UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly Period Ended July 1, 1996
Commission File Number: 33-27611-NY
MAIN STREET AND MAIN INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 11-294-8370
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5050 N. 40TH STREET, SUITE 200, PHOENIX, ARIZONA 85018
(Address of principal executive offices)
(602) 852-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Number of shares of common stock, .001 par value, of registrant outstanding at
July 1, 1996: 7,951,825
<PAGE>
MAIN STREET AND MAIN INCORPORATED
- --------------------------------------------------------------------------------
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements - Main Street and Main Incorporated
Consolidated Balance Sheets - July 1, 1996 and
December 25, 1995 3
Consolidated Statements of Operations - Three Months
and Six Months Ended July 1, 1996 and June 26, 1995 4
Consolidated Statements of Cash Flows - Six Months
Ended July 1, 1996 and June 26, 1995 5
Notes to Consolidated Financial Statements -
July 1, 1996 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE>
MAIN STREET AND MAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
July 1, 1996 December 25, 1995
------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,489 $ 4,741
Accounts receivable, net 1,249 2,484
Inventories 1,562 1,517
Prepaid expenses 559 461
----------- -----------
Total current assets 6,859 9,203
Property and equipment, net 44,824 44,104
Other assets, net 5,684 6,287
Franchise costs, net 22,300 22,761
Notes receivable 1,250 6,250
----------- -----------
$ 80,917 $ 88,605
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 4,425 $ 4,567
Accounts payable 2,261 3,543
Other accrued liabilities 9,257 8,941
----------- -----------
Total current liabilities 15,943 17,051
----------- -----------
Long-term debt, net of current portion 31,688 31,204
----------- -----------
Other liabilities and deferred credits 2,614 3,089
----------- -----------
Commitments and contingencies
Stockholders' Equity
Common stock, $.001 par value, 40,000,000 shares
authorized; 7,951,825 shares issued and
outstanding in 1996 and 1995 8 8
Additional paid-in capital 40,205 40,205
Accumulated deficit (9,541) (2,952)
----------- -----------
30,672 37,261
----------- -----------
$ 80,917 $ 88,605
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE>
MAIN STREET AND MAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 1, 1996 June 26, 1995 July 1, 1996 June 26, 1995
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue $ 30,668 $ 31,128 $ 63,919 $ 60,922
----------- ----------- ----------- -----------
Restaurant Operating Expenses:
Cost of sales 8,747 8,947 18,206 17,306
Payroll and benefits 9,546 9,367 19,780 18,437
Depreciation and amortization 1,055 1,079 2,230 2,103
Other operating expenses 8,968 8,862 18,493 17,377
----------- ----------- ----------- -----------
Total restaurant operating expenses 28,316 28,255 58,709 55,223
----------- ----------- ----------- -----------
Income from restaurant operations 2,352 2,873 5,210 5,699
Depreciation and amortization 350 326 736 655
General and administrative expenses 1,047 1,111 2,005 2,221
Restructuring charge 7,448 --- 7,448 ---
----------- ----------- ----------- ------
Operating income (loss) (6,493) 1,436 (4,979) 2,823
Interest expense, net 795 1,125 1,610 2,277
----------- ----------- ----------- -----------
Net income (loss) before taxes (7,288) 311 (6,589) 546
Income tax expense --- --- --- ---
----------- ----------- ----------- -----------
Net income (loss) $ (7,288) $ 311 $ (6,589) $ 546
=========== =========== =========== ===========
Net Income (Loss) Per Share $ (0.92) $ 0.09 $ (0.83) $ 0.15
============ ============ ============= ===========
Weighted average shares outstanding 7,952 3,648 7,952 3,652
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
MAIN STREET AND MAIN INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
July 1, 1996 June 26, 1995
------------ -------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ (6,589) $ 546
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,966 2,758
Restructuring charge 7,448 ---
----------- -----------
Changes in assets and liabilities:
Accounts receivable 1,192 (68)
Inventories (45) (180)
Prepaid expenses (98) 38
Other assets (597) (1,660)
Accounts payable (1,282) (1,620)
Other liabilities (104) 544
----------- -----------
Net cash - operating activities 2,891 358
Cash Flows From Investing Activities:
Investments in affiliates --- (670)
Payment of accrued acquisition costs --- (242)
Net additions to property and equipment (4,485) (2,639)
Cash received from sale-leaseback transactions --- 3,203
----------- -----------
Net cash - investing activities (4,485) (348)
----------- -----------
Cash Flows From Financing Activities:
Cash proceeds from sale of common stock --- 16
Borrowing under credit facilities 2,100 2,228
Principal payments on long-term debt (1,758) (1,899)
----------- -----------
Net cash - financing activities 342 345
----------- -----------
Net change in cash and cash equivalents (1,252) 355
Cash and cash equivalents, beginning of period 4,741 3,049
----------- -----------
Cash and cash equivalents, end of period $ 3,489 $ 3,404
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest $ 1,625 $ 1,736
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
MAIN STREET AND MAIN INCORPORATED
Notes to Consolidated Financial Statements
July 1, 1996
(Unaudited)
1. The financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments)
which are, in the opinion of management, necessary to fairly state the
operating results for the respective periods. Certain information and
footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations, although
management of the Company believes that the disclosures are adequate to
make the information presented not misleading. For a complete
description of the accounting policies, see the Company's Form 10-K
filing for the year ended December 25, 1995.
2. The Company's restaurants operate on a fiscal quarter of 13 weeks.
3. The results of operations for the six months ended July 1, 1996 are not
necessarily indicative of the results to be expected for a full year.
4. As a result of certain events taking place during the quarter ended
July 1, 1996, the Company has recorded a restructuring charge of
$7,448,000. This charge is comprised of the following:
Non-core assets reduced to net realizable value $5,474,000
Under performing core assets 1,146,000
Other restructuring costs 828,000
----------
$7,448,000
==========
Non-core assets reduced to net realizable value:
During the quarter ended July 1, 1996, the debtor of the Company's $6
million promissory note sold assets related to its dairy operations
which represented a significant portion of the collateral securing the
note. The debtor used cash from the sale to pay down senior debt and to
provide working capital for its ice cream novelty production facility.
The Company is currently evaluating various options including
converting its promissory note to an equity position in the debtor's
business. Due to uncertainty of the business, the Company's promissory
note, net of a deferred gain booked at the time of the initial sale of
the Company's dairy and food distribution business, was written down by
$4.1 million. In addition, the Company has determined that its
investment in an indoor entertainment center being leased to a third
party may exceed its realizable value and has taken a charge of
$582,000. The remaining balance of non-core assets reduced to net
realizable value is comprised primarily of write downs of real estate
that the Company was holding for future restaurant development and now
plans to dispose of within the next 12 months.
6
<PAGE>
Under performing core assets:
The charge related to under performing core assets relates primarily to
the write off of preopening costs associated with two of the Company's
recently developed restaurants. While it is the Company's policy to
amortize preopening costs over 12 months commencing with the opening of
each new restaurant, the operating results at these restaurants were
not sufficient to support the amortization of preopening costs. One of
the restaurants was the recently opened Front Row Sports Grill. The
Company is currently negotiating with various parties regarding the
future of this restaurant. The remaining balance of under performing
core assets relates to a charge the Company is taking in anticipation
of closing a 20 year old T.G.I. Friday's restaurant in southern
California.
Other restructuring costs:
Other restructuring costs include costs to be incurred through December
31, 1998 under the terms of an existing employment agreement with the
Company's former Chairman and accrued professional fees incurred in
conjunction with the restructuring.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth, for the periods indicated, the percentages which
certain items of income and expense bear to total revenue:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 1, 1996 June 26, 1995 July 1, 1996 June 26, 1995
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Restaurant Operating Expenses
Cost of sales 28.5 28.7 28.5 28.4
Payroll and benefits 31.1 30.1 30.9 30.3
Depreciation and amortization 3.4 3.5 3.5 3.5
Other operating expenses 29.3 28.5 28.9 28.5
--------- --------- --------- ---------
Total restaurant operating expenses 92.3 90.8 91.8 90.7
--------- --------- --------- ---------
Income from restaurant operations 7.7 9.2 8.2 9.3
Depreciation and amortization 1.2 1.0 1.2 1.1
General and administrative expenses 3.4 3.6 3.2 3.6
Restructuring charge 24.3 --- 11.6 ---
--------- ---------- ---------
Operating income (loss) (21.2) 4.6 (7.8) 4.6
Interest expense, net 2.6 3.6 2.5 3.7
--------- --------- --------- ---------
Net income (loss) (23.8)% 1.0% (10.3)% 0.9%
========== ========= ========== =========
</TABLE>
Revenue for the three months ended July 1, 1996 decreased by 1.5% to $30,668,000
compared to $31,128,000 in the same period in 1995. Revenue for the six months
ended July 1, 1996 increased by 4.9% to $63,919,000 compared to $60,922,000 in
the same period in 1995. Revenue from the three restaurants opened subsequent to
June 26, 1995 contributed to the overall revenue gain for the six months ended
July 1, 1996; however, it was offset by a decline in same store sales for the
three and six months ended July 1, 1996 of 2.0% and 1.7%, respectively. The
decline in same store sales can be attributed to six specific locations and
approximately 90% of the decline relates to the Company's restaurants in
Southern California.
Cost of sales decreased as a percentage of revenue to 28.5% in the three months
ended July 1, 1996 from 28.7% in the same period in 1995. Cost of sales
increased as a percentage of revenue to 28.5% in the first six months of 1996
from 28.4% from the same period in 1995. Cost of sales have increased due to a
shift in the beverage market to premium/specialty beers and liquors which have
slightly lower margins and increases in portion sizes on several menu items;
however, most of the resulting increases have been offset by negotiated
purchasing discounts.
Labor costs increased as a percentage of revenue to 31.1% in the three months
ended July 1, 1996 from 30.1% in the same period in 1995. Labor costs increased
as a percentage of revenue to 30.9% in the first six months of 1996 from 30.3%
in the same period of 1995. This increase is almost entirely related to the
decline in same store sales in relation to the fixed component of labor costs.
8
<PAGE>
Other restaurant operating expenses increased as a percentage of revenue to
29.3% in the three months ended July 1, 1996 from 28.5% in the same period in
1995. Other restaurant operating expenses increased as a percentage of revenue
to 28.9% in the first six months of 1996 from 28.5% in the same period of 1995.
This increase is primarily related to the fixed nature of occupancy costs and
the decline in same store sales.
Income from restaurant operations decreased as a percentage of revenue to 8.2%
in the six months ended July 1, 1996 from 9.3% in the same period of 1995. In
addition to the items discussed above, there were two primary factors
contributing to this decrease. In February 1996, the Company opened its first
Front Row Sports Grill in Portland, Oregon. The higher costs associated with
opening a new concept coupled with lower than anticipated revenue accounted for
approximately 50 basis points of the decrease. In addition, the three-month
period of 1995 included $204,000 or approximately 40 basis points related to the
Company's management assistance agreement with AsianStar Co., Ltd. (AsianStar)
to provide management services and expertise relative to the development and
operation of T.G.I. Friday's restaurants in the Republic of Korea. No revenue
related to the management assistance agreement was recorded in the six-month
period ended July 1, 1996 as the Company has entered into an agreement for an
ownership interest in AsianStar, which currently owns and operates seven T.G.I.
Friday's restaurants in Korea.
In total, depreciation and amortization increased as a percentage of revenue to
4.6% in the three months ended July 1, 1996 from 4.5% in the same period in
1995. Depreciation and amortization increased as a percentage of revenue to 4.7%
in the first six months of 1996 from 4.6% in the same period of 1995. These
increases are due primarily to the fixed nature of these expenses given a
decline in same store sales.
General and administration expenses decreased as a percentage of revenue to 3.4%
in the three months ended July 1, 1996 from 3.6% in the same period in 1995.
General and administrative expenses decreased as a percentage of revenue to 3.2%
in the first six months of 1996 from 3.6% in the same period of 1995. This
decrease relates to reductions in corporate staff coupled with the relatively
fixed nature of these expenses in comparison to the overall increase in revenue.
A restructuring charge of $7,448,000 was recorded during the quarter ended July
1, 1996 as a result of certain events taking place. This charge is comprised of
the following:
Non-core assets reduced to net realizable value $5,474,000
Under performing core assets 1,146,000
Other restructuring costs 828,000
----------
$7,448,000
==========
Non-core assets reduced the net realizable value:
During the quarter ended July 1, 1996, the debtor of the Company's $6
million promissory note sold assets related to its dairy operations
which represented a significant portion of the collateral securing the
note. The debtor used cash from the sale to pay down senior debt and to
provide working capital for its ice cream novelty production facility.
The Company is currently evaluating various options including
converting its promissory note to an equity position in the debtor's
business. Due to uncertainty of the business, the
9
<PAGE>
Company's promissory note, net of a deferred gain booked at the time of
the initial sale of the Company's dairy and food distribution business,
was written down by $4.1 million. In addition, the Company has
determined that its investment in an indoor entertainment center being
leased to a third party may exceed its realizable value and has taken a
charge of $582,000. The remaining balance of non-core assets reduced to
net realizable value is comprised primarily of write downs of real
estate that the Company was holding for future restaurant development
and now plans to dispose of within the next 12 months.
Under performing core assets:
The charge related to under performing core assets relates primarily to
the write off of preopening costs associated with two of the Company's
recently developed restaurants. While it is the Company's policy to
amortize preopening costs over 12 months commencing with the opening of
each new restaurant, the operating results at these restaurants were
not sufficient to support the amortization of preopening costs. One of
the restaurants was the recently opened Front Row Sports Grill. The
Company is currently negotiating with various parties regarding the
future of this restaurant. The remaining balance of under performing
core assets relates to a charge the Company is taking in anticipation
of closing a 20 year old T.G.I. Friday's restaurant in southern
California.
Other restructuring costs:
Other restructuring costs include costs to be incurred through December
31, 1998 under the terms of an existing employment agreement with the
Company's former Chairman and accrued professional fees incurred in
conjunction with the restructuring.
Interest expense was $795,000 in the three months ended July 1, 1996 compared to
$1,125,000 in the same period of 1995. Interest expense was $1,610,000 in the
first six months of 1996 compared to $2,277,000 in the same period of 1995. This
decrease was a result of the retirement of over $8.7 million of indebtedness
with the proceeds from a public offering completed in September 1995 and the
concurrent modification of the Company's Senior Term Loan.
No income tax provision was recorded in 1996 or 1995 due to the availability of
net operating loss carryforwards. At December 25, 1995, the Company had
approximately $7,000,000 of net operating loss carryforwards to be used to
offset future income for income tax purposes.
Liquidity and Capital Resources
The Company's primary use of funds over the past three years has been for the
acquisition of existing T.G.I. Friday's restaurants and exclusive development
rights. These acquisitions were financed principally through the issuance of
long-term debt and Common Stock. The Company has also expended funds for the
development of new restaurants. The principal source of these funds has been
operating cash flows, supplemented by bank and lease financing.
The Company's current liabilities exceed its current assets due in part to cash
expended on the Company's development requirements and because the restaurant
business receives substantially immediate payment for sales, while payables
related to inventories and other current liabilities normally carry longer
payment terms, usually 15 to 30 days. The Company currently generates average
monthly cash receipts of approximately $10,900,000, which have been sufficient
to pay all obligations as they become due.
10
<PAGE>
The Company's debt at July 1, 1996 is comprised of the following:
The Company's Term Loan of $28,500,000 bears interest at LIBOR plus 280
basis points (8.37% as of July 1, 1996) and is payable in quarterly
installments of $750,000 with a final payment of $9,000,000 due upon
maturity on September 30, 2002.
In conjunction with the acquisition of Friday's of California, Inc., the
Company issued an unsecured note to TGI Friday's Inc. The outstanding
balance of this note is approximately $1,742,000 which bears interest at
12% per annum and has had its maturity date extended to March 31, 1998.
Due to terms of an intercreditor agreement, the Company is currently
prohibited from making payments under this note.
The Company currently finances equipment and leasehold improvements at
restaurants it develops and has approximately $5,871,000 in debt secured
by specific restaurants. These notes range from $400,000 to $950,000, have
interest rates ranging from 10.3% to 11.0% and require monthly principal
and interest payments.
Pursuant to its franchise agreements, the Company currently pays royalties of
4.0% and marketing fees of up to 1.2% of revenue to TGI Friday's Inc. The
Company also leases its restaurants with terms ranging from 10 to 20 years.
Minimum payments on the Company's existing lease obligations are approximately
$6,100,000 per year through 2000.
The Company has development agreements with TGI Friday's Inc. which require the
Company to open at least 34 additional T.G.I. Friday's restaurants by December
31, 1999. The Company intends to develop restaurants with approximately 5,000 to
6,500 square feet with development costs (excluding land) of approximately $1.4
to $2.0 million. The Company expects that current financing commitments,
potential joint ventures and cash flows from operations, will be sufficient to
develop the additional restaurants that the development agreements require the
Company to open.
11
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May
22, 1996. The matters voted on at the Annual Meeting were as
follows:
(a) The election of directors;
(b) Approval to adopt the Company's 1995 Stock Option Plan;
and
(c) The appointment of Arthur Andersen LLP as independent
auditors for the Company.
Messrs. Sherman, Panter, Antioco, Chua, and Metz were elected; the 1995
Stock Option Plan was approved; and the appointment of Arthur Andersen
LLP as independent auditors was approved by the stockholders as
follows:
Election of Directors For Votes Withheld
- --------------------- --- --------------
Steven A. Sherman 6,569,233 211,137
Joe W. Panter 6,611,092 169,278
John F. Antioco 6,614,582 165,788
David K.B. Chua 6,602,433 177,937
John C. Metz 6,606,702 173,668
Adopt Company's 1995 Stock Option Plan
- --------------------------------------
For Against Abstain Not Voted
--- ------- ------- ---------
6,260,928 420,913 66,989 31,540
Ratify Appointment of Arthur Andersen LLP
- -----------------------------------------
For Against Abstain
--- ------- -------
6,677,542 80,174 22,654
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
(b) The Registrant did not file any reports on Form 8-K
during the three months ended July 1, 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Main Street and Main Incorporated
Dated: August 20, 1996 /s/ Joe W. Panter
---------------------------------------
Joe W. Panter, President and
Chief Executive Officer
Dated: August 20, 1996 /s/ Mark C. Walker
---------------------------------------
Mark C. Walker, Chief Financial Officer,
Vice President Finance, Secretary and Treasurer
13
