UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19623
MIAMI SUBS CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0249329
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 N.W. 31st Avenue, Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(Zip Code)
(954) 973-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 13, 1997
Common Stock, $.01 par value 28,244,340
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 30, May 31,
ASSETS 1996 1996
- ---------------------------------------------------------------------------------------- -------------- ------------
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CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund contributions of $ 1,943,000 $ 3,103,000
$647,000 and $525,000 respectively)
Notes and accounts receivable (net of allowances for uncollectible accounts of $379,000 2,358,000 2,250,000
at November 30, 1996 and $390,000 at May 31, 1996)
Food and supplies inventories 307,000 381,000
Other 336,000 332,000
-------------- ------------
Total Current Assets 4,944,000 6,066,000
Notes receivable 6,053,000 3,778,000
Property and equipment - net 15,317,000 17,955,000
Intangible assets - net 7,706,000 8,004,000
Other 505,000 558,000
-------------- ------------
TOTAL $ 34,525,000 $36,361,000
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 5,394,000 $ 6,106,000
Current portion of notes payable and capitalized lease obligations 1,343,000 1,539,000
-------------- ------------
Total Current Liabilities 6,737,000 7,645,000
Long-term portion of notes payable and capitalized lease obligations 7,180,000 7,955,000
Deferred franchise fees and other deferred income 1,660,000 1,712,000
Accrued liabilities and other 1,781,000 2,106,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock, $.01 par value,
8,000,000 shares authorized; 1,005,500 shares outstanding at
May 31, 1996, none outstanding at November 30, 1996 10,000
Common stock, $.01 par value; authorized 50,000,000 shares; 28,244,340
shares outstanding at November 30, 1996 283,000 273,000
Additional paid-in capital 24,565,000 24,565,000
Accumulated deficit (7,118,000) (7,342,000)
-------------- ------------
17,730,000 17,506,000
Less note receivable from sale of stock (563,000) (563,000)
-------------- ------------
Total Shareholders' Equity 17,167,000 16,943,000
TOTAL $ 34,525,000 $36,361,000
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
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MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
-------------------
November 30, November 30,
REVENUES 1996 1995
- -------------------------------------------------------------------------- ------------------- -------------
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Restaurant sales $ 7,369,000 $ 7,521,000
Revenues from franchised restaurants 1,088,000 1,177,000
Net gain from sales of restaurants 484,000 18,000
Interest income 140,000 118,000
Other revenues 38,000 114,000
------------------- -------------
Total 9,119,000 8,948,000
------------------- -------------
EXPENSES
- --------------------------------------------------------------------------
Restaurant operating costs (including lease costs paid to Kavala, Inc. of
$29,000 and $44,000, respectively) 6,902,000 6,714,000
General, administrative and franchise costs 1,351,000 1,557,000
Depreciation and amortization 480,000 469,000
Interest expense - net 229,000 173,000
------------------- -------------
Total 8,962,000 8,913,000
------------------- -------------
Net income $ 157,000 $ 35,000
=================== =============
Net income per common share and common share equivalents $ .01 $ .00
=================== =============
Weighted average number of common share and common share
equivalents outstanding 28,249,000 26,921,000
=================== =============
</TABLE>
See accompanying notes to consolidated financial statements.
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MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended
-----------------
November 30, November 30,
REVENUES 1996 1995
- -------------------------------------------------------------------------- ----------------- -------------
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Restaurant sales $ 16,422,000 $ 15,472,000
Revenues from franchised restaurants 2,220,000 2,367,000
Net gain from sales of restaurants 657,000 102,000
Interest income 256,000 258,000
Other revenues 99,000 168,000
----------------- -------------
Total 19,654,000 18,367,000
----------------- -------------
EXPENSES
- --------------------------------------------------------------------------
Restaurant operating costs (including lease costs paid to Kavala, Inc. of
$70,000 and $98,000, respectively) 15,145,000 13,758,000
General, administrative and franchise costs 2,818,000 3,118,000
Depreciation and amortization 995,000 936,000
Interest expense - net 472,000 362,000
----------------- -------------
Total 19,430,000 18,174,000
----------------- -------------
Net income $ 224,000 $ 193,000
================= =============
Net income per common share and common share equivalents $ .01 $ .01
================= =============
Weighted average number of common share and common share
equivalents outstanding 28,250,000 26,921,000
================= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
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MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
November 30, November 30,
------------------ --------------
OPERATING ACTIVITIES: 1996 1995
------------------ --------------
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Net income $ 224,000 $ 193,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 762,000 684,000
Amortization of intangible assets 233,000 252,000
Net gain from sales of restaurants (657,000) (102,000)
Changes in assets and liabilities:
(Increase) in accounts receivable (635,000) (258,000)
Decrease (increase) in food and supplies inventories 74,000 (28,000)
Decrease (increase) in other current assets (17,000) 5,000
Decrease (increase) in other assets 53,000 (22,000)
(Decrease) in accounts payable and accrued liabilities (627,000) (177,000)
(Decrease) in deferred fees and other deferred income (206,000) (484,000)
------------------ --------------
Net Cash Provided By (Used For) Operating Activities (796,000) 63,000
------------------ --------------
INVESTMENT ACTIVITIES:
Purchase of property and equipment (381,000) (1,417,000)
Proceeds from sales of restaurants 650,000 255,000
Loans to franchisees and other - (29,000)
Payments received on notes receivable 246,000 399,000
------------------ --------------
Cash Provided By (Used For) Investment Activities 515,000 (792,000)
------------------ --------------
FINANCING ACTIVITIES:
Repayment of debt (879,000) (980,000)
------------------ --------------
Cash (Used For) Financing Activities (879,000) (980,000)
------------------ --------------
(DECREASE) IN CASH (1,160,000) (1,709,000)
CASH AT BEGINNING OF PERIOD 3,103,000 3,145,000
------------------ --------------
CASH AT END OF PERIOD $ 1,943,000 $ 1,436,000
================== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 474,000 $ 395,000
================== ==============
Loans to franchisees in connection with sales of restaurants $ 2,067,000 $ 593,000
================== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the Company's financial position
and results of operations for the periods presented. The financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required for annual financial statements. The
financial statements included herein should be read in conjunction with the
financial statements presented in the Company's Annual Report on Form 10-K for
the year ended May 31, 1996.
Results of operations reported for interim periods are not necessarily
indicative of results for the entire fiscal year.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
In the first quarter of the current fiscal year, 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."
SFAS No. 121 in general requires that such impaired assets be written down to
a reduced carrying value. The adoption of SFAS No. 121 by the Company did not
result in a write down of such assets.
In the first quarter of the current fiscal year, the Company adopted SFAS No.
123, "Accounting For Stock Based Compensation." SFAS No. 123 in general
permits stock compensation cost to be measured using either the intrinsic
value-based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," or the fair value-based method of accounting.
The Company elected to continue to use the intrinsic value-based method of
accounting and accordingly will provide the expanded pro forma disclosures
required by SFAS No. 123 in its annual financial statements.
3. REVENUES FROM FRANCHISED RESTAURANTS
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Revenues from franchised restaurants consist of the following:
Three Months Ended
-------------------
November 30, November 30,
------------------- -------------
1996 1995
------------------- -------------
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Royalties $ 915,000 $ 916,000
Franchise and development fees 125,000 123,000
Net sublease rental income and other 48,000 138,000
------------------- -------------
Total $ 1,088,000 $ 1,177,000
=================== =============
Six Months Ended
-------------------
November 30, November 30,
------------------- -------------
1996 1995
------------------- -------------
Royalties $ 1,900,000 $ 1,850,000
Franchise and development fees 238,000 293,000
Net sublease rental income and other 82,000 224,000
------------------- -------------
Total $ 2,220,000 $ 2,367,000
=================== =============
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4. INCOME TAXES
The Company did not provide for income taxes for the three and six month
periods ended November 30, 1996 and 1995 due to the availability of net
operating loss carry-forwards.
The Company's federal income tax returns for fiscal years 1992 through 1995,
inclusive, are currently under examination by the Internal Revenue Service.
The examining agent has not issued a formal report reflecting proposed
adjustments to tax returns previously filed by the Company. Based on informal
communications with the examining agent, the Company believes that any
adjustment(s) likely to be proposed will (if sustained upon a final
determination) impact only on the loss and credit carryovers and not have a
material effect on the Company's current tax liability.
5. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are parties to various legal actions arising
in the ordinary course of business as described in the Company's Annual Report
on Form 10-K for the fiscal year ended May 31, 1996. Other than as described
below, there have been no material developments in these legal proceedings.
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.
During January, 1992, the Company filed a Petition for Declaratory Judgment
against the Murray Family Trust/Kenneth Dash Partnership ("F/D"), 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 1995 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 case was
appealed by both the Company and F/D, and in November 1996, the appeal was
argued before the New Hampshire Supreme Court. The Court has not yet rendered
a ruling on the appeal.
In March 1992, a subsidiary of the Company filed an action for declaratory
relief against a third party seeking a determination that a letter of intent
executed by Miami Subs, Inc. (n/k/a B&B Food Ventures, Inc.) did not
constitute a binding agreement concerning the possible granting of an
exclusive area for development. As a result of this lawsuit, the third party
filed a separate lawsuit against the Company in which the plaintiffs allege
they are entitled to damages for breach of contract, fraud, tortious
inducement to breach a contract and breach of fiduciary duty arising from the
Company's alleged failure to grant the plaintiffs an exclusive area
development right. The plaintiffs claim compensatory damages in excess of
$20.0 million and punitive damages in excess of $20.0 million. Discovery is
substantially completed. The case has been schedule for trial in August 1997.
The Company believes that it had no obligation to proceed to enter into any
agreements with the plaintiffs and is vigorously contesting the action.
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 damages in excess of $15,000 relating to an incident at 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. The Company expects that both of
these matters will be handled by its insurance carrier.
Subsidiaries of the Company are the prime lessee under various land and
building leases for restaurants operated by the Company and its franchisees.
A Miami Subs restaurant which was sub-leased by a Company subsidiary to a
former franchisee has recently closed. The lease currently terminates in 2010
and the average annual base rent for the term is approximately $97,000. The
Company subsidiary, which remains obligated on the master lease with the
landlord, is attempting to negotiate an early termination of the lease.
6. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
In October 1996, all shares of the Company's Series A Convertible Preferred
Stock which were then outstanding were automatically converted on a
one-for-one basis into Common Stock of the Company.
At November 30, 1996, options and warrants representing a total of 5,228,000
shares of common stock, at an average exercise price of $2.72, were
outstanding.
The net income 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.
7. RELATED PARTY TRANSACTIONS
Effective January 1, 1997, the Company leased a vacant property to a company
which is owned by Gus Boulis, a director of Miami Subs Corporation. The
Company believes that the terms of the lease are not materially different than
would have been obtained from a lease with unaffiliated parties on a stand
alone basis.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's revenues and expenses are derived principally from operating and
franchising Miami Subs Grill restaurants. Franchise revenues consist
principally of initial franchise fees, area development fees, monthly royalty
fees, and net sublease rental income. In the normal course of operations, the
Company may also derive revenues from the sale of Company restaurants to
franchisees.
Restaurant operating costs include food and paper costs, direct restaurant
labor and benefits, marketing fees, and all other direct costs associated with
operating the restaurants. General, administrative and franchise costs relate
both to Company owned restaurants and the Company's franchising operations.
The Company's revenues and expenses are directly affected by the number, sales
volumes, and profitability of its Company operated restaurants. Revenues, and
to a lesser extent expenses, are also affected by the number, sales volumes
and profitability of franchised restaurants. Initial franchise fees and any
gains on sales of restaurants are directly affected by the number of
restaurants opened and sold during the period.
The Company's fiscal year ends on May 31. The results of operations for the
three and six months ended November 30, 1996 are not necessarily indicative of
the results that may be expected for the Company's fiscal year.
The Company's profitability in the first and second quarters of the current
fiscal year resulted from gains on the sale of certain Company operated
restaurants. Although the Company intends to sell up to 18 of its existing
restaurants in the future, there can be no assurance that any such sales will
be consummated or that gains will be realized. The Company's ability to
become and sustain profitability on an operating basis will be dependent on
improvement of sales and operating margins in Company and franchised
restaurants, expansion of its franchise base, its ability to reduce and
control general and administrative expenses, and on the success of its
existing and future franchisees.
During the six months ended November 30, 1996, seven franchised restaurants
opened, one Company and two franchised restaurants closed, and the Company
sold/transferred eight of its Company-operated restaurants to franchisees. At
November 30, 1996, there were 181 restaurants in the system, consisting of 28
Company operated restaurants and 153 franchised restaurants. At November 30,
1995, there were 168 restaurants in the system, consisting of 29 Company
operated restaurants and 139 franchised restaurants.
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1996 TO NOVEMBER 30, 1995
Total Revenues
Total Company revenues increased 1.9% to $9.1 million in the second quarter of
the current year, as compared to $8.9 million in the second quarter of last
year. The increase in total revenues in the current period was primarily due
to a significant increase in net gains from the sales of restaurants, which
was in part offset by lower restaurant sales, revenues from franchised
restaurants and other revenues.
Restaurant Sales
The Company's total restaurant sales decreased approximately 2.0% to $7.4
million in this year's second quarter, as compared to $7.5 million in the
second quarter of last year. Although the Company operated more restaurants
in the current three month period (resulting in an approximate 9% increase in
weeks of restaurant operations), total sales in the current period declined
reflecting declines in same-store-sales and average unit volumes as compared
to the year earlier period.
At the beginning of the current year quarter the Company operated 32
restaurants and during the quarter the Company sold/transferred four
restaurants to franchisees. At the beginning of the prior year second
quarter, the Company operated 29 restaurants, and during the quarter the
Company opened one new restaurant and sold one existing restaurant to a
franchisee.
During the current year's second quarter and in an effort to improve sales and
customer traffic in its restaurants, the Company continued a recently
implemented marketing strategy involving price discounting. Despite such
marketing efforts, same-store-sales in Company operated restaurants declined
by approximately 4.6% in the current quarter, and average unit sales for
restaurants operated by the Company for all of the current year's second
quarter decreased by approximately 6.6% as compared to the prior year quarter.
The Company is attempting to improve sales in its restaurants by continuing
the marketing programs, improving the level of service and operations, and is
considering possible changes to its pricing and product offerings.
At November 30, 1996, Company operated restaurants were located in Florida
(11), Texas (6), Georgia (3), North Carolina (4), South Carolina (3), and New
York (1). The Company currently plans on franchising up to 18 of its existing
Company operated restaurants, however there can be no assurances that such
restaurants will be franchised on terms and conditions acceptable to the
Company.
Revenues From Franchised Restaurants
Revenues from franchised restaurants declined approximately 7.6% to $1.1
million in the second quarter of the current year, as compared to $1.2 million
in the prior year's second quarter. In the prior year second quarter, the
Company recognized income of $160,000 from the termination and cancellation of
three area development agreements. No such income was recognized in the
current quarter.
The Company and many of its franchisees recently implemented a marketing
strategy involving price discounting. Despite such marketing efforts,
same-store-sales in franchised restaurants declined by approximately 4.0% in
the current quarter. Such sales declines, along with the non-accrual of
royalty income from an increased number of franchisees, continued to adversely
affect franchise fee revenues in the current quarter as compared to the year
earlier quarter.
During the second quarter of the current year, three new franchised
restaurants opened, and four restaurants previously operated by the Company
were franchised. There were 153 franchised restaurants in operation at
November 30, 1996, as compared to 139 franchised restaurants at November 30,
1995.
System-Wide Sales
System-wide sales, which includes sales from all Company operated restaurants
and franchised restaurants, increased by approximately 4.3% to $36.3 million
in this year's second quarter, as compared to $34.8 million in last year's
second quarter, principally reflecting the increase in the total number of
units in the system (181 at November 30, 1996 as compared to 168 at November
30, 1995). Same-store-sales for both Company and franchised units in the
system decreased by approximately 4.3% in the current quarter. Average unit
sales for restaurants in operation for all of the current quarter decreased by
approximately 4.9% as compared to average sales for units in operation for all
of the prior year's second quarter.
Net Gains From Sales of Restaurants
The Company sold/transferred four of its existing restaurants to franchisees
during the second quarter of the current year. Gains on the sale of
restaurants are dependent 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 the second quarter of the current
year amounted to $484,000, as compared to $18,000 in the prior year second
quarter. Although the Company intends to sell up to 18 of its existing
restaurants in the future, there can be no assurance that any such sales will
be consummated or that gains will be realized.
Other Revenues
Other revenues declined in the second quarter of the current year primarily as
a result of lease costs associated with two vacant properties. One of the
properties was subsequently subleased to a new tenant, and the Company is
attempting to negotiate a termination of the lease with the landlord on the
remaining property (see note 5. to the accompanying Consolidated Financial
Statements).
Restaurant Operating Costs
Restaurant operating costs increased to approximately $6.9 million in this
year's second quarter, as compared to $6.7 million in last year's second
quarter, and such costs as a percent of restaurant sales increased to 93.7% in
the current quarter, as compared to 89.3% in the prior year's second quarter.
The increase in operating costs was a result of higher labor, cost of sales,
repairs, and amortization of pre-opening costs, and also reflected the effect
of price discounting offered during the quarter in an effort to stimulate
sales and increase customer traffic and lower unit volumes in the current
quarter.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $1.4
million or 14.8% of total revenues in the current quarter, as compared to $1.6
million or 17.4% of total revenues in the prior year's second quarter.
Included in such costs in the current quarter was a charge of approximately
$61,000 resulting from a decision by the Company not to exercise an option to
renew a lease on a non Miami Subs facility which had previously been subleased
to a third party. The Company is maintaining strict cost controls in all
areas of its business resulting in a reduction in general and administrative
costs, including salaries, general marketing and outside legal costs. The
Company
expects that the amount of such costs will continue to decline in the second
half of the fiscal year as a result of recently implemented corporate
streamlining and as a number of the current Company operated restaurants are
franchised.
Depreciation and Amortization
Depreciation and amortization increased to $480,000 in this year's second
quarter, as compared to $469,000 in the prior year's second quarter,
principally due to higher depreciation associated with certain new, higher
cost restaurants that the Company developed and opened since the prior year
quarter.
Interest Expense
Interest expense increased to $229,000 in this year's second quarter, as
compared to $173,000 in the prior year's second quarter, principally
reflecting additional debt outstanding in the current quarter ($8.4 million at
November 30, 1996) as compared to the prior year quarter ($6.8 million at
November 30, 1995).
Provision For Income Taxes
A tax provision was not provided for in the current or prior year periods
because of available net operating loss carryforwards (see Note 4. to the
Consolidated Financial Statements).
COMPARISON OF SIX MONTHS ENDED NOVEMBER 30, 1996 TO NOVEMBER 30, 1995
Total Revenues
Total Company revenues increased 7.0% to $19.7 million in the current six
month period, as compared to $18.4 million in the same period last year. The
increase in total revenues reflected an increase in restaurant sales (all of
which occurred in this year's first quarter), and a significant increase in
net gains from the sales of Company restaurants.
Restaurant Sales
The Company's total restaurant sales increased approximately 6.1% to $16.4
million in the current six month period, as compared to $15.5 million in the
same period last year. Such sales increase reflected more Company units in
operation for the current six month period, as compared to the year earlier
period. At the beginning of the current fiscal year, the Company operated 37
restaurants, and during the current six month period the Company
sold/transferred eight existing restaurants to franchisees and closed one
restaurant. At the beginning of the prior year, the Company operated 30
restaurants, and during the period the Company opened one new restaurant and
sold/transferred two restaurants to franchisees.
In an effort to improve sales and customer traffic in its restaurants, the
Company has continued a recently implemented marketing strategy involving
price discounting. Despite these marketing efforts and as a result of a
decline in same-store-sales in the Company operated restaurants during the
current three month period, same-store-sales for the six month period
reflected a decline of approximately 1.7%.
In addition, average unit sales for restaurants operated by the Company for
all of the current six month period decreased by approximately 3.3% as
compared to the average in the prior year six month period. The Company is
attempting to improve sales in its restaurants by continuing the marketing
programs, improving the level of service and operations, and is considering
possible changes to its pricing and product offerings.
The Company currently plans on franchising up to 18 of its existing Company
operated restaurants, however there can be no assurances that such restaurants
will be franchised on terms and conditions acceptable to the Company.
Revenues From Franchised Restaurants
Revenues from franchised restaurants declined approximately 6.2% to $2.2
million in the current six month period, as compared to $2.4 million in the
year earlier period. Although royalty fee income increased by approximately
2.7% in the current period, such increase was offset by a reduction in initial
franchise fee income. In addition, the prior year six month period included
income of $220,000 associated with the termination of area development
agreements with franchisees. No such income was recognized in the current
period.
The Company and many of its franchisees recently implemented a marketing
strategy involving price discounting. However, despite these marketing
programs, same-store-sales in franchised restaurants decreased by
approximately 2.0% during the current six month period, as a result of
increased sales pressure in the most recent three month period. Such sales
declines, along with the non-accrual of royalty income from an increased
number of franchisees, adversely affected franchise fee revenues in the
current six month period. Although it is expected that such marketing
programs will continue, there can be no assurance that they will be
successful.
During the current six month period, seven franchised restaurants opened, two
franchised restaurants closed, and eight restaurants operated by the Company
were franchised. There were 153 franchised restaurants in operation at
November 30, 1996, as compared to 139 franchised restaurants at November 30,
1995.
System-Wide Sales
System-wide sales, which includes sales from all Company operated restaurants
and franchised restaurants, increased by approximately 8.5% to $76.3 million
in the current six month period, as compared to $70.4 million in the same
period last year, principally reflecting the increase in the total number of
units in the system (181 at November 30, 1996 as compared to 168 at November
30, 1995). Same-store-sales for both Company and franchised units in the
system decreased by approximately 2.4% in the current period, and average unit
sales for all restaurants in operation for all of the current six month period
decreased by approximately 3.2% as compared to average sales for units in
operation for all of the prior year six month period.
Net Gains From Sales of Restaurants
The Company sold/transferred eight of its existing restaurants to franchisees
during the current year six month period. Gains on the sale of restaurants
are dependent 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 the current six month period amounted to
$657,000, as compared to $102,000 in the prior year six month period.
Although the Company intends to sell other existing restaurants in the future,
there can be no assurance that any such sales will be consummated or that
gains will be realized.
Restaurant Operating Costs
Restaurant operating costs increased to approximately $15.1 million in the
current six month period, as compared to $13.8 million in the year earlier
period. Such costs as a percent of restaurant sales increased to 92.2% in the
current six month period, as compared to 88.9% in the prior year six month
period. The increase in operating costs was a result of higher labor, cost of
sales, repairs, and amortization of pre-opening costs, and also reflected the
effect of price discounting offered during the quarter in an effort to
stimulate sales and customer traffic and lower unit volumes during the current
six month period.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $2.8
million or 14.3% of total revenues in the current six month period, as
compared to $3.1 million or 17.0% of total revenues in the prior year six
month period. The Company is maintaining strict cost controls in all areas of
its business resulting in a reduction in administrative costs including
salaries, general marketing and outside legal costs. The Company expects that
the amount of such costs will continue to decline in the second half of the
fiscal year as a result of recently implemented corporate streamlining and as
a number of the current Company operated restaurants are franchised.
Depreciation and Amortization
Depreciation and amortization increased to $995,000 in the current six month
period, as compared to $936,000 in the prior year six month period,
principally due to higher depreciation associated with certain new and higher
cost restaurants that the Company developed in the prior fiscal year.
Interest Expense
Interest expense increased to $472,000 in the current six month period, as
compared to $362,000 in the prior year six month period, principally
reflecting higher debt levels ($8.4 million at November 30, 1996) as compared
to the year earlier period ($6.8 million at November 30, 1995).
Provision For Income Taxes
A tax provision was not provided for in the current or prior year six month
periods because of available net operating loss carryforwards (see Note 4. to
the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
During the current six month period, the Company's principal sources of cash
were from earnings before depreciation and amortization and gains from sales
of restaurants totaling approximately $562,000, from the repayment of notes
receivable totaling approximately $246,000 and proceeds from sales of
restaurants totaling $650,000. The Company's principal uses of cash during
the current period were for property additions and improvements of
approximately $381,000, scheduled debt repayments of approximately $879,000,
and a reduction in accounts payable and accrued liabilities.
Cash and cash equivalents at November 30, 1996, amounted to $1,943,000 (which
includes unexpended marketing fund contributions of $647,000), as compared to
$3,103,000 (including $525,000 in unexpended marketing fund contributions) at
the beginning of the year, and $1.4 million (including $279,000 in unexpended
marketing fund contribution) one year ago. At November 30, 1996, the
Company's working capital deficiency was $1,793,000, as compared to $1,579,000
at the beginning of the current fiscal year and $2.5 million one year ago.
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.
At November 30, 1996, the Company's assets include a non-recourse note
receivable in the amount of approximately $1,270,000 resulting from the
acquisition of five restaurants in March 1996. The note, which is secured by
1,325,000 shares of common stock of the Company, was originally due on July 1,
1996 and has been extended by the Company to January 31, 1997. The Company
expects that the maturity date of the note will be extended for an additional
period of up to one year. Accordingly, the note has been classified as
long-term at November 30, 1996. At November 30, 1996, the quoted market price
of the common stock which has been pledged as collateral for the note was
approximately $1,284,000.
In September 1996, the Company announced a revision of its growth strategy
which will focus on expanding the restaurant chain principally through
franchised restaurants. In addition to continuing to expand its franchise
base through new traditional and non-traditional franchised restaurants, the
strategy also focuses on the franchising of up to 18 of its existing
Company-operated restaurants. During the first half of the current fiscal
year, eight Company-operated restaurants were sold to franchisees. Although
the Company believes that this new strategic direction will help to improve
its future operating results, cash flow, and liquidity, there are no
assurances that such plans will be successful or that additional sales of
restaurants will be consummated.
In connection with the planned sale of many of the existing Company-operated
restaurants, the Company typically provides financing for the sale and
leases/sub-leases the property to the franchisee. Accordingly, the Company
would be susceptible to default of the note and lease/sub-lease by the
franchisee. During the first half of the current fiscal year, total new
financings provided by the Company to franchisees who acquired the restaurants
from the Company totaled approximately $2.1 million. If the sale of
additional restaurants are consummated on terms acceptable to the Company, the
Company's working capital position and restaurant operating margins are
expected to improve, royalty and interest income would increase, while at the
same time restaurant sales and total Company revenues would decrease. There
can be no assurances however that any future sales will be consummated.
In addition to scheduled debt maturities/repayments during the balance of the
current fiscal year of $660,000, the Company's capital requirements for the
balance of fiscal year 1997 relate primarily to necessary capital improvements
to existing restaurants and possible further enhancements to corporate and
restaurant management information systems. Such expenditures will be made as
required, and will take into consideration the Company's current liquidity and
working capital positions and anticipated future cash flows from operations
and other sources.
The Company 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 margins, and slower development
of traditional restaurants by franchisees. Accordingly, emphasis will be
placed on franchising existing Company restaurants, expanding non-traditional
franchised restaurants, improving operations in all restaurants, developing
new products, enhancing the effectiveness of marketing programs, and overall
improvement and possible refinements to the entire system.
As of November 30, 1996, the Miami Subs restaurant system consisted of 181
restaurants, of which 125 of the restaurants were located in Florida, 53
restaurants were located in 16 other states, and three restaurants were
located in Ecuador. Of these restaurants, 28 were Company operated and 153
were franchised. The Company plans to significantly reduce the current number
of Company operated restaurants by selling up to 18 of its existing
restaurants to franchisees, and intends to focus on franchise development,
with the objective of expanding the franchise system in existing markets as
well as nationally and internationally. In part due to the limited number of
restaurants located in other states, the restaurants operating outside of
Florida have generally not been as successful as the restaurants operating in
Florida. Additionally, as a result of the current concentration of
restaurants in Florida, the Company and its Florida franchisees could be more
severely affected by any adverse economic conditions in Florida than would a
more geographically diversified company.
At November 30, 1996, franchisees operated 153 of the 181 restaurants in the
system, and the Company intends to franchise many of its existing Company
operated restaurants. The Company receives royalty and advertising fees from
its franchised restaurants, and also receives lease/sub-lease rental income
from certain of these franchised restaurants. In addition, the Company has
guaranteed certain third party equipment and real estate leases for certain
franchisees and typically finances the sale of Company-operated restaurants to
franchisees. Accordingly, the Company's success and future profitability will
be substantially dependent on the management skills and success of its
existing and future franchisees, and 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. Subsidiaries of the Company are
the prime lessee under various land and building leases for restaurants
operated by the Company and its franchisees. A Miami Subs restaurant which
was sub-leased by a Company subsidiary to a former franchisee has recently
closed. The lease currently terminates in 2010 and the average annual base
rent for the term is approximately $97,000. The Company subsidiary, which
remains obligated on the master lease with the landlord, is attempting to
negotiate an early termination of the lease.
Seasonality
The Company does not expect seasonality to affect its operations in a
materially adverse manner. However, the Company's restaurant sales during its
first and fourth fiscal quarters have historically been higher that its second
and third quarters.
Adoption of New Accounting Standards
In the first quarter of the current fiscal year, 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."
SFAS No. 121 in general requires that such impaired assets be written down to
a reduced carrying value. The adoption of SFAS No. 121 by the Company did not
result in a write down of such assets.
In the first quarter of the current fiscal year, the Company adopted SFAS No.
123, "Accounting For Stock Based Compensation." SFAS No. 123 in general
permits stock compensation cost to be measured using either the intrinsic
value-based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," or the fair value-based method of accounting.
The Company elected to continue to use the intrinsic value-based method of
accounting and accordingly will provide the expanded pro forma disclosures
required by SFAS No. 123 in its annual financial statements.
PART II. OTHER INFORMATION
ITEM L. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, Legal Proceedings, in the Company's
Annual Report on Form
10-K for the fiscal year ended May 31, 1996 for a description of certain legal
proceedings involving the Company. Other than as described below, there have
been no material developments in these legal proceedings. The Company is
vigorously contesting these actions and currently believes the outcome of such
cases will not have a material adverse effect on the Company.
During January, 1992, the Company filed a Petition for Declaratory Judgment
against the Murray Family Trust/Kenneth Dash Partnership ("F/D"), 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 1995 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 case was
appealed by both the Company and F/D, and in November 1996, the appeal was
argued before the New Hampshire Supreme Court. The Court has not yet rendered
a ruling on the appeal.
In March 1992, a subsidiary of the Company filed an action for declaratory
relief against a third party seeking a determination that a letter of intent
executed by Miami Subs, Inc. (n/k/a B&B Food Ventures, Inc.) did not
constitute a binding agreement concerning the possible granting of an
exclusive area for development. As a result of this lawsuit, the third party
filed a separate lawsuit against the Company in which the plaintiffs allege
they are entitled to damages for breach of contract, fraud, tortious
inducement to breach a contract and breach of fiduciary duty arising from the
Company's alleged failure to grant the plaintiffs an exclusive area
development right. The plaintiffs claim compensatory damages in excess of
$20.0 million and punitive damages in excess of $20.0 million. Discovery is
substantially completed. The case has been schedule for trial in August 1997.
The Company believes that it had no obligation to proceed to enter into any
agreements with the plaintiffs and is vigorously contesting the action.
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 damages in excess of $15,000 relating to an incident at 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. The Company expects that both of
these matters will be handled by its insurance carrier.
ITEM 2. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on December 12,
1996. At the meeting the shareholders of the Company voted on the election of
directors of the Company and ratification of the appointment of KPMG Peat
Marwick, LLP as the Company's independent auditors for the fiscal year ending
May 31, 1997.
Set forth below is a table which indicates the number of votes cast for or
against, as well as the number of abstentions with respect to each of the
above matters.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
---------- ------- ---------
<S> <C> <C> <C>
Proposal I:
Election of Directors:
Thomas J. Russo 21,312,969 476,675 N/A
Gus Boulis 21,298,569 491,075 N/A
Richard U. Jelinek 21,311,894 477,750 N/A
Greg Karan 21,304,994 484,650 N/A
Francis P. Lucier 21,314,794 474,850 N/A
William L. Paternotte 21,312,394 477,250 N/A
Joseph Zappala 21,312,099 477,545 N/A
Proposal II:
Ratification of the
Appointment of the
Company's Auditors 21,524,845 173,035 91,764
</TABLE>
N/A - not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
NONE
(b) Reports on Form 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIAMI SUBS CORPORATION
Date: January 13, 1997 By: /s/ Jerry W. Woda
JERRY W. WODA
Senior Vice President,
Chief Financial Officer, and
Pricipal Accounting Officer
