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 27, 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
November 8, 1999: 10,025,116
<PAGE>
MAIN STREET AND MAIN INCORPORATED
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements - Main Street and Main Incorporated
Consolidated Balance Sheets - September 27, 1999 and
December 28, 1998 3
Consolidated Statements of Operations - Three Months
and Nine Months Ended September 27, 1999 and September 28, 1998 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 27, 1999 and September 28, 1998 5
Notes to Consolidated Financial Statements -
September 27, 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 12
SIGNATURES 12
2
<PAGE>
MAIN STREET AND MAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 27, December 28,
1999 1998
-------- --------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 362 $ 7,294
Accounts receivable, net 3,459 2,096
Inventories 1,167 840
Prepaid expenses 700 593
-------- --------
Total current assets 5,688 10,823
Property and equipment, net 48,713 39,195
Other assets, net 2,155 2,337
Franchise costs, net 17,873 17,900
-------- --------
$ 74,429 $ 70,255
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,365 $ 1,365
Accounts payable 3,404 4,183
Other accrued liabilities 7,819 8,082
-------- --------
Total current liabilities 12,588 13,630
-------- --------
Long-term debt, net of current portion 30,807 28,264
-------- --------
Other liabilities and deferred credits 2,185 1,989
-------- --------
Commitments and contingencies
Stockholders' Equity:
Common stock, $.001 par value, 25,000,000 shares
authorized; 10,023,011 and 9,976,416 shares
issued and outstanding in 1999 and 1998,
respectively 10 10
Additional paid-in capital 44,180 44,149
Accumulated deficit (15,341) (17,787)
-------- --------
28,849 26,372
-------- --------
$ 74,429 $ 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 Nine Months Ended
------------------------ ------------------------
September 27, September 28, September 27, September 28,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 35,291 $ 31,020 $ 102,371 $ 84,567
--------- --------- --------- ---------
Restaurant Operating Expenses:
Cost of sales 9,911 9,022 28,955 24,309
Payroll and benefits 10,599 8,963 30,502 25,028
Depreciation and amortization 1,073 1,203 3,184 2,864
Other operating expenses 9,732 8,456 28,149 22,663
--------- --------- --------- ---------
Total restaurant operating expenses 31,315 27,644 90,790 74,864
--------- --------- --------- ---------
Income from restaurant operations 3,976 3,376 11,581 9,703
Other Operating (Income) Expenses:
Amortization of intangible assets 239 286 751 702
General and administrative expenses 1,567 1,305 4,297 3,594
Preopening expenses 500 192 1,542 416
New manager training expenses 497 177 1,171 510
Management fee income (215) (343) (701) (785)
--------- --------- --------- ---------
Operating income 1,388 1,759 4,521 5,266
Interest expense, net 653 537 1,907 1,763
--------- --------- --------- ---------
Net income before taxes 735 1,222 2,614 3,503
Income tax expense -- -- -- --
--------- --------- --------- ---------
Net income before cumulative effect of
change in accounting principle 735 1,222 2,614 3,503
Cumulative effect of change in
accounting principle -- -- 168 --
--------- --------- --------- ---------
Net income $ 735 $ 1,222 $ 2,446 $ 3,503
========= ========= ========= =========
Diluted Earnings Per Share:
Net income before cumulative effect
of change in accounting principle $ 0.07 $ 0.11 $ 0.25 $ 0.33
Cumulative effect of change in
accounting principle -- -- (0.02) --
--------- --------- --------- ---------
Net income $ 0.07 $ 0.11 $ 0.23 $ 0.33
========= ========= ========= =========
Weighted average shares outstanding-diluted 10,591 10,747 10,493 10,619
========= ========= ========= =========
</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 27, September 28,
1999 1998
-------- --------
Cash Flows From Operating Activities:
Net Income $ 2,446 $ 3,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,935 3,867
Changes in assets and liabilities:
Accounts receivable, net (1,363) 40
Inventories (327) (85)
Prepaid expenses (107) (326)
Other assets, net (3) (870)
Accounts payable (779) (354)
Other accrued liabilities (68) 1,512
-------- --------
Net Cash Flows - Operating Activities 3,734 7,287
-------- --------
Cash Flows From Investing Activities:
Net additions to property and equipment (18,740) (12,563)
Cash received from sale-leaseback transactions 6,038 2,920
Cash received from note receivable -- 757
Cash paid to acquire franchise rights (38) (3,173)
Cash paid to acquire additional interest
in subsidiary (500) --
Cash received from sale of assets -- 2,062
-------- --------
Net Cash Flows - Investing Activities (13,240) (9,997)
-------- --------
Cash Flows From Financing Activities:
Proceeds from sale of common stock 31 4
Long-term debt borrowings 3,700 5,620
Principal payments on long-term debt (1,157) (1,193)
-------- --------
Net Cash Flows - Financing Activities 2,574 4,431
-------- --------
Net change in cash and cash equivalents (6,932) 1,721
Cash and cash equivalents, beginning 7,294 8,424
-------- --------
Cash and cash equivalents, end $ 362 $ 10,145
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 2,218 $ 1,968
======== ========
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 27, 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 and nine months ended
September 27, 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 the SOP
98-5, preopening costs of $1,542,000, or $0.15 per share, were charged to
operations during the nine months ended September 27, 1999.
6. During the nine months ended September 27, 1999, the Company charged
approximately $497,000 in legal costs and severance payments against the
reserve for projected losses. The reserve balance in other accrued
liabilities at September 27, 1999 was approximately $870,000 for severance,
legal and condemnation costs.
6
<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 Nine Months Ended
-------------------- --------------------
September 27, September 28, September 27, September 28,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Restaurant Operating Expenses:
Cost of sales 28.1 29.1 28.3 28.7
Payroll and benefits 30.0 28.9 29.8 29.6
Depreciation and amortization 3.0 3.8 3.1 3.4
Other operating expenses 27.6 27.3 27.5 26.8
----- ----- ----- -----
Total restaurant operating expenses 88.7 89.1 88.7 88.5
----- ----- ----- -----
Income from restaurant operations 11.3 10.9 11.3 11.5
Other Operating (Income) Expenses:
Amortization of intangible assets 0.8 0.9 0.7 0.8
General and administrative expenses 4.4 4.2 4.2 4.2
Preopening expenses 1.4 0.6 1.5 0.5
New manager training expenses 1.4 0.6 1.1 0.6
Management fee income (0.6) (1.0) (0.6) (0.8)
----- ----- ----- -----
Operating income 3.9 5.6 4.4 6.2
Interest expense, net 1.8 1.7 1.8 2.1
----- ----- ----- -----
Net income before taxes 2.1% 3.9% 2.6% 4.1%
===== ===== ===== =====
</TABLE>
Revenue for the three months ended September 27, 1999 increased by 14% to
$35,291,000 compared with $31,020,000 for the comparable period in 1998. Revenue
for the nine months ended September 27, 1999 increased 21% to $102,371,000
compared with $84,567,000 for the same period of the prior year. Revenue
increased as a result of the acquisition of six restaurants in May 1998 and the
development of seven new restaurants in 1999. Additionally, same-store sales for
the quarter were up 2.4% as compared with an increase of 4.3% for the comparable
period in 1998. Year-to-date same-store sales were up 5.0% as compared with an
increase in same-store sales of 4.2% for the same period of the prior year.
Cost of sales as a percentage of revenue for the three months ended September
27, 1999 were reduced to 28.1% for the three months ended September 27, 1999 as
compared with the same period in 1998. Cost of sales decreased as a percentage
of revenue to 28.3% for the nine months ended September 27, 1999 from 28.7% in
7
<PAGE>
the comparable period in 1998. These reductions were due to management's
on-going efforts to reduce food costs by implementing more efficient and cost
effective practices in food preparation, as well as reducing costs through more
efficient purchasing of food items.
Labor costs as a percentage of revenue were 30.0% for the three months ended
September 27, 1999 as compared with 28.9% for the same period in 1998. Labor
costs as a percentage of revenue for the nine months ended September 27, 1999
were 29.8% as compared with 29.6% for the comparable nine months of 1998. These
increases are primarily due to increased staffing needs during the initial
months of operation for newly opened restaurants. Once a restaurant has reached
operating maturity, labor costs as a percentage of revenue will be normalized.
Other operating expenses increased as a percentage of revenue to 27.6% in the
three months ended September 27, 1999 from 27.3% in the comparable period in
1998 and to 27.5% for the nine months ended September 27, 1999 from 26.8% for
the comparable period in 1998. These increased costs as a percentage of revenue
are due primarily to additional marketing and promotional costs.
General and administrative expenses increased as a percentage of revenue to 4.4%
for the three months ended September 27, 1999 as compared with 4.2% for the same
period in 1998. This increase is due primarily to costs incurred in training the
Company's restaurant management staff on new software and hardware installed to
insure that the restaurant computer systems are Year 2000 compliant, as well as
additional recruiting costs associated with the hiring of managers for the
Company's restaurants to be opened in 1999. General and administrative expenses
for the nine months ended September 27, 1999 remained constant as a percentage
of revenue as compared with the same period in 1998.
During the first quarter of 1999, 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 expenses as they
are incurred. Prior to 1999, such expenses were capitalized and amortized over a
period of one year. Pursuant to 98-5, preopening expenses of $500,000 (1.4% of
revenue) were charged to operations during the quarter ended September 27, 1998,
as compared with amortization of preopening expenses of $192,000 (0.6% of
revenue) for the same period in 1998. For the nine months ended September 27,
1999, preopening expenses of $1,542,000 (1.5% of revenue) were charged to
operations, as compared with amortization of preopening expenses of $416,000
(0.5% of revenue) for the same period in 1998.
New manager training expenses are those costs incurred in training newly hired
or promoted managers, as well as those costs incurred to relocate those managers
to permanent management positions. Due to the Company's aggressive growth, these
expenses increased to $497,000 (1.4% of revenue) for the three months ended
September 27, 1999, as compared with $177,000 (0.6% of revenue) for the same
period in 1998. For the nine months ended September 27, 1999, these expenses
increased to $1,171,000 (1.1% of revenue) from $510,000 (0.6% of revenue) for
the same period in 1998.
8
<PAGE>
Interest expense was $653,000 for the three months ended September 27, 1999
compared with $537,000 in the same period of 1998 and $1,907,000 for the nine
months ended September 27, 1999 as compared with $1,763,000 for the same period
in 1998. These increases are due to debt incurred in the development of new
restaurants and to the acquisition of six new restaurants in May 1998.
No income tax provision was recorded in 1999 or 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.
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 27, 1999, the Company had a
cash balance of $362,000 and monthly cash receipts have been sufficient to pay
all obligations as they become due.
The Company has outstanding debt and sale/leaseback financing commitments
totaling $36,500,000 which will be utilized to help fund development activity
and working capital requirements through 2000.
The Company plans to develop approximately six additional restaurants by the end
of 1999 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
capital needs during the next 12 months at its current level of operations,
apart from capital needs resulting from additional developed restaurants or
acquisitions. 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
$6,000,000 per year through 2002.
9
<PAGE>
YEAR 2000
The Company continues to assess and quantify the impact that 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-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 substantially completed the remediation
plans. Contingency plans are being implemented by the Company and will be in
place by the end of 1999 should any problems arise on January 1, 2000. The
estimated cost of the analysis and remediation plans related to the Year 2000
issues is approximately $450,000.
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.
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 November
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.
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, imbedded 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.
10
<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 28, 1998, as filed with the Securities and Exchange
Commission.
11
<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 27, 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: November 8, 1999 /s/ Bart A. Brown Jr.
----------------------------------------
Bart A. Brown Jr., President and
Chief Executive Officer
Dated: November 8, 1999 /s/ James Yeager
----------------------------------------
James Yeager, Vice President-Finance and
Secretary
12
<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 27,
1999 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-27-1999
<PERIOD-END> SEP-27-1999
<CASH> 362
<SECURITIES> 0
<RECEIVABLES> 3,459
<ALLOWANCES> 0
<INVENTORY> 1,167
<CURRENT-ASSETS> 5,688
<PP&E> 66,697
<DEPRECIATION> (17,984)
<TOTAL-ASSETS> 74,429
<CURRENT-LIABILITIES> 12,588
<BONDS> 30,807
0
0
<COMMON> 10
<OTHER-SE> 28,839
<TOTAL-LIABILITY-AND-EQUITY> 74,429
<SALES> 102,371
<TOTAL-REVENUES> 103,072
<CGS> 28,955
<TOTAL-COSTS> 90,790
<OTHER-EXPENSES> 7,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,907
<INCOME-PRETAX> 2,614
<INCOME-TAX> 0
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<DISCONTINUED> 0
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<CHANGES> 168
<NET-INCOME> 2,446
<EPS-BASIC> .25
<EPS-DILUTED> .23
</TABLE>
