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 June 28, 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
August 5, 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 - June 28, 1999 and
December 28, 1998 3
Consolidated Statements of Operations - Three Months
and Six Months Ended June 28, 1999 and June 29, 1998 4
Consolidated Statements of Cash Flows - Six Months
Ended June 28, 1999 and June 29, 1998 5
Notes to Consolidated Financial Statements -
June 28, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
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)
JUNE 28, DECEMBER 28,
1999 1998
-------- --------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,329 $ 7,294
Accounts receivable, net 2,671 2,096
Inventories 1,079 840
Prepaid expenses 777 593
-------- --------
Total current assets 9,856 10,823
Property and equipment, net 45,174 39,195
Other assets, net 1,976 2,337
Franchise costs, net 18,046 17,900
-------- --------
$ 75,052 $ 70,255
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,365 $ 1,365
Accounts payable 3,809 4,183
Other accrued liabilities 8,415 8,082
-------- --------
Total current liabilities 13,589 13,630
-------- --------
Long-term debt, net of current portion 31,228 28,264
-------- --------
Other liabilities and deferred credits 2,152 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 (16,076) (17,787)
-------- --------
28,083 26,372
-------- --------
$ 75,052 $ 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)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1999 1998 1999 1998
-------- -------- -------- --------
Revenue $ 35,615 $ 29,388 $ 67,080 $ 53,547
-------- -------- -------- --------
Restaurant Operating Expenses:
Cost of sales 10,080 8,312 19,044 15,287
Payroll and benefits 10,514 8,892 19,903 16,065
Depreciation and amortization 1,070 908 2,111 1,661
Other operating expenses 9,920 7,757 18,417 14,207
-------- -------- -------- --------
Total restaurant operating
expenses 31,584 25,869 59,475 47,220
-------- -------- -------- --------
Income from restaurant operations 4,031 3,519 7,605 6,327
Other Operating (Income) Expenses:
Amortization of intangible assets 254 215 512 416
General and administrative expenses 1,449 1,115 2,730 2,289
Preopening expenses 403 102 1,042 224
New manager training expenses 347 166 674 333
Management fee income (253) (259) (486) (442)
-------- -------- -------- --------
Operating income 1,831 2,180 3,133 3,507
Interest expense, net 683 649 1,254 1,226
-------- -------- -------- --------
Net income before taxes 1,148 1,531 1,879 2,281
Income tax expense -- -- -- --
-------- -------- -------- --------
Net income before cumulative effect
of change in accounting principle 1,148 1,531 1,879 2,281
Cumulative effect of change in
accounting
principle -- -- 168 --
-------- -------- -------- --------
Net income $ 1,148 $ 1,531 $ 1,711 $ 2,281
======== ======== ======== ========
Diluted Earnings Per Share:
Net income before cumulative effect
of change in accounting principle $ 0.11 $ 0.15 $ 0.18 $ 0.22
Cumulative effect of change in
accounting principle -- -- (0.02) --
-------- -------- -------- --------
Net income $ 0.11 $ 0.15 $ 0.16 $ 0.22
======== ======== ======== ========
Weighted average shares
outstanding-diluted 10,400 10,376 10,400 10,396
======== ======== ======== ========
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)
SIX MONTHS ENDED
------------------
JUNE 28, JUNE 29,
1999 1998
------- -------
Cash Flows From Operating Activities:
Net Income $ 1,711 $ 2,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,623 2,301
Changes in assets and liabilities:
Accounts receivable, net (575) 440
Inventories (239) (207)
Prepaid expenses (184) (443)
Other assets, net 225 (644)
Accounts payable (374) (600)
Other accrued liabilities 496 1,197
------- -------
Net Cash Flows - Operating Activities 3,683 4,325
------- -------
Cash Flows From Investing Activities:
Net additions to property and equipment (9,768) (9,609)
Cash received from sale-leaseback transaction 1,678 --
Cash received from note receivable -- 757
Cash paid to acquire franchise rights (22) (3,159)
Cash paid to acquire additional interest in subsidiary (500) --
Cash received from sale of assets -- 2,062
------- -------
Net Cash Flows - Investing Activities (8,612) (9,949)
------- -------
Cash Flows From Financing Activities:
Long-term debt borrowings 3,700 5,737
Principal payments on long-term debt (736) (843)
------- -------
Net Cash Flows - Financing Activities 2,964 4,894
------- -------
Net change in cash and cash equivalents (1,965) (730)
Cash and cash equivalents, beginning 7,294 8,424
------- -------
Cash and cash equivalents, end $ 5,329 $ 7,694
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 1,435 $ 1,226
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
MAIN STREET AND MAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 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 six months ended June
28, 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 $1,042,000, or $0.10 per share, were charged to
operations during the six months ended June 28, 1999.
6. During the six months ended June 28, 1999, the Company charged
approximately $355,000 in legal costs and severance payments against the
reserve for projected losses. The reserve balance in other accrued
liabilities at June 28, 1999 was approximately $1,012,000 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:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1999 1998 1999 1998
--------- -------- -------- --------
Revenue 100.0% 100.0% 100.0% 100.0%
Restaurant Operating Expenses:
Cost of sales 28.3 28.3 28.4 28.6
Payroll and benefits 29.5 30.3 29.7 30.0
Depreciation and amortization 3.0 3.0 3.1 3.1
Other operating expenses 27.9 26.4 27.5 26.5
----- ----- ----- -----
Total restaurant operating expenses 88.7 88.0 88.7 88.2
----- ----- ----- -----
Income from restaurant operations 11.3 12.0 11.3 11.8
Other Operating (Income) Expenses:
Amortization of intangible assets 0.7 0.8 0.7 0.8
General and administrative expenses 4.1 3.8 4.0 4.3
Preopening expenses 1.1 0.3 1.6 0.4
New manager training expenses 1.0 0.6 1.0 0.6
Management fee income (0.7) (0.9) (0.7) (0.8)
----- ----- ----- -----
Operating income 5.1 7.4 4.7 6.5
Interest expense, net 1.9 2.2 1.9 2.3
----- ----- ----- -----
Net income before taxes 3.2% 5.2% 2.8% 4.2%
===== ===== ===== =====
Revenue for the three months ended June 28, 1999 increased by 21.2% to
$35,615,000 compared with $29,388,000 for the comparable period in 1998. Revenue
for the six months ended June 28, 1999 increased 25.3% to $67,080,000 compared
to $53,547,000 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 since the second quarter of 1998. Additionally, same-store
sales for the quarter increased 6.1% as compared with an increase of 4.2% for
the comparable period in 1998. Year-to-date same-store sales were up 6.4% 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 June 28,
1999 were comparable with the same period in 1998. Cost of sales decreased as a
percentage of revenue to 28.4% for the six months ended June 28, 1999 from 28.6%
in the comparable period in 1998 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.
7
<PAGE>
Labor costs as a percentage of revenue were 29.5% for the three months ended
June 28, 1999 as compared with 30.3% for the same period in 1998. Labor costs as
a percentage of revenue for the six months ended June 28, 1999 were 29.7% as
compared to 30.0% for the comparable six months of 1998. These decreases in
labor costs as a percentage of revenue are primarily due to the implementation
by management of more effective labor management policies and the integration of
the six locations purchased in May 1998 into the Company's labor management
standards. These decreases are in spite of the Company's recently introduced
policy of increasing restaurant management staff in many of its restaurants from
four to five managers. During the quarter, the Company completed this increase
of managers in approximately 80% of its restaurants. Management does not
anticipate a need to increase its management staff in the remaining 20% of its
restaurants.
Other operating expenses increased as a percentage of revenue to 27.9% in the
three months ended June 28, 1999 from 26.4% in the comparable period in 1998 and
to 27.5% for the six months ended June 28, 1999 from 26.5% for the comparable
period in 1998. These increased costs as a percentage of revenue are due
primarily to a one-time charge for workers' compensation expenses and to
additional marketing and promotional costs.
General and administrative expenses increased as a percentage of revenue to 4.1%
for the three months ended June 28, 1999 as compared with 3.8% 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. General and
administrative expenses decreased as a percentage of revenue to 4.0% for the six
months ended June 28, 1999 as compared with 4.3% for the same period in 1998.
This decrease is due primarily to the relatively fixed nature of these expenses
when compared with the increases in revenue.
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 $403,000 (1.1% of
revenue) were charged to operations during the quarter ended June 28, 1998, as
compared with amortization of preopening expenses of $102,000 (0.3% of revenue)
for the same period in 1998. For the six months ended June 28, 1999, preopening
expenses of $1,042,000 (1.6% of revenue) were charged to operations, as compared
with amortization of preopening expenses of $224,000 (0.4% 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 $347,000 (1.0% of revenue) for the three months ended June
28, 1999, as compared with $166,000 (0.6% of revenue) for the same period in
1998. For the six months ended June 28, 1999, these expenses increased to
$674,000 (1.0% of revenue) from $333,000 (0.6% of revenue) for the same period
in 1998.
8
<PAGE>
Interest expense was $683,000 for the three months ended June 28, 1999 compared
with $649,000 in the same period of 1998 and $1,254,000 for the six months ended
June 28, 1999 as compared with $1,226,000 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 June 28, 1999, the Company had a cash
balance of $5,329,000 and monthly cash receipts have been sufficient to pay all
obligations as they become due.
The Company plans to develop approximately seven additional restaurants by the
end of 1999 funded partially from corporate funds and partially from debt and
sale/leasebacks.
The Company has outstanding debt and sale/leaseback financing commitments
totaling $34,251,000 which will be utilized to help fund development activity
through 1999.
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 begun correcting the deficiencies identified
in all affected areas and anticipates completion of the remediation plans by
September 30, 1999. 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 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held June 11, 1999. The matters
voted on at the meeting were as follows:
(a) The election of directors,
(b) The approval the Company's 1999 Incentive Stock Plan, and
(c) The appointment of Arthur Andersen LLP as independent auditors for the
Company.
Messrs. Antioco, Brown, Shrader, Metz and Sherman and Ms. Evans were elected to
the Board of Directors, the Company's 1999 Incentive Stock 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
- --------------------- --------- --------------
John F. Antioco 8,107,483 439,948
Bart A. Brown, Jr. 8,107,783 439,648
William G. Shrader 8,106,408 441,023
Jane Evans 8,102,908 444,523
John C. Metz 8,107,408 440,023
Steven A. Sherman 8,097,336 450,095
Approve the Company's Incentive Stock Plan
For Against Abstain Not Voted
--- ------- ------- ---------
3,766,401 733,242 72,605 3,975,183
Ratify Appointment of Arthur Andersen LLP
For Against Abstain
--- ------- -------
8,527,555 13,743 6,133
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 June 28, 1999
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 5, 1999 /s/ Bart A. Brown Jr.
----------------------------------------
Bart A. Brown Jr., President and
Chief Executive Officer
Dated: August 5, 1999 /s/ James Yeager
----------------------------------------
James Yeager, Vice President-
Finance and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 28, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1999
<PERIOD-END> JUN-28-1999
<CASH> 5,329
<SECURITIES> 0
<RECEIVABLES> 2,671
<ALLOWANCES> 0
<INVENTORY> 1,079
<CURRENT-ASSETS> 9,856
<PP&E> 62,108
<DEPRECIATION> (16,934)
<TOTAL-ASSETS> 75,052
<CURRENT-LIABILITIES> 13,589
<BONDS> 31,228
10
0
<COMMON> 0
<OTHER-SE> 28,073
<TOTAL-LIABILITY-AND-EQUITY> 75,052
<SALES> 67,080
<TOTAL-REVENUES> 67,566
<CGS> 19,044
<TOTAL-COSTS> 59,475
<OTHER-EXPENSES> 4,958
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,254
<INCOME-PRETAX> 1,879
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 168
<NET-INCOME> 1,711
<EPS-BASIC> .17
<EPS-DILUTED> .16
</TABLE>
