UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 31, 1997
---------------
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
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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)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 8, 1997
----- ------------------------------
Common Stock, $.01 par value 28,244,340
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
August 31, May 31,
ASSETS 1997 1997
- ---------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund contributions of. . . . . $ 3,278,000 $ 2,940,000
$1,133,000 and $683,000, respectively)
Notes and accounts receivable (net of allowances for uncollectible accounts of $281,000. 1,808,000 2,000,000
and $289,000, respectively)
Food and supplies inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,000 192,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000 191,000
------------ ------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,454,000 5,323,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,793,000 8,073,000
Property and equipment - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,502,000 11,500,000
Intangible assets - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,022,000 7,128,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463,000 457,000
------------ ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,234,000 $32,481,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . $ 4,890,000 $ 4,737,000
Current portion of notes payable and capitalized lease obligations . . . . . . . . . . . 1,649,000 1,706,000
------------ ------------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,539,000 6,443,000
Long-term portion of notes payable and capitalized lease obligations . . . . . . . . . . 5,971,000 6,288,000
Deferred franchise fees and other deferred income. . . . . . . . . . . . . . . . . . . . 2,025,000 2,088,000
Accrued liabilities and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,066,000 2,154,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 50,000,000 shares; 28,244,340
shares outstanding at August 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 283,000 283,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,565,000 24,565,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,608,000) (7,733,000)
------------ ------------
17,240,000 17,115,000
Note receivable from sale of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (563,000) (563,000)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,044,000) (1,044,000)
------------ ------------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,633,000 15,508,000
------------ ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,234,000 $32,481,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Three Months Ended
REVENUES August 31, 1997 August 31, 1996
- -------------------------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,778,000 $ 9,053,000
Revenues from franchised restaurants . . . . . . . . . . . . . . . . . . . 1,119,000 1,132,000
Net gain from sales of restaurants . . . . . . . . . . . . . . . . . . . . 11,000 173,000
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,000 116,000
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,000 61,000
------------------- -------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,218,000 10,535,000
------------------- -------------------
EXPENSES
Restaurant operating costs (including lease costs paid to Kavala, Inc. of
$41,000 in 1997 and 1996, respectively). . . . . . . . . . . . . . . . . 4,550,000 8,243,000
General, administrative and franchise costs. . . . . . . . . . . . . . . . 900,000 1,467,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 368,000 515,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,000 243,000
------------------- -------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,026,000 10,468,000
------------------- -------------------
Income before provision for income taxes . . . . . . . . . . . . . . . . . 192,000 67,000
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . 67,000 -
------------------- -------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125,000 $ 67,000
=================== ===================
Net income per common and common share equivalents . . . . . . . . . . . . - -
=================== ===================
Weighted average number of common and common share
equivalents outstanding. . . . . . . . . . . . . . . . . . . . . . . . . 27,119,000 28,251,000
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Three Months Ended
OPERATING ACTIVITIES: August 31, 1997 August 31, 1996
- --------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125,000 $ 67,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 259,000 396,000
Amortization of intangible assets . . . . . . . . . . . . . . . 108,000 119,000
Net gain from sales of restaurants. . . . . . . . . . . . . . . (11,000) (173,000)
Changes in assets and liabilities:
(Increase) in accounts receivable . . . . . . . . . . . . . . . (194,000) (380,000)
Decrease in food and supplies inventories . . . . . . . . . . . 14,000 52,000
Decrease in other current assets. . . . . . . . . . . . . . . . 1,000 37,000
(Increase) decrease in other assets . . . . . . . . . . . . . . (6,000) 20,000
Increase (decrease) in accounts payable and accrued liabilities 153,000 (435,000)
(Decrease) in deferred fees and accrued liabilities . . . . . . (98,000) (291,000)
-------------------- --------------------
Net Cash Provided By (Used For) Operating Activities. . . . . . 351,000 (588,000)
-------------------- --------------------
INVESTMENT ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . . . . (73,000) (289,000)
Proceeds from sales of restaurants. . . . . . . . . . . . . . . 10,000 250,000
Payments received on notes receivable . . . . . . . . . . . . . 424,000 99,000
-------------------- --------------------
Cash Provided By Investment Activities. . . . . . . . . . . . . 361,000 60,000
-------------------- --------------------
FINANCING ACTIVITIES:
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . (374,000) (573,000)
-------------------- --------------------
Cash (Used For) Financing Activities. . . . . . . . . . . . . . (374,000) (573,000)
-------------------- --------------------
INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . 338,000 (1,101,000)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 2,940,000 3,103,000
-------------------- --------------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 3,278,000 $ 2,002,000
==================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . $ 209,000 $ 242,000
==================== ====================
Loans to franchisees in connection with sales of restaurants. . $ 190,000 $ 1,010,000
==================== ====================
Acquisition of restaurants in exchange for notes receivable . . $ 432,000
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the Company's financial position
and results of operations for the periods presented. The financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required for annual financial statements. The
financial statements included herein should be read in conjunction with the
financial statements presented in the Company's Annual Report on Form 10-K for
the year ended May 31, 1997.
Results of operations reported for interim periods are not necessarily
indicative of results for the entire fiscal year.
2. REVENUES FROM FRANCHISED RESTAURANTS
<TABLE>
<CAPTION>
Revenues from franchised restaurants consist of the following:
Three Months Ended Three Months Ended
August 31, 1997 August 31, 1996
------------------- -------------------
<S> <C> <C>
Royalties. . . . . . . . . . . . . . . $ 922,000 $ 985,000
Franchise and development fees . . . . 142,000 116,000
Sublease rental income (net) and other 55,000 31,000
------------------- -------------------
Total. . . . . . . . . . . . . . . . . $ 1,119,000 $ 1,132,000
=================== ===================
</TABLE>
3. NOTES AND ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Notes and accounts receivable consist of the following:
Three Months Ended Three Months Ended
August 31, 1997 May 31, 1997
-------------------- --------------------
<S> <C> <C>
Notes receivable . . . . . . . . . . . . . . . . . . $ 8,771,000 $ 9,437,000
Royalties and other receivables due from franchisees 1,029,000 867,000
Other. . . . . . . . . . . . . . . . . . . . . . . . 82,000 58,000
-------------------- --------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . 9,882,000 10,362,000
Less allowance for doubtful accounts . . . . . . . . (281,000) (289,000)
-------------------- --------------------
9,601,000 10,073,000
Less notes receivable due after one year . . . . . . (7,793,000) (8,073,000)
-------------------- --------------------
Notes and accounts receivable-current portion. . . . $ 1,808,000 $ 2,000,000
==================================================== ==================== ====================
<FN>
Notes receivable at August 31, 1997, 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. The notes are generally due in monthly installments of principal
and interest, with interest rates ranging principally between 8% and 12%.
</TABLE>
4. INCOME TAXES
The Company's federal income tax returns for fiscal years 1991 through 1995,
inclusive, have been examined by the Internal Revenue Service and an
examination of fiscal year 1996 is in process. The IRS has issued a report
for the years 1991 through 1995 reflecting substantial adjustments which the
Company and its outside counsel are currently reviewing. Based on the
preliminary review of the report, a substantial portion of the Company's net
operating loss carryovers may be absorbed by the proposed adjustments,
however, the Company is unable at this time to determine the ultimate
potential impact of the proposed adjustments on the carryovers and on its
overall tax liability. The Company, through its counsel, will appeal many of
the proposed adjustments.
5. STOCK OPTIONS AND WARRANTS
At May 31, 1997, there were 4,416,700 stock options outstanding under the
Company's stock option plan, of which 2,362,500 of such options subsequently
expired. There are currently 2,638,200 options outstanding under the plan.
As a result of a repricing of certain options to current market value and
grants of 584,000 new options during June 1997, 2,055,500 of such options are
exercisable at prices between $ .59 and $ .75 per share (average exercise
price of $ .747 per share), and the remaining options outstanding under the
plan are exercisable at prices between $2.00 and $3.00 per share (average
exercise price of $2.40 per share). In addition to options outstanding under
the plan, there are 509,600 additional warrants and options outstanding which
are exercisable at prices between $2.00 and $6.00 per share (average exercise
price $2.91 per share).
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
- ------------
The Company's revenues are derived principally from operating, franchising,
and financing Miami Subs restaurants. Franchise revenues consist principally
of initial franchise fees and area development fees, monthly royalty fees, and
net sublease rental income. In the normal course of its business, the Company
also derives revenues from the sale of restaurants to franchisees, and
interest income from financing the sale of restaurants to franchisees.
Restaurant operating costs include food and paper costs, direct restaurant
labor and benefits, marketing fees and costs, 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.
In order to supplement expansion of traditional free-standing restaurants, the
Company has continued to focus growth in franchising non-traditional
restaurants. Such restaurants are typically smaller and less costly to
develop then the traditional free-standing restaurants, and sales at these
non-traditional restaurants are typically less than those of traditional
restaurants. During the three months ended August 31, 1997, six new
non-traditional restaurants were opened by franchisees, and at August 31,
1997, there were 27 non-traditional restaurants in the system.
The Company's ability to achieve and sustain profitability will, among other
factors, be dependent on improvement of sales and operating margins in
existing Company and franchised restaurants, successful expansion of its
franchise base, its ability to control future operating costs, and the
successful operation of existing and new restaurants on a profitable basis.
The Company's fiscal year ends on May 31. The results of operations for the
three months ended August 31, 1997 are not necessarily indicative of the
results that may be expected for the Company's fiscal year.
During the three months ended August 31, 1997, seven franchised restaurants
opened (of which six were non-traditional restaurants), and three franchised
restaurants closed. In addition, the Company sold/transferred two
Company-operated restaurants to franchisees, and reacquired two restaurants
from former franchisees in exchange for notes receivable due to the Company.
At August 31, 1997, there were 191 restaurants in the system, consisting of 17
Company operated restaurants and 174 franchised restaurants. At August 31,
1996, there were 178 restaurants in the system, consisting of 32 Company
operated restaurants and 146 franchised restaurants.
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1997 TO AUGUST 31, 1996
Total Revenues
- ---------------
Principally as a result of the planned sale of Company restaurants to
franchisees since the first quarter of last year and a resulting reduction in
the number of Company operated restaurants, total Company revenues declined
41% to $6.2 million in the first quarter of the current year, as compared to
$10.5 million in the first quarter of the prior year.
Restaurant Sales
- -----------------
The Company's total restaurant sales decreased approximately 47% to $4.8
million in the current quarter, as compared to $9.1 million in the prior year
quarter. The decrease in sales resulted principally from the sale of Company
operated restaurants to franchisees since August 1996, resulting in a
reduction in the number of Company operated restaurants from 32 at August 31,
1996, to 17 at August 31, 1997.
"Same-store-sales" in Company operated restaurants (which is computed for
restaurants open since December 1995 and operated by the Company for the
current and prior year quarters) declined by approximately 6.4% in the current
quarter. To address the decline in same-store-sales, average unit volumes and
lower guest counts that the Company's restaurants have been experiencing, and
in response to aggressive advertising and lower pricing of the major fast food
chains, in March 1997 the Company made a strategic change in its marketing
strategy, and revised its pricing structure and menu. At the same time, the
Company ceased the extensive use of couponing in its restaurants. The Company
also began a test of certain operational and marketing changes to increase
guest counts and become more competitive on price points with other fast-food
operators, and began a major system-wide program to bring all restaurants up
to current standards and image. During this test period and throughout most
of the first quarter of the current year, system-wide advertising and
marketing activities were essentially placed on hold. The Company's
initiatives to date have included an integrated program to address image
improvements to restaurants, crew and manager training and retraining, sales
and customer service incentives, an introduction of new lower-priced products
and lower prices on certain existing products, and new local-store marketing
programs. Following the test period and introduction of the changes to the
system, the Company recommenced radio and print advertising at the end of the
current quarter. There can be no assurance that these recent efforts will
ultimately be successful in reversing the same-store-sales trends or
increasing unit volumes.
At August 31, 1997, Company operated restaurants were located in Florida (10);
Texas (6), and New York (1). The Company currently plans to sell to
franchisees up to nine of these restaurants. However, there can be no
assurance that any such sales will be consummated at terms acceptable to the
Company.
Revenues From Franchised Restaurants
- ---------------------------------------
Revenues from franchised restaurants amounted to $1,119,000 in the current
quarter, as compared to $1,132,000 in the prior year quarter.
In the current year's first quarter, seven franchised restaurants opened (of
which 6 were non-traditional restaurants), the Company sold/transferred two
restaurants to franchisees, and three franchised restaurants closed. Royalty
income in the current quarter amounted to $922,000, as compared to $985,000 in
the prior year quarter. Although the number of franchised restaurants have
increased, a decrease of approximately 10.4% in "same-store-sales" at
franchised restaurants (which is computed for franchised restaurants open
since December 1995), lower average unit sales at franchised restaurants, and
the non-payment and non-accrual of royalty fees due from franchisees adversely
affected royalty income in the current year's first quarter. At August 31,
1997, approximately 15% of franchised units have been granted a temporary
waiver from paying royalty fees, and royalty fees were not paid or accrued on
22% of certain other franchised units due to delinquency in the payment of
royalties to the Company.
As discussed in "Restaurant Sales" above, by the end of the current quarter
the Company had initiated throughout the system significant and strategic
changes to its marketing strategy, pricing structure, and menu, and
recommenced radio and print advertising at the end of the current quarter in
order to improve guest counts and unit sales in the restaurants and become
more competitive on price points with other fast-food operators. There can be
no assurance that these initiatives will ultimately be successful in reversing
the same store sales trends, increasing unit volumes, or improving restaurant
profitability.
System-Wide Sales
- ------------------
System-wide sales, which includes sales from Company operated and franchised
restaurants, amounted to approximately $37.8 million in the current quarter,
as compared to $40.0 million in the prior year quarter. The decrease in
system-wide sale reflects a decline in "same store sales" for both Company
operated and franchised units (which is computed for restaurants open since
December 1995) of approximately 10.1% in the current quarter, the increased
number of non-traditional restaurants in the system which typically have lower
sales volumes than traditional restaurants, and continuation of intense
industry-wide competition and aggressive price discounting and marketing by
large national chains.
As discussed in "Restaurant Sales" above, by the end of the current quarter
the Company had initiated throughout the system significant and strategic
changes to its marketing strategy, pricing structure, and menu, and
recommenced radio and print advertising in order to improve unit sales in the
restaurants and become more competitive on price points with other fast-food
operators. There can be no assurance that these initiatives will ultimately
be successful in reversing the same store sales trends, increasing unit
volumes, or improving restaurant profitability.
Net Gain From Sales of Restaurants
- ---------------------------------------
As a part of the Company's current strategy to focus future growth and
operations in franchising restaurants, the Company sold/transferred two
restaurants to franchisees during the first quarter of the current year. Four
Company restaurants were sold to franchisees in the year earlier quarter.
Gains on the sale of restaurants are dependent on the Company's basis in and
the overall performance of such units. 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. Losses on the sale of restaurants are
recognized at the time of sale. Total deferred gains on the sales of
restaurants amounted to $827,000 at August 31, 1997. Although the Company
intends to sell other existing Company operated restaurants in the future,
there can be no assurance that any such sales will be consummated on terms
acceptable to the Company or that gains will be realized.
Interest Income
- ----------------
In connection with its strategy of focusing growth in franchising restaurants,
the Company has sold restaurants to franchisees and provided financing for
such sales. Principally as a result of the increase in notes receivable from
such sales, interest income increased to $197,000 in the current quarter, as
compared to $116,000 in the year earlier quarter. The Company currently plans
to sell additional restaurants to franchisees, and it is expected that such
sales, when and if consummated, will also be financed by the Company.
Restaurant Operating Costs
- ----------------------------
Restaurant operating costs in Company operated restaurants amounted to $4.6
million or 95.2% of sales in the current quarter, as compared to $8.2 million
or 91.1% of sales in last year's first quarter. The increase in restaurant
operating costs as a percent of sales in the current quarter reflects higher
food and paper costs as a result of the lower prices currently being offered
in the restaurants, higher labor costs as the Company has increased staffing
in order to improve customer service, and also reflects the impact of lower
average unit volumes, especially in certain units that are held for sale.
General, Administrative and Franchise Costs
- -----------------------------------------------
General, administrative and franchise costs amounted to $900,000 or 14.5% of
total revenue in the current quarter, as compared to approximately $1.5
million or 13.9% of total revenue in the prior year quarter.
During the second half of the prior year, the Company eliminated certain
administrative and support positions, implemented a reduction in
office/administration facilities, and took other cost control measures which
resulted in a 39% decrease in such costs as compared to the year earlier
level. The Company is maintaining strict cost controls in all areas of its
business, and does not currently expect any significant increases to current
levels.
Depreciation and Amortization
- -------------------------------
Depreciation and amortization decreased in the current quarter due to the
reduction in the number of restaurants operated by the Company in the current
quarter as compared to the year earlier period. At August 31, 1997, the
Company operated 17 restaurants as compared to 32 restaurants at August 31,
1996.
Interest Expense
- -----------------
Interest expense decreased to $208,000 in the current quarter, as compared to
$243,000 in the prior year quarter, principally reflecting lower average debt
levels outstanding in the current quarter.
Provision for Income Taxes
- -----------------------------
The Company's federal income tax returns for fiscal years 1991 through 1995,
inclusive, have been examined by the Internal Revenue Service and an
examination of fiscal year 1996 is in process. The IRS has issued a report
for the years 1991 through 1995 reflecting substantial adjustments which the
Company and its outside counsel are currently reviewing. Based on the
preliminary review of the report, a substantial portion of the Company's net
operating loss carryovers may be absorbed by the proposed adjustments.
Accordingly, in the quarter ended August 31, 1997, the Company provided for
estimated income taxes on the current operating results.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
During the first quarter of the current year, the Company's principal sources
of cash were from principal payments received on notes receivable of $424,000,
and from operating activities totaling $351,000. The Company's principal uses
of cash in the current quarter were for scheduled debt repayments and payoffs
of $374,000, and property renovations and improvements of $73,000. Cash and
cash equivalents at August 31, 1997, amounted to $3,278,000 (which includes
unexpended marketing fund contributions of $1,133,000), as compared to
$2,940,000 (including $683,000 in unexpended marketing fund contributions) at
May 31, 1997, and $2,002,000 (including $565,000 in unexpended marketing fund
contributions) at August 31, 1996. At August 31, 1997, the Company's working
capital deficiency was $1,085,000, as compared to $1,120,000 at May 31, 1997,
and $1,808,000 one year ago. The Company has been 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.
Due to the high cost of suitable real estate and sites, the intense
competition in the industry, and the Company's strategy of focusing on
franchising, the Company does not currently plan to develop new Company
restaurants in fiscal year 1998. Accordingly, in addition to scheduled debt
maturities/repayments for the remainder of fiscal year 1998 of approximately
$1,325,000, the Company's capital requirements for the balance of the current
fiscal year relate primarily to necessary or required capital improvements to
existing restaurants and certain enhancements to corporate and restaurant
management information systems. Such capital expenditures will be made as
required, and will take into consideration the Company's current liquidity and
working capital positions, as well as anticipated future cash flows from
operations and other sources.
In connection with its strategy of focusing future growth in franchising
restaurants, the Company has sold restaurants to franchisees and provided
financing for such sales. Notes receivable, which amounted to $8.8 million at
August 31, 1997 (of which approximately $978,000 is due within one year),
principally consist of 36 notes arising from the sale of restaurants to
franchisees. Eight of these notes were delinquent at August 31, 1997, and
during the current quarter, the Company reacquired two restaurants from former
franchisees in exchange for notes receivable. In certain cases, the Company
has instituted proceedings for the collection of such delinquent notes, which
may result in the reacquisition of the restaurant by the Company. The Company
currently plans to sell additional restaurants to franchisees, and it is
expected that such sales, when and if consummated, will also be financed by
the Company.
As a result of fewer restaurants operated by the Company and a decline in
same-store-sales, the Company's total revenues declined by 41% in the current
quarter as compared to the year earlier quarter. The Company currently plans
to sell to franchisees up to nine of the restaurants that it operated at
August 31, 1997. If the Company consummates the sale of additional planned
restaurants, the Company's future total revenues would 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 restaurant operating profit.
Accordingly, continued emphasis will be placed on franchising non-traditional
restaurants and certain of the Company's existing restaurants, improving the
performance of Company and franchised 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 achieve
and sustain profitability and improve cash flow and liquidity, will, among
other factors, be dependent on improvement of sales and operating margins in
existing Company and franchised restaurants, successful expansion of its
franchise base, its ability to control future operating costs, and the
successful operation of existing and new restaurants on a profitable basis.
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 have historically been higher that its second
and third quarters.
PART II. OTHER INFORMATION
ITEM L. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, Legal Proceedings, in the Company's
Annual Report on Form
10-K for the fiscal year ended May 31, 1997 for a description of certain legal
proceedings involving the Company. Since May 31, 1997, there have been no
material developments in these legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
--------
NONE
(b) Reports on Form 8-K
----------------------
NONE
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIAMI SUBS CORPORATION
Date: October 8, 1997 By:/s/ Jerry W. Woda
--------------- --------------------
JERRY W. WODA
Senior Vice President,
Chief Financial Officer, and
Principal Accounting Officer
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