FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19623
MIAMI SUBS CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0249329
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 N.W. 31ST AVENUE, FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices)
(Zip Code)
(954) 973-0000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of August 26, 1996, 27,738,840 shares of common stock were outstanding. On
such date, the aggregate market value of the common stock held by
non-affiliates of the Registrant, was approximately $19,254,000 (amount
computed based on the closing price on August 26, 1996). As of August 26,
1996, 505,500 shares of convertible preferred stock, which are also voting
stock, were outstanding and held by non-affiliates. Such shares are not
traded on a market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement which the Registrant will file
with the Securities and Exchange Commission in connection with the Company's
annual meeting of shareholders, are incorporated by reference in Part III of
this Form 10-K.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Miami Subs Corporation (hereinafter referred to as "Miami Subs" or the
"Company") develops, owns, operates and franchises restaurants under the name
"Miami Subs" and "Miami Subs Grill" ("Restaurants"). The Restaurants are
designed to offer fresh quality food with speed and moderate prices found at
fast food restaurants such as McDonald's and Burger King, and the quality,
freshness and variety found at casual dining restaurants such as TGI Friday's
and Chili's. The Restaurants feature fresh food prepared and cooked to order
including hot and cold submarine sandwiches, various ethnic foods such as
gyros, pita sandwiches and greek salads, flame grilled hamburgers and chicken
breasts, chicken wings, fresh salads, ice cream and other desserts. The
diverse, moderately priced menu is designed to attract a broad customer base
and to encourage frequent visits. The Restaurants feature a distinct exterior
highlighted with pink and blue neon and an interior decorated in tropical
motif. The appearance is intended to create strong guest appeal and serves as
an effective marketing tool.
The Company has historically expanded principally through a strategy of
leasing existing free-standing fast food restaurants and other properties, and
converting them to Miami Subs Restaurants. Although the Company still
believes that the strategy of converting existing properties will continue,
competition for closed and under-performing restaurant properties has
increased significantly in recent years, and fewer sites suitable for
conversion are available. Accordingly, future growth of traditional
free-standing Restaurants will require more costly unit development, including
the acquisition of raw land and construction of buildings. In order to
supplement its historical traditional free-standing unit growth, in 1996 the
Company initiated various programs for franchisees involving non-traditional
development, including Restaurants located on tollroads, at airports, in
convenience stores, and a proto-type "in-line" location. Typically, these
Restaurants are smaller than the traditional Miami Subs Grill Restaurants and
where appropriate involve modifications to food preparation and delivery, and
to the menu. In addition to selling Baskin-Robbins ice cream in certain
Restaurants, the Company is also reviewing other opportunities for dual
branding in existing or new Restaurants.
Competition in the quick service restaurant industry continues to be intense
and will remain so in the foreseeable future. In response to intense industry
competition and aggressive price discounting and marketing by larger national
chains, and in an attempt to reduce or eliminate same-store-sales declines
that the Miami Subs Grill system has been experiencing, in 1996 the Company
adopted value pricing and price discounting strategies. If not successful
such strategies could adversely effect restaurant level profitability in both
Company and franchised Restaurants. There can be no assurance that these
strategies, or other marketing strategies that the Company may take, will be
successful.
As of May 31, 1996, the Company's restaurant system included 177 Restaurants,
of which 125 of the Restaurants were located in Florida, 50 Restaurants were
located in 13 other states, and two Restaurants were located in Ecuador. Of
these Restaurants, 37 were Company operated and 140 were franchised. The
Company plans to reduce the current number of Company operated Restaurants by
selling units to franchisees, and intends to focus its growth in the near term
on franchise development, with the objective of expanding the franchise system
in existing markets as well as nationally and internationally. In part due to
the limited number of Restaurants located in other states, the Restaurants
operating outside of Florida have generally not been as successful as the
Restaurants operating in Florida. Additionally, as a result of the current
concentration of restaurants in Florida, the Company and its Florida
franchisees could be more severely affected by any adverse economic conditions
in Florida than would a more geographically diversified restaurant company.
Franchisees currently operate 140 of the 177 Restaurants in the system. The
Company receives royalty and advertising fees from its franchised Restaurants,
and also receives lease/sub-lease rental income from certain of these
franchised Restaurants. In addition, the Company has guaranteed certain third
party equipment and real estate leases for certain franchisees and from time
to time has financed the sale of Restaurants to franchisees. Accordingly, the
Company's success and future profitability will be substantially dependent on
the management skills and success of its existing franchisees. In addition,
expansion of the chain will be dependent on the Company's ability to attract
qualified franchisees who will be able to successfully develop and operate
Restaurants.
Miami Subs Corporation was incorporated in the State of Florida by Mr. Gus
Boulis ("Boulis") during August 1990 for the purpose of acquiring the
worldwide rights to develop, own, operate and franchise Miami Subs
restaurants. Through a series of transactions, these rights were acquired by
the Company from Boulis, the founder of the concept, and from privately-owned
companies owned by or affiliated with him. The remaining rights were acquired
during 1991 through a merger with QSR, Inc.
ACQUISITIONS
On March 1, 1996, the Company acquired from a franchisee five existing Miami
Subs Grill Restaurants located in the Dallas, Texas metropolitan area, along
with the development rights for the Dallas and Fort Worth, Texas markets. As
consideration for the acquisition, the Company issued 1,325,000 shares of its
common stock and assumed existing indebtedness on the Restaurants of
$1,467,000. In addition, the Company received a non-interest bearing
promissory note in the original amount of $1,500,000, which was reduced by
cash and equivalents (principally transferable inventories, supplies, and
deposits) in the amount of $200,000 at the closing. The unpaid principal
balance of the note, which is non-recourse and secured by the common stock,
was originally due on July 1, 1996, and has been extended by the Company to
September 30, 1996.
On December 21, 1994, the Company acquired by merger MG III, Inc. ("MG III").
At the time of the acquisition, MG III was the Company's largest franchisee,
operating eight Restaurants, and was also a joint venture partner with the
Company in the operation of five Restaurants. MG III also held the
non-exclusive development rights in a four state territory (North Carolina,
South Carolina, and parts of Georgia and Northern Florida), and provided
franchisor required services to franchised Restaurants in the territory (31 at
the time of acquisition) in return for approximately one-half of the standard
royalty fees and initial franchise fees paid by all franchisees in the
territory. In the merger, the sole shareholder of MG III received 1.0 million
shares of the Company's common stock, a warrant to acquire 100,000 shares of
the Company's common stock at an exercise price of $6.00 per share, and
$800,000 cash representing the repayment of certain amounts due to the sole
shareholder by MG III. The Company also assumed MG III's indebtedness to
banks of approximately $1.8 million and other liabilities totaling
approximately $900,000. As a result of the acquisition and merger of MG III,
the Company began operating 13 additional Restaurants (of which five
Restaurants have been franchised as of May 31, 1996) and began receiving all
royalties from the 31 franchised Restaurants in the territory.
Effective January 1, 1995, the Company acquired from Kavala, Inc. ("Kavala") a
private company owned by Miami Subs founder and Company director Gus Boulis,
two existing Miami Subs Restaurants located in South Florida, and additional
royalties from 21 existing franchised Restaurants which were originally
developed by Kavala. Under an arrangement with Kavala prior to this
acquisition, the Company received one-half of the royalties associated with
these franchised Restaurants. The acquisition was made for cash totaling $3.2
million, of which $2.5 million was provided through bank financing.
THE MIAMI SUBS CONCEPT
Miami Subs Restaurants feature moderately priced lunch, dinner and snack
foods, including hot and cold submarine sandwiches, various ethnic foods such
as gyros, pita sandwiches and Greek salads, flame grilled hamburgers and
chicken breasts, chicken wings, fresh salads, ice cream and other desserts.
Soft drinks, iced tea, coffee, beer and wine also are offered. The majority
of the menu items are priced between $2.99 and $4.95.
Freshness and quality of breads, produce and other ingredients are strongly
emphasized. The menu includes low-fat selections such as salads, grilled
chicken breasts, vegetarian items and non-fat frozen yogurt which the Company
believes are perceived as nutritious and appealing to health conscious
consumers. The Company believes it has become known for certain "signature"
foods, such as grilled chicken on pita bread, cheese steak subs, and gyros on
pita bread.
In 1994, the Company entered into an agreement with Baskin-Robbins USA, Co.
("Baskin-Robbins") whereby Baskin-Robbins ice cream products may be sold in
approved Restaurants pursuant to a separate franchise agreement with
Baskin-Robbins. Under the agreement, the Company performs training,
operational monitoring and guidance over the Baskin-Robbins products. As of
May 31, 1996, 11 of the Company operated Restaurants and 32 franchised
Restaurants sell Baskin-Robbins ice cream products.
The Restaurants feature a distinctive decor unique to the Miami Subs concept.
The exterior features an unusual roof design and neon pastel highlights for
easy recognition. Interiors have a tropical motif in a neon pink and blue
color scheme with murals of fish, mermaids, flamingos and tropical foliage.
Exteriors and interiors are brightly lit to create an inviting, active
ambience to distinguish the Restaurants from its competitors. All but 18 of
the existing Miami Subs Restaurants are freestanding buildings, consisting of
approximately 2,000 to 5,000 square feet.
Miami Subs Restaurants are open seven days a week, and generally open at 10:30
am and have extended late-night hours. Indoor service is provided at a
walk-up counter where the customer places an order and is given an order
number and a drink cup. The customer then proceeds to a self service soda bar
while the food is prepared to order. Typical time from order to pick-up is
usually five minutes or less.
Drive-thru service is provided at principally all free-standing Restaurants.
All items are generally available at the drive-thru, but the drive-thru menu
board is simplified to speed ordering. After ordering via intercom, the
customer proceeds to the first of two windows. At the first window, drinks
are served and payments taken. This allows the customer to enjoy a soft drink
while proceeding to the next window for the completion of the order. The
Company estimates that drive-thru sales account for approximately 35% - 40% of
its sales.
GROWTH STRATEGY
Restaurants in the Miami Subs system have been developed primarily through
conversions of existing properties. This strategy enabled the chain to expand
more quickly and economically than would have been possible if each Restaurant
had been developed on a vacant site. Although the Company still believes that
the strategy of converting existing properties will continue, competition for
closed and under-performing restaurant properties has increased significantly
in recent years, and fewer acceptable sites are available. Accordingly, the
Company believes that future growth will also consider traditional development
opportunities including the acquisition of raw land and construction of
buildings, and that such future growth of traditional units may be slower than
the historical unit growth.
Historically, the Company and its franchisees have utilized traditional,
free-standing buildings for its Restaurants. However, during fiscal year
1996, the Company initiated various programs principally for franchisees for
non-traditional unit development, including Restaurants located on tollroads,
at airports, in convenience stores, and in-line locations. As of May 31,
1996, Miami Subs Restaurants were operating on two tollroads, three airports,
one convenience store, and one in-line location.
With the development of these new non-traditional franchising programs, the
Company intends to focus its future growth through franchising. In addition
to expected new franchised units, especially in the non-traditional area, the
Company intends to franchise certain of its existing Company operated units.
COMPANY OPERATED RESTAURANTS
At May 31, 1996, the Company operated 37 Restaurants, of which nineteen are
located in Florida, six are located in Texas, four are located in North
Carolina, three are located in each of Georgia and South Carolina, and one is
located in each of New York and New Jersey. The Company's Restaurants are
utilized for many purposes which are integral to the entire system. New menu
items are tested and restaurant management and operating personnel are trained
in the Company's procedures. In addition, the Company's operating standards
are further refined, and the Company acquires a better understanding of
day-to-day management and operating concerns of its franchisees.
In an effort to maximize operating profits and to enhance product quality for
Company operated and franchised Restaurants, the Company maintains a
purchasing department that works with suppliers on behalf of the entire system
to obtain high quality products and services at competitive prices. The
purchasing department approves all products and product specifications, and
has also private labelled several of its products, resulting in lower cost.
The Company has established a relationship with a national food distributor
whereby the Company and its franchisees are able to order and receive
deliveries of most of its food and paper products directly through the
distributor. The Company believes that this arrangement is efficient and cost
effective and facilitates quality control. The Company believes that a
majority of its franchisees use the Company's suppliers; however, a franchisee
may use an alternate source for its supply needs that complies with Company
specifications upon approval by the Company.
The Company utilizes kitchen equipment in its Restaurants which is designed to
be versatile, improve product consistency, reduce labor costs and facilitate
menu modifications. In conjunction with a major supplier, the Company
developed a four-chain broiler intended to replace chargrills and convection
ovens. The Company also utilizes computerized fryers with automatic
lift-arms. The equipment is programmed to follow instructions for cooking
temperatures and times. Fresh meats and other products, which are purchased
in pre-weighed individual servings, can be consistently cooked-to-order
automatically. The Company requires that its franchisees also utilize this
kitchen equipment to maximize consistency and speed of food preparation.
During fiscal year 1996, the Company acquired six Restaurants from
franchisees, opened four new Company operated Restaurants (including one
proto-type "in-line" Restaurant to be utilized in future franchising efforts),
and sold/transferred three Restaurants to franchisees. In fiscal year 1995,
the Company acquired 18 Restaurants from franchisees, and sold/transferred
seven Restaurants to franchisees. The Company does not have plans for
additional acquisitions or for the development of new Company Restaurants in
fiscal 1997, but does intend to reduce the current number of Company operated
Restaurants by selling certain units to franchisees. In addition, one
existing Company Restaurant is scheduled to close in the second quarter of
fiscal 1997.
FRANCHISE OPERATIONS
Strategy. The Company intends to focus future development in franchised
Restaurants, through both traditional and non-traditional Restaurants. In
1996, the Company initiated various programs for franchisees involving
non-traditional development, including Restaurants located on tollroads, at
airports, in convenience stores, and in "in-line" locations. Typically, these
Restaurants are smaller than the traditional Miami Subs Grill Restaurants and
where appropriate involve modifications to food preparation and delivery, and
to the menu. In addition to selling Baskin-Robbins ice cream products in
certain Restaurants, the Company is also reviewing other opportunities for
dual branding in existing or new Restaurants.
The primary criteria considered by the Company in the selection, review and
approval of franchisees are prior experience in operating fast food
restaurants or other comparable business experience, net worth, and capital
available for investment. The Company believes that it has attracted a number
of franchisees with significant experience in the restaurant industry as a
result of the unique aspects of the concept.
Franchisee Support Services. The Company maintains a staff of operations
personnel to train and assist franchisees in opening new Restaurants and to
monitor the operations of existing Restaurants. These services are provided
as part of the Company's franchise program. New franchisees are required to
complete a six-week training program. Upon the opening of a new franchised
Restaurant, Company representatives are typically sent to the Restaurant to
assist the franchisee during the opening period. These Company
representatives work in the Restaurant to monitor compliance with the
Company's standards and provide additional on-site training of the
franchisee's restaurant personnel.
The Company also provides development and construction support services to its
franchisees. Plans and specifications for the Restaurants must be approved by
the Company before improvements begin. The Company's personnel typically
visit the facility during construction to meet with the franchisee's site
contractor and to verify that construction standards are met.
Training. New franchisees are required to complete a six-week program that
features various aspects of day-to-day operations and certification in all
functioning positions. The program consists of formal classroom training and
in--restaurant training, including human resources, accounting, purchasing and
labor and food handling laws. Generally, a team of Company employed personnel
is provided for new Restaurants to conduct hands-on training and to ensure
compliance with Company standards. Standard operating manuals are provided to
each franchisee. Classroom training is performed in the Company's training
center located in Fort Lauderdale, Florida.
Quality Assurance. To maintain uniformly high standards of appearance,
service, food and beverage quality, the Company has adopted policies and
implemented a monitoring program. Franchisees are expected to adhere to Miami
Sub's specifications and standards in connection with the selection and
purchase of products used in the operation of the Restaurant. Detailed
specifications are provided for the products used, and the Company must
approve any deviations. The Company does not sell equipment, supplies or
products to its franchisees. The franchise agreement requires franchisees to
operate their Restaurants in accordance with the Company's requirements.
Ongoing advice and assistance is provided to franchisees in connection with
the operation and management of each Restaurant. The Company's area
consultants are responsible for oversight of franchisees and periodically
visit each Restaurant. During such visits, the area consultant completes a
report which contains evaluations on speed of preparation for menu items,
quality of delivered product, cleanliness of Restaurant facilities as well as
evaluations of managers and other personnel. The area consultants also make
unannounced follow-up visits to ensure adherence to the Company's operational
specifications.
In addition, the Company utilizes information about the Restaurants which is
received from customers on the Company's standardized "comment card" and
maintains a toll-free telephone number to receive customer comments.
Franchise Agreements. Each franchisee is required to execute a standard
franchise agreement with the Company relating to the operation of each
Restaurant. Currently, the term of the franchise agreement is 20 years and
the initial franchise fee is $25,000 for traditional Restaurants and $15,000
for certain non-traditional Restaurants. Franchisees are also required to pay
a monthly royalty of 4% of gross sales for the term of the franchise
agreement. The agreements permit additional charges of up to 5% of gross
sales to support various system-wide advertising funds.
Development Agreements. In addition to individual franchise agreements, the
Company from time to time has entered into development agreements with certain
franchisees. The development agreement establishes the minimum number of
Restaurants the franchisee is required to open in an agreed upon exclusive
area during the term of the agreement. The Company receives a non-refundable
fee based upon the minimum number of Restaurants required to be opened under
the agreement. The Company also receives a franchise fee for each Restaurant
opened, and standard royalty and advertising fees. The Company believes that
multi-unit operation under development agreements offer advantages to the
Company and its franchisees as it enables the franchisee to achieve economies
of scale in operating costs and the Company to achieve penetration of a
defined market. During fiscal year 1996, nine area development agreements
were terminated by the Company for non-performance. At May 31, 1996, there
were existing development agreements with 10 franchisees which provide for the
opening of up to 79 Restaurants over a seven year period. There can be no
assurance that performance by the franchisees under these agreements will be
successful.
During fiscal year 1996, 24 franchised Restaurants opened, including 18
traditional units and six non-traditional units, and seven franchised
restaurants closed. Due to the escalating cost of traditional free-standing
locations, the Company believes that the future development pace of
free-standing locations by franchisees may continue to decline; in addition,
since various non-traditional development programs have only recently been
initiated, the Company is unable to estimate the ultimate success or future
development pace of such programs.
RESTAURANT LOCATIONS
At May 31, 1996, there were 177 Miami Subs Restaurants in the system, of which
37 were operated by the Company and 140 were operated by franchisees. The
following table sets forth the locations of such Restaurants.
<TABLE>
<CAPTION>
Company
Operated Franchised
-------- ----------
<S> <C> <C>
Florida 19 106
Texas 6 2
North Carolina 4 8
South Carolina 3 2
Georgia 3 1
New Jersey 1 1
New York 1 1
Pennsylvania - 5
Indiana - 4
Connecticut - 1
New Hampshire - 1
Illinois - 2
Tennessee - 3
Virginia - 1
Guayaquil, Ecuador - 2
-------- ----------
Total 37 140
================== ======== ==========
</TABLE>
MARKETING
The physical facility of each Miami Subs Restaurant has been designed to be a
key ingredient of its marketing strategy. The Restaurants have well-lit
exteriors featuring a distinctive roof design, an abundance of pastel neon
lights and a lively interior featuring a tropical motif which the Company
believes creates strong appeal during the day and night.
The Company's advertising programs include the use of radio, print, and to a
lesser degree, television advertising, and carries the theme that Miami Subs
offers a variety of menu selections. The Company's radio and television
advertisements are broadcast principally in markets where there are sufficient
Restaurants to benefit from such advertisements.
In June 1994, the Company increased the advertising contribution from all
Restaurants in the system from 2% of sales to 3% of sales. As a result, the
Company was able to expand the marketing program in fiscal 1995, including the
use of television advertising in several markets. The new advertising plan
highlighted the Company's "signature" products, and differentiated the
Restaurants from typical fast food restaurants.
In addition to other marketing programs and in response to the highly
competitive fast-food industry, during fiscal year 1996 the Company introduced
lower priced "value meals" and, in the later half of the fiscal year,
implemented various discounting programs in order to increase customer
traffic, sales, and ultimate unit level profitability. There can be no
assurance that such programs will be successful.
EMPLOYEES
At August 1, 1996, the Company employed 439 full-time and 480 part-time
employees. Approximately 860 of the employees work in the Company's
Restaurants and the remaining 59 are administrative, supervision, and support
personnel. None of the employees belong to a labor union, and the Company
believes its employee relations to be good.
As the operation and expansion of the Miami Sub's restaurant business is
dependent upon attracting, training and keeping competent employees,
restaurant management applicants receive screening and training. The Company
emphasizes continuing restaurant management and crew training and holds
various meetings stressing communications and skill development for managers.
Benefit programs for eligible employees include group life, health,
hospitalization, paid vacations and a bonus plan for restaurant managers.
TRADEMARKS
The Company believes its trademarks and service marks are of significant value
and an important marketing tool. The Company has registered the marks "Miami
Subs and Design" and "Miami Subs Grill and Design" with the United States
Patent and Trademark Office. In addition, the marks have been registered in
the states of Florida, Georgia, South Carolina, and Louisiana.
COMPETITION
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional
or national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the
number of, and particular locations of, competing restaurants. Factors such
as inflation, increases in food, labor and energy costs, the availability and
cost of suitable sites, fluctuating interest and insurance rates, state and
local regulations and licensing requirements and the availability of an
adequate number of hourly paid employees can also adversely affect the fast
food restaurant industry. Multi-unit food service chains like the Company can
also be substantially adversely affected by publicity resulting from food
quality, illness, injury, or other health concerns. Major chains, which have
substantially greater financial resources and longer operating histories than
the Company, dominate the fast food restaurant industry. The Company competes
primarily on the basis of location, food quality, price and menu diversity. A
change in pricing or other marketing strategies by one or more of these
competitors could have an adverse impact on the Company's sales, earnings and
growth. In response to intense industry competition and aggressive price
discounting and marketing by larger national chains, and in an attempt to
reduce or eliminate same-store-sales declines that the Miami Subs Grill system
has been experiencing, the Company has recently intensified its marketing
efforts and has adopted value pricing and price discounting strategies. There
can be no assurance that these strategies will be successful or that the
Company will be able to compete effectively against its competitors. In
addition, with respect to the sale of franchises, the Company competes with
many franchisors of restaurants and other business concepts for qualified and
financially capable franchisees.
REGULATION
The Company is subject to a variety of federal, state, and local laws
affecting the conduct of its business. Operating restaurants are subject to
various sanitation, health, fire and safety standards and restaurants under,
or proposed for construction, are subject to state and local building codes,
zoning restrictions and alcoholic beverage regulations. Difficulties in
obtaining or failure to obtain required licenses or approvals could delay or
prevent the development or opening of a new Restaurant in a particular area.
The Company is also subject to the Federal Fair Labor Standards Act, which
governs minimum wages, overtime, working conditions and other matters, and the
Americans with Disabilities Act, which became effective in January 1992. The
Company believes that it is in compliance with such laws, and that its
Restaurants have all applicable licenses as required by governmental
authorities.
Alcoholic beverage control regulations require each of the Company's
Restaurants to apply to a state authority and, in certain locations, county
and municipal authorities for a license or permit to sell alcoholic beverages
on the premises. Typically, licenses must be renewed annually and may be
revoked or suspended for cause at any time. The Company has never had an
alcoholic beverage license revoked. Alcoholic beverage control regulations
relate to numerous aspects of the daily operations of the
Company's Restaurants, including minimum age of customers and employees, hours
of operation, advertising, wholesale purchasing, inventory control and
handling, storage and dispensing of alcoholic beverages. The Company
currently offers for sale beer and wine in most of its existing Company
operated Restaurants. Each of these Restaurants have current alcoholic
beverage licenses permitting the sale of these beverages.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to
recover damages from an establishment which wrongfully served alcoholic
beverages to such person. The Company carries liquor liability coverage as
part of its existing comprehensive general liability insurance and has never
been named as a defendant in a lawsuit involving "dram-shop" statutes.
The Company believes that it is in compliance with the applicable federal and
state laws concerning designated non-smoking and smoking areas in its Company
operated Restaurants.
The Company is subject to regulations of the Federal Trade Commission (the
"FTC") and various states relating to disclosure and other requirements in the
sale of franchises and franchise operations. The FTC's regulations require
the Company to timely furnish prospective franchisees a franchise offering
circular containing prescribed information. Certain state laws also require
registration of the franchise offering with state authorities. Other states
regulate the franchise relationship, particularly concerning termination and
renewal of the franchise agreement. The Company believes that it is in
compliance with the applicable franchise disclosure and registration
regulations of the FTC and the various states that it operates in.
ITEM 2. PROPERTIES
At May 31, 1996, the Company owned or leased the following number of
restaurant properties which are used in its operations:
<TABLE>
<CAPTION>
Restaurants
Company Leased/Sub-Leased to
Restaurants Franchisees or Others
----------- ---------------------
<S> <C> <C>
Lease land and building 31 44
Lease land and own building 4 4
Own land and building 2 1
----------- ---------------------
Total 37 49
=========== =====================
</TABLE>
Properties leased by the Company generally provide for an initial term of up
to 20 years and renewal terms of five to 20 years. The leases generally
provide for fixed rentals plus adjustments based on changes in the consumer
price index or percentage rentals on gross sales. Restaurants and other
facilities are leased/sub-leased to franchisees or others on terms which are
generally similar to the terms in the Company's lease with the third-party
landlord, except that in certain cases the rent has been marked-up. The
Company remains liable for all lease costs when properties are sub-leased to
franchisees or others.
The Company owns its executive headquarters, an approximate 8,500 square foot
facility located in Fort Lauderdale, Florida and leases an approximate 8,500
square foot facility in Fort Lauderdale which is used for training, product
development, and operations. The Company believes that these facilities are
adequate and suitable for its needs.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various legal actions arising
in the ordinary course of business, including the separate actions described
below. The Company is vigorously contesting these actions, and currently
believes that the outcome of such cases will not have a material adverse
effect on the Company.
On March 6, 1992, a subsidiary of the Company filed an action for declaratory
relief against Ronald F. Opper and Norman Opper (Miami Subs USA, Inc. v.
Ronald Opper et al., Broward County Circuit Court, Case No. 92-6402-25)
seeking a determination that a letter of intent executed by Miami Subs, Inc.
(n/k/a B&B Food Ventures, Inc.) did not constitute a binding agreement
concerning the possible granting of an exclusive area for development. As a
result of this lawsuit, Ronald P. Opper and Tammy Investments, Inc. filed a
separate lawsuit against the Company (Ronald P. Opper, et al. v. Miami Subs
Corporation, et al., Broward County Circuit Court, Case No. 92-06841-O5) in
which the plaintiffs allege they are entitled to damages for breach of
contract, fraud, tortious inducement to breach contract and breach of
fiduciary duty arising from the Company's alleged failure to grant the
plaintiffs an exclusive area development right. The plaintiffs claim
compensatory damages in excess of $20.0 million and punitive damages in excess
of $20.0 million. Discovery is substantially completed. The case has not
been scheduled for trial. The Company believes that it had no obligation to
proceed to enter into any agreements with the plaintiffs and is vigorously
contesting the action.
During January, 1992, the Company filed a Petition for Declaratory Judgment
against the Murray Family Trust/Kenneth Dash Partnership ("F/D"), case number
91-E1077 filed in the Superior Court Northern District of Hillsborough County,
New Hampshire. The Company sought to dissolve an alleged joint venture
between the Company and F/D to develop Miami Subs restaurants in New England.
F/D opposed the dissolution, counterclaimed, and sought damages arising from
amounts expended in developing new locations and lost profits from the
termination of the joint venture. A bench trail was completed in April 1995,
and in July the court issued its ruling in favor of the Company on virtually
all of F/D's counterclaims, except that the court denied the Company's
petition for declaratory judgement and awarded F/D damages in the amount of
$241,000 plus costs and attorney fees allegedly incurred by the joint venture.
The Company provided a reserve for this matter as of May 31, 1995. The case
has been appealed by both the Company and F/D to the Supreme Court of New
Hampshire.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A - not applicable
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Marketsm under the symbol "SUBS." The following table shows high
and low sales price information as quoted by Nasdaq for the two most recent
fiscal years. Such quotations reflect inter-dealer prices, without retail
mark-ups, markdowns or commissions, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal Year Ended May 31, 1995
First Quarter $ 3 1/16 $ 2 3/8
Second Quarter 2 3/4 2
Third Quarter 2 11/16 1 15/16
Fourth Quarter 2 3/16 1 3/4
Fiscal Year Ended May 31, 1996
First Quarter $ 2 1/8 $ 1 7/16
Second Quarter 2 9/16 1 1/2
Third Quarter 2 5/16 1 7/16
Fourth Quarter 2 1 1/2
</TABLE>
There were approximately 2,000 holders of record of the Company's Common Stock
as of August 26, 1996. This number includes shareholders of record who may
hold stock for the benefit of others. The Company does not consider it
practical to attempt to determine the number of individuals who are beneficial
owners of its shares.
The Company has never paid cash dividends on its Common Stock and does not
expect to pay such dividends in the foreseeable future. Management currently
intends to retain all available funds for the development of its business and
for use as working capital. The declaration of a cash dividend on the
Company's Common Stock would require that a cash dividend be paid also to the
holders of Preferred Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data in the following table is qualified
in its entirety by, and should be read in conjunction with the consolidated
financial statements and notes thereto and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Year Ended
------------
May 31, May 31, May 31, May 31, May 31,
1996 1995 1994 1993 1992
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Restaurant sales $ 32,398 $ 27,148 $ 22,190 $ 16,766 $ 5,654
Franchise revenues 4,720 3,920 3,207 2,842 1,948
Net gain (loss) from sales of restaurants 117 112 332 249 (34)
Gain from sale/leaseback with Kavala, Inc. - - - - 109
Interest income and other revenues 677 716 513 632 421
------------ --------- --------- --------- ---------
Total 37,912 31,896 26,242 20,489 8,098
------------ --------- --------- --------- ---------
Restaurant operating costs 28,573 23,942 19,925 15,090 5,074
General, administrative and franchise costs 6,351 6,390 5,936 4,107 2,720
Depreciation and amortization 1,942 1,544 1,318 750 314
Interest expense - net 741 581 381 138 129
Provision for under-performing restaurants - - 2,452 - -
Merger expense - - - - 248
Loss on disposal of Taco Viva restaurant business - - - - 545
------------ --------- --------- --------- ---------
Total 37,607 32,457 30,012 20,085 9,030
------------ --------- --------- --------- ---------
Net income (loss) $ 305 $ (561) $ (3,770) $ 404 $ (932)
============ ========= ========= ========= =========
Net income (loss) per share $ .01 $ ( .02) $ ( .16) $ .02 $ ( .06)
============ ========= ========= ========= =========
May 31, May 31, May 31, May 31, May 31,
1996 1995 1994 1993 1992
------------ --------- --------- --------- ---------
BALANCE SHEET DATA
Total assets $ 36,361 $ 33,042 $ 26,102 $ 22,156 $ 19,377
Current assets 6,066 5,180 6,832 4,432 7,383
Current liabilities 7,645 6,785 5,964 3,202 1,630
Long-term portion of notes payable and capitalized leases 7,955 6,249 2,832 2,721 2,398
Deferred franchise fees and other deferred income 1,712 2,241 2,185 1,274 935
Shareholders' equity 16,943 15,053 13,403 14,815 14,414
OTHER DATA
Number of restaurants at year end:
Company operated 37 30 19 21 12
Franchised 140 130 129 103 77
------------ --------- --------- --------- ---------
Total 177 160 148 124 89
============ ========= ========= ========= =========
System-wide sales $ 145,517 $138,963 $125,706 $102,971 $ 63,952
Average sales per restaurant $ 874 $ 894 $ 930 $ 966 $ 861
Percent increase (decrease) in "same store sales" (2.2)% (3.6)% (3.1)% 17.7% (1.5)%
========================================================== ============ ========= ========= ========= =========
<FN>
(All dollar amounts in thousands, except for per share amounts)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's revenues are derived principally from operating and franchising
Miami Subs restaurants. Franchise revenues consist principally of initial
franchise fees, area development fees, monthly royalty fees, and net sublease
rental income. In the normal course of operations, the Company may also
derive revenues from the sale of restaurants to franchisees.
Restaurant operating costs include food and paper costs, direct restaurant
labor and benefits, marketing fees, and all other direct costs associated with
operating the restaurants. General, administrative and franchise costs relate
both to Company owned restaurants and the Company's franchising operations.
The Company's revenues and expenses are directly affected by the number, sales
volumes, and profitability of its Company operated restaurants. Revenues, and
to a lesser extent expenses, are also affected by the number and sales volumes
of franchised restaurants. Initial franchise fees and the net gain on sales
of restaurants are directly affected by the number of restaurants opened by
franchisees and the number of restaurants sold to franchisees during the
period.
For fiscal year 1996, the Company achieved net income of $305,000, as compared
to losses in each of the two preceding fiscal years. The Company believes
that its ability to sustain profitability will, among other factors, be
dependent on improvement of sales and operating margins in existing Company
and franchised restaurants, expansion of its franchise base, its ability to
control future operating costs, and the successful opening and operation of
new restaurants on a profitable basis.
On December 21, 1994, the Company acquired by merger MG III, Inc. ("MG III").
At the time of the acquisition, MG III was the Company's largest franchisee,
operating eight restaurants, and was also a joint venture partner with the
Company in the operation of five restaurants. MG III also held the
non-exclusive development rights in a four state territory (North Carolina,
South Carolina, and parts of Georgia and Northern Florida), and provided
franchisor required services to franchised restaurants in the territory (31 at
the time of acquisition) in return for approximately one-half of the standard
royalty fees and initial franchise fees paid by all franchisees in the
territory. As a result of the acquisition and merger of MG III, the Company
began operating 13 additional restaurants (of which five restaurants were
subsequently franchised as of May 31, 1996) and began receiving all royalties
from the 31 franchised restaurants in the territory. See Note 2. to the
consolidated financial statements.
Effective January 1, 1995, the Company acquired from Kavala, Inc. ("Kavala") a
private company owned by Miami Subs founder and Company director Gus Boulis,
two existing Miami Subs restaurants located in South Florida, and additional
royalties from 21 existing franchised restaurants which were originally
developed by Kavala. Under an arrangement with Kavala prior to this
acquisition, the Company received one-half of the royalties associated with
these franchised restaurants. See Note 2. to the consolidated financial
statements.
On March 1, 1996, the Company acquired from a franchisee five existing Miami
Subs Restaurants located in the Dallas, Texas metropolitan area, along with
the development rights for the Dallas and Fort Worth, Texas markets. See Note
2. to the consolidated financial statements.
During fiscal year 1996, the Company opened four new restaurants, acquired six
restaurants from franchisees, and sold three existing restaurants to
franchisees; franchisees opened 20 new restaurants and seven franchised
restaurants closed. At May 31, 1996, there were 177 restaurants in the
system, including 37 Company operated Restaurants and 140 franchised
restaurants.
COMPARISON OF FISCAL YEAR 1996 TO 1995
Total Revenues
Total Company revenues increased 18.9% to $37.9 million in fiscal year 1996,
as compared to $31.9 million in fiscal year 1995. The increase in total
revenues was primarily due to restaurant sales from additional Company
operated restaurants which were acquired and to a lesser extent, an increase
in franchise revenues.
Restaurant Sales
The Company's total restaurant sales increased approximately 19.3% to $32.4
million in 1996, as compared to $27.1 million in 1995. The increase in sales
resulted from additional Company operated restaurants, which totaled 37 at the
end of 1996, as compared to 30 at the end of 1995. During 1996, the Company
opened four new Restaurants, acquired six restaurants from franchisees, and
sold/transferred three restaurants to franchisees.
"Same-store-sales" in Company operated Restaurants declined by approximately
0.6% in 1996, and average unit sales for all restaurants operated by the
Company in 1996 declined by approximately 1.4% to $1,058,000. Same store
sales and average unit sales in the Company operated Restaurants increased by
approximately 1.8% and 3.2% respectively, in fiscal year 1995. The Company
attributes the 1996 declines in large part to intense industry competition and
aggressive price discounting and marketing by larger national chains. In
response to such conditions, during 1996 the Company introduced lower priced
"value meals" and, in the later half of the fiscal year, implemented various
discounting programs in order to increase customer traffic and sales. There
can be no assurance that such programs will ultimately be successful in
reversing the 1996 sales trends.
At May 31, 1996, the Company operated restaurants were located in Florida
(19); Atlanta, Georgia (3), North Carolina (4), South Carolina (3), New York
(1), New Jersey (1), and Texas (6).
Revenues From Franchised Restaurants
Revenues from franchised restaurants increased approximately 20.4% to $4.7
million in 1996, as compared to $3.9 million in 1995. Increased franchise
revenues in 1996 were primarily the result of increased royalties, which
increased by approximately 18.2% to $3.7 million in 1996, as compared to $3.2
million in 1995. This increase principally reflects the impact of the two
acquisitions consummated in the third quarter of 1995, which included the
right to receive additional royalty fees from 52 existing franchised
restaurants. This increase was partially offset by a decrease of
approximately 3.1% in average sales from franchised restaurants in 1996 as
compared to 1995 and the closure of seven franchised restaurants in 1996.
Same store sales in franchised restaurants (which is computed for those
franchised restaurants operated for all of fiscal years 1996 and 1995
following an initial six month opening period) declined by approximately 4.1%
in 1996 and 5.5% in 1995. The Company attributes such declines to intense
industry-wide competition and, in 1996, to the introduction of lower priced
"value meals" and the implementation of various discounting programs.
In addition to the recognition of initial franchise fees associated with the
opening of 20 new franchised restaurants in 1996, the Company also recognized
income of $324,000 in 1996 associated with the termination of nine area
development agreements with franchisees. No income from the termination of
area development agreements was recognized in 1995. Revenues from franchised
restaurants was adversely affected in 1996 by a reduction of net rental income
from franchised units from $142,000 in 1995 to $32,000 in 1996 principally as
a result of delinquent (and unaccrued) rent due on certain franchised
restaurants.
System-Wide Sales
System-wide sales, which includes sales from Company operated restaurants and
franchised restaurants, increased by approximately 4.7% to $145.5 million in
1996, as compared to $139.0 million in 1995. Average unit sales for all
restaurants in operation in 1996 decreased by approximately 2.2% to $874,000,
as compared to $894,000 in 1995. Same store sales for all units in the system
(which is computed for those restaurants operated for all of fiscal years 1995
and 1994 following an initial six month opening period) declined by
approximately 3.8% in 1996 and 3.6% in 1995, reflecting intense industry-wide
competition, and aggressive price discounting and marketing by large national
chains.
Net Gain From Sales of Restaurants
The Company sold/transferred three of its existing restaurants to franchisees
during 1996, and sold/transferred six restaurants to franchisees in 1995.
Gains on the sale of restaurants are dependant on the Company's basis in and
the overall performance of such units. Any gains realized are recorded as
income when the sales are consummated and other conditions are met, including
the adequacy of the down payment and the completion by the Company of its
obligations under the contracts. Total gains recognized in 1996 amounted to
$117,000, as compared to $112,000 in 1995, and deferred gains amounted to
$387,000 at May 31, 1996. Although the Company intends to sell other existing
restaurants in the future, there can be no assurance that any such sales will
be consummated or that gains will be realized.
Restaurant Operating Costs
Restaurant operating costs increased to $28.6 million in 1996, as compared to
$23.9 million in 1995, principally as a result of additional Company
restaurants in operation and correspondingly higher sales during the year.
Such costs as a percent of sales were 88.2% in both 1996 and 1995. Although
food and labor costs improved by approximately 120 basis points in 1996, such
improvements were offset by higher sales discounts associated with various
marketing programs initiated in the later half of the year, and higher paper
and produce costs.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $6.4
million in 1996 and 1995, or 16.8% and 20.0% of total revenues, respectively.
Although the Company has not hired additional administrative personnel in 1996
or granted salary increases to senior management, general and administrative
costs in 1996 reflect a full year impact of certain senior level management
and administrative/operating support personnel added during 1995, and the full
year cost associated with a training and product development center which
opened in the third quarter of 1995. General and administrative costs in 1996
and 1995 also include outside legal costs of approximately $628,000 and
$362,000, respectively, a large part of which was incurred in defending or
settling certain lawsuits which arose in prior years. Costs in 1995 also
included a legal reserve of $400,000 in connection with a ruling in a lawsuit
against the Company which is currently on appeal.
Depreciation and Amortization
Depreciation and amortization increased to $1.9 million in 1996, as compared
to $1.5 million in 1995. The increase was principally the result of
additional Company owned restaurants acquired or opened by the Company, and
amortization of intangible assets associated with acquisitions consummated in
the later half of the prior year.
Interest Expense
Net interest expense increased to $741,000 in 1996, as compared to $581,000 in
the previous year, principally reflecting higher debt levels ($9.5 million at
May 31, 1996 as compared to $7.7 million at May 31, 1995).
COMPARISON OF FISCAL YEAR 1995 TO 1994
Total Revenues
Total revenues increased 21.5% to $31.9 million in fiscal year 1995, as
compared to $26.2 million in fiscal year 1994. The increase in total revenues
was primarily due to restaurant sales from additional Company operated
restaurants which were acquired in fiscal year 1995, and to a lesser extent,
an increase in franchise revenues.
Restaurant Sales
The Company's total restaurant sales increased approximately 22.3% to $27.1
million in 1995, as compared to $22.2 million in 1994. Substantially all of
the increase in sales resulted from unit growth of Company operated
restaurants, which totaled 30 at the end of 1995, as compared to 19 at the end
of 1994. During 1995, the Company acquired 18 restaurants from franchisees
and sold/transferred seven restaurants to franchisees.
Same store sales in Company operated units increased by approximately 1.8% in
fiscal year 1995. The Company determines same store sales for those
restaurants operated by the Company for all of fiscal years 1995 and 1994
following an initial six month opening period. Accordingly, the increase for
1995 reflects the sales comparison for ten of the Company operated
restaurants. Same store sales for Company operated restaurants were up
approximately 2.8% in the first nine months of 1995, and were down
approximately 1.9% in the fourth quarter. The Company attributes the decline
in the fourth quarter to intense industry-wide competition, especially in the
fast-service and quick-service/sandwich sector.
Average unit sales for all restaurants operated by the Company during 1995
increased by approximately 3.2% to $1,073,000, as compared to average unit
sales of $1,040,000 in 1994. The increase in average unit sales was primarily
attributable to higher sales volumes in certain of the Company's new
restaurants, the sale or transfer of lower volume restaurants, and an increase
in same store sales.
At May 31, 1995, the Company operated restaurants were located in Florida
(20); Atlanta, Georgia (3), North Carolina (2), South Carolina (2), New York
(1), New Jersey (1), and Texas (1). In addition to these restaurants, the
Company had two restaurants located in North Carolina under development at May
31, 1995.
Revenues From Franchised Restaurants
Revenues from franchised restaurants increased approximately 22.2% to $3.9
million in 1995, as compared to $3.2 million in 1994. Increased franchise
revenues in 1995 were primarily the result of increased royalties, which
increased by approximately 20.6% to $3.2 million in 1995, as compared to $2.6
million in 1994. This increase principally reflects the impact of the two
acquisitions consummated in the third quarter of 1995, which included the
right to receive additional royalty fees from 52 franchised restaurants. This
increase was partially offset by a decrease of approximately 5.5% in average
sales from franchised restaurants in 1995 as compared to 1994 and the closure
of nine franchised restaurants in 1995. Same store sales in franchised
restaurants (which is computed for those franchised restaurants operated for
all of fiscal years 1995 and 1994 following an initial six month opening
period) declined by approximately 5.5% in 1995. The Company attributes this
decline to intense industry-wide competition and, for restaurants located in
Florida, a decline in tourism.
System-Wide Sales
System-wide sales, which includes sales from Company operated restaurants and
franchised restaurants, increased by approximately 10.5% to $139 million in
1995, as compared to $125.7 million in 1994. Average unit sales for all
restaurants in operation in 1995 decreased by approximately 3.8% to $894,000,
as compared to $930,000 in 1994. Same store sales for all units in the system
(which is computed for those restaurants operated for all of fiscal years 1995
and 1994 following an initial six month opening period) declined by
approximately 3.6% in 1995, reflecting increased industry-wide competition
and, for restaurants located in Florida, a decline in tourism.
Net Gain From Sales of Restaurants and Other
During 1995, the Company recognized a gain from the sale of one restaurant and
deferred the gains on other sales until certain conditions are met. During
1994, the Company realized gains from the sale of three restaurants and a gain
on the sale of a contract to purchase real estate. Although the Company may
sell other existing or turn-key restaurants in the future, there can be no
assurance that any such sales will be consummated or that gains will be
realized.
Interest Income and Other Revenues
Interest income and other revenues increased to $716,000 in 1995, as compared
to $513,000 in 1994. The increase in 1995 was principally due to an increase
in interest income resulting from higher average short term investments and
notes receivable.
Restaurant Operating Costs
Restaurant operating costs increased to $23.9 million in 1995, as compared to
$19.9 million in 1994, principally as a result of additional Company
restaurants in operation and correspondingly higher sales during the year.
Such costs as a percent of sales were 88.2% in 1995, as compared to 89.8% in
1994, resulting in a 1.6% increase in restaurant level operating margins.
Restaurant level operating margins increased throughout 1995 (from 10.4% in
the first quarter to 12.6% in the fourth quarter), reflecting improvements in
virtually all operating cost categories as well as increased average sales
volumes.
General, Administrative and Franchise Costs
General, administrative and franchise costs increased to $6.4 million or 20.0%
of total revenues in 1995, as compared to $5.9 million or 22.6% of total
revenues in 1994. Since the third quarter of 1994, the Company has added
senior level management and administrative/operating support personnel,
including new training and product development facilities necessary to support
the Company's current level of operations as well as future development and
enhancement of the concept. General, administrative and franchise costs in
1995 also included a reserve of $400,000 in connection with a ruling in a
lawsuit against the Company. General and administrative costs in 1994
included a provision for doubtful accounts of $556,000.
Depreciation and Amortization
Depreciation and amortization increased to $1,544,000 in 1995, as compared to
$1,318,000 in 1994. The increase was principally the result of additional
Company owned restaurants acquired in 1995, and amortization of intangible
assets associated with acquisitions consummated during the year.
Interest Expense
Net interest expense increased to $581,000 in 1995, as compared to $381,000 in
the previous year, principally reflecting higher debt levels ($7.7 million at
May 31, 1995 as compared to $4.3 million at May 31, 1994).
Provision for Under-performing Restaurants
In 1994, the Company recorded a non-cash charge of $2,452,000, which
principally related to six under-performing restaurants operated by the
Company. The charge included the write down of the investment in certain of
the restaurants, estimated losses to be incurred upon the disposition of
certain restaurants, and a loss incurred relating to the reacquisition of a
restaurant from a franchisee. The Company anticipates that the disposition of
the identified restaurants would have a modest impact on its overall future
profitability, restaurant margins and liquidity. No such charge was made in
1995.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company's principal sources of cash were from operations
totaling $2,217,000, principal payments received on notes receivable of
$888,000, proceeds from the sale of restaurants of $296,000, and new
borrowings, including borrowings under a bank line of credit for development
of new restaurants, totalling $1,803,000. In addition, in connection with the
Company's acquisition of five restaurants from a franchisee, the Company
assumed existing indebtedness on the restaurants acquired of $1,467,000. The
Company's principal uses of cash in 1996 were for development of new
restaurants and property renovations and additions totaling $3,718,000, and
scheduled debt repayments and maturities of $1,512,000. Cash and cash
equivalents at May 31, 1996, amounted to $3,103,000 (which includes unexpended
marketing fund contributions of $525,000), as compared to $3,145,000
(including $1,204,000 in unexpended marketing fund contributions) at May 31,
1995. At May 31, 1996, the Company's working capital deficiency was
$1,579,000, as compared to $1,605,000 at the end of 1995. The Company is able
to operate with a working capital deficiency because restaurant operations are
conducted primarily on a cash basis, rapid turnover and frequent deliveries
allow a limited investment in inventories, and accounts payable for food,
beverages and supplies usually become due after the receipt of cash from the
related sales.
Current assets at May 31, 1996 include a non-recourse note receivable in the
amount of approximately $1,270,000 resulting from the acquisition of five
restaurants in March 1996. The note, which is secured by 1,325,000 shares of
common stock of the Company, was originally due on July 1, 1996. The Company
has extended the maturity date to September 30, 1996.
Although the Company continues to search out and access possible sites for the
development of new free-standing Company restaurants, due to the current high
cost of suitable real estate and sites and the intense competition in the
industry, the Company does not currently plan to develop traditional,
free-standing Company restaurants in fiscal year 1997. However, in connection
with the development by the Company of non-traditional units for operation in
airports and on tollroads, in fiscal 1996 the Company developed and opened a
smaller, lower-cost proto-type unit which the Company believes is
competitively positioned and suitable for development of in-line locations by
franchisees. During fiscal year 1997, the Company, subject to availability of
suitable locations, may develop one to two of these lower cost units for the
purpose of expanding franchising efforts in this area. The Company has
available through December 1997, a bank line of credit of approximately
$5,600,000 for the development of new restaurants.
In addition to scheduled debt maturities/repayments in 1997 of $1,539,000, the
Company's capital requirements for 1997 relate primarily to necessary capital
improvements to existing restaurants and further enhancements to corporate and
restaurant management information systems. Such expenditures in 1997 will be
made as required, and will take into consideration the Company's current
liquidity and working capital positions and anticipated future cash flows from
operations and other sources.
The Company regularly reviews its restaurant facilities and operations and
identifies certain restaurants for sale to franchisees. During 1996, three
restaurants were sold/transferred to franchisees. The Company usually
provides financing for these sales, and it is expected that future sales of
identified restaurants will also be financed by the Company. Accordingly, the
sale of such restaurants, if consummated, may not have a significant impact on
the Company's liquidity position. The Company does expect however that its
restaurant operating margins may improve, and that royalty income, interest
income, and cash flow will increase as a result of the consummation of such
sales. There can be no assurances however that any future sales will be
consummated.
The Company's revenues increased from approximately $20.5 million in 1993 to
$37.9 million in 1996, principally as a result of acquisitions of restaurants
from franchisees and, in 1996, from development of new Company restaurants.
The Company currently does not have plans for additional acquisitions or for
the development of new Company restaurants in 1997, but may continue to sell
certain existing Company restaurants to franchisees and focus future expansion
on franchise development of both traditional and non-traditional restaurants.
As a result, the Company's total future revenues may decline.
The Company expects that competition in the quick-service restaurant industry
will continue to be intense and will remain so in the foreseeable future,
resulting in continued pressure on sales and slower development of new
traditional restaurants by franchisees. Accordingly, continued emphasis will
be placed on franchising certain existing restaurants, improving operations in
the remaining restaurants, developing new products, enhancing the
effectiveness of marketing programs, and overall improvement and possible
refinements to the entire system. The Company's ability to significantly
expand and develop additional Company restaurants will ultimately depend on a
number of factors, including unit level profitability and the Company's
overall profitability and cash flow, the availability and cost of suitable
locations, and the availability of adequate equity or debt financing.
Inflation
The Company does not believe that inflationary factors have had a significant
effect on Company operations in the past three years. Any significant
increase in inflation could affect Company operations as a result of increased
costs for food and labor, as well as increased occupancy and equipment costs.
Congress has recently passed the "Small Business Job Protection Act" which,
amoung other provisions, provides for an increase in the minimum wage from the
current $4.25 per hour to $4.75 on October 1, 1996, and to $5.15 on September
1, 1997. The Company is reviewing the potential impact of the minimum wage
increase on its operations, and is considering whether the wage increase or
any part thereof will be passed on through price increases.
During fiscal year 1996, the Company did not make any significant menu price
adjustments in order to increase or maintain profit margins. The Company
expects that greater volume purchase discounts on food and supplies may be
available in the future as the restaurant chain grows, which could partially
offset the impact of any cost increases.
Seasonality
The Company does not expect seasonality to affect its operations in a
materially adverse manner. However, the Company's restaurant sales during its
first and fourth fiscal quarters are generally higher than its second and
third quarters due to the location of the majority of its restaurants in
Florida.
Recently Issued Accounting Standards
The Company is required to adopt Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting For the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of" in the first quarter of fiscal year 1997.
SFAS No. 121 in general requires that such impaired assets be written down to
a reduced carrying value. The Company is currently reviewing implementation
of SFAS 121 and has not determined the impact of SFAS 121 on its results of
operations or financial position.
In October 1995, SFAS No. 123, "Accounting for Stock Based Compensation" was
issued, which prescribes revised standards of accounting and reporting for
stock based employee compensation plans. The Company is required to adopt
Statement No. 123 during the year ending May 31, 1997 and anticipates that the
accounting for its stock based compensation will continue to follow APB
Opinion No. 25. The Company expects to provide pro forma disclosure in fiscal
1997 using the fair market value method specified in Statement No. 123.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Form 10-K are the consolidated
financial statements and the consolidated financial statement schedule listed
in the Index to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these items is omitted because the Company intends
to file a proxy statement with the Commission pursuant to Regulation 14A not
later than 120 days after the close of the fiscal year in accordance with
General Instruction G(3) to Form 10-K. The information called for by these
items is incorporated herein by reference to the proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements. See Index to Consolidated
Financial Statements on page 18 of this Report on
Form 10-K.
(2) Consolidated Financial Statement Schedule. See Index to
Consolidated Financial Statements on page 18 of this
Report on Form 10-K.
(b) Reports on Form 8-K.
A Form 8-K dated March 14, 1996 was filed on March 15, 1996 together with
the audited financial statements of LoneStar Hospitality Corporation and its
subsidiaries at March 31, 1994 and 1995 to report under Item 2. "Acquisition
or disposition of Assets", the acquisition of five existing Miami Subs Grill
restaurants along with the development rights for Dallas and Fort Worth, Texas
market from LoneStar Hospitality Corporation on March 1, 1996. A Form 8-K/A
(Amendment No. 1) dated May 9, 1996 was filed on May 10, 1996 together with
certain pro forma financial information related to the acquisition.
(c) Exhibits.
Exhibit No. Description
10.1 Amendment dated June 26, 1996 to Mr. Russo's Employment
Agreement.
10.2 Amendment dated June 11, 1996 to Mr. Russo's Stock
Option Agreement.
23 Accountants' Consent regarding Registration Statements
on Forms S-8 and S-3.
MIAMI SUBS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of the Registrant are included
in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of May 31, 1996 and 1995
Consolidated Statements of Operations for each of the years in the three
year period ended May 31, 1996
Consolidated Statements of Shareholders' Equity for each of the years in
the three year period ended May 31, 1996
Consolidated Statements of Cash Flows for each of the years in the three
year period ended May 31, 1996
Notes to Consolidated Financial Statements
The following financial information is provided as consolidated financial
statement schedules under Item 14(d) to this Form 10-K:
(i) MIAMI SUBS CORPORATION CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable regulation
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Miami Subs Corporation:
We have audited the accompanying consolidated balance sheets of Miami Subs
Corporation and subsidiaries as of May 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended May 31, 1996. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as of May 31, 1996 and 1995, and
for each of the years in the three-year period ended May 31, 1996. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Miami Subs
Corporation and subsidiaries as of May 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
KPMG PEAT MARWICK LLP
August 2, 1996
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
May 31, May 31,
ASSETS 1996 1995
- -------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,103,000 $ 3,145,000
Notes and accounts receivable - net 2,250,000 1,437,000
Food and supplies inventories 381,000 289,000
Other 332,000 309,000
------------ ------------
Total Current Assets 6,066,000 5,180,000
Notes receivable 3,778,000 3,530,000
Property and equipment - net 17,955,000 14,592,000
Intangible assets - net 8,004,000 9,227,000
Other 558,000 513,000
------------ ------------
TOTAL $36,361,000 $33,042,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 6,106,000 $ 5,298,000
Current portion of notes payable and capitalized lease obligations 1,539,000 1,487,000
------------ ------------
Total Current Liabilities 7,645,000 6,785,000
------------ ------------
Long-term portion of notes payable and capitalized lease obligations 7,955,000 6,249,000
Deferred franchise fees and other deferred income 1,712,000 2,241,000
Accrued liabilities and other 2,106,000 2,714,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock, $.01 par value, 8,000,000
shares authorized; aggregate liquidation preference $2,011,000
at May 31, 1996 10,000 13,000
Common stock, $.01 par value; authorized 50,000,000 shares 273,000 257,000
Additional paid-in capital 24,565,000 22,993,000
Accumulated deficit (7,342,000) (7,647,000)
------------ ------------
17,506,000 15,616,000
Less note receivable from sale of stock (563,000) (563,000)
------------ ------------
Total Shareholders' Equity 16,943,000 15,053,000
------------ ------------
TOTAL $36,361,000 $33,042,000
==================================================================== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31,
--------------------
1996 1995 1994
----------- -------------------- ------------
<S> <C> <C> <C>
REVENUES
- -----------------------------------------------------------------
Restaurant sales $32,398,000 $ 27,148,000 $22,190,000
Revenues from franchised restaurants 4,720,000 3,920,000 3,207,000
Net gain from sales of restaurants and other 117,000 112,000 332,000
Interest income 469,000 477,000 348,000
Other revenues 208,000 239,000 165,000
----------- -------------------- ------------
Total 37,912,000 31,896,000 26,242,000
----------- -------------------- ------------
EXPENSES
- -----------------------------------------------------------------
Restaurant operating costs (including lease costs paid to Kavala
, Inc. of $313,000, $271,000 and $230,000, respectively) 28,573,000 23,942,000 19,925,000
General, administrative and franchise costs 6,351,000 6,390,000 5,936,000
Depreciation and amortization 1,942,000 1,544,000 1,318,000
Interest expense - net of capitalized interest 741,000 581,000 381,000
Provision for under-performing restaurants - - 2,452,000
----------- -------------------- ------------
Total 37,607,000 32,457,000 30,012,000
----------- -------------------- ------------
Net income (loss) $ 305,000 $ (561,000) $(3,770,000)
=========== ==================== ============
Net income (loss) per common and common share equivalents
$ .01 $ ( .02) $ ( .16)
=========== ==================== ============
Weighted average number of common and common
share equivalents outstanding 27,243,000 26,026,000 24,195,000
=========== ==================== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Preferred Stock Common Stock Common Stock
Shares Amount Shares Amount
---------------- ----------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at May 31, 1993 1,933,270 $ 20,000 21,720,624 $ 217,000
Preferred stock conversions (703,175) (7,000) 703,175 7,000
Preferred stock dividend 345,023 3,000
Exercise of warrants - net 1,042,000 11,000
Redemption of note receivable
Net loss
- ------------------------------------------------- ---------------- ----------------- ------------ -------------
BALANCE AT MAY 31, 1994 1,230,095 13,000 23,810,822 238,000
Preferred stock dividend 307,523 3,000
Exercise of options and warrants 545,900 6,000
Stock issued to acquire MG III, Inc. 1,000,000 10,000
Net loss
- ------------------------------------------------- ---------------- ----------------- ------------ -------------
BALANCE AT MAY 31, 1995 1,230,095 13,000 25,664,245 257,000
Preferred stock conversions (224,595) (3,000) 224,595 3,000
Exercise of options and warrants 25,000
Stock issued to acquire restaurants 1,325,000 13,000
MG III, Inc. purchase accounting adjustment
Net income
- ------------------------------------------------- ---------------- ----------------- ------------ -------------
BALANCE AT MAY 31, 1996 1,005,500 $ 10,000 27,238,840 $ 273,000
================================================= ================ ================= ============ =============
Additional Paid-In
Capital Accumulated Note
---------------------
Deficit Receivable Total
------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at May 31, 1993 $ 18,014,000 $ (3,316,000) $ (120,000) $14,815,000
Preferred stock conversions
Preferred stock dividend (3,000)
Exercise of warrants - net 2,227,000 2,238,000
Redemption of note receivable 120,000 120,000
Net loss (3,770,000) (3,770,000)
- ------------------------------------------------- --------------------- ------------- ------------ ------------
BALANCE AT MAY 31, 1994 20,238,000 (7,086,000) 13,403,000
Preferred stock dividend (3,000)
Exercise of options and warrants 768,000 (563,000) 211,000
Stock issued to acquire MG III, Inc. 1,990,000 2,000,000
Net loss (561,000) (561,000)
- ------------------------------------------------- --------------------- ------------- ------------ ------------
BALANCE AT MAY 31, 1995 22,993,000 (7,647,000) (563,000) 15,053,000
Preferred stock conversions
Exercise of options and warrants 13,000 13,000
Stock issued to acquire restaurants 1,909,000 1,922,000
MG III, Inc. purchase accounting adjustment
(350,000) (350,000)
Net income 305,000 305,000
- ------------------------------------------------- --------------------- ------------- ------------ ------------
BALANCE AT MAY 31, 1996 $ 24,565,000 $ (7,342,000) $ (563,000) $16,943,000
================================================= ===================== ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
--------------------
1996 1995 1994
-------------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 305,000 $ (561,000) $(3,770,000)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,438,000 1,253,000 1,163,000
Amortization of intangible assets 504,000 291,000 155,000
Provision for under-performing restaurants, doubtful accounts and other - - 3,233,000
Net gain on sales of restaurants and other (117,000) (112,000) (332,000)
Loss (income) from investment in joint venture - 16,000 (16,000)
Cash received from operations of joint venture - 3,000 131,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 330,000 (268,000) 253,000
(Increase) decrease in food and supplies inventories (43,000) 8,000 27,000
(Increase) decrease in other current assets (7,000) (133,000) 143,000
(Increase) decrease in other assets (39,000) 68,000 (311,000)
Increase in accounts payable and accrued liabilities 288,000 335,000 1,420,000
(Decrease) increase in deferred franchise fees and other deferred income (442,000) (231,000) 772,000
-------------------- ------------ ------------
Net Cash Provided By Operating Activities 2,217,000 669,000 2,868,000
-------------------- ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (3,718,000) (1,318,000) (3,443,000)
Investment in joint venture - - (355,000)
Proceeds from sales of restaurants 296,000 215,000 800,000
Loans to franchisees and other (29,000) (296,000) (100,000)
Acquisition of MG III, Inc. - (800,000) -
Acquisition from Kavala, Inc. - (3,250,000) -
Payments received on notes receivable 888,000 611,000 716,000
-------------------- ------------ ------------
Net Cash Used In Investing Activities (2,563,000) (4,838,000) (2,382,000)
-------------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,803,000 2,933,000 1,250,000
Repayment of debt (1,512,000) (1,255,000) (977,000)
Proceeds from exercise of stock options and warrants - net 13,000 211,000 2,238,000
-------------------- ------------ ------------
Cash Provided By Financing Activities 304,000 1,889,000 2,511,000
-------------------- ------------ ------------
INCREASE (DECREASE) IN CASH (42,000) (2,280,000) 2,997,000
CASH AT BEGINNING OF PERIOD 3,145,000 5,425,000 2,428,000
CASH AT END OF PERIOD $ 3,103,000 $ 3,145,000 $ 5,425,000
==================== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 806,000 $ 556,000 $ 427,000
Loans to franchisees in connection with sales of restaurants $ 818,000 $ 2,144,000 $ 971,000
Liabilities assumed in the acquisition of restaurants - - $ 935,000
- ---------------------------------------------------------------------------- -------------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MIAMI SUBS CORPORATION (the "Company") operates and franchises quick service
restaurants under the names "Miami Subs" and "Miami Subs Grill". At May 31,
1996, there were 177 restaurants operating in the Miami Subs system, of which
37 were operated by the Company and 140 were operated by franchisees.
Nineteen of the Company operated restaurants and 106 of the franchised
restaurants are located in Florida.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and on deposit, highly
liquid instruments with maturities of three months or less, and unexpended
marketing fund contributions of $525,000 and $1,204,000 at May 31, 1996 and
1995, respectively.
FRANCHISE OPERATIONS
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to marketing funds,
and in certain cases, revenue from sub-leasing restaurant properties to
franchisees. Initial franchise fees are recognized as income when
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied, which occurs when the franchised
restaurant commences operations. Development fees are non-refundable and the
related agreements require the franchisee to open a specified number of
restaurants in the development area within a specified time period or the
agreements may be cancelled by the Company. Revenue from development
agreements is deferred and recognized as restaurants in the development area
commence operations on a pro rata basis to the minimum number of restaurants
required to be open, or at the time the development agreement is effectively
cancelled. Royalties, which are based upon a percentage of the franchisee's
gross sales, are recognized as income when the fees are earned and become
receivable and collectible. Revenue from sub-leasing properties to
franchisees is recognized as income as the revenue is earned and becomes
receivable and collectible. Such revenues are presented net of the associated
occupancy costs in the accompanying consolidated financial statements.
Marketing contributions are offset against the related costs incurred.
Contributions received in excess of expenditures are classified as current
liabilities in the accompanying consolidated financial statements.
Revenues from franchised restaurants consist of the following:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------
1996 1995 1994
------------------- ---------- ----------
<S> <C> <C> <C>
Royalties $ 3,752,000 $3,173,000 $2,630,000
Franchise and development fees 936,000 605,000 448,000
Sublease rental income (net) 32,000 142,000 129,000
------------------- ---------- ----------
Total $ 4,720,000 $3,920,000 $3,207,000
=============================== =================== ========== ==========
</TABLE>
SALES OF RESTAURANTS
Gains on the sale of restaurants are recorded as income when the sales are
consummated and other conditions are met, including adequacy of down payment
and the completion by the Company of its obligations under the contracts.
Until such conditions are met, such gains are included in deferred income.
FOOD AND SUPPLIES INVENTORIES
Food and supplies inventories are stated at the lower of cost (first-in,
first-out method) or market.
PRE-OPENING COSTS
Certain costs related to hiring, training and other costs of opening new
Company-operated restaurants are capitalized and amortized over a twelve-month
period commencing with the restaurant opening.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Additions and renewals are charged to the property accounts and
expenditures for maintenance and repairs are charged to operations as
incurred. Depreciation and amortization are expensed on the straight-line
method over the lesser of the lease term (including option periods) or the
estimated useful lives of the assets.
INTANGIBLE ASSETS
Costs incurred to acquire the trademark and franchise rights to the Miami Subs
concept and other intangibles consisting principally of royalty rights
acquired, are amortized over a twenty year period on a straight line basis.
Restaurants acquired are accounted for under the purchase method and recorded
at the estimated fair value of the equipment and building improvements
acquired. The excess of cost over the fair value of the assets acquired,
including goodwill if any, is amortized using the straight-line method over
the remaining term of the underlying property leases, but not in excess of 20
years.
PROVISION FOR UNDERPERFORMING RESTAURANTS AND IMPAIRMENT OF LONG-LIVED
ASSETS
The Company regularly reviews the investment in its restaurants, intangibles,
and other non-current assets for the possible permanent impairment of value.
When such impairment is identified, or when the Company adopts a plan for the
disposal of identified restaurants, a provision is made to adjust the carrying
value of the asset to estimated net realizable value. The provision includes
the estimated direct costs associated with the divestiture of the identified
restaurants, but does not include any possible future losses from operation of
the restaurants identified to be sold. At May 31, 1996 and 1995, accrued
liabilities and other includes $1,243,000 and $1,359,000, respectively,
relating to the provision for underperforming restaurants.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109").
Under Statement 109, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
NET INCOME (LOSS) PER SHARE
The net income (loss) per share amounts are computed based on the weighted
average number of common shares and common share equivalents outstanding
during the period, computed using the treasury stock method. Common share
equivalents include convertible preferred stock, options and warrants. Common
share equivalents were excluded from the computations in 1995 and 1994 because
the effect would have been anti-dilutive.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined based on
available information and appropriate valuation methodologies. The carrying
amounts of accounts receivable, accounts payable and accrued liabilities
approximate fair value due to the short-term nature of the accounts. The fair
value of long-term notes receivable and notes payable approximate the carrying
value of such assets and liabilities as of May 31, 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting For the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of" in the first quarter of fiscal year 1997.
SFAS No. 121 in general requires that such impaired assets be written down to
a reduced carrying value. The Company is currently reviewing implementation
of SFAS 121 and has not determined the impact of SFAS 121 on its results of
operations or financial position.
In October 1995, SFAS No. 123, "Accounting for Stock Based Compensation" was
issued, which prescribes revised standards of accounting and reporting for
stock based employee compensation plans. The Company is required to adopt
Statement No. 123 during the year ending May 31, 1997 and anticipates that the
accounting for its stock based compensation will continue to follow APB
Opinion No. 25. The Company expects to provide pro forma disclosure in fiscal
1997 using the fair market value method specified in Statement No. 123.
RECLASSIFICATION
Certain 1995 and 1994 balances have been reclassified to conform to the 1996
presentation.
2. ACQUISITIONS
On December 21, 1994, the Company acquired by merger MG III, Inc.
("MG III"). At the time of the acquisition, MG III was the Company's largest
franchisee, operating eight restaurants, and was also a joint venture partner
with the Company in the operation of five restaurants. MG III also held the
non-exclusive development rights in a four state territory (North Carolina,
South Carolina, and parts of Georgia and Northern Florida), and provided
franchisor required services to franchised restaurants in the territory (31 at
the time of acquisition) in return for approximately one-half of the standard
royalty fees and initial franchise fees paid by all franchisees in the
territory. In the merger, the sole shareholder of MG III received 1.0 million
shares of the Company's common stock, a warrant to acquire 100,000 shares of
the Company's common stock at an exercise price of $6.00 per share, and
$800,000 cash representing the repayment of certain amounts due to the sole
shareholder by MG III. The Company also assumed MG III's indebtedness to
banks of approximately $1.8 million and other liabilities totaling
approximately $900,000. As a result of the acquisition and merger of MG III,
the Company began operating 13 additional restaurants (of which five
restaurants were subsequently franchised as of May 31, 1996) and began
receiving all royalties from the 31 franchised restaurants in the territory.
Effective January 1, 1995, the Company acquired from Kavala, Inc.
("Kavala") a private company owned by Miami Subs founder and Company director
Gus Boulis, two existing Miami Subs restaurants located in South Florida, and
additional royalties from 21 existing franchised restaurants which were
originally developed by Kavala. Under an arrangement with Kavala prior to
this acquisition, the Company received one-half of the royalties associated
with these franchised restaurants. The acquisition was made for cash totaling
$3.2 million, of which $2.5 million was provided through bank financing.
The above described acquisitions were accounted for as purchases and
the accompanying Consolidated Statements of Operations include the results of
these operations from the dates of their respective acquisitions. The
purchase prices allocated to the assets and liabilities acquired were based on
their fair values as follows:
<TABLE>
<CAPTION>
MG III Kavala Total
------------ ---------- ------------
<S> <C> <C> <C>
Current assets $ 153,000 - $ 153,000
Property and equipment 2,449,000 $ 355,000 2,804,000
Intangible and other assets 3,138,000 2,895,000 6,033,000
Current liabilities (1,506,000) - (1,506,000)
Notes payable (1,784,000) - (1,784,000)
------------ ---------- ------------
Total $ 2,450,000 $3,250,000 $ 5,700,000
=========================== ============ ========== ============
</TABLE>
Assuming that the above acquisitions had been consummated at the
beginning of each year, the unaudited pro forma results of operations for 1995
and 1994 would have been as follows:
<TABLE>
<CAPTION>
For the Year Ended May 31,
----------------------------
1995 1994
---------------------------- ------------
<S> <C> <C>
Total revenues $ 39,707,000 $37,603,000
Net loss $ (287,000) $(4,265,000)
Net loss per share $ ( .01) $ ( .17)
=================================== ============================ ============
Weighted average shares outstanding 26,539,000 25,195,000
=================================== ============================ ============
</TABLE>
The above information may not be indicative of the results of
operations which actually would have occurred had the transactions taken place
at the beginning of fiscal year 1994 or which may be obtained in the future.
On March 1, 1996, the Company acquired from a franchisee five existing Miami
Subs Grill restaurants located in the Dallas, Texas metropolitan area, along
with the development rights for the Dallas and Fort Worth Texas markets. As
consideration for the acquisition, the Company issued 1,325,000 shares of its
common stock and assumed existing indebtedness on the restaurants of
$1,467,000. In addition, the Company received a non-interest bearing
promissory note in the original amount of $1,500,000, which was reduced by
cash and equivalents (principally transferable inventories, supplies, and
deposits) in the amount of $200,000 at the closing. The unpaid principal
balance of the note, which is non-recourse and secured by the common stock,
was originally due on July 1, 1996, and has been extended by the Company to
September 30, 1996. The acquisition was accounted for as a purchase and the
accompanying Consolidated Statements of Operations includes the results of
these operations from the date of the acquisition. The purchase price was
allocated principally to property and equipment of the restaurants acquired.
Assuming that the above acquisition has been consummated at the beginning of
each year, the unaudited pro forma results of operations for 1996 and 1995
would have been as follows:
<TABLE>
<CAPTION>
For the Year Ended May 31,
---------------------------
1996 1995
--------------------------- ------------
<S> <C> <C>
Total revenues $ 41,046,000 $36,816,000
Net income (loss) $ 183,000 $(1,059,000)
Net income (loss) per share $ .01 $ ( .04)
==================================== =========================== ============
Weighted average shares outstanding 28,235,000 27,351,000
==================================== =========================== ============
</TABLE>
The above information may not be indicative of the results of operations which
actually would have occurred had the acquisition taken place at the beginning
of fiscal year 1995 or which may be obtained in the future.
3. NOTES AND ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Notes and accounts receivable consist of the following:
1996 1995
------------ ------------
<S> <C> <C>
Notes receivable $ 5,548,000 $ 4,654,000
Royalties and other receivables due from franchisees 729,000 667,000
Other 141,000 135,000
------------ ------------
Total 6,418,000 5,456,000
Less allowance for doubtful accounts (390,000) (489,000)
------------ ------------
6,028,000 4,967,000
Less notes receivable due after one year (3,778,000) (3,530,000)
------------ ------------
Notes and accounts receivable-current portion $ 2,250,000 $ 1,437,000
============ ============
</TABLE>
Notes receivable at May 31, 1996, include a non-recourse note in the amount of
approximately $1,270,000 resulting from the acquisition of five restaurants in
March 1996 (See Note 2.). The maturity date of the note, which is secured by
the common stock issued, was originally due on July 1, 1996, and has been
extended by the Company to September 30, 1996. The balance of notes
receivable at May 31, 1996, principally result from sales of restaurant
businesses to franchisees and are generally guaranteed by the purchaser and
collateralized by the restaurant businesses and assets sold, which are mostly
located in Florida. The notes are generally due in monthly installments of
principal and interest, with interest rates ranging principally between 8% and
12%.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
1996 1995
------------ ------------
<S> <C> <C>
Land $ 2,231,000 $ 2,231,000
Buildings and leasehold improvements 12,118,000 9,018,000
Furniture and equipment 7,257,000 5,637,000
Property held under capitalized leases 812,000 812,000
Construction in progress 30,000 20,000
------------ ------------
Property and equipment at cost 22,448,000 17,718,000
Less accumulated depreciation and amortization (4,493,000) (3,126,000)
------------ ------------
Property and equipment-net $17,955,000 $14,592,000
============ ============
</TABLE>
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Intangible assets consist of the following:
1996 1995
------------ -----------
<S> <C> <C>
Trademark and franchise rights $ 2,719,000 $2,666,000
Excess of costs over fair value of net assets acquired 6,472,000 7,244,000
------------ -----------
9,191,000 9,910,000
Less accumulated amortization (1,187,000) (683,000)
------------ -----------
Intangible assets - net $ 8,004,000 $9,227,000
====================================================== ============ ===========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accounts payable and accrued liabilities consist of the following:
1996 1995
---------- ----------
<S> <C> <C>
Accounts payable $2,331,000 $1,566,000
Accrued wages and related liabilities 988,000 742,000
Accrued real estate and sales taxes 608,000 476,000
Legal and related 604,000 129,000
Marketing fund contributions 525,000 1,204,000
Other 1,050,000 1,181,000
---------- ----------
Total $6,106,000 $5,298,000
===================================== ========== ==========
</TABLE>
7. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
<TABLE>
<CAPTION>
A summary of notes payable and capitalized lease obligations is as follows:
1996 1995
------------ ------------
<S> <C> <C>
Various notes payable to banks at prime plus 1.5% (9.75% at May 31,
1996), secured by accounts and notes receivable, land, restaurant
property and equipment and due in monthly payments through 2001 $ 5,367,000 $ 4,586,000
Note payable to finance company at 11.5%, secured by five
restaurants and equipment, payable in equal monthly installments
through 2001, with a principal payment of $267,000 paid in June 1996 1,430,000 -
9.0% - 11.5% mortgages and notes payable, secured by
various restaurant properties and equipment and due in
varying monthly installments through 2001 1,453,000 1,411,000
10 3/8% mortgage note payable, secured by corporate
office building, due in monthly payments through 2007 509,000 534,000
Note payable to bank at prime plus 2.0% (10.25% at May 31, 1996),
secured by leased restaurant properties and equipment,
due in monthly payments through 2000 264,000 605,000
Capitalized lease obligations 471,000 600,000
------------ ------------
Total 9,494,000 7,736,000
Less current portion (1,539,000) (1,487,000)
------------ ------------
Long-term portion $ 7,955,000 $ 6,249,000
====================================================================== ============ ============
</TABLE>
The above notes are secured by property and equipment with a book value of
approximately $12,210,000 at May 31, 1996, and notes and accounts receivable
of approximately $2,000,000.
At May 31, 1996, the approximate annual maturities of notes payable and
capitalized lease obligations for each of the five years ending May 31, 2001,
are $1,539,000, $1,728,000, $2,087,000, $910,000 and $2,888,000, respectively.
Total interest costs incurred for the years ended May 31, 1996, 1995 and 1994
was $798,000, $581,000, and $440,000, respectively. Capitalized interest cost
with respect to qualifying new restaurant construction was $57,000 in 1996 and
$59,000 in 1994.
The Company has a $7.0 million line of credit from a bank for the development
of new Company operated restaurants. Approximately $1.4 million has been
funded under this facility. The credit facility, which is available through
December 1997, may be used for interim construction of individual restaurants
as well as term financing for five years upon completion of construction of
such restaurants. Amounts funded under the facility incur interest at the
banks prime rate plus 1.5%.
8. DEFERRED FRANCHISE FEES AND OTHER DEFERRED INCOME
<TABLE>
<CAPTION>
Deferred franchise fees and other deferred income consist of the following:
1995 1995
---------- ----------
<S> <C> <C>
Development fees $ 475,000 $ 760,000
Franchise fees 87,000 180,000
Deferred gains and vendor rebates 1,150,000 1,301,000
---------- ----------
Total $1,712,000 $2,241,000
========== ==========
</TABLE>
9. INCOME TAXES
<TABLE>
<CAPTION>
The primary components that comprise the deferred tax assets and
liabilities are as follows:
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts and notes receivable $ 125,000 $ 178,000
Other liabilities and reserves 1,136,000 1,003,000
Deferred income and franchise deposits 172,000 387,000
Other 15,000 20,000
Net operating loss and other carry-forwards 2,408,000 1,954,000
------------ ------------
Total deferred tax assets 3,856,000 3,542,000
------------ ------------
Deferred tax liabilities:
Property and equipment 311,000 465,000
Investment in joint venture 75,000
Intangible assets 145,000
Other 38,000 85,000
------------ ------------
Total deferred tax liabilities 494,000 625,000
------------ ------------
Subtotal 3,362,000 2,917,000
Less valuation allowance (3,362,000) (2,917,000)
------------ ------------
Net deferred tax assets $ - $ -
============================================== ============ ============
</TABLE>
The net change in the valuation allowance for the year ended May 31, 1996 was
an increase of $445,000.
At May 31, 1996 and 1995, the Company had no deferred tax assets or
liabilities reflected on its consolidated financial statements since net
deferred tax assets are offset by a valuation allowance. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the level of
historical operating results, scheduled reversal of deferred tax liabilities,
and projected future taxable income in making this assessment.
The difference between the actual tax provision and the tax provision by
applying the statutory federal income tax rate is attributable to the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% (34.0)% (34.0)%
Intangible costs amortized 21.3 3.2 -
Other 2.4 (.4) (.2)
Operating losses (utilized) not utilized (57.7) 31.2 34.2
------ ------- -------
Effective income tax rate - % - % - %
====== ======= =======
</TABLE>
At May 31, 1996, the Company had net operating loss carry-forwards for tax
purposes of approximately $5.7 million, which are available to reduce future
taxable income through 2011 (subject to limitations imposed under the Internal
Revenue Code regarding changes in ownership which limits utilization of $2.8
million of the carry-forwards on an annual basis to approximately $340,000).
The Company also has general business credit carry-forwards of approximately
$300,000 which can be used to offset tax liabilities through 2010.
The Company's federal income tax returns for fiscal years 1992 through 1995,
inclusive, are currently under examination by the Internal Revenue Service.
The examining agent has not issued a formal report reflecting proposed
adjustments to tax returns previously filed by the Company. Based on informal
communications with the examining agent, the Company believes that any
adjustment(s) likely to be proposed will (if sustained upon a final
determination) impact only on the loss and credit carryovers and not have a
material effect on the Company's current tax liability.
10. COMMITMENTS AND CONTINGENCIES
The Company is the prime lessee under various land and building leases for
restaurants operated by the Company and its franchisees. The leases generally
have initial terms ranging from five to 20 years and usually provide for
renewal options ranging from five to 20 years. In certain instances, the
leases contain purchase options during the lease term. Most of the leases
contain escalation clauses and common area maintenance charges (including
taxes and insurance). Certain of the leases require additional (contingent)
rental payments if sales volumes at the related restaurants exceed specified
limits.
Base rent expense for Company operated restaurants for the years ended May 31,
1996, 1995 and 1994 was approximately $2,455,000, $2,085,000, and $1,634,000,
respectively. Additional (contingent) rental payments were approximately
$100,000, $75,000, and $30,000, respectively, in 1996, 1995, and 1994.
The Company also owns or leases sites which it then leases or subleases to
franchisees. The Company remains liable for all lease costs, including common
area maintenance charges, when properties are subleased to franchisees. In
addition, the Company has guaranteed the lease payments of certain franchised
locations, aggregating approximately $173,000 per year.
The Company also subleases non-Miami Subs locations to third parties. Such
sub-leases provide for minimum annual rental payments aggregating
approximately $306,000 and expire on various dates through 2003 exclusive of
renewal options.
The Company leases restaurant equipment under capital lease agreements
that expire in 1999.
The Company's future minimum rental commitments and sublease rentals as of May
31, 1996 for all noncancellable capital and operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating Sublease
Fiscal Year Leases Leases Rentals
- ---------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
1997 $ 205,000 $ 5,276,000 $ 2,670,000
1998 195,000 5,123,000 2,609,000
1999 146,000 5,050,000 2,591,000
2000 41,000 4,905,000 2,346,000
2001 - 4,744,000 2,201,000
Thereafter - 35,505,000 17,428,000
---------- ----------- -----------
Total 587,000 $60,603,000 $29,845,000
========== =========== ===========
Less amount representing interest (116,000)
----------
Present value of future minimum lease payments $ 471,000
============================================== ==========
</TABLE>
The Company has arranged for equipment financing for its franchisees with a
third party lender. Under the terms of the agreement with the lender, in the
event of a default by a franchisee, the Company has the right to acquire
possession of the related restaurant and equipment and assume the remaining
obligation to the lender, or sell the restaurant to a franchisee who would
assume the loan. In the event that the restaurant is closed, the Company is
required to payoff the loan. The Company's maximum obligation for all loans
funded by the lender as of May 31, 1996, was approximately $987,000. In
addition, the Company guarantees other equipment loans and leases for certain
franchisees in the approximate amount of $458,000.
LITIGATION
The Company and its subsidiaries are parties to various legal actions arising
in the ordinary course of business, including the separate actions described
below. The Company is vigorously contesting these actions and currently
believes that the outcome of such cases will not have a material adverse
effect on the Company.
In January, 1992, the Company filed a Petition for Declaratory Judgment
against a third party seeking to dissolve an alleged joint venture between the
Company and the third party. The third party opposed the dissolution,
counterclaimed, and sought damages arising from amounts expended in developing
new locations and lost profits from the termination of the joint venture. A
bench trial was completed in April 1995, and in July the court issued its
ruling in favor of the Company on virtually all of the defendants
counterclaims, except that the court denied the Company's petition for
declaratory judgement and awarded the defendant damages in the amount of
$241,000 plus costs and attorney fees allegedly incurred by the joint venture.
The Company provided a reserve for this matter as of May 31, 1995. The case
has been appealed by both the Company and the third party.
In March 1992, a subsidiary of the Company filed an action for declaratory
relief against a third party seeking a determination that a letter of intent
executed by Miami Subs, Inc. (n/k/a B&B Food Ventures, Inc.) did not
constitute a binding agreement concerning the possible granting of an
exclusive area for development. As a result of this lawsuit, the third party
filed a separate lawsuit against the Company in which the plaintiffs allege
they are entitled to damages for breach of contract, fraud, tortious
inducement to breach a contract and breach of fiduciary duty arising from the
Company's alleged failure to grant the plaintiffs an exclusive area
development right. The plaintiffs claim compensatory damages in excess of
$20.0 million and punitive damages in excess of $20.0 million. Discovery is
substantially completed. The case has not been scheduled for trial. The
Company believes that it had no obligation to proceed to enter into any
agreements with the plaintiffs and is vigorously contesting the action.
11. SHAREHOLDERS' EQUITY
At May 31, 1996, there were 1,005,500 shares of Series A Convertible Preferred
Stock ("Preferred Stock") outstanding. The Preferred Stock is convertible at
the option of the holder into one share of common stock, and automatically
converts into common stock in October 1996. In the event of liquidation, the
preferred stockholders would be entitled to receive, prior and in preference
to the holders of the common stock, $2.00 per share. The Preferred Stock does
not have any preference in the payment of dividends and would participate
equally in any dividend declared on a share for share basis with the common
stock.
The Company's stock option plans provide for the granting of non-qualified
stock options for the purchase of up to 7,950,000 shares of common stock of
the Company by directors, officers, employees and consultants. Under the
terms of the plans, options may be granted at a price not less than the market
value of the common stock on the date of grant. At May 31, 1996 and 1995,
options were outstanding to acquire 6,032,000 and 4,997,700 shares of common
stock at an average exercise price of $2.43 and $2.92 per share, respectively.
Such options generally become exercisable over a three year period. At May
31, 1996, options to acquire 3,672,000 shares were exercisable. In March
1995, the Company's Chairman of the Board and President exercised options to
acquire 450,000 shares of common stock of the Company. As payment for the
stock, the Company received a non-interest bearing note in the amount of
$563,000 which is collateralized by the stock and due in full in January 1999.
At May 31, 1996, 50,000 warrants issued to Kavala, Inc. in September 1991 at
an exercise price of $3.00 per share are outstanding and exercisable until
August 1996.
In connection with the acquisition of MG III, Inc. in December 1994, the
Company issued to the sole shareholder of MG III, Inc. 1.0 million shares of
the Company's common stock and a warrant to acquire 100,000 shares of the
Company's common stock at an exercise price of $6.00 per share. The warrant
is exercisable through 1999. In connection with the acquisition of
restaurants and territory from a franchisee in March 1996, the Company issued
1,325,000 shares of the Company's common stock.
12. RELATED PARTY TRANSACTIONS
In fiscal year 1995, the Company acquired from Kavala, Inc., ("Kavala") a
private company owned by Miami Subs founder and Company director Gus Boulis,
two existing Miami Subs restaurants located in South Florida, and additional
royalties from 21 existing franchised restaurants which were originally
developed by Kavala. The purchase price was $3.2 million. Under an
arrangement with Kavala prior to this acquisition, the Company received
one-half of the royalties associated with these franchised restaurants, and
paid to Kavala a fee of 2% of sales on restaurants developed by Kavala and
acquired and operated by the Company. During fiscal years 1995 and 1994, the
Company received royalty fees from independent franchisees of approximately
$284,000 and $352,000, respectively, from restaurants franchised pursuant to
this arrangment. In addition, in 1995 and 1994, the Company paid fees to
Kavala of approximately $13,000 and $38,000, respectively, for restaurants
which the Company operated.
The Company leases seven restaurant properties from Kavala. Rent expense for
all leases between the Company and Kavala was $494,000 in 1996, 496,000 in
1995, and $470,000 in 1994. Future minimum rental commitments due to Kavala
at May 31, 1996 under existing leases are approximately $497,000 for each of
the next five years and $3,090,000 thereafter. The Company believes that rent
expense under these leases with Kavala is not materially different from the
expense that would have been incurred from leasing arrangements with
unaffiliated parties or on a stand alone basis.
From January 1994 until January 1995, Mr. Boulis provided consulting services
to the Company on matters pertaining to the Company's business, including but
not limited to franchising methods, restaurant site selection and development,
restaurant operating procedures, recipe development, procedures and techniques
for preparing, packaging and serving food, and marketing programs. Amounts
paid to Boulis under this agreement amounted to $100,000 in fiscal year 1995,
and $50,000 in 1994.
Mr. Bartsocas, an officer of the Company, is also an officer and director of
Subies Enterprises, Inc. ("Subies"), a franchisee of the Company. Under an
agreement which was entered into in 1991 between the Company and Subies,
Subies paid a franchise fee of $5,000 per restaurant and is exempt from paying
royalty fees on five restaurants.
In December, 1993, the Company entered into a one year management agreement
for a Company owned restaurant with C&M Management, Inc. ("C&M"), a company in
which Ms. Margaret Hren, a former director of the Company, is a 50% partner.
Under the agreement, the Company received its standard royalty and advertising
fees, and pursuant to the terms of the agreement, C&M acquired the restaurant
from the Company in February 1995. Prior to fiscal year 1995, the Company and
certain of its franchisees utilized a real estate brokerage company owned by
Ms. Hren in various real estate acquisitions. Commissions received by that
company from sellers, lessors or franchisees amounted to approximately $56,000
in 1994.
In March 1995, Thomas J. Russo, the Company's Chairman of the Board and
President, exercised options to acquire 450,000 shares of common stock of the
Company. As payment for the stock, the Company received a non-interest
bearing note in the amount of $563,000 which is collateralized by the stock
and due in full in January 1999.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
DESCRIPTION
Additions
-----------
Balance at Charged to Balance at
beginning costs and Charged to end of
of period expenses other accounts Deductions period
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1994:
Allowance for doubtful
accounts and discounts -
Notes and Accounts Receivable $ 188,000 $ 556,000 $ 229,000(1) $ 515,000
Year ended May 31, 1995:
Allowance for doubtful
accounts and discounts -
Notes and Accounts Receivable $ 515,000 - $ 26,000 $ 489,000
Year ended May 31, 1996:
Allowance for doubtful
accounts and discounts -
Notes and Accounts Receivable $ 489,000 - $ 99,000 $ 390,000
<FN>
(1) Write-off and discounts on notes.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT LIST
Location in this report or
Reg. S-K incorporated by reference
Item No. Document to prior Filing
- -------- -------------------------------------------------------------------- --------------------------
<C> <S> <C>
10.1 Amendment dated June 26, 1996 to Mr. Russo's Employment Agreement. Filed herewith on page 37
10.2 Amendment dated June 11, 1996 to Mr. Russo's Stock Option Agreement. Filed herewith on page 38
23 Accountants' Consent re Registration Statement on Form S-8 and S-3. Filed herewith on page 39
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MIAMI SUBS CORPORATION
Dated: August 26, 1996 By: /s/ Thomas J. Russo
THOMAS J. RUSSO, President
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Thomas J. Russo Dated: August 26, 1996
THOMAS J. RUSSO, Chairman of the Board,
President and Chief Executive Officer
By: /s/ Gus Boulis Dated: August 26, 1996
GUS BOULIS, Director
By: /s/ Richard U. Jelinek Dated: August 26, 1996
RICHARD U. JELINEK, Director
By: /s/ Greg Karan Dated: August 26, 1996
GREG KARAN, Director
By: /s/ Francis P. Lucier Dated: August 26, 1996
FRANCIS P. LUCIER, Director
By: /s/ William L. Paternotte Dated: August 26, 1996
WILLIAM L. PATERNOTTE, Director
By: /s/ Joseph Zappala Dated: August 26, 1996
JOSEPH ZAPPALA, Director
By: /s/ Jerry W. Woda Dated: August 26, 1996
JERRY W. WODA, Senior Vice President, Chief
Financial Officer and Principal Accounting Officer
AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit No. 10.1
THIS AMENDMENT of the Employment Agreement dated January 14, 1994 and the
February 13, 1996 change of control amendment, by and between Miami Subs
Corporation, a Florida corporation (the "Company") and Thomas J. Russo (the
"Executive") is made as of June 26, 1996, and
WHEREAS, the Company desires to employ Executive and Executive desires to
be employed by the Company under the terms of the Employment Agreement by and
between them dated January 14, 1994, as amended February 13, 1994, and as
amended herein, and
WHEREAS, the Compensation Committee and the Board of Directors of the
Company has on June 26, 1996 approved this amendment to Executive's Employment
Agreement.
NOW, THEREFORE, in consideration of the promises and other good and
valuable consideration, receipt and sufficiency of which is hereby
acknowledged, the Company and Executive agree as follows:
1. Section 1.1 of the January 14, 1994 Employment Agreement is hereby
amended by deleting the phrase at Line 4 "within 135 days" and adding "on or
before June 26, 1996", and adding the following sentence at the end of Section
1.1: "this Employment Agreement shall therefore terminate, without any further
renewal provisions, on January 20, 2000."
2. Section 1.4(a) of the January 14, 1994 Employment Agreement is
deleted in its entirety; and Section 1.3(a) is amended to reflect that Mr.
Russo's current annual base salary ("base salary") is $280,000; and further,
the second sentence of the February 13, 1996 Change of Control Amendment is
further amended to clarify the original intent of the parties in the January
14, 1994 Employment Agreement by deleting the phrase, at Section 1(b) on page
2 of the February 13, 1996 Amendment "your bonuses, if any, for the three most
recently-ended fiscal years prior to the Change of Control", and adding the
phrase, "three (3) times your maximum bonus potential, which is deemed to be
in the amount equal to an amount three (3) times your then current Base
Salary".
3. Section 1.4(g) of the January 14, 1994 Employment Agreement is
hereby amended at Line 3 by deleting the phrase "5 years" and adding the
phrase "10 years", and by adding at Line 3 after the word "grant," the
following, "or January 20, 2004,".
Other than as set out above and in the Change of Control Agreement dated
February 13, 1996, (which Agreement amended the Employment Agreement by
deleting Section 3 of the Employment Agreement in its entirety and by adding
the February 13, 1996 Agreement in its place), the Employment Agreement,
consisting of the January 14, 1994 Employment Agreement, the February 13, 1996
Amendment, and this Amendment dated June 26, 1996, (collectively, the
Employment Agreement), is hereby ratified and affirmed and represents the
entire understanding and agreement among the parties hereto with respect to
the subject matter hereof, and supersedes all previous understandings, written
or oral.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment
as of the day and year first above written.
Miami Subs Corporation,
a Florida corporation
By:
FRANK M. PUTHOFF
Vice President
THOMAS J. RUSSO
Executive
AMENDMENT TO STOCK OPTION AGREEMENT Exhibit No. 10.2
THIS AMENDMENT of the Stock Option Agreement dated January 20, l994, by
and between Miami Subs Corporation, a Florida corporation ("Company") and
Thomas J. Russo ("Optionee").
WHEREAS, Company and Optionee desire to amend the Stock Option Agreement
by extending the term of the Option from five (5) years to ten (l0) years,
NOW, THEREFORE, in consideration of the promises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledge, Company and Optionee agree as follows:
1. Section 2 at Line l is amended by deleting the word "five (5)",
and adding the word "ten (l0)", and by adding at the end of the first sentence
after the word "hereof.", the phrase "until January 20, 2004."
2. Other than as specifically set out herein, the above-referenced
Option Agreement is hereby ratified and affirmed in its entirety.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment
as of the day and year first above written.
Miami Subs Corporation,
a Florida corporation
By:_______________________
Frank M. Puthoff
Vice President
___________________________
Thomas J. Russo
Optionee
Exhibit No. 23
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Miami Subs Corporation:
We consent to incorporation by reference in the Registration Statements on
Form S-3 and Form S-8 of Miami Subs Corporation of our report dated August 2,
1996, relating to the consolidated balance sheets of Miami Subs Corporation
and subsidiaries as of May 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended May 31, 1996, and related schedule which
report appears in the May 31, 1996 annual report on Form 10-K of Miami Subs
Corporation. We also consent to the reference to our firm under the heading
"Experts" in the prospectus.
KPMG PEAT MARWICK LLP
August 28, 1996
