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 September 28, 1998
Commission File Number: 000-18668
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
November 9, 1998: 9,975,041
<PAGE>
MAIN STREET AND MAIN INCORPORATED
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements - Main Street and Main Incorporated
Consolidated Balance Sheets - September 28, 1998 and
December 29, 1997 3
Consolidated Statements of Operations - Three Months and Nine
Months Ended September 28, 1998 and September 29, 1997 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 28, 1998 and September 29, 1997 5
Notes to Consolidated Financial Statements -
September 28, 1998 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
2
<PAGE>
MAIN STREET AND MAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
SEPTEMBER 28, DECEMBER 29,
1998 1997
------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 10,145 $ 8,424
Accounts receivable, net 1,191 3,293
Inventories 1,128 1,043
Prepaid expenses 615 289
Assets held for disposal, net 363 363
-------- --------
Total current assets 13,442 13,412
Property and equipment, net 37,053 30,194
Other assets, net 3,398 3,091
Franchise costs, net 17,941 15,288
Note receivable -- 757
-------- --------
$ 71,834 $ 62,742
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,233 $ 1,233
Accounts payable 3,536 3,890
Other accrued liabilities 10,877 9,619
-------- --------
Total current liabilities 15,646 14,742
-------- --------
Long-term debt, net of current portion 28,735 24,308
-------- --------
Other liabilities and deferred credits 1,743 1,489
-------- --------
Commitments and contingencies
Stockholders' Equity:
Common stock, $.001 par value, 25,000,000
shares authorized; 9,975,041 and
9,970,691 shares issued and outstanding
in 1998 and 1997, respectively 10 10
Additional paid-in capital 44,149 44,145
Accumulated deficit (18,449) (21,952)
-------- --------
25,710 22,203
-------- --------
$ 71,834 $ 62,742
======== ========
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE>
MAIN STREET AND MAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- --------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $31,363 $29,050 $85,352 $ 84,580
------- ------- ------- --------
Restaurant Operating Expenses:
Cost of sales 9,022 8,441 24,309 24,189
Payroll and benefits 9,329 8,805 25,676 25,654
Depreciation and amortization 1,280 968 3,165 2,876
Other operating expenses 8,382 8,060 22,640 23,729
------- ------- ------- --------
Total restaurant operating expenses 28,013 26,274 75,790 76,448
------- ------- ------- --------
Income from restaurant operations 3,350 2,776 9,562 8,132
Other Operating (Income) Expenses:
Depreciation and amortization 286 220 702 648
General and administrative expenses 1,305 1,340 3,594 3,468
Gain on disposal of assets -- -- -- (1,595)
------- ------- ------- --------
Operating income 1,759 1,216 5,266 5,611
Interest expense, net 537 622 1,763 1,905
------- ------- ------- --------
Net income before taxes 1,222 594 3,503 3,706
Income tax expense -- -- -- --
------- ------- ------- --------
Net income before extraordinary item 1,222 594 3,503 3,706
Extraordinary loss from debt
extinguishment -- -- -- 1,638
------- ------- ------- --------
Net income $ 1,222 $ 594 $ 3,503 $ 2,068
======= ======= ======= ========
Diluted Earnings Per Share:
Net income before extraordinary item $ 0.11 $ 0.06 $ 0.33 $ 0.37
Extraordinary loss from debt
extinguishment -- -- -- (0.16)
------- ------- ------- --------
Net income $ 0.11 $ 0.06 $ 0.33 $ 0.21
======= ======= ======= ========
Weighted average shares
outstanding-diluted 10,747 10,266 10,619 10,026
======= ======= ======= ========
</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)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 29,
1998 1997
---- ----
Cash Flows From Operating Activities
Net Income $ 3,503 $ 2,068
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,867 3,524
Gain on disposal of assets -- (1,595)
Extraordinary loss from debt extinguishment -- 1,638
Changes in assets and liabilities:
Accounts receivable, net 40 (707)
Inventories (85) 147
Prepaid expenses (326) (86)
Other assets, net (870) (462)
Accounts payable (354) (914)
Other accrued liabilities 1,512 (2,103)
-------- --------
Net Cash Flows - Operating Activities 7,287 1,510
-------- --------
Cash Flows From Investing Activities:
Cash paid to acquire assets through business
combination -- (880)
Net additions to property and equipment (12,563) (2,913)
Cash received from sale-leaseback transactions 2,920 1,641
Cash received from note receivable 757 --
Cash paid to acquire franchise rights (3,173) --
Cash received from sale of assets 2,062 11,588
-------- --------
Net Cash Flows - Investing Activities (9,997) 9,436
-------- --------
Cash Flows From Financing Activities:
Proceeds from sale of common stock 4 2,449
Long-term debt borrowings 5,620 21,554
Principal payments on long-term debt (1,193) (29,740)
-------- --------
Net Cash Flows - Financing Activities 4,431 (5,737)
-------- --------
Net change in cash and cash equivalents 1,721 5,209
Cash and cash equivalents, beginning 8,424 2,613
-------- --------
Cash and cash equivalents, end $ 10,145 $ 7,822
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 1,968 $ 2,803
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
MAIN STREET AND MAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1998
(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 Report for the year ended December 29, 1997.
2. The Company operates on fiscal quarters of 13 weeks.
3. The results of operations for the three and nine months ended September 28,
1998 are not necessarily indicative of the results to be expected for a
full year.
4. On January 16, 1997, the Company sold five restaurants in northern
California (the "Northern California Sale") for $10,575,000 in cash and
entered into a Management Agreement with the buyer to manage the
restaurants. This transaction resulted in a gain before taxes of
approximately $1,595,000. Of the total proceeds, $8,000,000 was used to
reduce the Company's Term Loan with the balance used for working capital
purposes.
5. During 1997, $26,500,000 of debt was repaid with proceeds from the Northern
California Sale and with proceeds from new borrowings. The early
extinguishment of the debt resulted in an extraordinary loss of
approximately $1,638,000 before taxes.
6. In May 1998, the Company acquired six T.G.I. Friday's restaurants in
northern California for approximately $6,800,000, funded in part by the
assumption of existing long-term debt and the addition of new long-term
debt for a total increase in debt of $5,737,000.
7. In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities". This statement is effective for fiscal years
beginning after December 15, 1998. SOP 98-5 provides authoritative guidance
on the financial reporting of start-up and organization costs, including
the costs incurred prior to the opening of a restaurant, or preopening
costs. This statement requires that such costs be expensed as incurred and
not capitalized and amortized. The Company currently capitalizes and
amortizes these costs over a one year period. The Company will adopt SOP
98-5 for its fiscal year beginning on December 29, 1998 and will commence
expensing preopening costs as they are incurred. All unamortized costs
outstanding at the end of the fiscal year ending December 28, 1998 will be
6
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reported as the cumulative effect of a change in accounting principle, as
described in Accounting Principles Board Opinion No. 20, "Accounting
Changes", to be included in the financial statements for the fiscal year
ended December 27, 1999.
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 that
certain items of income and expense bear to total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Restaurant Operating Expenses:
Cost of sales 28.8 29.1 28.5 28.6
Payroll and benefits 29.7 30.3 30.1 30.3
Depreciation and amortization 4.1 3.3 3.7 3.4
Other operating expenses 26.7 27.7 26.5 28.1
----- ----- ----- -----
Total restaurant operating expenses 89.3 90.4 88.8 90.4
----- ----- ----- -----
Income from restaurant operations 10.7 9.6 11.2 9.6
Other Operating (Income) Expenses:
Depreciation and amortization 0.9 0.8 0.8 0.8
General and administrative expenses 4.2 4.6 4.2 4.1
Gain on disposal of assets -- -- -- (1.9)
----- ----- ----- -----
Operating income 5.6 4.2 6.2 6.6
Interest expense, net 1.7 2.1 2.1 2.2
----- ----- ----- -----
Net income before taxes 3.9% 2.1% 4.1% 4.4%
===== ===== ===== =====
</TABLE>
Revenue for the three months ended September 28, 1998 increased by 8.0% to
$31,363,000 compared with $29,050,000 for the comparable period in 1997. Revenue
for the nine months ended September 28, 1998 increased 0.9% to $85,352,000
compared to $84,580,000 for the comparable period in 1997. These increases are
attributed to increased same store sales and new units acquired and developed
during 1998. Included in revenue are management fees derived from the Company's
agreements to manage five restaurants in northern California, one restaurant in
7
<PAGE>
El Paso, Texas, and three restaurants in Louisiana. Management fee income was
$343,000 and $785,000 for the three months and nine months ended September 28,
1998, respectively.
Same store sales for the quarter were up 4.3% as compared with an increase of
7.0% for the comparable period in 1997. Year-to-date same store sales were up
4.2% as compared with an increase in same store sales of 1.3% for the same
period of the prior year.
Cost of sales decreased as a percentage of revenue to 28.8% in the three months
ended September 28, 1998 from 29.1% in the comparable period in 1997 and to
28.5% for the nine months ended September 28, 1998 from 28.6% for the comparable
period in 1997. These decreases are primarily due to the Company's food cost
reduction efforts and optimum pricing of all menu items.
Labor costs as a percentage of revenue were 29.7% in the three months ended
September 28, 1998, a decrease of 0.6% as compared with the same period in 1997.
Labor costs as a percentage of revenue for the nine months ended September 28,
1998 were 30.1% as compared with 30.3% for the comparable period in 1997. The
current quarter and year-to-date decreases as a percentage of revenue are in
spite of the acquisition of six restaurants in May 1998, a $0.40 per hour
increase in the federal minimum wage rate in September 1997 and an additional
$0.60 per hour increase in California in March 1998.
Other operating expenses decreased as a percentage of revenue to 26.7% in the
three months ended September 28, 1998 from 27.7% in the comparable period in
1997 and to 26.5% for the nine months ended September 28, 1998 from 28.1% for
the comparable period in 1997. These decreases are the result of the Company's
programs to lower supply, insurance, and maintenance costs, as well as
fluctuations in the percentage of revenue the Company pays to a national
marketing fund administered by T.G.I. Friday's, Inc.
Interest expense was $537,000 for the three months ended September 28, 1998
compared with $622,000 in the same period of 1997. This decrease is due to the
allocation of interest costs to new restaurants under construction.
No income tax provision was recorded in 1998 or 1997 due to the availability of
net loss carryforwards. At December 29, 1997, the Company had approximately
$14,700,000 of net operating and capital loss carryforwards to be used to offset
future income for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
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. At September 28, 1998, the Company had a
8
<PAGE>
cash balance of $10,145,000 and monthly cash receipts have been sufficient to
pay all obligations as they become due.
The Company currently has five restaurants under development and is on schedule
to complete four by the end of 1998 or in January 1999. These new restaurants
are being funded partially from corporate funds and partially from debt and
sale/leasebacks.
The Company believes that its current cash resources, its lines of credit, and
expected cash flows from operations will be sufficient to fund the Company's
recurring capital needs during the next 12 months at its current level of
operations. The Company has available debt and sale/leaseback financing
commitments totaling $30,000,000 that will be utilized to help fund development
activity through 1999. The Company may be required to obtain additional capital
to fund its planned growth during the next 12-18 months and beyond. Potential
sources of any such capital may include bank financing, strategic alliances and
additional offerings of the Company's equity or debt securities. There can be no
assurance that such capital will be available from these or other potential
sources, and the lack of capital could have a material adverse effect on the
Company's business.
The Company leases its restaurants with terms ranging from 10 to 20 years.
Minimum payments on the Company's existing lease obligations are approximately
$4,800,000 per year through 2002.
YEAR 2000
The Company has completed its assessment of the impact the Year 2000 issue will
have on its information systems and operations. The Company's corporate
information system, which consolidates operating results from all the
restaurants and processes accounts payable and payroll, will be Year 2000
compliant through vendor software upgrades which will be completed during the
first quarter of 1999. These updates are part of the software vendor's regular
maintenance program and will be provided at no additional cost to the Company.
The Company is currently evaluating new point-of-sale equipment along with new
back-office hardware and software for each of its restaurants. These systems and
related equipment which process guest orders, schedule labor, and provide store
level operating data, need to be upgraded periodically to incorporate the latest
technology.
To insure that these systems are Year 2000 compliant, the Company expects to
invest approximately $600,000 over the next 12 months to upgrade the back-office
hardware and software.
These enhancements will be made in the normal course of business to keep the
Company current in its technology and information systems, to keep it
competitive with other restaurant companies and to insure the Company is Year
2000 compliant.
9
<PAGE>
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including statements regarding
the Company's business strategies, the Company's business, and the industry in
which the Company operates. These forward-looking statements are based primarily
on the Company's expectations and are subject to a number of risks and
uncertainties, some of which are beyond the Company's control. Actual results
could differ materially from the forward-looking statements as a result of
numerous factors, including those set forth in the Company's Form 10-K for the
year ended December 29, 1997, as filed with the Securities and Exchange
Commission.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 27.1 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended September 28, 1998
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: November 9, 1998 /s/ Bart A. Brown Jr.
-----------------------------------
Bart A. Brown Jr., President and
Chief Executive Officer
Dated: November 9, 1998 /s/ James Yeager
-----------------------------------
James Yeager,
Corporate Controller and Secretary
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 28,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1998
<PERIOD-END> SEP-28-1998
<CASH> 10,145
<SECURITIES> 0
<RECEIVABLES> 1,191
<ALLOWANCES> 0
<INVENTORY> 1,128
<CURRENT-ASSETS> 13,442
<PP&E> 51,278
<DEPRECIATION> (14,225)
<TOTAL-ASSETS> 71,834
<CURRENT-LIABILITIES> 15,646
<BONDS> 28,735
0
0
<COMMON> 10
<OTHER-SE> 25,700
<TOTAL-LIABILITY-AND-EQUITY> 71,834
<SALES> 85,352
<TOTAL-REVENUES> 85,352
<CGS> 24,309
<TOTAL-COSTS> 75,790
<OTHER-EXPENSES> 4,296
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,763
<INCOME-PRETAX> 3,503
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,503
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
