Phone (810) 978-8829
Toll Free (800) 752-0644
Fax (810) 977-8083
July 15, 1999
Stout Risius, Ross, Inc.
338 South High Street
Columbus, OH 43220
Dear Sirs:
In connection with your engagement to provide financial advisory services to
the Board of Directors of Tubby's, Inc., (the "Company"), the scope of which
is defined in an engagement letter dated May 12, 1999, we make the following
representations to you.
We are solely responsible for the representations, facts, assumptions and
estimates presented or used in your valuation of the common equity of the
Company. To the best of our knowledge and belief, they are fair and
reasonable in the circumstances.
We have read the Valuation Report and the Fairness Opinion Letter, each dated
July 15, 1999, prepared in connection with your analysis and are in agreement
with the representations, facts, assumptions and estimates included therein.
We acknowledge that the scope of your engagement did not include any
verification of them and that you have expressed no opinion on them.
We understand that the latest financial information made available to you was
the internal Financial statements of the Company as of May 31, 1999. We
represent to you since May 31, 1999, there have been no material changes in
the balance sheet of the Company or the operations or prospects of the
Company as of July 15, 1999.
We also acknowledge that under the terms of your engagement, you have no
responsibility to update your analysis for events occurring subsequent to its
issuance. We have not withheld information that in our view could reasonably
be expected to affect your analysis.
Sincerely,
/s/ Robert Paganes /s/ Theresa M. Borto
Robert Paganes, Theresa M. Borto
President and CEO Chief Financial Officer
6029 East Fourteen Mile Road * Sterling Heights, Michigan 48312-5801
-67-
EXHIBIT F
Statement of Qualifications
[ LOGO Stout-Risius-Ross ]
GREGORY A. O'HARA
Mr. O'Hara is a Managing Director of the Ohio Region at Stout Risius Ross. He
has extensive experience in the field of valuation and litigation support
consulting. His asset and business valuation experience encompasses a broad
range of industries. He has performed valuations for numerous purposes
including estate and gift taxation, Employee Stock Ownership Plans, stock
options and warrants, marital dissolution, shareholder disputes, purchase
price allocation, purchase and sale advisement, and other tax and corporate
related matters.
Among the industries Mr. O'Hara has served include, but are not limited to,
apparel, automotive, banks and thrifts, beverage distribution, building &
construction materials, broadcasting, computer software, construction
management, consumer products, electronic components, film distribution,
financial services, health care, heavy manufacturing, hotels, paper products,
publishing, retailing, metal stamping, telecommunications, and tool & die
manufacturing.
PREVIOUS EXPERIENCE
Prior to joining Stout Risius Ross, Mr. O'Hara was a consultant with Price
Waterhouse in its Valuation Services Group in Chicago. During his tenure with
Price Waterhouse's Valuation Group, he planned, performed and supervised
valuation consulting engagements for various purposes in a diverse range of
industries. Preceding his experience with Price Waterhouse, Mr. O'Hara was a
senior financial analyst with the Keywell Corporation in Chicago.
EDUCATION
M.B.A. Finance - University of Michigan, Ann Arbor, Michigan
B.A. Economics - University of Pittsburgh, Pittsburgh, Pennsylvania
-69-
CERTIFICATION
I certify that, to the best of our knowledge and belief:
o The statements of fact contained in this report are true and correct.
o The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are our
personal, unbiased professional analyses, opinions, and conclusions.
o We have no present or prospective interest in the business that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
o Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in, or the use of, this
report.
o Our analyses, opinions, and conclusions were developed, and this
report has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice.
o No one provided significant professional assistance to the person(s)
signing this report except as indicated below.
o In addition to the undersigned, Mark R. Fournier assisted in the
preparation of this valuation report.
/s/ Gregory A. O'Hara
- ------------------------------
Gregory A. O'Hara
Managing Director
Stout Risius Ross, Inc.
-70-
EXHIBIT (b) (2)
FAIRNESS OPINION
STOUT RISIUS ROSS, INC.,
July 15, 1999
Board of Directors
Tubby's, Inc.
c/o Mr. Robert Paganes
6029 East 14 Mile Road
Sterling Heights, MI 48312-5802
Members of the Board:
We understand Tubby's, Inc. ("Tubby's" or the "Company") is considering a
merger with R Corp pursuant to which all shareholders of the Company (the
"Shareholders"), other than those shareholders that are also shareholders of
R Corp, will receive cash in exchange for their shares of Tubby's, Inc. at
the price of $1.10 per share. The aforementioned plan of merger is referred
to hereinafter as the "Transaction."
You have requested, from a financial point of view, our opinion as to the
fairness of this Transaction to the Shareholders of the Company. To arrive at
our opinion, we performed an analysis to estimate the Fair Value of the
common equity of the Company. We define Fair Value as the price at which
property would exchange between a willing buyer and a willing seller, when
the former is not under any undue compulsion to buy and the latter is not
under any undue compulsion to sell, both having reasonable knowledge of the
relevant facts.
In general, we considered the following factors in performing our analysis:
the nature and history of the Company; the outlook for the economy and
industry in which the Company operates; the book value and financial
condition of the Company; the earning capacity of the Company; the dividend
paying capacity of the Company; whether goodwill or other intangible value
exists within the Company; previous sales of the Company's stock and the size
of the block transferred; and the market prices of companies in the same or
similar industries which trade in the open market.
In arriving at our opinion, we reviewed the Agreement and Plan of Merger (the
"Agreement") and the associated proxy statement (the "Proxy Statement"), and
held discussions with members of senior management of the Company concerning
its business, industry, historical financial performance, and projected
franchise openings and closings for the next five years. We examined the
Company's audited and internally prepared financial statements for the years
ended November 30, 1995 to 1998 and the Company's internally prepared interim
financial statements for the six months ended May 31, 1999. We considered, to
the extent available, the financial terms of certain other
transactions involving target companies similar to Tubby's. In addition, we
performed a discounted cash flow analysis based on the Company's future
prospects and also a market comparable approach (which estimates value based
on the price of comparable publicly traded stocks) to test the reasonableness
of the proposed transaction terms.
Management's projections regarding store franchise openings and closings
formed the basis of the discounted cash flow analysis. In addition to the
foregoing, we conducted such other analyses and examinations and considered
such other publicly available financial, economic, and market criteria as we
deemed appropriate in arriving at our opinion.
We did not perform an independent valuation of all of the underlying assets
and liabilities of the Company, nor have we been furnished with any such
evaluation or appraisal.
Our opinion is premised on the assumption that the financial condition and
prospects of the Company as of the date of this letter, including the balance
sheet of the Company, has not changed materially since May 31, 1999, the date
the latest financial information was available. In rendering our opinion, we
have assumed and relied, without independent verification, upon the accuracy
and completeness of all financial and other information that was publicly
available, furnished by the Company, or otherwise reviewed by or discussed
with us. In that regard, we have relied upon Tubby's management as to the
reasonableness and achievability of the financial and operating forecasts
provided to us, and we have assumed that such forecasts reflect the best
currently available estimates and judgements of management.
In connection with performing our services for the Board of Directors, we
have not been authorized by the Company to solicit, nor have we solicited,
third-party indications of interest for the acquisition of all or any part of
the Company. Further, we were not requested to consider, and our opinion does
not address, the relative merits of the contemplated Transaction as compared
to any alternative business strategies that may exist for the Company or the
effect of any other transactions in which the Company might engage.
Our opinion is necessarily based on market, economic and other conditions as
they exist and can be evaluated on, and on the information made available to
us as of the date hereof.
We are acting as financial advisor to the Board of Directors of the Company
and will receive a fee from the Company for our services. However, our
compensation for providing financial advisory services to the Board is
neither based nor contingent on the results of our analysis. Further, none of
our
employees who worked on this engagement has any known financial interest
in the assets or equity of the Company or the outcome of our analysis. In
addition, the Company has agreed to indemnify us for certain liabilities
arising out of our engagement.
Our work is only to be utilized by the Board of Directors of the Company as
one input to consider in the process of analyzing the contemplated
Transaction. Further, our opinion is not intended to be, nor does it
constitute, a recommendation to any of the Shareholders as to how such
Shareholder should act in regard to the Transaction described in the first
paragraph of this letter.
Our opinion may not be published or otherwise used or referred to, without
our prior written consent. We understand that this opinion letter, subject to
us giving written consent, may be attached to a Proxy Statement that will be
sent to the Shareholders. In giving such consent, we do not hereby admit that
we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933 or the rules and regulations of the
Securities and Exchange Commission thereunder.
Based upon and subject to the forgoing, including the various assumptions and
limitations set forth herein, it is our opinion that as of the date hereof,
the Transaction, as detailed in the Agreement, is fair from a financial point
of view to the Shareholders of the Company.
Yours very truly,
STOUT RISIUS ROSS, INC.
______/s/______________________
Gregory A. O'Hara
Managing Director
EXHIBIT C
STOCK PURCHASE, REDEMPTION &
SHAREHOLDERS AGREEMENT
STOCK PURCHASE, STOCK REDEMPTION AND
SHAREHOLDER AGREEMENT
This Agreement dated this 14th day of July 1999, by and between
Robert M. Paganes ("R. Paganes"), Peter T. Paganes ("T. Paganes"), Vincent J.
Tatone ("Tatone") and Tubby's, Inc., a New Jersey corporation ("Tubby's").
RECITALS
A. R. Paganes, T. Paganes and Tatone are each directors, officers and
shareholders of Tubby's, Inc. R. Paganes owns 259,775, T. Paganes owns
191,400 and Tatone owns 50,000 shares of Tubby's common stock.
B. As officers and individually, R. Paganes, T. Paganes and Tatone have
procured financing on behalf of Tubby's, and have been asked to
personally guarantee and collateralize those loans by pledging personal
assets. Those loans in amounts which will exceed one million nine hundred
thousand ($1,900,000) dollars will be used to complete a proposed merger
pursuant to which all shareholders other than R. Paganes, T. Paganes and
Tatone will receive cash in exchange for their shares of Tubby's common
stock. Thereafter, R. Paganes, T. Paganes and Tatone will be the only
shareholders of Tubby's. For purposes of the merger, the shares have been
valued at $1.10.
C. The parties have agreed that R. Paganes, T. Paganes and Tatone shall own
an equal amount of shares of Tubby's after implementation of the proposed
merger. In that regard, the parties have agreed that Tatone will purchase
shares from Tubby's and Tubby's shall redeem shares from R. Paganes and
T. Paganes so that
2
each individual shall own one hundred fifty thousand (150,000) shares of
Tubby's common stock after the merger.
WHEREFORE, the parties agree as follows:
1. The parties agree to execute personal guarantees and any other necessary
and/or desirable instruments as may be requested by lenders in order to
procure adequate financing to complete the proposed merger.
2. Tatone shall purchase directly from Tubby's one hundred thousand
(100,000) shares of common stock at the merger price of $1.10 per share.
3. Tubby's shall redeem from T. Paganes forty-one thousand four hundred
(41,400) shares of common stock at the merger price of $1.10 per share.
4. Tubby's shall redeem from R. Paganes one hundred nine thousand seven
hundred seventy five (109,775) shares of common stock at the merger price
of $1.10.
5. It is the intent of the parties that each individual shall own one
hundred fifty thousand (150,000) shares of the common stock of Tubby's.
Therefore, in the event that there are any inaccuracies in the current
number of shares owned by any of the individual parties, the number of
shares to be purchased and/or redeemed shall be adjusted to achieve the
intent of the parties.
6. The purchase and/or redemption of shares pursuant to this Agreement is
subject to and conditioned upon the proposed merger being approved by a
majority of the shares held by Tubby's shareholders entitled to vote on
the proposed merger. The transactions set forth in this Agreement shall
3
be implemented within thirty (30) days after the Effective Date of the
merger, as defined in the Plan of Merger, and shall be retroactive to the
Effective Date.
7. This Agreement may be amended by the parties in writing so long as the
ratio of stock ownership (one-third common equity ownership by each
individual) and the number of shares to be owned by each individual is
not altered (i.e., 150,000 shares).
WHEREFORE, the parties have signed this Agreement on the date
first above written.
Tubby's Inc.
/s/ Robert M. Paganes /s/ Robert M. Paganes
- ----------------------------- -------------------------
By: Robert M. Paganes Robert M. Paganes
Its: President
/s/ Peter T. Paganes /s/ Vincent J. Tatone
- ----------------------------- -------------------------
Peter T. Paganes Vincent J. Tatone
4
EXHIBIT D
PRELIMINARY PROXY STATEMENT
(WITHOUT EXHIBITS)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 2)
Filed by Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commissioner Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14(a)-11(c)
Tubby's, Inc.
------------------------------------------------
(Name of Registrant as Specified in its Charter)
-----------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(I)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to the Exchange Act
Rule 14a--6(i)(3).
[ X ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
[ ] Previously paid.
1) Title of each class of securities to which transaction applies;
Common Stock, par value $0.01
2) Aggregate number of securities to which transaction applies;
2,081,938
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the fee is calculated and state how it was determined); 1/50 of 1
percent of $2,290,131.80
4) Proposed maximum aggregate value of transactions; $2,290,131.80
5) Total fee paid; $458.03
[ ] Fee paid previously with preliminary materials.
[ X ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11 (a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid; $458.03
2) Form, Schedule or Registration Statement No.; Schedule 13E-3
3) Filing Party; Tubby's, Inc.
4) Date Filed; _________________
LETTER TO SHAREHOLDERS OF
Tubby's, Inc.
Dear Shareholders:
We cordially invite you to attend the Annual Meeting of
Shareholders of Tubby's, Inc. ("Tubby's") to be held on ____________, 2000 at
10:00 a.m. at the Best Western Inn, 34911 Van Dyke Avenue, Sterling Heights,
Michigan 48312. First, as explained in the accompanying Proxy Statement, the
Shareholders of Tubby's will be asked to consider and vote upon a proposed
Agreement and Plan of Merger (the "Merger Agreement") providing for the
merger of R Corp with Tubby's, with Tubby's to be the surviving corporation.
The principal aspect of the Merger Agreement is that all shareholders, other
than three current members of Tubby's management who also constitute a
majority of its Board of Directors, will receive cash in exchange for their
shares at the merger price of $1.10 per share. Second, the shareholders will
be asked to elect Directors to serve for the ensuing year, in the event the
proposed merger is not approved.
The Board of Directors of Tubby's and R Corp are affiliated.
Messrs. Robert M. Paganes, Peter T. Paganes and Vincent J. Tatone ("Paganes,
Paganes and Tatone") constitute the Board of Directors of R. Corp and
constitute a majority of Tubby's Board of Directors. If the Merger Agreement
is approved, Paganes, Paganes and Tatone will be the only remaining
shareholders of Tubby's. They will acquire all of the benefits and detriments
of owning all of Tubby's Shares and will be responsible for the repayment of
all of the loans required to fund the Merger Agreement. Therefore, it may be
in their best interests to undervalue the shares for purposes of the merger
to the detriment of unaffiliated shareholders. Because of this inherent
conflict of interest, the terms of the Merger Agreement were determined in
the context of the objective fair market value of Tubby's assets. The Board
of Directors of Tubby's sought and received a fairness opinion from Stout
Risius Ross, Inc., an independent valuation firm, which concluded that the
terms of the proposal merger are fair from a financial point of view to the
unaffiliated shareholders of Tubby's. The Board of Directors also considered
the Company's recent delisting from the NASDAQ Small Cap Market, recent
trading activity and the current and potential future bid prices for the
shares. After carefully considering all of these factors, the Board of
Directors of Tubby's concluded that the Merger is in the best interest of the
Shareholders. Accordingly, the Board of Directors of Tubby's is recommending
that the Shareholders vote FOR approval of the Merger Agreement.
As further described in the Proxy Statement, closing upon the
Merger Agreement will result in all unaffiliated shareholders receiving
cash in exchange for their shares. Each share of Common Stock of Tubby's will
be exchanged for $1.10.
The accompanying Proxy Statement provides a description of the
terms of the proposed Merger and certain additional information to which you
are urged to give your careful attention. Whether or not you are personally
able to attend the Annual Meeting, please complete, sign, date and return the
enclosed Proxy as soon as possible. This action will not limit your right to
vote in person if you wish to attend the Annual Meeting and vote personally.
Very truly yours,
Robert M. Paganes
President and CEO
Dated: __________________
TUBBY'S, INC.
NOTICE OF 1999 ANNUAL MEETING OF SHAREHOLDERS
______, 1999
To the shareholders of Tubby's, Inc.:
You are cordially invited to attend the 1999 Annual Meeting of
Shareholders of Tubby's, Inc. to be held at 10:00 a.m. EST, on ____________,
__________, 2000, at the Best Western Sterling Inn, 34911 Van Dyke Avenue,
Sterling Heights, Michigan 48312, for the following purposes:
1. Consider and vote upon the approval of the Agreement and
Plan of Merger ("Merger Agreement") to merge R Corp with
Tubby's, Inc. ("Tubby's"), pursuant to which Tubby's
shareholders will receive cash in exchange for their shares
at the merger price of $1.10 per share.
2. To elect Directors to serve for the ensuing year and until
their successors are elected in the event the Merger is not
approved; and
3. To transact such other business as may properly come before
the meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on
November 30, 1999 as the record date for the determination of shareholders
entitled to vote at the Meeting or any adjournment thereof. You are cordially
invited to attend the Meeting. Your vote is important. Whether you plan to
attend the Meeting or not, you are requested to complete, date and sign the
enclosed proxy form and return it promptly in the envelope provided for that
purpose. The enclosed proxy is being solicited on behalf of the Board of
Directors of the Company.
By Order of the Board of Directors
Vincent J. Tatone
Secretary
1
PROXY STATEMENT
TUBBY'S, INC.
6029 East Fourteen Mile Road
Sterling Heights, Michigan 48312-5801
1999 Annual Meeting of Shareholders
___________, 1999
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Tubby's, Inc., a New Jersey
corporation (the "Company" or "Tubby's"), to be voted at the 1999 Annual
Meeting of Shareholders of the Company (the "Meeting"), to be held at 10:00
a.m. EST. on ______________, 2000 at the Best Western Sterling Inn, 34911 Van
Dyke Avenue, Sterling Heights, Michigan 48312. The approximate mailing date
of this Proxy Statement is ___________, 2000.
All properly executed proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon or otherwise
as provided therein.
Unless instructions to the contrary are marked, proxies will be voted for the
approval of the Merger Agreement and for the election of three directors in
the event the Merger Agreement is not approved. Any proxy may be revoked at
any time prior to the exercise thereof by giving written notice to the
Secretary of the Company.
The Directors have fixed the close of business on November 30, 1999, as the
record date for the determination of shareholders entitled to notice of and
to vote at the Meeting and at any adjournment thereof. Shareholders on the
record date will be entitled to one vote for each share held, with no shares
having cumulative voting rights. As of November 30, 1999, the Company had
outstanding 2,583,113 shares of Common Stock, par value $0.01 per share and
approximately 7,000 record holders.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
2
TABLE OF CONTENTS
Page
----
Introduction .................................................... 2
Summary of Proxy Statement ...................................... 4
Special Factors ................................................. 7
Sources and Amounts of Funds and Other Consideration ............ 7
Purpose(s), Alternatives, Reasons and Effects ................... 8
Fairness of Transaction ......................................... 13
Reports, Opinions, Appraisals and Certain Negotiations .......... 15
Interests of Certain Persons in the Merger ...................... 16
Conditions to Merger ............................................ 17
Certain Federal Income Tax Consequences ......................... 17
Dissenters Appraisal Rights ..................................... 17
Business of Tubby's and R Corp. ................................. 17
Consolidated Selected Financial Data of Tubby's, Inc. ........... 18
Market Prices of Tubby's Common Stock ........................... 18
Description of the Transaction .................................. 19
Solicitation of Proxies ......................................... 20
Accounting Treatment ............................................ 21
Previous Contacts Between Tubby's, Interfoods of
America, Inc., and R Corp. .................................... 21
Business of Tubby's ............................................. 22
Management of Tubby's ........................................... 29
Security Ownership of Certain Beneficial Owners and
Management .................................................... 32
Management's Discussion and Analysis of Financial
Condition and Results of Operations of Tubby's ................ 33
Certain Relationships and Related Transactions of
R Corp and Tubby's ............................................ 41
Federal Income Tax Consequences ................................. 42
Legal Matters ................................................... 42
Experts ......................................................... 42
Reports and Board of Directors Meetings ......................... 42
Director's Compensation ......................................... 43
Independent Accountants ......................................... 43
Proposals of Shareholders ....................................... 43
Miscellaneous ................................................... 43
Agreement and Plan of Merger .................................... Appendix A
Fairness Opinion of Stout Risius Ross, Inc. ..................... Appendix B
Financial Statements ............................................ F1 - F36
3
SUMMARY OF PROXY STATEMENT
Certain information contained in this Proxy Statement is summarized below.
This summary is not intended to be complete and is qualified in all respects
by the detailed information appearing elsewhere in this Proxy Statement and
the annexes hereto. Shareholders are urged to review carefully the entire
Proxy Statement, the Agreement and Plan of Merger, which is attached hereto
as Appendix A and the other annexes hereto. Cross-references in this summary
are to captions in the Proxy Statement.
R Corp
R Corp, a Michigan corporation ("R Corp"), exists only for the
purpose of structuring the Agreement and Plan of Merger. Its shareholders
consist of the following members of Tubby's current management, who also
constitute a majority of Tubby's Board of Directors: Peter T. Paganes,
Chairman of the Board and Executive Vice-President, Vincent J. Tatone,
Director and Corporate Secretary, and Robert M. Paganes, Director, President
and CEO. Messrs. Paganes, Paganes and Tatone ("P, P & T") are the sole
shareholders of R Corp. R Corp does not own and/or operate any restaurants
and has not conducted any business other than its formation and entering into
the Agreement and Plan of Merger. R Corp's address is 6029 E. Fourteen Mile
Road, Sterling Heights, Michigan 48312. R Corp was originally established for
the purpose of acquiring all of the assets of Tubby's from Interfoods of
America, Inc., ("Interfoods") pursuant to a proposed merger between Tubby's
and Interfoods which never proceeded beyond an initial letter of intent, and
was never submitted for consideration to the shareholders of either
corporation. See "Previous Contacts Between Tubby's , Interfoods of America,
Inc., and R Corp."
Tubby's
Tubby's, Inc., a New Jersey corporation ("Tubby's"), wholly-owns
the following subsidiaries: (1) Tubby's Sub Shops, Inc., a Michigan
corporation ("TSSI'"), (2) Sub Line Co., a Michigan corporation ("Sub Line"),
(3) SUBperior Distribution Systems, Inc., a Michigan corporation ("SDS"), and
(4) Tubby's Company Stores, Inc., a Michigan corporation ("Company Stores").
TSSI franchises a chain of restaurants under the name "Tubby's Sub Shops"
that specialize in submarine sandwiches and under the name "Stuff Yer Face"
that specialize in pizza and stromboli sandwiches. As of August 31, 1999, 93
sub shops and two Stuff Yer Face restaurants were in operation. TSSI has a
wholly owned subsidiary, Tubby's Sub Shops Advertising Co., Inc., a Michigan
corporation ("TSSAC"), that manages advertising contributions that Tubby's
receives from its franchisees. Sub Line acts as a broker for machinery and
equipment that may be purchased by franchisees. SDS distributes food and
other products that may be purchased by franchisees. Company Stores owns and
operates four Tubby's Sub Shop restaurants. Unless the context otherwise
requires, any references to "Tubby's" shall also
4
be deemed to refer to its wholly owned subsidiaries. The principal offices of
Tubby's are located at 6029 E. Fourteen Mile Road, Sterling Heights, Michigan
48312, and its telephone number is (810) 978-8829. Tubby's Common Stock $.01
Par Value (the "Tubby's Common Stock") is traded in the over-the-counter
market with price quotations as available on the over-the-counterbulletin
board (the "OTCBB"). Tubby's Common Stock was listed on the NASDAQ Small Cap
Market until May 5, 1999, when it was delisted because of the stock's
inability to maintain a minimum bid price of $1.00.
The following diagram illustrates Tubby's current corporate structure:
Tubby's, Inc.
____________________________________
/ / \ \
/ / \ \
/ / \ \
TSSI Subline SDS Company Stores
|
|
TSSAC
Date, Time, Place and Purposes of the Annual Meeting
The Annual Meeting of Shareholders of Tubby's will be held on
__________, 2000, at 10:00 a.m. local time at the Best Western Sterling Inn
located at 34911 Van Dyke Avenue, Sterling Heights, Michigan 48312. At the
Annual Meeting, the shareholders of Tubby's will consider and vote upon a
proposal to approve the Agreement and Plan of Merger dated as of May 27, 1999
(the "Merger Agreement") among Tubby's and R Corp. A copy of the Merger
Agreement is attached hereto as Appendix A. The approval of the Merger
Agreement by the shareholders shall be contingent upon the affirmative vote
of a majority of the outstanding shares. The failure by the shareholders of
Tubby's to approve the terms of the Merger Agreement shall result in the
termination of the Merger Agreement. The shareholders will also vote upon the
election of three Directors to serve for the ensuing year, in the event the
Merger Agreement is not approved.
Record Date; Quorum
Only holders of record of shares of Tubby's Common Stock at the
close of business on November 30, 1999 (the " record date") will be entitled
to vote at the annual meeting including any adjournment or postponement
thereof. Holders of Tubby's Common Stock are entitled to cast one vote for
each share held by them. The presence, either in person or by properly
executed proxy of holders of a majority of the outstanding shares of Tubbys
Common Stock entitled to vote is necessary to constitute a quorum at the
Annual Meeting. The presence of a majority of unaffiliated shareholders is
not necessary to constitute a quorum.
Vote Required
Pursuant to the provisions of the New Jersey Business Corporation
Act, the affirmative
5
vote of the holders of the majority of the outstanding shares of Tubby's
Common Stock entitled to vote is required to approve the Merger Agreement.
Holders of approximately 1,054,000 outstanding shares of Tubby's Common Stock
(approximately 40.4%), which includes 500,000 shares held by affiliates
Robert M. Paganes (259,000 shares), Peter T. Paganes (191,000 shares) and
Vincent J. Tatone (50,000 shares), have informally indicated their intention
to vote in favor of the Merger Agreement. Assuming these unaffiliated holders
vote in favor of the Merger Agreement, the approval of holders of at least an
additional 246,557 shares (approximately 9.5%) will be necessary for approval
of the Merger Agreement. The affirmative vote of the holders of the majority
of shares constituting a quorum is required for the election of Directors.
Abstentions and broker non-votes will not be counted as affirmative votes.
The Merger
R Corp, a Michigan Corporation which exists only for purposes of
structuring this transaction, would be merged into Tubby's. Tubby's would be
the surviving corporation and R Corp would no longer have any separate
existence. All of the shareholders of Tubby's, other than Paganes, Paganes
and Tatone, would receive cash from Tubby's in exchange for their shares.
Paganes, Paganes and Tatone the only shareholders of both R Corp and Tubby's,
would not receive any cash in exchange for their Tubby's shares and would
remain as Tubby's only shareholders. The merger would be funded though loans
to Tubby's, to Paganes, Paganes and Tatone, individually, and from Tubby's
general account. Paganes, Paganes and Tatone have procured a commitment for
adequate financing to complete the merger and have agreed to personally
guarantee repayment of the loan.
The shares, for purposes of the Merger Agreement, have been valued
at $1.10. Each share of Tubby's Common Stock surrendered shall be exchanged
for $1.10. There are presently outstanding 2,583,113 shares of Tubby's Common
Stock. Therefore, following completion of the Merger, and the exchange of all
outstanding shares of Tubby's Common Stock for cash, there will be
approximately 500,000 shares outstanding, which will be held by Paganes,
Paganes and Tatone. Thereafter, Tubby's will terminate its registration under
Section 12 of the Securities Exchange Act of 1934 (the "Act") and its shares
will not be publicly traded. Tubby's will no longer be a reporting company
under the Act and will operate as a private company. A copy of the Agreement
and Plan of Merger is attached as Appendix A.
After the Effective Date of the Merger, Tubby's will make the cash
payments of $1.10 per share described above as follows. Promptly after the
Effective Date of the Merger, Tubby's will mail to each shareholder a form
letter of transmittal and instructions for use in effecting the surrender for
payment therefor of certificates which prior to the Merger represented
Tubby's Common Stock. After the Effective Date of the Merger and until so
surrendered and exchanged, each outstanding certificate which prior to the
Effective Date of the Merger represented shares of Tubby's Common Stock will
be deemed for all purposes to represent only a right to receive a cash
payment of $1.10 per share, and no interest will be paid or accrued on the
amount payable upon surrender of any such certificates. Upon surrender to
Tubby's of such certificates, together with such letter of transmittal duly
executed, Tubby's will pay to the persons entitled thereto, in cash or
equivalent, the amount to which such persons are entitled. If payment is to
be made to a person other than the one in whose name the certificate
surrendered is registered, it will be a condition of such payment that the
certificate so surrendered must be properly endorsed or
6
otherwise in proper form for transfer and that the person requesting such
payment shall pay to Tubby's any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the
certificate surrendered, or establish to the satisfaction of Tubby's that
such tax has been paid or is not applicable. If any holder of Tubby's Common
Stock is unable to surrender such holder's stock certificates because such
certificates have been lost or destroyed, such holder may deliver in lieu
thereof an affidavit and indemnity bond in form and substance and with surety
reasonably satisfactory to Tubby's.
The Merger will become effective upon the later of either (i) the
filing of the Merger Agreement with the Secretary of State of New Jersey, or
(ii) the issuance by the Secretary of State of New Jersey of a Certificate of
Merger relating to the Merger (the "Effective Date"). It is expected that if
the Merger is approved by Tubby's shareholders at the annual meeting, and
assuming that the conditions to the Merger are satisfied, the Merger will
become effective during the fourth calendar quarter of 1999.
SPECIAL FACTORS
Sources and Amounts of Funds and Other Consideration
The Merger, which will require approximately Two Million Two
Hundred Ninety Thousand ($2,290,000) Dollars, will be funded though loans
from Comerica Bank, Detroit, to Tubby's, which will be secured by all of the
assets of Tubby's and will be personally guaranteed and personally
collateralized by the pledge of additional property owned by Paganes, Paganes
and Tatone; loans to Paganes, Paganes and Tatone, individually; replacing
Tubby's current $250,000 line of credit with a new $400,000 line of credit;
and with funds from Tubby's general account, as follows:
(A) A One Million ($1,000,000) Dollar secured term loan to
Tubby's at a fixed interest rate, to be set at the time of
Closing, or interest at one-quarter percent (0.25%) above
the announced prime rate of Comerica Bank ("the Prime
Rate") amortizing over 15 years with a balloon in five
years ("Term Loan A");
(B) A Five Hundred Thousand ($500,000) Dollar interest only,
cash secured loan due in 24 months to Tubby's at an
interest rate equal to the current CD rate + 2.0% ("Term
Loan B");
(C) A Two Hundred and Fifty Thousand ($250,000) Dollar secured
term loan to Paganes, Paganes and Tatone, individually, at
an interest rate equal to one-quarter percent (0.25%)
above the Prime Rate, due in 12 months ("Term Loan C");
(D) Two Hundred Seventy Thousand ($270,000) Dollars from
Tubby's revolving line of credit which will bear interest
at one-quarter percent (0.25%) above the Prime Rate (the
"Line of Credit"); and
7
(E) Two Hundred and Seventy Thousand ($270,000) Dollars from
Tubby's General Account.
(F) Term Loan A, Term Loan B and the Line of Credit, will be
secured by mortgage liens on two buildings owned by
Tubby's which house Tubby's Sub Shops, located in
Southgate, Michigan, and Clinton Township, Michigan, and a
security interest in all of the assets of Tubby's, and
Paganes, Paganes and Tatone, jointly and severally, will
personally guaranty repayment of Term Loan A, Term Loan B
and the Line of Credit;
(G) Term Loan C and the personal guaranties of Paganes,
Paganes and Tatone will be secured by mortgage liens on a
condominium unit located in St. Clair Shores, Michigan,
two buildings which house franchised Tubby's Sub Shops,
located in Royal Oak and Dearborn, Michigan, two houses
located in Clinton Township and Macomb, Michigan, and a
condominium unit located in Naples, Florida. These
properties are owned by Paganes, Paganes and Tatone,
individually.
The expenses estimated to be incurred in connection with the
Merger are as follows:
Legal $ 20,000
Appraisal and Fairness Opinion Fees $ 25,000
Accounting $ 5,000
Printing and Mailing Costs $ 30,000
Transfer Agent Fees $ 15,000
Exchange Agent Fees $ 15,000
Loan Closing Costs $ 7,500
Filing Fees $ 450
=========
Total $ 127,950
Tubby's has paid $10,000 of the legal fees, all of the appraisal and fairness
opinion fees, and will be responsible for paying for all of the remaining
estimated expenses.
Purpose(s), Alternatives, Reasons and Effects
The Merger is a "going-private" transaction. Its purpose is to pay
all unaffiliated shareholders cash in exchange for all of their shares, which
will be surrendered to Tubby's and retired, and to make Tubby's a private
company which will no longer be a public reporting company under the
Securities Exchange Act of 1934. Tubby's shares will no longer be publicly
traded, its former shareholders will receive $1.10 per share for all of their
shares, and Tubby's will operate as a closely held private company.
Since it became a public company in 1986, Tubby's has met with
limited success in its effort to expand its operations. Tubby's began as a
small franchising company in 1977 with submarine sandwich shops located in
the Detroit Metropolitan area. In the course of its efforts to expand,
Tubby's has opened locations in states other than Michigan. Because of
unsatisfactory
8
sales, most of these locations have closed
Because of its modest size, modest growth rate and limited
resources, among other things, an established market for Tubby's shares never
developed. Its short-term and long-term goals to achieve explosive national
expansion negatively affected its ability to be profitable. Nevertheless,
Paganes, Paganes and Tatone believe that Tubby's could be successfully
operated as a closely held private company. The reason for this belief is
that Tubby's could focus all of its resources on improving operations and
franchise development rather than committing substantial resources to public
company matters such as reporting requirements, public relations, shareholder
relations, and the constantly present issue of how management decisions may
affect the market price of its shares. First, it will be relieved of the
substantial expenses incurred in operating as a public company, including
legal and accounting expenses, transfer agent expenses, printing and annual
meeting expenses which, because of its relatively small size, create a
formidable burden on its limited resources, both financial and human; in
financial terms, these expenses are approximately $150,000 annually and, in
human terms, between 600 and 800 combined hours are required annually by the
small staff at its headquarters (13 full time employees). While the annual
expenses incurred constituted less than two (2%) percent of Tubby's total
costs and expenses during fiscal 1998, and committing 600 to 800 employee
hours is not insurmountable, these administrative burdens significantly
interfere with the ability of a company of Tubby's size to pursue its core
business: operating and franchising submarine sandwich shops. Second, it will
be relieved of the pressure to achieve fast national growth in order to
complete with other public restaurant companies. Rather, Paganes, Paganes and
Tatone may be content to simply operate Tubby's as a small local franchising
company, focusing on efficiency and improving existing operations, without
incurring the expenses and incurring the risk of attempting to achieve
accelerated national expansion, to maximize short-term profits. Tubby's
became public in 1986 when it merged with a Utah public "shell" corporation
(a public company with no assets) called Like Development, Inc. ("LDI"). LDI,
the surviving corporation, then changed its name to Tubby's, moved its
domicile to Michigan, and its original shareholders sold their new Tubby's
shares on the over-the-counter market primarily to Michigan residents who
were familiar with Tubby's Sub Shops. Tubby's incurred all of the expenses of
that "going public" transaction and did not receive any proceeds from the
sale of any shares. By 1990, there were approximately 600 Tubby's
shareholders.
Tubby's began its efforts to expand nationally in 1990 when it
merged with Stuff Yer Face, Inc. ("SYF"), a public New Jersey restaurant
company. SYF restaurants are full service, sit down restaurants featuring
pizza and a specialty sandwich called a "strombolli". See "Business of
Tubby's". At the time of the merger, SYF only had two remaining restaurants.
Those restaurants were sold back to the founder of SYF who continues to
operate them as franchises. As a result of the SYF merger, Tubby's acquired
sufficient assets to qualify to have its shares listed on the NASDAQ Small
Cap Market. It also inherited approximately 6,000 new shareholders.
Tubby's attempted to revise and expand the SYF concept in 1991.
It established a restaurant in Atlanta, Georgia called "Boli's" which was
based on the SYF concept. Unfortunately, that venture was not successful,
Tubby's lost its entire investment in it and the concept was not further
developed. Other attempts to develop restaurants based on the SYF concept
were also unsuccessful. Two additional SYF restaurants were opened, one
company owned and one franchise, but they both ultimately went out of
business.
9
In early 1993, Tubby's entered into an agreement with Sears Robuck
& Co. to establish restaurants to be called "Cafe Express" within Sears
department stores. Tubby's built and opened six "Cafe Express" restaurants
during 1993 and 1994 and had short-term plans to build up to 20 of them.
Unfortunately this project was also not successful. Three of the restaurants
were substantially unprofitable, two of them were underperforming, creating
additional losses, and one was profitable, although only marginally. Other
attempts to develop SYF restaurants were also unsuccessful.
As a result of those and other research and development projects
aimed at national growth, Tubby's sustained record losses for fiscal 1994
(more than $900,000). In late 1994, a significant management change took
place. It's prior chairman of the board and its prior president and chief
executive officer were replaced and Paganes, Paganes and Tatone assumed
managerial control over Tubby's. At that time, Tubby's was facing a financial
crisis. Because of the substantial losses it had sustained, and the increased
expenses it was incurring, it could not pay its bills and was incurring
substantial losses. As a result, Paganes, Paganes and Tatone's first priority
was to stabilize Tubby's financial condition.
First, Tubby's offered all of the Sears restaurants for sale.
Three of them could not be sold and were closed in early 1995. Two of them
were sold at a substantial loss and the one that was marginally profitable
continues to be operated as a company store. Second, Tubby's substantially
decreased its operating expenses by, among other things, applying across the
board pay cuts to all of its employees. Third, it terminated all research and
development projects and focussed all of its resources on its core business
- -- submarine sandwich shops. It focused on finding good locations and
building Sub Shops in the Detroit Metropolitan area. The plan worked; Tubby's
operations immediately achieved profitability, beginning with the first
quarter of 1995.
However, because of the substantial losses in 1993 and 1994,
Tubby's net asset value had decreased below the minimum requirement for
continued listing on the NASDAQ Small Cap Market: Tubby's net assets had
decreased to $1,600,000, $400,000 below the minimum requirement of
$2,000,000. The NASDAQ notified Tubby's that its shares would be delisted if
it did not achieve compliance within 90 days. Tubby's achieved compliance by
obtaining capital contributions in the cumulative amount of $460,000 by
selling restricted stock through private placements, which increased its net
assets above the minimum requirement Paganes, Paganes and Tatone provided
$240,000 of the total capital contributions.
Once its financial condition was stabilized, Tubby's attempted to
expand nationally through the implementation of a development agent program,
which it introduced in 1996. Development Agents ("DA's") are awarded an
exclusive geographical area in exchange for their commitment to sell
franchises pursuant to a development schedule and to perform other continuing
services. Their compensation includes commissions equal to fifty percent of
the initial franchise fees and forty percent of the royalties received by
Tubby's from the stores in their geographic area. Unfortunately, the DA
program did not achieve the goals Tubby's had intended. DA Agreements awarded
to individuals in the following territories were ultimately terminated
because of the DA's failure to achieve their development schedules: Arizona,
Texas, Pennsylvania, Cleveland, Ohio, Indiana, the province of Ontario,
Canada, Edmonton and Calgary, Canada. Tubby's currently has a DA Agreement
for the St. Louis, Missouri market. Five stores were opened in that market
within a one-year period. Unfortunately, three of those stores have recently
closed. Tubby's also continues to have DA's in Florida and Nebraska. There
are three stores in Florida and one in Nebraska.
10
Over the next five years Tubby's intends to further develop the
Michigan, Florida and Nebraska markets. Tubby's believes the Detroit market
can handle an additional 15 stores. It projects that it will increase the
number of new stores by 13 stores per year with an attrition rate of two
stores per year (i.e., net 11 new stores). Tubby's also projects an attrition
rate of four stores per year for existing stores which results in projected
net growth of seven stores per year (i.e., 11 net new stores minus four
existing stores). While, in light of Tubby's historical growth rate, these
projections seem ambitions and, if achieved, would be an impressive
accomplishment, in the context of the public company quick service restaurant
industry, this growth rate would be considered unremarkable. In addition,
because of the recent popularity of non-traditional stores, revenues to
Tubby's from new stores will decrease. Non-traditional stores are located in
gas stations, convenience stores and other non-traditional locations. While
these stores are generally less expensive to establish, their sales are also
generally lower. Non-traditional stores result in less revenue to Tubby's for
two reasons. First, the initial franchise fee is lower: $8,000 versus
$15,000. Second, royalties, which are a percentage of net sales, are lower
because total sales at these stores are generally lower.
Tubby's shares were listed on the NASDAQ Small Cap Market
beginning in 1990 as a result of the SYF merger. The price at which Tubby's
shares traded fluctuated from between approximately $.12 to $.80 per share
but, generally, they traded at between $.18 and $.25 per share through 1997.
Although Tubby's tried to increase shareholder value, its limited resources
and limited growth made increasing the value of its shares a difficult task.
In the fall of 1997, the NASDAQ amended its rules regarding listing
qualifications. One of the changes was that, to qualify for continued
listing, companies must maintain a minimum bid price of at least $1.00 per
share. To comply with the minimum bid price requirement, Tubby's adopted and
implemented a one for ten reverse split in February of 1998. Just prior to
the split, Tubby's shares were trading at approximately $.25 per share. After
the reverse split, the bid price for Tubby's shares began to decline from
$2.50 all the way down to $.375 in February of 1999, even though the number
of outstanding shares decreased from more than 25 Million to just over 2.5
million. In December of 1998, the NASDAQ notified Tubby's that it was not in
compliance with the minimum bid price requirement and would be delisted if
that noncompliance was not corrected within 90 days. Tubby's requested a
hearing before the NASDAQ. Tubby's intended to show that it would achieve
compliance through a proposed merger with Interfoods of America, Inc.
(OTCBB--IFDA), a Miami based Popeye's Chicken Franchisee. See Previous
Contacts Between Tubby's, Interfoods of America, Inc., and R Corp."
Earlier in the fall of 1998 (mid-September), Interfoods' president
Robert Berg contacted Tubby's and expressed an interest in a possible merger.
Mr. Berg stated that Interfoods was not interested in the submarine sandwich
business. Rather, its interest was increasing the market price for its shares
and qualifying to have its shares listed on the NASDAQ Small Cap Market. In
that regard, Mr. Berg suggested selling all of the assets of Tubby's to
Paganes, Paganes and Tatone as part of the possible merger. Tubby's was
interested in the possible merger for several reasons. First, the merger
would result in the combined company becoming a larger company which may have
increased shareholder value by increasing its ability to compete as a public
small cap company. Second, it could allow Tubby's original business, the
submarine sandwich business, to go private and Paganes, Paganes and Tatone
were interested in undertaking that challenge. Because Paganes, Paganes and
Tatone had a conflict of interest and, consistent with their obligations as
directors, Tubby's Board of Directors insisted that an independent valuation
11
of the fair market value of both Tubby's and Interfoods be conducted prior to
negotiating the terms of the proposed merger. Stout Risius Ross, Inc., an
independent valuation firm referred to Tubby's by its auditors BDO Seidman
LLP, conducted that valuation and concluded that the fair market value of
Tubby's and Interfoods were $2,600,000 and $12,500,000, respectively. In
early December, the two companies met at Interfoods offices in Miami,
negotiated the terms of the proposed merger and entered into a letter of
intent. See "Previous Contacts Between Tubby's, Interfoods of America, Inc.,
and R Corp. Tubby's believed that implementing that merger may have achieved
compliance with the minimum bid requirement for its shares. In March of 1999,
the NASDAQ notified Tubby's that it also appeared not to be in compliance
with the $1,000,000 market value of public float requirement either and that
it would have to demonstrate compliance with that requirement as well at the
hearing. Tubby's believed the Interfoods merger would correct that alleged
deficiency as well.
The NASDAQ hearing was scheduled for May 6, 1999. On April 23,
1999, however, Interfoods announced that it would not proceed with the
merger. Interfoods advised Tubby's that, after a thorough evaluation, its
Board of Directors had decided not to proceed. Interfoods gave no other
explanation for its decision. Tubby's requested an explanation but did not
receive one and is not aware of why Interfoods decided not to pursue the
proposed merger. Tubby's then considered another reverse spilt but concluded
that it would not result in compliance. That conclusion was based, first, on
Tubby's experience with its prior reverse split which proved that reducing
the number of outstanding shares did not result in a long term increase in
the market price of its shares and, second, another reverse split would not
correct, and would probably worsen, its compliance with the public float
requirement. Therefore, on May 5, 1999, Tubby's withdrew its request for a
hearing. Accordingly, on May 5, 1999, Tubby's shares were delisted by NASDAQ
for failure to meet those minimum requirements and trades of Tubby's shares
were automatically listed on the Over the Counter Bulletin Board ("OTCBB").
Thereafter, Tubby's announced the present proposed merger.
As a result of the delisting, Tubby's Board of Directors concluded
that increasing shareholder value would now be an even more formidable task.
There has never been a well established market for Tubby's shares; quotations
have always been limited and sporadic. The NASDAQ delisting was viewed,
objectively, as probably having a future negative effect on the already
under-established market for Tubby's shares. This was a substantial factor
which was considered by Tubby's Board of Directors. Because of Tubby's
limited resources, the current and potential future bid prices for its
shares, and the substantial expenses inherent in operating a public company,
the Board of Directors of Tubby's determined that undertaking this
transaction was appropriate at this time.
The Interfoods merger would have been an alternative to this
transaction and, therefore, warrants some discussion. That proposed merger
provided for a one for five reverse split of Tubby's shares followed by a
registered exchange offer of Tubby's shares on a one for two basis for all
Interfoods shares. Simultaneously, the surviving corporation, Tubby's, would
have changed its name to Interfoods of America, Inc., would have sold all of
Tubby's pre-merger assets to R Corp, and would have continued to operate as a
Popeye's Chicken franchisee. See "Previous Contract Between Tubby's,
Interfoods of America, Inc., and R. Corp." On April 23, 1999, however,
Interfoods advised Tubby's that it had decided not to proceed with the
proposed merger. Tubby's did not seek any additional alternatives and no
other alternatives were presented by any third party. For a comparison of the
fairness of that proposed merger within the
12
present proposed merger see "Fairness of the Transaction", and "Previous
Contracts Between Tubby's, Interfoods of America, Inc., and R Corp".
The most substantial effect of the Merger on Tubby's will be that
it will no longer be a public reporting company and, instead, will operate as
a private company. Its limited resources will be relieved of the substantial
burdens inherent in operating a public company and Tubby's will have more
flexibility in its day to day management. Although R Corp will no longer
exist as a separate entity, its shareholders, Paganes, Paganes and Tatone,
will be the only shareholders of Tubby's. In addition, Paganes, Paganes and
Tatone will be personally liable, pursuant to their personal guarantees and
the pledge of their personal property as collateral, for the repayment of the
loans from Comerica Bank which will be used to fund the Merger.
Unaffiliated security holders will receive $1.10 in exchange for
each of their shares, which is higher than the current market price. The
Merger will provide security holders with small numbers of shares (e.g., less
than 100 shares) an easy and efficient procedure to liquidate their shares.
Tubby's estimates that, of its approximately 7,000 shareholders, less than
600 are round lot holders (shareholders who hold 100 shares or more). This
was also an important factor considered by Tubby's in proposing the present
transaction. They will be required to recognize, for federal tax purposes, a
gain or loss on the exchange. See "Certain Federal Income Tax Consequences."
The only additional potential detriment to all shareholders, unaffiliated and
affiliated, is that they will loose the opportunity to hold the shares and,
in the event an established market develops and the market price for the
shares exceeds $1.10, sell their shares at a higher price. Any attempt to
"quantity" this detriment would be entirely premised on speculation and,
therefore, it can not reasonably be "quantified."
Finally, Paganes, Paganes and Tatone's purpose for engaging in
this transaction is to acquire Tubby's and to reverse what they believe
(obviously in hind-sight) to have been an incorrect decision to become a
public company in the first place. Stated simply, Tubby's was too small to
compete as a public company. The SYF merger, pursuant to which Tubby's
inherited approximately 6,000 shareholders, most of whom now hold shares
cumulatively valued at less than $100, further complicated its existence and
only made matters worse. While Tubby's was unable to develop nationally by
establishing thousands of sub shops, and the value of its shares did not fair
well, Paganes, Paganes and Tatone believe that Tubby's is fundamentally sound
and can be operated profitably as a small closely held company. If the merger
is approved, Paganes, Paganes and Tatone will operate Tubby's as a small
private company. Their first priority will be to improve current operations
and to maintain profitability. Growth, which may be modest, will be
secondary.
Fairness of the Transaction
Tubby's and Paganes, Paganes and Tatone believe that the merger is
fair to unaffiliated security holders. This belief is supported by the
Fairness Opinion issued by Stout Risius Ross, Inc. A copy of the Fairness
Opinion is attached as Appendix B. The material factors which form the basis
of this belief include Tubby's fair market value, as analyzed by Stout Risius
Ross, Inc., the book value and financial condition of Tubby's, its earning
capacity, current market prices and previous sales of Tubby's stock and the
sizes of the blocks transferred, and the market prices of companies in the
same industry that trade in the open market. Tubby's Board of Directors
13
reasonably believes that the delisting of Tubby's shares from the NASDAQ
Small Cap Market will probably negatively affect shareholder value and
considered that factor as well. However, the primary factor considered in
establishing the per share price of $1.10 was the objective fair market value
of Tubby's as a going concern. Current market prices for the shares, which
have been substantially lower than $1.10, recent sales and the sizes of the
blocks transferred, which have been sporadic and small, and the NASDAQ
delisting, which were considered in Tubby's decision to undertake this
transaction at this time, were considered very little in establishing the per
share price. Similarly Tubby's history and past earnings were not considered.
All of the factors listed in the prior two sentences would support a per share
price lower than $1.10. Therefore, each of those factors clearly supports the
fairness of the $1.10 per share price to be paid to unaffiliated
shareholders.
At August 31, 1999, Tubby's tangible book value per share was
$1.05. Tangible book value is calculated by dividing total shareholder equity
(i.e., all assets, other than good will, at book value, minus all
liabilities) by the number of outstanding shares. The book value of a
company's assets may or may not reflect its fair market value just as a
company's market capitalization (all outstanding shares multiplied by current
market price per share) may or may not. For example, prior to announcing the
present proposed merger, Tubby's shares traded as low as $.375. At that
price, Tubby's total market capitalization would be $968,668. After this
proposed merger was announced, shares traded as high as $1.00 which would
result in a market capitalization of $2,583,113. On October 11, 1999, the
last reported trade was at $.8437 which would equal a market capitalization
of $2,179,372.
In determining the per share price for the proposed merger,
Tubby's estimated the objective Fair Value of its common equity. Fair Value
was considered as the price at which property would exchange between a
willing buyer and a willing seller, when neither the former nor the latter
are under any undue compulsion to buy or sell, and both have reasonable
knowledge of the relevant facts. Tubby's began by considering its prior
valuation in connection with the proposed merger between Tubby's and
Interfoods of America, Inc. As part of that proposed merger, Interfoods'
board of directors, which would have been the board of directors of the
surviving corporation, agreed to sell all of the assets of Tubby's to R Corp
for a total purchase price of $2,500,000. Dividing that purchase price by the
number of Tubby's outstanding shares results in a per share price of $.97.
Tubby's set the per share merger price at $1.10 which, multiplied by the
number of outstanding shares, results in estimating Tubby's Fair Market Value
at $2,841,424. There are at least two reasons for this increase. First, after
it sustained a small net loss for fiscal 1998, Tubby's began to be profitable
in the first three quarters of 1999. Second, because of the clear conflict of
interest, Tubby's Board of Directors believed it would be better to
overestimate rather than to underestimate Tubby's fair market value. As it
turned out, the per share price of $1.10 was accurate, as confirmed by the
independent analysis of Stout Risius Ross, Inc. Paganes, Paganes and Tatone
expressly adopt the analysis of Tubby's and Stout Risuis Ross, Inc., in
support of their individual conclusions that this transaction is fair to
unaffiliated shareholders. Paganes, Paganes and Tatone relied on each of the
same factors set forth in this Proxy Statement and in the Opinion of Stout
Risuis Ross, Inc., and did not rely on any other material factors in reaching
their conclusions that the proposed merger is fair to unaffiliated
shareholders.
The Board of Directors believes that this merger is more
beneficial to unaffiliated shareholders than the Interfoods merger would have
been. The proposed Interfoods merger
14
first provided for a one for five reverse split of Tubby's shares and,
second, for an exchange of one new share for each two shares held by
Interfoods shareholders. Tubby's shareholders would have held one share in
the surviving corporation for every five shares they held prior to the
merger. At the time, Interfoods had approximately 6,000,000 outstanding
shares. After the one for five reverse split and the exchange of Interfoods'
shares, Tubby's shareholders, including affiliates, would have held
approximately 500,000 and Interfoods shareholders would have held
approximately 3,000,000 shares in the surviving corporation. At the time the
proposed merger was announced, Interfoods shares were trading at
approximately $.40 and Tubby's shares were trading at approximately $1.00.
After the announcement, the price of Interfoods' shares increased
dramatically while the price of Tubby's shares decreased slowly but
consistently. After Interfoods announced it would not proceed with the
merger, the price of its shares began decreasing steadily. The last trade of
Interfoods shares on October 15, 1999, was reported to be at 7/16 or $.43.
Had the Interfoods merger been completed, Interfoods' assets would have
increased by $2,500,000 (the purchase price for Tubby's pre-merger assets)
and the number of its outstanding shares would have decreased from
approximately 6,000,000 to approximately 3,500,00. The long-term effect on
the market prices for Interfoods shares, however, can not be quantified with
any degree of certainly. Nevertheless, because of the one for five reverse
split of Tubby's shares, any decrease in the market prices would have been
magnified for Tubby's shareholders. In addition, like Tubby's, there is no
well-established market for Interfoods shares.
Paganes, Paganes and Tatone will receive and assume the following
benefits and detriments. The benefits are, first, although they will not
receive cash in exchange for all of their shares, they will acquire all of
the equity of Tubby's. Second, they will enjoy the challenge of operating
Tubby's as a private company and, if profitable, will receive distributions
in the form of dividends. For example, Tubby's has been profitable during and
at the end of each of the first three quarters of fiscal 1999. If this trend
continues, Paganes, Paganes and Tatone would benefit accordingly. Third,
their equity will appreciate as Tubby's repays the loans from Comerica and
the principal balances of the loans decrease. The detriments of the
transaction to Paganes, Paganes and Tatone are that they will be personally
liable for the repayment of the loans and will pledge individually owned
personal assets to secure their repayment.
The transaction is structured so that the approval of a majority
of all security holders is required. Approximately 80% of the shares are held
by unaffiliated security holders. The only affiliated security holders are
Paganes, Paganes and Tatone. Other shareholders who have informally indicated
their approval of the proposed merger (See "Vote Required") are not
affiliated security holders because they do not directly, or indirectly
through any intermediaries, control, nor are they controlled by or under
common control, with Tubby's or with Paganes, Paganes and Tatone. The merger
was approved unanimously by the directors including the one director who is
not employed by Tubby's. Neither Tubby's nor anyone else retained an
unaffiliated representative to act solely on behalf of unaffiliated security
holders for the purposes of negotiating the terms of the merger and/or for
preparing a report concerning the fairness of the transaction. In addition,
the transaction does not require the approval of a majority of the shares
held by non-affiliates and actually voted on the transaction. Nevertheless,
and notwithstanding those two facts, Tubby's, and Paganes, Paganes and
Tatone, believe the proposed merger is fair to unaffiliated shareholders for
the following reasons. First, the independent analysis of Stout Risuis Ross,
Inc., was very comprehensive and analyzed Tubby's fair market value. Second,
the current market price for Tubby's shares, the history of Tubby's earnings,
the
15
underdeveloped market for Tubby's shares and the NASDAQ delisting each
support a lower per share price. The per share price of $1.10 is so fair
to unaffiliated shareholders that Tubby's, and Paganes, Paganes and Tatone,
believe that it was completely unnecessary to retain a separate
representative to negotiate and / or prepare a report regarding the fairness
of the transaction on behalf of unaffiliated shareholders or to require to
the votes of a majority of shares held by non-affiliates to approve it.
Tubby's, and Paganes, Paganes and Tatone, believe that neither of those
actions would have made any difference in the final analysis.
Reports, Opinions, Appraisals and Certain Negotiations
Tubby's received an opinion on July 15, 1999, relating to the
fairness of the consideration to be offered to the security holders, from
Stout Risius Ross, Inc. Stout Risius Ross, Inc., is a Michigan based
consulting firm specializing in business valuations, appraisals, and mergers
and acquisitions. Stout Risius Ross, Inc., was referred to Tubby's by its
auditors, BDO Seidman, LLP in connection with the proposed Interfoods merger.
No material relationship existed between Stout Risius Ross, Inc., and/or any
of its affiliates or representatives, and Tubby's or any of its affiliates
nor is it contemplated that any such relationship will exist in the future.
Tubby's determined the merger price of $1.10 per share, and asked Stout
Risius Ross, Inc., to render its opinion regarding the fairness of that per
share price.
In reaching its opinion that the transaction is fair from a
financial point of view to the shareholders of Tubby's, Stout Risius Ross,
Inc., performed an analysis to estimate the fair value of the common equity
of Tubby's, defined as the price at which property would exchange between a
willing buyer and a willing seller, when the former is not under any undue
compulsion to buy and the later is not under any undue compulsion to sell,
both having reasonable knowledge of the relevant facts. In general, it
considered the nature and history of Tubby's, the outlook for the economy and
industry in which Tubby's operates, the book value and financial condition of
the Company, the earning capacity of Tubby's, the dividend paying capacity of
Tubby's, whether good will or other intangible value exists within Tubby's,
previous sales of Tubby's stock and the size of the blocks transferred, and
the market prices of companies in the same or similar industries which trade
in the open market. Tubby's only instructions were for Stout Risius Ross,
Inc., to render an opinion as to the fairness of the proposed merger to
Tubby's shareholders from a financial point of view. No limitations were
imposed by Tubby's or any affiliate of Tubby's on the scope of the valuation
or Fairness Opinion. See Fairness Opinion, attached as Appendix B. Stout
Risius did not consider the merits of the transaction as compared to an
alternative business strategy. A copy of the valuation will be made available
for inspection and copying at Tubby's principal offices during regular
business hours by any interested security holder or his representative who
has been so designated in writing.
In its analysis, Stout Risius Ross, Inc., considered a variety of
valuation methods, including an income approach, market approach and an
underlying asset approach. In reaching its ultimate conclusion, it relied
equally on an income approach and market approach. The average of the two
resulted in estimating the fair market value of Tubby's at $1.10 per share.
The income approach is a valuation technique in which the fair
market value of a company is estimated on the basis of that company's earning
capacity. This approach analyzes cash flows during a projected future period
and the resulting residual cash flow thereafter. The future cash flows are
then discounted to reflect present value. Under this approach, Stout Risius
16
Ross, Inc., projected increases in revenues for 1999 through 2005. It then
analyzed corresponding increases in expenses. A noteworthy component in this
analysis is that 70% of new franchise growth during the projection period
will occur in nondominant market areas (outside of Metro Detroit) which
materially affects earnings primarily because of the increase in distribution
costs. After projecting revenues, expenses, capital expenditures, and
discounting residual cash flow, Stout Risius Ross, Inc., then added the value
of Tubby's nonoperating assets which included excess cash, rental property
and notes receivable. The discount rate was applied at 16.5%, which,
consistent with industry standards, is a rate of return commensurate with the
risk involved in realizing the projected cash flows. Based on 2,583,114
shares outstanding, it estimated Tubby's value of equity per share to be
$1.08.
The market comparable approach analyzes prices paid for securities
of similar companies that are publicly traded. Stout Risius Ross, Inc.,
identified and analyzed the securities of the following companies:
Schlotsky's, Inc; Miami Subs; Quizno's; and Blimpie International, Inc. Stout
Risius Ross, Inc., conducted an evaluation of these companies to determine
their earnings before interest, taxes, depreciation and amortization
("EBITDA") to establish a total capital to EBITDA multiple. Each multiple was
then adjusted on the basis of the differences between those companies and
Tubby's to account for differences in size, growth outlook, capital
structure, and other risk factors. ^ For example, Scholotysky's, Inc., has
730 franchised locations with system wide rates of 348.5 million. It has
7,516,000 shares, which traded at $11.17, resulting in a market value of 84
million. Its adjusted capital value was 86.5 million and its EBITDA was 10.3
million resulting in a capital to EBITDA multiple of 8.42. That multiple was
then adjusted downward to 4.3. Miami Subs Corp., on the other hand, had a
total capital value of 6.9 million and EBITDA of 2.4 million resulting in a
capital to EBITDA mulitple of 2.83. That multiple was then adjusted upwards
to 4.0. Quizness Corp. and Blimpie International were assigned multiples of
4.10 and 4.20 respectively. The median multiple of 4.20 was applied to
Tubby's adjusted EBITDA of $266,452 (calculated over the prior 12 months)
which, after deducting interest-bearing debt, resulted in an operating value
of $992,829. Stout Risius Ross, Inc., then applied a control premium of
twenty (20%) percent because the analysis of the comparable companies was
performed on a minority-interest basis, which resulted in an actual operating
value of $1,191,394. The value of Tubby's non-operating assets and the value
of its deferred tax assets (Net Operating Loss carry forwards) were then
added to the operating value. Applying this approach to Tubby's resulted in
estimating the equity value of Tubby's at $1.12 per share.
The underlying asset approach is only relevant when a company's
assets exceed its estimated value under the first two approaches. Because
this was not the case with Tubby's, this approach was not used.
Stout Risius Ross, Inc., relied equally on those two approaches.
Therefore, it concluded that the fair value of common equity of Tubby's is
$1.10. Tubby's, R Corp, and Paganes, Paganes and Tatone expressly adopt the
conclusion and analysis of Stout Risius Ross, Inc. In addition, R Corp, and
Paganes, Paganes and Tatone, expressly adopt the conclusion and analysis of
Tubby's, set forth in this proxy statement, and rely on each of the same
factors. R Corp, and Paganes, Paganes and Tatone, did not rely on any other
material factors in reaching their conclusion that the merger is fair to
unaffiliated shareholders.
17
Recommendations
The Board of Directors of Tubby's has received a favorable
fairness opinion with respect to the terms of the merger, believe that the
Merger is in the best interest of and fair to the shareholders and has
recommended that the shareholders vote FOR approval of the Merger Agreement.
For a discussion of the factors considered by Tubby's Board of Directors in
approving the Merger Agreement, see "Description of the Transaction."
Interests of Certain Persons in the Merger
General - The respective management and Boards of Directors of R
Corp and Tubby's are affiliated (Paganes, Paganes and Tatone are directors
and serve as the President, Vice President and Secretary, respectively, in
both corporations), the effect of the Merger Agreement will be considered a
"going private" transaction and the terms of the Merger Agreement were
considered and determined in the context of the objective fair market value
of the Company's assets and the fair distribution of its equity to the
shareholders of Tubby's.
Principal Shareholders of Tubby's - Paganes, Paganes and Tatone
have personally procured a commitment for adequate financing on behalf of
Tubby's to complete the Merger, and will personally guarantee the required
debt financing and pledge personal assets, in addition to all of the assets
of Tubby's, to secure the loans. Paganes, Paganes and Tatone will not receive
any cash in exchange for their shares and they will remain as the only
shareholders of Tubby's. In order to equalize the number of shares held by
each of them, Paganes, Paganes and Tatone have also entered into a Stock
Purchase, Redemption and Shareholder Agreement with Tubby's pursuant to which
some of them will purchase restricted shares of common stock from Tubby's and
Tubby's will redeem shares from the others. The price per share is equal to
the Merger price of $1.10. The Stock Purchase, Redemption and Shareholder
Agreement is contingent upon the consummation of the Merger.
Conditions to Merger: Termination: Amendment
The obligations of Tubby's and R Corp to effect the Merger are
subject to the satisfaction of several conditions, including the approval of
the Merger Agreement by the required vote of the outstanding shares of
Tubby's, closing on the bank financing, and the absence of any material
adverse changes. See the Merger Agreement attached hereto as Appendix A.
The Merger Agreement may be terminated at any time prior to the
Effective Date of the Merger, whether before or after submission or approval
by the shareholders of Tubby's, by the Board of Directors of Tubby's. The
Merger Agreement may be amended at any time prior to the Effective Date of
the Merger, whether before or after the meeting of shareholders of Tubby's,
by written Instrument executed by Tubby's and R Corp, provided that no
amendment shall change the exchange ratio (i.e., the Merger Price of $1.10
per share) set forth in the Merger Agreement without the approval of the
shareholders of Tubby's.
Material Federal Income Tax Consequences
Tax Counsel has advised that for federal income tax purposes, if
the Merger is carried out in accordance with the Merger Agreement (1) no
taxable gain or loss will be recognized by
18
Tubby's as a result of the Merger; (2) taxable gain or loss will be
recognized by the holders of shares of Tubby's stock upon receipt of cash in
exchange for those shares; (3) no taxable gain or loss should be recognized
by the shareholders of R Corp and the basis of their shares of Tubby's should
not be affected.
Dissenter's Appraisal Rights
Dissent and Rights of Appraisal for Tubby's Shareholders -
Pursuant to the provisions of section 14(a):11-1 et seq. of the New Jersey
General Corporation Law, and because Tubby's has in excess of 1,000
shareholders of record, shareholders of Tubby's will not be entitled to
dissent or receive appraisal rights in connection with the proposed Merger.
Nor do Tubby's Articles of Incorporation or By-Laws provide any rights to
dissent or receive appraisal rights.
Business of Tubby's
The restaurant business is highly competitive and there can be no
assurance that the merged corporation will be able to operate profitably.
Tubby's operated unprofitably from 1990 through 1994. It operated profitably
from 1995 through 1997 and had a small net loss for fiscal 1998, resulting in
a current accumulated earnings deficit of $896,749 at the end of fiscal 1998.
For the first three-quarters of fiscal 1999, ended August 31, 1999, Tubby's
had a net profit of $298,675.00. For the first three-quarters of fiscal 1998,
Tubby's had a net loss of $117,001. Revenues for the first nine months ended
August 31, 1999, increased 30.7%. See "Tubby's Financial Statements."
CONSOLIDATED FINANCIAL DATA OF TUBBY'S, INC.
The following table sets forth the consolidated selected
historical financial information for Tubby's, Inc. The consolidated selected
financial data for and as of the years ended November 30, 1998, 1997, 1996,
1995 and 1994 have been derived from the audited consolidated financial
statements of Tubby's, Inc. The selected financial data for the nine months
ended August 31, 1999 and 1998 are derived from the unaudited financial
statements of Tubby's, Inc. In the opinion of Tubby's, Inc., the interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data.
<TABLE>
<CAPTION>
(Thousands except per share amounts)
Nine Months Ended
August 31 Year Ended November 30,
------------------ --------------------------------------------------
1999 1998 1998 1997 (1) 1996 (1) 1995 (1) 1994 (1)
---- ---- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales and operating revenues
& other revenues................... $7,032 $5,380 $7,366 $3,556 $3,123 $3,662 $3.737
Income before extraordinary
items.............................. 299 (117) (31) 107 117 274 (921)
Extraordinary Items.................. 0 0 0 0 0 0 0
Net Income (Loss) ................... 299 (117) (31) 107 117 274 (921)
Net Income (Loss) per share
before extraordinary items......... 12 (0.05) (0.01) 0.04 0.05 0.11 (0.5)
Net income (loss) per share,
basic & fully diluted.............. 12 (0.05) (0.01) 0.04 0.05 0.11 (0.5)
Working Capital...................... 1,835 1,339 1,437 1,177 871 1,094(2) 64
Total Assets......................... 3,436 3,303 3,326 3,325 3,333 3,270(2) 2,683
Total Assets less goodwill........... 3,238 3,049 3,063 3,095 2,994 2,923 2,340
Dividends ........................... -- -- __ __ __ __ __
Book Value per Share $1.12 $ .98 $ 1.01 $ 1.02 $ .98 $ .93 $ .83
Tangible book value per share........ $1.05 $ .88 0.91 0.93 0.86 0.84 0.66
Ratio of earnings to fixed charges... 11.59 ___(5) ___(4) 5.08 2.65 3.52 ___(3)
<FN>
- ---------
(1) Adjusted for 1 for 10 reverse split in February of 1998.
(2) In March of 1995, Tubby's issued 575,000 shares of restricted Common
Stock pursuant to private placements in exchange for $.80 per share to
seven individuals which included three related parties.
(3) For the year ended November 30, 1994, the ratio was negative. The
deficiency, expressed in a dollar amount, was $955,110.
(4) For the year ended November 30, 1998, the ratio was negative; the
deficiency was $ 31,207.
(5) For the nine months ended August 31, 1998, the ratio was negative; the
deficiency was $80,735.
</TABLE>
MARKET PRICES OF TUBBY'S COMMON STOCK
The following table sets forth the high and low stock prices (bid)
for Tubby's Common Stock as reported by NASDAQ (symbol TUBY) for the calendar
years indicated and as reported by the Over the Counter Bulletin Board
("OTCBB") after May 5, 1999, when Tubby's shares were delisted by NASDAQ for
failing to maintain a $1.00 bid price and were automatically listed for
reporting by the OTCBB. There is currently no established trading market for
Tubby's common stock (excluding limited and sporadic quotations.) On May 4,
1999, the day before the present proposed merger was announced, the market
price as of the last trade was 5/16 or $.3125. The last trade on October 11,
1999 was for 27/32 or $.8437. The following quotations do not include retail
mark-ups, markdowns or commissions and represent prices between dealers and
not necessarily actual transactions.
Tubby's
-------------------------
High Low
---- ---
1997 (1)
--------
4th Qtr. 4.062 2.500
1998
--------
1st Qtr. 3.125 2.000
2nd Qtr. 2.375 1.625
3rd Qtr. 2.000 .6875
4th Qtr. 1.250 .6250
1999 (2)
--------
1st Qtr. 1.000 .375
2nd Qtr 1.000 .3125
3RD Qtr. .6250 .375
(1) Prices are adjusted to reflect a 1 for 10 reverse split which was
effective in the first quarter of 1998.
(2) The public announcement in connection with this transaction was first
made on May 5, 1999.
The approximate number of shareholders of record of Tubby's was 7,000 as of
August 31, 1999. There are no restrictions on Tubby's present or future
ability to pay dividends; however, Tubby's has never paid cash dividends on
its Common Stock.
20
DESCRIPTION OF THE TRANSACTION
Pursuant to the Agreement and Plan of Merger (the "Merger
Agreement") between Tubby's and R Corp, the shareholders of Tubby's are being
asked to approve a merger pursuant to which all shareholders, other than
three current members of Tubby's management, who also constitute a majority
of its Board of Directors, will receive cash in exchange for their shares.
Pursuant to the Merger Agreement, each share of outstanding Tubby's Common
Stock, other than shares held by the shareholders of R Corp, will be
exchanged for cash at the merger price of $1.10 per share. The merger price
per share was established by Tubby's Board of Directors. The fairness to
shareholders from a financial point of view is supported by a Fairness
Opinion prepared by Stout Risius Ross, Inc. A copy of the Fairness Opinion is
attached as Appendix B. Tubby's will be the surviving corporation but its
shares will no longer be publicly traded
The Board of Directors of Tubby's has determined that the Merger
is in the best interest of the shareholders of Tubby's because, among other
things, it will allow shareholders to receive $1.10 per share, which is
higher than the current market price, without incurring brokerage commissions
and/or other fees. It will also allow shareholders with small numbers of
shares (e.g., less than 100 shares), an easy and efficient procedure to
liquidate their shares. Tubby's registration will then be terminated under
the Securities Act of 1934 and it will not be a reporting company
Holders of shares of Common Stock of Tubby's are entitled to cast
one vote for each share held at all shareholder's meetings for all purposes.
Shares of Tubby's Common Stock are not redeemable, have no conversion rights
and carry no preemptive or other rights to subscribe to or purchase
additional shares in the event of any subsequent offering and/or merger. All
outstanding shares of Tubby's Common Stock are fully paid and non-assessable.
Tubby's Common Stock does not have cumulative voting rights which means that
holders of more than 50% of Tubby's Common Stock voting for the election of
Directors can elect 100% of the directors of Tubby's if they choose to do so.
After the Effective Date of the Merger, Tubby's will make the cash
payments of $1.10 per share described above as follows. Promptly after the
Effective Date of the Merger, Tubby's will mail to each such shareholder a
form letter of transmittal and instructions for use in effecting the
surrender for payment therefor of certificates which prior to the Merger
represented Tubby's Common Stock. After the Effective Date of the Merger and
until so surrendered and exchanged, each outstanding certificate which prior
to the Effective Date of the Merger represented shares of Tubby's Common
Stock owned by a shareholder who is not also a shareholder of R Corp will be
deemed for all purposes to represent only a right to receive a cash payment
of $1.10 per share, and no interest will be paid or accrued on the amount
payable upon surrender of any such certificates. Upon surrender to Tubby's of
such certificates, together with such letter of transmittal duly executed,
Tubby's will pay to the persons entitled thereto, in cash or equivalent, the
amount to which such persons are entitled. If payment is to be made to a
person other than
21
the one in whose name the certificate surrendered is registered, it will be a
condition of such payment that the certificate so surrendered must be
properly endorsed or otherwise in proper form for transfer and that the
person requesting such payment shall pay to Tubby's any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of the certificate surrendered, or establish to the satisfaction of
Tubby's that such tax has been paid or is not applicable. If any holder of
Tubby's Common Stock is unable to surrender such holder's Tubby's stock
certificates because such certificates have been lost or destroyed, such
holder may deliver in lieu thereof an affidavit and indemnity bond in form
and substance and with surety reasonably satisfactory to Tubby's.
SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS
The terms of the Agreement and Plan of Merger, which is attached hereto as
Appendix A, are incorporated herein by reference, in their entirety.
SOLICITATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of
Directors of Tubby's. The Board of Directors of Tubby's has approved the
Merger Agreement and has nominated the proposed Directors. Accordingly, the
Board of Directors is recommending that the shareholders vote FOR approval of
the Merger Agreement and FOR the election of each Director. Proxies solicited
by the Board of Directors, if properly signed and returned, will be voted in
favor of the resolutions being presented to the shareholders.
A proxy may be revoked by the person giving it at any time before
the exercise thereof by written notice to the Secretary of Tubby's. All valid
proxies not revoked will be voted. Where a choice is specified on a proxy,
the shares represented by such proxy will be voted in accordance with the
specification made.
The cost of soliciting proxies, including preparing, assembling
and mailing the notice of meeting, proxy statement, formal proxy and other
soliciting materials as well as the cost of forwarding such material to the
beneficial owners of stock is being borne by Tubby's.
Even if you plan to attend the meeting please complete, date and
sign the enclosed proxy and mail it promptly in the enclosed envelope. In the
event you attend the meeting, you may revoke your proxy and vote your shares
in person.
ACCOUNTING TREATMENT
Under generally accepted accounting principles, this transaction
will be accounted for as a reorganization and Tubby's will continue to apply
current book value to its assets. Assuming completion of the Merger, Tubby's
does not intend to change its November 30 financial year-end.
22
PREVIOUS CONTACTS BETWEEN TUBBY'S,
INTERFOODS OF AMERICA, INC., AND R CORP
On December 15, 1998, Tubby's and Interfoods of America, Inc., a
Miami based Popeye's chicken franchisee, executed a letter of intent pursuant
to which Tubby's and Interfoods would merge, with Tubby's being the surviving
corporation. The letter of intent provided for a one for five reverse split
of outstanding Tubby's shares followed by a registered exchange offer of
Tubby's shares on a one for two basis for all Interfoods shares then
currently outstanding. Simultaneously, the surviving corporation (Tubby's),
would change its name to Interfoods of America, Inc., and sell all of Tubby's
pre-merger assets to R Corp. The purchase price for the assets was $2,500,000
payable as follows:
A. Down payment of $350,000 in cash and the redemption of Tubby's
shares held by shareholders of R Corp at the trading value
assigned to them upon the effectiveness of the one for five
reverse split.
B. The balance was to be paid pursuant to a ten-year Promissory
Note, providing for monthly payments of interest only at 7%
during the first three years. Principal and interest payments
would be made during years four through ten calculated on a
thirty-year amortization with a ten-year balloon with interest
at the rate of 7% per annum.
C. The Promissory Note was also to provide for an option to obtain
prepayment discounts as follows: R Corp would receive a 25%
discount from the principal balance if it paid all amounts due
prior to the fourth anniversary date of the closing and would
receive a 20% discount if it paid all the amounts due prior to
the eighth anniversary date.
D. The letter of intent also provided that the parties would enter
into a three-year Consulting Agreement. R Corp would provide
consultation regarding the Company's historical accounting
procedures, records, public relations, legal and other
corporate matters in exchange for compensation from Interfoods
as follows: $225,000 in year one; $150,000 in year two; and
$100,000 in year three.
Because Interfoods had more than 6,000,000 shares outstanding and Tubby's
would have only had 516,623 after the one for five reverse split, Tubby's
shareholders would have held approximately 20% of the outstanding shares in
the surviving corporation.
On April 23, 1999, Interfoods advised Tubby's that, after a
thorough evaluation, its Board of Directors had decided not to proceed with
the proposed merger. Thereafter, Tubby's announced the present proposed
merger on May 5,1999.
The Merger Agreement that has been executed with respect to this
transaction, which is the subject of this proxy statement, varies from the
previous proposal in many ways. Under this transaction, shareholders will
receive $1.10 in exchange for each share of Tubby's Common Stock. Under the
Interfoods proposal, Tubby's shareholders would have received one share of
Tubby's Common Stock in exchange for every five shares. In addition, under
this transaction, shareholders can take the proceeds of the exchange and use
them in the investment of their choice rather than automatically becoming
shareholders of the surviving corporation which
23
would have changed its name to Interfoods and continued largely in the fried
chicken segment of the quick service food industry.
BUSINESS OF TUBBY'S
Introduction
Tubby's, Inc. ("Tubby's") was originally incorporated on May 16,
1984 in the State of Utah under the name "Like Development, Inc." Like
Development did not conduct any business until May 23, 1986 when it acquired
all of the outstanding capital stock of Tubby's Sub Shops, Inc., a Michigan
corporation in exchange for 7,424,961 shares of Like Development's Common
Stock that were issued to the former shareholders of Tubby's Sub Shops, Inc.
At the time of that reorganization, Like Development also changed its name to
"Tubby's Sub Shops, Inc."
Tubby's Sub Shops, Inc., was originally incorporated in the State
of Michigan on December 2, 1977 for the purpose of franchising the rights to
operate Tubby's Sub Shops restaurants. The founders of Tubby's had been
operating restaurants under the Tubby's name since 1968 and, after developing
a Plan of Operation for those restaurants that would enable others to operate
similar restaurants, they founded Tubby's in 1977 to franchise the rights to
operate those restaurants. The founders of Tubby's then assigned their
trademarks, know-how, and existing agreements to Tubby's.
In September 1987, Like Development changed its domicile from Utah
to Michigan and changed the name of the company to "Tubby's, Inc.", a
wholly-owned subsidiary of Like Development that was incorporated in Michigan
for that purpose. As a result, each share of Like Developments' Common Stock
was converted to one share of Tubby's, Inc., Common Stock. Like Developments
authorized capital stock and the number of shares of its outstanding capital
stock were unchanged as a result of its re-domicile from Utah to Michigan.
In March of 1990, Tubby's and Stuff Yer Face ("SYF"), a New Jersey
restaurant company, merged with SYF as the surviving corporation. First,
shareholders of SYF approved a one for three reverse split of the outstanding
shares of Common Stock of SYF. Simultaneously, shareholders of both
corporations approved an Agreement and Plan of Merger pursuant to which each
share of Tubby's outstanding Common Stock was exchanged for one share of the
post split Common Stock of SYF. As part of that merger, the founders of SYF
entered into Employment Agreements and were granted options for the right to
purchase two SYF restaurants to be operated as franchises. The Employment
Agreements and Option Agreement became effective upon the closing of the
merger. As a result of that merger, shareholders of Tubby's Common Stock
owned approximately 67% of the outstanding SYF stock. Also as part of that
merger, SYF immediately changed its name to "Tubby's, Inc."
Tubby's currently has five wholly owned subsidiaries:
Tubby's Sub Shops, Inc., a Michigan corporation, grants
licenses to franchisees, pursuant to franchise agreements, to
own and operate Tubby's Sub Shops and SYF restaurants, in
exchange for franchisee fees and continuing royalties.
SUBperior Distribution Systems, Inc. ("SDS"), a Michigan
corporation, purchases
24
and distributes food and other products used in the operation
of Tubby's Sub Shops restaurants through contracts with
manufacturers and with warehousing and distribution companies.
Sub Line Company, Inc., a Michigan corporation, purchases,
sells and brokers equipment used in the construction of
Tubby's Sub Shop restaurants.
Tubby's Company Stores, Inc. a Michigan corporation, owns and
operates Tubby's Sub Shops restaurants. Company Stores
currently owns and operates three restaurants located in
Southeastern Michigan.
Tubby's Sub Shops Advertising Company, Inc., a Michigan
corporation, administers the advertising fund made up of
advertising contributions made by all Tubby's Sub Shop
restaurants.
Description of Tubby's Restaurants
Tubby's Sub Shops are sit down and carry out restaurants that
feature approximately twenty types of submarine sandwiches along with soup,
french fries, onion rings, breaded mushrooms, a selection of desserts and
soft drinks and other beverages. No table service is provided in a Tubby's
restaurants. Customers place and pay for their orders at a serving counter
and their food is then prepared to order, with most of the sandwiches being
grilled. When the order is ready, it is picked up at the counter. Customers
may also place their orders by telephone, either for consumption at the
restaurant or for carry out. Tubby's restaurants do not offer any alcoholic
beverages.
Tubby's restaurants are usually located in a neighborhood shopping
center or in a free standing building that has been designed and built as a
Tubby's restaurant or converted from another use. The decor of the Tubby's
restaurants has been designed to create a pleasing atmosphere for the
restaurant's customers. The building that is required for a Tubby's
restaurant will range from approximately 1,200 square feet to 2,500 square
feet. The cost of a new Tubby's restaurant will vary depending upon many
factors, including the size of the restaurant, whether it is new construction
or conversion of an existing building, whether it is to be purchased or
leased and prevailing real estate and construction costs. See "Franchising"
for description of the Tubby's Franchise Agreement.
SYF restaurants promote a specialty sandwich called a "Stromboli."
A Stromboli is a closed sandwich with bread freshly baked around a favorite
filling selected by the customer together with cheese, tomato sauce, onions
and peppers. The fillings available are meatballs, sausage, pepperoni, veal,
chicken, shrimp, eggplant, mushrooms, broccoli and spinach. SYF restaurants
also offer pizza, hamburgers, and numerous side orders like french fries,
onion rings, mozzarella sticks and others. SYF's restaurants are sit down,
full service restaurants with table service. SYF restaurants may also offer
beer and wine. At August 31, 1999, 91 Tubby's and two SYF restaurants were
operating.
25
Restaurant Development and Expansion
The following table shows the growth of the company's franchised
restaurants during its last six fiscal years:
Fiscal Year Ended November 30
-----------------------------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Tubby's Restaurants
Opened ............ 5 7 10 7 16 10
Closed ............ 4 1 3 2 2 10
Ending Number ..... 56 62 69 74 88 88
All operating Tubby's restaurants, of which as of August 31, 1999
there were 93 operating, are located in Michigan other than three restaurants
which are located in Florida, two in Missouri, one in Nebraska, one in Iowa,
two in Arizona and two in New Jersey. During the year ended November 30, 1998
10 Tubby's franchised restaurants closed and 10 new Tubby's franchised
restaurants opened, of which five are located in the Detroit metropolitan
area. Of the 10 restaurants that closed, four were located in Michigan, two
in Windsor, Ontario Canada, one in Indiana, one in Pennsylvania and two in
Ohio.
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 locations, quality and speed of
service, advertising and attractiveness of facilities.
Tubby's competes with restaurant chains and other restaurants
serving a variety of foods which operate more restaurants and have greater
financial resources, greater name recognition and marketing capability.
Furthermore, competition for management and other key operating personnel and
for restaurant sites could increase as Tubby's operations expand.
In the sale of franchises, Tubby's competes with franchisors of
other restaurants and franchisors of a variety of other products and
services. Tubby's management considers the amount of the initial investment
required of the franchisee, the perceived potential for business success and
return on investment, the assistance provided by the franchisor and the
franchisor's name recognition and reputation to be the most significant
competitive factors in franchising.
Franchising
Franchises for Tubby's Sub Shops and SYF restaurants have been
offered since 1977. The Company currently offers single-unit franchise
agreements, area development agreements and development agent agreements.
Except as noted below, the terms and conditions of the franchise agreements
used by Tubby's are the same.
The franchisee is responsible for all construction and remodeling
costs required to bring a location up to the standard specifications of a
Tubby's store. Subline Co., a subsidiary of
26
Tubby's, Inc., may, at the option of the franchisee, assist in the
construction of the restaurant or in the leasehold improvements. Also, the
franchisee may purchase the required construction drawings and equipment from
Subline Co.
The single-unit franchise agreement gives the franchisee the right
to use Tubby's or SYF's trademarks, service marks and methods of operation to
operate a Tubby's or SYF restaurant at a specific location that is approved
by Tubby's. The initial term of Tubby's current franchise agreement is ten
(10) years with the franchisee generally having two five year options to
renew. The initial license fee, which is payable upon execution of the
franchise agreement, is $15,000 for a traditional Tubby's franchise and
$15,000 for a SYF franchise, with a reduction in that fee provided to persons
who purchase more than one franchise and to existing franchisees. The initial
license fee for nontraditional restaurants, such as ones located in
convenience store, gas stations, etc., is $8,000, also payable upon execution
of the franchise agreement. The initial franchise fee compensates Tubby's for
the cost of various services 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. Tubby's current franchise agreement requires the franchisee to
pay Tubby's a weekly royalty equal to the greater of $100 dollars per
restaurant or six percent (6%) of the franchisee's gross weekly sales. All of
the existing franchise agreements require the franchisee to pay Tubby's a
weekly advertising fee equal to the greater of $50 per restaurant or three
and a half percent (3 1/2%) of the franchisee's gross weekly sales. Those
advertising fees are administered by Tubby's or its affiliates or designees
and 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 and menu and food quality specifications, to purchase supplies from
Tubby's approved sources and to permit inspections and audits by Tubby's.
If a potential franchisee desires to establish multiple
restaurants in a defined geographical area or wishes to have the right to
procure other persons to apply to become franchisees within a designated
area, that franchisee may enter into an Area Development or Development Agent
Agreement. At this time Tubby's has entered into one Area Development and
five Development Agent Agreements.
Tubby's does not make projections regarding sales volume of
existing or future stores. Many factors influence an individual store's sales
volume and/or profitability. Items affecting the success of a particular
franchise include, but are not limited to, site location, local competition,
local advertisement, direct owner participation, management's restaurant
experience, respective financing and capitalization costs and control of
labor costs.
Training
Tubby's provides a complete course of instruction 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 Tubby's restaurants. This course is offered to a licensed
franchisee, and for one additional franchisee or management representative.
Salaries, expenses of travel, food and lodging for franchisees and their
representatives are at the franchisee's own expense. The training program
consists of a minimum 120 hours of in-store operations, under
27
direct supervision of qualified personnel, in addition to classroom sessions
at Tubby's corporate offices. After successfully completion of training,
Tubby's will provide assistance by providing a member of its staff to the
franchisee's location for three (3) days out of the first nine (9) weeks of
operation. Tubby's does not charge for the training described above, but it
is only obligated to provide training for a franchisee's first location.
Additional training of management, employees, etc,, is available at a fee, as
is assistance at a subsequent location.
Quality Control and Supervision
Tubby's requires all of its franchisees to satisfy certain quality
control standards governing both the products and services that are offered
by its franchisees. Operating specifications for Tubby's restaurants are
documented by Tubby's in its operations manuals that are provided to all
franchisees. Tubby's audits performance and adherence to such standards by
performing periodic inspections of each restaurant.
Supplies
The materials, inventories and other items required to equip and
operate a Tubby's restaurant are generally available from several sources.
Although franchisees are not required to make any purchases from Tubby's, in
order to maintain quality control, Tubby's does require its franchisees to
purchase certain designated food and supply items from suppliers that have
been 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 and 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 of that 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 Subline is able to offer
competitive prices is that it can often obtain volume discounts for the items
that are sold to Tubby's franchisees. Subline will make a profit on any
equipment it sells in an amount equal to the sales price of that equipment
minus Subline's costs incurred in connection with that equipment. In most
instances, the terms of purchase from Subline are more favorable than terms
available from unaffiliated third parties. A portion of Subline's volume
discounts are passed on to the franchisee. Additionally, franchisees have
standing open accounts with Subline.
SDS is an approved supplier of food and other products that are
sold to franchisees. Although franchisees are not required to purchase any
products from SDS, many of them do so because SDS offers lower prices, higher
quality, superior service and certain purchase incentives.
Advertising
Each franchisee is required to pay advertising fees equal to the
greater of $50 per week or 3 1/2% of total weekly gross sales of that
franchisee's restaurant. Those funds are administered by Tubby's Sub Shops
Advertising Co., Inc. ("TSSAC"), and are used to pay for shared production
28
and media advertising costs as well as other promotional costs. Local
advertising campaigns are conducted through radio, television, local
newspapers, direct mailing and billboards and other media that would be cost
prohibitive for an individual franchisee. All monies received for advertising
are escrowed and spent for advertising purposes only. A portion is retained
by the franchisor to cover administrative costs. Generally, franchisees
located in states other than Michigan pay 1% of weekly gross sales to TSSAC
and are required to spend an additional 2 1/2% on local marketing until such
time as the number of franchises in their area reaches an "area of dominant
influence" large enough to warrant the formation of an advertising
cooperative.
Trademarks and Service Marks
Tubby's name and logo and SYF's logo are registered as trademarks
and service marks with the United States Patent and Trademark Office.
Regulation
Many states 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 is also subject to the Federal Trade Commission
regulations relating to disclosure requirements in the sale of franchises.
Tubby's believes it is operating in 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 restaurants serving alcoholic beverages (i.e.,
SYF restaurants), 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.
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 wages, 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.
Employees
As of November 30, 1998, Tubby's and its subsidiaries employed 45
persons. This includes 13 at corporate offices (4 officers, 3 managers, 6
clerical) and 32 at Company owned restaurants (3 managers and 19 part-time
employees). None of Tubby's employees are covered by collective bargaining
agreements. Tubby's considers its employee relations to be good.
29
Properties
Tubby's leases an approximately 8,000 square foot office building
at 6029 E. Fourteen Mile Road, Sterling Heights, Michigan 48312 where its
principal executive offices are located. The lease provided for a five year
initial term which ended June 30, 1998, and, thereafter, month-to-month, with
monthly rent of $3,200, plus insurance and taxes. The lease also includes an
option to purchase the building for $425,000 until the termination of the
lease. Tubby's believes that the building is suitable and adequate for its
current operation. Tubby's also owns a Tubby's restaurant located in Clinton
Township, Michigan, which it operates, and a Tubby's restaurant located in
Southgate, Michigan that it leases to an unaffiliated franchisee at a monthly
rental of $2,300.00.
Legal Proceedings
A. Civil Actions.
1. Tubby's, Inc. v Walter Lasko (Macomb County Circuit Court Case No.
98-3499-CK). In August 1998, the Company commenced a civil action
against Walter Lasko in the circuit court for the County of
Macomb, Michigan. The Complaint asserts claims for specific
performance, equitable estoppel and unjust enrichment in
connection with Mr. Lasko's refusal to honor the option to
purchase the office building where its headquarters are located.
The Company originally entered into a five year lease with an
option to purchase the office building prior to the expiration of
the lease. The Defendant claims that the Company failed to
strictly comply with the written option to purchase by failing to
provide a timely written notice that it was exercising the option.
At this time, the Company is awaiting a trial date and intends to
vigorously pursue its claim to specifically enforce the
Defendant's obligation to sell the office building to the Company.
2. Tubby's Sub Shops, Inc., a Michigan corporation, and SUBperior
Distribution Systems, Inc., a Michigan corporation v Sun Valley
Foods Company d/b/a AAA Warehouse & Cold Storage Company, a
Michigan corporation, and Greg Tatarian, and Sun Valley Foods
Company d/b/a AAA Warehouse & Cold Storage Company, a Michigan
corporation, and Greg Tatarian, individually v Tubby's Sub Shops,
Inc. a Michigan corporation, SUBperior Distribution Systems, Inc.
a Michigan corporation and Sun Valley Foods Company d/b/a AAA
Warehouse & Cold Storage Company, a Michigan corporation v
Tubby's, Inc., a New Jersey corporation (Macomb County Circuit
Court Case No. 98-3796-CK). On September 18, 1998, the Company
commenced a civil action against Sun Valley Foods Company and Greg
Tatarian, its President, individually in the circuit court for the
County of Macomb. The Complaint asserts claims for breach of
contract, reimbursement for overpayments, fraudulent
misrepresentation, and reimbursement for damaged and/or missing
inventory. In the fall of 1997, the Company entered into a
warehousing and distribution contract with Sun Valley and these
claims arose out of Sun Valley's failure to perform pursuant to
that contract. At present,
30
this action is in the discovery phase. The Company intends to
pursue settlement negotiations and, if not successful, to
vigorously pursue these claims through trial or arbitration.
3. 1266020 Ontario Limited, Tony Houad, Natalie Kemeny v T & J
Franchising Systems LTD., Tubby's Sub Shops Inc., Theresa
Hutchinson and Jerry Hutchinson (Ontario Court General Division
Case No. 45035); 1266115 Ontario Limited, Rita Marra, Biagio
Marra, Christina Gatto, Brunno Gatto and Theresa Williams v T & J
Franchising Systems LTD, Tubby's Sub Shops Inc., Theresa
Hutchinson and Jerry Hutchinson (Ontario Court General Division
Case No. 45033). On October 16, 1998, the above plaintiffs
commenced actions against T & J Franchising Systems LTD and its
shareholders Theresa and Jerry Hutchinson ("T & J") and Tubby's. T
& J are former development agents for Tubby's whose geographic
area included all of Ontario, Canada. T & J are also former
franchisees of Tubby's. In that regard they sold two of their
franchises to the plaintiffs in these cases who now claim that T &
J misrepresented the prior sales of those franchises. Their claim
against Tubby's is that Tubby's is liable for the
misrepresentations of its former development agents in connection
with the sales of those stores. They are seeking damages in the
amount of their investments and losses. Tubby's has retained local
counsel in Ontario, has denied any liability and intends to
vigorously defend against these claims.
4. Scott McBeath v 1266092 Ontario Limited, T & J Franchising Systems
LTD, Tubby's Sub Shops Inc., Jerry Hutchinson and Theresa
Hutchinson (Ontario Court General Division Case No. 44278). On
June 16, 1998, Scott McBeath commenced this action against the
above listed defendants. McBeath claims that he paid T & J $50,000
(Canadian) as payment in full to acquire a 50% ownership interest
in a Tubby's Sub Shop franchise owned by 1266092 Ontario Limited
whose shareholders were Terry and Jerry Hutchinson. This claim is
for reimbursement of that payment. The claim against Tubby's is
that Tubby's should be liable for its former development agent's
fraud and conversion. Tubby's has retained counsel in Ontario, has
denied any liability and intends to vigorously defend this case.
MANAGEMENT OF TUBBY'S
The directors and executive officers of Tubby's are as follows:
Name Age Position Held with Tubby's
- ---- --- --------------------------
Robert M. Paganes........ 42 President, Chief Executive Officer
and Director
P. Terrance Paganes...... 57 Executive Vice President and
Director
Vincent J. Tatone........ 42 Secretary and Director
Ronald Boraks............ 39 Director
31
PRESIDENT & CEO - ROBERT M. PAGANES. Mr. Paganes has been the CEO of
Tubby's since August 12, 1994, has been the President of Tubby's since
June 10, 1994, and was Executive Vice-President and Secretary of
Tubby's from June 21, 1991 to June 10, 1994. Mr. Paganes has been an
Officer and Director of Tubby's and its predecessor TSSI since December
2, 1977. Mr. Paganes is also one of the Tubby's franchisees.
CHAIRMAN OF THE BOARD & VICE-PRESIDENT - PETER T. PAGANES
Mr. Paganes has been the Chairman of the Board of Tubby's since August
12, 1994, and was the Vice-Chairman of the Board of Tubby's from June
21, 1991, to August 12, 1994, and has been a Director of Tubby's and
its predecessor TSSI since December 2, 1977. Mr. Paganes has also been
a Vice-President of Tubby's since December 2, 1977. Mr. Paganes is also
one of the Company's franchisees; Peter T. Paganes and Robert M.
Paganes are brothers.
SECRETARY & DIRECTOR - VINCENT J. TATONE Mr. Tatone has been Secretary
of Tubby's since August 12, 1994, and has been a Director of Tubby's
since January 30, 1993. Mr. Tatone was an officer and shareholder of
the law firm of Lites & Tatone, P.C. of Detroit, Michigan from
September 1992 until April 1994. From September 1987 to September 1992,
Mr. Tatone practiced with the law firm of Bodman, Longley and Dahling
of Detroit, Michigan. He became Corporate Counsel of Tubby's in April
1994.
DIRECTOR - RONALD BORAKS
Ronald Boraks has been a Director of Tubby's since June of 1996. Mr.
Boraks has been in the real estate and property management business for
the past 15 years. He has a bachelor of science degree in operations
management from Wayne State University and a juris doctor degree from
the University of Detroit School of Law. Mr. Boraks is licensed by the
State of Michigan as an attorney, real estate broker and residential
builder and specializes in financial and administrative management. Mr.
Boraks is an officer and director of Certified Realty, Inc., located in
Farmington Hills, Michigan.
The by-laws of Tubby's, the surviving corporation, provide that
directors shall serve a term of one year or until their successors are
appointed or duly elected. The directors listed above are proposed to be
elected and hold office until the 2000 Annual Meeting and until their
successors are elected and qualified, in the event the Merger Agreement is
not approved. All of the nominees have indicated their willingness to serve,
but if any of them should decline or be unable to serve, it is intended that
the enclosed proxy will be noted for the election of such persons as are
nominated as replacements by the Board of Directors in accordance with the
By-Laws.
32
Compensation of Tubby's Officers and Directors
Set forth below is, for the fiscal years ended November 30, 1998,
1997, and 1996 all cash compensation paid to each of the executive officers
or directors of Tubby's and to all officers and Directors of Tubby's as a
group:
Restricted Securities
Name and Principal(s) Other Annual Stock Underlying
Position Year Salary Compensation Award SAR's
--------------------- ---- ------ ------------ --------- ----------
Robert M. Paganes 1998 $76,000.00 0 0 0
President and CEO 1997 $74,000.00 0 0 0
1996 62,500.00 0 0 0
P. Terrance Paganes 1998 $75,000.00 0 0 0
Vice President 1997 $75,000.00 0 0 0
1996 $62,500.00 0 0 0
Vincent J. Tatone 1998 $75,000.00 0 0 0
Secretary 1997 $65,000.00 0 0 0
1996 $50,000.00 0 0 0
Theresa M. Borto 1998 $32,500.00 0 0 0
Chief Financial Officer 1997 -- -- -- --
1996 -- -- -- --
Melvyn Erdos 1998 $32,500.00 0 0 0
Chief Financial Officer 1997 $65,000.00 0 0 0
1996 57,500.00 0 0 0
Tubby's anticipates paying the following salaries to its officers
during its current fiscal year: Robert M. Paganes - $100,000; P. Terrance
Paganes - $75,000 and Vincent J. Tatone - $87,500. Tubby's does have stock
option plans in effect for its employees, including officers, but no stock
options were granted in fiscal 1998 and Tubby's anticipates that none will be
granted in its current fiscal year.
33
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 1998.
<TABLE>
<CAPTION>
Amount and Nature Percent of
Name of Beneficial Owner of Ownership (1) Class(2)
- ------------------------ ----------------- ----------
<S> <C> <C>
Robert M. Paganes .......................... 259,775 10.0%
6029 E. Fourteen Mile Road President
Sterling Heights, Michigan 48312 Director
Peter T. Paganes ........................... 191,400 7.4%
6029 E. Fourteen Mile Road Vice President
Sterling Heights, Michigan 48312 Director
Vincent J. Tatone .......................... 50,000 3.1%(3)
6029 E. Fourteen Mile Road Secretary
Sterling Heights, Michigan 48312 Director
Ronald Boraks .............................. 0 --
38345 West Ten Mile Road, Suite 300 Director
Farmington Hills, Michigan 48335
J. Thomas Paganes .......................... 187,738 7.3%
38633 Moravian Shareholder
Mount Clemens, Michigan 48043
All Executive Officers & Directors as a
Group (5 persons) ....................... 501,175 19.4%
<FN>
(1) The nature of ownership is sole voting and investment power unless
otherwise indicated.
(2) As of June 3, 1999.
(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. Vincent J. Tatone has an option to purchase
30,000 shares of Common Stock under Tubby's Statutory Employee Stock
Option Plan.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto and with the
Company's Form 10-KSB and audited financial statements and notes thereto for
the fiscal year-ended November 30, 1998.
FINANCIAL CONDITION
Cash and Equivalents, Certificates of Deposit, and Investments increased by
$95,709 for the nine months ended August 31,1999, compared with a decrease of
$215,707 for the nine months ended August 31, 1998. The decrease during the
same period in 1998 was primarily due to repayment of long term debt. The
current period increase in the Company's cash position resulted primarily
from net income of $298,675, non-cash expenses of depreciation and
amortization of $95,389 and federal tax expense of $158,729, also a non-cash
expense because of the utilization of NOL's, net of a decrease in accounts
payable of $114,215 and the purchase of assets, including goodwill, of
$229,462. The purchased assets included the purchase of a high volume store
from an unaffiliated franchisee for $220,000, cash.
34
Consolidated Revenues increased by $1,651,910 primarily as a result of an
increase in SDS Product Sales of $1,634,187. Consolidated Expenses increased
by $1,015,531 primarily due to an increase in Cost of Product Sales of
$1,139,117. Other fluctuations of lesser significance are explained below.
The Company opened fourteen new franchised stores during the first nine
months of 1999 compared to eight stores in the first nine months of 1998 and
has signed franchise agreements for an additional five with projected opening
dates during the fourth quarter 1999. Nine franchised stores were closed
during the first nine months of 1999 compared to six in 1998 and one
previously closed store was re-opened.
At August 31, 1999, the Company operated four restaurants and franchised
eighty-nine restaurants. Franchised restaurants are located in Michigan,
Missouri, Nebraska, Iowa, Florida, Arizona, New Jersey and the Canadian
province of Ontario.
Results of operations for the three months ended August 31, 1999 as compared
with the three months ended August 31, 1998.
The current three-month period shows a Net Income of $132,342 as compared to
a Net Loss of $116,673 in the same three months of the prior year.
Revenues for the three months ended August 31, 1999 increased by $316,257 or
14.5% to $2,504,523. The increase in Revenues was attributable to:
o An increase in SDS Product Sales for the quarter of $268,991 or 20% due to
additional products stocked by SDS in third quarter 1999 compared to third
quarter 1998. o Food Sales increased by $74,727 or 28.4%. This is
primarily due to the acquisition of a new Company-owned store.
o Advertising fees were $193,760, up 20.6% from the same period last year.
This increase reflects the income derived from the increased franchisee
food sales resulting from the advertising efforts of the Company and the
additional monthly fees derived from its new franchisees. In addition,
there was approximately $24,000 of deferred advertising revenue in the
three months ended August 31, 1998 whereas there was $0 deferred revenue
at the end of the current three-month period.
o Equipment and Restaurant Sales decreased $39,291 or 52% for the three
months ended August 31, 1999 as compared to the three months ended August
31, 1998 despite the increase in the number of stores opened (five in
third quarter 1999 compared to two in third quarter 1998). The decrease is
a result of the continuing trend toward building the lower cost,
non-traditional Tubby's Sub Shops rather than the traditional type. In
addition, all of the stores opened in the third quarter 1999 elected to
handle store construction/renovations and some of the equipment purchases
internally rather than through The Subline Company.
35
Total Costs & Expenses for the three months ended August 31, 1999 decreased
by $65,628 or 2.8% compared to the three months ended August 31, 1998. The
decrease in Total Costs was attributable to:
o Cost of Product Sales was $1,185,960 or 73.6% of Product Sales for the
three months ended August 31, 1999 compared to $1,032,572 or 76.9% for the
three months ended August 31, 1998. The increase of $153,388 represents
increased sales, primarily through sales of additional stock items, during
third quarter 1999 compared to third quarter 1998. The decrease in cost of
product sold as a percentage of sales represents the continued efforts to
provide quality products at a lower cost.
o Operating expenses decreased by $205,404 or 19.8% reflecting primarily a
decrease of approximately $181,000 in outbound freight costs due to a
change of distributors. o The Cost of Restaurant Food Sales increased in
third quarter 1999, compared to 1998, by $21,191 or 11.2%. This is
primarily because the company acquired an additional company-owned store,
as of June 30, 1999.
o Cost of Equipment Sales decreased as a percentage of Equipment &
Restaurant Sales from 86% in 1998 to 84% in 1999 reflecting increased
gross profit margins.
The loss on disposal of assets of $43,586 represents leasehold improvements
that were abandoned when the Company closed a store. The store had been under
an agreement whereby a manager would operate the store with the option to
purchase. When the manager opted not to purchase, the Company decided to
close the location rather than to sell it.
Results of Operations for the nine months ended August 31, 1999 as compared
to the nine months ended August 31, 1998.
The company realized Net Income of $298,675 for the nine months ending
August 31, 1999 as compared to a Net Loss of $(117,001) for the nine months
ending August 31, 1998.
Total Revenues for the nine months ending August 31, 1999 increased by
$1,651,910 or 30.7% to $7,031,844. The increase in Total Revenues was
attributable to:
o An increase in Product Sales of $1,634,187 or 54.8%. The SDS inception
date was February 1998; therefore, there were only seven months of SDS
operation in the financial results for the nine months ending August 31,
1998 whereas there are nine months of operations in the same period ended
August 31, 1999. This represents approximately $820,000 of the increase.
The balance of the increase is due to sales to new stores and sales of
additional products stocked by SDS in 1999 compared to 1998.
o Monthly Franchise fees for the nine months ended August 31, 1999 were
$729,643, up 8.7%. The increase reflects the income derived from the
increased franchisee food sales resulting
36
from the advertising efforts of the Company and the additional monthly
fees derived from its new franchisees.
o Restaurant Food Sales increased by $76,267, or 11.6% in the nine-month
period ended August 31, 1999 as compared to the nine-month period ended
August 31, 1998. This increase is the net effect of closing one company
store in 1998 and opening another company store in 1999.
o Increase of $93,949 or 18.9% in Advertising Fees. The increase reflects
the income derived from the increased franchisee food sales and the
advertising efforts of the Company. In addition, the nine-month period
ended August 31, 1999 reflects approximately $32,000 of revenue that was
deferred from November 30, 1998.
o Equipment and Restaurant Sales decreased $233,829 or 64.7% for the nine
months ended August 31, 1999 as compared to the nine months ended August
31, 1998 despite the increase in the number of stores opened (fourteen in
1999 compared to eight in 1998). The decrease is a result of the
continuing trend toward building the lower cost, non-traditional Tubby's
Sub Shops rather than the traditional type. In addition, many of the
stores opened in 1999 elected to handle store construction/renovations and
some of the equipment purchases internally rather than through The Subline
Company.
Total Costs & Expenses for the nine months ended August 31, 1999 increased by
$1,015,531 or 18.3% as compared to the nine months ended August 31, 1998.
o Cost of Product Sales was $3,453,436 or 74.8% of Product Sales for the
nine months ended August 31, 1999 compared to $2,314,319 or 77.6% for the
nine months ended August 31, 1998. The SDS inception date was February
1998; therefore, there were only seven months of SDS operation in the
financial results for the nine months ending August 31, 1998, whereas
there are nine months of operations in the same period ended August 31,
1999. This represents approximately $641,000 of the increase. The balance
of the increase is due to cost of additional products stocked by SDS in
1999 compared to 1998.
o Operating Expenses increased by $43,973 or 1.8% in the nine months ended
August 31, 1999. The increase is comprised of increases in Advertising of
$94,279, and Professional Services of $45,530, as well as a decrease in
Shareholder Compliance Costs of $39,362 and many small decreases
reflective of management's ongoing cost control measures.
o Cost of Equipment Sales increased as a percentage of Equipment &
Restaurant Sales from 81% for the nine month period ended August 31, 1998
to 85% in 1999 reflecting decreasing gross profit margins.
The loss on disposal of assets of $43,586 represents leasehold improvements
that were abandoned when the Company closed a store. The store had been under
an agreement whereby a
37
manager would operate the store with the option to purchase. When the manager
opted not to purchase, the Company decided to close the location rather than
to sell it.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Equivalents, Certificates of Deposit, and Investments increased by
$95,709 for the nine months ended August 31,1999, compared with a decrease of
$215,707 for the nine months ended August 31, 1998. The decrease during the
same period in 1998 was primarily due to repayment of long term debt. The
current period increase in the Company's cash position resulted primarily
from net income of $298,675, non-cash expenses of depreciation and
amortization of $95,389 and federal tax expense of $158,729, also a non-cash
expense because of the utilization of NOL's, (See 10KSB for fiscal year ended
November 30, 1998, Note 7), net of a decrease in accounts payable of $114,215
and the purchase of assets, including goodwill, of $229,462. The purchased
assets included the purchase of a high volume store from an unaffiliated
franchisee for $220,000, cash.
Cash and equivalents increased by $95,709 for the nine months
ended August 31, 1999. The increase is composed of the following significant
cash flows: Net Cash Flows Provided By Operating Activities Was $276,810,
Compared To Net Cash Used By Operating Activities Of $188,602 For The Same
Period In 1998.
Operating activities creating significant cash inflows:
o Net income of $298,675, compared to net loss of $117,001 for the same
period in 1998.
o Non-cash adjustments for depreciation and amortization of $95,389,
compared to $125,846, for the for the same period in 1998.
o A non-cash expense for taxes on income of $158,729 (because of the
utilization of NOL's), compared to $0 for the same period in 1998.
o Prepaid expenses decreased by $11,980, compared to an increase of $57,878
for the same period in 1998.
Operating activities creating significant cash out flows:
o Accounts receivable increased by $85,599, compared to an increase of
$228,059 for the same period in 1998. Both increases are primarily related
to SDS operations; SDS began operating in February 1998 and revenues
increased for the first nine months of 1999.
o Inventories increased by $65,929, compared to an increase of $223,859 for
the same period in 1998.
o Accounts payable decreased by $114,215, compared to an increase of
$293,803 for the same period in 1998.
o Deferred revenues increased by $86,954, compared to an increase of $21,863
for the same period in 1998.
38
Net Cash Used In Investing Activities Was $172,740, Compared To Net Cash
Provided By Investing Activities Of $191,931 For The Same Period In 1998.
Cash flows from investing activities:
o Payments on notes receivable of $42,624, compared to $129,425 for the same
period in 1998.
o Net proceeds from the sale of equipment and property of $14,098, compared
to $147,138 for the same period in 1998.
Cash flows used in investing activities:
o Purchase of property and equipment for $109,462, compared to $19,616 for
the same period in 1998.
o Purchase of goodwill and a covenant not to compete for $120,000, compared
to $0 for the same period in 1998.
Cash Flows Used In Financing Activities Was $8,361, Compared To $219,036 For
The Same Period In 1998.
Cash used in financing activities:
o Payment of long-term debt of $8,361, compared to $219,036 for the same
period in 1998, which was used to repay a note in connection with the
dissolution of the McTub partnership.
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 short-term and long-term needs of the Company. The Company also
maintains a $250,000 revolving line of credit with a local financial
institution. The line, which would provide long-term liquidity, of credit can
be drawn upon as needed to meet future cash requirements. As of August 31,
1999, the entire line of credit was available to the Company.
Results of Operations - Comparison of the years ended November 30, 1998
and 1997
Tubby's and its consolidated subsidiaries experienced an increase in 1998
total revenues of $3,810,297 or 107.2%. The Company had a loss before taxes
of $31,207 in 1998 versus income before taxes of $202,799 in 1997 which is a
115.4% decrease. Net loss after taxes was $31,207 in 1998 versus net income
after taxes of $107,499 in 1997.
The increase in revenues is attributable to revenues generated by the new
distribution subsidiary, SDS, of $4,397,578, a decrease in food sales of
$151,082, or 16.2%, an increase in monthly franchise fees of $110,339, or
14%, a decrease in equipment and restaurant sales of $184,116, or 32%, and a
decrease in commissions and other fees of $367,589, or 76.6%.
The revenues of the distribution subsidiary represent revenues generated
since the launch of SDS on February 2, 1998. SDS product sales continued to
grow each month as the franchisees became familiar and comfortable with the
new distribution system.
39
The decrease in food sales revenues is primarily attributable to one Company
owned restaurant that was closed in June 1998 due to a lease non-renewal. The
food sales attributable to this restaurant was $210,846 in the seven months
it operated in 1998 compared to $383,849 in twelve months of 1997.
The increase in monthly franchise fees is a result of improved food sales
system-wide. The Company believes that this overall increase in food sales is
the result of the strong Detroit area economy as well as the increased
efforts of the Marketing Director in advertising and marketing Tubby's
Submarine Shops and their products.
The decrease in the equipment and restaurant sales revenue is a result of
opening 10 stores in 1998 as compared to 16 stores in 1997. The trend toward
building the lower cost non-traditional Tubby's Sub Shops rather than the
traditional Tubby's Sub Shop continues. In 1997, seven of the ten new stores
were of the non-traditional type. In addition, many of the new franchisees,
particularly the growing number of out-of-state stores, are electing to
handle store construction/improvements on their own rather than using the
Subline Company, reducing purchases from Subline to equipment only.
Commissions and other fees are comprised of marketing rights, material sales,
rental income of existing Company owned franchisee operated Tubby's Sub
Shops, and, in 1997, vendor rebates. The decrease of $367,589, or 76.6%,
relates primarily to vendor rebates. In 1998, vendor rebates are classified
as a reduction in costs of SDS products sold, whereas in 1997 vendor rebates
of $364,629 are included in commissions and other fees.
The costs of SDS product sales were $3,402,997 during the ten months of
operation in 1998 with a gross margin of $994,581, or 22.6%. Management
continues to believe strongly in the value of SDS and its ability to provide
its franchised and Company-owned Tubby's Sub Shops with uniform and
consistently high quality products at equivalent or lower prices than
previously charged.
Operating expenses increased in 1998 by $881,817 or 37.4%. Incremental
operating expenses of SDS which began operations in February 1998 represents
approximately $703,000 of the increase. The largest portion of the SDS
operating expenses is the cost of warehousing and distribution of $592,000.
Advertising, promotional, and various marketing expenses increased by
$138,000 in 1998 as the Company expanded its marketing efforts in regions
where Tubby's stores are located. Commissions paid to development agents
increased by $68,000. The Company anticipates continued increases in
commissions paid to development agents as the development agent agreements
are fulfilled over the next twenty years. Salaries increased by $147,000, or
23.6%. The increase in salaries included additional staffing related to SDS
operation, full year salaries for the staff positions in purchasing and
marketing which were filled in April 1997 and July 1997, respectively, and
annual merit increases. Expenses related to Franchise Development decreased
by approximately $115,000, or 67.6%, primarily due to attendance at fewer
trade shows.
40
The cost of food sales at Company-owned stores decreased by $155,018, or
23.2% primarily due to the closing of one store in June 1998 due to lease
non-renewal. The gross margin for 1998 was 34% compared to 28.3% in 1997.
Company-owned stores absorb certain costs that franchised stores do not,
including costs related to training new franchisees.
The costs of equipment and restaurant sales decreased by $129,118, or 27.5%.
The gross margin for 1998 was 12.8% compared to 18.3% in 1997. The decrease
in margin is due to increased price competition in equipment sales. The
Company has taken steps to reduce the operating expenses related to the sale
of equipment and restaurant construction and expects improved financial
results in 1999.
Other income (expense) decreased by $43,625, or 30.5%, in 1998 as compared to
1997. This decrease was primarily due to a decrease in interest income of
$38,479 or 35.5% in 1998 because the Company utilized its excess funds to
provide short term funding for SDS inventory and accounts receivable.
Liquidity and Capital Resources
For the year ended November 30, 1998, cash and equivalents decreased by
$172,033 when compared to 1997 during which cash and equivalents increased by
$70,735. The decrease during fiscal 1998 is composed of the following
significant cash flows:
Net Cash Flows Used By Operating Activities Was $84,098 In 1998
Compared To Net Cash Provided By Operating Activities Of $169,799 In
1997
Operating Activities Creating Significant Cash Inflows:
o Non-cash adjustments to the Net Loss included Depreciation and
Amortization for 1998 of $136,704, compared to $135,468 for 1997.
o Provision for doubtful accounts was $71, 896, compared to $0 for
1997
o Accounts payable increased by $272,769 as a result of the new SDS
operations, compared to decrease of $83,522 for 1997.
Operating Activities Creating Significant Cash Out Flows:
o Net Loss of $31,207, compared to a Net Income of $107,499 for 1997.
o Accounts receivable increased by $282,479 as a result of the new
SDS operations, compared to an increase of $198,543, in 1997.
o Inventories increased by $228,861 also as a result of SDS
operations, compared to a decrease of $3,386 for 1997.
o Prepaid expenses increased by $16,409, compared to a decrease of
$59,195 for 1997.
41
Net Cash Flows Provided By Investing Activities Was $140,716 in 1998,
Compared To Net Cash Flows Used By Investment Activities of $16,921 In 1997.
Cash Flows From Investing Activities:
o Net Proceeds From Sale Of Property and Equipment of $156,502,
compared to $5,000 for 1997.
o Payments on Notes receivable of $92,508, compared to $52,912 for
1997.
Cash Used In Investing Activities:
o Purchases of Property and Equipment of $37,525, compared to $69,020
for 1997.
o Acquisition of McTub 49% Minority Interest of $65,000, compared to
$0 for 1997.
Cash Flows Used in Financing Activities Was $228,651, Compared To Cash
Flows Used In Financing Activities Of $82,143 In 1997.
Cash Used In Financing Activities:
o Payments of long-term debt of $228,651 which is comprised of the
repayment of a note in connection with dissolving the McTub
partnerships and to principal reduction on notes owed by the
Company, compared to payment of long-term debt of $232,143 and
proceeds from long-term debt of $150,000 for 1997.
Year 2000
The Company, like most owners of computer hardware and software, has been
required to modify certain portions of its hardware and software so that it
will function properly in the year 2000. The Company evaluated its system as
to year 2000 compliance. All of the Company's hardware was year 2000
compliant. The company has no custom-programmed software. Certain purchased
software packages have been upgraded to the year 2000 compliant versions. The
work was started on September 20, 1999 and was completed November 13, 1999.
All devices that may be susceptible to Y2K issues have been inventoried. The
entire project took a total of 50.5 hours totaling $5,112.50. We are
currently 100% completed. The Company has received a letter of assurance from
the unrelated company that handles SDS warehousing and distribution that
their system is year 2000 compliant. The Company has received responses from
other third party vendors confirming they are year 2000 compliant. Management
believes that the Company will not incur any additional year 2000 costs;
however, due to the complexities involved, management cannot provide
assurances that the year 2000 issue will not have an impact on the Company's
operation. After conducting various tests, the outside software consultant
has assured the Company that he does not anticipate any Y2K system defects.
Worst case scenario would include an entire system failure. In the case of
this event, the Company would be able to operate on a manual basis during the
interim of the system adjustments without any great detriment. The Company
does a back up of all network files on a daily basis, which could be used to
restore any lost information.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OF TUBBY'S AND R. CORP
The shareholders of R Corp, Robert M. Paganes, Peter T. Paganes
and Vincent J. Tatone, who are also directors, officers and shareholders of
Tubby's, Inc., have entered into a
Stock Purchase, Redemption and Shareholder Agreement with Tubby's. The
purpose of the agreement, which is conditioned on shareholder approval of the
Merger Agreement, is to equalize the equity ownership between these three
individuals in the surviving corporation. Therefore, the agreement provides
that the Company will redeem 109,000 shares of Tubby's Common Stock from
Robert M. Paganes and 41,000 shares from Peter T. Paganes at the merger price
of $1.10 and provides for the sale of 100,000 shares to Vincent J. Tatone at
the same price. Each individual will then own 150,000 shares of Tubby's
Common Stock, assuming the Merger Agreement is approved. In addition, these
individuals have each agreed to personally guarantee loans to Tubby's, and to
obtain loans to themselves, individually, the proceeds of which will be used
to fund the Merger Agreement, and have each agreed to pledge property owned
by them in roughly equal amounts as collateral to secure repayment of the
guaranteed loans.
Federal Income Tax Consequences
As a part of the Merger, Shareholders of Tubby's will exchange
each share of the Common Stock of Tubby's for cash at the merger price of
$1.10. Any gain or loss realized under this exchange of property must be
recognized for federal income tax purposes by the shareholders. With regard
to Tubby's, no gain or loss will be recognized by Tubby's as a result of this
transaction. Tubby's will not be acquiring any assets nor will it be assuming
any of the liabilities of R Corp because R Corp has no assets or liabilities
other than its rights under the Merger Agreement.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF THE FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER. NO DISCUSSION IS INCLUDED WITH RESPECT TO THE
STATE AND LOCAL INCOME TAX CONSEQUENCES OF THE TRANSACTION. EACH SHAREHOLDER
IS URGED TO CONSULT HIS TAX ADVISOR WITH RESPECT TO THE CONSEQUENCES TO HIM
OF THE CONSUMMATION OF THE MERGER AGREEMENT.
Legal Matters
Certain legal matters with respect to the Merger will be passed
upon by Bodman, Longley & Dahling, LLP, Detroit, Michigan as special counsel
for Tubby's.
Experts
The financial statements of Tubby's, Inc. and its subsidiaries as
of November 30, 1998, November 30, 1997 and November 30, 1996, and for the
years then ended, have been audited by BDO Seidman, LLP, Independent
Certified Public Accountants, Detroit, to the extent and for the periods set
forth in their reports appearing elsewhere herein, and are included herein
in reliance upon such reports and given upon the authority of said firm as
experts in auditing and accounting.
The terms of the Merger Agreement were examined by Stout Risius
Ross, Inc., and, as set forth in their Fairness Opinion, copy at Appendix B,
that firm opined that the terms of the Merger Agreement are fair and
equitable, from a financial point of view, to all of the shareholders of
Tubby's.
43
Reports and Board of Directors Meetings
To the best of Tubby's knowledge, based solely upon a review of Forms 3 and 4
furnished to Tubby's during its most recent fiscal year, one director, Mr.
Tatone, failed to file on a timely basis reports required by Section 16(a) of
the Securities Exchange Act of 1934. He filed one late report.
There were six (6) 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,
1998. Tubby's does not have standing audit, nominating or compensation
committees of the Board of Directors, or similar committees.
Directors' Compensation
A fee of $500 per meeting attended was paid to each independent,
non-employee, Director for their services as such for the fiscal year ended
November 30, 1998. The total amount paid to independent Directors as a group
was $6,000. Mr. John Fayad resigned as a director on September 19, 1999. He
did not cite any disagreements with management as a factor in his decision to
resign. The reason he gave was that he lacked sufficient time to contribute
because of numerous other commitments.
Independent Accountants
The Board of Directors has selected BDO Seidman, LLP, independent public
accountants, to examine the financial statements of the Company for the year
ending November 30, 1999. A representative from BDO Seidman, LLP, will be
present at the meeting and will be available to respond to appropriate
questions.
Proposals of Shareholders
If the Merger is not approved by the shareholders of Tubby's, shareholder
proposals for the year 2000 Annual Meeting of Shareholders must be received
by the Company at 6029 E. Fourteen Mile Road, Sterling Heights, Michigan
48312-5801 before the close of business on January 3, 2000 for consideration
for inclusion in Tubby's proxy statement. Shareholder proposals should be
addressed to the attention of Tubby's Secretary.
Miscellaneous
The Board of Directors is not aware of any other business that
will be presented for action at the Meeting. If any other business comes
before the Meeting, the Management Proxy Committee has been directed by the
Board of Directors to cast such votes at their discretion. The cost of
preparing and mailing the notice of meeting, proxy statement and proxy to the
shareholders will be borne by Tubby's.
By Order of the Board of Directors
Vincent J. Tatone
Secretary
Dated: __________, 1999
Appendix A
Agreement and Plan of Merger
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 27, 1999, by and
between Tubby's, Inc., a New Jersey corporation ("Tubby's") and R Corp, a
Michigan corporation ("R Corp").
RECITALS
A. The Boards of Directors of Tubby's and R Corp deem the merger of R
Corp into Tubby's on the terms herein set forth to be desirable
and in the best interests of the shareholders and, subject to
approval by Tubby's shareholders, desire to adopt this Agreement
and Plan of Merger.
B. The Boards of Directors of Tubby's and R Corp, and the
shareholders of R Corp, have approved this Agreement and Plan of
Merger (the "Agreement") and have directed that the Agreement and
merger contemplated hereby be submitted to the shareholders of
Tubby's for adoption.
Now therefore, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements contained herein,
Tubby's and R Corp hereby agree that R Corp shall be merged into Tubby's,
which shall be the surviving corporation, and that the plan, terms and
conditions of such merger shall be as follows:
ARTICLE I
Merger of R Corp Into Tubby's
1.01 The Merger. On the Effective Date of the Merger (as defined in
Section 4.02), R Corp shall be merged into Tubby's, the separate
existence of R Corp (except as it may be continued by operation of
law) shall cease and Tubby's as the surviving corporation shall
continue its corporate existence under the laws of the State of
New Jersey and Tubby's shall possess all the rights, privileges,
immunities, powers, franchises and authority, of a public as well
as of a private nature, and be subject to all the restrictions,
disabilities and duties of R Corp.
1.02 Instruments. When requested by Tubby's, or by its successors or
assigns, the officers and directors of R Corp last in office shall
execute and deliver such instruments for transfer and shall take
or cause to be taken such further or such other actions as shall
be reasonably necessary in order to vest or perfect in Tubby's, or
to confirm of record or otherwise to Tubby's, title to and
possession of all the rights, powers, franchises and authority of
R Corp.
ARTICLE II
Articles of Incorporation, Directors, Officers and By-Laws
2.01 Articles of Incorporation. Except as provided below, the articles
of incorporation of Tubby's, as in effect on the Effective Date of
the Merger, shall be the articles of incorporation of Tubby's, as
the surviving corporation, until they are amended as provided
herein or by law.
2.02 Directors and Officers. Upon the Effective Date of the Merger, the
Board of Directors of Tubby's, the surviving corporation, shall
consist of the persons who were Directors and officers of Tubby's
prior to the Merger. Said Directors shall hold offices provided in
the by-laws of the surviving corporation.
2.03 By-Laws. The by-laws of Tubby's as in effect on the Effective Date
of the Merger shall be the by-laws of the surviving corporation,
until they are amended as provided therein or by law.
ARTICLE III
Exchange of Shares
The manner of exchanging the shares of Tubby's shall be as
follows:
3.01 Basis of Exchange of Tubby's Shares.
(A) Each share of common stock, $.01 par value, of Tubby's
outstanding on the Effective Date shall be exchanged for cash
at the Merger Price of $1.10, other than shares of Tubby's
held by shareholders of R Corp, which will not be exchanged.
(B) Each share of Tubby's common stock exchanged and held by
Tubby's as treasury stock shall be cancelled and retired and
no shares of common stock of Tubby's shall be issued with
respect thereto.
3.02 Exchange Agent. As promptly as feasible after the Effective Date,
Tubby's will make available to an exchange agent, for the holders
of record of certificates of common stock of Tubby's, cash in
sufficient quantities as shall enable shares of Tubby's to be
surrendered and exchanged as herein provided.
3.03 Surrender and Exchange of Shares. As promptly as feasible after
the Effective Date, each holder of an outstanding certificate or
certificates representing common stock of Tubby's shall be
notified by the Exchange Agent and shall surrender such
certificate or certificates to the Exchange Agent in the manner
specified in the Exchange Agent's notification and such holders
shall be entitled upon such surrender to received in exchange cash
in the amount of $1.10 per share represented by the
certificate or certificates so surrendered. Until so surrendered,
each outstanding certificate which, prior to the Effective Date,
represented common stock of Tubby's, shall not be transferable on
the books of Tubby's.
From and after the Effective Date, the sole rights of the holders
of certificates representing common stock of Tubby's, except as otherwise
provided by law, shall be to exchange the common stock of Tubby's for cash
pursuant to the merger as herein provided.
3.04 Transfers. If any cash for common stock of Tubby's is to be issued
in a name other than that in which the certificate for common
stock of Tubby's surrendered for exchange is registered, such
exchange shall be on the condition that the certificate so
surrendered shall be properly endorsed and otherwise enclosed for
transfer acceptable to the Exchange Agent and the person
requesting such exchange shall pay to Tubby's or the Exchange
Agent any transfer or other taxes required by reason of the
issuance of such cash for common stock of Tubby's or the Exchange
Agent shall have determined that such tax has been paid or is not
applicable.
3.05 Termination of Exchange Agent's Duties. One year after the
Effective Date, all cash which has been received by the Exchange
Agent and has not been distributed as hereinbefore provided, shall
be returned to Tubby's or its agent and the duties of the Exchange
Agent shall thereupon terminate. Thereafter, subject to the
applicable law, any stock holder of Tubby's who has not
theretofore surrendered his certificate or certificates for
exchange as herein provided shall be entitled, upon surrender of
such certificate or certificates to Tubby's or its agent, to
receive cash for the number of shares of common stock of Tubby's
as set forth under this Agreement, without interest thereon.
3.06 Financing. The Shareholders of R Corp agree to personally
guarantee debt financing in the amount of $1,750.00 and agree to
pledge personal collateral, if necessary, to procure said
financing to be used for the exchange of shares on behalf of
Tubby's.
ARTICLE IV
Closing; Effective Date of Merger
4.01 Closing. The closing of the transactions contemplated by this
Agreement shall take place at the offices of Tubby's located at
6029 E. Fourteen Mile Road, Sterling Heights, Michigan 48312, at
such date and time, within five business days after the
satisfaction or waiver of the last of the conditions set forth in
this Agreement to be satisfied or waived, as the parties may fix.
The closing of such transactions is herein called the "Closing"
and the
date of that Closing is referred to herein as the "Closing Date."
The Closing Date may be the same date as the Effective Date.
4.02 Effective Date. Subject to the conditions in this Agreement and to
the execution and filing of a Certificate of Merger in the manner
required by the New Jersey Business Corporation Act and the filing
of any documents that may be required by the Act, the Merger shall
become effective at the close of business on such date as such
filings are made or at such other date as stated in the
Certificate of Merger (the "Effective Date"). Such filings shall
be made on or as soon as practicable after the Closing.
ARTICLE V
Representations and Warranties of Tubby's
Tubby's hereby warrants and represents to R Corp as follows:
5.01 Organization, Standing, Qualification, etc. Tubby's is a
corporation duly organized, validly existing and in good standing
under the laws of the State of New Jersey and has all requisite
corporate power and is duly authorized, qualified, franchised and
licensed and to carry on its business as it is presently being
conducted. Tubby's is qualified to do business in all states where
the nature of Tubby's business and the ownership of its properties
require it to become qualified as a foreign corporation.
5.02 Capitalization. The authorized capital stock of Tubby's consists
of 6,000,000 shares of common stock, with $.01 par value, of which
2,583,113 shares will be issued and outstanding as of the
Effective Date of the Merger. All outstanding shares are duly
authorized, fully paid, validly issued and nonassessable in
accordance with applicable law. No dividends or other distribution
of the assets of Tubby's have been declared or paid in the capital
stock of Tubby's. There are no outstanding warrants, options,
preemptive rights or rights to subscribe for or purchase any
shares of Tubby's capital stock or any outstanding securities that
are convertible into Tubby's capital stock.
5.03 Authorization. The Board of Directors of Tubby's has approved this
Agreement and the transactions contemplated hereby, has authorized
the execution and delivery of this Agreement by Tubby's, and has
authorized the submission of this Agreement and the transaction
contemplated hereby to the Tubby's shareholders for their
consideration with the recommendation that it be approved. Tubby's
has full power, authority and legal right to enter into this
Agreement and to consummate the transactions contemplated hereby
and this Agreement constitutes a legal, valid and binding
obligation of Tubby's enforceable in accordance with its terms.
5.04 Subsidiaries. Other than directly or indirectly owning all of the
capital stock of: (1) Tubby's Sub Shops, Inc., a Michigan
corporation; (2) Tubby's Sub Shops Advertising Co., Inc., a
Michigan corporation; (3) Sub Line Co., a Michigan corporation;
(4) Tubby's Company Stores, Inc., a Michigan corporation; and (5)
SUBperior Distribution Systems, Inc., a Michigan corporation
(collectively referred to herein as the "Subsidiaries"). Tubby's
does not own, directly or indirectly, any interest or investment,
whether equity or debt, in any corporation, business, trust or
other entity. Unless the context otherwise requires, any
references herein to Tubby's shall be deemed to include the
Subsidiaries.
5.05 Compliance, Articles, Bylaws and Other Instruments. Tubby's is not
in violation or default of any term or its Articles of
Incorporation or Bylaws, or of any agreement, contract,
commitment, instrument, indenture, judgment, decree of order,
applicable to it and has timely filed all reports and any other
documents required by it to be filed with any governmental agency.
The execution, delivery and performance of this Agreement and the
taking of action contemplated hereby will not result in any
violation of or be in conflict with or constitute a default under
(a) the Articles of Incorporation or Bylaws of Tubby's, or (b) any
material agreement or instrument to which Tubby's or any
consolidated subsidiary is a party or by which it is bound, or (c)
any material judgment, decree or order to which Tubby's is
subject, or result in the creation of any material lien, charge or
encumbrance on any of the properties of Tubby's.
5.06 Financial Statements.
(a) Attached are the audited consolidated balance sheet of Tubby's
and its subsidiaries as of November 30, 1998, and related
audited consolidated statements of operation and changes of
financial position for the year then ended, including the
notes thereto and an unaudited consolidated balance sheet of
Tubby's and its subsidiaries as of May 31, 1999 and related
unaudited consolidated financial statements of operation and
changes in financial position for the period then ended (the
"Tubby's Financial Statements").
(b) All such financial statements have been prepared with
generally accepted accounting principles consistently applied
throughout the periods involved. As of the date of any of such
balance sheets except as and to the extent reflected or
reserved against therein, Tubby's did not have any liabilities
or obligations (absolute or contingent) which should be
reflected in a balance sheet or the notes thereto prepared in
accordance with generally accepted accounting principles, and
all assets reflected therein are promptly reported and
presently fairly the value of the assets of Tubby's in
accordance with generally accepted accounting principles. Such
statements of operations present fairly the results of
operations of Tubby's for the periods indicated. Such
statements of changes in
financial position present fairly the information, which
should be presented therein in accordance with generally,
accepted accounting principles.
(c) The financial and other books and records of Tubby's are in
all material respects complete and correct and have been
maintained in accordance with good business and accounting
practice.
5.07 Title and Related Matters. Tubby's has good and marketable title
to all of its properties, interests in properties and assets, real
and personal, which are reflected in the latest balance sheet
included in the Tubby's Financial Statements or acquired after
that date (except properties, interests in properties and assets
sold or otherwise disposed of since such date in the ordinary
course of business), free and clear of all mortgages, liens,
pledges, charges or encumbrances except: (I) statutory liens or
claims not yet delinquent, (ii) such imperfections of title and
easements as do not and will not materially detract from or
interfere with the present or proposed use of the properties
subject thereto or affected thereby, or otherwise materially
impair present business operations of such properties; or (iii) as
described in the Tubby's Financial Statements.
5.08. Inventory. The inventories of raw materials, work in progress and
finished goods (collectively called "Inventories") shown on the
most recent balance sheet of Tubby's included in the Tubby's
Financial Statements consisted, and all such Inventories as of the
Closing Date will consist, of items of a quality and quantity
usable and saleable in the ordinary course of business by Tubby's,
except for obsolete and slow-moving items and items below standard
quality, all of which have been written down on the books of
Tubby's to net realizable market value or have been provided for
by adequate reserves. All items included in the Inventories are
the property of Tubby's, except for sales made in the ordinary
course of business since the date of the last balance sheet. For
each of the sales of Inventories, either the purchaser had made
full payment or the purchaser's liability to make payment is
reflected on the books of Tubby's. No items included in the
Inventories have been pledged as collateral or are held by Tubby's
on consignment from others. The Inventories shown on the most
recent balance sheet included in the Tubby's Financial Statements
are based on quantities determined by physical count or
measurement, taken within the preceding 12 months, and are valued
at the lower of cost or market value (with cost determined on a
first-in, first-out basis), all in accordance with generally
accepted accounting principles applied on a basis consistent with
that of prior years.
5.09. Trade Secrets. Tubby's owns all inventions, franchises,
discoveries, research, improvements, engineering processes,
methods, practices, systems, designs, drawings, formulae, trade
secrets, ideas or other know-how (collectively, the "Tubby's
know-how") which are utilized by Tubby's in
the conduct of its business, and no existing or former
shareholder, officer or employee of Tubby's or any other person
has any right or interest in any Tubby's know-how. Tubby's owns
all of the Tubby's know-how free and clear of all liens or other
forms of encumbrance.
5.10. Insurance Policies. Tubby's has maintained and now maintains (I)
insurance on all its assets and business of a type customarily
insured, covering property damage and loss of income by fire or
casualty, and (ii) adequate insurance protection against all
liabilities, claims, and risks against which it is customary to
insure.
5.11. Tax Returns. Within the times and in the manner prescribed by law,
Tubby's has filed all federal, state and local tax returns
required by law and has paid all taxes, assessments and penalties
due and payable. All taxes and governmental charges levied or
assessed against the property or the business of Tubby's have been
paid, other than taxes or charges the payment of which is not yet
due or which, if due, is not yet delinquent or is being contested
in good faith or has not been finally determined.
5.12. Shareholder List. Tubby's will provide an alphabetical list, as of
August 30, 1999, of all of the shareholders of Tubby's and the
number of shares of Tubby's common stock owned by each of them.
That list shall indicate which stock certificates have stop
transfer orders and restrictive legends placed upon the.
5.13. Stock Transfer Records. The stock transfer books and stockholders
of Tubby's are in good order, complete, accurate, and up to date,
and with all necessary signatures, and set forth all stock and
securities issued, transferred and surrendered. No duplicate
certificate has been issued at anytime heretofore without an
indemnity agreement and/or bond being posted. No transfer has been
made without surrender of the proper certificate duly endorsed.
All certificates so surrendered have been duly cancelled.
5.14. Corporate Record Books. The corporate record books of Tubby's are
in good order, complete, accurate, up to date, with all necessary
signatures, and set forth all meetings and actions set forth in
all certificates of votes of stockholders or directors furnished
to anyone at any time.
5.15. Compliance with Laws and Regulations. To the best of its
knowledge, Tubby's has complied with all applicable statutes and
regulations of any federal, state or other applicable jurisdiction
or agency thereof (including, without limitation, any law, any
applicable licensing, building, zoning or other law, ordinance or
regulation) affecting Tubby's properties or the operation of
Tubby's business and has timely filed all reports and any other
documents required by it to be filed with any governmental agency,
except (i) to the extent that noncompliance would not materially
and adversely affect the business, operations, properties assets
or condition of Tubby's or (ii) to the extent that noncompliance
would not result in any material liability.
ARTICLE VI
Covenants of Tubby's Prior to the Merger
Between the date hereof and the Effective Date of the Merger:
6.01. Stockholders Meeting. The Board of Directors of Tubby's will
submit this Agreement to its stockholders for their approval, and
will recommend such approval, at a meeting thereof to be duly
called and held at the earliest practicable date as may be agreed
upon in writing by R Corp and Tubby's. That shareholders' meeting
will be duly called, convened and conducted in accordance with all
applicable requirements of the corporation laws of the State of
New Jersey and in accordance and with all applicable provisions of
the Articles of Incorporation and Bylaws of Tubby's and the
resolutions adopted by the shareholders at that meeting will
constitute the duly authorized actions of Tubby's and will be in
full force and effect as of the Closing Date.
6.02. Representations. Tubby's will take all action necessary to render
accurate, as of the Effective Date of the Merger, Tubby's
representations and warranties contained herein, and it will
refrain from taking any action which would render any such
representation or warranty inaccurate as of such time. Tubby's
wi11 use its best efforts to perform or cause to be satisfied each
covenant or condition to be performed or satisfied by it.
6.03. Approvals. Tubby's will use its best efforts to obtain all
licenses or other approvals required to be obtained by it from any
appropriate governmental or regulatory body or other person in
connection with the carrying out of the transactions contemplated
by this Agreement and the continued operation of its business
after the merger.
6.04. Negotiations with Third Parties. Tubby's will not, without the
prior approval of R Corp, engage in, or encourage discussions or
negotiations with third parties relating to or otherwise approve
(or approve without prior discussions with R Corp any unsolicited
offer regarding) any merger, sale, or other disposition of any
substantial part of Tubby's assets or stock.
ARTICLE VII
Obligations of R Corp and its Shareholders
7.01. Personal Guarantees and Pledge of Personal Assets. R Corp and its
Shareholders, agree to personally guarantee debt financing for
Tubby's in the amount of $1,750,000 to be used to complete the
Merger, and to pledge personal assets as collateral to secure the
repayment of said indebtedness.
7.02. Stock Purchase, Redemption, and Shareholders Agreement. The
Shareholders of R Corp agree to execute a Stock Purchase,
Redemption and Shareholders' Agreement, with Tubby's for the
purpose of equalizing the number of shares of Tubby's stock owned
by each of them and to evidence their agreement to personally
guarantee the debt financing referenced in section 7.01 and their
agreement to pledge personal property as collateral for the
repayment of the indebtedness.
ARTICLE VIII
Representations and Warranties of R Corp
R Corp hereby represents or warrants to Tubby's as follows:
8.01. Organization, Standing, Qualification, etc. R Corp is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Michigan and has all requisite
corporate power and is duly authorized, qualified, franchised and
licensed under all applicable properties and assets and to carry
on its business as it is presently being conducted. R Corp is
qualified to do business in all states where the nature of R
Corp's business and the ownership of its properties require it to
become qualified as a foreign corporation.
8.02. Capitalization. The authorized capital stock of R Corp consists of
60,000 shares of common stock, par value, of which 3,000 shares
are issued and outstanding. All outstanding shares are duly
authorized, fully paid, validly issued and nonassessable in
accordance with applicable law. No dividends or other distribution
of the assets of R Corp have been declared or paid in the capital
stock of R Corp. There are no outstanding warrants, options,
preemptive rights or rights to subscribe for or purchase any
shares of R Corp capital stock or any outstanding securities that
are convertible into R Corp capital stock.
8.03. Articles of Incorporation and Bylaws. The complete Articles of
Incorporation and the Bylaws of R Corp as will be in effect on the
Closing Date are attached.
8.04. Authorization. The Board of Directors of R Corp has approved this
Agreement and the transactions contemplated hereby, has authorized
the execution and delivery of this Agreement by R Corp, and has
authorized the submission of this Agreement and the transaction
contemplated hereby to the R Corp shareholders for their
consideration with the recommendation that it be approved. R Corp
has full power, authority and legal right to enter into this
Agreement and to consummate the transactions contemplated hereby
and this Agreement constitutes a legal, valid and binding
obligation of R Corp enforceable in accordance with its terms.
ARTICLE IX
Conditions to Obligations of R Corp and Tubby's
The obligations of Tubby's and R Corp to effect the Merger are as
follows:
9.01. Stockholder Approval. Before the Closing, Tubby's Shareholders
shall have approved this Agreement.
9.02. Financing. Before submitting this Agreement for consideration and
approval to Tubby's shareholders, R Corp and it shareholders shall
have procured adequate financing for Tubby's to be used to
complete the Merger. Before the closing, Tubby's and the
shareholders of R Corp shall have closed on all required financing
transactions.
9.03. Fairness Opinion. Before submitting this Agreement for approval by
Tubby's stockholders, Tubby's shall have received a favorable
fairness opinion from Stout, Risuis, Ross, Valuation Consultants,
Inc.
9.04. No Material Adverse Change. Prior to the Closing, there shall not
have occurred any material adverse change in the financial
condition, business or operations of Tubby's.
ARTICLE X
Miscellaneous
10.01 Amendments. This Agreement may be amended at any time, prior to
the Effective Date of the Merger, whether before or after the
meeting of stockholders, by a written instrument executed by R
Corp and Tubby's with the approval of their respective Boards of
Directors, provided that no amendment shall change the exchange
ratios set forth in Section 3.01 without the approval of the
stockholders of both Tubby's and R Corp.
10.02 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Michigan without
reference to
its principles of conflicts of laws. However, any questions of
corporate law with respect to Tubby's or its subsidiaries shall be
governed by New Jersey corporate law.
10.03 Complete Agreement - Severability. This Agreement contains the
entire understanding between the parties and supercedes any and
all prior agreements between the parties. If any provision of the
Agreement is found to be void by any court of competent
jurisdiction, the remaining provisions shall remain in full force
and effect
10.04 Multiple Copies. This Agreement may be executed on multiple
copies, each of which shall Constitute an original, but all of
which shall constitute one and the same agreement.
IN WITNESS WHEREOF, R Corp and Tubby's have caused this Agreement and Plan of
Merger to be executed as of the date first above written.
R CORP TUBBY'S, INC.
/s/ Vincent J. Tatone /s/ Robert M. Paganes
------------------------------ -----------------------------
By: Vincent J. Tatone By: Robert M. Paganes
Its: Secretary Its: President
Appendix A
Agreement and Plan of Merger
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 27, 1999, by and
between Tubby's, Inc., a New Jersey corporation ("Tubby's") and R Corp, a
Michigan corporation ("R Corp").
RECITALS
A. The Boards of Directors of Tubby's and R Corp deem the merger of R
Corp into Tubby's on the terms herein set forth to be desirable
and in the best interests of the shareholders and, subject to
approval by Tubby's shareholders, desire to adopt this Agreement
and Plan of Merger.
B. The Boards of Directors of Tubby's and R Corp, and the
shareholders of R Corp, have approved this Agreement and Plan of
Merger (the "Agreement") and have directed that the Agreement and
merger contemplated hereby be submitted to the shareholders of
Tubby's for adoption.
Now therefore, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements contained herein,
Tubby's and R Corp hereby agree that R Corp shall be merged into Tubby's,
which shall be the surviving corporation, and that the plan, terms and
conditions of such merger shall be as follows:
ARTICLE I
Merger of R Corp Into Tubby's
1.01 The Merger. On the Effective Date of the Merger (as defined in
Section 4.02), R Corp shall be merged into Tubby's, the separate
existence of R Corp (except as it may be continued by operation of
law) shall cease and Tubby's as the surviving corporation shall
continue its corporate existence under the laws of the State of
New Jersey and Tubby's shall possess all the rights, privileges,
immunities, powers, franchises and authority, of a public as well
as of a private nature, and be subject to all the restrictions,
disabilities and duties of R Corp.
1.02 Instruments. When requested by Tubby's, or by its successors or
assigns, the officers and directors of R Corp last in office shall
execute and deliver such instruments for transfer and shall take
or cause to be taken such further or such other actions as shall
be reasonably necessary in order to vest or perfect in Tubby's, or
to confirm of record or otherwise to Tubby's, title to and
possession of all the rights, powers, franchises and authority of
R Corp.
ARTICLE II
Articles of Incorporation, Directors, Officers and By-Laws
2.01 Articles of Incorporation. Except as provided below, the articles
of incorporation of Tubby's, as in effect on the Effective Date of
the Merger, shall be the articles of incorporation of Tubby's, as
the surviving corporation, until they are amended as provided
herein or by law.
2.02 Directors and Officers. Upon the Effective Date of the Merger, the
Board of Directors of Tubby's, the surviving corporation, shall
consist of the persons who were Directors and officers of Tubby's
prior to the Merger. Said Directors shall hold offices provided in
the by-laws of the surviving corporation.
2.03 By-Laws. The by-laws of Tubby's as in effect on the Effective Date
of the Merger shall be the by-laws of the surviving corporation,
until they are amended as provided therein or by law.
ARTICLE III
Exchange of Shares
The manner of exchanging the shares of Tubby's shall be as
follows:
3.01 Basis of Exchange of Tubby's Shares.
(A) Each share of common stock, $.01 par value, of Tubby's
outstanding on the Effective Date shall be exchanged for cash
at the Merger Price of $1.10, other than shares of Tubby's
held by shareholders of R Corp, which will not be exchanged.
(B) Each share of Tubby's common stock exchanged and held by
Tubby's as treasury stock shall be cancelled and retired and
no shares of common stock of Tubby's shall be issued with
respect thereto.
3.02 Exchange Agent. As promptly as feasible after the Effective Date,
Tubby's will make available to an exchange agent, for the holders
of record of certificates of common stock of Tubby's, cash in
sufficient quantities as shall enable shares of Tubby's to be
surrendered and exchanged as herein provided.
3.03 Surrender and Exchange of Shares. As promptly as feasible after
the Effective Date, each holder of an outstanding certificate or
certificates representing common stock of Tubby's shall be
notified by the Exchange Agent and shall surrender such
certificate or certificates to the Exchange Agent in the manner
specified in the Exchange Agent's notification and such holders
shall be entitled upon such surrender to received in exchange cash
in the amount of $1.10 per share represented by the
certificate or certificates so surrendered. Until so surrendered,
each outstanding certificate which, prior to the Effective Date,
represented common stock of Tubby's, shall not be transferable on
the books of Tubby's.
From and after the Effective Date, the sole rights of the holders
of certificates representing common stock of Tubby's, except as otherwise
provided by law, shall be to exchange the common stock of Tubby's for cash
pursuant to the merger as herein provided.
3.04 Transfers. If any cash for common stock of Tubby's is to be issued
in a name other than that in which the certificate for common
stock of Tubby's surrendered for exchange is registered, such
exchange shall be on the condition that the certificate so
surrendered shall be properly endorsed and otherwise enclosed for
transfer acceptable to the Exchange Agent and the person
requesting such exchange shall pay to Tubby's or the Exchange
Agent any transfer or other taxes required by reason of the
issuance of such cash for common stock of Tubby's or the Exchange
Agent shall have determined that such tax has been paid or is not
applicable.
3.05 Termination of Exchange Agent's Duties. One year after the
Effective Date, all cash which has been received by the Exchange
Agent and has not been distributed as hereinbefore provided, shall
be returned to Tubby's or its agent and the duties of the Exchange
Agent shall thereupon terminate. Thereafter, subject to the
applicable law, any stock holder of Tubby's who has not
theretofore surrendered his certificate or certificates for
exchange as herein provided shall be entitled, upon surrender of
such certificate or certificates to Tubby's or its agent, to
receive cash for the number of shares of common stock of Tubby's
as set forth under this Agreement, without interest thereon.
3.06 Financing. The Shareholders of R Corp agree to personally
guarantee debt financing in the amount of $1,750.00 and agree to
pledge personal collateral, if necessary, to procure said
financing to be used for the exchange of shares on behalf of
Tubby's.
ARTICLE IV
Closing; Effective Date of Merger
4.01 Closing. The closing of the transactions contemplated by this
Agreement shall take place at the offices of Tubby's located at
6029 E. Fourteen Mile Road, Sterling Heights, Michigan 48312, at
such date and time, within five business days after the
satisfaction or waiver of the last of the conditions set forth in
this Agreement to be satisfied or waived, as the parties may fix.
The closing of such transactions is herein called the "Closing"
and the
date of that Closing is referred to herein as the "Closing Date."
The Closing Date may be the same date as the Effective Date.
4.02 Effective Date. Subject to the conditions in this Agreement and to
the execution and filing of a Certificate of Merger in the manner
required by the New Jersey Business Corporation Act and the filing
of any documents that may be required by the Act, the Merger shall
become effective at the close of business on such date as such
filings are made or at such other date as stated in the
Certificate of Merger (the "Effective Date"). Such filings shall
be made on or as soon as practicable after the Closing.
ARTICLE V
Representations and Warranties of Tubby's
Tubby's hereby warrants and represents to R Corp as follows:
5.01 Organization, Standing, Qualification, etc. Tubby's is a
corporation duly organized, validly existing and in good standing
under the laws of the State of New Jersey and has all requisite
corporate power and is duly authorized, qualified, franchised and
licensed and to carry on its business as it is presently being
conducted. Tubby's is qualified to do business in all states where
the nature of Tubby's business and the ownership of its properties
require it to become qualified as a foreign corporation.
5.02 Capitalization. The authorized capital stock of Tubby's consists
of 6,000,000 shares of common stock, with $.01 par value, of which
2,583,113 shares will be issued and outstanding as of the
Effective Date of the Merger. All outstanding shares are duly
authorized, fully paid, validly issued and nonassessable in
accordance with applicable law. No dividends or other distribution
of the assets of Tubby's have been declared or paid in the capital
stock of Tubby's. There are no outstanding warrants, options,
preemptive rights or rights to subscribe for or purchase any
shares of Tubby's capital stock or any outstanding securities that
are convertible into Tubby's capital stock.
5.03 Authorization. The Board of Directors of Tubby's has approved this
Agreement and the transactions contemplated hereby, has authorized
the execution and delivery of this Agreement by Tubby's, and has
authorized the submission of this Agreement and the transaction
contemplated hereby to the Tubby's shareholders for their
consideration with the recommendation that it be approved. Tubby's
has full power, authority and legal right to enter into this
Agreement and to consummate the transactions contemplated hereby
and this Agreement constitutes a legal, valid and binding
obligation of Tubby's enforceable in accordance with its terms.
5.04 Subsidiaries. Other than directly or indirectly owning all of the
capital stock of: (1) Tubby's Sub Shops, Inc., a Michigan
corporation; (2) Tubby's Sub Shops Advertising Co., Inc., a
Michigan corporation; (3) Sub Line Co., a Michigan corporation;
(4) Tubby's Company Stores, Inc., a Michigan corporation; and (5)
SUBperior Distribution Systems, Inc., a Michigan corporation
(collectively referred to herein as the "Subsidiaries"). Tubby's
does not own, directly or indirectly, any interest or investment,
whether equity or debt, in any corporation, business, trust or
other entity. Unless the context otherwise requires, any
references herein to Tubby's shall be deemed to include the
Subsidiaries.
5.05 Compliance, Articles, Bylaws and Other Instruments. Tubby's is not
in violation or default of any term or its Articles of
Incorporation or Bylaws, or of any agreement, contract,
commitment, instrument, indenture, judgment, decree of order,
applicable to it and has timely filed all reports and any other
documents required by it to be filed with any governmental agency.
The execution, delivery and performance of this Agreement and the
taking of action contemplated hereby will not result in any
violation of or be in conflict with or constitute a default under
(a) the Articles of Incorporation or Bylaws of Tubby's, or (b) any
material agreement or instrument to which Tubby's or any
consolidated subsidiary is a party or by which it is bound, or (c)
any material judgment, decree or order to which Tubby's is
subject, or result in the creation of any material lien, charge or
encumbrance on any of the properties of Tubby's.
5.06 Financial Statements.
(a) Attached are the audited consolidated balance sheet of Tubby's
and its subsidiaries as of November 30, 1998, and related
audited consolidated statements of operation and changes of
financial position for the year then ended, including the
notes thereto and an unaudited consolidated balance sheet of
Tubby's and its subsidiaries as of May 31, 1999 and related
unaudited consolidated financial statements of operation and
changes in financial position for the period then ended (the
"Tubby's Financial Statements").
(b) All such financial statements have been prepared with
generally accepted accounting principles consistently applied
throughout the periods involved. As of the date of any of such
balance sheets except as and to the extent reflected or
reserved against therein, Tubby's did not have any liabilities
or obligations (absolute or contingent) which should be
reflected in a balance sheet or the notes thereto prepared in
accordance with generally accepted accounting principles, and
all assets reflected therein are promptly reported and
presently fairly the value of the assets of Tubby's in
accordance with generally accepted accounting principles. Such
statements of operations present fairly the results of
operations of Tubby's for the periods indicated. Such
statements of changes in
financial position present fairly the information, which
should be presented therein in accordance with generally,
accepted accounting principles.
(c) The financial and other books and records of Tubby's are in
all material respects complete and correct and have been
maintained in accordance with good business and accounting
practice.
5.07 Title and Related Matters. Tubby's has good and marketable title
to all of its properties, interests in properties and assets, real
and personal, which are reflected in the latest balance sheet
included in the Tubby's Financial Statements or acquired after
that date (except properties, interests in properties and assets
sold or otherwise disposed of since such date in the ordinary
course of business), free and clear of all mortgages, liens,
pledges, charges or encumbrances except: (I) statutory liens or
claims not yet delinquent, (ii) such imperfections of title and
easements as do not and will not materially detract from or
interfere with the present or proposed use of the properties
subject thereto or affected thereby, or otherwise materially
impair present business operations of such properties; or (iii) as
described in the Tubby's Financial Statements.
5.08. Inventory. The inventories of raw materials, work in progress and
finished goods (collectively called "Inventories") shown on the
most recent balance sheet of Tubby's included in the Tubby's
Financial Statements consisted, and all such Inventories as of the
Closing Date will consist, of items of a quality and quantity
usable and saleable in the ordinary course of business by Tubby's,
except for obsolete and slow-moving items and items below standard
quality, all of which have been written down on the books of
Tubby's to net realizable market value or have been provided for
by adequate reserves. All items included in the Inventories are
the property of Tubby's, except for sales made in the ordinary
course of business since the date of the last balance sheet. For
each of the sales of Inventories, either the purchaser had made
full payment or the purchaser's liability to make payment is
reflected on the books of Tubby's. No items included in the
Inventories have been pledged as collateral or are held by Tubby's
on consignment from others. The Inventories shown on the most
recent balance sheet included in the Tubby's Financial Statements
are based on quantities determined by physical count or
measurement, taken within the preceding 12 months, and are valued
at the lower of cost or market value (with cost determined on a
first-in, first-out basis), all in accordance with generally
accepted accounting principles applied on a basis consistent with
that of prior years.
5.09. Trade Secrets. Tubby's owns all inventions, franchises,
discoveries, research, improvements, engineering processes,
methods, practices, systems, designs, drawings, formulae, trade
secrets, ideas or other know-how (collectively, the "Tubby's
know-how") which are utilized by Tubby's in
the conduct of its business, and no existing or former
shareholder, officer or employee of Tubby's or any other person
has any right or interest in any Tubby's know-how. Tubby's owns
all of the Tubby's know-how free and clear of all liens or other
forms of encumbrance.
5.10. Insurance Policies. Tubby's has maintained and now maintains (I)
insurance on all its assets and business of a type customarily
insured, covering property damage and loss of income by fire or
casualty, and (ii) adequate insurance protection against all
liabilities, claims, and risks against which it is customary to
insure.
5.11. Tax Returns. Within the times and in the manner prescribed by law,
Tubby's has filed all federal, state and local tax returns
required by law and has paid all taxes, assessments and penalties
due and payable. All taxes and governmental charges levied or
assessed against the property or the business of Tubby's have been
paid, other than taxes or charges the payment of which is not yet
due or which, if due, is not yet delinquent or is being contested
in good faith or has not been finally determined.
5.12. Shareholder List. Tubby's will provide an alphabetical list, as of
August 30, 1999, of all of the shareholders of Tubby's and the
number of shares of Tubby's common stock owned by each of them.
That list shall indicate which stock certificates have stop
transfer orders and restrictive legends placed upon the.
5.13. Stock Transfer Records. The stock transfer books and stockholders
of Tubby's are in good order, complete, accurate, and up to date,
and with all necessary signatures, and set forth all stock and
securities issued, transferred and surrendered. No duplicate
certificate has been issued at anytime heretofore without an
indemnity agreement and/or bond being posted. No transfer has been
made without surrender of the proper certificate duly endorsed.
All certificates so surrendered have been duly cancelled.
5.14. Corporate Record Books. The corporate record books of Tubby's are
in good order, complete, accurate, up to date, with all necessary
signatures, and set forth all meetings and actions set forth in
all certificates of votes of stockholders or directors furnished
to anyone at any time.
5.15. Compliance with Laws and Regulations. To the best of its
knowledge, Tubby's has complied with all applicable statutes and
regulations of any federal, state or other applicable jurisdiction
or agency thereof (including, without limitation, any law, any
applicable licensing, building, zoning or other law, ordinance or
regulation) affecting Tubby's properties or the operation of
Tubby's business and has timely filed all reports and any other
documents required by it to be filed with any governmental agency,
except (i) to the extent that noncompliance would not materially
and adversely affect the business, operations, properties assets
or condition of Tubby's or (ii) to the extent that noncompliance
would not result in any material liability.
ARTICLE VI
Covenants of Tubby's Prior to the Merger
Between the date hereof and the Effective Date of the Merger:
6.01. Stockholders Meeting. The Board of Directors of Tubby's will
submit this Agreement to its stockholders for their approval, and
will recommend such approval, at a meeting thereof to be duly
called and held at the earliest practicable date as may be agreed
upon in writing by R Corp and Tubby's. That shareholders' meeting
will be duly called, convened and conducted in accordance with all
applicable requirements of the corporation laws of the State of
New Jersey and in accordance and with all applicable provisions of
the Articles of Incorporation and Bylaws of Tubby's and the
resolutions adopted by the shareholders at that meeting will
constitute the duly authorized actions of Tubby's and will be in
full force and effect as of the Closing Date.
6.02. Representations. Tubby's will take all action necessary to render
accurate, as of the Effective Date of the Merger, Tubby's
representations and warranties contained herein, and it will
refrain from taking any action which would render any such
representation or warranty inaccurate as of such time. Tubby's
wi11 use its best efforts to perform or cause to be satisfied each
covenant or condition to be performed or satisfied by it.
6.03. Approvals. Tubby's will use its best efforts to obtain all
licenses or other approvals required to be obtained by it from any
appropriate governmental or regulatory body or other person in
connection with the carrying out of the transactions contemplated
by this Agreement and the continued operation of its business
after the merger.
6.04. Negotiations with Third Parties. Tubby's will not, without the
prior approval of R Corp, engage in, or encourage discussions or
negotiations with third parties relating to or otherwise approve
(or approve without prior discussions with R Corp any unsolicited
offer regarding) any merger, sale, or other disposition of any
substantial part of Tubby's assets or stock.
ARTICLE VII
Obligations of R Corp and its Shareholders
7.01. Personal Guarantees and Pledge of Personal Assets. R Corp and its
Shareholders, agree to personally guarantee debt financing for
Tubby's in the amount of $1,750,000 to be used to complete the
Merger, and to pledge personal assets as collateral to secure the
repayment of said indebtedness.
7.02. Stock Purchase, Redemption, and Shareholders Agreement. The
Shareholders of R Corp agree to execute a Stock Purchase,
Redemption and Shareholders' Agreement, with Tubby's for the
purpose of equalizing the number of shares of Tubby's stock owned
by each of them and to evidence their agreement to personally
guarantee the debt financing referenced in section 7.01 and their
agreement to pledge personal property as collateral for the
repayment of the indebtedness.
ARTICLE VIII
Representations and Warranties of R Corp
R Corp hereby represents or warrants to Tubby's as follows:
8.01. Organization, Standing, Qualification, etc. R Corp is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Michigan and has all requisite
corporate power and is duly authorized, qualified, franchised and
licensed under all applicable properties and assets and to carry
on its business as it is presently being conducted. R Corp is
qualified to do business in all states where the nature of R
Corp's business and the ownership of its properties require it to
become qualified as a foreign corporation.
8.02. Capitalization. The authorized capital stock of R Corp consists of
60,000 shares of common stock, par value, of which 3,000 shares
are issued and outstanding. All outstanding shares are duly
authorized, fully paid, validly issued and nonassessable in
accordance with applicable law. No dividends or other distribution
of the assets of R Corp have been declared or paid in the capital
stock of R Corp. There are no outstanding warrants, options,
preemptive rights or rights to subscribe for or purchase any
shares of R Corp capital stock or any outstanding securities that
are convertible into R Corp capital stock.
8.03. Articles of Incorporation and Bylaws. The complete Articles of
Incorporation and the Bylaws of R Corp as will be in effect on the
Closing Date are attached.
8.04. Authorization. The Board of Directors of R Corp has approved this
Agreement and the transactions contemplated hereby, has authorized
the execution and delivery of this Agreement by R Corp, and has
authorized the submission of this Agreement and the transaction
contemplated hereby to the R Corp shareholders for their
consideration with the recommendation that it be approved. R Corp
has full power, authority and legal right to enter into this
Agreement and to consummate the transactions contemplated hereby
and this Agreement constitutes a legal, valid and binding
obligation of R Corp enforceable in accordance with its terms.
ARTICLE IX
Conditions to Obligations of R Corp and Tubby's
The obligations of Tubby's and R Corp to effect the Merger are as
follows:
9.01. Stockholder Approval. Before the Closing, Tubby's Shareholders
shall have approved this Agreement.
9.02. Financing. Before submitting this Agreement for consideration and
approval to Tubby's shareholders, R Corp and it shareholders shall
have procured adequate financing for Tubby's to be used to
complete the Merger. Before the closing, Tubby's and the
shareholders of R Corp shall have closed on all required financing
transactions.
9.03. Fairness Opinion. Before submitting this Agreement for approval by
Tubby's stockholders, Tubby's shall have received a favorable
fairness opinion from Stout, Risuis, Ross, Valuation Consultants,
Inc.
9.04. No Material Adverse Change. Prior to the Closing, there shall not
have occurred any material adverse change in the financial
condition, business or operations of Tubby's.
ARTICLE X
Miscellaneous
10.01 Amendments. This Agreement may be amended at any time, prior to
the Effective Date of the Merger, whether before or after the
meeting of stockholders, by a written instrument executed by R
Corp and Tubby's with the approval of their respective Boards of
Directors, provided that no amendment shall change the exchange
ratios set forth in Section 3.01 without the approval of the
stockholders of both Tubby's and R Corp.
10.02 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Michigan without
reference to
its principles of conflicts of laws. However, any questions of
corporate law with respect to Tubby's or its subsidiaries shall be
governed by New Jersey corporate law.
10.03 Complete Agreement - Severability. This Agreement contains the
entire understanding between the parties and supercedes any and
all prior agreements between the parties. If any provision of the
Agreement is found to be void by any court of competent
jurisdiction, the remaining provisions shall remain in full force
and effect
10.04 Multiple Copies. This Agreement may be executed on multiple
copies, each of which shall Constitute an original, but all of
which shall constitute one and the same agreement.
IN WITNESS WHEREOF, R Corp and Tubby's have caused this Agreement and Plan of
Merger to be executed as of the date first above written.
R CORP TUBBY'S, INC.
/s/ Vincent J. Tatone /s/ Robert M. Paganes
------------------------------ -----------------------------
By: Vincent J. Tatone By: Robert M. Paganes
Its: Secretary Its: President
Appendix B
Fairness Opinion
Stout Risius Ross, Inc.,
July 15, 1999
Board of Directors
Tubby's, Inc.
c/o Mr. Robert Paganes
6029 East 14 Mile Road
Sterling Heights, MI 48312-5802
Members of the Board:
We understand Tubby's, Inc. ("Tubby's" or the "Company") is considering a
merger with R Corp pursuant to which all shareholders of the Company (the
"Shareholders"), other than those shareholders that are also shareholders of
R Corp, will receive cash in exchange for their shares of Tubby's, Inc. at
the price of $1.10 per share. The aforementioned plan of merger is referred
to hereinafter as the "Transaction."
You have requested, from a financial point of view, our opinion as to the
fairness of this Transaction to the Shareholders of the Company. To arrive at
our opinion, we performed an analysis to estimate the Fair Value of the
common equity of the Company. We define Fair Value as the price at which
property would exchange between a willing buyer and a willing seller, when
the former is not under any undue compulsion to buy and the latter is not
under any undue compulsion to sell, both having reasonable knowledge of the
relevant facts.
In general, we considered the following factors in performing our analysis:
the nature and history of the Company; the outlook for the economy and
industry in which the Company operates; the book value and financial
condition of the Company; the earning capacity of the Company; the dividend
paying capacity of the Company; whether goodwill or other intangible value
exists within the Company; previous sales of the Company's stock and the size
of the block transferred; and the market prices of companies in the same or
similar industries which trade in the open market.
In arriving at our opinion, we reviewed the Agreement and Plan of Merger (the
"Agreement") and the associated proxy statement (the "Proxy Statement"), and
held discussions with members of senior management of the Company concerning
its business, industry, historical financial performance, and projected
franchise openings and closings for the next five years. We examined the
Company's audited and internally prepared financial statements for the years
ended November 30, 1995 to 1998 and the Company's internally prepared interim
financial statements for the six months ended May 31, 1999. We considered, to
the extent available, the financial terms of certain other
transactions involving target companies similar to Tubby's. In addition, we
performed a discounted cash flow analysis based on the Company's future
prospects and also a market comparable approach (which estimates value based
on the price of comparable publicly traded stocks) to test the reasonableness
of the proposed transaction terms.
Management's projections regarding store franchise openings and closings
formed the basis of the discounted cash flow analysis. In addition to the
foregoing, we conducted such other analyses and examinations and considered
such other publicly available financial, economic, and market criteria as we
deemed appropriate in arriving at our opinion.
We did not perform an independent valuation of all of the underlying assets
and liabilities of the Company, nor have we been furnished with any such
evaluation or appraisal.
Our opinion is premised on the assumption that the financial condition and
prospects of the Company as of the date of this letter, including the balance
sheet of the Company, has not changed materially since May 31, 1999, the date
the latest financial information was available. In rendering our opinion, we
have assumed and relied, without independent verification, upon the accuracy
and completeness of all financial and other information that was publicly
available, furnished by the Company, or otherwise reviewed by or discussed
with us. In that regard, we have relied upon Tubby's management as to the
reasonableness and achievability of the financial and operating forecasts
provided to us, and we have assumed that such forecasts reflect the best
currently available estimates and judgements of management.
In connection with performing our services for the Board of Directors, we
have not been authorized by the Company to solicit, nor have we solicited,
third-party indications of interest for the acquisition of all or any part of
the Company. Further, we were not requested to consider, and our opinion does
not address, the relative merits of the contemplated Transaction as compared
to any alternative business strategies that may exist for the Company or the
effect of any other transactions in which the Company might engage.
Our opinion is necessarily based on market, economic and other conditions as
they exist and can be evaluated on, and on the information made available to
us as of the date hereof.
We are acting as financial advisor to the Board of Directors of the Company
and will receive a fee from the Company for our services. However, our
compensation for providing financial advisory services to the Board is
neither based nor contingent on the results of our analysis. Further, none of
our
employees who worked on this engagement has any known financial interest in
the assets or equity of the Company or the outcome of our analysis. In
addition, the Company has agreed to indemnify us for certain liabilities
arising out of our engagement.
Our work is only to be utilized by the Board of Directors of the Company as
one input to consider in the process of analyzing the contemplated
Transaction. Further, our opinion is not intended to be, nor does it
constitute, a recommendation to any of the Shareholders as to how such
Shareholder should act in regard to the Transaction described in the first
paragraph of this letter.
Our opinion may not be published or otherwise used or referred to, without
our prior written consent. We understand that this opinion letter, subject to
us giving written consent, may be attached to a Proxy Statement that will be
sent to the Shareholders. In giving such consent, we do not hereby admit that
we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933 or the rules and regulations of the
Securities and Exchange Commission thereunder.
Based upon and subject to the forgoing, including the various assumptions and
limitations set forth herein, it is our opinion that as of the date hereof,
the Transaction, as detailed in the Agreement, is fair from a financial point
of view to the Shareholders of the Company.
Yours very truly,
STOUT RISIUS ROSS, INC.
/s/ Gregory A. O'Hara
- -------------------------------
Gregory A. O'Hara
Managing Director
FINANCIAL STATEMENTS
F-1
TUBBY'S INC.
CONSOLIDATED UNAUDITED
BALANCE SHEET &
STATEMENT OF OPERATIONS
AS OF AUGUST, 1999
F-2
TUBBY'S INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, November 30,
1999 1998
ASSETS (Unaudited) (Note)
- ------ ----------- -----------
Current Assets
Cash and Equivalents $ 787,905 $ 692,196
Certificate of Deposit 111,199 111,199
Accounts Receivable - Trade, less
allowance for doubtful accounts of
$65,196 and $59,580 757,576 702,990
Inventories 394,209 328,280
Prepaid expenses and other 81,309 93,289
Notes receivable 82,941 59,721
----------- -----------
Total Current Assets 2,215,139 1,987,675
----------- -----------
Property and Equipment
Land 187,684 187,684
Buildings and Improvements 691,235 689,514
Equipment 500,405 498,354
Furniture and Fixtures 144,835 140,815
Vehicles 11,509 11,509
----------- -----------
1,535,668 1,527,876
Less: accumulated depreciation (886,935) 861,659
----------- -----------
Net Property & Equipment 648,733 666,217
----------- -----------
Other Assets
Goodwill, less amortization of
$294,984 and $112,370 198,810 263,666
Notes Receivable, less allowance
for Doubtful accounts of $20,000
and $20,000 373,902 408,733
----------- -----------
Total Other Assets 572,712 672,399
----------- -----------
Total Assets $ 3,436,584 $ 3,326,291
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
F-3
TUBBY'S INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, November 30,
LIABILITIES & STOCKHOLDERS' EQUITY 1999 1998
(Unaudited) (NOTE)
- ---------------------------------- ----------- ------------
Current Liabilities
Accounts Payable $ 264,961 $ 379,176
Accrued Liabilities:
Compensation 44,455 20,738
Other 22,126 24,695
Deferred Revenue 36,000 114,954
Long-Term Debt due within one year 12,262 11,455
---------- ----------
Total Current Liabilities 379,804 551,018
Deferred Revenue 32,000 40,000
Long-Term Debt, less amounts due in one year 111,178 120,346
---------- ----------
Total Liabilities 522,982 711,364
---------- ----------
Stockholders' Equity
Common Stock, $.01 Par Value, 6,000,000 shares
authorized, 2,583,114 issued and outstanding 25,832 25,832
Additional Paid In Capital 3,485,844 3,485,844
Retained Earnings (Deficit) (598,074) (896,749)
---------- ----------
Total Stockholders' Equity 2,913,602 2,614,927
---------- ----------
Total Liabilities and Stockholders' Equity $3,436,584 $3,326,291
========== ==========
See Accompanying Notes to Consolidated Financial Statements
F-4
<TABLE>
<CAPTION>
TUBBY'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
------------------------- --------------------------
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $1,611,757 $1,342,766 $4,617,690 $2,983,503
Franchise Fees:
Monthly 263,404 279,382 729,643 671,057
Initial 24,500 36,500 111,500 111,001
Food Sales 337,514 262,787 731,485 655,218
Advertising Fees 193,760 160,715 589,958 496,009
Equipment and Restaurant Sales 36,239 75,530 127,850 361,679
Commissions & Other Fees 37,349 30,586 123,718 101,467
---------- ---------- ---------- ----------
Total Revenues 2,504,523 2,188,266 7,031,844 5,379,934
---------- ---------- ---------- ----------
Costs & Expenses:
Cost of Product Sales 1,185,960 1,032,572 3,453,436 2,314,319
Operating Expenses 831,733 1,037,137 2,533,558 2,489,585
Cost of Food Sales 209,835 188,644 462,199 443,873
Cost of Equipment & Restaurant Sales 30,349 65,152 108,168 294,053
---------- ---------- ---------- ----------
Total Costs & Expenses 2,257,877 2,323,505 6,557,361 5,541,830
---------- ---------- ---------- ----------
Operating Income (Loss) 246,646 (135,239) 474,483 (161,896)
Other Income (Expense):
Interest Expense (2,961) (5,817) (9,015) (10,648)
Loss on disposal of assets (43,586) 0 (43,586) 0
Interest Income 14,731 24,383 44,968 55,543
---------- ---------- ---------- ----------
Total Other Income (Expense) (31,816) 18,566 (7,633) 44,895
---------- ---------- ---------- ----------
Income (Loss) Before Taxes on Income 214,830 (116,673) 466,850 (117,001)
Taxes on Income 82,488 0 168,175 0
---------- ---------- ---------- ----------
Net Income (Loss) $ 132,342 $ (116,673) $ 298,675 $ (117,001)
========== ========== ========== ==========
Earnings (Loss) Per Share --
Basic & Diluted $ 0.05 $ (0.05) $ 0.12 $ (0.05)
========== ========== ========== ==========
Weighted Average Common
Shares Outstanding 2,583,114 2,583,114 2,583,114 2,583,114
========== ========== ========== ==========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
F-5
TUBBY'S INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
-----------------------
August 31, August 31,
1999 1998
---------- ----------
Cash Flows From Operating Activities:
Net Income (Loss) $ 298,675 $(117,001)
Adjustments To Reconcile Net Income(Loss)
To Net Cash Used and Provided By
Operating Activities:
Depreciation & Amortization 95,389 125,846
Taxes on Income 158,729 0
(Gain) Loss on disposal of assets 43,586 (1,287)
Increase (Decrease) In Cash Due To
Changes In:
Accounts Receivable (85,599) (228,059)
Inventories (65,929) (223,859)
Prepaid Expenses & Other 11,980 (57,878)
Accounts Payable (114,215) 293,803
Accrued Liabilities 21,148 41,696
Deferred Revenues (86,954) (21,863)
--------- ---------
Net Cash (Used In) Provided By
Operating Activities 276,810 (188,602)
Cash Flows From Investing Activities
Sale of Certificate of Deposits 0 (16)
Acquisition of McTub 49% interest 0 (65,000)
Purchase of Property & Equipment (109,462) (19,616)
Goodwill & Covenant not to Compete (120,000) 0
Payments On Notes Receivable 42,624 129,425
Proceeds on sale of Property 14,098 147,138
--------- ---------
Net Cash (Used In) Provided by
Investing Activities (172,740) 191,931
Cash Flows From Financing Activities:
Payments On Long-Term Debt (8,361) (219,036)
--------- ---------
Net Cash (Used In) Financing Activities (8,361) (219,036)
--------- ---------
Net (Decrease) Increase In Cash 95,709 (215,707)
Cash and Equivalents, at beginning of period 692,196 864,229
--------- ---------
Cash and Equivalents, at end of period $ 787,905 $ 648,522
========= =========
See Accompanying Notes to Consolidated Financial Statements
F-6
TUBBY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements do not include all of the information
and footnotes necessary for the annual presentation of financial position,
results of operation and cash flows in conformance with generally accepted
accounting principles. In the opinion of the Company, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and changes in cash flow at August
31, 1999 and August 31, 1998 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto as of November 30, 1998 and the Form 10-KSB as of November 30,
1998.
2. ACCOUNTING FOR INCOME TAXES
The Company has acquired net operating loss carry forwards relating to the
SYF merger of approximately $670,000 which are available to offset future
taxable income. However, to the extent such loss carry forwards are utilized
to reduce future operating income, the related tax benefit will first be
credited to goodwill until fully eliminated and then to income. In the nine
months ending August 31, 1999, the Company had taxable income of
approximately $466,800 that resulted in a reduction of goodwill of
approximately $168,175. Utilization of these losses is limited based on the
taxable income generated by the activity that generated these losses and
expire beginning in 1999.
The Company also has net operating loss carry forwards for tax purposes of
approximately $640,000 relating to losses incurred subsequent to the SYF
acquisition which expire beginning in 2006.
As a result of the proposed merger discussed in Note 4, the availability of
the net operating loss carry forwards may be limited.
3. LITIGATION
During 1998, the Company exercised its option to purchase the building that
houses its corporate headquarters for a total cost of $425,000. However, the
seller claimed that the Company failed to strictly comply with the written
option to purchase. As a result, the Company commenced a civil action against
the seller to enforce the seller's obligation to sell the building to the
Company and is awaiting a trial date. If the Company prevails in its
litigation, it expects to finance the cost of the building.
F-7
4. PROPOSED MERGER
On May 5, 1999, the Company announced that the proposed merger between the
Company and Interfoods of America, Inc., a Miami based Popeye's Chicken
franchisee, which was previously announced by both companies on December 16,
1998, had been canceled. At the same time, the Company announced a new
proposed merger between it and a private Michigan corporation, R Corp, whose
shareholders include certain members of Tubby's current management. Pursuant
to this proposed merger, all of the shareholders of Tubby's, other than
shareholders that are shareholders of R Corp, would receive cash in exchange
for their shares. The Company announced that, although the price per share
had not been definitively set, the shares would be valued at somewhere
between eighty cents and a dollar ($.80 -- $1.00) and that, ultimately, the
proposed merger would be subject to a vote of the Company's shareholders. On
July 16, 1999, the Company definitively established the merger price at $1.10
per share. The Company has received a fairness opinion from an independent
valuation firm and a written commitment from a lender for adequate financing
to complete the proposed merger. The Company has filed a preliminary proxy
statement and a form Schedule 13-E with the Securities and Exchange
Commission ("SEC"). Once the preliminary proxy statement is approved for
distribution, the Company will set a date for its annual meeting at which it
will present the proposed merger for a vote of the Company's Shareholders.
F-8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Tubby's, Inc. and Subsidiaries
Sterling Heights, Michigan
We have audited the accompanying consolidated balance sheets of
Tubby's, Inc. and Subsidiaries as of November 30, 1998, 1997 and 1996,
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, 1998, 1997 and 1996, and
the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Troy, Michigan
January 22, 1999
F-9
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
------------------------------
Assets 1998 1997 1996
---- ---- ----
Current Assets
Cash and equivalents $ 692,196 $ 864,229 $ 793,494
Certificate of deposit 111,199 105,430 100,000
Accounts receivable - trade, less
allowance for doubtful accounts
of $59,580, $36,740 & $20,850 702,990 443,810 245,267
Inventories 328,280 99,419 102,805
Prepaid expenses and other 93,289 76,832 135,644
Notes receivable 59,721 66,217 72,091
---------- ---------- ----------
Total Current Assets 1,987,675 1,655,937 1,449,301
---------- ---------- ----------
Property and Equipment
Land 187,684 325,347 $ 325,347
Building and improvements 689,514 663,753 693,347
Equipment 498,354 527,265 440,705
Furniture and fixtures 140,815 138,394 219,464
Vehicles 11,509 15,009 15,009
---------- ---------- ----------
1,527,876 1,669,768 1,693,872
Less accumulated depreciation 861,659 773,576 654,255
---------- ---------- ----------
Net Property and Equipment 666,217 896,192 1,039,617
---------- ---------- ----------
Other Assets
Notes receivable, less allowance
for doubtful accounts of $20,000,
$0, & $5,894 408,733 543,342 505,380
Goodwill, less amortization of
$112,370, $81,118, & $68,045 263,666 229,918 338,241
---------- ---------- ----------
Total Other Assets 672,399 773,260 843,621
---------- ---------- ----------
Total Assets $3,326,291 $3,325,389 $3,332,539
========== ========== ==========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-10
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
--------------------------------------
Liabilities and Stockholders' Equity 1998 1997 1996
---- ---- ----
Current Liabilities
Accounts payable $ 379,176 $ 106,407 $ 189,929
Accrued liabilities
--Compensation 20,738 19,887 21,075
--Other 24,695 16,153 13,305
Deferred revenue 114,954 115,489 87,000
Long-term debt due in one year 11,455 220,520 266,825
---------- ---------- ----------
Total Current Liabilities 551,018 478,456 578,134
Deferred Revenue 40,000 60,867 40,000
Long Term Debt, less amounts due
in one year 120,346 139,932 175,770
---------- ---------- ----------
Total Liabilities 711,364 679,255 793,904
---------- ---------- ----------
Stockholders' Equity
Common stock, $.01 par value,
6,000,000 shares authorized,
2,583,114 issued and outstanding 25,832 25,832 25,832
Additional paid in capital 3,485,844 3,485,844 3,485,844
Retained earnings (deficit) (896,749) (865,542) (973,041)
---------- ---------- ----------
Total Stockholders' Equity 2,614,927 2,646,134 2,538,635
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity $3,326,291 $3,325,389 $3,332,539
========== ========== ==========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-11
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended November 30,
----------------------------------
Consolidated Statements of Operations 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
Product sales $ 4,397,578 $ -- $ --
Franchise fees
--Monthly 896,298 785,959 659,074
--Initial 139,501 132,543 118,250
Food sales 779,918 931,000 796,990
Advertising fees 649,118 650,909 569,982
Equipment and restaurant sales 391,311 575,427 611,064
Commissions and other fees 112,259 479,848 367,856
----------- ----------- -----------
Total Revenues 7,365,983 3,555,686 3,123,216
----------- ----------- -----------
Costs and Expenses
Cost of product sales 3,402,997 -- --
Operating expenses 3,239,755 2,357,938 1,942,490
Cost of food sales 512,836 667,854 588,257
Cost of equipment and restaurant sales 341,197 470,315 527,005
----------- ----------- -----------
Total Costs and Expenses 7,496,785 3,496,107 3,057,752
----------- ----------- -----------
Operating Income (Loss) (130,802) 59,579 65,464
----------- ----------- -----------
Other Income (Expense)
Interest income 69,951 108,430 94,899
Interest expense (13,829) (9,572) (28,235)
Loss on sale of fixed assets (5,546) -- (5,880)
Miscellaneous 49,019 44,362 (8,891)
----------- ----------- -----------
Total Other Income 99,595 143,220 51,893
----------- ----------- -----------
Income (Loss) Before Taxes on Income (31,207) 202,799 117,357
Taxes on Income -- 95,300 --
----------- ----------- -----------
Net Income (Loss) (31,207) 107,499 117,357
=========== =========== ===========
Basic and Diluted Earnings (Loss)
Per Share (.01) .04 .05
=========== =========== ===========
Weighted Average Common
Shares Outstanding $ 2,583,114 $ 2,604,720 $ 2,556,720
=========== =========== ===========
<FN>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
F-12
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional Retained
Stock Paid-In Earnings
Shares Amount Capital (Deficit)
------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Balance, at December 1, 1995 2,538,114 $ 25,382 $ 3,430,044 $(1,090,398) $ 2,365,028
Issuance of common stock 45,000 450 55,800 56,250
Net income -- -- -- 117,357 117,357
--------- -------- ----------- ----------- -----------
Balance, at December 1, 1996 2,583,114 $ 25,832 $ 3,485,844 $ (973,041) $ 2,538,635
Net income -- -- -- 107,499 107,499
--------- -------- ----------- ----------- -----------
Balance, at November 30, 1997 2,583,114 25,832 3,485,844 (865,542) 2,646,134
Net loss -- -- -- (31,207) (31,207)
--------- -------- ----------- ----------- -----------
Balance, at November 30, 1998 2,583,114 $ 25,832 $ 3,485,844 $ (896,749) $ 2,614,927
========= ======== =========== =========== ===========
<FN>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
F-13
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended November 30,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (31,207) $ 107,499 $ 117,357
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation and amortization 136,704 135,468 105,226
Provision for doubtful accounts 71,896 -- --
Loss on sale of fixed assets 5,546 -- 5,880
Taxes on income -- 95,300 --
Increase (Decrease) In Cash Due to Changes In
Accounts receivable (282,479) (198,543) (11,596)
Inventories (228,861) 3,386 (67,965)
Prepaid expenses and other (16,457) 59,195 (65,506)
Accounts payable 272,769 (83,522) 26,457
Accrued liabilities 9,393 1,660 (19,344)
Deferred revenue (21,402) 49,356 (44,000)
--------- --------- ---------
Net Cash (Used In)Provided By Operating Activities (84,098) 169,799 46,509
--------- --------- ---------
Cash Flows From Investing Activities
Increase in certificate of deposit (5,769) (5,813) (25,000)
Net proceeds from sale of property and equipment 156,502 5,000 13,500
Purchase of property and equipment (37,525) (69,020) (462,155)
Payments on notes receivable 92,508 52,912 134,936
Sale of certificate of deposit and marketable
securities -- -- 154,590
Other assets -- -- (2,242)
Acquisition of partnership Interest (65,000) -- --
--------- --------- ---------
Net Cash Provided by (Used In) Investing Activities 140,716 (16,921) (186,371)
--------- --------- ---------
Cash Flows From Financing Activities
Payments on long-term debt (228,651) (232,143) (74,038)
Proceeds from long-term debt -- 150,000 --
Proceeds from issuance of capital stock -- -- 56,250
--------- --------- ---------
Net Cash Used In Financing Activities (228,651) (82,143) (17,788)
--------- --------- ---------
Net Increase (Decrease) in Cash & Cash Equivalents (172,033) 70,735 (157,650)
Cash and Equivalents, at beginning of period 864,229 793,494 951,144
--------- --------- ---------
Cash and Equivalents, at end of period $ 692,196 $ 864,229 $ 793,494
========= ========= =========
<FN>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
F-14
TUBBY'S, INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998, 1997 and 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 (the "Company" or "Tubby's"), and
additionally in 1997 and 1996, its fifty-one percent interest in the McTub
Company (Tubby's Express). Intercompany balances and transactions have been
eliminated.
Nature of Operations
The Company's 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) distribution of food and restaurant supplies to franchisees (beginning in
1998); (3) food sales at Company owned stores; (4) equipment sales to
franchisees; and (5) vendor commissions and rebates. The Company and its
franchisees operate restaurants in Michigan, Ohio, New Jersey, Arizona,
Missouri, Nebraska and the province of Ontario Canada.
Number of Restaurants in Operation: November 30,
------------------------
1998 1997 1996
---- ---- ----
Operated by Franchisees
Beginning of year 84 68 63
Franchises opened 10 16 6
Franchises closed (9) (0) (1)
End of year 85 84 68
Operated by the Company
Beginning of year 4 6 3
Stores opened 0 0 4
Stores sold 0 (2) 0
Stores closed (1) 0 (1)
End of year 3 4 6
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and equivalents, certificates of
deposit, 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.
Fair Values of Financial Instruments
The carrying amounts of cash and equivalents, certificates of deposit,
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 and notes receivable approximate fair value because the
interest rates on these instruments approximate market rates.
F-15
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.
Inventories
Inventories include food, restaurant supplies and equipment held for resale
to franchisees. Inventories are stated at the lower of cost or market, with
cost determined by the first-in, first-out method for food and restaurant
supplies and specific identification methods for equipment.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over the
useful lives of the assets ranging from 5 to 40 years, using the
straight-line method. Depreciation expense was $106,843, $122,395, $94,550 in
1998, 1997 and 1996, respectively.
Goodwill
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at acquisition. The Company is amortizing
goodwill over periods ranging from three years to forty 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
discounted future cash flows and the net book value of the related goodwill.
Revenue Recognition
Monthly franchise fees are recognized based on the franchisees' sales as
earned, except where collection is not deemed probable. Advertising fees are
recognized as the related expenses are incurred.
Initial franchise fees and fees from Area Development Agreements ("ADA's")
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 are recognized as revenue on a pro rata basis
as each store opens.
The Company recognizes product sales at the time of shipment.
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 $650,000 in 1998 and 1997 and $582,000 in 1996.
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.
F-16
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
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the SFAS 128 requirements. The following
table presents the earnings per share calculations:
For the Year Ended November 30, 1998 1997 1996
- ------------------------------ ---- ---- ----
Numerator for Basic and Diluted Earnings
per Share Net income (loss) $ (31,207) $ 107,499 $ 117,357
Denominator
Denominator for basic earnings
per share - weighted average shares 2,583,114 2,583,114 2,567,719
Effect of dilutive securities
stock options -- 21,606 6,540
Dilutive Potential Common Stock
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 2,583,114 2,604,720 2,563,259
Basic Earnings (Loss) Per Share $ (.01) $ .04 $ .05
Diluted Earnings (Loss) Per Share $ (.01) $ .04 $ .05
As a result of the net loss in 1998, no stock options were included in the
computation of diluted earnings per share.
Options to purchase 60,467 shares of common stock at prices ranging from
$3.60 to $8.40 in 1997 and 1996, were outstanding, but were not included in
the computation of diluted earnings per share because the option's exercise
price was greater than the average market price of the common shares.
In January 1998, the Company declared a one for ten reverse stock split. As a
result, the amount of outstanding shares was reduced from 25,831,131 to
2,583,114. In connection with the reverse stock split, the Company amended
its Articles of Incorporation to reduce the number of shares authorized from
60,000,000 to 6,000,000. Retroactive effect has been given to all share and
per share data contained in the consolidated financial statements.
Long-lived Assets
The Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstance indicate that the
carrying amount of the assets may not be recoverable. The Company evaluates
whether impairment exists on the basis of undiscounted future cash flows from
operations before interest for the remaining useful life of the assets. Any
long-lived assets held for disposal are reported at the lower of these
carrying amounts or fair value less costs to sell.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
statement is effective for financial periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Management has not determined the impact, if any, this statement may have on
future financial statement disclosures.
F-17
Additionally, SFAS 130, "Reporting Comprehensive Income" was issued in June
1997. Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up
Activities", was issued in April 1998 and SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued in June 1998.
These statements are effective in fiscal 1999 and 2000 and are not expected
to have a material impact on the consolidated financial statements.
Reclassifications
Certain 1997 balances have been reclassified for purposes of comparison to
the 1998 balances.
2. INVENTORIES
Inventories at November 30, 1998, 1997and 1996 are summarized as follows:
1998 1997 1996
---- ---- ----
Food, restaurant supplies, paper goods $297,475 $ 28,989 $ 21,811
Equipment 30,805 70,430 80,994
-------- -------- --------
$328,280 $ 99,419 $102,805
======== ======== ========
3. NOTES RECEIVABLE
Notes receivable consisted of the following at November 30, 1998, 1997
and 1996.
1998 1997 1996
---- ---- ----
Note receivable, due in monthly
installments with interest at 10%
collateralized by a second
mortgage on property, maturing in 2007 $307,663 $330,296 $347,629
Various notes receivable, due in monthly
installments with interest at various
interest rates up to 10%, collateralized
by equipment, maturing through 2001 180,791 279,263 229,842
-------- -------- --------
488,454 609,559 557,471
Less: Amounts due within one year 59,721 66,217 72,091
Allowance for doubtful accounts 20,000 -- --
-------- -------- --------
Total Notes Receivable - Noncurrent $408,733 $543,342 $505,380
======== ======== ========
In 1998, the Company's recorded investment in impaired loans totaled $60,000,
with $20,000 of related credit loss allowance. The Company's recorded
investment in impaired loans totaled $43,000 in 1997 and 1996, with no
related credit loss allowance in 1997 and 1996. The average recorded
investment in impaired loans during 1998 was approximately $51,000 with no
related interest income recognized. The average recorded investment in
impaired loans during 1997 was $43,000; this balance was completely reduced
in 1998 by payments of approximately $33,000 with the remaining balance being
written off. Interest income on impaired loans is recognized only when
payments are received. Interest income recognized in 1997 was approximately
$21,000.
4. REVOLVING CREDIT AGREEMENT
In January 1997, 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
(8.25% at November 30, 1998). 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
F-19
certificate of deposit. No borrowings were outstanding under the
line-of-credit at November 30, 1998, 1997 and 1996.
5. LONG-TERM DEBT
Long-term debt consisted of the following at November 30, 1998, 1997
and 1996.
1998 1997 1996
---- ---- ----
Mortgage notes payable in equal
monthly installments of $1,930
through March, 2002, at which time
a balloon payment is due; with interest
payable at 9.25% $131,801 $142,084 $180,704
Note payable - stockholder (see Note 13) -- 200,000 200,000
Other -- 18,368 19,857
Notes payable - paid during 1997 -- -- 42,034
-------- -------- --------
131,801 402,486 400,561
Less amounts due within one year 11,455 220,520 266,825
-------- -------- --------
$120,346 $181,966 $133,736
======== ======== ========
The Company has pledged substantially all of its property and equipment as
collateral for repayment of debt.
1998 Annual maturities of long-term debt are as follows:
1999 $ 11,455
2000 12,560
2001 13,772
2002 94,014
--------
$131,801
========
6. RELATED PARTIES
Peter T. Paganes and Robert M. Paganes are directors, officers and
shareholders of the Company and J. Thomas Paganes, their brother, is a
shareholder of the Company. These three shareholders own approximately
24% of the Company's outstanding common stock in 1998, 1997 and 1996.
They each own and operate franchised stores. The following is a summary
of activity with these stockholders and their restaurants as of and for
the years ended November 30, 1998, 1997 and 1996.
1998 1997 1996
---- ---- ----
Product sales (1998), franchise
and advertising fees $867,809 $156,412 $150,215
Accounts receivable 55,922 29,191 26,262
Interest income -- 1,431 3,401
Notes receivable, due in quarterly
installments plus interest at 9% -- -- 24,436
F-19
7. INCOME TAXES
Significant components of deferred tax assets and liabilities consisted of
the following at November 30, 1998, 1997 and 1996.
Deferred Tax Assets and Liabilites 1998 1997 1996
- ----------------------------------- ---- ---- ----
Net operating loss carry-forwards $ 531,000 $ 531,000 $ 725,000
Deferred revenue 71,000 78,000 43,000
Depreciation 27,000 24,000 13,000
Allowance for doubtful accounts 27,000 12,000 10,000
Installment sale (25,000) (27,000) --
Change to Accrual Method-
Section 481(a) adjustment (20,000) (30,000) --
Other (23,000) 1,000 2,000
------- ----- -----
Net Deferred Tax Asset 588,000 589,000 793,000
Valuation allowance on net
deferred tax asset (588,000) (589,000) (793,000)
--------- --------- ---------
Deferred Taxes $ -- $ -- $ --
========= ========= =========
The following reconciles the expected income tax rate to the effective income
tax rate.
1998 1997 1996
---- ---- ----
Income taxes at federal statutory rate (34.0)% 34.0% 34.0%
Tax expense resulting from utilization of NOLs -- 47.0 --
Valuation allowance adjustment (1.1) (40.9) (53.7)
Non-deductible goodwill and entertainment
expenses 44.1 8.3 14.6
Other (9.0) (1.4) 5.1
---- ---- ----
Effective Tax Rate 00.0 % 47.0% 00.0 %
==== ==== ====
The Company has acquired net operating loss carry-forwards of approximately
$670,000 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. In 1997, the Company had taxable income of
approximately $288,000 which when utilizing the loss carry-forwards resulted
in a reduction of goodwill of $95,300. 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 $892,000 relating to losses incurred subsequent to the above
mentioned acquisition which expire from 2006 through 2009.
As a result of the proposed merger discussed in Note 14 of the consolidated
financial statements, the availability of the net operating loss
carry-forwards may be limited.
8. STOCK OPTION PLAN
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 with
option prices approximating market prices at the date of grant. Options are
subject to the terms of each plan.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation expense for the Company's stock
option plans been determined based on the fair value at the grant dates
consistent with
F-20
the method of SFAS No. 123, the Company's net income and net income per share
would have been the following pro forma amounts:
1998 1997 1996
---- ---- ----
Net Income (Loss)
As reported $(31,207) 107,499 117,357
Pro forma (43,963) 52,277 117,357
Earnings Per Share
As reported
Basic (.01) .04 .05
Diluted (.01) .04 .05
Pro forma
Basic (.02) .02 .05
Diluted (.02) .02 .05
As of November 30, 1998, 283,383 shares were reserved under the Incentive
Stock Option Plan and 83,300 were reserved under the non-statutory Incentive
Stock Option Plan. A summary of the options under both plans is as follows:
Weighted Average
Shares Exercise Price
------ -----------------
Incentive Stock Option Plan
Outstanding, at December 1, 1995
(2,967 exercisable) 112,967 $ 2.50
Exercised (45,000) 1.20
Expired (7,500) 3.10
Outstanding, at November 30, 1996
(60,467 exercisable) 60,467 3.10
Granted 13,500 3.30
Outstanding, at November 30, 1997
(60,467 exercisable at weighted
average exercise price of $3.10) 73,967 3.20
Forfeited (37,000) 2.70
Outstanding at November 30, 1998
(36,967 exercisable) 36,967 3.60
Weighted Average
Shares Exercise Price
------ -----------------
Non-Statutory Incentive Option Plan
Outstanding at December 1, 1995 and
November 30, 1996
(20,000 exercisable) 20,000 $ 3.60
Granted 20,500 1.60
Outstanding at November 30, 1997
(20,000 exercisable at weighted
average exercise price of $3.60) 40,500 $ 2.60
Forfeited (12,000) 1.50
Outstanding at November 30, 1998
(28,500 exercisable) 28,500 $ 3.05
F-21
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1997: dividend yield of 0%; expected volatility of
74%; risk free interest rate of 6.2%; and expected lives of 3.3 years.
The weighted average grant date fair value options granted in 1997 was $2.00.
No options were granted in 1998.
The following is a summary of stock options outstanding at November 30, 1998:
Options Outstanding and Exercisable
------------------------------------
Weighted Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
----------- ------ ------------ ------------
Incentive Stock Option Plan
$ 3.10 -4.40 36,833 6.0 3.60
8.40 134 2.0 8.40
------ --- -----
36,967 6.0 $3.60
Non-Statutory Plan
$ 1.50 - 1.90 8,500 8.5 $1.75
3.60 20,000 2.0 3.60
------ --- -----
28,500 4.0 $3.05
9. EMPLOYEE BENEFIT PLAN
In 1997, the Company implemented a 401(k) plan covering substantially all
full-time employees. The Company matches each employee's contribution up to a
predetermined limit. The Company's contribution expense amounted to
approximately $3,000 in 1998 and 1997.
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:
1999 $ 56,513
2000 44,795
2001 29,256
--------
$130,564
========
Total rent expense under the operating leases was approximately $102,000,
$120,000, and $129,000 for 1998, 1997 and 1996, respectively.
11. COMMITMENT AND CONTINGENCY
In connection with the distribution of food and restaurant supplies to
franchisees, the Company entered into an agreement effective November 1, 1998
with an unaffiliated entity that is experienced with multiple location
institutional food distribution to provide warehouse and distribution
services for the Company. Minimum annual billings to the Company for these
services must be $425,000. Failure to generate the
F-22
volume necessary to achieve such annual billings will constitute a
termination of the agreement. In connection with such termination or if the
agreement is terminated without cause by the Company prior to September 1,
2002, the Company agrees to pay the unaffiliated entity the following amounts
based on specific termination dates:
o Prior to September 1, 1999 - $225,000
o September 1, 1999 - August 31, 2000 - $150,000
o September 1, 2000 - August 31, 2001 - $ 75,000
o September 1, 2001 - August 31, 2002 - $ 50,000
12. Supplemental Disclosure of Cash Flow Information
Cash paid for interest during 1998, 1997 and 1996 amounted to $13,829,
$17,572 and $28,235, respectively. Cash paid for income taxes during 1996
amounted to $10,000. No amounts were paid for income taxes in 1998 and 1997.
During 1997, the Company exchanged property and equipment for a note
receivable totaling $85,000.
13. LITIGATION SETTLEMENT
o In January 1998, the Company entered into a release and settlement
agreement with Patrick J. McCourt (McCourt), minority shareholder of
McTub Company, in connection with the litigation between the Company and
McCourt. The agreement required the Company to pay McCourt the sum of
$200,000 which constitutes repayment of the principle of a term note
dated in October 1993. Also, in connection with the agreement, the
Company paid McCourt $65,000 for his 49% interest in McTub Company
resulting in an increase in goodwill during 1998. The agreement
discharged and released the Company from any and all claims with
McCourt.
o During 1998, the Company exercised its option to purchase the building
that houses its corporate headquarters for a total cost of $425,000.
However, the seller claimed that the Company failed to strictly comply
with the written option to purchase. As a result, the Company commenced
a civil action against the seller to enforce the seller's obligation to
sell the building to the Company and is awaiting a trial date. If the
Company prevails in its litigation, it expects to finance the cost of
the building.
14. SUBSEQUENT EVENTS
In December 1998, the Company and Interfoods of America, Inc. (Interfoods)
entered into a proposed merger agreement which is subject to, among other
things, approval by the shareholders of both parties. Under the terms of the
proposed merger, Tubby's shall issue to Interfoods one new share of common
stock (after giving effect to a planned one for five reverse stock split by
Tubby's) for each two shares of outstanding Interfoods stock. The surviving
corporation (Tubby's) will have approximately 3,300,000 shares (of which
Tubby's shareholders will own approximately nineteen percent). Simultaneously
with the merger, the surviving corporation (Tubby's) shall change its name to
Interfoods of America, Inc. and shall sell all of Tubby's pre-merger assets
to a related entity, the principals of which include certain members of
Tubby's current management, for $2,500,000.
15. SUBSEQUENT EVENTS {UNAUDITED}
In April 1999, Interfoods advised the Company that, after a thorough
evaluation, its Board of Directors decided not to proceed with the proposed
merger.
F-23
<PAGE>
[Proxycard front]
TUBBY'S, INC.
Proxy Solicited on Behalf of the Board of Directors for
Annual Shareholders Meeting ________, 1999
The undersigned hereby appointed PETER T. Paganes and ROBERT M.
Paganes, jointly and severally, proxies, with the full power of substitution,
to represent the undersigned at the Annual Meeting of Shareholders of
Tubby's, Inc., to be held at the Best Western Inn, 34911 Van Dyke Avenue,
Sterling Heights, Michigan 48312 on _______________ at 10:00 a.m., or at any
adjournments thereof, and to vote all shares of common stock of Tubby's,
Inc., which the undersigned is entitled to vote, and act with all the powers
the undersigned would possess if personally present at the meeting:
1. "FOR" / / "AGAINST" / / "WITHHOLD VOTE FOR" / /
The approval of the Agreement and Plan of Merger for the proposed Merger of
Tubby's, Inc. and R Corp:
2. "FOR" / / "AGAINST" / / "WITHHOLD VOTE FOR" / /
The election of the following persons as Directors of the Company to hold
office until the next Annual Meeting and until their successors shall have
been elected and qualified:
Robert M. Paganes, Peter T. Paganes, Vincent J. Tatone
A VOTE FOR ANY OF THE ABOVE MAY BE WITHHELD BY LINING OUT THEIR NAME(S).
3. In their discretion, for or against such other matters as may
properly come before the meeting or any adjournment or
adjournment thereof:
The Board of Directors recommends a vote "FOR" Items 1 and 2.
Unless otherwise directed herein, the proxy or proxies appointed
hereby are authorized to vote "FOR" Items 1 and 2 and to vote in their
discretion with respect to all other matters which may come before the
meeting or any adjournments thereof.
If only one of the above-named proxies shall be present in person
or by substitute at the Meeting, or any adjournment thereof, then that one,
either in person or by substitute, may exercise all of the powers hereby
given.
This proxy may be revoked prior to its exercise.
(Continued on the reverse side)
[Proxycard back]
(Continued from reverse side)
Any proxy or proxies heretofore given to vote such shares are
hereby revoked.
Dated:_______________________________, 1999
-------------------------------------------
-------------------------------------------
Please sign exactly as name appears hereon.
Executors, administrators, trustees, etc. should
give full title as such
(This proxy is solicited by the Board of Directors)
- -------------------------------------------------------------------------
IMPORTANT: PLEASE DATE, SIGN AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE, NO POSTAGE REQUIRED.
