SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. ___)
Filed by Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commissioner Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14(a)-11(c)
Tubby's, Inc.
------------------------------------------------
(Name of Registrant as Specified in its Charter)
-----------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(I)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to the Exchange Act
Rule 14a--6(i)(3).
[ X ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
[ ] Previously paid.
1) Title of each class of securities to which transaction applies;
Common Stock, par value $0.01
2) Aggregate number of securities to which transaction applies;
2,081,938
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the fee is calculated and state how it was determined); 1/50 of 1
percent of $2,290,131.80
4) Proposed maximum aggregate value of transactions; $2,290,131.80
5) Total fee paid; $458.03
[ ] Fee paid previously with preliminary materials.
[ X ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid; $458.03
2) Form, Schedule or Registration Statement No.; Schedule 13E-3
3) Filing Party; Tubby's, Inc.
4) Date Filed; _________________
LETTER TO SHAREHOLDERS OF
Tubby's, Inc.
Dear Shareholders:
We cordially invite you to attend the Annual Meeting of Shareholders
of Tubby's, Inc. ("Tubby's") to be held on ____________, 1999 at 10:00 a.m.
at the Best Western Inn, 34911 Van Dyke Avenue, Sterling Heights, Michigan
48312. First, as explained in the accompanying Proxy Statement, the
Shareholders of Tubby's will be asked to consider and vote upon a proposed
Agreement and Plan of Merger (the "Merger Agreement") providing for the
merger of R Corp with Tubby's, with Tubby's to be the surviving corporation.
The principal aspect of the Merger Agreement is that all shareholders, other
than three current members of Tubby's management who also constitute a
majority of its Board of Directors, will receive cash in exchange for their
shares at the merger price of $1.10 per share. Second, the shareholders will
be asked to elect Directors to serve for the ensuing year, in the event the
proposed merger is not approved.
The Board of Directors of Tubby's carefully considered the proposed
merger, sought and received an independent valuation and fairness opinion
from Stout Risius Ross, Inc., considered the Company's recent delisting from
the NASDAQ Small Cap Market, recent trading activity and the current and
potential future bid prices for the shares. After carefully considering all
of these factors, the Board of Directors of Tubby's concluded that the Merger
is in the best interest of the Shareholders. Accordingly, the Board of
Directors of Tubby's is recommending that the Shareholders vote FOR approval
of the Merger Agreement.
As further described in the Proxy Statement, closing upon the Merger
Agreement will result in the shareholders, other than three current members
of Tubby's management, receiving cash in exchange for their shares. Each
share of Common Stock of Tubby's will be exchanged for $1.10.
The accompanying Proxy Statement provides a description of the terms
of the proposed Merger and certain additional information to which you are
urged to give your careful attention. Whether or not you are personally able
to attend the Annual Meeting, please complete, sign, date and return the
enclosed Proxy as soon as possible. This action will not limit your right to
vote in person if you wish to attend the Annual Meeting and vote personally.
Very truly yours,
Robert M. Paganes
President and CEO
Dated: __________________
TUBBY'S, INC.
NOTICE OF 1999 ANNUAL MEETING OF SHAREHOLDERS
______, 1999
To the shareholders of Tubby's, Inc.:
You are cordially invited to attend the 1999 Annual Meeting of
Shareholders of Tubby's, Inc. to be held at 10:00 a.m. EST, on ____________,
__________, 1999, at the Best Western Sterling Inn, 34911 Van Dyke Avenue,
Sterling Heights, Michigan 48312, for the following purposes:
1. Consider and vote upon the approval of the Agreement and Plan
of Merger ("Merger Agreement") to merge R Corp with Tubby's,
Inc. ("Tubby's"), pursuant to which Tubby's shareholders will
receive cash in exchange for their shares at the merger price
of $1.10 per share.
2. To elect Directors to serve for the ensuing year and until
their successors are elected in the event the Merger is not
approved; and
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on August 30,
1999 as the record date for the determination of shareholders entitled to
vote at the Meeting or any adjournment thereof. You are cordially invited to
attend the Meeting. Your vote is important. Whether you plan to attend the
Meeting or not, you are requested to complete, date and sign the enclosed
proxy form and return it promptly in the envelope provided for that purpose.
The enclosed proxy is being solicited on behalf of the Board of Directors of
the Company.
By Order of the Board of Directors
Vincent J. Tatone
Secretary
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PROXY STATEMENT
TUBBY'S, INC.
6029 E. Fourteen Mile Road
Sterling Heights, Michigan 48312-5801
1999 Annual Meeting of Shareholders
___________, 1999
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Tubby's, Inc., a New Jersey
corporation (the "Company" or "Tubby's"), to be voted at the 1999 Annual
Meeting of Shareholders of the Company (the "Meeting"), to be held at 10:00
EST. on ______________, 1999 at the Best Western Sterling Inn, 34911 Van Dyke
Avenue, Sterling Heights, Michigan 48312. The approximate mailing date of
this Proxy Statement is ___________, 1999.
All properly executed proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon or otherwise
as provided therein.
Unless instructions to the contrary are marked, proxies will be voted for the
approval of the Merger Agreement and for the election of three directors in
the event the Merger Agreement is not approved. Any proxy may be revoked at
any time prior to the exercise thereof by giving written notice to the
Secretary of the Company.
The Directors have fixed the close of business on August 30, 1999, as the
record date for the determination of shareholders entitled to notice of and
to vote at the Meeting and at any adjournment thereof. Shareholders on the
record date will be entitled to one vote for each share held, with no shares
having cumulative voting rights. As of August 30, 1999, the Company had
outstanding 2,583,113 shares of Common Stock, par value $0.01 per share and
approximately 7,000 record holders.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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TABLE OF CONTENTS
Page
----
Introduction..................................................... 2
Summary of Proxy Statement....................................... 4
Special Factors.................................................. 6
Sources and Amounts of Funds and Other Consideration............. 6
Purpose(s), Alternatives, Reasons and Effects.................... 7
Fairness of Transaction.......................................... 9
Reports, Opinions, Appraisals and Certain Negotiations........... 9
Interests of Certain Persons in the Merger....................... 10
Conditions to Merger............................................. 11
Certain Federal Income Tax Consequences.......................... 11
Dissenters Appraisal Rights..................................... 11
Business of Tubby's and R Corp................................... 11
Consolidated Selected Financial Data of Tubby's, Inc............. 12
Market Prices of Tubby's Common Stock............................ 12
Description of the Transaction................................... 13
Solicitation of Proxies.......................................... 14
Accounting Treatment............................................. 15
Previous Contacts Between Tubby's and R Corp..................... 15
Business of Tubby's.............................................. 16
Management of Tubby's............................................ 23
Security Ownership of Certain Beneficial Owners and Management... 25
Management's Discussion and Analysis of Financial Condition and
Results of Operations of Tubby's............................... 26
Certain Relationships and Related Transactions of R Corp
and Tubby's.................................................... 31
Federal Income Tax Consequences.................................. 33
Legal Matters.................................................... 33
Experts.......................................................... 33
Reports and Board of Directors Meetings.......................... 33
Director's Compensation.......................................... 34
Independent Accountants.......................................... 34
Proposals of Shareholders........................................ 34
Miscellaneous.................................................... 34
Agreement and Plan of Merger..................................... Appendix A
Fairness Opinion of Stout Risius Ross, Inc....................... Appendix B
Financial Statements............................................. F1 - F34
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SUMMARY OF PROXY STATEMENT
Certain information contained in this Proxy Statement is summarized below.
This summary is not intended to be complete and is qualified in all respects
by the detailed information appearing elsewhere in this Proxy Statement and
the annexes hereto. Shareholders are urged to review carefully the entire
Proxy Statement, the Agreement and Plan of Merger, which is attached hereto
as Appendix A and the other annexes hereto. Cross-references in this summary
are to captions in the Proxy Statement.
R Corp
R Corp, a Michigan corporation ("R Corp"), was established only for
the purpose of structuring the Agreement and Plan of Merger. Its shareholders
consist of the following members of Tubby's current management, who also
constitute a majority of Tubby's Board of Directors: Peter T. Paganes,
Chairman of the Board and Executive Vice-President, Vincent J. Tatone,
Director and Corporate Secretary, and Robert M. Paganes, Director, President
and CEO. R Corp does not own and/or operate any restaurants and has not
conducted any business other than its formation and entering into the
Agreement and Plan of Merger. R Corp's address is 6029 E. Fourteen Mile Road,
Sterling Heights, Michigan 48312.
Tubby's
Tubby's, Inc., a New Jersey corporation ("Tubby's"), wholly-owns the
following subsidiaries: (1) Tubby's Sub Shops, Inc., a Michigan corporation
("TSSI'"), (2) Sub Line Co., a Michigan corporation ("Sub Line"), (3)
SUBperior Distribution Systems, Inc., a Michigan corporation ("SDS"), and (4)
Tubby's Company Stores, Inc., a Michigan corporation ("Company Stores"). TSSI
franchises a chain of restaurants under the name "Tubby's Sub Shops" that
specialize in submarine sandwiches. As of May 31, 1999, 95 franchised sub
shops were in operation. TSSI has a wholly owned subsidiary, Tubby's Sub
Shops Advertising Co., Inc., a Michigan corporation ("TSSAC"), that manages
advertising contributions that Tubby's receives from its franchisees. Sub
Line acts as a broker for machinery and equipment that may be purchased by
franchisees. SDS distributes food and other products that may be purchased by
franchisees. Company Stores owns and operates four Tubby's Sub Shop
restaurants. Unless the context otherwise requires, any references to
"Tubby's" shall also be deemed to refer to its wholly owned subsidiaries. The
principal offices of Tubby's are located at 6029 E. Fourteen Mile Road,
Sterling Heights, Michigan 48312, and its telephone number is (810) 978-8829.
Tubby's Common Stock $.01 Par Value (the "Tubby's Common Stock") is traded in
the over-the-counter market with price quotations as available on the
over-the-counter bulletin board (the "OTCBB"). Tubby's Common Stock was
listed on the NASDAQ Small Cap Market until May 5, 1999, when it was delisted
because of the stock's inability to maintain a minimum bid price of $1.00.
Date, Time, Place and Purposes of the Annual Meeting
The Annual Meeting of Shareholders of Tubby's will be held on
__________, 1999, at
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10:00 a.m. local time at the Best Western Sterling Inn located at 34911 Van
Dyke Avenue, Sterling Heights, Michigan 48312. At the Annual Meeting, the
shareholders of Tubby's will consider and vote upon a proposal to approve the
Agreement and Plan of Merger dated as of May 27, 1999 (the "Merger
Agreement") among Tubby's and R Corp. A copy of the Merger Agreement is
attached hereto as Appendix A. The approval of the Merger Agreement by the
shareholders shall be contingent upon the affirmative vote of a majority of
the outstanding shares. The failure by the shareholders of Tubby's to approve
the terms of the Merger Agreement shall result in the termination of the
Merger Agreement. The shareholders will also vote upon the election of three
Directors to serve for the ensuing year, in the event the Merger Agreement is
not approved.
Record Date; Quorum
Only holders of record of shares of Tubby's Common Stock at the
close of business on August 30, 1999 (the "record date") will be entitled to
vote at the annual meeting including any adjournment or postponement thereof.
Holders of Tubby's Common Stock are entitled to cast one vote for each share
held by them. The presence, either in person or by properly executed proxy of
holders of a majority of the outstanding shares of Tubbys Common Stock
entitled to vote is necessary to constitute a quorum at the Annual Meeting.
Vote Required
Pursuant to the provisions of the New Jersey Business Corporation
Act, the affirmative vote of the holders of the majority of the outstanding
shares of Tubby's Common Stock entitled to vote is required to approve the
Merger Agreement. Holders of approximately 1,054,000 outstanding shares of
Tubby's Common Stock (approximately 40.4%), which includes 500,000 shares
held by Tubby's officers Robert M. Paganes (259,000 shares), Peter T. Paganes
(191,000 shares) and Vincent J. Tatone (50,000 shares), who also constitute a
majority of Tubby's Board of Directors, have indicated their intention to
vote in favor of the Merger Agreement. Therefore, the approval of holders of
at least an additional 246,557 shares (approximately 9.5%) will be necessary
for approval of the Merger Agreement. Holders of a majority of outstanding
shares of R Corp Common Stock have voted in favor of the approval of the
Merger Agreement. See "Certain Relationships and Related Transactions of
Tubby's and R Corp". The affirmative vote of the holders of the majority of
shares constituting a quorum is required for the election of Directors.
The Merger
If the Merger Agreement is consummated, all Tubby's shareholders,
other than those shareholders who are all of the shareholders of R Corp,
shall receive cash in exchange for their shares (the "Merger"). The shares,
for purposes of the Merger Agreement, have been valued at $1.10. The
shareholders of R Corp, who together own approximately 500,000 shares of
Tubby's Common Stock, will not surrender any of their shares. Regarding all
other shareholders, each share of Tubby's Common Stock surrendered shall be
exchanged for $1.10. There are presently outstanding 2,583,113 shares of
Tubby's Common Stock. Therefore, following completion of the Merger, and the
exchange of all outstanding shares of
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Tubby's Common Stock held by persons who are not shareholders of R Corp for
cash, there will be approximately 500,000 shares outstanding, which will be
held by the current shareholders of R Corp, who also constitute a majority of
Tubby's Directors. Thereafter, Tubby's will terminate its registration under
Section 12 of the Securities Exchange Act of 1934 (the "Act") and it shares
will not be publicly traded. Tubby's will no longer be a reporting company
under the Act and Tubby's will operate as a private company. A copy of the
Agreement and Plan of Merger is attached as Appendix A.
The Merger will become effective upon the later of either (i) the
filing of the Merger Agreement with the Secretary of State of New Jersey, or
(ii) the issuance by the Secretary of State of New Jersey of a Certificate of
Merger relating to the Merger (the "Effective Date"). It is expected that if
the Merger is approved by Tubby's shareholders at the annual meeting, and
assuming that the conditions to the Merger are satisfied, the Merger will
become effective during the fourth calendar quarter of 1999.
SPECIAL FACTORS
Sources and Amounts of Funds and Other Consideration
The Merger, which will require approximately Two Million Two Hundred
Ninety Thousand ($2,290,000) Dollars, will be funded though loans from
Comerica Bank, Detroit, to Tubby's, which will be personally guaranteed and
personally collateralized by the pledge of property owned by the shareholders
of R Corp, loans to the shareholders of R Corp, individually, replacing
Tubby's current $250,000 line of credit with a new $400,000 line of credit,
and with funds from Tubby's general account as follows:
(A) A One Million ($1,000,000) Dollar secured term loan to Tubby's
at a fixed interest rate, to be set at the time of Closing, or
interest at one-quarter percent (0.25%) above the announced
prime rate of Comerica Bank ("the Prime Rate") amortizing over
fifteen years with a balloon in five years ("Term Loan A");
(B) A Five Hundred Thousand ($500,000) Dollar interest only, cash
secured loan due in 24 months to Tubby's at an interest rate
equal to the current CD rate + 2.0% ("Term Loan B");
(C) A Two Hundred and Fifty Thousand ($250,000) Dollar secured
term loan to the shareholders of R Corp individually, at an
interest rate equal to one-quarter percent (0.25%) above the
Prime Rate, due in 12 months ("Term Loan C");
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(D) Two Hundred Seventy Thousand ($270,000) Dollars from Tubby's
revolving line of credit which will bear interest at
one-quarter percent (0.25%) above the Prime Rate (the "Line
of Credit"); and
(E) Two Hundred and Seventy Thousand ($270,000) Dollars from
Tubby's General Account.
(F) Term Loan A, Term Loan B and the Line of Credit, will be
secured by mortgage liens on two buildings owned by Tubby's
which house Tubby's Sub Shops, located in Southgate, Michigan,
and Clinton Township, Michigan, and a security interest in all
of the assets of Tubby's and Robert M. Paganes, Peter T.
Paganes and Vincent J. Tatone, jointly and severally, will
personally guaranty payment of the Line of Credit, Term Loan A
and Term Loan B;
(G) Term Loan C will be secured by mortgage liens on a condominium
unit located in St. Clair Shores, Michigan, two buildings which
house franchised Tubby's Sub Shops, located in Royal Oak and
Dearborn, Michigan, two houses located in Clinton Township and
Macomb, Michigan, and a condominium unit located in Naples,
Florida.
The expenses estimated to be incurred in connection with the Merger
are as follows:
Legal $ 20,000
Appraisal and Fairness Opinion Fees $ 25,000
Accounting $ 5,000
Printing and Mailing Costs $ 30,000
Transfer Agent Fees $ 15,000
Exchange Agent Fees $ 15,000
Loan Closing Costs $ 7,500
Filing Fees $ 450
=========
Total $ 127,950
Tubby's has paid a portion of the legal fees, all of the appraisal and
fairness opinion fees, and will be responsible for paying for all of the
remaining estimated expenses.
Purpose(s), Alternatives, Reasons and Effects
The Merger is a "going-private" transaction. Its purpose is to make
Tubby's a private company which will no longer be a reporting company under
the Securities Exchange Act of 1934. Because of its relatively small size,
the substantial expenses it must incur to comply with the reporting
requirements, including legal expenses, accounting expenses, transfer agent
expenses, printing and annual meeting expenses, creates a formidable burden
on Tubby's limited resources, both financial and human. In financial terms,
annual expenses for outside services are approximately $150,000. Tubby's has
13 full time employees at its headquarters. In terms of human resources,
although difficult to quantify, Tubby's estimates that between 600 and 800
combined employee hours per year are required as a result of its status as a
public reporting company under the Act.
Since it became a public company, Tubby's has met with limited
success in its effort to expand its operations. Tubby's began as a small
franchising company with submarine sandwich shops primarily located in the
Detroit Metropolitan area. In the course of its efforts to expand, Tubby's
has opened locations in states other than Michigan. Because of unsatisfactory
sales, and because of its limited resources, most of these locations have
closed. Tubby's believes that the "public company" burden on its financial
and human resources has negatively affected its ability to expand and that
operating as a closely held private company would enhance its ability to
compete in the highly competitive quick service restaurant and franchising
industries.
Tubby's shares were listed on the NASDAQ Small Cap Market beginning
in 1990. The price at which Tubby's shares traded fluctuated from between
approximately $.12 to $.80 per
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share but, generally, they traded at between $.18 and $.25 per share.
Although Tubby's tried to increase shareholder value, its limited resources
and limited financial success made increasing the value of its shares a
difficult task. In the fall of 1997, the NASDAQ amended its rules regarding
listing qualifications. One of the changes was that, to qualify for continued
listing, companies must maintain a minimum bid price of at least $1.00 per
share. To comply with the minimum bid price requirement, Tubby's adopted and
implemented a one for ten reverse split in February of 1998. Just prior to
the split, Tubby's shares were trading at approximately $.25 per share. After
the reverse split, the bid price for Tubby's shares began to decline from
$2.50 to $.375 in February of 1999, even though the number of outstanding
shares decreased from more than 25 Million to just over 2.5 million. In
December of 1998, the NASDAQ notified Tubby's that it was not in compliance
with the minimum bid price requirement. In March of 1999, the NASDAQ notified
Tubby's that it also appeared not to be in compliance with the market value
of public float requirement either. Finally, on May 5, 1999, Tubby's shares
were delisted by NASDAQ for failure to meet those minimum requirements and
trades of Tubby's shares were automatically listed on the Over the Counter
Bulletin Board ("OTCBB").
As a result of the delisting, Tubby's Board of Directors concluded
that increasing shareholder value would now be an even more formidable task.
There has never been a well established market for Tubby's shares; quotations
have always been limited and sporadic. The NASDAQ delisting was viewed,
objectively, as probably having a future negative effect on the already
under-established market for Tubby's shares. This was a substantial factor
which was considered by Tubby's Board of Directors. Because of Tubby's
limited resources, the current and potential future bid prices for its
shares, and the substantial expenses inherent in operating a public company,
the Board of Directors of Tubby's determined that undertaking this
transaction was appropriate at this time.
Tubby's did consider an alternative to this transaction which would
have involved a merger between Tubby's and Interfoods of America, Inc. (OTCBB
- - IFDA), a Miami based Popeye's Chicken franchisee. See "Previous Contacts
Between Tubby's and R Corp." That proposed merger provided for a one for five
reverse split of Tubby's shares followed by a registered exchange offer of
Tubby's shares on a one for two basis for all Interfoods shares.
Simultaneously, the surviving corporation, Tubby's, would have changed its
name to Interfoods of America, Inc., sold all of Tubby's pre-merger assets to
R Corp, and continued to operate as a Popeye's Chicken franchisee. On April
23, 1999, however, Interfoods advised Tubby's that, after a thorough
evaluation, its Board of Directors had decided not to proceed with the
proposed merger. Interfoods gave no further explanation for its decision.
Thereafter, Tubby's announced the present proposed merger.
The most substantial effect of the Merger on Tubby's will be that it
will no longer be a reporting company and, instead, will operate as a private
company. Its limited resources will be relieved of the substantial burdens
inherent in operating a public company. It will be relieved from the
substantial expenses for professional and other outside services, and its
management and staff will be able to focus exclusively on improving
operations and expanding, without the constant burden of considering
intricate compliance issues inherent in operating a public, reporting
company. As a result, Tubby's will have more flexibility in its day to day
management. Although R Corp will no longer exist as a separate entity,
its shareholders will be the only shareholders of Tubby's. In addition,
those shareholders will be personally liable, pursuant to their personal
guarantees and the pledge of their personal
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property as collateral, for the repayment of the loans to Tubby's from
Comerica Bank which will be used to fund the Merger. Unaffiliated security
holders will receive $1.10 in exchange for each of their shares, which is
higher than the current market price. In addition, they will not incur
brokerage commissions. The Merger will provide security holders with small
numbers of shares (e.g., less than 100 shares) an easy and efficient
procedure to liquidate their shares. Tubby's estimates that, of its
approximately 7,000 shareholders, less than 600 are round lot holders
(shareholders who hold 100 shares or more). This was also an important factor
considered by Tubby's in proposing the present transaction. They will be
required to recognize, for federal tax purposes, a gain or loss on the
exchange. See "Certain Federal Income Tax Consequences."
Fairness of the Transaction
Tubby's believes that the merger is fair to unaffiliated security
holders. This belief is supported by the Fairness Opinion issued by Stout
Risius Ross, Inc. A copy of the Fairness Opinion is attached as Appendix B.
The material factors which form the basis of this belief include Tubby's fair
market value, the nature and history of Tubby's, the outlook for the economy
and industry in which Tubby's operates, the book value and financial
condition of Tubby's, the earning capacity, the dividend paying capacity,
current market prices and previous sales of Tubby's stock and the sizes of
the blocks transferred, and the market prices of companies in the same
industry that trade in the open market. Tubby's Board of Directors'
reasonably believes that the delisting of Tubby's shares from the NASDAQ
Small Cap Market will probably negatively affect shareholder value and
considered that factor as well. However, the primary factor considered in
establishing the per share price of $1.10 was the objective fair market value
of Tubby's as a going concern. This involved an analysis of the fair market
value of Tubby's operating and nonoperating assets and its earning capacity.
Current market prices for the shares, which have been substantially lower
than $1.10, recent sales and the size of the blocks transferred, which have
been sporadic and small, and the NASDAQ delisting, which were considered in
Tubby's decision to undertake this transaction at this time, were considered
very little in establishing the per share price.
The transaction is structured so that the approval of a majority of
all security holders is required. Approximately 80% of the shares are held by
unaffiliated security holders. The merger was approved unanimously by the
directors including the one director who is not employed by Tubby's. Neither
Tubby's nor anyone else retained an unaffiliated representative to act solely
on behalf of unaffiliated security holders for the purposes of negotiating
the terms of the merger and/or for preparing a report concerning the fairness
of the transaction.
Reports, Opinions, Appraisals and Certain Negotiations
Tubby's received an opinion on July 15, 1999, relating to the
fairness of the consideration to be offered to the security holders, from
Stout Risius Ross, Inc. Stout Risius Ross, Inc., is a Michigan based
consulting firm specializing in business valuations, appraisals, and mergers
and acquisitions. Stout Risius Ross, Inc., was referred to Tubby's by its
auditors, BDO Seidman, LLC. No material relationship existed between Stout
Risius Ross, Inc., and/or any of its affiliates or representatives, and
Tubby's or any of its affiliates nor is it contemplated
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that any such relationship will exist in the future. Tubby's determined the
merger price of $1.10 per share, and asked Stout Risius Ross, Inc., to render
its opinion regarding the fairness of that per share price.
In reaching its opinion that the transaction is fair from a
financial point of view to the shareholders of Tubby's, Stout Risius Ross,
Inc., performed an analysis to estimate the fair value of the common equity
of Tubby's, defined as the price at which property would exchange between a
willing buyer and a willing seller, when the former is not under any undue
compulsion to buy and the later is not under any undue compulsion to sell,
both having reasonable knowledge of the relevant facts. In general, it
considered the nature and history of Tubby's, the outlook for the economy and
industry in which Tubby's operates, the book value and financial condition of
the Company, the earning capacity of Tubby's, the dividend paying capacity of
Tubby's, whether good will or other intangible value exists within Tubby's,
previous sales of Tubby's stock and the size of the blocks transferred, and
the market prices of companies in the same or similar industries which trade
in the open market. Tubby's only instructions were for Stout Risius Ross,
Inc., to render an opinion as to the fairness of the proposed merger to
Tubby's shareholders from a financial point of view. No limitations were
imposed by Tubby's or any affiliate of Tubby's on the scope of the valuation
or Fairness Opinion. See Fairness Opinion, attached as Appendix B. A copy of
the valuation will be made available for inspection and copying at Tubby's
principal offices during regular business hours by any interested security
holder or his representative who has been so designated in writing.
Recommendations
The Board of Directors of Tubby's has received a favorable fairness
opinion with respect to the terms of the merger, believe that the Merger is
in the best interest of and fair to the shareholders and has recommended that
the shareholders vote FOR approval of the Merger Agreement. For a discussion
of the factors considered by Tubby's Board of Directors in approving the
Merger Agreement, see "Description of the Transaction."
Interests of Certain Persons in the Merger
General - The respective managements and Boards of Directors of R
Corp and Tubby's are affiliated, the effect of the Merger Agreement will be
considered a "going private" transaction and the terms of the Merger
Agreement were considered and determined in the context of the objective fair
market value of the Company's assets and the fair distribution of its equity
to the shareholders of Tubby's.
Principal Shareholders of Tubby's - The principal shareholders of
Tubby's, other than those principal shareholders who are also shareholders of
R Corp, are being accorded the same treatment as the remaining shareholders
of Tubby's. No compensation of any sort has been promised to these principal
shareholders in order to induce them to vote in favor of the Merger. Messrs.
Peter T. Paganes, Robert M. Paganes and Vincent J. Tatone, who are principal
shareholders of Tubby's, and constitute a majority of its Board of Directors,
and are the shareholders of R Corp, have personally procured a commitment for
adequate financing on behalf of Tubby's to complete the Merger, and will
personally guaranty all of the required debt financing and pledge personal
assets to secure the loans which will be made to Tubby's.
10
These individuals will not receive any cash in exchange for their shares and
they will remain as the only shareholders of Tubby's. In order to equalize
the number of shares held by each of them, Messrs. Peter T. Paganes, Robert
M. Paganes and Vincent J. Tatone have also entered into a Stock Purchase,
Redemption and Shareholder Agreement with Tubby's pursuant to which Vincent
J. Tatone will purchase 100,000 shares of restricted Tubby's Common Stock,
and Tubby's will redeem 109,000 shares from Robert M. Paganes and 41,000
shares from Peter T. Paganes. The price per share is equal to the Merger
price of $1.10. The Stock Purchase, Redemption and Shareholder Agreement is
contingent upon the consummation of the Merger.
Conditions to Merger: Termination: Amendment
The obligations of Tubby's and R Corp to effect the Merger are
subject to the satisfaction of several conditions, including the approval of
the Merger Agreement by the required vote of the outstanding shares of
Tubby's, closing on the bank financing, and the absence of any material
adverse changes. See the Merger Agreement attached hereto as Appendix A.
The Merger Agreement may be terminated at any time prior to the
Effective Date of the Merger, whether before or after submission or approval
by the shareholders of Tubby's, by the Board of Directors of Tubby's. The
Merger Agreement may be amended at any time prior to the Effective Date of
the Merger, whether before or after the meeting of shareholders of Tubby's,
by written Instrument executed by Tubby's and R Corp, provided that no
amendment shall change the exchange ratio (i.e., the Merger Price of $1.10
per share) set forth in the Merger Agreement without the approval of the
shareholders of Tubby's.
Certain Federal Income Tax Consequences
Tax Counsel has advised that for federal income tax purposes, if the
Merger is carried out in accordance with the Merger Agreement (1) no taxable
gain or loss will be recognized by Tubby's as a result of the Merger; (2)
taxable gain or loss will be recognized by the holders of shares of Tubby's
stock upon receipt of cash in exchange for those shares; (3) no taxable gain
or loss should be recognized by the shareholders of R Corp and the basis of
their shares of Tubby's should not be affected.
Dissenter's Appraisal Rights
Dissent and Rights of Appraisal for Tubby's Shareholders - Pursuant
to the provisions of section 14(a):11-1 et seq. of the New Jersey General
Corporation Law, and because Tubby's has in excess of 1,000 shareholders of
record, shareholders of Tubby's will not be entitled to dissent or receive
appraisal rights in connection with the proposed Merger. Nor do Tubby's
Articles of Incorporation or By-Laws provide any rights to dissent or receive
appraisal rights.
11
Business of Tubby's and R Corp
The restaurant business is highly competitive and there can be no
assurance that the merged corporation will be able to operate profitably.
Tubby's operated unprofitably from 1990 through 1994. It operated profitably
from 1995 through 1997 and had a small net loss for fiscal 1998, resulting in
a current accumulated earnings deficit of $896,749 at the end of fiscal 1998.
For the first half of fiscal 1999, ended May 31, 1998, Tubby's had a net
profit of $166,333. See "Tubby's Financial Statements." R Corp has no current
operations.
CONSOLIDATED FINANCIAL DATA OF TUBBY'S, INC.
The following table sets forth the consolidated selected historical
financial information for Tubby's, Inc. The consolidated selected financial
data for and as of the years ended November 30, 1998, 1997, 1996, 1995 and
1994 have been derived from the audited consolidated financial statements of
Tubby's, Inc. The selected financial data for the six months ended May 31,
1999 and 1998 are derived from the unaudited financial statements of Tubby's,
Inc. In the opinion of Tubby's, Inc., the interim financial statements
reflect all adjustments, consisting only of normal reccurring adjustments,
necessary for a fair presentation of such data.
<TABLE>
<CAPTION>
(Thousands except per share amounts)
Six Months Ended
May 31 Year Ended November 30,
----------------- -------------------------------------------
1999 1998 1998 1997(1) 1996(1) 1995(1) 1994(1)
---- ---- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales and operating revenues
& other revenues ............... $4,527 $3,192 $7,366 $3,556 $3,123 $3,662 $3.737
Income before extraordinary
items .......................... 252 0 (31) 107 117 274 (921)
Extraordinary Items .............. 0 0 0 0 0 0 0
Net Income ....................... 252 0 (31) 107 117 274 (921)
Net Income (Loss) per share
before extraordinary items ..... 0.06 0 (0.01) 0.04 0.05 0.11 (0.5)
Net income (loss) per share,
basic & fully diluted .......... 0.06 0 (0.01) 0.04 0.05 0.11 (0.5)
Working Capital .................. 1,756 1,195 1,437 1,177 871 1,094 64
Total Assets ..................... 3,373 3,350 3,326 3,325 3,333 3,270(2) 2,683
Total assets less
deferred research
& development charges
and excess of costs of
assets acquired over
book value ..................... 3,212 3,232 3,063 3,095 2,994 2,923 2,340
Shareholder's equity per share ... 1.01 0.92 0.91 0.93 0.86 0.84 0.66
Dividends ........................ -- -- -- -- -- -- --
Book Value per Share ............. $ 1.08 $ 1.02 $ 1.01 $ 1.02 $ .98 $ .93 $ .83
Ratio of earnings to fixed charges 27.7 1.0 (.06) 16 4.8 7.2 (10.1)
<FN>
- -------------------------
(1) Adjusted for 1 for 10 reverse split in February of 1998.
(2) In March of 1995, Tubby's issued 575,000 shares of restricted Common
Stock pursuant to private placements in exchange for $.80 per share to
seven individuals which included three related parties.
</TABLE>
12
MARKET PRICES OF TUBBY'S COMMON STOCK
The following table sets forth the high and low stock prices (bid)
for Tubby's Common Stock as reported by NASDAQ (symbol TUBY) for the calendar
years indicated and as reported by the Over the Counter Bulletin Board
("OTCBB") after May 5, 1999, when Tubby's shares were delisted by NASDAQ for
failing to maintain a $1.00 bid price and were automatically listed for
reporting by the OTCBB. There is currently no established trading market for
Tubby's common stock (excluding limited and sporadic quotations. The
following quotations do not include retail mark-ups, markdowns or commissions
and represent prices between dealers and not necessarily actual transactions.
Tubby's
-------------------------
High Low
------- ------
1997 (1)
3rd Qtr. 4.375 2.8125
4th Qtr. 4.0625 2.500
1998
1st Qtr. 3.125 1.875
2nd Qtr. 2.375 1.625
3rd Qtr. 2.000 .6875
4th Qtr. 1.250 .625
1999 (2)
1st Qtr. 1.125 .375
2nd Qtr 1.000 .375
- -----------------------------------------------------------------------------
(1) Prices are adjusted to reflect a 1 for 10 reverse split which was
effective in the first quarter of 1998.
(2) The public announcement in connection with this transaction was first
made on May 5, 1999.
The approximate number of shareholders of record of Tubby's was 7,000 as of
May 31, 1999. There are no restrictions on Tubby's present or future ability
to pay dividends; however, Tubby's has never paid cash dividends on their
Common Stock.
DESCRIPTION OF THE TRANSACTION
Pursuant to the Agreement and Plan of Merger (the "Merger
Agreement") between Tubby's and R Corp, the shareholders of Tubby's are being
asked to approve a merger pursuant to which all shareholders, other than
three current members of Tubby's management, who also constitute a majority
of its Board of Directors, will receive cash in exchange for their shares.
Pursuant to the Merger Agreement, each share of outstanding Tubby's Common
Stock, other than shares held by the shareholders of R Corp, will be
exchanged for cash at the merger price of $1.10 per share. The merger price
per share was established by Tubby's Board of Directors. The fairness to
shareholders from a financial point of view is supported by a Fairness
Opinion prepared by Stout Risius Ross, Inc. A copy of the Fairness Opinion is
attached as Appendix B. Tubby's will be the surviving corporation but its
shares will no longer be publicly traded.
13
The Board of Directors of Tubby's has determined that the Merger is
in the best interest of the shareholders of Tubby's because, among other
things, it will allow shareholders to receive $1.10 per share, which is
higher than the current market price, without incurring brokerage commissions
and/or other fees. It will also allow shareholders with small numbers of
shares (e.g., less than 100 shares), an easy and efficient procedure to
liquidate their shares. Tubby's registration will then be terminated under
the Securities Act of 1934 and it will not be a reporting company.
Holders of shares of Common Stock of Tubby's are entitled to cast
one vote for each share held at all shareholder's meetings for all purposes.
Shares of Tubby's Common Stock are not redeemable, have no conversion rights
and carry no preemptive or other rights to subscribe to or purchase
additional shares in the event of any subsequent offering and/or merger. All
outstanding shares of Tubby's Common Stock are fully paid and non-assessable.
Tubby's Common Stock does not have cumulative voting rights which means that
holders of more than 50% of Tubby's Common Stock voting for the election of
Directors can elect 100% of the directors of Tubby's if they choose to do so.
After the Effective Date of the Merger, Tubby's will make the cash
payments of $1.10 per share described above to the shareholders' of Tubby's
who are not also shareholders of R Corp as follows. Promptly after the
Effective Date of the Merger, Tubby's will mail to each such shareholder a
form letter of transmittal and instructions for use in effecting the
surrender for payment therefor of certificates which prior to the Merger
represented Tubby's Common Stock. After the Effective Date of the Merger and
until so surrendered and exchanged, each outstanding certificate which prior
to the Effective Date of the Merger represented shares of Tubby's Common
Stock owned by a shareholder who is not also a shareholder of R Corp will be
deemed for all purposes to represent only a right to receive a cash payment
of $1.10 per share, and no interest will be paid or accrued on the amount
payable upon surrender of any such certificates. Upon surrender to Tubby's of
such certificates, together with such letter of transmittal duly executed,
Tubby's will pay to the persons entitled thereto, in cash or equivalent, the
amount to which such persons are entitled. If payment is to be made to a
person other than the one in whose name the certificate surrendered is
registered, it will be a condition of such payment that the certificate so
surrendered must be properly endorsed or otherwise in proper form for
transfer and that the person requesting such payment shall pay to Tubby's any
transfer or other taxes required by reason of the payment to a person other
than the registered holder of the certificate surrendered, or establish to
the satisfaction of Tubby's that such tax has been paid or is not applicable.
If any holder of Tubby's Common Stock is unable to surrender such holder's
Tubby's stock certificates because such certificates have been lost or
destroyed, such holder may deliver in lieu thereof an affidavit and indemnity
bond in form and substance and with surety reasonably satisfactory to Tubby's
SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS
The terms of the Agreement and Plan of Merger, which is attached hereto as
Appendix A, are incorporated herein by reference, in their entirety.
14
SOLICITATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of
Directors of Tubby's. The Board of Directors of Tubby's has approved the
Merger Agreement and has nominated the proposed Directors. Accordingly, the
Board of Directors is recommending that the shareholders vote FOR approval of
the Merger Agreement and FOR the election of each Director. Proxies solicited
by the Board of Directors, if properly signed and returned, will be voted in
favor of the resolutions being presented to the shareholders.
A proxy may be revoked by the person giving it at any time before
the exercise thereof by written notice to the Secretary of Tubby's. All valid
proxies not revoked will be voted. Where a choice is specified on a proxy,
the shares represented by such proxy will be voted in accordance with the
specification made.
The cost of soliciting proxies, including preparing, assembling and
mailing the notice of meeting, proxy statement, formal proxy and other
soliciting materials as well as the cost of forwarding such material to the
beneficial owners of stock is being borne by Tubby's.
Even if you plan to attend the meeting please complete, date and
sign the enclosed proxy and mail it promptly in the enclosed envelope. In the
event you attend the meeting, you may revoke your proxy and vote your shares
in person.
ACCOUNTING TREATMENT
Under generally accepted accounting principles, this transaction
will be accounted for as a reorganization and Tubby's will continue to apply
current book value to its assets. Assuming completion of the Merger, Tubby's
does not intend to change its November 30 financial year-end.
PREVIOUS CONTACTS BETWEEN TUBBY'S AND R CORP
On December 15, 1998, Tubby's and Interfoods of America, Inc., a
Miami based Popeye's chicken franchisee, executed a letter of intent pursuant
to which Tubby's and Interfoods would merge, with Tubby's being the surviving
corporation. The letter of intent provided for a one for five reverse split
of outstanding Tubby's shares followed by a registered exchange offer of
Tubby's shares on a one for two basis for all Interfoods shares then
currently outstanding. Simultaneously, the surviving corporation (Tubby's),
would change its name to Interfoods of America, Inc., and sell all of Tubby's
pre-merger assets to R Corp. The purchase price for the assets was $2,500,000
payable as follows:
A. Down payment of $350,000 in cash and the redemption of Tubby's
shares held by shareholders of R Corp at the trading value
assigned to them upon the effectiveness of the one for five
reverse split.
B. The balance was to be paid pursuant to a ten-year Promissory
Note, providing for monthly payments of interest only at 7%
during the first three years. Principal and interest payments
would be made during years four through ten calculated on a
thirty-year amortization with a ten-year balloon with interest at
the rate of 7% per annum.
C. The Promissory Note was also to provide for an option to obtain
prepayment
15
discounts as follows: R Corp would receive a 25% discount from
the principal balance if it paid all amounts due prior to the
fourth anniversary date of the closing and would receive a 20%
discount if it paid all the amounts due prior to the eighth
anniversary date.
D. The letter of intent also provided that the parties would enter
into a three-year Consulting Agreement. R Corp would provide
consultation regarding the Company's historical accounting
procedures, records, public relations, legal and other corporate
matters in exchange for compensation from Interfoods as follows:
$225,000 in year one; $150,000 in year two; and $100,000 in year
three.
Because Interfoods had more than 6,000,000 shares outstanding and Tubby's
would have only had 516,623 after the one for five reverse split, Tubby's
shareholders would have held approximately 20% of the outstanding shares in
the surviving corporation.
On April 23, 1999, Interfoods advised Tubby's that, after a thorough
evaluation, its Board of Directors had decided not to proceed with the
proposed merger. Thereafter, Tubby's announced the present proposed merger on
May 5,1999.
The Merger Agreement that has been executed with respect to this
transaction, which is the subject of this proxy statement, varies from the
previous proposal in many ways. Under this transaction, shareholders will
receive $1.10 in exchange for each share of Tubby's Common Stock. Under the
Interfoods proposal, Tubby's shareholders would have received one share of
Tubby's Common Stock in exchange for every five shares. In addition, under
this transaction, shareholders can take the proceeds of the exchange and use
them in the investment of their choice rather than automatically becoming
shareholders of the surviving corporation which would have changed its name
to Interfoods and continued largely in the fried chicken segment of the quick
service food industry.
BUSINESS OF TUBBY'S
Introduction
Tubby's, Inc. ("Tubby's") was originally incorporated on May 16,
1984 in the State of Utah under the name "Like Development, Inc." Like
Development did not conduct any business until May 23, 1986 when it acquired
all of the outstanding capital stock of Tubby's Sub Shops, Inc., a Michigan
corporation in exchange for 7,424,961 shares of Like Development's Common
Stock that were issued to the former shareholders of Tubby's Sub Shops, Inc.
At the time of that reorganization, Like Development also changed its name to
"Tubby's Sub Shops, Inc."
Tubby's Sub Shops, Inc., was originally incorporated in the State of
Michigan on December 2, 1977 for the purpose of franchising the rights to
operate Tubby's Sub Shops restaurants. The founders of Tubby's had been
operating restaurants under the Tubby's name since 1968 and, after developing
a Plan of Operation for those restaurants that would enable others to operate
similar restaurants, they founded Tubby's in 1977 to franchise the rights to
operate those restaurants. The founders of Tubby's then assigned their
trademarks, know-how, and existing agreements to Tubby's.
16
In September 1987, Like Development changed its domicile from Utah
to Michigan and changed the name of the company to "Tubby's, Inc.", a
wholly-owned subsidiary of Like Development that was incorporated in Michigan
for that purpose. As a result, each share of Like Developments' Common Stock
was converted to one share of Tubby's, Inc., Common Stock. Like Developments
authorized capital stock and the number of shares of its outstanding capital
stock were unchanged as a result of its re-domicile from Utah to Michigan.
In March of 1990, Tubby's and Stuff Yer Face ("SYF"), a New Jersey
restaurant company, merged with SYF as the surviving corporation. First,
shareholders of SYF approved a one for three reverse split of the outstanding
shares of Common Stock of SYF. Simultaneously, shareholders of both
corporations approved an Agreement and Plan of Merger pursuant to which each
share of Tubby's outstanding Common Stock was exchanged for one share of the
post split Common Stock of SYF. As part of that merger, the founders of SYF
entered into Employment Agreements and were granted options for the right to
purchase two SYF restaurants to be operated as franchises. The Employment
Agreements and Option Agreement became effective upon the closing of the
merger. As a result of that merger, shareholders of Tubby's Common Stock
owned approximately 67% of the outstanding SYF stock. Also as part of that
merger, SYF immediately changed its name to "Tubby's, Inc."
Tubby's currently has five wholly owned subsidiaries:
Tubby's Sub Shops, Inc., a Michigan corporation, grants
licenses to franchisees, pursuant to franchise agreements,
to own and operate Tubby's Sub Shops and SYF restaurants,
in exchange for franchisee fees and continuing royalties.
SUBperior Distribution Systems, Inc. ("SDS"), a Michigan
corporation, purchases and distributes food and other
products used in the operation of Tubby's Sub Shops
restaurants through contracts with manufacturers and with
warehousing and distribution companies.
Sub Line Company, Inc., a Michigan corporation, purchases,
sells and brokers equipment used in the construction of
Tubby's Sub Shop restaurants.
Tubby's Company Stores, Inc. a Michigan corporation, owns
and operates Tubby's Sub Shops restaurants. Company Stores
currently owns and operates three restaurants located in
Southeastern Michigan.
Tubby's Sub Shops Advertising Company, Inc., a Michigan
corporation, administers the advertising fund made up of
advertising contributions made by all Tubby's Sub Shop
restaurants.
Description of Tubby's Restaurants
Tubby's Sub Shops are sit down and carry out restaurants that
feature approximately twenty types of submarine sandwiches along with soup,
french fries, onion rings, breaded
17
mushrooms, a selection of desserts and soft drinks and other beverages. No
table service is provided in a Tubby's restaurants. Customers place and pay
for their orders at a serving counter and their food is then prepared to
order, with most of the sandwiches being grilled. When the order is ready, it
is picked up at the counter. Customers may also place their orders by
telephone, either for consumption at the restaurant or for carry out. Tubby's
restaurants do not offer any alcoholic beverages.
Tubby's restaurants are usually located in a neighborhood shopping
center or in a free standing building that has been designed and built as a
Tubby's restaurant or converted from another use. The decor of the Tubby's
restaurants has been designed to create a pleasing atmosphere for the
restaurant's customers. The building that is required for a Tubby's
restaurant will range from approximately 1,200 square feet to 2,500 square
feet. The cost of a new Tubby's restaurant will vary depending upon many
factors, including the size of the restaurant, whether it is new construction
or conversion of an existing building, whether it is to be purchased or
leased and prevailing real estate and construction costs. See "Franchising"
for description of the Tubby's Franchise Agreement.
SYF restaurants promote a specialty sandwich called a "Stromboli." A
Stromboli is a closed sandwich with bread freshly baked around a favorite
filling selected by the customer together with cheese, tomato sauce, onions
and peppers. The fillings available are meatballs, sausage, pepperoni, veal,
chicken, shrimp, eggplant, mushrooms, broccoli and spinach. SYF restaurants
also offer pizza, hamburgers, and numerous side orders like french fries,
onion rings, mozzarella sticks and others. SYF's restaurants are sit down,
full service restaurants with table service. SYF restaurants may also offer
beer and wine. At May 31, 1999, 95 Tubby's and two SYF restaurants were
operating.
Restaurant Development and Expansion
The following table shows the growth of the company's franchised
restaurants during its last six fiscal years:
Fiscal Year Ended November 30
-------------------------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
[S] [C] [C] [C] [C] [C] [C]
Tubby's Restaurants
Opened ...... 5 7 10 7 16 10
Closed ...... 4 1 3 2 2 10
Ending Number 56 62 69 74 88 88
All operating Tubby's restaurants, of which as of May 31, 1999 there
were 95 operating, are located in Michigan other than one restaurant which is
located in Florida, four in Missouri, one in Nebraska, one in Idaho, two in
Florida, one in Windsor, Ontario and two in New Jersey. During the year ended
November 30, 1998 10 Tubby's franchised restaurants closed and 10 new Tubby's
franchised restaurants opened, of which five are located in the Detroit
metropolitan area. Of the 10 restaurants that closed, four were located in
Michigan, two in Windsor, Ontario Canada, one in Indiana, one in Pennsylvania
and two in Ohio.
Competition
The restaurant business is highly competitive and is often affected
by changes in taste
18
and eating habits of the public, by local and national economic conditions
affecting spending habits and by population and traffic patterns. Tubby's
believes that the quality and price of food products offered are the
principal means of competition in the restaurant industry. Also of importance
are site locations, quality and speed of service, advertising and
attractiveness of facilities.
Tubby's competes with restaurant chains and other restaurants
serving a variety of foods which operate more restaurants and have greater
financial resources, greater name recognition and marketing capability.
Furthermore, competition for management and other key operating personnel and
for restaurant sites could increase as Tubby's operations expand.
In the sale of franchises, Tubby's competes with franchisors of
other restaurants and franchisors of a variety of other products and
services. Tubby's management considers the amount of the initial investment
required of the franchisee, the perceived potential for business success and
return on investment, the assistance provided by the franchisor and the
franchisor's name recognition and reputation to be the most significant
competitive factors in franchising.
Franchising
Franchises for Tubby's Sub Shops and SYF restaurants have been
offered since 1977. The Company currently offers single-unit franchise
agreements, area development agreements and development agent agreements.
Except as noted below, the terms and conditions of the franchise agreements
used by Tubby's are the same.
The franchisee is responsible for all construction and remodeling
costs required to bring a location up to the standard specifications of a
Tubby's store. Subline Co., a subsidiary of Tubby's, Inc., may, at the option
of the franchisee, assist in the construction of the restaurant or in the
leasehold improvements. Also, the franchisee may purchase the required
construction drawings and equipment from Subline Co.
The single-unit franchise agreement gives the franchisee the right
to use Tubby's or SYF's trademarks, service marks and methods of operation to
operate a Tubby's or SYF restaurant at a specific location that is approved
by Tubby's. The initial term of Tubby's current franchise agreement is ten
(10) years with the franchisee generally having two five year options to
renew. The initial license fee, which is payable upon execution of the
franchise agreement, is $15,000 for a traditional Tubby's franchise and
$15,000 for a SYF franchise, with a reduction in that fee provided to persons
who purchase more than one franchise and to existing franchisees. The initial
license fee for nontraditional restaurants, such as ones located in
convenience store, gas stations, etc., is $8,000, also payable upon execution
of the franchise agreement. The initial franchise fee compensates Tubby's for
the cost of various services provided by Tubby's to franchisees, such as
management and operations training, review of restaurant site selection,
restaurant design assistance, specifications and equipment lists, assistance
in locating suppliers and operating assistance during the initial opening of
a restaurant. Tubby's current franchise agreement requires the franchisee to
pay Tubby's a weekly royalty equal to the greater of $100 dollars per
restaurant or six percent (6%) of the
19
franchisee's gross weekly sales. All of the existing franchise agreements
require the franchisee to pay Tubby's a weekly advertising fee equal to the
greater of $50 per restaurant or three and a half percent (3 1/2%) of the
franchisee's gross weekly sales. Those advertising fees are administered by
Tubby's or its affiliates or designees and used to pay for shared production
and media advertising costs and other promotional costs. The franchise
agreement further requires the franchisee, among other things, to comply with
Tubby's standards and procedures of operation and menu and food quality
specifications, to purchase supplies from Tubby's approved sources and to
permit inspections and audits by Tubby's.
If a potential franchisee desires to establish multiple restaurants
in a defined geographical area or wishes to have the right to procure other
persons to apply to become franchisees within a designated area, that
franchisee may enter into an Area Development or Development Agent Agreement.
At this time Tubby's has entered into one Area Development and five
Development Agent Agreements.
Tubby's does not make projections regarding sales volume of existing
or future stores. However, during the year ended November 30, 1998,
eighty-eight stores reporting sales information for the twelve months ended
October 31, 1998, reported sales of $25,400,000. This averages approximately
$288,636, which is slightly lower than the preceding year. This average
cannot be used to project sales revenues for any particular location. Many
factors influence an individual store's sales volume and/or profitability.
Items affecting the success of a particular franchise include, but are not
limited to, site location, local competition, local advertisement, direct
owner participation, management's restaurant experience, respective financing
and capitalization costs and control of labor costs.
Training
Tubby's provides a complete course of instruction relating to the
operations, methods, and other related procedures, with emphasis placed on
the preparation and serving of the specialty food items that are
characteristic of Tubby's restaurants. This course is offered to a licensed
franchisee, and for one additional franchisee or management representative.
Salaries, expenses of travel, food and lodging for franchisees and their
representatives are at the franchisee's own expense. The training program
consists of a minimum 120 hours of in-store operations, under direct
supervision of qualified personnel, in addition to classroom sessions at
Tubby's corporate offices. After successfully completion of training, Tubby's
will provide assistance by providing a member of its staff to the
franchisee's location for three (3) days out of the first nine (9) weeks of
operation. Tubby's does not charge for the training described above, but it
is only obligated to provide training for a franchisee's first location.
Additional training of management, employees, etc,, is available at a fee, as
is assistance at a subsequent location.
Quality Control and Supervision
Tubby's requires all of its franchisees to satisfy certain quality
control standards governing both the products and services that are offered
by its franchisees. Operating
20
specifications for Tubby's restaurants are documented by Tubby's in its
operations manuals that are provided to all franchisees. Tubby's audits
performance and adherence to such standards by performing periodic
inspections of each restaurant.
Supplies
The materials, inventories and other items required to equip and
operate a Tubby's restaurant are generally available from several sources.
Although franchisees are not required to make any purchases from Tubby's, in
order to maintain quality control, Tubby's does require its franchisees to
purchase certain designated food and supply items from suppliers that have
been approved by Tubby's. The approval of suppliers is based upon the quality
of the items they supply and their conformity with specifications established
by Tubby's.
Subline is an approved supplier of certain equipment and also acts
as a broker for several approved suppliers of machinery, equipment and food
products that are sold to Tubby's franchisees and others. Although Tubby's
franchisees are not required to purchase any of that equipment from Subline
or utilize Subline's brokerage services, Tubby's believes that many of them
do so because the costs of utilizing Subline's services are often less than
the prices charged by other sources. One reason Subline is able to offer
competitive prices is that it can often obtain volume discounts for the items
that are sold to Tubby's franchisees. Subline will make a profit on any
equipment it sells in an amount equal to the sales price of that equipment
minus Subline's costs incurred in connection with that equipment. In most
instances, the terms of purchase from Subline are more favorable than terms
available from unaffiliated third parties. A portion of Subline's volume
discounts are passed on to the franchisee. Additionally, franchisees have
standing open accounts with Subline.
SDS is an approved supplier of food and other products that are sold
to franchisees. Although franchisees are not required to purchase any
products from SDS, many of them do so because SDS offers lower prices, higher
quality, superior service and certain purchase incentives.
Each franchisee is required to pay advertising fees equal to the
greater of $50 per week or 3 1/2% of total weekly gross sales of that
franchisee's restaurant. Those funds are administered by Tubby's Sub Shops
Advertising Co., Inc. ("TSSAC"), and are used to pay for shared production
and media advertising costs as well as other promotional costs. Local
advertising campaigns are conducted through radio, television, local
newspapers, direct mailing and billboards and other media that would be cost
prohibitive for an individual franchisee. All monies received for advertising
are escrowed and spent for advertising purposes only. A portion is retained
by the franchisor to cover administrative costs. Generally, franchisees
located in states other than Michigan pay 1% of weekly gross sales to TSSAC
and are required to spend an additional 2 1/2% on local marketing until such
time as the number of franchises in their area reaches an "area of dominant
influence" large enough to warrant the formation of an advertising
cooperative.
21
Trademarks and Service Marks
Tubby's name and logo and SYF's logo are registered as trademarks
and service marks with the United States Patent and Trademark Office.
Regulation
Many states have laws regulating franchise operations, including
registration and disclosure requirements in the offer and sale of franchises
and the application of statutory standards regulating franchise
relationships. Tubby's is also subject to the Federal Trade Commission
regulations relating to disclosure requirements in the sale of franchises.
Tubby's believes it is operating in compliance with applicable laws and
regulations governing its operations.
Each of the restaurants operated by Tubby's franchisees is subject
to licensing and regulation by the health, sanitation, safety, fire
department and, in the case of restaurants serving alcoholic beverages (i.e.,
SYF restaurants), the alcoholic beverage control agencies in the state or
municipality where located. Difficulties or failures in obtaining the
required licensing or approval could result in delays or cancellations in the
opening of new restaurants.
Federal and state environmental regulations have not had a material
effect on the operations of Tubby's or its franchisees, but more stringent
and varied requirements of local governmental bodies with respect to zoning,
land use and environmental factors could delay construction of new
restaurants.
Tubby's and its franchisees are also subject to the Fair Labor
Standards Act, which governs such matters as minimum wages, overtime, and
other working conditions. A significant portion of the food service personnel
employed by Tubby's franchisees are paid at rates related to the federal
minimum wage, and accordingly, increases in the minimum wage increase the
labor cost incurred by Tubby's franchisees.
Employees
As of November 30, 1998, Tubby's and its subsidiaries employed 45
persons. This includes 13 at corporate offices (4 officers, 3 managers, 6
clerical) and 32 at Company owned restaurants (3 managers and 19 part-time
employees). None of Tubby's employees are covered by collective bargaining
agreements. Tubby's considers its employee relations to be good.
Properties
Tubby's leases an approximately 8,000 square foot office building at
6029 E. Fourteen Mile Road, Sterling Heights, Michigan 48312 where its
principal executive offices are located. Tubby's believes that the building
is suitable and adequate for its current operation. Tubby's also owns a
Tubby's restaurant located in Clinton Township, Michigan, which it operates,
and a Tubby's restaurant located in Southgate, Michigan that it leases to an
unaffiliated franchisee at a monthly rental of $2,300.00.
22
Legal Proceedings
A. Civil Actions.
Tubby's, Inc. v Walter Lasko (Macomb County Circuit Court Case No.
98-3499-CK). In August 1998, the Company commenced a civil action
against Walter Lasko in the circuit court for the County of Macomb,
Michigan. The Complaint asserts claims for specific performance,
equitable estoppel and unjust enrichment in connection with Mr. Lasko's
refusal to honor the option to purchase the office building where its
headquarters are located. The Company originally entered into a five
year lease with an option to purchase the office building prior to the
expiration of the lease. The Defendant claims that the Company failed to
strictly comply with the written option to purchase by failing to
provide a timely written notice that it was exercising the option. At
this time, the Company is awaiting a trial date and intends to
vigorously pursue its claim to specifically enforce the Defendant's
obligation to sell the office building to the Company.
Tubby's Sub Shops, Inc., a Michigan corporation, and SUBperior
Distribution Systems, Inc., a Michigan corporation v Sun Valley Foods
Company d/b/a AAA Warehouse & Cold Storage Company, a Michigan
corporation, and Greg Tatarian, and Sun Valley Foods Company d/b/a AAA
Warehouse & Cold Storage Company, a Michigan corporation, and Greg
Tatarian, individually v Tubby's Sub Shops, Inc. a Michigan corporation,
SUBperior Distribution Systems, Inc. a Michigan corporation and Sun
Valley Foods Company d/b/a AAA Warehouse & Cold Storage Company, a
Michigan corporation v Tubby's, Inc., a New Jersey corporation (Macomb
County Circuit Court Case No. 98-3796-CK). On September 18, 1998, the
Company commenced a civil a action against Sun Valley Foods Company and
Greg Tatarian, its President, individually in the circuit court for the
County of Macomb. The Complaint asserts claims for breach of contract,
reimbursement for overpayments, fraudulent misrepresentation, and
reimbursement for damaged and/or missing inventory. In the fall of 1997,
the Company entered into a warehousing and distribution contract with
Sun Valley and these claims arose out of Sun Valley's failure to perform
pursuant to that contract. At present, this action is in the discovery
phase. The Company intends to pursue settlement negotiations and, if not
successful, to vigorously pursue these claims through trial or
arbitration.
MANAGEMENT OF TUBBY'S
The directors and executive officers of Tubby's are as follows:
Name Age Position Held with Tubby's
---- --- --------------------------
Robert M. Paganes.... 42 President, Chief Executive Officer
and Director
P. Terrance Paganes.. 57 Executive Vice President and
Director
Vincent J. Tatone.... 42 Secretary and Director
Theresa M. Borto..... 40 Chief Financial Officer
Ronald Boraks........ 39 Director
23
PRESIDENT & CEO - ROBERT M. PAGANES.
Mr. Paganes has been the CEO of Tubby's since August 12, 1994, has been
the President of Tubby's since June 10, 1994, and was Executive
Vice-President and Secretary of Tubby's from June 21, 1991 to June 10,
1994. Mr. Paganes has been an Officer and Director of Tubby's and its
predecessor TSSI since December 2, 1977. Mr. Paganes is also one of the
Tubby's franchisees.
CHAIRMAN OF THE BOARD & VICE-PRESIDENT - PETER T. PAGANES
Mr. Paganes has been the Chairman of the Board of Tubby's since August
12, 1994, and was the Vice-Chairman of the Board of Tubby's from June
21, 1991, to August 12, 1994, and has been a Director of Tubby's and its
predecessor TSSI since December 2, 1977. Mr. Paganes has also been a
Vice-President of Tubby's since December 2, 1977. Mr. Paganes is also
one of the Company's franchisees; Peter T. Paganes and Robert M.
Paganes are brothers.
SECRETARY & DIRECTOR - VINCENT J. TATONE
Mr. Tatone has been Secretary of Tubby's since August 12, 1994, and has
been a Director of Tubby's since January 30, 1993. Mr. Tatone was an
officer and shareholder of the law firm of Lites & Tatone, P.C. of
Detroit, Michigan from September 1992 until April 1994. From September
1987 to September 1992, Mr. Tatone practiced with the law firm of
Bodman, Longley and Dahling of Detroit, Michigan. He became Corporate
Counsel of Tubby's in April 1994.
CHIEF FINANCIAL OFFICER - THERESA M. BORTO
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.,
located at 25800 Northwestern Highway, Suite 700, Southfield, MI
48086-5131.
DIRECTOR - RONALD BORAKS
Ronald Boraks has been a Director of Tubby's since June of 1996. Mr.
Boraks has been in the real estate and property management business for
the past 15 years. He has a bachelor of science degree in operations
management from Wayne State University and a juris doctor degree from
the University of Detroit School of Law. Mr. Boraks is licensed by the
State of Michigan as an attorney, real estate broker and residential
builder and specializes in financial and administrative management. Mr.
Boraks is an officer and director of Certified Realty, Inc., located in
Farmington Hills, Michigan.
The by-laws of Tubby's, the surviving corporation, provide that
directors shall serve a term of one year or until their successors are
appointed or duly elected.
24
Compensation of Tubby's Officers and Directors
Set forth below is, for the fiscal years ended November 30, 1998,
1997, and 1996 all cash compensation paid to each of the executive officers
or directors of Tubby's and to all officers and Directors of Tubby's as a
group:
<TABLE>
<CAPTION>
Name and Principal(s) Other Annual Restricted Stock Securities
Position Year Salary Compensation Award Underlying SAR's
--------------------- ---- ---------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Robert M. Paganes 1998 $76,000.00 0 0 0
President and CEO 1997 $74,000.00 0 0 0
1996 62,500.00 0 0 0
P. Terrance Paganes 1998 $75,000.00 0 0 0
Vice President 1997 $75,000.00 0 0 0
1996 $62,500.00 0 0 0
<CAPTION>
Name and Principal(s) Other Annual Restricted Stock Securities
Position Year Salary Compensation Award Underlying
--------------------- ---- ---------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C>
Vincent J. Tatone 1998 $75,000.00 0 0 0
Secretary 1997 $65,000.00 0 0 0
1996 $50,000.00 0 0 0
Theresa M. Borto 1998 $32,500.00 0 0 0
Chief Financial Officer 1997 -- -- -- --
1996 -- -- -- --
Melvyn Erdos 1998 $32,500.00 0 0 0
Chief Financial Officer 1997 $65,000.00 0 0 0
1996 57,500.00 0 0 0
</TABLE>
Tubby's anticipates paying the following salaries to its officers
during its current fiscal year: Robert M. Paganes - $100,000; P. Terrance
Paganes - $75,000; Vincent J. Tatone - $87,500 and Theresa M. Borto -
$70,000. Tubby's does have stock option plans in effect for its employees,
including officers, but no stock options were granted in fiscal 1998 and
Tubby's anticipates that none will be granted in its current fiscal year.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information concerning management and other
persons who are known by the Company to own beneficially more than 5% of the
Company's Common Stock, $0.001 par value, on November 30, 1998.
25
Amount and Nature Percent of
Name of Beneficial Owner of Ownership (1) Class (2)
- --------------------------------------- ----------------- ----------
Robert M. Paganes . . . . . . . . . . . 259,775 10.0%
6029 E. Fourteen Mile Road President
Sterling Heights, Michigan 48312 Director
Peter T. Paganes. . . . . . . . . . . . 191,400 7.4%
6029 E. Fourteen Mile Road Vice President
Sterling Heights, Michigan 48312 Director
Vincent J. Tatone . . . . . . . . . . . 50,000 3.1%(3)
6029 E. Fourteen Mile Road Secretary
Sterling Heights, Michigan 48312 Director
Ronald Boraks . . . . . . . . . . . . . 0 --
38345 West Ten Mile Road, Suite 300 Director
Farmington Hills, Michigan 48335
J. Thomas Paganes. . . . . . . . . . . . 187,738 7.3%
38633 Moravian Shareholder
Mount Clemens, Michigan 48043
Theresa M. Borto. . . . . . . . . . . . 0 --
6029 E. Fourteen Mile Road Chief Financial Officer
Sterling Heights, Michigan 48312
All Executive Officers & Directors as
a Group (5 persons) . . . . . . . . . . 501,175 19.4%
- ------------
(1) The nature of ownership is sole voting and investment power unless
otherwise indicated.
(2) As of June 3, 1999.
(3) Pursuant to the rules of the Securities and Exchange Commission, the
Company's Common Stock which is not outstanding but which is subject to
options is deemed to be outstanding for the purpose of computing the
percentage of outstanding Common Stock owned by the optionee, but not
deemed to be outstanding for the purpose of computing the percentage
owned by any other person. Vincent J. Tatone has an option to purchase
30,000 shares of Common Stock under Tubby's Statutory Employee Stock
Option Plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto and with the
Company's Form 10-KSB and audited financial statements and notes thereto for
the fiscal year ended November 30, 1998.
FINANCIAL CONDITION
Cash and equivalents, certificates of deposit, and Investments increased by
$202,508 for the six months ended May 31,1999, compared with a decrease of
$331,358 for the
26
six months ended May 31, 1998. The current period increase in the Company's
cash position resulted primarily from net income of $166,333, non-cash
expenses of depreciation and amortization of $61,786 and federal tax expense
of $85,687 and from decreases in accounts payable of $64,216 and in deferred
revenue of $78,606.
Consolidated revenues increased by $1,335,653 primarily as a result of an
increase in SDS product sales of $1,365,196. Consolidated expenses increased
by $1,081,159 primarily due to an increase in cost of product sales of
$985,729. Other fluctuations of lesser significance are explained below.
The Company opened ten new franchised stores during the first six months of
1999 compared to six stores in the first six months of 1998 and has signed
franchise agreements for an additional six with projected opening dates
during the third and fourth quarter of 1999. Five franchised stores were
closed during the first six months of 1999 compared to three in 1998 and one
previously closed store was re-opened.
At May 31, 1999, the Company operated three restaurants and franchised
ninety-one restaurants. Franchised restaurants are located in Michigan,
Missouri, Nebraska, Iowa, Florida, Arizona, New Jersey and the Canadian
province of Ontario.
Results of operations for the three months ended May 31, 1999 as compared
with the three months ended May 31, 1998.
The current three-month period shows a net income of $103,231 as compared to
a net loss of $22,818 in the same three months of the prior year.
Revenues for the three months ended May 31, 1999 increased by $388,224 or
19.6% to $2,368,508. The increase in revenues was attributable to:
o An increase in SDS product sales for the quarter of $338,087 or 26.7%
due to additional products stocked by SDS in second quarter 1999
compared to second quarter 1998.
o Monthly franchise fees for the quarter were $253,841 and advertising
fees were $191,099, up 38.2% and 15.0%, respectively, from the same
period last year. These increases reflect the income derived from the
increased franchisee food sales resulting from the advertising efforts
of the Company and the additional monthly fees derived from its new
franchisees. As successful new franchised Tubby's Sub Shops are opened,
monthly franchise fees and advertising fees are expected to increase,
accordingly.
o Equipment and restaurant sales decreased $77,662 or 69.3% for the three
months ended May 31, 1999 as compared to the three months ended May 31,
1998 despite the increase in the number of stores opened (six in second
quarter 1999 compared to three in second quarter 1998). The decrease is
a result of the continuing trend
27
toward building the lower cost, non-traditional Tubby's Sub Shops rather
than the traditional type. In addition, many of the stores opened in the
second quarter 1999 were out-of-state stores which elected to handle
store construction/renovations and some of the equipment purchases
internally rather than through The Subline Company.
Total costs & expenses for the three months ended May 31, 1999 increased by
$191,094 or 9.4% compared to the three months ended May 31, 1998. The
increase in total costs was attributable to:
o Cost of product sales was $1,211,445 or 75.6% of product sales for the
three months ended May 31, 1999 compared to $980,754 or 77.5% for the
three months ended May 31, 1998. The increase of $230,691 represents
increased sales, primarily through sales of additional stock items,
during second quarter 1999 compared to second quarter 1998. The decrease
in cost of product sold as a percentage of sales represents the
continued efforts to provide quality products at a lower cost.
o Operating expenses increased by $44,327 or 5% reflecting increases in
advertising and commissions paid to development agents and decreases in
bad debt expense and shareholder compliance costs.
o The cost of restaurant food sales decreased in second quarter 1999,
compared to 1998, by $33,209 or 21.3%. This is primarily because a
company owned store, open in second quarter 1998 and incurring cost of
food of $42,377, was closed June 1998.
o Cost of equipment sales increased as a percentage of equipment &
restaurant sales from 73% in 1998 to 89% in 1999 reflecting decreased
gross profit margins.
Results of Operations for the six months ended May 31, 1999 as compared to
the six months ended May 31, 1998.
The Company realized net income of $166,333 for the six months ending May 31,
1999 as compared to a net loss of $(328) for the six months ending May 31,
1998.
Total revenues for the six months ending May 31, 1999 increased by $1,335,653
or 41.8% to $4,527,321. The increase in total revenues was attributable to:
o An increase in product sales of $1,365,196 or 83.2%. The SDS inception
date was February 1998; therefore, there were only four months of SDS
operation in the financial results for the six months ending May 31,
1998 whereas there are six months of operations in the same period ended
May 31, 1999. This represents approximately $820,000 of the increase.
The balance of the increase is due to sales to new stores and sales of
additional products stocked by SDS in 1999 compared to 1998.
28
o Monthly franchise fees for the six months ended May 31, 1999 were
$466,239 and advertising fees were $396,198, up 19.0% and 18.2%,
respectively. These increases reflect the income derived from the
increased franchisee food sales resulting from the advertising efforts
of the Company and the additional monthly fees derived from its new
franchisees.
o Equipment and restaurant sales decreased $194,538 or 68.0% for the six
months ended May 31, 1999 as compared to the six months ended May 31,
1998 despite the increase in the number of stores opened (ten in 1999
compared to six in 1998). The decrease is a result of the continuing
trend toward building the lower cost, non-traditional Tubby's Sub Shops
rather than the traditional type. In addition, many of the stores opened
in the first and second quarters of 1999 were out-of-state stores which
elected to handle store construction/renovations and some of the
equipment purchases internally rather than through The Subline Company.
Total costs & expenses for the six months ended May 31, 1999 increased by
$1,081,159 or 33.6% as compared to the six months ended May 31, 1998.
o Cost of product sales was $2,267,476 or 75.4% of product sales for the
six months ended May 31, 1999 compared to $1,281,747 or 78.1% for the
six months ended May 31, 1998. The SDS inception date was February 1998;
therefore, there were only four months of SDS operation in the financial
results for the six months ending May 31, 1998, whereas there are six
months of operations in the same period ended May 31, 1999. This
represents approximately $641,000 of the increase. The balance of the
increase is due to cost of additional products stocked by SDS in 1999
compared to 1998.
o Operating expenses increased by $249,377 or 17.2% in the six months
ended May 31, 1999. Approximately $176,700 of the increase is due to
there being only four months of SDS operations included in the six
months ended May 31, 1998 compared to six months included in the six
months ended May 31, 1999. The balance of the increase is comprised of
increases in advertising of $89,053 and commissions paid to development
agents of $30,131, as well as a decrease in shareholder compliance costs
of $27,992 and in bad debts expense of $25,204.
o Cost of equipment sales increased as a percentage of equipment &
restaurant sales from 80% for the six month period ended May 31, 1998 to
85% in 1999 reflecting decreasing gross profit margins.
29
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents, certificates of deposit, and investments increased by
$202,508 for the six months ended May 31, 1999, compared with a decrease of
$331,358 for the six months ended May 31, 1998. The current period increase
in the Company's cash position resulted primarily from net income of
$166,333, non-cash expenses of depreciation and amortization of $61,786 and
federal tax expense of $85,687 and from decreases in accounts payable of
$64,216 and in deferred revenue of $78,606.
In addition to the ten new restaurants that opened in the first six months of
1999, six new Tubby's Sub Shops are expected to open by the end of the fourth
quarter. All six of these restaurants will be owned and operated by
franchisees. These stores have elected to contract construction/renovations
themselves rather than using The Subline Company.
The Company maintains a $400,000 revolving line of credit with a local
financial institution. The line of credit can be drawn upon as needed to meet
future cash requirements. As of July 30, 1999, the entire line of credit was
available to the Company.
On June 30, 1999, the Company purchased one of its high volume stores from a
franchisee for a total purchase price of $220,000 cash. This store will be
used as the Company's primary training facility.
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
30
marketing Tubby's Submarine Shops and their products.
The decrease in the equipment and restaurant sales revenue is a result of
opening 10 stores in 1998 as compared to 16 stores in 1997. The trend toward
building the lower cost non-traditional Tubby's Sub Shops rather than the
traditional Tubby's Sub Shop continues. In 1997, seven of the ten new stores
were of the non-traditional type. In addition, many of the new franchisees,
particularly the growing number of out-of-state stores, are electing to
handle store construction/improvements on their own rather than using the
Subline Company, reducing purchases from Subline to equipment only.
Commissions and other fees are comprised of marketing rights, material sales,
rental income of existing Company owned franchisee operated Tubby's Sub
Shops, and, in 1997, vendor rebates. The decrease of $367,589, or 76.6%,
relates primarily to vendor rebates. In 1998, vendor rebates are classified
as a reduction in costs of SDS products sold, whereas in 1997 vendor rebates
of $364,629 are included in commissions and other fees.
The costs of SDS product sales were $3,402,997 during the ten months of
operation in 1998 with a gross margin of $994,581, or 22.6%. Management
continues to believe strongly in the value of SDS and its ability to provide
its franchised and Company-owned Tubby's Sub Shops with uniform and
consistently high quality products at equivalent or lower prices than
previously charged.
Operating expenses increased in 1998 by $881,817 or 37.4%. Incremental
operating expenses of SDS which began operations in February 1998 represents
approximately $703,000 of the increase. The largest portion of the SDS
operating expenses is the cost of warehousing and distribution of $592,000.
Advertising, promotional, and various marketing expenses increased by
$138,000 in 1998 as the Company expanded its marketing efforts in regions
where Tubby's stores are located. Commissions paid to development agents
increased by $68,000. The Company anticipates continued increases in
commissions paid to development agents as the development agent agreements
are fulfilled over the next twenty years. Salaries increased by $147,000, or
23.6%. The increase in salaries included additional staffing related to SDS
operation, full year salaries for the staff positions in purchasing and
marketing which were filled in April 1997 and July 1997, respectively, and
annual merit increases. Expenses related to Franchise Development decreased
by approximately $115,000, or 67.6%, primarily due to attendance at fewer
trade shows.
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.
31
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF TUBBY'S AND R. CORP
Peter T. Paganes and Robert M. Paganes are directors, officers and
shareholders of Tubby's and J. Thomas Paganes, their brother, is a principal
shareholder of Tubby's. They each own and operate franchised stores, pay
royalites to TSSI, pay advertising fees to TSSAC and purchase products from
SDS. Their accounts, on a cumulative basis, as of the year ended November 30,
1999, were as follows:
Included in Accounts Receivable...... $ 55,922
Included in Revenue.................. $ 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 Tubby's.
As of November 30, 1998, there were no officers and directors or other
related parties of Tubby's that had any remaining balances regarding loans
from the Company and/or credits for loans made to Tubby's.
The following table summarizes the amounts due as of November 30, 1998 from
all stores owned by officers, directors or other related parties of Tubby's:
Number of
Owner Stores
----- ---------
Robert M. Paganes 2 $17,476
Peter T. Paganes 1 8,601
------- -------
Amount Due from Officers, Directors 3 26,077
J. Thomas Paganes 3 29,845
------- -------
Amount Due from Officers, Directors and
other related parties 6 $55,922
======= =======
32
Tubby's and R Corp
The shareholders of R Corp, Robert M. Paganes, Peter T. Paganes and
Vincent J. Tatone, who are also directors, officers and shareholders of
Tubby's, Inc., have entered into a Stock Purchase, Redemption and Shareholder
Agreement with Tubby's. The purpose of the agreement, which is conditioned on
shareholder approval of the Merger Agreement, is to equalize the equity
ownership between these three individuals in the surviving corporation.
Therefore, the agreement provides that the Company will redeem 109,000 shares
of Tubby's Common Stock from Robert M. Paganes and 41,000 shares from Peter
T. Paganes at the merger price of $1.10 and provides for the sale of 100,000
shares to Vincent J. Tatone at the same price. Each individual will then own
150,000 shares of Tubby's Common Stock, assuming the Merger Agreement is
approved. In addition, these individuals have each agreed to personally
guarantee loans to Tubby's in the amount of $1,950,000 and have each agreed
to pledge property owned by them in roughly equal amounts as collateral to
secure repayment of the guaranteed loans.
Federal Income Tax Consequences
As a part of the Merger, Shareholders of Tubby's will exchange each
share of the Common Stock of Tubby's for cash at the merger price of $1.10.
Any gain or loss realized under this exchange of property must be recognized
for federal income tax purposes by the shareholders. With regard to Tubby's,
no gain or loss will be recognized by Tubby's as a result of this
transaction. Tubby's will not be acquiring any assets nor will it be assuming
any of the liabilities of R Corp because R Corp has no assets or liabilities
other than its rights under the Merger Agreement.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF THE FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER. NO DISCUSSION IS INCLUDED WITH RESPECT TO THE
STATE AND LOCAL INCOME TAX CONSEQUENCES OF THE TRANSACTION. EACH SHAREHOLDER
IS URGED TO CONSULT HIS TAX ADVISOR WITH RESPECT TO THE CONSEQUENCES TO HIM
OF THE CONSUMMATION OF THE MERGER AGREEMENT.
Legal Matters
Certain legal matters with respect to the Merger will be passed upon
by Bodman, Longley & Dahling, LLP, Detroit, Michigan as special counsel for
Tubby's.
Experts
The financial statements of Tubby's, Inc. and its subsidiaries as of
November 30, 1998, November 30, 1997 and November 30, 1996, and for the years
then ended, have been audited by BDO Seidman, LLP, Independent Certified
Public Accountants, Detroit, to the
33
extent and for the periods set forth in their reports appearing elsewhere
herein, and are incorporated herein in reliance upon such reports and given
upon the authority of said firm as experts in auditing and accounting.
The terms of the Merger Agreement were examined by Stout Risius
Ross, Inc., and, as set forth in their Fairness Opinion, copy at Appendix B,
that firm opined that the terms of the Merger Agreement are fair and
equitable, from a financial point of view, to all of the shareholders of
Tubby's.
Reports and Board of Directors Meetings
To the best of Tubby's knowledge, based solely upon a review of Forms 3 and 4
furnished to Tubby's during its most recent fiscal year, one director, Mr.
Tatone, failed to file on a timely basis reports required by Section 16(a) of
the Securities Exchange Act of 1934. He filed one late report.
There were six (6) meetings of the Board of Directors held during the past
fiscal year. Each director attended at least seventy-five percent of the
meetings of the Board of Directors during the fiscal year ended November 30,
1998. Tubby's does not have standing audit, nominating or compensation
committees of the Board of Directors, or similar committees.
Directors' Compensation
A fee of $500 per meeting attended was paid to each independent,
non-employee, Director for their services as such for the fiscal year ended
November 30, 1998. The total amount paid to independent Directors as a group
was $6,000.
Independent Accountants
The Board of Directors has selected BDO Seidman, LLP, independent public
accountants, to examine the financial statements of the Company for the year
ending November 30, 1999. A representative from BDO Seidman, LLP, will be
present at the meeting and will be available to respond to appropriate
questions.
Proposals of Shareholders
If the Merger is not approved by the shareholders of Tubby's, shareholder
proposals for the year 2000 Annual Meeting of Shareholders must be received
by the Company at 6029 E. Fourteen Mile Road, Sterling Heights, Michigan
48312-5801 before the close of business on January 3, 2000 for consideration
for inclusion in Tubby's proxy statement. Shareholder proposals should be
addressed to the attention of Tubby's Secretary.
34
Miscellaneous
The Board of Directors is not aware of any other business that will be
presented for action at the Meeting. If any other business comes before the
Meeting, the Management Proxy Committee has been directed by the Board of
Directors to cast such votes at their discretion. The cost of preparing and
mailing the notice of meeting, proxy statement and proxy to the shareholders
will be borne by Tubby's.
By Order of the Board of Directors
Vincent J. Tatone
Secretary
Dated: __________, 1999
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 27, 1999, by and
between Tubby's, Inc., a New Jersey corporation ("Tubby's") and R Corp, a
Michigan corporation ("R Corp").
RECITALS
A. The Boards of Directors of Tubby's and R Corp deem the
merger of R Corp into Tubby's on the terms herein set forth
to be desirable and in the best interests of the
shareholders and, subject to approval by Tubby's
shareholders, desire to adopt this Agreement and Plan of
Merger.
B. The Boards of Directors of Tubby's and R Corp, and the
shareholders of R Corp, have approved this Agreement and
Plan of Merger (the "Agreement") and have directed that the
Agreement and merger contemplated hereby be submitted to
the shareholders of Tubby's for adoption.
Now therefore, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements contained herein,
Tubby's and R Corp hereby agree that R Corp shall be merged into Tubby's,
which shall be the surviving corporation, and that the plan, terms and
conditions of such merger shall be as follows:
ARTICLE I
Merger of R Corp Into Tubby's
1.01 The Merger. On the Effective Date of the Merger (as defined
in Section 4.02), R Corp shall be merged into Tubby's, the
separate existence of R Corp (except as it may be continued
by operation of law) shall cease and Tubby's as the
surviving corporation shall continue its corporate
existence under the laws of the State of New Jersey and
Tubby's shall possess all the rights, privileges,
immunities, powers, franchises and authority, of a public
as well as of a private nature, and be subject to all the
restrictions, disabilities and duties of R Corp.
1.02 Instruments. When requested by Tubby's, or by its
successors or assigns, the officers and directors of R Corp
last in office shall execute and deliver such instruments
for transfer and shall take or cause to be taken such
further or such other actions as shall be reasonably
necessary in order to vest or perfect in Tubby's, or to
confirm of record or otherwise to Tubby's, title to and
possession of all the rights, powers, franchises and
authority of R Corp.
ARTICLE II
Articles of Incorporation, Directors, Officers and By-Laws
2.01 Articles of Incorporation. Except as provided below, the
articles of incorporation of Tubby's, as in effect on the
Effective Date of the Merger, shall be the articles of
incorporation of Tubby's, as the surviving corporation,
until they are amended as provided herein or by law.
2.02 Directors and Officers. Upon the Effective Date of the
Merger, the Board of Directors of Tubby's, the surviving
corporation, shall consist of the persons who were
Directors and officers of Tubby's prior to the Merger. Said
Directors shall hold offices provided in the by-laws of the
surviving corporation.
2.03 By-Laws. The by-laws of Tubby's as in effect on the
Effective Date of the Merger shall be the by-laws of the
surviving corporation, until they are amended as provided
therein or by law.
ARTICLE III
Exchange of Shares
The manner of exchanging the shares of Tubby's shall be as follows:
3.01 Basis of Exchange of Tubby's Shares.
(A) Each share of common stock, $.01 par value, of
Tubby's outstanding on the Effective Date shall be
exchanged for cash at the Merger Price of $1.10,
other than shares of Tubby's held by shareholders
of R Corp, which will not be exchanged.
(B) Each share of Tubby's common stock exchanged and
held by Tubby's as treasury stock shall be
cancelled and retired and no shares of common
stock of Tubby's shall be issued with respect
thereto.
3.02 Exchange Agent. As promptly as feasible after the Effective
Date, Tubby's will make available to an exchange agent, for
the holders of record of certificates of common stock of
Tubby's, cash in sufficient quantities as shall enable
shares of Tubby's to be surrendered and exchanged as herein
provided.
3.03 Surrender and Exchange of Shares. As promptly as feasible
after the Effective Date, each holder of an outstanding
certificate or certificates representing common stock of
Tubby's shall be notified by the Exchange Agent and shall
surrender such certificate or certificates to the Exchange
Agent in the manner specified in the Exchange Agent's
notification and such holders shall be entitled upon such
surrender to received in exchange cash in the amount of
$1.10 per share represented by the certificate or
certificates so surrendered. Until so surrendered, each
outstanding certificate which, prior to the Effective Date,
represented
common stock of Tubby's, shall not be transferable on the
books of Tubby's.
From and after the Effective Date, the sole rights of the holders of
certificates representing common stock of Tubby's, except as otherwise
provided by law, shall be to exchange the common stock of Tubby's for cash
pursuant to the merger as herein provided.
3.04 Transfers. If any cash for common stock of Tubby's is to be
issued in a name other than that in which the certificate
for common stock of Tubby's surrendered for exchange is
registered, such exchange shall be on the condition that
the certificate so surrendered shall be properly endorsed
and otherwise enclosed for transfer acceptable to the
Exchange Agent and the person requesting such exchange
shall pay to Tubby's or the Exchange Agent any transfer or
other taxes required by reason of the issuance of such cash
for common stock of Tubby's or the Exchange Agent shall
have determined that such tax has been paid or is not
applicable.
3.05 Termination of Exchange Agent's Duties. One year after the
Effective Date, all cash which has been received by the
Exchange Agent and has not been distributed as hereinbefore
provided, shall be returned to Tubby's or its agent and the
duties of the Exchange Agent shall thereupon terminate.
Thereafter, subject to the applicable law, any stock holder
of Tubby's who has not theretofore surrendered his
certificate or certificates for exchange as herein provided
shall be entitled, upon surrender of such certificate or
certificates to Tubby's or its agent, to receive cash for
the number of shares of common stock of Tubby's as set
forth under this Agreement, without interest thereon.
3.06 Financing. The Shareholders of R Corp agree to personally
guarantee debt financing in the amount of $1,750.00 and
agree to pledge personal collateral, if necessary, to
procure said financing to be used for the exchange of
shares on behalf of Tubby's.
ARTICLE IV
Closing; Effective Date of Merger
4.01 Closing. The closing of the transactions contemplated by
this Agreement shall take place at the offices of Tubby's
located at 6029 E. Fourteen Mile Road, Sterling Heights,
Michigan 48312, at such date and time, within five business
days after the satisfaction or waiver of the last of the
conditions set forth in this Agreement to be satisfied or
waived, as the parties may fix. The closing of such
transactions is herein called the "Closing" and the date of
that Closing is referred to herein as the "Closing Date."
The Closing Date may be the same date as the Effective
Date.
4.02 Effective Date. Subject to the conditions in this Agreement
and to the execution and filing of a Certificate of Merger
in the manner required by the New Jersey Business
Corporation Act and the filing of any documents that may be
required by the Act, the Merger shall become effective at
the close of business on such date as such filings are made
or at such other date as stated in the Certificate of
Merger (the "Effective Date"). Such filings shall be made
on or as soon as practicable after the Closing.
ARTICLE V
Representations and Warranties of Tubby's
Tubby's hereby warrants and represents to R Corp as follows:
5.01 Organization, Standing, Qualification, etc. Tubby's is a
corporation duly organized, validly existing and in good
standing under the laws of the State of New Jersey and has
all requisite corporate power and is duly authorized,
qualified, franchised and licensed and to carry on its
business as it is presently being conducted. Tubby's is
qualified to do business in all states where the nature of
Tubby's business and the ownership of its properties
require it to become qualified as a foreign corporation.
5.02 Capitalization. The authorized capital stock of Tubby's
consists of 6,000,000 shares of common stock, with $.01 par
value, of which 2,583,113 shares will be issued and
outstanding as of the Effective Date of the Merger. All
outstanding shares are duly authorized, fully paid, validly
issued and nonassessable in accordance with applicable law.
No dividends or other distribution of the assets of Tubby's
have been declared or paid in the capital stock of Tubby's.
There are no outstanding warrants, options, preemptive
rights or rights to subscribe for or purchase any shares of
Tubby's capital stock or any outstanding securities that
are convertible into Tubby's capital stock.
5.03 Authorization. The Board of Directors of Tubby's has
approved this Agreement and the transactions contemplated
hereby, has authorized the execution and delivery of this
Agreement by Tubby's, and has authorized the submission of
this Agreement and the transaction contemplated hereby to
the Tubby's shareholders for their consideration with the
recommendation that it be approved. Tubby's has full power,
authority and legal right to enter into this Agreement and
to consummate the transactions contemplated hereby and this
Agreement constitutes a legal, valid and binding obligation
of Tubby's enforceable in accordance with its terms.
5.04 Subsidiaries. Other than directly or indirectly owning all
of the capital stock of: (1) Tubby's Sub Shops, Inc., a
Michigan corporation; (2) Tubby's Sub Shops Advertising
Co., Inc., a Michigan corporation; (3) Sub Line Co., a
Michigan corporation; (4) Tubby's Company Stores, Inc., a
Michigan
corporation; and (5) SUBperior Distribution Systems, Inc.,
a Michigan corporation (collectively referred to herein as
the "Subsidiaries"). Tubby's does not own, directly or
indirectly, any interest or investment, whether equity or
debt, in any corporation, business, trust or other entity.
Unless the context otherwise requires, any references
herein to Tubby's shall be deemed to include the
Subsidiaries.
5.05 Compliance, Articles, Bylaws and Other Instruments. Tubby's
is not in violation or default of any term or its Articles
of Incorporation or Bylaws, or of any agreement, contract,
commitment, instrument, indenture, judgment, decree of
order, applicable to it and has timely filed all reports
and any other documents required by it to be filed with any
governmental agency. The execution, delivery and
performance of this Agreement and the taking of action
contemplated hereby will not result in any violation of or
be in conflict with or constitute a default under (a) the
Articles of Incorporation or Bylaws of Tubby's, or (b) any
material agreement or instrument to which Tubby's or any
consolidated subsidiary is a party or by which it is bound,
or (c) any material judgment, decree or order to which
Tubby's is subject, or result in the creation of any
material lien, charge or encumbrance on any of the
properties of Tubby's.
5.06 Financial Statements.
(a) Attached are the audited consolidated balance
sheet of Tubby's and its subsidiaries as of
November 30, 1998, and related audited
consolidated statements of operation and changes
of financial position for the year then ended,
including the notes thereto and an unaudited
consolidated balance sheet of Tubby's and its
subsidiaries as of May 31, 1999 and related
unaudited consolidated financial statements of
operation and changes in financial position for
the period then ended (the "Tubby's Financial
Statements").
(b) All such financial statements have been prepared
with generally accepted accounting principles
consistently applied throughout the periods
involved. As of the date of any of such balance
sheets except as and to the extent reflected or
reserved against therein, Tubby's did not have any
liabilities or obligations (absolute or
contingent) which should be reflected in a balance
sheet or the notes thereto prepared in accordance
with generally accepted accounting principles, and
all assets reflected therein are promptly reported
and presently fairly the value of the assets of
Tubby's in accordance with generally accepted
accounting principles. Such statements of
operations present fairly the results of
operations of Tubby's for the periods indicated.
Such statements of changes in financial position
present fairly the information, which should be
presented therein in accordance with generally,
accepted accounting principles.
(c) The financial and other books and records of
Tubby's are in all material respects complete and
correct and have been maintained in accordance
with good business and accounting practice.
5.07 Title and Related Matters. Tubby's has good and marketable
title to all of its properties, interests in properties and
assets, real and personal, which are reflected in the
latest balance sheet included in the Tubby's Financial
Statements or acquired after that date (except properties,
interests in properties and assets sold or otherwise
disposed of since such date in the ordinary course of
business), free and clear of all mortgages, liens, pledges,
charges or encumbrances except: (I) statutory liens or
claims not yet delinquent, (ii) such imperfections of title
and easements as do not and will not materially detract
from or interfere with the present or proposed use of the
properties subject thereto or affected thereby, or
otherwise materially impair present business operations of
such properties; or (iii) as described in the Tubby's
Financial Statements.
5.08. Inventory. The inventories of raw materials, work in
progress and finished goods (collectively called
"Inventories") shown on the most recent balance sheet of
Tubby's included in the Tubby's Financial Statements
consisted, and all such Inventories as of the Closing Date
will consist, of items of a quality and quantity usable and
saleable in the ordinary course of business by Tubby's,
except for obsolete and slow-moving items and items below
standard quality, all of which have been written down on
the books of Tubby's to net realizable market value or have
been provided for by adequate reserves. All items included
in the Inventories are the property of Tubby's, except for
sales made in the ordinary course of business since the
date of the last balance sheet. For each of the sales of
Inventories, either the purchaser had made full payment or
the purchaser's liability to make payment is reflected on
the books of Tubby's. No items included in the Inventories
have been pledged as collateral or are held by Tubby's on
consignment from others. The Inventories shown on the most
recent balance sheet included in the Tubby's Financial
Statements are based on quantities determined by physical
count or measurement, taken within the preceding 12 months,
and are valued at the lower of cost or market value (with
cost determined on a first-in, first-out basis), all in
accordance with generally accepted accounting principles
applied on a basis consistent with that of prior years.
5.09. Trade Secrets. Tubby's owns all inventions, franchises,
discoveries, research, improvements, engineering processes,
methods, practices, systems, designs, drawings, formulae,
trade secrets, ideas or other know-how (collectively, the
"Tubby's know-how") which are utilized by Tubby's in the
conduct of its business, and no existing or former
shareholder, officer or employee of Tubby's or any other
person has any right or interest in any Tubby's know-how.
Tubby's owns all of the Tubby's know-how free and clear of
all liens or other forms of encumbrance.
5.10. Insurance Policies. Tubby's has maintained and now
maintains (I) insurance on all its assets and business of a
type customarily insured, covering property damage and loss
of income by fire or casualty, and (ii) adequate insurance
protection against all liabilities, claims, and risks
against which it is customary to insure.
5.11. Tax Returns. Within the times and in the manner prescribed
by law, Tubby's has filed all federal, state and local tax
returns required by law and has paid all taxes, assessments
and penalties due and payable. All taxes and governmental
charges levied or assessed against the property or the
business of Tubby's have been paid, other than taxes or
charges the payment of which is not yet due or which, if
due, is not yet delinquent or is being contested in good
faith or has not been finally determined.
5.12. Shareholder List. Tubby's will provide an alphabetical
list, as of August 30, 1999, of all of the shareholders of
Tubby's and the number of shares of Tubby's common stock
owned by each of them. That list shall indicate which stock
certificates have stop transfer orders and restrictive
legends placed upon the.
5.13. Stock Transfer Records. The stock transfer books and
stockholders of Tubby's are in good order, complete,
accurate, and up to date, and with all necessary
signatures, and set forth all stock and securities issued,
transferred and surrendered. No duplicate certificate has
been issued at anytime heretofore without an indemnity
agreement and/or bond being posted. No transfer has been
made without surrender of the proper certificate duly
endorsed. All certificates so surrendered have been duly
cancelled.
5.14. Corporate Record Books. The corporate record books of
Tubby's are in good order, complete, accurate, up to date,
with all necessary signatures, and set forth all meetings
and actions set forth in all certificates of votes of
stockholders or directors furnished to anyone at any time.
5.15. Compliance with Laws and Regulations. To the best of its
knowledge, Tubby's has complied with all applicable
statutes and regulations of any federal, state or other
applicable jurisdiction or agency thereof (including,
without limitation, any law, any applicable licensing,
building, zoning or other law, ordinance or regulation)
affecting Tubby's properties or the operation of Tubby's
business and has timely filed all reports and any other
documents required by it to be filed with any governmental
agency, except (i)
to the extent that noncompliance would not materially and
adversely affect the business, operations, properties
assets or condition of Tubby's or (ii) to the extent that
noncompliance would not result in any material liability.
ARTICLE VI
Covenants of Tubby's Prior to the Merger
Between the date hereof and the Effective Date of the Merger:
6.01. Stockholders Meeting. The Board of Directors of Tubby's
will submit this Agreement to its stockholders for their
approval, and will recommend such approval, at a meeting
thereof to be duly called and held at the earliest
practicable date as may be agreed upon in writing by R Corp
and Tubby's. That shareholders' meeting will be duly
called, convened and conducted in accordance with all
applicable requirements of the corporation laws of the
State of New Jersey and in accordance and with all
applicable provisions of the Articles of Incorporation and
Bylaws of Tubby's and the resolutions adopted by the
shareholders at that meeting will constitute the duly
authorized actions of Tubby's and will be in full force and
effect as of the Closing Date.
6.02. Representations. Tubby's will take all action necessary to
render accurate, as of the Effective Date of the Merger,
Tubby's representations and warranties contained herein,
and it will refrain from taking any action which would
render any such representation or warranty inaccurate as of
such time. Tubby's wi11 use its best efforts to perform or
cause to be satisfied each covenant or condition to be
performed or satisfied by it.
6.03. Approvals. Tubby's will use its best efforts to obtain all
licenses or other approvals required to be obtained by it
from any appropriate governmental or regulatory body or
other person in connection with the carrying out of the
transactions contemplated by this Agreement and the
continued operation of its business after the merger.
6.04. Negotiations with Third Parties. Tubby's will not, without
the prior approval of R Corp, engage in, or encourage
discussions or negotiations with third parties relating to
or otherwise approve (or approve without prior discussions
with R Corp any unsolicited offer regarding) any merger,
sale, or other disposition of any substantial part of
Tubby's assets or stock.
ARTICLE VII
Obligations of R Corp and its Shareholders
7.01. Personal Guarnatees and Pledge of Personal Assets. R Corp
and its Shareholders, agree to personally guarantee debt
financing for Tubby's in the amount of $1,750,000 to be
used to complete the Merger, and to pledge personal assets
as collateral to secure the repayment of said indebtedness.
7.02. Stock Purchase, Redemption, and Shareholders Agreement. The
Shareholders of R Corp agree to execute a Stock Purchase,
Redemption and Shareholders' Agreement, with Tubby's for
the purpose of equalizing the number of shares of Tubby's
stock owned by each of them and to evidence their agreement
to personally guarantee the debt financing referenced in
section 7.01 and their agreement to pledge personal
property as collateral for the repayment of the
indebtedness.
ARTICLE VIII
Representations and Warranties of R Corp
R Corp hereby represents or warrants to Tubby's as follows:
8.01. Organization, Standing, Qualification, etc. R Corp is a
corporation duly organized, validly existing and in good
standing under the laws of the State of Michigan and has
all requisite corporate power and is duly authorized,
qualified, franchised and licensed under all applicable
properties and assets and to carry on its business as it is
presently being conducted. R Corp is qualified to do
business in all states where the nature of R Corp's
business and the ownership of its properties require it to
become qualified as a foreign corporation.
8.02. Capitalization. The authorized capital stock of R Corp
consists of 60,000 shares of common stock, par value, of
which 3,000 shares are issued and outstanding. All
outstanding shares are duly authorized, fully paid, validly
issued and nonassessable in accordance with applicable law.
No dividends or other distribution of the assets of R Corp
have been declared or paid in the capital stock of R Corp.
There are no outstanding warrants, options, preemptive
rights or rights to subscribe for or purchase any shares of
R Corp capital stock or any outstanding securities that are
convertible into R Corp capital stock.
8.03. Articles of Incorporation and Bylaws. The complete Articles
of Incorporation and the Bylaws of R Corp as will be in
effect on the Closing Date are attached.
8.04. Authorization. The Board of Directors of R Corp has
approved this Agreement and the transactions contemplated
hereby, has authorized
the execution and delivery of this Agreement by R Corp, and
has authorized the submission of this Agreement and the
transaction contemplated hereby to the R Corp shareholders
for their consideration with the recommendation that it be
approved. R Corp has full power, authority and legal right
to enter into this Agreement and to consummate the
transactions contemplated hereby and this Agreement
constitutes a legal, valid and binding obligation of R Corp
enforceable in accordance with its terms.
ARTICLE IX
Conditions to Obligations of R Corp and Tubby's
The obligations of Tubby's and R Corp to effect the Merger are as
follows:
9.01. Stockholder Approval. Before the Closing, Tubby's
Shareholders shall have approved this Agreement.
9.02. Financing. Before submitting this Agreement for
consideration and approval to Tubby's shareholders, R Corp
and it shareholders shall have procured adequate financing
for Tubby's to be used to complete the Merger. Before the
closing, Tubby's and the shareholders of R Corp shall have
closed on all required financing transactions.
9.03. Fairness Opinion. Before submitting this Agreement for
approval by Tubby's stockholders, Tubby's shall have
received a favorable fairness opinion from Stout, Risuis,
Ross, Valuation Consultants, Inc.
9.04. No Material Adverse Change. Prior to the Closing, there
shall not have occurred any material adverse change in the
financial condition, business or operations of Tubby's.
ARTICLE X
Miscellaneous
10.01 Amendments. This Agreement may be amended at any time,
prior to the Effective Date of the Merger, whether before
or after the meeting of stockholders, by a written
instrument executed by R Corp and Tubby's with the approval
of their respective Boards of Directors, provided that no
amendment shall change the exchange ratios set forth in
Section 3.01 without the approval of the stockholders of
both Tubby's and R Corp.
10.02 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of
Michigan without reference to its principles of conflicts
of laws. However, any questions of corporate law with
respect to Tubby's or its subsidiaries shall be governed by
New Jersey corporate law.
10.03 Complete Agreement - Severability. This Agreement contains
the entire understanding between the parties and supercedes
any and all prior agreements between the parties. If any
provision of the Agreement is found to be void by any court
of competent jurisdiction, the remaining provisions shall
remain in full force and effect
10.04 Multiple Copies. This Agreement may be executed on multiple
copies, each of which shall Constitute an original, but all
of which shall constitute one and the same agreement.
IN WITNESS WHEREOF, R Corp and Tubby's have caused this Agreement and Plan of
Merger to be executed as of the date first above written.
R CORP TUBBY'S, INC.
______/S/_____________________ _______/s/____________________
By: Vincent J. Tatone By: Robert M. Paganes
Its: Secretary Its: President
APPENDIX B
FAIRNESS OPINION
STOUT RISIUS ROSS, INC.,
July 15, 1999
Board of Directors
Tubby's, Inc.
c/o Mr. Robert Paganes
6029 East 14 Mile Road
Sterling Heights, MI 48312-5802
Members of the Board:
We understand Tubby's, Inc. ("Tubby's" or the "Company") is considering a
merger with R Corp pursuant to which all shareholders of the Company (the
"Shareholders"), other than those shareholders that are also shareholders of
R Corp, will receive cash in exchange for their shares of Tubby's, Inc. at
the price of $1.10 per share. The aforementioned plan of merger is referred
to hereinafter as the "Transaction."
You have requested, from a financial point of view, our opinion as to the
fairness of this Transaction to the Shareholders of the Company. To arrive at
our opinion, we performed an analysis to estimate the Fair Value of the
common equity of the Company. We define Fair Value as the price at which
property would exchange between a willing buyer and a willing seller, when
the former is not under any undue compulsion to buy and the latter is not
under any undue compulsion to sell, both having reasonable knowledge of the
relevant facts.
In general, we considered the following factors in performing our analysis:
the nature and history of the Company; the outlook for the economy and
industry in which the Company operates; the book value and financial
condition of the Company; the earning capacity of the Company; the dividend
paying capacity of the Company; whether goodwill or other intangible value
exists within the Company; previous sales of the Company's stock and the size
of the block transferred; and the market prices of companies in the same or
similar industries which trade in the open market.
In arriving at our opinion, we reviewed the Agreement and Plan of Merger (the
"Agreement") and the associated proxy statement (the "Proxy Statement"), and
held discussions with members of senior management of the Company concerning
its business, industry, historical financial performance, and prospects. We
examined the Company's audited and internally prepared financial statements
for the years ended November 30, 1995 to 1998 and the Company's internally
prepared interim financial statements for the six months ended May 31, 1999.
We considered, to the extent available, the financial terms of certain other
transactions involving target companies similar to Tubby's. In addition to
the foregoing, we conducted such other analyses and examinations and
considered such other financial, economic, and market criteria as we deemed
appropriate in arriving at our opinion.
We did not perform an independent valuation of all of the underlying assets
and liabilities of the Company, nor have we been furnished with any such
evaluation or appraisal.
Our opinion is premised on the assumption that the financial condition and
prospects of the Company as of the date of this letter, including the balance
sheet of the Company, has not changed materially since May 31, 1999, the date
the latest financial information was available. In rendering our opinion, we
have assumed and relied, without independent verification, upon the accuracy
and completeness of all financial and other information that was publicly
available, furnished by the Company, or otherwise reviewed by or discussed
with us. In that regard, we have relied upon Tubby's management as to the
reasonableness and achievability of the financial and operating forecasts
provided to us, and we have assumed that such forecasts reflect the best
currently available estimates and judgements of management.
In connection with performing our services for the Board of Directors, we
have not been authorized by the Company to solicit, nor have we solicited,
third-party indications of interest for the acquisition of all or any part of
the Company. Further, we were not requested to consider, and our opinion does
not address, the relative merits of the contemplated Transaction as compared
to any alternative business strategies that may exist for the Company or the
effect of any other transactions in which the Company might engage.
Our opinion is necessarily based on market, economic and other conditions as
they exist and can be evaluated on, and on the information made available to
us as of the date hereof.
We are acting as financial advisor to the Board of Directors of the Company
and will receive a fee from the Company for our services. However, our
compensation for providing financial advisory services to the Board is
neither based nor contingent on the results of our analysis. Further, none of
our employees who worked on this engagement has any known financial interest
in the assets or equity of the Company or the outcome of our analysis. In
addition, the Company has agreed to indemnify us for certain liabilities
arising out of our engagement.
Our work is only to be utilized by the Board of Directors of the Company as
one input to consider in the process of analyzing the contemplated
Transaction. Further, our opinion is not intended to be, nor does it
constitute, a
recommendation to any of the Shareholders as to how such Shareholder should
act in regard to the Transaction described in the first paragraph of this
letter.
Our opinion may not be published or otherwise used or referred to, without
our prior written consent. We understand that this opinion letter, subject to
us giving written consent, may be attached to a Proxy Statement that will be
sent to the Shareholders. However, in providing such consent, except as may
be required by the federal securities laws, we do not intend that any person
other than the Board of Directors rely upon such opinion. In giving such
consent, we do not hereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933 or
the rules and regulations of the Securities and Exchange Commission
thereunder.
Based upon and subject to the forgoing, including the various assumptions and
limitations set forth herein, it is our opinion that as of the date hereof,
the Transaction, as detailed in the Agreement, is fair from a financial point
of view to the Shareholders of the Company.
Yours very truly,
STOUT RISIUS ROSS, INC.
______/s/______________________
Gregory A. O'Hara
Managing Director
FINANCIAL STATEMENTS
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
F-1
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current Assets
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
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-2
<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
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-3
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended November 30,
CONSOLIDATED STATEMENTS OF OPERATIONS 1998 1997
---- ----
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
=========== ===========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
<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
=========== =========== =========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
<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
========= =========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
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.
Number of Restaurants in Operation: November 30,
----------------------
1998 1997
---- ----
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
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
F-7
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.
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
F-8
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. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the SFAS 128 requirements. The following
table presents the earnings per share calculations:
For the Year Ended November 30, 1998 1997
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
As a result of the net loss in 1998, no stock options were included in the
computation of diluted earnings per share.
F-9
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.
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:
F-10
1998 1997
---- ----
Food and restaurant supplies $ 297,475 $ 28,989
Equipment 30,805 70,430
----------- ------------
$ 328,280 $ 99,419
=========== ============
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.
F-11
5. LONG-TERM DEBT
Long-term debt consisted of the following at November 30, 1998 and 1997.
1998 1997
-------- --------
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
======== ========
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:
1999 $ 11,455
2000 12,560
2001 13,772
2002 94,014
-----------------------------------
$131,801
========
6. RELATED PARTIES
Peter T. Paganes and Robert M. Paganes are directors, officers and
shareholders of the Company and J. Thomas Paganes, their brother, is a
shareholder of the Company. These 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.
1998 1997
-------- --------
Product sales, franchise and advertising fees $867,809 $156,412
Accounts receivable 55,922 29,191
Interest income -- 1,431
F-12
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 $ 531,000
Deferred revenue 71,000 78,000
Depreciation 27,000 24,000
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.
1998 1997
------ ------
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%
====== ======
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.
F-13
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:
1998 1997
---------- ----------
Net Income (Loss)
As reported $ (31,207) 107,499
Pro forma (43,963) 52,277
Earnings Per Share
As reported
Basic (.01) .04
Diluted (.01) .04
Pro forma
Basic (.02) .02
Diluted (.02) .02
As of November 30, 1998, 283,383 shares were reserved under the Incentive
Stock Option Plan and 83,300 were reserved under the non-statutory Incentive
Stock Option Plan. A summary of the options under both plans is as follows:
Weighted Average
Shares Exercise
------ --------
Price
- -----
Incentive Stock Option Plan
Outstanding, at December 1, 1996
(60,467 exercisable) 60,467 $ 3.10
Granted 13,500 3.30
Outstanding, at November 30, 1997
(60,467 exercisable at weighted
average exercise price of $3.10) 73,967 3.20
Forfeited (37,000) 2.70
Outstanding at November 30, 1998
(36,967 exercisable) 36,967 3.60
- ----------------------------------------------------------------------------
Weighted Average
Shares Exercise
------ --------
Price
- -----
Non-Statutory Incentive Option Plan
Outstanding at December 1, 1996
(20,000 exercisable) 20,000 $ 3.60
Granted 20,500 1.60
Outstanding at November 30, 1997
(20,000 exercisable at weighted
average exercise price of $3.60) 40,500 $ 2.60
Forfeited (12,000) 1.50
Outstanding at November 30, 1998
(28,500 exercisable) 28,500 $ 3.05
F-14
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1997: dividend yield of 0%; expected volatility of
74%; risk free interest rate of 6.2%; and expected lives of 3.3 years.
The weighted average grant date fair value options granted in 1997 was $2.00.
No options were granted in 1998.
The following is a summary of stock options outstanding at November 30, 1998:
Options Outstanding
and Exercisable
-----------------------------
Weighted Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
- -----------------------------------------------------------------------------
Incentive Stock Option Plan
$ 3.10 - 4.40 36,833 6.0 3.60
8.40 134 2.0 8.40
- -----------------------------------------------------------------------------
36,967 6.0 $ 3.60
Non-Statutory Plan
$ 1.50 - 1.90 8,500 8.5
$ 1.75 - 3.60 20,000 2.0 3.60
- -----------------------------------------------------------------------------
28,500 4.0 $ 3.05
9. EMPLOYEE BENEFIT PLAN
In 1997, the Company implemented a 401(k) plan covering substantially all
full-time employees. The Company matches each employee's contribution up to a
predetermined limit. The Company's contribution expense amounted to
approximately $3,000 in 1998 and 1997.
F-15
10. OPERATING LEASES
The Company leases buildings, equipment, and restaurant space under various
operating leases. The future minimum rental payments, under all operating
leases containing minimum annual rental payments, are as follows:
1999 $56,513
2000 44,795
2001 29,256
---------
$ 130,564
=========
Total rent expense under the operating leases was approximately $102,000 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.
F-16
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.
F-17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Tubby's, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Tubby's, Inc.
and Subsidiaries as of November 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tubby's,
Inc. and Subsidiaries at November 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
Troy, Michigan
February 3, 1998
F-18
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash and equivalents $ 864,229 $ 793,494
Certificate of deposit 105,430 100,000
Marketable securities 25,383 25,000
Accounts receivable - trade, less allowance for doubtful
accounts of $36,740 and $20,850 in 1997 and 1996 443,810 245,267
Notes receivable 66,217 72,091
Inventories 99,419 102,805
Prepaid expenses and other 51,449 110,644
---------- ----------
Total Current Assets 1,655,937 1,449,301
---------- ----------
Property and Equipment
Land 325,347 325,347
Building and improvements 663,753 693,347
Equipment 527,265 440,705
Furniture and fixtures 138,394 219,464
Vehicles 15,009 15,009
---------- ----------
1,669,768 1,693,872
Less accumulated depreciation 773,576 654,255
---------- ----------
Net Property and Equipment 896,192 1,039,617
---------- ----------
Other Assets
Goodwill, less amortization of $81,118
and $68,045 in 1997 and 1996 229,918 338,241
Notes receivable, less allowance for doubtful
accounts of $-0- and $5,894 in 1997 and 1996 543,342 505,380
---------- ----------
Total Other Assets 773,260 843,621
---------- ----------
Total All Assets $3,325,389 $3,332,539
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-19
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
---- ----
<S> <C> <C>
Current Liabilities
Accounts payable $ 106,407 $ 189,929
Accrued liabilities
--Compensation 19,887 21,075
--Other 16,153 13,305
Deferred revenue 115,489 87,000
Long-term debt due in one year 220,520 266,825
----------- -----------
Total Current Liabilities 478,456 578,134
Deferred Revenue 60,867 40,000
Long Term Debt, less amounts due in one year 139,932 175,770
----------- -----------
Total Liabilities 679,255 793,904
----------- -----------
Stockholders' Equity
Common stock, $.01 par value, 6,000,000 shares
authorized, 2,583,114 issued and outstanding 25,832 25,832
Additional paid in capital 3,485,844 3,485,844
Retained earnings (deficit) (865,542) (973,041)
----------- -----------
Total Stockholders' Equity 2,646,134 2,538,635
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,325,389 $ 3,332,539
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-20
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended November 30,
CONSOLIDATED STATEMENTS OF OPERATIONS 1997 1996
---- ----
Revenues
Food sales $ 931,000 $ 796,990
Franchise fees
--Monthly 785,959 659,074
--Initial 132,543 118,250
Advertising fees 650,909 569,982
Equipment and restaurant sales 575,427 611,064
Commissions and other fees 523,197 367,856
----------- -----------
Total Revenues 3,599,035 3,123,216
----------- -----------
Costs and Expenses
Operating expenses 2,357,938 1,942,490
Cost of food sales 667,854 588,257
Cost of equipment and restaurant sales 470,315 527,005
----------- -----------
Total Costs and Expenses 3,496,107 3,057,752
----------- -----------
Operating Income 102,928 65,464
----------- -----------
Other Income (Expense)
Interest income 108,430 94,899
Interest expense (9,572) (28,235)
Gain (loss) on sale of fixed assets -- (5,880)
Miscellaneous 1,013 (8,891)
----------- -----------
Total Other Income 99,871 51,893
----------- -----------
Income Before Taxes on Income 202,799 117,357
Taxes on Income 95,300 --
----------- -----------
Net Income 107,499 117,357
=========== ===========
Earnings Per Share
.04 .05
=========== ===========
Weighted Average Common Shares Outstanding 2,604,720 2,556,720
=========== ===========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-21
<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, 1995 2,538,114 $ 25,382 $ 3,430,044 $(1,090,398) $ 2,365,028
Issuance of common stock 45,000 450 55,800 -- 56,250
Net income -- -- -- 117,357 117,357
----------- ----------- ----------- ----------- -----------
Balance, at November 30, 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
=========== =========== =========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-22
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended November 30,
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 107,499 $ 117,357
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 135,468 105,226
Taxes on income 95,300 --
Loss on sale of fixed assets -- 5,880
Increase (Decrease) In Cash Due to Changes In
Accounts receivable (198,543) (11,596)
Inventories 3,386 (67,965)
Prepaid expenses and other 59,195 (65,506)
Accounts payable (83,522) 26,457
Accrued liabilities 1,660 (19,344)
Deferred revenues 49,356 (44,000)
--------- ---------
Net Cash Provided by Operating Activities 169,799 46,509
--------- ---------
Cash Flows From Investing Activities
Purchase of property and equipment (69,020) (462,155)
Payments on note receivable 52,912 134,936
Increase in certificate of deposit and marketable securities (5,813) (25,000)
Net proceeds from sale of property and equipment 5,000 13,500
Sale of certificate of deposit and marketable securities -- 154,590
Other assets -- (2,242)
--------- ---------
Net Cash Used In Investing Activities (16,921) (186,371)
--------- ---------
Cash Flows From Financing Activities
Proceeds from long-term debt 150,000 --
Payments on long-term debt (232,143) (74,038)
Proceeds from issuance of capital stock -- 56,250
--------- ---------
Net Cash Used In Financing Activities (82,143) (17,788)
--------- ---------
Net Increase (Decrease) in Cash 70,735 (157,650)
Cash and Equivalents, at beginning of period 793,494 951,144
--------- ---------
Cash and Equivalents, at end of period $ 864,229 $ 793,494
========= =========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-23
TUBBY'S, INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Tubby's Inc., its wholly-owned subsidiaries and its fifty-one percent
partnership interest in the McTub Company (Tubby's Express). Intercompany
balances and transactions have been eliminated.
Natures of Operations
The Company's and its subsidiaries' revenue is derived from: (1) franchise
and advertising fees for the rights to operate sit down and carry-out
restaurants specializing in submarine sandwiches, hamburgers or steak
sandwiches, pizzas or ice cream; (2) food sales at Company owned stores; (3)
equipment sales to franchisees; and (4) vendor commissions and rebates. The
Company and its franchisees operate restaurants in Michigan, Ohio, New
Jersey, Pennsylvania, Arizona, Missouri, Indiana and the provinces of Ontario
and Alberta Canada.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash, cash equivalents, certificates of
deposit, marketable securities and accounts and notes receivable. At times
such cash and equivalents in banks are in excess of the respective financial
institution's FDIC insurance limit. The Company attempts to minimize credit
risk by reviewing all franchisees' credit history before extending credit and
by monitoring franchisees' credit exposure on a continuing basis. The Company
establishes an allowance for possible losses on accounts and notes
receivable, when necessary, based upon factors surrounding the credit risk of
specific customers, historical trends and other information. The Company also
establishes an allowance for possible losses, when necessary, for declines in
market value of its marketable securities.
Fair Values of Financial Instruments
The carrying amounts of cash, cash equivalents, certificates of deposit,
marketable securities, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the short maturity of these items.
The carrying amounts of the long-term debt issued pursuant to the Company's
credit agreements approximate fair value because the interest rates on these
instruments approximate market rates.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect (1) the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the
financial statements, and (2) revenues and expenses during the reporting
period. Actual results could differ from these estimates.
F-24
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 and equipment held for resale to franchisees.
Inventories are stated at the lower of cost (primarily on a specific
identification basis) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over the
useful lives of the assets ranging from 5 to 19 years, using the
straight-line method. Depreciation expense was $122,395 and $94,550 in 1997
and 1996, respectively.
Goodwill
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at acquisition. The Company amortizes goodwill
over periods not exceeding 40 years. The Company reviews goodwill for
impairment based upon the estimated undiscounted cash flows over the
remaining life of the goodwill. If necessary, impairment will be measured
based on the difference between undiscounted cash flows and the book value of
the related goodwill.
Revenue Recognition
Monthly franchise 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.
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 $651,000 and $582,000 in 1997 and 1996, respectively.
Taxes on Income
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
F-25
Earnings Per Share
The computation of earnings per share is based on the weighted average number
of outstanding common shares and equivalents. Common share equivalents
included in the computation represent shares issuable upon assumed exercise
of stock options which would have a dilutive effect in years where there are
earnings.
In January 1998, the Company declared a one for ten reverse stock split. As a
result, the amount of outstanding shares has been reduced from 25,831,131 to
2,583,114. In connection with the reverse stock split, the Company amended it
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.
The Financial Accounting Standards Board has issued SFAS No. 128 "Earnings
per Share" which modifies the standards for computing earnings per share. The
statement is effective for financial statements issued for periods ending
after December 15, 1997. The statements are not expected to have a material
impact on the Company's computation of earnings per share.
Long-lived Assets
The Company adopted the provision of Statement of Financial Accounting
Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be disposed of" during the year ended
November 30, 1997. SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
related goodwill to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. The effect of adopting this
standard did not have a financial impact on the Company.
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 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 Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operation and financial
position, however, will be unaffected by implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, (SFAS
131) which supersedes SFAS
F-26
No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS 131
establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
2. MARKETABLE SECURITIES
The Company has classified its marketable securities as available-for-sale
and are reported at fair market value with unrealized gains or losses
reported as a component of stockholders' equity. Available-for-sale
securities are comprised of corporate bonds. During each of the fiscal years
and as of November 30, 1997 and 1996, there were no realized or unrealized
gains or losses reported as cost approximated fair value.
At November 30, 1997, corporate bonds included in available-for-sale
securities have contractual maturities exceeding ten years.
3. INVENTORIES
Inventories at November 30, 1997 and 1996 are summarized as follows:
1997 1996
---- ----
Equipment $ 70,430 $ 80,994
Food and paper goods 28,989 21,811
-------- --------
$ 99,419 $102,805
======== ========
4. NOTES RECEIVABLE
Notes receivable consisted of the following at November 30, 1997 and 1996.
F-27
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Note receivable, due in monthly installments
with interest at 10%, collateralized by a second
mortgage on property, maturing in 2007 $330,296 $347,629
Various notes receivable, due in monthly installments with
interest at various interest rates up to 10%,
collateralized by equipment,
maturing through 2001 279,263 229,842
-------- --------
609,559 577,471
Less amounts due within one year 66,217 72,091
-------- --------
Total Notes Receivable - Noncurrent $543,342 $505,380
======== ========
</TABLE>
The Company's recorded investment in impaired loans totaled $43,000, with no
related credit loss allowance, in 1997 and 1996. The average recorded
investment in impaired loans during 1997 was $43,000, with related interest
income recognized in 1997 of approximately $21,000. Interest Income on
impaired loans is recognized only when payments are received.
5. REVOLVING CREDIT AGREEMENT
In January 1997, the Company entered into a $250,000 line-of-credit with a
bank with interest payable at the bank's prime rate plus one-half percent
(9.0% at November 30, 1997). 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, 1997 and 1996.
6. LONG-TERM DEBT
Long-term debt consisted of the following at November 30, 1997 and 1996.
1997 1996
-------- --------
Notes payable - stockholder (see Note 13) $200,000 $200,000
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% 142,084 180,704
Other obligations payable in equal monthly
installments of $1,100 through September
2000, with interest of up to 9% 18,368 19,857
Notes payable - paid during 1997 -- 42,034
-------- --------
360,452 442,595
Less amounts due within one year 220,520 266,825
-------- --------
$139,932 $175,770
======== ========
F-28
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:
1998 $220,520
1999 16,223
2000 15,906
2001 13,700
2002 94,103
-----------------------------------
$360,452
========
7. RELATED PARTIES
Two founding stockholders of the Company are directors and are also officers.
These stockholders own approximately 17% of the outstanding common stock. In
addition to their responsibilities to the Company, they also own and operate
three franchised Tubby's restaurants. The following is a summary of activity
with these stockholders and their restaurants as of and for the years ended
November 30, 1997 and 1996.
1997 1996
-------- --------
Accounts receivable $ 29,191 $ 26,262
Notes receivable, due in quarterly installments
plus interest at 9% -- 24,436
Franchise and advertising fees 151,130 150,215
Interest income 1,431 3,401
8. INCOME TAXES
Significant components of deferred tax assets and liabilities consist of the
following at November 30, 1997 and 1996.
Deferred Tax Assets 1997 1996
- ------------------- ---- ----
Net operating loss carry-forwards $ 615,000 $ 725,000
Allowance for doubtful accounts 60,000 43,000
Deferred revenue 22,000 13,000
Depreciation 12,000 10,000
Other 1,000 2,000
--------- ---------
Net Deferred Tax Asset 710,000 793,000
Valuation allowance on net deferred tax asset (710,000) (793,000)
--------- ---------
Deferred Taxes $ -- $ --
========= =========
- -----------------------------------------------------------------------------
F-29
The following reconciles the expected income tax rate to the effective income
tax rate.
1997 1996
---- ----
Income taxes (benefit) at federal statutory rate 34.0% 34.0%
Tax expense resulting from utilization of NOLs 47.0 --
Valuation allowance adjustment (40.9) (53.7)
Non-deductible goodwill and entertainment
expenses 8.3 14.6
Other (1.4) 5.1
---- ----
Effective Tax Rate 47.0% --%
==== ====
The Company has acquired net operating loss carry-forwards of approximately
$918,000 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
of 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.
9. 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 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 Option 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 has 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:
1997 1996
----------- -----------
Net Income
As reported $ 107,499 117,357
Pro forma 52,276 117,357
Earnings Per Share
As reported .04 .05
Pro forma .02 .05
As of November 30, 1997, 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 is as follows:
F-30
Weighted Average
Shares Exercise
------ --------
Price
Incentive Stock Option Plan
Outstanding, at December 1, 1995
(2,967 exercisable) 112,967 $ 2.50
Exercised (45,000) 1.20
Expired (7,500) 3.10
Outstanding, at November 30, 1996
(60,467 exercisable) 60,467 3.10
Granted 13,500 3.30
Outstanding at November 30, 1997
(60,467 exercisable) 73,967 3.20
- -----------------------------------------------------------------------------
Weighted Average
Shares Exercise
------ --------
Price
Non-Statutory Incentive Option Plan
Outstanding at December 1, 1995
and November 30, 1996
(20,000 exercisable) 20,000 $ 3.60
Granted 20,500 1.60
- -----------------------------------------------------------------------------
Outstanding at November 30, 1997
(20,000 exercisable) 40,500 2.60
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.
The following is a summary of stock options outstanding at November 30, 1997:
F-31
Options Outstanding
-------------------
Weighted Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
- -----------------------------------------------------------------------------
Incentive Stock Option Plan
$ 1.60 - 1.90 20,000 7.7 $ 1.80
3.10 - 4.40 53,833 7.3 3.70
8.40 134 6.0 8.40
- -----------------------------------------------------------------------------
73,967 7.4 $ 3.20
Non-Statutory Plan
$ 1.50 - 1.90 20,500 9.7 $ 1.60
3.60 20,000 4.0 3.60
- -----------------------------------------------------------------------------
40,500 6.9 $ 2.60
Options Exercisable
-------------------
Weighted Average
Price Range Number Exercise Price
- -----------------------------------------------------------------------------
Incentive Stock Option Plan
$1.60 - 1.90 20,000 $ 1.80
3.10 - 4 40 40,333 3.70
8.40 134 8.40
- -----------------------------------------------------------------------------
60,467 $ 3.10
Non-Statutory Plan
$3.60 20,000 $ 3.60
- -----------------------------------------------------------------------------
The weighted average exercise price of the 60,467 shares which were
exercisable at November 30, 1996, was $3.10.
10. 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 1997.
11. 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:
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1998 $ 76,540
1999 44,370
2000 30,560
2001 14,300
--------
$ 65,770
========
Total rent expense under the operating leases was approximately $120,000 and
$129,000 for 1997 and 1996, respectively.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Year Ended November 30, 1997 1996
---- ----
Interest $17,572 $28,235
Income taxes -- 10,000
During 1997, the Company exchanged property and equipment for a note
receivable totaling $85,000.
13. LITIGATION SETTLEMENT
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. The
liability under the term note is included in the "long-term debt due in one
year" caption in the accompanying consolidated balance sheets. Also, in
connection with the agreement, the Company agreed to pay McCourt $65,000 in
1998 for his 49% interest in McTub Company. The agreement discharges and
releases the Company from any and all claims with McCourt.
14. SUBSEQUENT EVENTS
o Subsequent to November 30, 1997, the Company entered into a
commitment for the purchase of the building that houses its
corporate headquarters fort the total cost of $425,000. Long term
financing will be obtained in connection with the purchase of the
building.
o In February 1998, the Company began 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. SDS has contracted
with an unaffiliated company that is experienced with multiple
location institutional food distribution to
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provide the warehouse and distribution to provide the warehouse and
distribution activities that are required to serve Tubby's Sub
Shops. In connection with the addition of the new subsidiary the
Company entered into an additional line-of-credit agreement, which
allows for maximum borrowings of $250,000 with interest payable at
prime plus one-half percent.
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