SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended November 30, 1998
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Commission File Number 0-12706
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TUBBY'S, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2166602
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6029 East Fourteen Mile Road, Sterling Heights, Michigan 48312-5801
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Registrant's telephone number, including area code 810/978-8829
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing sale price of the common stock on
February 19, 1999, as reported on the NASDAQ SmallCap Market was
approximately $882,635. Shares of common stock held by each officer and
by each person who owns 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
Issuer's revenues for its most recent fiscal year: $7,365,983
As of February 19, 1999, there were 2,583,114 shares of the registrant's
common stock outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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Introduction
Tubby's, Inc., the Registrant, and its subsidiaries, are referred to
herein as the "Company" or "Tubby's."
Business Development
Tubby's was founded in 1968 in Metropolitan Detroit, Michigan. The
Company began by selling submarine sandwiches from a small store. The
Company enjoyed success and growth and in 1977 began the sale of
franchises of its submarine sandwich concept. In 1990, the Company,
through a reverse merger, acquired the rights to the Stuff-Yer-Face
Restaurants which operated primarily in New Jersey.
The Company develops, operates, franchises and services a system of
restaurants which prepare and serve a comprehensive menu of submarine
sandwiches and related items. Tubby's submarine sandwiches are all
prepared to order and many of its sandwiches are cooked on a grill.
These restaurants are franchised or owned and operated as company
stores. The Submarine sandwich shops are located in Michigan, Ohio,
Arizona, Nebraska, Missouri, and Ontario,Canada.
The Company also franchises and services a line of restaurants known as
Stuff-Yer-Face. These restaurants are casual, sit-down, full service
restaurants offering a line of "stuffed pizza" products known as
"Stromboli". These restaurants create a casual and distinctive
atmosphere by emphasizing the humorous "Stuff-Yer-Face" name and service
by friendly waiters and waitresses. Consistent with the Stuff-Yer-Face
name, portions are large.
With an eye to the future, the Company sold its first Development Agent
Agreement ("DA Agreement") in April, 1996. A DA Agreement confers the
right to qualified persons to operate as an independent agent, on a
non-exclusive basis, to develop and service the Company's franchised
stores in a specific geographical area. The DA agrees that during the
term of the agreement he will diligently perform his obligations on
behalf of the Company to identify and assist prospective franchisees and
to perform site acquisition services and supervision of franchisees
operating Tubby's Sub Shop restaurants located in the territory. At
November 30, 1998 the Company had nine active DA Agreements representing
a potential of an additional 297 Tubby's Sub Shops over the next twenty
years. Stores that are expected to result from the implementation of DA
Agreements are the contractual responsibility of the Development Agents
("DAs"). Tubby's anticipates that these agreements will be fulfilled on
a timely basis as stipulated in their respective contracts.
In February of 1998 the Company launched a new subsidiary named
SUBperior Distribution Systems, Inc. ("SDS"). SDS was formed by
management to become its distributor of food and restaurant supplies to
the franchised and Company-owned Tubby's Sub Shops. All purchasing and
distribution decisions are made by SDS personnel while the warehousing
and actual distribution are handled, under a negotiated contract, by an
unaffiliated company experienced with institutional food/paper product
distribution.
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 outstanding 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.
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The continuing strategy to sell DA Agreements, in addition to single
store Tubby's Sub Shop franchises, has resulted in the following
achievements in 1998 and expected store openings:
Store Openings in 1998:
o Six new single franchised stores opened in 1998.
o Four stores opened pursuant to DA Agreements in 1998.
First and Second Quarters of 1999:
o Twelve new franchised stores are expected to be opened in the first
and second quarters of 1999. Of these stores, nine are pursuant to DA
Agreements.
Closed and Reacquired Stores:
o Nine franchisee owned Tubby's Sub Shop were closed in 1998.
o One Company-owned Tubby's Sub Shop was closed in 1998.
As of November 30, 1998, a total of eighty-eight restaurants were in
operation consisting of two Stuff-Yer-Face restaurants, three Tubby's
Express restaurants, (of which one was owned by the Company), and
eighty-three Tubby's Sub Shop restaurants, (of which two were owned by
the Company). In the first and second quarters of 1999, twelve new
franchisee owned Tubby's Sub Shop restaurants are expected to open.
Expansion is an important part of Tubby's growth plans. The Company
carefully studies possible locations and evaluates those potential sites
based on a variety of criteria including traffic patterns, population,
availability of drive-thru permits and other relevant criteria. The
following table shows a summary of the Company's franchise activity and
Company store activity over the last five years:
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
Tubby's/Tubby's Express/SYF Restaurants 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Opened 10 16 7 10 7
Closed 10 2 2 3 1
Ending Number 88 88 74 69 62
Company-owned 3 4 5 2 6
</TABLE>
This Business Development section contains forward-looking statements
that involve uncertainties. Actual results could differ materially from
those in the forward-looking statements, due to a number of
uncertainties, including but not limited to, those discussed below and
in "Management's Discussion & Analysis of Financial Condition & Results
of Operation."
Products
Tubby's restaurants offer a uniform menu which includes over twenty
different submarine and pita sandwiches cooked to order, along with
french fries, onion chips and breaded mushrooms, potato chips, soup, and
a full line of Pepsi-Cola soft drinks. Some restaurants also offer a
line of premium ice cream that is sold in cones, desserts and take home
packaging.
The Company's submarine sandwiches are all prepared to order and many of
the products, including its line of steak sandwiches, chicken sandwiches
etc., are cooked when ordered. The Company's sandwiches are offered in
different sizes from a length of six inches to a length in excess of
five feet. Sandwiches in excess of twelve inches are generally ordered
for parties, picnics and social events. The "party sub" is offered at
all stores on an advance order basis, only. In 1998 the Company
introduced a new catering menu which includes a variety of sandwich
platters, party salads, and fresh-baked cookie platters. Tubby's menu is
offered for carry out, on-site consumption and, where available,
delivery.
The Stuff-Yer-Face ("SYF") restaurants offer a menu featuring a
specialty sandwich called a "Stromboli." A Stromboli is a closed
sandwich with the bread freshly baked around a favorite filling selected
by the customer together with cheeses, tomato sauce, onions and peppers.
The Stromboli fillings, which customers may select in any combination,
include meatballs, sausage, pepperoni, veal, steak, chicken
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and shrimp. The "Vegetaboli (R)" is a meatless "Boli" with fillings
selected by the customer including eggplant, mushroom, broccoli and
spinach. The sandwiches may be prepared in any combination of meat and
vegetables. Management is of the opinion that wrapping the dough around
the fillings improves the taste of the Stromboli over pizza through a
steaming process which occurs inside the Stromboli. The steaming process
permits the vegetables to retain flavor and crispness, meats to remain
tender and juicy, and cheeses and sauce to blend together to create a
fine flavor while also permitting the dough to crisp and brown. "Boli"
sandwiches are served in two sizes: "Large", and a smaller size Boli,
the "Baby Boli (R)."
The Stuff-Yer-Face restaurants also serve hamburgers, steak sandwiches,
and pizzas together with side orders which include, among other things,
French fries, onion rings, and fried mozzarella sticks. The restaurants
also serve "Lite-Stuff"(R), consisting of a variety of fresh salads and
club sandwiches. One location serves alcoholic beverages. Each of the
present Stuff-Yer-Face restaurants are sit-down, full service
restaurants utilizing waitress and waiter service. Beverages and side
orders are served while the customer's order is being prepared. When the
order is ready, each customer is served at his table by the waiter or
waitress. Each restaurant also accommodates phone orders for take out
sales.
Franchising
The Company franchises all of its restaurant concepts, including the
Tubby's Sub Shop and Stuff-Yer-Face concepts.
The Company believes that customer satisfaction is critical to the
long-term success of the Company and emphasizes quality, proven, well
trained entrepreneurs in its Franchisee selection process. All potential
Franchisees are carefully screened by top members of the Management team
who all participate in the Franchisee approval process.
Franchises for Tubby's Sub Shops restaurants have been offered since
1977. Tubby's management is continuing its efforts to expand Tubby's and
Stuff-Yer-Face restaurants both through selling single unit franchises
and through locating qualified DAs and implementing DA Agreements.
A Tubby's Franchisee is responsible to supply sufficient capital for
construction, remodeling and equipment costs required to bring a
location to the standard specifications of a Tubby's store. SubLine Co.
("SubLine"), a subsidiary of Tubby's, may, at the option of the
Franchisee, construct the restaurant, provide leasehold improvements and
supply the necessary equipment. Alternately, the Franchisee may purchase
the required construction drawings from the Company and do the work
himself. Regardless of how constructed, all restaurants must meet the
Company's specifications before they are allowed to enter the system.
The License Agreement gives the Franchisee the right to use Tubby's
trademarks, service marks and methods of operation to operate a Tubby's
restaurant at a specific location that is approved by Tubby's. The
initial term of a Tubby's Franchise Agreement is ten (10) years with the
Franchisee generally having the option to renew. The initial license
fee, which is payable upon execution of the Franchise Agreement is
$15,000 for a traditional location. For non-traditional sites, such as
convenience store locations, the Franchise fee is $8,000. Persons who
commit to the construction of more than one franchise could have a
reduced up-front franchise fee. The initial franchise fee compensates
Tubby's for various services provided by Tubby's to Franchisees, such as
management and operations training, review of restaurant site selection,
restaurant design assistance, specifications and equipment lists,
assistance in locating suppliers and operating assistance during the
initial opening of a restaurant. New Tubby's License Agreements require
the Franchisee to pay Tubby's a weekly royalty equal to the greater of
$125 per restaurant or six percent (6%) (as of January, 1996) of the
Franchisee's adjusted gross weekly sales. Previously, Tubby's Licensing
Agreements required the franchisee to pay Tubby's a weekly royalty equal
to the greater of $125 per restaurant or four percent (4%) of the
Franchisee's adjusted gross weekly sales. Most of the already existing
Franchise Agreements require the Franchisee to pay Tubby's a weekly
advertising fee equal to the greater of $100 per restaurant or three and
one-half percent (3 1/2%) of the Franchisee's adjusted gross weekly
sales. Those advertising fees are used to pay for shared production and
media advertising costs and other promotional costs. The Franchise
Agreement further requires the Franchisee, among other things, to
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comply with Tubby's standards and procedures of operation along with
menu and food quality specifications, to purchase supplies from Tubby's
approved sources, and to permit inspections and audits by Tubby's.
DA Agreements require franchisees to pay a licensing fee, similar to
those described above, to the Company. Upon receipt of a licensing fee,
however, the Company is required to pay a commission to the DA of 50% of
the amount collected. Similarly, the receipt of royalty payments by the
Company from stores licensed under a DA Agreement also require that a
commission be paid to the DA of 28% of the royalty fee if collected at a
rate under 6% of sales and 40% of the royalty fee if collected at a rate
of 6% or higher of sales.
Franchised restaurants are operated in accordance with uniform standards
required of all Franchisees. These standards include such items as
selection, quality, preparation and approval of menu items, signage,
decor, equipment, uniforms, suppliers, hours of operation, cleanliness,
appearance, etc. All standards are developed by the Company and
implemented in conjunction with its Franchisees.
The Company offers ongoing Franchisee support as well as scheduled and
unscheduled site inspections. All services are designed to ensure
customer satisfaction, efficient franchise operation and compliance with
the Company's standards.
In addition to the above standards, the Company also has financial
reporting requirements. These requirements include weekly/monthly sales
reporting and royalty and advertising payments, monthly financial
statement submission and the maintenance of books and records that will
allow the Company to audit those records if it so desires. The Company
has the right to terminate a Franchise Agreement if the Franchisee fails
to meet the requirements imposed by the above standards.
Training
The Company emphasizes Franchisee training as a means of ensuring the
quality and value of the products delivered to its customers, and the
profitability and long-term sales growth to the Company. Training is an
essential part of the Franchisee experience. In order to enter the
Tubby's system, a Franchisee is required to complete an extensive
training program as part of the orientation process.
Tubby's provides a complete course of instructions relating to the
operations, methods, and other related procedures, with emphasis placed
on the preparation and serving of the specialty food items that are
characteristic of its restaurants. Salaries, expenses of travel, food
and lodging for a Franchisee and his/her representative are at the
Franchisee's own expense. The training program consists of a minimum of
150 hours of in-store operations, under direct supervision of qualified
personnel, in addition to classroom sessions at Tubby's corporate
offices.
After successfully completing the training program, Tubby's provides
assistance to new franchisees by providing a member of Tubby's staff to
the Franchisee's location for at least three days out of the first nine
weeks of operation.
Tubby's may charge a fee for the training described above. However, it
is only obligated to provide such training for a Franchisee's first
location. Additional training is available at a fee, as is assistance at
a subsequent location.
Tubby's commitment to training is not limited to the initial training
provided at the time a Franchisee enters the system. The Company offers
training and education to its Franchisees on an ongoing basis. This
training includes restaurant operation, management training, equipment
training and marketing assistance. The Company emphasizes continued
training as part of its Franchisee support program.
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Supplies
As of February 2, 1998, the Company initiated operation of its SUBperior
Distribution Systems, Inc. ("SDS") subsidiary that sells food and
proprietary items to its Franchisees. The Company also maintains an
approved supplier list and the Franchisees are able to select the
approved supplier of their choice. The Company believes that its new
subsidiary, SDS, provides its franchised and Company owned Tubby's Sub
Shops with uniform and consistently high quality products at equivalent
or lower prices than previously charged.
The Franchisees are also required to purchase fixtures and equipment
meeting Tubby's specifications from suppliers that are approved by
Tubby's. The approval of suppliers is based upon the quality of the
items they supply and their conformity with specifications established
by Tubby's.
SubLine is an approved supplier of certain equipment that has been
specially manufactured for use in Tubby's restaurants. SubLine also acts
as a broker for several approved suppliers of machinery, equipment and
food products that are sold to Tubby's Franchisees and others. Although
Tubby's Franchisees are not required to purchase any equipment from
SubLine or utilize SubLine's brokerage services, Tubby's believes that
many of them do so because the costs of utilizing SubLine's services are
often less than the prices charged by other sources. One reason why
SubLine is able to offer competitive prices is that, when it acts as a
broker, it can often obtain volume discounts for the items that are sold
to Tubby's Franchisees. SubLine will make a profit on equipment it
purchases and resells. It does not make a profit in connection with the
assistance it offers regarding leasehold improvements.
Advertising
Tubby's Franchisees are generally required to pay advertising fees equal
to the greater of $100 per week or 3 1/2% of total weekly adjusted gross
sales of that Franchisee's restaurant. Those funds are administered by
Tubby's Sub Shop Advertising Co., a subsidiary of the Company, and are
used to pay for shared production and media advertising costs as well as
other promotional costs. Marketing and promotion is voted on by an
advertising council. This council is made up of Franchisees and
employees of the Company and works with the Company in setting
advertising programs and the timing of those programs.
The Company has historically emphasized local print media, direct mail,
television and radio as its form of advertising. Such advertising is
generally cost prohibitive for an individual Franchisee, but can be cost
effective when included with other Franchisees. All funds received for
advertising are spent for advertising purposes only, except for a
portion which is retained by the Company to cover administrative costs.
The Company has two full time employees devoted exclusively to the
process of marketing and advertising for its Franchisees on both an
individual and on a system wide basis. As a result of the efforts of
these people, and the efforts of the Advertising Council, the Company
has expanded and refined its marketing efforts and in 1999 will continue
its advertising campaign.
Competition
The restaurant business is highly competitive and is often affected by
changes in taste and eating habits of the public, by local and national
economic conditions affecting spending habits and by population and
traffic patterns. Tubby's believes that the quality and price of food
products offered are the principal means of competition in the
restaurant industry. Also of importance are site location, quality and
speed of service, advertising and attractiveness of facilities.
Tubby's competes with restaurant chains and other restaurants serving a
variety of quick service products. Some of Tubby's competitors operate
more restaurants and have greater financial resources, greater name
recognition and more experienced operational organizations than Tubby's.
In an effort to obtain greater name recognition in new markets outside
of the metropolitan Detroit area, the Company has participated in
numerous national industry trade shows. Additionally, the Company now
places advertisements in leading industry publications as well as on the
Internet. Although Tubby's believes it can operate favorably,
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it may be at a competitive disadvantage with respect to chains with
greater name recognition and marketing capability. Furthermore,
competition for management, other key operating personnel and restaurant
sites could increase as Tubby's operations expand and as the general
economy improves.
As a result of the standards Tubby's has set for its franchisees, it
competes with other franchisors for high quality, well capitalized
franchisees. Tubby's management considers the amount of the initial
investment required of the franchisee, the perceived potential for
business success, return on investment, assistance provided by the
franchisor and the franchisor's name recognition and reputation to be
the most significant competitive factors in franchising. The Company
believes that the present economy will intensify this competition.
Trademarks and Service Marks
The Company has registered trademark and service marks including
"Tubby's", "Boli's" and the "Stuff-Yer-Face" names and logos. These
trademarks and service marks, as well as others, are registered with the
United States Patent and Trademark Office and are of material importance
to the Company.
Seasonal Operation
Although weather can be a factor in the sales of the Company's products,
the Company does not consider this business to be seasonal.
Regulation
The Company is subject to Federal Trade Commission regulations and
several state laws which regulate the offer, sale and licensing process
of Franchisors. In addition to the FTC, most states have laws which
regulate and control the Franchisor/Franchisee relationships.
Many states also have laws regulating franchise operations, including
registration and disclosure requirements in the offer and sale of
franchises and the application of statutory standards regulating
franchise relationships. Tubby's believes it is operating in substantial
compliance with applicable laws and regulations governing its
operations.
Each of the restaurants operated by Tubby's Franchisees is subject to
licensing and regulation by the health, sanitation, safety, fire
department and in the case of Stuff-Yer-Face Franchisees serving
alcoholic beverages, the alcoholic beverage control agencies in the
state or municipality where located. Difficulties or failures in
obtaining the required licensing or approval could result in delays or
cancellations in the opening of new restaurants.
Federal and state environmental regulations have not had a material
effect on the operations of Tubby's or its Franchisees, but more
stringent and varied requirements of local governmental bodies with
respect to zoning, land use and environmental factors could delay
construction of new restaurants.
Tubby's and its Franchisees are also subject to the Fair Labor Standards
Act, which governs such matters as minimum wage, overtime and other
working conditions. A significant portion of the food service personnel
employed by Tubby's Franchisees are paid at rates related to the federal
minimum wage, and accordingly, increases in the minimum wage increase
the labor cost incurred by Tubby's Franchisees.
In addition to the above rules and regulations, Tubby's Company stores
are subject to state and local laws governing such items as health,
sanitation, licensing, etc. All stores are subject to local inspection
and ongoing permit approval. Local inspections govern items that Tubby's
believes are essential to providing a quality customer experience and
bringing customers back after their initial visit. Tubby's works hard to
comply with these laws and regulations.
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Customers
The Company is not dependent on a single customer.
Backlog
Company-owned restaurants have no backlog orders.
Research and Development
The Company works hard to ensure that the menu meets the needs of its
customers. Research and development efforts are done in conjunction with
suppliers, franchisees and the general public. New products, if
approved, are introduced via a variety of marketing programs. While the
Company considers research and development to be essential to the
successful long-term operation of the Company, its expenditures in this
area at this time are not material.
Employees
As of November 30, 1998, the Company employed fourteen people in the
management and administration of the corporation. In addition, the
Company owned two Tubby's Sub Shop restaurants, and one Tubby's Express
store. These stores employ thirty-one people, including related store
managers. None of Tubby's employees are covered by collective bargaining
agreements. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
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The Company leases approximately 9,000 square feet in an office building
which it uses as its headquarters and warehouse under a five year lease.
Tubby's believes that these facilities offer sufficient space to allow
it to conduct its business affairs. As of January, 1998, the Company had
notified the lessor of its corporate headquarters building that,
pursuant to its lease, it intended to exercise its option to purchase
the building at a contract price of $425,000. Also refer to Item 3 Legal
Proceedings for a discussion of the status since January 1998
The Company owns one parcel of real estate. That parcel is leased to a
Franchisee. All of the Company's real estate has been pledged as
collateral on outstanding mortgage loans.
The Company leases all its Company stores including its Stuff-Yer-Face
and Tubby's Express locations. These leases are for various terms and
various expiration dates.
ITEM 3. LEGAL PROCEEDINGS
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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. The
agreement discharges and releases the Company from any and all claims
with McCourt.
On August 14, 1998, the Company commenced a civil action against Walter
Lasko in the circuit court for the county of Macomb. 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
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vigorously pursue its claim to specifically enforce the Defendant's
obligation to sell the office building to the Company.
On September 18, 1998, the Company commenced a civil action against Sun
Valley Foods Company and Greg Tartarian, its President, individually in
the circuit court for the Count 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,
the parties are attempting to resolve these claims through negotiating a
possible settlement. The Defendants have been granted an extension of
the deadline for answering the Complaint. At this time, the Company
intends to pursue settlement negotiations and, if not successful, to
vigorously pursue these claims through trial or arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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There is no information required to be reported hereunder.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED
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STOCKHOLDER MATTERS
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The following table sets forth the high and low stock prices for the
Company's $.01 par value common stock as reported by NASDAQ for the
fiscal years indicated.
The following quotations do not include retail mark-ups, markdowns or
commissions and represent prices between dealers and not necessarily
actual transactions. The past performance of the Tubby's, $.01 par value
common stock is not necessarily indicative of future performance.
<TABLE>
<CAPTION>
1998 1997
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C>
Quarter 1 $3 1/8 $1 7/8 Quarter 1 $5 $2 1/2
Quarter 2 2 3/8 1 5/8 Quarter 2 4 3/8 2 3/16
Quarter 3 2 11/16 Quarter 3 4 3/8 2 13/16
Quarter 4 1 1/4 10/16 Quarter 4 4 1/16 2 1/2
</TABLE>
As of February 19, 1999, the approximate number of shareholders of
record of the Company was 7,000. The Company has never paid cash
dividends on its common stock. Payment of dividends is within the
discretion of the Company's Board of Directors and depends, among other
factors, on earnings, capital requirements and the operating and
financial condition. At the present time, the Company's anticipated
financial capital requirements will be such that it intends to follow a
policy of retaining earnings in order to finance the development of its
business.
ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
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& RESULTS OF OPERATIONS
-----------------------
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto (see Item 7).
This section contains forward-looking statements that involve
uncertainties. Actual results could differ materially from those in the
forward-looking statements, due to a number of uncertainties, including
but not limited to, those discussed below and in the "Business" section.
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Financial Overview
Tubby's and its consolidated subsidiaries experienced an increase in
1998 Total Revenues of $3,810,297 or 107.2%. The increase in revenues is
primarily attributable to revenues generated by the new distribution
subsidiary, SUBperior Distribution Systems, Inc.(SDS). Other significant
changes in revenues include a 16.2% decrease in Food sales, a 14%
increase in Monthly Franchise fees, a 32% decrease in equipment sales,
and a 76.6% decrease in Commissions and other fees.
Total Costs and Expenses increased by $4,000,678, or 114.4%, primarily
due to the costs of products sold by the new distribution subsidiary.
Other significant changes in Costs and Expenses include a 37.4% increase
in operating expenses, a 23.2% decrease in cost of food sales and a
27.5% decrease in cost of equipment sales.
Other income decreased by 30.5% primarily due to a 35.5% decrease in
interest income which was related to the use cash as working capital for
the SUBperior Distribution Systems, Inc. start up.
The Company had a net loss before taxes of $31,207, in 1998 versus net
income before taxes of $202,799 in 1997.
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.
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 cost of SDS products sold,
whereas in 1997 vendor rebates of $364,629 are included in Commissions
and other fees.
10
<PAGE>
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 it's 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 are located. Commissions
paid to Development Agents increased by $68,000. The Company anticipates
continued increases in commissions paid to DA's as the DA 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.
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
Working capital was $1,436,657 in 1998 compared to $1,177,481 in 1997.
Cash and Equivalents decreased by $172,033 when compared to 1997. This
decrease is composed of the following significant cash flows:
Net Cash Flows Used by Operating Activities was $84,098 in 1998.
Operating Activities Creating Significant Cash Inflows:
o Non-cash adjustments to the Net Loss included Depreciation and
Amortization for 1998 of $136,704.
o Provision for doubtful accounts was $71,896.
o Accounts payable increased by $272,769 as a result of the new SDS
operations.
Operating Activities Creating Significant Cash Out Flows:
o Net Loss of $31,207.
o Accounts receivable increased by $282,479 as a result of the new SDS
operations.
o Inventories increased by $228,861 also as a result of SDS operations.
o Prepaid expenses increased by $16,409.
11
<PAGE>
Net Cash Flows Provided By Investing Activities Was $140,716 in 1998.
Cash Flows From Investing Activities:
o Net Proceeds From Sale Of Property and Equipment of $156,502.
o Payments on Notes receivable of $92,508.
Cash Used In Investing Activities:
o Purchases of Property and Equipment of $37,525.
o Acquisition of McTub 49% Minority Interest of $65,000.
Cash Flows Used in Financing Activities Was $228,651
Cash Used In Financing Activities:
o Payments of Long-Term Debt of $228,651 which is comprised of the
repayment of the note to McCourt (refer to Item 3 Legal proceedings) and
to principal reduction on notes owed by the Company.
The Company has identified several items which will impact cash flow and
the liquidity of the Company during 1999. Those items are:
Items Creating Cash Inflows
o The Company anticipates the construction and opening of as many as
twelve new restaurants in the first two quarters of 1999. These
stores have elected to contract construction or improvements
themselves rather than using the Subline Company to do it. If these
restaurants open as planned, the Company may realize operating
income from the sale of equipment of about $4,500 from each store.
The Company will also receive initial licensing fees, and ongoing
monthly royalty and advertising fees. Reduced fees are derived from
stores that are opened pursuant to DA Agreements.
Items Creating Cash Outflows
o In January, 1998, pursuant to its corporate headquarters lease, the
Company notified its landlord of their intention to purchase the
building at the contract price of $425,000. The Company has a confirmed
bank commitment for funding the entire purchase. The terms of the
commitment are 100% financing at a fixed rate of 8.25% for five years
with a fifteen year amortization. After five years, a new commitment
will be required.
o 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 outstanding 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. The cash
flow impact of this agreement includes Tubby's portion of merger costs
such as legal, accounting and other professional fees which is limited
to $50,000 by the agreement.
As a result of the above sources and uses of cash and the expected
continued cash flows, the Company believes it has sufficient liquidity
to meet the needs of the Company in 1999. The Company maintains a
$250,000 lines of credit with a local financial institution to meet
short term financial needs. There were no borrowings under this
agreement at November 30, 1998.
12
<PAGE>
Year 2000 Costs
The Company, like most owners of computer hardware and software, will be
required to modify certain portions of its hardware and software so that
it will function properly in the year 2000. The Company is evaluating
its system as to year 2000 compliance. Most of the Company's hardware is
year 2000 compliant. The Company has no custom programmed software.
Certain purchased software packages will need to be upgraded to the year
2000 compliant versions. 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 plans to contact
other third party vendors to evaluate their year 2000 complinace status.
Management believes that year 2000 costs will be immaterial, 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.
Impact of Inflation
The Company does not believe inflation has had a material impact on
earnings during the past several years. The Company has demonstrated an
ability to manage its assets, adjust retail prices, and use long-term
debt for real estate holdings - made less expensive by inflation - and
take such other steps as necessary to mitigate the effects of inflation.
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.
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.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
------- --------------------
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
1998 1997
---- ----
ASSETS
Current Assets
<S> <C> <C>
Cash and equivalents $ 692,196 $ 864,229
Certificate of deposit 111,199 105,430
Accounts receivable - trade, less allowance
for doubtful accounts of $59,580 and $36,740 702,990 443,810
Inventories 328,280 99,419
Prepaid expenses and other 93,289 76,832
Notes receivable 59,721 66,217
---------- ----------
Total Current Assets 1,987,675 1,655,937
---------- ----------
Property and Equipment
Land 187,684 325,347
Building and improvements 689,514 663,753
Equipment 498,354 527,265
Furniture and fixtures 140,815 138,394
Vehicles 11,509 15,009
---------- ----------
1,527,876 1,669,768
Less accumulated depreciation 861,659 773,576
---------- ----------
Net Property and Equipment 666,217 896,192
---------- ----------
Other Assets
Notes receivable, less allowance for doubtful
accounts of $20,000 and $0 408,733 543,342
Goodwill, less amortization of $112,370 and $81,118 263,666 229,918
---------- ----------
Total Other Assets 672,399 773,260
---------- ----------
Total Assets $3,326,291 $3,325,389
========== ==========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---- ----
<S> <C> <C>
Current Liabilities
Accounts payable $ 379,176 $ 106,407
Accrued liabilities
--Compensation 20,738 19,887
--Other 24,695 16,153
Deferred revenue 114,954 115,489
Long-term debt due in one year 11,455 220,520
----------- -----------
Total Current Liabilities 551,018 478,456
Deferred Revenue 40,000 60,867
Long Term Debt, less amounts due in one year 120,346 139,932
----------- -----------
Total Liabilities 711,364 679,255
----------- -----------
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) (896,749) (865,542)
----------- -----------
Total Stockholders' Equity 2,614,927 2,646,134
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,326,291 $ 3,325,389
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended November 30,
CONSOLIDATED STATEMENTS OF OPERATIONS 1998 1997
---- ----
<S> <C> <C>
Revenues
Product sales $ 4,397,578 $ --
Franchise fees
--Monthly 896,298 785,959
--Initial 139,501 132,543
Food sales 779,918 931,000
Advertising fees 649,118 650,909
Equipment and restaurant sales 391,311 575,427
Commissions and other fees 112,259 479,848
----------- -----------
Total Revenues 7,365,983 3,555,686
----------- -----------
Costs and Expenses
Cost of product sales 3,402,997 --
Operating expenses 3,239,755 2,357,938
Cost of food sales 512,836 667,854
Cost of equipment and restaurant sales 341,197 470,315
----------- -----------
Total Costs and Expenses 7,496,785 3,496,107
----------- -----------
Operating Income (Loss) (130,802) 59,579
----------- -----------
Other Income (Expense)
Interest income 69,951 108,430
Interest expense (13,829) (9,572)
Loss on sale of fixed assets (5,546) --
Miscellaneous 49,019 44,362
----------- -----------
Total Other Income 99,595 143,220
----------- -----------
Income (Loss) Before Taxes on Income (31,207) 202,799
Taxes on Income -- 95,300
----------- -----------
Net Income (Loss) (31,207) 107,499
=========== ===========
Basic and Diluted Earnings (Loss) Per Share (.01) .04
=========== ===========
Weighted Average Common Shares Outstanding 2,583,114 2,604,720
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ --------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance, at December 1, 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>
17
<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended November 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (31,207) $ 107,499
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 136,704 135,468
Provision for doubtful accounts 71,896 --
Loss on sale of fixed assets 5,546 --
Taxes on income -- 95,300
Increase (Decrease) In Cash Due to Changes In
Accounts receivable (282,479) (198,543)
Inventories (228,861) 3,386
Prepaid expenses and other (16,457) 59,195
Accounts payable 272,769 (83,522)
Accrued liabilities 9,393 1,660
Deferred revenue (21,402) 49,356
--------- ---------
Net Cash (Used In)Provided By Operating Activities (84,098) 169,799
--------- ---------
Cash Flows From Investing Activities
Increase in certificate of deposit (5,769) (5,813)
Net proceeds from sale of property and equipment 156,502 5,000
Purchase of property and equipment (37,525) (69,020)
Payments on notes receivable 92,508 52,912
Acquisition of partnership Interest (65,000) --
--------- ---------
Net Cash Provided by (Used In) Investing Activities 140,716 (16,921)
--------- ---------
Cash Flows From Financing Activities
Payments on long-term debt (228,651) (232,143)
Proceeds from long-term debt -- 150,000
--------- ---------
Net Cash Used In Financing Activities (228,651) (82,143)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (172,033) 70,735
Cash and Equivalents, at beginning of period 864,229 793,494
--------- ---------
Cash and Equivalents, at end of period $ 692,196 $ 864,229
========= =========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
18
<PAGE>
TUBBY'S, INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Tubby's Inc., and its wholly-owned subsidiaries (the "Company" or
"Tubby's"). 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; (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.
<TABLE>
<CAPTION>
Number of Restaurants in Operation: November 30,
---------------
1998 1997
---- ----
<S> <C> <C>
Operated by Franchisees
Beginning of year 84 68
Franchises opened 10 16
Franchises closed (9) (0)
End of year 85 84
Operated by the Company
Beginning of year 4 6
Stores opened 0 0
Stores sold 0 (2)
Stores closed (1) 0
End of year 3 4
</TABLE>
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
equivalents, 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.
19
<PAGE>
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 and $122,395 in
1998 and 1997, 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 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 both 1998 and 1997.
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.
20
<PAGE>
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:
<TABLE>
<CAPTION>
For the Year Ended November 30, 1998 1997
---- ----
<S> <C> <C>
Numerator for Basic and Diluted Earnings per Share
Net income (loss) $ (31,207) $ 107,499
Denominator
Denominator for basic earnings per share -
weighted average shares 2,583,114 2,583,114
Effect of dilutive securities stock options -- 21,606
Dilutive Potential Common Stock
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions 2,583,114 2,604,720
Basic Earnings (Loss) Per Share $ (.01) $ .04
Diluted Earnings (Loss) Per Share $ (.01) $ .04
</TABLE>
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, 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.
21
<PAGE>
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 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Food and restaurant supplies $ 297,475 $ 28,989
Equipment 30,805 70,430
------ ------
$ 328,280 $ 99,419
======== =======
</TABLE>
3. NOTES RECEIVABLE
Notes receivable consisted of the following at November 30, 1998 and
1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note receivable, due in monthly installments
with interest at 10%, collateralized by a second
mortgage on property, maturing in 2007 $307,663 $330,296
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
-------- --------
488,454 609,559
Less: Amounts due within one year 59,721 66,217
Allowance for doubtful accounts 20,000 --
-------- --------
Total Notes Receivable - Noncurrent $408,733 $543,342
======== ========
</TABLE>
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, with no related
credit loss allowance in 1997. 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
The Company has 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 certificate of deposit. No borrowings were outstanding under
the line-of-credit at November 30, 1998 and 1997.
22
<PAGE>
5. LONG-TERM DEBT
Long-term debt consisted of the following at November 30, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
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
Note payable - stockholder (see Note 14) -- 200,000
Other -- 18,368
----------- -----------
131,801 360,452
Less amounts due within one year 11,455 220,520
----------- -----------
$ 120,346 $ 139,932
=========== ===========
</TABLE>
The Company has pledged substantially all of its property and equipment
as collateral for repayment of debt.
Annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999 $ 11,455
2000 12,560
2001 13,772
2002 94,014
--------
$131,801
========
</TABLE>
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 shareholders own approximately 24%
of the Company's outstanding common stock. 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 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Product sales, franchise
and advertising fees $ 867,809 $ 156,412
Accounts receivable 55,922 29,191
Interest income -- 1,431
</TABLE>
7. INCOME TAXES
Significant components of deferred tax assets and liabilities consisted
of the following at November 30, 1998 and 1997.
<TABLE>
<CAPTION>
Deferred Tax Assets and Liabilites 1998 1997
----------------------------------- ---- ----
<S> <C> <C>
Net operating loss carry-forwards $531,000 $513,000
Deferred revenue 71,000 78,000
Depreciation 27,000 24,000
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Allowance for doubtful accounts 27,000 12,000
Installment sale (25,000) (27,000)
Change to Accrual Method-Section 481(a) adjustment (20,000) (30,000)
Other (23,000) 1,000
-------- ---------
Net Deferred Tax Asset 588,000 589,000
Valuation allowance on net deferred tax asset (588,000) (589,000)
-------- ---------
Deferred Taxes $ -- $ --
======== =========
</TABLE>
The following reconciles the expected income tax rate to the effective
income tax rate.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income taxes at federal statutory rate (34.0)% 34.0%
Tax expense resulting from utilization of NOLs -- 47.0
Valuation allowance adjustment (1.1) (40.9)
Non-deductible goodwill and entertainment
expenses 44.1 8.3
Other (9.0) (1.4)
----- ------
Effective Tax Rate 00.0% 47.0%
===== ====
</TABLE>
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 the method of SFAS No. 123, the
Company's net income and net income per share would have been the
following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income (Loss)
As reported $ (31,207) 107,499
Pro forma (43,963) 52,277
Earnings Per Share
As reported
Basic (.01) .04
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
Diluted (.01) .04
Pro forma
Basic (.02) .02
Diluted (.02) .02
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Incentive Stock Option Plan
Outstanding, at December 1, 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
- -----------------------------------------------------------------------------
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Non-Statutory Incentive Option Plan
Outstanding at December 1, 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
</TABLE>
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:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
Weighted Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
----------- ------ ------------ -----
<S> <C> <C> <C>
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
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<S> <C>
1999 $56,513
2000 44,795
2001 29,256
---------
$ 130,564
</TABLE>
Total rent expense under the operating leases was approximately $102,000
and $120,000 for 1998 and 1997, 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
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 and 1997 amounted to $13,829 and
$17,572, respectively. 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.
26
<PAGE>
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.
27
<PAGE>
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 and 1997, 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 and 1997, 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
28
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
------- ----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
There is no information required to be reported hereunder.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------- --------------------------------------------------
All of the executive officers of Tubby's as of February 19, 1999, are
shown below. Each of the executive officers has a term of office until
the June, 1999 Board of Directors meeting.
NAME/ AGE POSITION HELD WITH REGISTRANT
--------- -----------------------------
Robert M. Paganes/42 President and Chief Executive Officer
Peter T. Paganes/56 Vice President
Vincent J. Tatone/42 Secretary
Theresa M. Borto, CPA/39 Chief Financial Officer
Messrs. Paganes are brothers and shareholders of the Company. There are
no other relationships among the executive officers.
Robert M. Paganes was a founder of Tubby's Sub Shops, Inc. which was
formed in December, 1977. Mr. Paganes has been an Officer and Director
of Tubby's, Inc. since May of 1986. Since 1979, Mr. Paganes has also
been an owner and operator of Tubby's Submarine Shop franchises in the
Detroit, Michigan area. From 1990 through June 9, 1994 Mr. Paganes was
Vice President and Secretary of the Company. On June 10, 1994, Mr.
Paganes was appointed President and on August 12, 1994, he was appointed
Chief Executive Officer for the Company.
Peter T. Paganes has been a Vice President and Director of Tubby's, Inc.
since May, 1986. In May, 1990, Mr. Paganes was appointed as Vice
Chairman of the Board of the Company. Mr. Paganes was a founder of
Tubby's Sub Shops, Inc., which was incorporated in December 1977. Mr.
Paganes has also been an owner and operator of Tubby's Submarine Shop
franchises in the Detroit, Michigan area since 1973. On August 12, 1994
Mr. Paganes was elected as Chairman of the Board of the Company.
Vincent J. Tatone was appointed to the Board of Directors of the Company
in January, 1993. Mr. Tatone graduated, cum laude, from the University
of Detroit Law School in 1985. After serving a two year appointment as a
law clerk at the Michigan Supreme Court, Mr. Tatone engaged in the
private practice of law. Mr. Tatone became General Counsel to the
Company in April, 1994, and was elected as Secretary of the Company on
August 12, 1994.
Theresa M. Borto was appointed Chief Financial Officer of Tubby's, Inc.
in May 1998. She has a bachelor of arts degree in accounting from
Michigan State University. Ms. Borto is a CPA with seventeen years
management experience. Prior to her employment at Tubby's, Ms. Borto was
the Chief Financial Officer for CAM Administrative Services, Inc.
ITEM 10. EXECUTIVE COMPENSATION
-------- ----------------------
Executive Compensation:
The following table sets forth compensation awarded to, earned by or
paid to the Company's president and Chief Executive Officer. No other
officer of the Company earned a salary and bonus of more than $100,000
during the Company's fiscal year ending November 30, 1998. The Company
did not grant any options, restricted stock awards or stock appreciation
rights, nor pay compensation that would qualify as "All Other
Compensation", nor did the Company make payments to any Executive
Officer earning an
29
<PAGE>
annual salary or bonus in excess of $100,000, which may be categorized
as "Other annual Compensation" or "LTIP Payouts", during the Company's
fiscal year ended November 30, 1998.
Name and Principal Position Fiscal Year Salary($)
--------------------------- ----------- ---------
Robert M. Paganes,
President & Chief Executive Officer 1998 76,000
No Stock options were granted to the above-named Executive Officer
during the fiscal year ended November 30, 1998.
Compensation of Directors:
A fee of $250 per meeting attended was paid to each independant,
non-employee Director for their services as such for the fiscal year
ended November 30, 1998. The Total amount paid to independant Directors
as a group was $1,250.
ITEM 11. 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, $0.01 par value, on November 30, 1998.
Amount and Nature Percent of
Name of Beneficial Owner of Ownership(1) Class(2)
------------------------ ----------------- ----------
Robert M. Paganes ............... 260,541 10.1%
6029 E. Fourteen Mile Road President
Sterling Heights, MI 48312 Director
Peter T. Paganes ................ 173,400 6.7%
6029 E. Fourteen Mile Road Vice President
Sterling Heights, MI 48312 Director
Vincent J. Tatone ............... 50,000 3.1%(2)
6029 E. Fourteen Mile Road Secretary
Sterling Heights, MI 48312 Director
Ronald Boraks ................... 0 0.0%(4)
38345 W. Ten Mile Road Director
Farmington Hills, MI 48335
J. Thomas Paganes ............... 187,738 7.3%
38633 Moravian Shareholder
Mt. Clemens, MI 48043
All Executive Officers and
Directors as a Group (5 persons). 671,679 26.0%
- -------
(1) The nature of ownership is sole voting and investment power unless
otherwise indicated.
(2) As of February 19, 1998.
(3) Pursuant to the rules of the Securities and Exchange commission, the
Company's common stock which is not outstanding but which is subject to
options is deemed to be outstanding for the purpose of computing the
percentage of outstanding common stock owned by the optionee, but not
deemed to be outstanding for the purpose of computing the percentage
owned by any other person.
(4) Less than 1%.
30
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------
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. They each own and operate franchised stores.
Amounts included in Accounts Receivable
at November 30, 1998 .......................... $ 55,922
Amounts included in Revenues for the year ended
November 30, 1998 ............................. $867,809
Prior to January 1, 1993, the above persons had an exemption from paying
royalties on their stores. Effective January 1, 1993, this exemption was
limited to previously existing stores and was discontinued until such
time as these persons were not employed by the Company. Each of the
above persons is in full compliance with all personal obligations to the
Company as of November 30, 1998.
As of November 30, 1998, there were no officers and directors, or other
related parties, of the Company that had any remaining balances
regarding loans from the Company and/or credits for loans made to the
Company.
The following table summarizes the amounts due as of November 30, 1998
from all stores owned by officers, directors or other related parties of
the Company:
Amounts Due from
Number of Stores at
Name Franchises Owned November 30, 1998
---- ---------------- -----------------
Robert M. Paganes ..................... 2 $17,476
Peter T. Paganes ...................... 1 $ 8,601
-- -------
Amounts due from Officers
and Directors .................. 3 $26,077
J. Thomas Paganes ..................... 3 $29,845
-- -------
Amounts Due from Officers,
Directors and other related
parties ........................ 6 $55,922
== =======
31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON 8K
-------- --------------------------
<TABLE>
<CAPTION>
Page
<S> <C> <C>
(a) Documents filed as a part of this report:
(1) Financial Statements:
Consolidated Balance Sheets as of November 30, 1998 and 1997....................................14, 15
Consolidated Statements of Operations for the Years Ended
November 30, 1998 and 1997..........................................................................16
Consolidated Statements of Stockholders' Equity for the
Years Ended November 30, 1998 and 1997..............................................................17
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1998 and 1997..........................................................................18
Notes to Consolidated Financial Statements..........................................................19
Report of Independent Certified Public Accountants..................................................28
(b) Reports on Form 8-K
No reports were filed on form 8-K during the last quarter
of the period covered by this report.
(c)Exhibits:
Name/Type of Exhibit
10 Material Contract - Clark Foodservice, Inc.
21 Subsidiaries of the registrant
23 Consent of independent certified public accountants
</TABLE>
32
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TUBBY'S, INC.
Robert M. Paganes
--------------------------
By: Robert M. Paganes
Its: President & Chief Executive Officer
Theresa M. Borto
--------------------------
By: Theresa M. Borto
Its: Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Peter T. Paganes Chairman of the Board, Vice-President 02/26/99
Robert M. Paganes President, Chief Executive Officer, Director 02/26/99
Vincent J. Tatone Secretary, Director 02/26/99
Ronald D. Boraks Director 02/26/99
</TABLE>
33
EXHIBIT 10
DISTRIBUTION AGREEMENT
This Agreement is made and entered into this 29th day of July, 1998,
between Clark Foodservice, Inc., and Illinois corporation, with
headquarters at 950 Arthur Avenue, Elk Grove Village, Illinois 60007
(hereinafter, "CLARK") and SUBperior Distribution Systems, Inc.,
(hereinafter, "SDS"), a wholly owned subsidiary of Tubby's, Inc., a
Michigan corporation, with headquarters at 6029 14th Mile Road, Sterling
Heights, Michigan 48312-5081 (hereinafter "TUBBY'S").
WITNESSETH
WHEREAS, CLARK distributes food, paper and chemical products to the food
service industry.
WHEREAS, TUBBY'S is a restaurant chain which uses large quantities of
food, produce, paper, chemical, fountain, dough and dough products in
its restaurant units.
WHEREAS, SDS desires CLARK to inventory and distribute certain
quantities of food, paper, and chemical products on its behalf and CLARK
desires to inventory and distribute such food, paper and chemical
products on behalf of SDS to TUBBY'S restaurant units.
WHEREAS, CLARK will be obligated to make substantial capital
improvements in its facilities and fleet to handle the increased volume
of such food, paper and chemical products.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement and for other good and valuable consideration the receipt
and sufficiency of which are hereby acknowledged, CLARK and SDS hereby
agree as follows.
one: GENERAL OBLIGATIONS. Clark agrees that it will order, on behalf of
SDS, the product necessary to meet the needs of TUBBY'S restaurant
units. All purchase orders will be reviewed with SDS. Furthermore,
CLARK agrees to receive such product, inventory such product, take
orders from, ship such product, and bill each TUBBY'S restaurant, on
behalf of SDS, for the product that each restaurant orders.
CLARK agrees to provide customer service representatives on behalf of
SDS between the hours of 8:30 a.m. and 5:00 p.m., Monday through
Friday, to take orders and resolve issues relative to delivery,
products, and collections, etc., and to reschedule special
deliveries. SDS agrees that it will negotiate and approve all product
and product specifications, rebate, growth and price programs
directly with its vendors and pay such vendors for the product
ordered by CLARK for TUBBY'S restaurant units.
two: WAREHOUSING. CLARK agrees to inventory the product purchased by,
and owned by, SDS. Such product while in the care, custody and
control of CLARK shall be handled in a manner which is consistent
with the standards of the food service industry: freezer temperatures
shall be maintained at 0(Degree) F or below; cooler temperatures
shall be maintained between 32(Degree) and 40(Degree) F; product
shall be properly rotated to ensure freshness; and code dates shall
be recorded as received. Out of date code product shall be promptly
discarded and CLARK shall identify all receiving times to SDS.
If product owned by SDS and inventoried by CLARK must be discarded
because of improper ordering by CLARK, then CLARK shall issue to SDS
a credit for such product.
SDS, however, shall be responsible for discarded product if SDS
requests additional inventory in excess of the normal ordering
sequence of CLARK. Any excess inventory requests (those made in
excess of CLARK'S normal ordering sequence) by SDS must be made in
writing to CLARK. If such excess inventory request by SDS results in
out of date product that must be discarded then no credit shall be
issued to SDS.
1
<PAGE>
three: DISTRIBUTION. CLARK agrees to distribute to the TUBBY'S
restaurant units product which has been inventoried by CLARK for SDS.
CLARK agrees that such distribution shall occur between the hours of
7:30 a.m. and 5:30 p.m., Monday through Friday. Routes identifying
the dates and approximate times for delivery to TUBBY'S restaurant
units are attached as Exhibit "A".
CLARK, furthermore, agrees that such distribution shall be consistent
with the standards of the food service industry: trucks and tractor
trailers shall be reefer equipped; drivers shall be properly licensed
and trained; and product shall be delivered within 48 hours of
receipt of an order. Drivers shall wear T- shirts and/or sweatshirts,
with a TUBBY'S/SDS logo, supplied by CLARK. Trucks solely dedicated
to such TUBBY'S business shall bear the TUBBY'S/SDS logo.
CLARK shall, at its own expense, make special deliveries, if such
deliveries are the result of CLARKS'S mistake. Such deliveries shall
be made within a 24 hour time period. Charges for special deliveries
which are the result of a restaurant units mistake shall be disclosed
to that restaurant unit and added to the invoice for that delivery.
In addition, CLARK shall offer "cash and carry" for pickups by
restaurant units for a charge to be negotiated between SDS and CLARK
if such pickups exceed 5 per week.
four: BILLING & COLLECTIONS. CLARK agrees to create for SDS an invoice
for each order rendered by a TUBBY'S restaurant. CLARK also agrees to
post such invoices on behalf of SDS and make a reasonable effort to
collect such sums on behalf of SDS. Any invoice which is not
collected within a 14 day period shall be turned over to SDS for
collection. Finally, CLARK will, upon written request by SDS, make
C.O.D. collections from individual TUBBY'S restaurant units and
deposit such sums into SDS's bank account on a daily basis.
five: TERM. This Agreement shall run for a term of five (5) years. It
shall begin on November 1st, 1998 and end October 31st, 2003. It may
be extended beyond this date for a period of two years at the
discretion of both CLARK and SDS.
six: COST. SDS agrees to pay to CLARK a "drop price" according to the
following schedule:
<TABLE>
<CAPTION>
<S> <C> <C>
0 - 43 pieces................. $ 75.00
44 - 73 pieces................. $ 85.00
74 - 88 pieces................. $ 90.00
89 - 103 pieces................. $100.00
</TABLE>
An additional charge of $5.00 per order shall be added for every 15
pieces per order in excess if 103 pieces. Both CLARK and SDS agree
that such "drop prices" shall be increased by one and one-half
percent (1 1/2 %) each year at the anniversary date (November 1st)
of this Agreement. However, if CLARK is able to demonstrate that its
costs have increased by more than such 1 1/2 %, or if SDS is able to
demonstrate that such costs have increased by less than 1 1/2 %,
then, CLARK and SDS agree to negotiate a reasonable increase or
decrease.
Such "drop prices" are intended to cover labor, trucking,
warehousing, insurance, access to the CLARK computer system,
billing, tracking, and the movement of goods from the current SDS
warehouse to the CLARK warehouse in Detroit. "Drop price" is
intended to mean a per stop basis by a CLARK truck at one of the
TUBBY'S restaurant units.
seven: TERMS. SDS agrees to pay CLARK all monies owed on the following
terms: net 15 days from date of invoice.
eight: MINIMUM YEARLY BILLINGS. SDS agrees that the minimum yearly
billings by CLARK for services rendered to the TUBBY'S restaurants
shall equal or exceed FOUR HUNDRED AND TWENTY FIVE THOUSAND DOLLARS
($425,000.00). SDS and CLARK further agree that a failure to generate
the volume necessary to meet such minimum yearly billings by CLARK to
TUBBY'S will not be resolved by additional payments to equal the
$425,000.00 but shall constitute a termination of this Agreement and
shall trigger provisions of paragraph 9(a) through 9(f) of this
Agreement.
2
<PAGE>
nine: CAPITAL IMPROVEMENTS. SDS acknowledges that CLARK will be
obligated to make immediate capital improvements in its warehouse; to
expand its freezer; to expand its cooler; to add new labor; and to
add new refrigerated trucks. SDS also acknowledges that if this
Agreement were terminated before September 1st, 2002, that CLARK
would not be able to recoup its cost of capital improvements in its
warehouse, its expansion of its freezer/cooler, and its new
refrigerated trucks.
SDS, therefore agrees to pay to CLARK the following sums of money if
this contract is terminated without cause by TUBBY'S or SDS prior to
September 1st, 2002.
a) Prior to September 1, 1999 - Two Hundred and Twenty Five Thousand
Dollars ($225,000.00).
b) September 1, 1999 to August 31, 2000 - One Hundred and Fifty
Thousand ($150,000.00) Dollars.
c) September 1, 2000 to August 31, 2001 - Seventy Five Thousand and
00/100 ($75,000.00) Dollars.
d) September 1, 2001 to August 31, 2002 - Fifty Thousand and 00/100
($50,000.00) Dollars.
e) September 1, 2002 to October 31, 2003 - Zero ($0) Dollars.
Such sums of money shall be paid by SDS to CLARK within thirty (30)
days of such termination.
ten: CONFIDENTIAL INFORMATION/TRADE SECRETS. SDS acknowledges that some
of its employees will be trained in, and given access to , certain
CLARK procedure manuals, certain CLARK inventory programs, and
certain CLARK MIS programs and procedures used in areas of accounts
receivable, accounts payable, inventory control, and inventory
ordering. SDS further acknowledges that much of the information,
manuals, procedures and programs that CLARK will share with SDS is
confidential in nature and proprietary to CLARK. SDS also
acknowledges that such confidential and proprietary material gives
CLARK a competitive advantage over other companies which do not have
access to this information and these programs.
SDS therefore agrees that it will not at anytime, in any form,
fashion or manner, either directly or indirectly, divulge, disclose,
or communicate to any person, firm or corporation in any manner
whatsoever any information of any kind, nature, or description
concerning any matters affecting or relating to CLARK'S business,
customer lists, or any "trade secrets", confidential information
and/or proprietary information regarding Clark.
"Trade secrets" as used herein shall mean any information, process or
idea that is not generally known in the industry, that CLARK
considers confidential and that gives CLARK a competitive advantage.
Examples of trade secrets include, but are not limited to, the
following:
a) purchasing techniques and sources;
b) information relating to sales programs;
c) customer lists and records;
d) management tools and problem solving techniques SDS understands
that the above list is intended to be illustrative and that other
trade secrets, which shall also be held confidential, may
currently exist or arise in the future.
SDS agrees that upon termination of this Agreement, for whatever
reason, SDS will surrender to CLARK all confidential and proprietary
information and data, in whatever form it may exist. Finally,
subsequent to the termination of this Agreement, SDS agrees not to
use any trade secrets of CLARK.
In return, CLARK agrees and acknowledges that some of its employees
will be trained and given access to certain SDS procedure manuals,
inventory programs, procedures and customer lists and that these
documents, programs and procedures are confidential in nature and
proprietary to SDS. CLARK further acknowledges that such confidential
and proprietary material gives SDS a competitive advantage over other
companies who do not have access to this information or these
programs.
CLARK therefore agrees that it will not at any time, in any form,
fashion or manner, either directly or indirectly, divulge, disclose
or communicate to any person, firm or corporation in any manner
whatsoever any information of any kind, nature, or description
concerning any matters affecting or
3
<PAGE>
relating to SDS business, customer lists, or any "trade secrets",
confidential information and/or proprietary information regarding
SDS. Examples of "trade secrets" include, but are not limited to, the
following:
a) Food preparation techniques
b) Product specifications
c) Product prices
d) New product research and development
e) New market development
f) Merger and/or acquisition information
g) Co-branding relationship information
"Trade Secrets" as used herein shall mean any information,
process or idea that is not generally known in the industry, that SDS
considers confidential and that gives SDS a competitive advantage.
CLARK understands that the above list is intended to be
illustrative and that other trade secrets, which shall also be held
confidential may currently exist or arise in the future.
CLARK agrees that upon termination of this Agreement, for
whatever reason, CLARK will surrender to SDS all confidential and
proprietary information and data, in whatever form it may exist.
Finally, subsequent to the termination of this Agreement, CLARK
agrees not to use any trade secrets of SDS.
eleven: DEDICATED SPACE. CLARK agrees to dedicate approximately 2,500
square feet of currently vacant warehouse space which shall be
equipped with a desk, a chair, and a terminal connected to CLARK'S
mainframe. Such space may be used to create a prototype TUBBY'S
franchise store. TUBBY'S may use this prototype store for
informational and training services for potential franchisees. CLARK
agrees to dedicate the offices in this space for SDS and TUBBY'S use.
CLARK agrees to maintain and clean all warehouse space on the same
standards and procedures as CLARK'S warehouse.
twelve: REPORTS. CLARK agrees to provide to SDS all monthly sales
reports currently generated by the CLARK MIS system that pertain to
the SDS business. Such reports shall include the following: inventory
reports; usage reports; vendor lists; stock status reports (re-order
guides); receiving reports; and rebate tracking reports. In the event
of a termination of this Agreement CLARK shall promptly supply to SDS
a series of final reports that pertain to the SDS business and its
inventory.
thirteen: INSURANCE. CLARK agrees to maintain insurance for worker's
compensation, fire, property loss, casualty loss and automotive. Such
insurance shall meet or exceed the standards of the food service
industry and shall be acceptable to SDS.
fourteen: OFFER OF EMPLOYMENT. Both CLARK and TUBBY'S/SDS agree that
neither will offer employment to the others employee(s) during the
term of this Agreement and for a period of twelve (12) months
following the termination of this Agreement.
fifteen: TERMINATION FOR CAUSE. Either party may terminate this
agreement, upon a material breach and significant breach or default
of this Agreement by the other party which is not cured within thirty
(30) days after receipt by the defaulting party of a Notice from the
Non-Defaulting party specifying the nature of such breach or default.
sixteen: FORCE MAJEURE. Each party to this Agreement shall be excused
for failures and delays in performance caused by war, governmental
proclamations, ordinances, or regulations, strikes, lockouts, floods,
fires, explosions, or other events beyond the reasonable control and
without the fault of such party. This section shall not, however,
relieve any party from using reasonable efforts to remove or avoid
any such events, and any party so affected shall continue performance
hereunder as soon as reasonably practicable whenever such causes are
eliminated. Any party claiming any such excuse for failure or delay
in performance shall give notice thereof to the other party.
4
<PAGE>
seventeen: CONSTRUCTION OF AGREEMENT. Nothing in this Agreement shall be
deemed or constructed to constitute or create between the parties
hereto a partnership, association, joint venture, franchise or
agency. CLARK is not a legal representative of TUBBY'S nor SDS. CLARK
agrees not to use the SDS logo(s), trademark(s), or tradename(s) in
any manner which would indicate that CLARK has any rights in, or to,
such logo, trademark, or tradename.
eighteen: GOOD FAITH. No employee of either party shall solicit, offer
and/or accept any compensation or anything of value from any employee
of the other party, from any vendor, or any other person which is in
any way related to either party's performance under this Agreement,
whether in the form of a kickback, rebate, gift and/or any other
form.
Both parties agree that, in the event they become aware, or have a
strong suspicion, that such a solicitation, offer and/or acceptance
has occurred, they shall promptly notify the other party. A breach of
this provision shall constitute a material breach of this Agreement
and shall be cause to terminate this Agreement pursuant to Section
15.
nineteen: NOTICE. Any notice required or permitted under this Agreement
shall be deemed to have been sufficiently given if mailed by
registered or certified mail, postage prepaid to the other parties
address shown at the beginning of this Agreement.
twenty: GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Michigan.
twenty-one: ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between CLARK and SDS with respect to the warehousing and
distribution of SDS products.
AGREED TO AND ACCEPTED BY:
CLARK FOODSERVIC, INC. SDS/DBA SUBPERIOR DISTRIBUTION SYSTEMS, INC.
By: Herman Baergen By: Robert M. Paganes
-------------- -----------------
Herman Baergen Robert M. Paganes
TUBBY'S, INC., a New Jersey corporation, by executing this Agreement
agrees to guarantee the obligations of SDS to CLARK FOODSERVICE, INC.,
pursuant to this AGREEMENT.
In witness whereof, CLARK and SDS, and TUBBY'S, have caused this
Agreement to be executed by a duly authorized officer on the day and
year first herein written.
CLARK FOODSERVICE, INC. SUBPERIOR DISTRIBUTION SYSTEMS, INC.
By: Herman Baergen By: Robert M. Paganes
Its: President Its: President CEO
TUBBY'S, INC.
By: Robert M. Paganes
Its: President CEO
5
TUBBY'S, INC.
LIST OF SUBSIDIARIES
NOVEMBER 30, 1998
EXHIBIT 21
Name State of Incorporation
---- ----------------------
Tubby's Sub Shop Advertising, Inc. Michigan
The SubLine Company, Inc. Michigan
Tubby's Company Stores, Inc. Michigan
Tubby's Sub Shops, Inc. Michigan
SUBperior Distribution Systems, Inc. Michigan
Exhibit 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Tubby's, Inc. and Subsidiaries
Sterling Heights, Michigan
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement (Form S-8) of our
report dated January 22, 1999, relating to the consolidated financial
statements of Tubby's, Inc. and Subsidiaries appearing in the Company's
Annual Report on Form 10-KSB for the year ended November 30, 1998.
BDO Seidman, LLP
Troy, Michigan
March 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> $ 803,395
<SECURITIES> 0
<RECEIVABLES> 1,251,024
<ALLOWANCES> 79,580
<INVENTORY> 328,280
<CURRENT-ASSETS> 1,987,675
<PP&E> 1,527,876
<DEPRECIATION> 861,659
<TOTAL-ASSETS> 3,326,291
<CURRENT-LIABILITIES> 551,018
<BONDS> 0
<COMMON> 25,832
0
0
<OTHER-SE> 2,589,095
<TOTAL-LIABILITY-AND-EQUITY> 3,326,291
<SALES> 5,568,807
<TOTAL-REVENUES> 7,484,953
<CGS> 4,257,030
<TOTAL-COSTS> 7,516,160
<OTHER-EXPENSES> 3,259,130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,829
<INCOME-PRETAX> (31,207)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,207)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
