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, 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
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 25, 1997, 28,244,340 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 $13,916,000 (amount
computed based on the closing price on August 25, 1997).
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.
<PAGE>
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 delivered in a fast-food environment
similar to other 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, growth of traditional free-standing
Restaurants has required more costly unit development, including the
acquisition of raw land and construction of buildings. In order to supplement
its traditional free-standing unit growth, during 1997 the Company continued
to develop various programs for franchisees involving non-traditional
development, consisting of smaller Restaurants that could be located on
tollroads, at airports, in convenience stores and "in-line" locations, and
other non-traditional outlets. Typically, these Restaurants are smaller than
the traditional Miami Subs Grill Restaurants and, where necessary, have
involved modifications to food preparation and the menu. Because of the size
and menu changes, sales at these non-traditional Restaurants typically are
less than those of traditional Restaurants. During 1997, 11 new
non-traditional restaurants were opened by franchisees and at May 31, 1997,
there were 22 non-traditional franchise restaurants in the system.
Competition in the quick service restaurant industry has been and continues to
be intense and is expected to 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 mitigate
same-store-sales declines and lower average unit volumes that the Miami Subs
Grill system has been experiencing since 1993, the Company has utilized value
pricing and price discounting strategies, and recently has lowered prices on
certain menu items and offered lower priced products. If not successful, such
strategies will 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, 1997, the Company's restaurant system included 187 Restaurants,
of which 128 of the Restaurants were located in Florida, 55 Restaurants were
located in 16 other states, and four Restaurants were located in Ecuador. Of
these Restaurants, 17 were Company operated and 170 were operated by
franchisees. During 1997, the Company sold 19 restaurants to franchisees, and
the Company intends to focus its future growth on franchise development, with
the objective of expanding the franchise system principally 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.
At May 31, 1997, franchisees operated 170 of the 187 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 (see Item 2. "Properties"). In addition, the
Company has guaranteed certain third party equipment and real estate leases
for certain franchisees and 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, and, through a series of transactions,
the Company acquired the worldwide rights to develop, own, operate, and
franchise Miami Subs restaurants 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.
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 $4.99.
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 being
sold in the Restaurants. As of May 31, 1997, seven of the Company operated
Restaurants and 26 franchised Restaurants sell Baskin-Robbins ice cream
products.
The Restaurants feature a distinctive decor unique to the Miami Subs concept.
The exterior of free-standing restaurants feature 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.
At May 31, 1997, 150 of the existing Miami Subs Restaurants are located in
freestanding buildings, consisting of approximately 2,000 to 5,000 square
feet.
Miami Subs Restaurants are typically open seven days a week, generally open at
10:30 am, and most of the Restaurants 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 approximately five minutes.
Drive-thru service is provided at principally all free-standing Restaurants.
All standard menu 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% - 45% of sales.
NON-TRADITIONAL RESTAURANTS
Restaurants in the Miami Subs system historically were developed primarily
through conversions of existing, free-standing properties. 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 suitable for conversion are available. Accordingly, in fiscal year
1996, the Company developed and initiated various programs for franchisees
involving non-traditional restaurant development, consisting of smaller
Restaurants that could be located on tollroads, at airports, in convenience
stores, and "in-line" locations, and other non-traditional locations.
Typically, these Restaurants are smaller and less costly to develop and
operate than the traditional Miami Subs Grill Restaurants. With the exception
of certain airport locations, the sales in the non-traditional Restaurants are
typically significantly lower than a standard free-standing Restaurant. In
addition, where appropriate, certain modifications have been made to food
preparation and delivery procedures and the standard menu has been revised.
During fiscal year 1997, 11 of the 18 new Restaurants opened by franchisees
were non-traditional Restaurants. At May 31, 1997, there were 22
non-traditional Restaurants in the system, including seven Restaurants located
in convenience store/gas stations; five Restaurants located in airport
facilities; seven Restaurants located in retail locations; two located in
turnpike facilities; and one "in-line" location.
COMPANY OPERATED RESTAURANTS
During fiscal year 1997, the Company began to primarily focus its growth and
operating strategy on franchising, and as part of this strategy, the Company
sold/franchised 19 of its Company operated Restaurants to franchisees. At May
31, 1997, the Company operated 17 Restaurants, of which nine are located in
Florida, six are located in Texas, one is located in South Carolina, and one
is located in New York. The Company currently plans on franchising the eight
Restaurants which are not located in Florida, and one of the Florida
locations.
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 certain products. The Company utilizes 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, and facilitate menu modifications.
In conjunction with a major supplier, the Company assisted in the development
of 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.
FRANCHISE OPERATIONS
Strategy. The Company's future growth will be focused on increasing the
number of franchised Restaurants, through both traditional and non-traditional
Restaurants.
The primary criteria considered by the Company in the review and approval of
franchisees are prior experience in operating restaurants or other comparable
business experience, 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 franchisees must
request Company approval for any deviations. The Company does not generally
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.
The Company also 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 between five
and 20 years, and the initial franchise fee is $25,000 for traditional
Restaurants and $15,000 for certain non-traditional Restaurants. The
franchise agreement provides for the payment of a monthly royalty fee based on
gross sales for the term of the franchise agreement, and additional charges of
up to 5% of gross sales to support various system-wide and local 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 a minimum number
of Restaurants that the franchisee is required to open in an agreed upon
exclusive area during the term of the agreement. In addition to receiving a
franchise fee for each Restaurant opened, the Company also receives a
non-refundable fee based upon the minimum number of Restaurants required to be
opened under the agreement. At May 31, 1997, there were existing development
agreements with 11 franchisees which provide for the future opening of up to
78 Restaurants. There can be no assurance that performance by the franchisees
under these agreements will be successful.
During fiscal year 1997, 18 new franchised Restaurants opened, including seven
traditional units and 11 non-traditional units, and seven franchised
restaurants closed. At May 31, 1997, there were 170 franchise Restaurants in
the system, including 22 non-traditional Restaurants.
<PAGE>
RESTAURANT LOCATIONS
At May 31, 1997, there were 187 Miami Subs Restaurants in the system, of
which 17 were operated by the Company and 170 were operated by franchisees.
The following table sets forth the locations of such Restaurants.
<TABLE>
<CAPTION>
Company
Operated Franchised
-------- ----------
<S> <C> <C>
Florida 9 119
Texas 6 3
North Carolina - 12
South Carolina 1 4
Georgia - 4
New Jersey - 3
New York 1 1
Pennsylvania - 5
Indiana - 3
Connecticut - 1
New Hampshire - 1
Tennessee - 4
Virginia - 2
Alabama - 1
Kansas - 1
Rhode Island - 1
Kentucky - 1
Ecuador - 4
-------- ----------
Total 17 170
============== ======== ==========
</TABLE>
MARKETING
The physical facility of each Miami Subs Restaurant represents a key
ingredient of the Company's 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 principally utilize radio and print, and
carries the theme that Miami Subs offers a variety of menu selections. The
Company's radio advertisements are broadcast principally in markets where
there are sufficient Restaurants to benefit from such advertisements.
In addition to other marketing programs and in response to the highly
competitive fast-food industry, during fiscal year 1997 the Company continued
to focus its advertising on lower priced "combo meals" and, utilized various
discounting programs in order to increase customer traffic and sales.
EMPLOYEES
At August 1, 1997, the Company employed 271 full-time and 223 part-time
employees. 456 of the employees work in the Company's Restaurants and the
remaining 38 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 restaurant 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.
Changes in pricing or other marketing strategies by these competitors can 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 mitigate same-store-sales
declines that the Miami Subs Grill system has been experiencing, the Company
adopted value pricing and price discounting strategies, and more recently is
testing a lower priced menu and introducing competitively priced new products.
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 that sell such products 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. At May 31, 1997, the
Company offered for sale beer and wine in 14 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, 1997, 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 12 60
Lease land and own building 4 2
Own land and building 1 2
----------- ---------------------
Total 17 64
=========================== =========== =====================
</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 increased. 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 4,200
foot facility in Fort Lauderdale which is used for training and product
development and testing. The Company believes that these facilities are
adequate and suitable for its current needs.
ITEM 3. LEGAL PROCEEDINGS
In July 1997, the Company agreed to settle a lawsuit filed in 1992 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 alleged
that they were 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 suit was settled with the Company agreeing to return
to the plaintiff an initial fee of $25,000 previously paid to the Company plus
$10,000.
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
was appealed by both the Company and F/D, and in November 1996, the appeal was
argued before the Supreme Court of New Hampshire. The Court has not yet
rendered a ruling on the appeal.
In October 1996, a lawsuit was filed against the Company (Rafaele Cruz, as
Personal Representative of the Estate of Miguel Angel Rivera, deceased, v.
Miami Subs Corporation, Broward County Circuit Court, Case No. 96-14900)
seeking unspecified damages in excess of $15,000 relating to an incident that
allegedly occurred in or around the parking lot of a Company-operated
restaurant. In addition, there have been inquiries of the Company by counsel
representing a party in a separate incident involving a deceased patron of a
franchised restaurant. Both of these matters are being handled by the
Company's insurance carrier.
The Company and its subsidiaries are parties to various other legal actions
arising in the ordinary course of business. 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.
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, 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
Fiscal Year Ended May 31, 1997
First Quarter $1 13/16 $ 31/32
Second Quarter 1 5/16 9/16
Third Quarter 31/32 19/32
Fourth Quarter 1 5/32 1/2
</TABLE>
There are approximately 1,800 holders of record of the Company's Common Stock.
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.
On August 25, 1997, the Board of the Nasdaq Stock Market announced substantial
changes to Nasdaq's listing qualification standards. One of the changes was
the establishment of a minimum bid price of $1.00 for common and preferred
stock listed on Nasdaq. Previously, companies whose stock fell below $1.00
could remain listed if they met certain alternative tests. The Company does
not currently meet the new requirement and, accordingly, the Company's common
stock is subject to de-listing if it is unable to come into compliance within
certain time periods.
<PAGE>
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 Year Ended Year Ended Year Ended
------------ ------------ ------------ ------------
MAY 31, May 31, May 31, May 31,
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Restaurant sales $ 28,180 $ 32,398 $ 27,148 $ 22,190
Franchise revenues 4,514 4,720 3,920 3,207
Net gain from sales of restaurants/other 868 117 112 332
Interest income and other revenues 871 677 716 513
------------ ------------ ------------ ------------
Total 34,433 37,912 31,896 26,242
------------ ------------ ------------ ------------
Restaurant operating costs 26,042 28,573 23,942 19,925
General, administrative and franchise costs 5,667 6,351 6,390 5,936
Depreciation and amortization 1,837 1,942 1,544 1,318
Interest expense - net 903 741 581 381
Loss on impairment of restaurants 375 - - 2,452
------------ ------------ ------------ ------------
Total 34,824 37,607 32,457 30,012
------------ ------------ ------------ ------------
Net income (loss) $ (391) $ 305 $ (561) $ (3,770)
============ ============ ============ ============
Net income (loss) per share $ (.01) $ .01 $ ( .02) $ ( .16)
============ ============ ============ ============
BALANCE SHEET DATA
Total assets $ 32,481 $ 36,361 $ 33,042 $ 26,102
Current assets 5,323 6,066 5,180 6,832
Notes receivable - long term 8,073 3,778 3,530 2,197
Current liabilities 6,443 7,645 6,785 5,964
Long-term portion of notes payable and capitalized leases 6,288 7,955 6,249 2,832
Deferred franchise fees and other deferred income 2,088 1,712 2,241 2,185
Shareholders' equity 15,508 16,943 15,053 13,403
OTHER DATA
Restaurants opened during the year 18 24 21 29
============ ============ ============ ============
Restaurants at year end:
Company operated 17 37 30 19
Franchised 170 140 130 129
------------ ------------ ------------ ------------
Total 187 177 160 148
============ ============ ============ ============
System-wide sales $ 151,201 $ 145,517 $ 138,963 $ 125,706
Average annualized sales per restaurant(1) $ 845 $ 874 $ 894 $ 930
Percent increase (decrease) in "same store sales" (5.5)% (3.8)% (3.6)% (3.1)%
=============================================================== ============ ============ ============ ============
(All dollar amounts in thousands, except for per share amounts)
Year Ended
------------
May 31,
1993
------------
<S> <C>
OPERATIONS STATEMENT DATA
Restaurant sales $ 16,766
Franchise revenues 2,842
Net gain from sales of restaurants/other 249
Interest income and other revenues 632
------------
Total 20,489
------------
Restaurant operating costs 15,090
General, administrative and franchise costs 4,107
Depreciation and amortization 750
Interest expense - net 138
Loss on impairment of restaurants -
------------
Total 20,085
------------
Net income (loss) $ 404
Net income (loss) per share $ .02
BALANCE SHEET DATA
Total assets $ 22,156
Current assets 4,432
Notes receivable - long term 2,191
Current liabilities 3,202
Long-term portion of notes payable and capitalized leases 2,721
Deferred franchise fees and other deferred income 1,274
Shareholders' equity 14,815
OTHER DATA
Restaurants opened during the year 36
============
Restaurants at year end:
Company operated 21
Franchised 103
------------
Total 124
System-wide sales $ 102,971
Average annualized sales per restaurant(1) $ 966
Percent increase (decrease) in "same store sales" 17.7%
=============================================================== ============
(All dollar amounts in thousands, except for per share amounts)
<FN>
(1) Does not include non-traditional restaurants in 1997.
</TABLE>
<PAGE>
ITEM 7. 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, 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.
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 opening and operation of new restaurants on a profitable basis.
During fiscal year 1997, the Company did not open any new Company restaurants,
and sold 19 existing restaurants to franchisees. Franchisees opened 18 new
restaurants, including 11 non-traditional restaurants. During the year, one
Company operated restaurant and seven franchised restaurants closed. At May
31, 1997, there were 187 restaurants in the system, consisting of 17 Company
operated restaurants and 170 franchised restaurants.
COMPARISON OF FISCAL YEAR 1997 TO 1996
Total Revenues
Total Company revenues declined 9.2% to $34.4 million in fiscal year 1997, as
compared to $37.9 million in fiscal year 1996. The decrease in total revenues
was primarily due to fewer Company operated restaurants which was in part
offset by a significant increase in net gains from the sale of restaurants to
franchisees, and to lower average sales in Company operated restaurants.
Restaurant Sales
The Company's total restaurant sales decreased approximately 13.0% to $28.2
million in 1997, as compared to $32.4 million in 1996. The decrease in sales
resulted principally from a reduction in the number of Company operated
restaurants, from 37 at the end of 1996, to 17 at the end of 1997. During
1997, the Company sold 19 restaurants to franchisees and closed one
restaurant.
"Same-store-sales" in Company operated Restaurants (which is computed for
restaurants open since December 1994) declined by approximately 3.1% in 1997,
and average annualized unit sales for all restaurants operated by the Company
in 1997 amounted to approximately $1,023,000. The Company attributes the
decline in same-store-sales in large part to intense industry competition and
aggressive price discounting and marketing by larger national chains. In
response to such conditions, the Company introduced lower priced "combo meals"
and utilized extensive discounting and couponing programs in an effort to
increase customer traffic and sales. In the fourth quarter of the current
year, the Company ceased the couponing programs, lowered prices of certain
products on its menu, introduced a selection of lower priced products, and
commenced direct local store marketing efforts. There can be no assurance
that these efforts will ultimately be successful in reversing the
same-store-sales trends and increasing average unit volumes.
At May 31, 1997, Company operated restaurants were located in Florida (9);
Texas (6), South Carolina (1), and New York (1). The Company currently plans
to sell to franchisees the eight restaurants located outside of Florida, and
one of the Florida 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 declined approximately 4.4% to $4.5
million in 1997, as compared to $4.7 million in 1996. Franchise revenues in
1997 included $400,000 in franchise fees from the sale of Company restaurants
to franchisees, and franchise revenues in 1996 included $324,000 resulting
from the termination of nine area development agreements with franchisees.
In 1997, 18 franchised restaurants opened (of which 11 were non-traditional
restaurants), the Company sold 19 of its restaurants to franchisees, and seven
franchised restaurants closed. Royalty income in 1997 amounted to $3,680,000,
as compared to $3,752,000 in 1996. Although the number of franchised
restaurants increased during 1997, a decrease of approximately 5.6% in
"same-store-sales" at franchised restaurants, lower average unit sales at
franchised restaurants, and the non-payment and non-accrual of royalty fees
from an increased number of franchisees adversely affected royalty income in
the current year. At May 31, 1997, 15% of franchised units have been granted
a temporary waiver from paying royalty fees, and 18% of franchised units were
considered delinquent in the payment of royalties to the Company.
System-Wide Sales
System-wide sales, which includes sales from Company operated and franchised
restaurants, increased by approximately 3.9% to $151.2 million in 1997, as
compared to $145.5 million in 1996. Average annualized unit sales for all
non-traditional restaurants in operation in 1997 decreased by 3.3% to
approximately $845,000, as compared to $874,000 in 1996. "Same store sales"
for all units in the system (which is computed for restaurants open since
December 1994) declined by approximately 5.5% in 1997 reflecting continuation
of intense industry-wide competition and aggressive price discounting and
marketing by large national chains, and extensive price discounting and
couponing by the Company and its franchisees.
Net Gain From Sales of Restaurants
As a part of its strategy to focus future growth and operations in franchising
restaurants, the Company sold/transferred 19 restaurants to franchisees during
1997. Gains on the sale of restaurants are dependant 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. As a result of these sales, the Company
recognized net gains of $868,000 in 1997, as compared to $117,000 in 1996.
Total deferred gains on the sales of restaurants amounted to $839,000 at May
31, 1997. 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 amounted to $26.0 million or 92.4% of sales in
1997, as compared to $28.6 million or 88.2% of sales in 1996. The increase in
restaurant operating costs as a percent of sales was a result of lower average
unit sales, the impact of price discounting and couponing promotions, and
higher direct operating costs, including cost of sales and labor.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $5.7
million or 16.5% of total revenue in 1997, as compared to $6.4 million or
16.8% of total revenue in 1996. Included in general, administrative and
franchise costs in 1997 are accrued severance costs payable to the Company's
former president, an accounting charge associated with the resolution of an
outstanding note receivable, and costs associated with relocating and
consolidating an administrative facility. Such costs and other charges
amounted to $601,000 in 1997.
During the second half of 1997, the Company eliminated certain administrative
and support positions, implemented a reduction in office/administration
facilities, and took other cost control measures resulting in a significant
decrease in such costs over the year earlier levels. The Company is
maintaining strict cost controls in all areas of its business, and does not
expect any significant increases to current levels in fiscal year 1998.
<PAGE>
Interest Expense
Interest expense increased to $903,000 in 1997, as compared to $741,000 in the
prior year, principally reflecting higher average debt levels outstanding in
1997.
Loss on Impairment of Restaurants
During 1997 and in conjunction with the Company's franchise strategy, several
Company operated restaurants were identified for sale to franchisees. At May
31, 1997, the Company provided a reserve of $375,000 to provide for the
intended sale of certain 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 annualized unit sales for all restaurants operated
by the Company in 1996 amounted to approximately to $1,058,000. The Company
attributes the decline in same-store-sales 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.
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
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. The Company attributes the decline to intense industry-wide
competition, 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 annualized 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, 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.
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 reserve of $400,000 in connection with a ruling in a lawsuit
against the Company. The case was appealed in November 1996, however the
court has not rendered a ruling on the 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).
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company's principal sources of cash were from principal
payments received on notes receivable of $997,000, and proceeds from sales of
restaurants totaling $1,487,000. The Company's principal uses of cash in 1997
were for property renovations and improvements of $794,000, scheduled debt
repayments and maturities of $1,491,000, and cash used in operations of
$362,000. Cash and cash equivalents at May 31, 1997, amounted to $2,940,000
(which includes unexpended marketing fund contributions of $683,000), as
compared to $3,103,000 (including $525,000 in unexpended marketing fund
contributions) at May 31, 1996. At May 31, 1997, the Company's working
capital deficiency was $1,120,000, as compared to $1,579,000 at the end of
1996. 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.
Due to the current 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 in fiscal year 1998 of $1,706,000, the Company's capital
requirements for 1998 relate primarily to any necessary or required capital
improvements to existing restaurants and planned enhancements to corporate and
restaurant management information systems. Capital expenditures in 1998 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.
During fiscal year 1997, and in connection with its strategy of focusing
future growth in franchising restaurants, the Company sold 19 restaurants to
franchisees. The Company provided financing for such sales totaling $6.2
million, and total notes receivable amounted to $9.4 million at May 31, 1997,
of which $1.4 million is due in 1998. The Company currently plans to sell to
franchisees nine of the restaurants that it operated at May 31, 1997, and it
is expected that such sales, when and if consummated, will also be financed by
the Company.
As a result of the sale of 19 Company operated restaurants during fiscal year
1997 and a decline in same-store-sales, the Company's total revenues declined
by 9.2% in 1997. The Company currently plans to sell to franchisees nine of
the restaurants that it operated at May 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 operating profit, and slower
development of traditional restaurants by franchisees. 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 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.
The "Small Business Job Protection Act" provides for an increase in the
minimum wage from $4.75 per hour to $5.15 on September 1, 1997. The Company
does not expect that the wage increase will have a significant impact on its
future operations.
During fiscal year 1997, the Company did not make any menu price increases 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
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" was issued, replacing APB Opinion No. 15, "Earnings
per Share." SFAS No. 128 specifies computation, presentation and disclosure
requirements for earnings per share. The Statement is effective for financial
statements ending after December 15, 1997, and earlier application is not
permitted. The adoption of SFAS No. 128 is not expected to result in a
significant difference in the calculations under the current method.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 17 of this Report on Form 10-K.
(2) Consolidated Financial Statement Schedule. See Index to
Consolidated Financial Statements on page 17 of this Report on Form 10-K.
(b) Reports on Form 8-K.
None
(c) Exhibits.
Exhibit No. Description
23 Accountants' Consent regarding Registration Statement
on Form S-8.
<PAGE>
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, 1997 and 1996
Consolidated Statements of Operations for each of the years in the three
year period ended May 31, 1997
Consolidated Statements of Shareholders' Equity for each of the years in
the three year period ended May 31, 1997
Consolidated Statements of Cash Flows for each of the years in the three
year period ended May 31, 1997
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.
<PAGE>
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, 1997 and 1996, 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, 1997. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as of May 31, 1997 and 1996, and
for each of the years in the three-year period ended May 31, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 31, 1997, 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 8, 1997
Fort Lauderdale, Florida
<PAGE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
May 31, May 31,
ASSETS 1997 1996
- -------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,940,000 $ 3,103,000
Notes and accounts receivable - net 2,000,000 2,250,000
Food and supplies inventories 192,000 381,000
Other 191,000 332,000
------------ ------------
Total Current Assets 5,323,000 6,066,000
Notes receivable 8,073,000 3,778,000
Property and equipment - net 11,500,000 17,955,000
Intangible assets - net 7,128,000 8,004,000
Other 457,000 558,000
------------ ------------
TOTAL $32,481,000 $36,361,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------- ------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 4,737,000 $ 6,106,000
Current portion of notes payable and capitalized lease obligations 1,706,000 1,539,000
------------ ------------
Total Current Liabilities 6,443,000 7,645,000
Long-term portion of notes payable and capitalized lease obligations 6,288,000 7,955,000
Deferred franchise fees and other deferred income 2,088,000 1,712,000
Accrued liabilities and other 2,154,000 2,106,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock, $.01 par value, 8,000,000 -
shares authorized 10,000
Common stock, $.01 par value; authorized 50,000,000 shares 283,000 273,000
Additional paid-in capital 24,565,000 24,565,000
Accumulated deficit (7,733,000) (7,342,000)
------------ ------------
17,115,000 17,506,000
Note receivable from sale of stock (563,000) (563,000)
Treasury Stock (1,044,000) -
------------ ------------
Total Shareholders' Equity 15,508,000 16,943,000
------------ ------------
TOTAL $32,481,000 $36,361,000
==================================================================== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31, Year Ended May 31, Year Ended May 31,
-------------------- ------------------- --------------------
REVENUES 1997 1996 1995
- ---------------------------------------------------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C>
Restaurant sales $ 28,180,000 $ 32,398,000 $ 27,148,000
Revenues from franchised restaurants 4,514,000 4,720,000 3,920,000
Net gain from sales of restaurants and other 868,000 117,000 112,000
Interest income 612,000 469,000 477,000
Other revenues 259,000 208,000 239,000
-------------------- ------------------- --------------------
Total 34,433,000 37,912,000 31,896,000
-------------------- ------------------- --------------------
EXPENSES
- ----------------------------------------------------------------
Restaurant operating costs (including lease costs paid to
Kavala, Inc. of $313,000, $271,000 and $230,000, respectively) 26,042,000 28,573,000 23,942,000
General, administrative and franchise costs 5,667,000 6,351,000 6,390,000
Depreciation and amortization 1,837,000 1,942,000 1,544,000
Interest expense - net of capitalized interest 903,000 741,000 581,000
Loss on impairment of restaurants 375,000 - -
-------------------- ------------------- --------------------
Total 34,824,000 37,607,000 32,457,000
-------------------- ------------------- --------------------
Net income (loss) $ (391,000) $ 305,000 $ (561,000)
==================== =================== ====================
Net income (loss) per common and common share
equivalents $ ( .01) $ .01 $ ( .02)
==================== =================== ====================
Weighted average number of common and common
share equivalents outstanding 28,244,000 27,243,000 26,026,000
================================================================ ==================== =================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Common Paid-In
Preferred Stock Shares Preferred Stock Amount Stock Shares Stock Amount Capital
----------------------- ------------------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1994 1,230,095 $ 13,000 23,810,822 $ 238,000 $20,238,000
- ------------------------------------ ----------------------- ------------------------ ------------ ------------- ------------
Preferred stock dividend 307,523 3,000 (3,000)
Exercise of options and warrants 545,900 6,000 768,000
Stock issued to acquire MG III, Inc. 1,000,000 10,000 1,990,000
Net loss
BALANCE AT MAY 31, 1995 1,230,095 13,000 25,664,245 257,000 22,993,000
==================================== ======================= ======================== ============ ============= ============
Preferred stock conversions (224,595) (3,000) 224,595 3,000
Exercise of options and warrants 25,000 13,000
Stock issued to acquire restaurants 1,325,000 13,000 1,909,000
MG III, Inc. purchase accounting
adjustment (350,000)
Net income
BALANCE AT MAY 31, 1996 1,005,500 10,000 27,238,840 273,000 24,565,000
==================================== ======================= ======================== ============ ============= ============
Preferred stock conversions (1,005,500) (10,000) 1,005,500 10,000
Acquisition of 1,125,000 shares of
treasury stock - at cost
Net loss
BALANCE AT MAY 31, 1997 - - 28,244,340 $ 283,000 $24,565,000
==================================== ======================= ======================== ============ ============= ============
Accumulated Note Treasury
Deficit Receivable Stock Total
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1994 $ (7,086,000) $13,403,000
- ------------------------------------ ------------- ------------ ------------ ------------
Preferred stock dividend
Exercise of options and warrants $ (563,000) 211,000
Stock issued to acquire MG III, Inc. 2,000,000
Net loss (561,000) (561,000)
------------- ------------ ------------ ------------
BALANCE AT MAY 31, 1995 (7,647,000) (563,000) 15,053,000
==================================== ============= ============ ============ ============
Preferred stock conversions
Exercise of options and warrants 13,000
Stock issued to acquire restaurants 1,922,000
MG III, Inc. purchase accounting
adjustment (350,000)
Net income 305,000 305,000
------------- ------------ ------------ ------------
BALANCE AT MAY 31, 1996 (7,342,000) (563,000) 16,943,000
==================================== ============= ============ ============ ============
Preferred stock conversions
Acquisition of 1,125,000 shares of
treasury stock - at cost $(1,044,000) (1,044,000)
Net loss (391,000) (391,000)
------------- ------------ ------------ ------------
BALANCE AT MAY 31, 1997 $ (7,733,000) $ (563,000) $(1,044,000) $15,508,000
==================================== ============= ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31 Year Ended May 31 Year Ended May 31
------------------- ------------------- -------------------
OPERATING ACTIVITIES: 1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Net income (loss) $ (391,000) $ 305,000 $ (561,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,382,000 1,438,000 1,253,000
Amortization of intangible assets 455,000 504,000 291,000
Net gain and franchise fees on sales of restaurants (1,268,000) (117,000) (112,000)
Charge associated with note receivable 257,000 - -
Loss on impairment of restaurants and other charges 525,000 - -
Adjustment for joint venture operations - - 19,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (284,000) 330,000 (268,000)
Decrease (increase) in food and supplies inventories 189,000 (43,000) 8,000
Decrease (increase) in other current assets 141,000 (7,000) (133,000)
Decrease (increase) in other assets 101,000 (39,000) 68,000
(Decrease) increase in accounts payable and accrued liabilities (1,425,000) 288,000 335,000
(Decrease) in deferred franchise fees and other deferred income (44,000) (442,000) (231,000)
------------------- ------------------- -------------------
Net Cash (Used In) Provided By Operating Activities (362,000) 2,217,000 669,000
------------------- ------------------- -------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (794,000) (3,718,000) (1,318,000)
Proceeds from sales of restaurants 1,487,000 296,000 215,000
Payments received on notes receivable 997,000 888,000 611,000
Loans to franchisees and other - (29,000) (296,000)
Acquisition of MG III, Inc. - - (800,000)
Acquisition from Kavala, Inc. - - (3,250,000)
------------------- ------------------- -------------------
Net Cash Provided By (Used In) Investing Activities 1,690,000 (2,563,000) (4,838,000)
------------------- ------------------- -------------------
FINANCING ACTIVITIES:
Proceeds from borrowings - 1,803,000 2,933,000
Repayment of debt (1,491,000) (1,512,000) (1,255,000)
Proceeds from exercise of stock options and warrants - net - 13,000 211,000
------------------- ------------------- -------------------
Net Cash (Used In) Provided By Financing Activities (1,491,000) 304,000 1,889,000
------------------- ------------------- -------------------
DECREASE IN CASH (163,000) (42,000) (2,280,000)
CASH AT BEGINNING OF PERIOD 3,103,000 3,145,000 5,425,000
------------------- ------------------- -------------------
CASH AT END OF PERIOD $ 2,940,000 $ 3,103,000 $ 3,145,000
=================== =================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 904,000 $ 806,000 $ 556,000
Loans to franchisees in connection with sales of restaurants $ 6,207,000 $ 818,000 $ 2,144,000
=================================================================== =================== =================== ===================
Debt assumed in acquisition of restaurant $ 184,000 - -
Acquisition of restaurant in exchange for note receivable $ 180,000 - -
Acquisition of treasury stock in exchange for note receivable $ 1,044,000 - -
=================================================================== =================== =================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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,
1997, there were 187 restaurants operating in the Miami Subs system, of which
17 were operated by the Company and 170 were operated by franchisees. Nine of
the Company operated restaurants and 119 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 $683,000 and $525,000 at May 31, 1997 and 1996,
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 generally 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. Sub-lease rental income is presented net of
associated leasing 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.
<TABLE>
<CAPTION>
Revenues from franchised restaurants consist of the following:
Year Ended May 31, Year Ended May 31, Year Ended May 31,
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Royalties $ 3,680,000 $ 3,752,000 $ 3,173,000
Franchise and development fees 707,000 936,000 605,000
Sublease rental income (net) 127,000 32,000 142,000
------------------- ------------------- -------------------
Total $ 4,514,000 $ 4,720,000 $ 3,920,000
=============================== =================== =================== ===================
</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.
Losses on the sale of restaurants are recognized at the time of sale.
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. At each balance sheet date, the Company evaluates the realizability of
goodwill based upon expectations of operating income for each restaurant
having a material goodwill balance. The Company believes that no material
impairment of goodwill exists at May 31, 1997 and 1996.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted 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. Under
SFAS No. 121, the Company evaluates whether events and circumstances have
occurred that indicate revision to the remaining useful life or the remaining
balances of long-lived assets, including intangible assets and goodwill, may
be appropriate. When factors indicate that the carrying amount of an asset
may not be recoverable, the Company estimates the future cash flows expected
to result from the use of such asset and its eventual disposition. If the sum
of the expected future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, the Company will recognize an
impairment loss equal to the excess of the carrying amount over the fair value
of the asset. Although the adoption of SFAS No. 121 by the Company did not
result in a write down of such assets, the Company provided a reserve of
$375,000 in 1997 to provide for the planned future sale of certain restaurants
operated by the Company.
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.
<PAGE>
EMPLOYEE STOCK OPTIONS
In fiscal year 1997, the Company adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under this standard, companies can
elect to adopt the fair value method of accounting for employee stock-based
transactions. Under the fair value method, compensation cost is measured at
the grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Companies are permitted
to continue to account for employee stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," but are required to disclose pro forma net income and earnings per
share as if the fair value method had been adopted. The Company elected to
continue to account for stock-based compensation under APB No. 25 (see Note
11).
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 computation in 1997 and 1995 because
the effect would have been anti-dilutive.
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" was issued, replacing APB Opinion No. 15, "Earnings
per Share." SFAS No. 128 specifies computation, presentation and disclosure
requirements for earnings per share. The Statement is effective for financial
statements ending after December 15, 1997, and earlier application is not
permitted. The adoption of SFAS No. 128 is not expected to result in a
significant difference in the calculations under the current method.
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, 1997.
RECLASSIFICATION
Certain 1996 and 1995 balances have been reclassified to conform to the 1997
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 Florida), and provided franchisor
required services to franchised restaurants in the territory 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.
Effective January 1, 1995, the Company acquired from Kavala, Inc. ("Kavala") a
private company owned by Miami Subs founder and then Company director Gus
Boulis, two existing Miami Subs restaurants located in South Florida, and the
rights to 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.
<PAGE>
Assuming that the above acquisitions had been consummated at the
beginning of fiscal year 1995, the unaudited pro forma results of operations
for 1995 would have been as follows:
<TABLE>
<CAPTION>
<S> <C>
Total revenues $39,707,000
Net loss $ (287,000)
Net loss per share $ ( .01)
=================================== ============
Weighted average shares outstanding 26,539,000
=================================== ============
</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 1995 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. 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. 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 and non-recourse promissory note
secured by the common stock 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 closing. In lieu of
payment of this note and settlement of other matters, the Company released
200,000 shares of the common stock to the former franchisee and the Company
retained the remaining 1,125,000 shares of stock as treasury stock, recorded
at cost. A charge of $257,000 which is included in General, Administrative,
and Franchise expenses in the accompanying 1997 Consolidated Statement of
Operations, was taken as a result of this settlement.
Assuming that the above acquisition had been consummated at the beginning of
each fiscal year presented, 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 For the Year Ended May 31, 1995
-------------------------------- ---------------------------------
<S> <C> <C>
Total revenues $ 41,046,000 $ 38,816,000
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 each fiscal year presented or which may be obtained in the
future.
3. NOTES AND ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Notes and accounts receivable consist of the following:
1997 1996
------------ ------------
<S> <C> <C>
Notes receivable $ 9,437,000 $ 5,548,000
Royalties and other receivables due from franchisees 867,000 729,000
Other 58,000 141,000
------------ ------------
Total 10,362,000 6,418,000
Less allowance for doubtful accounts (289,000) (390,000)
------------ ------------
10,073,000 6,028,000
Less notes receivable due after one year (8,073,000) (3,778,000)
------------ ------------
Notes and accounts receivable-current portion $ 2,000,000 $ 2,250,000
==================================================== ============ ============
</TABLE>
Notes receivable at May 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%.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
1997 1996
------------ ------------
<S> <C> <C>
Land $ 2,231,000 $ 2,231,000
Buildings and leasehold improvements 7,675,000 12,118,000
Furniture and equipment 4,487,000 7,257,000
Property held under capitalized leases 632,000 812,000
Construction in progress 50,000 30,000
------------ ------------
Property and equipment at cost 15,075,000 22,448,000
Less accumulated depreciation and amortization (3,575,000) (4,493,000)
------------ ------------
Property and equipment-net $11,500,000 $17,955,000
============ ============
</TABLE>
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Intangible assets consist of the following:
1997 1996
------------ ------------
<S> <C> <C>
Trademark and franchise rights $ 2,750,000 $ 2,719,000
Excess of costs over fair value of net assets acquired 5,903,000 6,472,000
------------ ------------
8,653,000 9,191,000
Less accumulated amortization (1,525,000) (1,187,000)
------------ ------------
Intangible assets - net $ 7,128,000 $ 8,004,000
====================================================== ============ ============
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accounts payable and accrued liabilities consist of the following:
1997 1996
---------- ----------
<S> <C> <C>
Accounts payable $1,036,000 $2,331,000
Accrued wages and related liabilities 658,000 988,000
Accrued real estate and sales taxes 643,000 608,000
LEGAL AND RELATED 470,000 604,000
MARKETING FUND CONTRIBUTIONS 683,000 525,000
OTHER 1,247,000 1,050,000
---------- ----------
TOTAL $4,737,000 $6,106,000
===================================== ========== ==========
</TABLE>
<PAGE>
7. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
<TABLE>
<CAPTION>
A summary of notes payable and capitalized lease obligations is as follows:
1997 1996
------------ ------------
<S> <C> <C>
Various notes payable to banks at prime plus 1.5% (10.0% at May 31,
1997), secured by accounts and notes receivable, land, restaurant
property and equipment and due in monthly payments through 2001 $ 5,141,000 $ 5,367,000
Note payable to finance company at 11.5%, secured by five
restaurants and equipment, payable in equal monthly installments
through 2001 961,000 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 876,000 1,453,000
10 3/8% mortgage note payable, secured by corporate
office building, due in monthly payments through 2007 481,000 509,000
Note payable to bank at prime plus 2.0% (10.5% at May 31, 1997),
secured by leased restaurant properties and equipment,
due in monthly payments through 2000 205,000 264,000
Capitalized lease obligations 330,000 471,000
------------ ------------
Total 7,994,000 9,494,000
Less current portion (1,706,000) (1,539,000)
------------ ------------
Long-term portion $ 6,288,000 $ 7,955,000
=================================================================== ============ ============
</TABLE>
The above notes are secured by property and equipment with a book value of
approximately $6.9 million at May 31, 1997, and notes and accounts receivable
of approximately $2,000,000.
At May 31, 1997, the approximate annual maturities of notes payable and
capitalized lease obligations for each of the five years ending May 31, 2002,
are $1,706,000, $1,985,000, $836,000, $2,966,000 and $77,000, respectively.
Total interest costs incurred for the years ended May 31, 1997, 1996 and 1995
was $903,000, $798,000, and $581,000, respectively. Capitalized interest cost
with respect to qualifying new restaurant construction was $57,000 in 1996.
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 as term debt under this facility and is included in notes payable to
banks at May 31, 1997. 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.
8. DEFERRED FRANCHISE FEES AND OTHER DEFERRED INCOME
<TABLE>
<CAPTION>
Deferred franchise fees and other deferred income consist of the following:
1997 1996
---------- ----------
<S> <C> <C>
Development fees $ 661,000 $ 475,000
Franchise fees 110,000 87,000
Deferred gains and vendor rebates 1,317,000 1,150,000
---------- ----------
Total $2,088,000 $1,712,000
========== ==========
</TABLE>
<PAGE>
9. INCOME TAXES
<TABLE>
<CAPTION>
The primary components that comprise the deferred tax assets and
liabilities are as follows:
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts and notes receivable $ 154,000 $ 125,000
Other liabilities and reserves 1,069,000 1,136,000
Deferred income and franchise deposits 241,000 172,000
Other 13,000 15,000
Net operating loss and other carry-forwards 2,500,000 2,408,000
------------ ------------
Total deferred tax assets 3,977,000 3,856,000
------------ ------------
Deferred tax liabilities:
Property and equipment 446,000 311,000
Intangible assets 185,000 145,000
Other 91,000 38,000
------------ ------------
Total deferred tax liabilities 722,000 494,000
------------ ------------
Subtotal 3,255,000 3,362,000
Less valuation allowance (3,255,000) (3,362,000)
------------ ------------
Net deferred tax assets $ - $ -
============================================== ============ ============
</TABLE>
The net change in the valuation allowance for the year ended May 31, 1997 was
a decrease of $107,000.
At May 31, 1997 and 1996, 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>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0)% 34.0% (34.0)%
Intangible costs amortized 12.5 21.3 3.2
Charges associated with note receivable 22.3 - -
Other 3.8 2.4 (.4)
Operating losses (utilized) not utilized (4.6) (57.7) 31.2
------- ------ -------
Effective income tax rate - % - % - %
======= ====== =======
</TABLE>
At May 31, 1997, the Company's tax returns reflect net operating loss
carry-forwards of approximately $5.8 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 $274,000 which can be used to offset tax liabilities through
2010. 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.
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, 1997, 1996, and 1995 was approximately $2,214,000, $2,455,000,
and $2,085,000, respectively. Additional (contingent) rental payments were
approximately $54,000, $100,000, and $75,000, respectively, in 1997, 1996, and
1995.
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 guarantees the lease payments of certain franchised
locations, aggregating approximately $173,000 for each of the next two years,
and approximately $60,000 per year thereafter through 2014.
The Company also subleases non-Miami Subs locations to third parties. Such
sub-leases provide for minimum annual rental payments aggregating
approximately $223,000 and expire on various dates through 2003 exclusive of
renewal options.
The Company's future minimum rental commitments and sublease rental income as
of May 31, 1997 for all noncancellable capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating Sublease
Fiscal Year Leases Leases Rental Income
- ---------------------------------------------- --------- ----------- --------------
<S> <C> <C> <C>
1998 $195,000 $ 5,300,000 $ 3,814,000
1999 146,000 5,239,000 3,850,000
2000 41,000 5,141,000 3,734,000
2001 - 4,980,000 3,544,000
2002 - 4,715,000 3,297,000
Thereafter - 29,110,000 25,855,000
--------- ----------- --------------
Total 382,000 $54,485,000 $ 44,094,000
========= =========== ==============
Less amount representing interest (52,000)
---------
Present value of future minimum lease payments $330,000
============================================== =========
</TABLE>
The Company has guaranteed a portion of certain equipment financing for
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 must
assume the remaining obligation to the lender, or the Company may 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,
1997, was approximately $880,000. In addition, the Company guarantees other
equipment loans for certain franchisees in the approximate amount of $260,000.
LITIGATION
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 1995 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
was appealed by both the Company and the third party, and in November 1996,
the appeal was argued before the Supreme Court of New Hampshire. The court
has not yet rendered a ruling on the appeal.
In October 1996, a suit was filed against the Company seeking unspecified
damages in excess of $15,000 relating to an incident that allegedly occurred
in or around the parking lot of a company operated restaurant. In addition
there have been inquiries of the Company by counsel representing the estate of
a party in a separate incident which occurred outside of a franchised
restaurant. Both of these matters are being handled by the Company's
insurance carrier.
The Company and its subsidiaries are parties to various other legal actions
arising in the ordinary course of business. 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.
11. STOCK OPTION PLAN AND WARRANTS
The Company's stock option plan provides for the granting of non-qualified
stock options for the purchase of up to 7,500,000 shares of common stock of
the Company by directors, officers, employees and consultants. Under the
terms of the plan, options may be granted for a term of up to 10 years at a
price not less than the market value of the common stock on the date of grant.
The following is a summary of stock option activity under the plan during each
of the last three years:
<TABLE>
<CAPTION>
Shares Under Weighted Average
Option Price Per Share
------------- -----------------
<S> <C> <C>
Balance at May 31, 1994 5,464,700 $ 2.89
Granted 120,000 2.25
Exercised (450,000) 1.25
Canceled (426,600) 2.84
------------- -----------------
Balance at May 31, 1995 4,708,100 3.03
Granted 1,289,000 1.81
Exercised (25,000) .50
Cancelled (200,000) 2.67
=================================== ============= =================
Balance at May 31, 1996 5,772,100 2.79
Granted 94,000 .85
Exercised - -
Cancelled (1,449,400) 2.11
=================================== ============= =================
Balance at May 31, 1997 4,416,700 $ 2.99
============= =================
Options exercisable at May 31, 1997 4,227,533 $ 3.04
=================================== ============= =================
</TABLE>
The Company accounts for employee stock options in accordance with the
intrinsic value method prescribed in APB No. 25. Accordingly, no compensation
cost is recognized at the time stock options are granted. Had employee
compensation expense been determined based on the fair value at the grant date
for options granted in 1997 and 1996 consistent with the provisions of SFAS
No. 123, the Company's results for 1997 and 1996 would have been reduced to
the pro forma results indicated below:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Net income (loss) - as reported $(391,000) $305,000
Net income (loss) - pro forma $(334,000) $(90,000)
Net income (loss) per share - as reported $ ( .01) $ .01
Net income (loss) per share - pro forma $ ( .01) $ .00
========================================= ========== =========
</TABLE>
<PAGE>
The fair market value of each option grant is estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Expected lives 10 years 10 years
Expected volatility 27.1% 27.1%
Risk-free interest rate 6.75% 6.75%
Dividend yield 0.0% 0.0%
======================= ========= =========
</TABLE>
At May 31, 1997, 409,600 options and 100,000 warrants are outstanding at
average exercise prices of $2.16 and $6.00 per share, respectively.
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
("Boulis"), two existing Miami Subs restaurants located in South Florida, and
the rights to 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 year 1995,
the Company received royalty fees of approximately $284,000 from restaurants
franchised pursuant to this arrangement, and the Company paid fees to Kavala
of approximately $13,000 for restaurants which the Company operated.
At May 31, 1997, the Company leased six restaurant properties from Kavala.
Rent expense for all leases between the Company and Kavala was $412,000 in
1997, 491,000 in 1996, and $496,000 in 1995. Future minimum rental
commitments due to Kavala at May 31, 1997 under existing leases are
approximately $394,000 for each of the next five years, and $2,116,000
thereafter. In fiscal year 1997, the Company leased a vacant, non-Miami Subs
property to a company owned by Boulis. The Company believes that rents
charged under these leases are not materially different from the rents that
would have been incurred or obtained from leasing arrangements with
unaffiliated parties or on a stand alone basis.
During fiscal year 1995, 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.
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 March 1995, the Company's former 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.
Mr. Perlyn, an officer and director of the Company, is also an officer and
principal of DEMAC Restaurant Corp., a franchisee of the Company.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
Additions Charged to
Balance at costs and Additions Charged to Balance at
beginning expenses other accounts end of
DESCRIPTION of period Deductions period
<S> <C> <C> <C> <C> <C>
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
Year ended May 31, 1997:
Allowance for doubtful
accounts and discounts -
Notes and Accounts Receivable $ 390,000 - $ 101,000 $ 289,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LIST
Location in this report or
Reg. S-K incorporated by reference
Item No. Document to prior Filing
- -------- ----------------------------------------------------------- --------------------------
<C> <S> <C>
23 Accountants' Consent re Registration Statement on Form S-8. Filed herewith on page 36
</TABLE>
<PAGE>
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 25, 1997 By: /s/ Gus Boulis
GUS BOULIS, Chairman of the Board
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/ Gus Boulis Dated: August 25, 1997
GUS BOULIS, Chairman of the Board
and Chief Executive Officer
By: /s/ Bruce R. Galloway Dated: August 25, 1997
BRUCE R. GALLOWAY, Director
By: /s/ Greg Karan Dated: August 25, 1997
GREG KARAN, Director
By: /s/ Peter Nasca Dated: August 25, 1997
PETER NASCA, Director
By: /s/ Donald L. Perlyn Dated: August 25, 1997
DONALD L. PERLYN, Director
By: /s/ Joseph Zappala Dated: August 25, 1997
JOSEPH ZAPPALA, Director
By: /s/ Jerry W. Woda Dated: August 25, 1997
JERRY W. WODA, Senior Vice President, Chief
Financial Officer and Principal Accounting Officer
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Miami Subs Corporation:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Miami Subs Corporation of our report dated August 28, 1997, relating to
the consolidated balance sheets of Miami Subs Corporation and subsidiaries as
of May 31, 1997 and 1996, 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, 1997, and related schedule which report
appears in the May 31, 1997 annual report on Form 10-K of Miami Subs
Corporation.
KPMG PEAT MARWICK LLP
August 22, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 2,940,000
<SECURITIES> 0
<RECEIVABLES> 2,289,000
<ALLOWANCES> (289,000)
<INVENTORY> 192,000
<CURRENT-ASSETS> 5,323,000
<PP&E> 15,075,000
<DEPRECIATION> (3,575,000)
<TOTAL-ASSETS> 32,481,000
<CURRENT-LIABILITIES> 6,443,000
<BONDS> 0
0
0
<COMMON> 283,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,481,000
<SALES> 28,180,000
<TOTAL-REVENUES> 34,433,000
<CGS> 26,042,000
<TOTAL-COSTS> 34,824,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 375,000
<INTEREST-EXPENSE> 903,000
<INCOME-PRETAX> (391,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (391,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
