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 March 29, 1999
Commission File Number: 000-18668
MAIN STREET AND MAIN INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 11-294-8370
(State or 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
May 11, 1999: 10,011,052
<PAGE>
MAIN STREET AND MAIN INCORPORATED
- --------------------------------------------------------------------------------
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements - Main Street and Main Incorporated
Consolidated Balance Sheets - March 29, 1999 and
December 28, 1998 3
Consolidated Statements of Operations - Three Months
Ended March 29, 1999 and March 30, 1998 4
Consolidated Statements of Cash Flows - Three Months
Ended March 29, 1999 and March 30, 1998 5
Notes to Consolidated Financial Statements -
March 29, 1999 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)
MARCH 29, DECEMBER 28,
1999 1998
-------- --------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,225 $ 7,294
Accounts receivable, net 2,385 2,096
Inventories 1,024 840
Prepaid expenses 523 593
-------- --------
Total current assets 10,157 10,823
Property and equipment, net 41,274 39,195
Other assets, net 2,105 2,337
Franchise costs, net 17,712 17,900
-------- --------
$ 71,248 $ 70,255
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,365 $ 1,365
Accounts payable 5,010 4,183
Other accrued liabilities 7,965 8,082
-------- --------
Total current liabilities 14,340 13,630
-------- --------
Long-term debt, net of current portion 27,917 28,264
-------- --------
Other liabilities and deferred credits 2,056 1,989
-------- --------
Commitments and contingencies
Stockholders' Equity:
Common stock, $.001 par value, 25,000,000 shares
authorized; 10,011,052 and 9,976,416 shares
issued and outstanding in 1999 and 1998,
respectively 10 10
Additional paid-in capital 44,149 44,149
Accumulated deficit (17,224) (17,787)
-------- --------
26,935 26,372
-------- --------
$ 71,248 $ 70,255
======== ========
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
------------------
MARCH 29, 1999 MARCH 30, 1998
-------------- --------------
<S> <C> <C>
Revenue $ 31,464 $ 24,159
-------- --------
Restaurant Operating Expenses:
Cost of sales 8,964 6,975
Payroll and benefits 9,389 7,176
Depreciation and amortization 1,041 773
Other operating expenses 8,497 6,452
-------- --------
Total restaurant operating expenses 27,891 21,376
-------- --------
Income from restaurant operations 3,573 2,783
Other Operating (Income) Expenses:
Amortization of intangible assets 258 201
General and administrative expenses 1,281 1,174
Preopening expenses 639 102
New manager training expenses 326 162
Management fee income (233) (183)
-------- --------
Operating income 1,302 1,327
Interest expense, net 571 577
-------- --------
Net income before taxes 731 750
Income tax expense -- --
-------- --------
Net income before cumulative effect
of change in accounting principle 731 750
Cumulative effect of change in accounting principle 168 --
-------- --------
Net income $ 563 $ 750
======== ========
Diluted Earnings Per Share:
Net income before cumulative effect of change in
accounting principle $ 0.07 $ 0.07
Cumulative effect of change in accounting principle (0.02) --
-------- --------
Net income $ 0.05 $ 0.07
======== ========
Weighted average shares outstanding-diluted 10,323 10,396
======== ========
</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>
THREE MONTHS ENDED
------------------
MARCH 29, MARCH 30,
1999 1998
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 563 $ 750
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,299 1,076
Changes in assets and liabilities:
Accounts receivable, net (289) 546
Inventories (184) 49
Prepaid expenses 70 (228)
Other assets, net 170 (274)
Accounts payable 827 (558)
Other accrued liabilities (50) 1,468
------- -------
Net Cash Flows - Operating Activities 2,406 2,829
------- -------
Cash Flows From Investing Activities:
Net additions to property and equipment (4,806) (4,416)
Cash received from sale-leaseback transactions 1,678 --
Cash received from sale of assets -- 2,062
------- -------
Net Cash Flows - Investing Activities (3,128) (2,354)
------- -------
Cash Flows From Financing Activities:
Principal payments on long-term debt (347) (315)
------- -------
Net Cash Flows - Financing Activities (347) (315)
------- -------
Net change in cash and cash equivalents (1,069) 160
Cash and cash equivalents, beginning 7,294 8,424
------- -------
Cash and cash equivalents, ending $ 6,225 $ 8,584
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 714 $ 577
======= =======
</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
MARCH 29, 1999
(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 28, 1998.
2. The Company operates on fiscal quarters of 13 weeks.
3. The results of operations for the three months ended March 29, 1999 are
not necessarily indicative of the results to be expected for a full year.
4. 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.
5. On the first day of its 1999 fiscal year, December 29, 1998, the Company
adopted Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities". Pursuant to this accounting requirement, the
costs of start-up activities are expensed as incurred. The adoption of SOP
98-5 resulted in deferred preopening costs on the Company's consolidated
balance sheet at December 28, 1998 of $168,000, or $0.02 per share, being
charged to operations as the cumulative effect of a change in accounting
principle during the quarter ended March 29, 1999. Additionally, pursuant
to SOP 98-5, preopening costs of $639,000, or $0.06 per share, were
charged to operations during the quarter.
6. During the quarter ended March 29, 1999, the Company charged approximately
$148,000 in legal costs and severance payments against the reserve for
projected losses. The reserve balance in other accrued liabilities at
March 29, 1999 was approximately $1,219,000 for severance, legal and
condemnation costs.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 29, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 30,
1998
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:
MARCH 29, 1999 MARCH 30, 1998
-------------- --------------
Revenue 100.0% 100.0%
Restaurant Operating Expenses:
Cost of sales 28.5 28.9
Payroll and benefits 29.8 29.7
Depreciation and amortization 3.3 3.2
Other operating expenses 27.0 26.7
----- -----
Total restaurant operating expenses 88.6 88.5
----- -----
Income from restaurant operations 11.4 11.5
Other Operating (Income)Expenses:
Amortization of intangible assets 0.8 0.8
General and administrative expenses 4.1 4.9
Preopening expenses 2.0 0.4
New manager training expenses 1.1 0.7
Management fee income (0.7) (0.8)
----- -----
Operating income 4.1 5.5
Interest expense, net 1.8 2.4
----- -----
Net income before taxes 2.3% 3.1%
===== =====
Revenue for the three months ended March 29, 1999 increased by 30.2% to
$31,464,000 compared with $24,159,000 in the comparable period in 1998. This
increase was due primarily to the acquisition of six restaurants in northern
California in May 1998, the development of three new restaurants during 1998,
the development of four new restaurants during the three months ended March 29,
1999, and a 6.8% increase in same-store sales for the quarter.
Cost of sales decreased as a percentage of revenue to 28.5% in the three months
ended March 29, 1999 from 28.9% in the comparable period in 1998. This decrease
was due to management's on-going efforts to reduce food costs by implementing
more efficient and cost effective practices in food preparation and purchasing.
7
<PAGE>
Beginning in 1999, the Company decided to increase the restaurant management
staff from four to five managers in many of its restaurants. The Company
believes that this change will provide benefit by adding management
effectiveness in the restaurants, which will result in increased sales volume
and lower operating expenses, and ultimately reduce other labor-related costs by
improving the quality of life for our managers, thus lowering management
turnover and the significant costs related thereto. As a result of this new
staffing policy, labor costs as a percentage of revenue were 29.8% in the three
months ended March 29, 1999, a slight increase over the rate for the same period
in 1998.
Other operating expenses increased to 27.0% of revenue in the three months ended
March 29, 1999 as compared with 26.7% in the comparable period in 1998. This
increase is due primarily to the costs of a direct mail advertising campaign
conducted in the first quarter of 1999.
General and administrative expenses decreased to 4.1% of revenue in the three
months ended March 29, 1999 from 4.9% in the comparable period in 1998 due
primarily to the relatively fixed nature of these expenses relative to the
increase in revenue.
During the quarter, the Company adopted Statement of Position 98-5 ("SOP 98-5"),
as promulgated by the American Institute of Certified Public Accountants, which
requires that the Company expense preopening costs as incurred. Prior to 1999,
such costs were capitalized and amortized over a period of one year. Pursuant to
SOP 98-5, preopening costs of $639,000 (2.0% of revenue) were charged to
operations during the quarter ended March 29, 1999, as compared with
amortization of preopening costs of $102,000 (0.4% of revenue) for the
comparable quarter of 1998. Prior to the effects of SOP 98-5, the Company would
have reported net income for the quarter ended March 29, 1999 of $1,225,000, or
$0.12 per diluted share (which would have been net of $145,000 in amortization
of preopening costs).
New manager training expenses are those costs incurred training newly hired or
promoted managers, as well as those costs incurred relocating those managers to
permanent management positions. Due to the Company's aggressive growth, these
costs increased to $326,000 (1.1% of revenue) as compared with $162,000 (0.7% of
revenue) for the comparable period in 1998.
Interest expense was $571,000 in the three months ended March 29, 1999 compared
with $577,000 in the same period of 1998. This decrease was primarily due to the
capitalization of financing costs of $142,350 associated with restaurants under
development during the quarter ended March 29, 1999.
No income tax provision was recorded in either quarter ended March 29, 1999 or
March 30, 1998 due to the availability of net loss carryforwards. At December
28, 1998, the Company had approximately $12,100,000 of net operating and capital
loss carryforwards to be used to offset future income for income tax purposes.
These carryforwards expire in 2002 to 2012.
8
<PAGE>
In prior years, the Company established various reserves to recognize certain
litigation, condemnation and severance losses. During the quarter ended March
29, 1999, approximately $148,000 was charged against these reserves for legal
costs paid in connection with litigation and condemnation claims, and severance
payments made to a former employee. The reserve balance at March 29, 1999 was
approximately $1,219,000. The Company expects that the transactions for which
these reserves were established will be fully concluded, and the reserves
eliminated, by the end of the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current liabilities exceed its current assets due primarily 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 March 29, 1999, the Company had
a cash balance of $6,225,000 and monthly cash receipts have been sufficient to
pay all obligations as they became due.
The Company plans to develop approximately ten or eleven additional restaurants
by the end of 1999, funded partially from available corporate funds and
partially from debt and sale/leaseback financing commitments.
The Company has received debt and sale/leaseback financing commitments totaling
$30,000,000 and a $3,000,000 bank revolving line of credit which will be
utilized to help fund development activity through 1999.
The Company leases its restaurants with terms ranging from 10 to 20 years.
Minimum payments on the Company's existing lease obligations are approximately
$5,800,000 per year through 2002.
YEAR 2000
The Company continues to assess and quantify the impact the Year 2000 issue will
have on its information systems, imbedded systems and business processes. The
systems that might be affected by the Year 2000 issue are (1) the Company's
internal corporate support systems, including a mid-range computer system the
Company relies upon to assimilate accounting information and produce internal
and external accounting reports; (2) the Company's internal personal computer
network and related software that it relies upon to produce correspondence,
daily and weekly financial data; (3) the Company's point-of-sale and restaurant
back-office accounting systems that it relies upon to process guest orders,
track the status of orders, schedule and track time and attendance information
and related labor costs, and produce store-level operating data; (4) restaurant
equipment necessary to prepare the guests' orders; and (5) third-
9
<PAGE>
party systems such as computer systems used by the banking, telephone, utility,
food preparation and distribution industries, all of which are necessary to the
basic operation of the Company's restaurants.
In 1998, the Company began identifying those most critical areas that might be
deficient and established a time line to complete the necessary analysis and
remediation plans. The Company has begun correcting the deficiencies identified
in all affected areas and anticipates completion of the remediation plans by
September 30, 1999. The estimated capital cost of the analysis and remediation
plans related to the Year 2000 issues is approximately $760,000.
As part of this process, the Company has assessed the role of critical suppliers
of products and services to determine the extent that the Company might be
vulnerable in the event that these suppliers have failures due to the Year 2000
issue. A questionnaire has been provided to, and research is being conducted on,
critical suppliers to determine their state of Year 2000 readiness.
The Company has determined that the worst case scenario related to the Year 2000
issue would be a complete failure of the Company's systems and those of the
Company's critical suppliers of products and services. The failure of the
Company's information systems, embedded systems, or business processes or the
systems of third parties to timely achieve Year 2000 compliance could have a
material adverse effect on the Company's business, financial condition and
operating results.
Where critical suppliers or processes might not be compliant, or compliance is
uncertain, the Company is establishing contingency plans in the event that such
suppliers or processes fail to perform after December 31, 1999. Such contingency
plans might consist of converting to manual systems or changing to alternative
processes or suppliers that will function properly after December 31, 1999. The
Company anticipates that it will complete these contingency plans by September
30, 1999. The Company is unable to reasonably estimate the effect, if any, on
its consolidated financial position, results of operations or cash flows from
the failure of its significant vendors to be Year 2000 ready.
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 28, 1998, 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 Financial Data Schedule
(b) The Company did not file any reports on Form
8-K during the three months ended March 29,
1999
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: May 11, 1999 /s/ Bart A. Brown Jr.
--------------------------------------------
Bart A. Brown Jr., President and
Chief Executive Officer
Dated: May 11, 1999 /s/ James Yeager
----------------------------
James Yeager, Vice President-Finance,
Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This exhibit contains summary financial information from the Registrant's
unaudited consolidated financial statements for the period ended March 29,
1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1999
<PERIOD-END> MAR-29-1999
<EXCHANGE-RATE> 1
<CASH> 6,225
<SECURITIES> 0
<RECEIVABLES> 2,385
<ALLOWANCES> 0
<INVENTORY> 1,024
<CURRENT-ASSETS> 10,157
<PP&E> 57,184
<DEPRECIATION> (15,910)
<TOTAL-ASSETS> 71,248
<CURRENT-LIABILITIES> 14,340
<BONDS> 27,917
0
0
<COMMON> 10
<OTHER-SE> 26,925
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<SALES> 31,464
<TOTAL-REVENUES> 31,697
<CGS> 8,964
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<OTHER-EXPENSES> 2,504
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 571
<INCOME-PRETAX> 731
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<INCOME-CONTINUING> 731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 168
<NET-INCOME> 563
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
