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 FEBRUARY 28, 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)
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 April 7, 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)
February 28, May 31,
ASSETS 1997 1996
- -------------------------------------------------------------------------------- -------------- ------------
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CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund contributions of $ 2,339,000 $ 3,103,000
$651,000 and $525,000, respectively)
Notes and accounts receivable (net of allowances for uncollectible accounts of 1,924,000 2,250,000
$343,000 and $390,000, respectively)
Food and supplies inventories 244,000 381,000
Other 370,000 332,000
Total Current Assets 4,877,000 6,066,000
Notes receivable 6,542,000 3,778,000
Property and equipment - net 14,733,000 17,955,000
Intangible assets - net 7,464,000 8,004,000
Other 482,000 558,000
TOTAL $ 34,098,000 $36,361,000
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------- -------------- ------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 4,950,000 $ 6,106,000
Current portion of notes payable and capitalized lease obligations 1,633,000 1,539,000
Total Current Liabilities 6,583,000 7,645,000
Long-term portion of notes payable and capitalized lease obligations 6,669,000 7,955,000
Deferred franchise fees and other deferred income 1,989,000 1,712,000
Accrued liabilities and other 1,628,000 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 February 28, 1997 10,000
Common stock, $.01 par value; authorized 50,000,000 shares;
28,244,340 shares outstanding at February 28, 1997 283,000 273,000
Additional paid-in capital 24,565,000 24,565,000
Accumulated deficit (7,056,000) (7,342,000)
17,792,000 17,506,000
Less note receivable from sale of stock (563,000) (563,000)
Total Shareholders' Equity 17,229,000 16,943,000
TOTAL $ 34,098,000 $36,361,000
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See accompanying notes to consolidated financial statements.
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MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
-------------------
February 28, February 29,
REVENUES 1997 1996
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Restaurant sales $ 6,397,000 $ 7,424,000
Revenues from franchised restaurants 1,116,000 1,158,000
Net gain from sales of restaurants 227,000 8,000
Interest income 139,000 103,000
Other revenues 116,000 31,000
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Total 7,995,000 8,724,000
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EXPENSES
- ------------------------------------------------------------- ------------------- -------------
Restaurant operating costs (including lease costs paid to
Kavala, Inc. of $21,000 and $39,000, respectively) 6,041,000 6,517,000
General, administrative and franchise costs 1,225,000 1,523,000
Depreciation and amortization 446,000 477,000
Interest expense - net 221,000 167,000
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Total 7,933,000 8,684,000
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Net income $ 62,000 $ 40,000
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Net income per common share and common share equivalents $ .00 $ .00
============================================================= =================== =============
Weighted average number of common share and common share
equivalents outstanding 28,248,000 26,907,000
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See accompanying notes to consolidated financial statements.
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MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended
------------------
February 28, February 29,
REVENUES 1997 1996
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Restaurant sales $ 22,818,000 $ 22,896,000
Revenues from franchised restaurants 3,337,000 3,525,000
Net gain from sales of restaurants 884,000 110,000
Interest income 395,000 361,000
Other revenues 215,000 199,000
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Total 27,649,000 27,091,000
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EXPENSES
- ------------------------------------------------------------- ------------------ -------------
Restaurant operating costs (including lease costs paid to
Kavala, Inc. of $87,000 and $137,000, respectively) 21,186,000 20,275,000
General, administrative and franchise costs 4,043,000 4,641,000
Depreciation and amortization 1,440,000 1,413,000
Interest expense - net 694,000 529,000
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Total 27,363,000 26,858,000
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Net income $ 286,000 $ 233,000
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Net income per common share and common share equivalents $ .01 $ .01
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Weighted average number of common share and common share
equivalents outstanding 28,250,000 26,904,000
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See accompanying notes to consolidated financial statements.
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MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-------------------
February 28, February 29,
OPERATING ACTIVITIES: 1997 1996
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Net income $ 286,000 $ 233,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 1,095,000 1,035,000
Amortization of intangible assets 345,000 378,000
Net gain from sales of restaurants (884,000) (110,000)
Changes in assets and liabilities:
(Increase) in accounts receivable (68,000) (312,000)
Decrease in food and supplies inventories 137,000 -
(Increase) in other current assets (60,000) (29,000)
Decrease (increase) in other assets 76,000 (20,000)
(Decrease) in accounts payable and accrued liabilities (1,874,000) (71,000)
Increase (decrease) in deferred fees and other deferred income 263,000 (586,000)
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Net Cash Provided By (Used For) Operating Activities (684,000) 518,000
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INVESTMENT ACTIVITIES:
Purchase of property and equipment (534,000) (2,330,000)
Proceeds from sales of restaurants 807,000 255,000
Loans to franchisees and other - (29,000)
Payments received on notes receivable 830,000 556,000
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Cash Provided By (Used For) Business Investment Activities 1,103,000 (1,548,000)
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FINANCING ACTIVITIES:
Repayment of debt (1,183,000) (1,242,000)
Proceeds from borrowings - 795,000
Proceeds from exercise of stock options/warrants - 13,000
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Cash (Used For) Financing Activities (1,183,000) (434,000)
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(DECREASE) IN CASH (764,000) (1,464,000)
CASH AT BEGINNING OF PERIOD 3,103,000 3,145,000
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CASH AT END OF PERIOD $ 2,339,000 $ 1,681,000
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 696,000 $ 545,000
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Loans to franchisees in connection with sales of restaurants $ 3,270,000 $ 593,000
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See accompanying notes to consolidated financial statements.
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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
Revenues from franchised restaurants consist of the following:
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THREE MONTHS ENDED
-------------------
February 28, February 29,
1997 1996
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Royalties $ 896,000 $ 947,000
Franchise and development fees 220,000 117,000
Net sublease rental income and area termination fees - 94,000
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Total $ 1,116,000 $ 1,158,000
==================================================== =================== =============
NINE MONTHS ENDED
-------------------
February 28, February 29,
1997 1996
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Royalties $ 2,796,000 $ 2,797,000
Franchise and development fees 474,000 409,000
Net sublease rental income and area termination fees 67,000 319,000
- ---------------------------------------------------- ------------------- -------------
Total $ 3,337,000 $ 3,525,000
==================================================== =================== =============
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4. INCOME TAXES
The Company did not provide for income taxes for the three and nine month
periods ended February 28, 1997 and February 29, 1996 due to the availability
of net operating loss carry-forwards.
The Company's federal income tax returns for fiscal years 1991 through 1995,
inclusive, have been examined by the Internal Revenue Service and the Company
has recently received the agent's report of proposed adjustments. The report
reflects substantial proposed adjustments which the Company and its outside
counsel are currently reviewing. Based on its preliminary review, the Company
anticipates that a substantial portion of its 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 its overall tax liability. The Company, through its counsel,
intends to appeal many of the proposed adjustments. The examining agent has
recently begun an examination of the Company's tax return for fiscal year
1996.
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 former Miami Subs restaurant which was sub-leased by a Company subsidiary to
a former franchisee is 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 February 28, 1997, options and warrants representing a total of 5,180,000
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 sublease rentals (net of expense). In the normal course of
operations and in conjunction with the Company's strategic decision to expand
through franchising, the Company has derived significant 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 nine months ended February 28, 1997 are not necessarily indicative
of the results that may be expected for the Company's fiscal year.
The Company's profitability for the three and nine months ended February 28,
1997 resulted from non-recurring gains on the sale of certain Company operated
restaurants. Although the Company currently intends to sell additional
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 nine months ended February 28, 1997, 14 franchised restaurants
opened, one Company and five franchised restaurants closed, 12 Company
operated restaurants were sold/transferred to franchisees, and one restaurant
was reacquired from a franchisee. At February 28, 1997, there were 185
restaurants in the system, consisting of 25 Company operated restaurants and
160 franchised restaurants. At February 29, 1996, there were 167 restaurants
in the system, consisting of 29 Company operated restaurants and 138
franchised restaurants.
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1997 TO FEBRUARY 29, 1996
Total Revenues
Total Company revenues decreased 8.4% to $8.0 million in the third quarter of
the current year, as compared to $8.7 million in the third quarter of last
year. The decrease in total revenues in the current period was primarily due
to fewer Company operated restaurants, which was in part offset by a
significant increase in net gains from the sales of restaurants.
Restaurant Sales
The Company's total restaurant sales decreased approximately 13.8% to $6.4
million in this year's third quarter, as compared to $7.4 million in the third
quarter of last year. The decline in sales in the current quarter resulted
from a net reduction in the number of Company operated restaurants and a
corresponding decrease of approximately nine percent in weeks of restaurant
operations, and a decline in same-store-sales.
At the beginning of the current year quarter the Company operated 28
restaurants and during the quarter the Company sold/transferred four
restaurants to franchisees and reacquired one restaurant from a franchisee.
The Company operated 29 restaurants throughout the prior year's third quarter.
During the current year's third quarter the Company continued a marketing
strategy involving price discounting and couponing. Despite such marketing
efforts, same-store-sales in Company operated restaurants declined by
approximately 3.8% in the current quarter. The Company is currently reviewing
its marketing programs and anticipates a revision of its strategy, including
reducing the prices of certain products, new product introductions and
modifications, and improvements to the level of service and overall operations
in its restaurants. There can be no assurances that these new strategies will
be successful.
At February 28, 1997, Company operated restaurants were located in Florida
(10), Texas (6), Georgia (3), North Carolina (4), South Carolina (1), and New
York (1). Subsequent to the end of the current quarter, the Company sold to
franchisees five of these restaurants, and the Company currently plans on
franchising up to 11 of its remaining Company operated restaurants. 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 3.6% to $1,116,000
in the third quarter of the current year, as compared to $1,158,000 in the
prior year's third quarter. In the prior year third quarter, the Company
recognized income of $104,000 from the termination and cancellation of certain
area development agreements. No such income was recognized in the current
quarter.
The marketing strategy adopted by the Company and many of its franchisees has
focused on price discounting and couponing. Despite such marketing efforts,
same-store-sales in franchised restaurants declined by approximately 7.0% in
the current quarter. Despite growth in the franchise base, such sales
declines, along with the non-accrual of certain sub-lease income and royalty
fees from an increased number of franchisees, continued to adversely affect
franchise fee revenues in the current quarter.
During the third quarter of the current year, seven new franchised restaurants
opened, and four restaurants previously operated by the Company were
franchised. Three franchised restaurants closed during the quarter. There
were 160 franchised restaurants in operation at February 28, 1997, as compared
to 138 franchised restaurants at February 29, 1996.
System-Wide Sales
System-wide sales, which includes sales from all Company operated and
franchised restaurants, increased by approximately 3.6% to $36.5 million in
this year's third quarter, as compared to $35.2 million in last year's third
quarter, principally reflecting the increase in the total number of units in
the system (185 at February 28, 1997 as compared to 167 at February 29, 1996).
Same-store-sales for both Company and franchised units in the system
decreased by approximately 6.5% in the current quarter.
Net Gains From Sales of Restaurants
The Company sold four restaurants to franchisees during the third 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 third quarter of the current year amounted to $227,000, as
compared to $8,000 in the prior year third quarter. Subsequent to the end of
the current quarter, the Company sold five restaurants to franchisees, with no
significant gain being realized. Although the Company intends to sell
additional restaurants, there can be no assurance that any such sales will be
consummated or that gains will be realized.
Other Revenues
Other revenues increased in the third quarter of the current year primarily as
a result of certain vendor revenues which were received in the current
quarter. However, total other revenues were adversely affected in the current
quarter due to costs associated with a vacant leased property. The Company is
attempting to negotiate a termination of the lease on this property with the
landlord (see note 5. to the accompanying Consolidated Financial Statements).
Restaurant Operating Costs
Restaurant operating costs increased to approximately $6.0 million in this
year's third quarter, as compared to $6.5 million in last year's third
quarter, and such costs as a percent of restaurant sales increased to 94.4% in
the current quarter, as compared to 87.8% in the prior year's third quarter.
The increase in restaurant operating costs as a percent of sales was a result
of lower average unit sales and the impact of higher costs associated with
price discounting and couponing promotions offered during the current quarter,
and higher direct operating costs, including cost of sales and labor.
The Company is addressing its restaurant operations and marketing strategies
and anticipates that the previous discounting and couponing strategy will be
significantly reduced. In addition to implementing improvements to the level
of service and overall operations in its restaurants, the Company is also
considering reducing the prices of certain products and new product
introductions and modifications in order to increase recurring visits by its
core customers. There is no assurance that these new strategies will be
successful.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $1.2
million or 15.3% of total revenues in the current quarter, as compared to $1.5
million or 17.5% of total revenues in the prior year's third quarter. 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.
Interest Expense
Interest expense increased to $221,000 in this year's third quarter, as
compared to $167,000 in the prior year's third quarter, principally reflecting
additional debt outstanding in the current quarter ($8.3 million at February
28, 1997, as compared to $7.3 million at February 29, 1996).
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 NINE MONTHS ENDED FEBRUARY 28, 1997 TO FEBRUARY 29, 1996
Total Revenues
Total Company revenues increased to $27.6 million in the current nine month
period, as compared to $27.1 million in the same period last year. Although
restaurant sales and franchise revenues were lower in the current period,
there was a significant increase in net gains from sales of Company
restaurants resulting in the 2.1% increase in total revenues as compared to
the year earlier period.
Restaurant Sales
The Company's total restaurant sales decreased approximately 0.3% to $22.8
million in the current nine month period, as compared to $22.9 million in the
same period last year. Although total sales from all non-comparable
Company-operated units increased during the current period due to a change in
the unit portfolio and the timing of unit dispositions/acquisitions, a
decrease in same store sales in comparable units of approximately 3.2%
resulted in a net decrease in total restaurant sales in the current period.
At the beginning of the current fiscal year, the Company operated 37
restaurants, and during the current nine month period the Company
sold/transferred 12 restaurants to franchisees, reacquired one restaurant from
a franchisee, 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. Total
weeks of restaurant operations were up approximately two percent in the
current nine month period, as compared to the prior year nine month period.
The Company has attempted to improve sales and customer traffic in its
restaurants with a marketing strategy principally involving price discounting
and couponing. Despite these marketing efforts, same-store-sales in Company
operated restaurants have declined since the first quarter of the current
year, resulting in a decrease in same store sales in comparable units of
approximately 3.2% for the current nine month period. The Company is
currently reviewing its marketing programs and anticipates a revision of its
strategy, including reducing the prices of certain products, new product
introductions and modifications, and improvements to the level of service and
overall operations in its restaurants. There can be no assurances that these
new strategies will be successful.
Subsequent to February 28, 1997, the Company sold to franchisees five of its
restaurants, and the Company currently plans on franchising up to 11 of its
remaining Company operated restaurants. 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 5.3% to $3.3
million in the current nine month period, as compared to $3.5 million in the
year earlier period. The prior year nine month period included income of
$324,000 associated with the termination of area development agreements with
franchisees. No such income was recognized in the current period.
The marketing strategy adopted by the Company and many of its franchisees has
focused on price discounting and couponing. Despite such marketing programs,
same-store-sales in franchised restaurants decreased by approximately 3.7%
during the current nine month period. Despite growth in the franchise base,
such sales declines, along with the non-accrual of certain sub-lease income
and royalty fees from an increased number of franchisees, adversely affected
franchise fee revenues in the current nine month period.
During the current nine month period, 14 franchised restaurants opened, 12
restaurants previously operated by the Company were franchised, and five
franchised restaurants closed. There were 160 franchised restaurants in
operation at February 28, 1997, as compared to 138 franchised restaurants at
February 29, 1996.
System-Wide Sales
System-wide sales, which includes sales from all Company operated and
franchised restaurants, increased by approximately 6.9% to $112.8 million in
the current nine month period, as compared to $105.6 million in the same
period last year, principally reflecting the increase in the total number of
units in the system (185 at February 28, 1997 as compared to 167 at February
29, 1996). Same-store-sales for both Company and franchised units in the
system decreased by approximately 3.8% in the current nine month period.
Net Gains From Sales of Restaurants
The Company sold/transferred 12 restaurants to franchisees during the current
nine 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 nine month period amounted to $884,000, as compared
to $110,000 in the prior year nine month period. Subsequent to February 28,
1997, the Company sold five restaurants to franchisees with no significant
gain being realized. Although the Company intends to sell additional
restaurants, 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 $21.2 million in the
current nine month period, as compared to $20.3 million in the year earlier
period. Such costs as a percent of restaurant sales increased to 92.8% in the
current nine month period, as compared to 88.6% in the prior year nine month
period. The increase in restaurant operating costs was a result of lower
average unit sales and the impact of higher costs associated with price
discounting and couponing promotions offered during the current period, and
higher direct operating costs, including cost of sales and labor.
The Company is addressing its restaurant operations and marketing strategies
and anticipates that the previous discounting and couponing strategy will be
significantly reduced. In addition to implementing improvements to the level
of service and overall operations in its restaurants, the Company is also
considering reducing the prices of certain products and new product
introductions and modifications in order to increase recurring visits by its
core customers. There is no assurance that these new strategies will be
successful.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $4.0
million or 14.6% of total revenues in the current nine month period, as
compared to $4.6 million or 17.1% of total revenues in the prior year nine
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.
Interest Expense
Interest expense increased to $694,000 in the current nine month period, as
compared to $529,000 in the prior year nine month period, reflecting higher
average debt levels in the current period.
Provision For Income Taxes
A tax provision was not provided for in the current or prior year nine month
periods because of available net operating loss carryforwards (see Note 4. to
the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
During the current nine month period, the Company's principal sources of cash
were from earnings before depreciation and amortization and gains from sales
of restaurants, totaling approximately $842,000, from the repayment of notes
receivable totaling approximately $830,000 and proceeds from sales of
restaurants totaling approximately $807,000. The Company's principal uses of
cash during the current period were for property additions and improvements of
approximately $534,000, scheduled debt repayments of approximately $1,183,000,
and a reduction in accounts payable and accrued liabilities.
Cash and cash equivalents at February 28, 1997, amounted to $2,339,000 (which
includes unexpended marketing fund contributions of $651,000), as compared to
$3,103,000 (including $525,000 in unexpended marketing fund contributions) at
the beginning of the year, and $1,681,000 (including $463,000 in unexpended
marketing fund contributions) one year ago. At February 28, 1997, the
Company's working capital deficiency was $1,706,000, as compared to $1,579,000
at the beginning of the current fiscal year and $2,006,000 one year ago. The
Company has been able to operate with a working capital deficiency because
restaurant operations are conducted primarily on a cash basis, rapid turnover
and frequent deliveries allow a limited investment in inventories, and
accounts payable for food, beverages and supplies usually become due after the
receipt of cash from the related sales.
At February 28, 1997, the Company's assets include a non-recourse note
receivable in the amount of approximately $1,270,000 which is secured by
1,325,000 shares of common stock of the Company. The note was originally due
on July 1, 1996 and has been formally 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, and accordingly, the note has been
classified as long-term at February 28, 1997. At February 28, 1997, the
quoted market price of the common stock which is pledged as collateral for the
note was approximately $787,000.
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
new strategy also involved the franchising of many of the Company operated
restaurants. During the first nine months of the current fiscal year, 12
Company operated restaurants were sold/transferred to franchisees and,
subsequent to February 28, 1997, five additional 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 Company operated restaurants, the
Company typically provides financing for the restaurant 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 nine months of the current fiscal year, total new financing provided by
the Company to franchisees who acquired restaurants from the Company totaled
approximately $3.3 million. One Company restaurant which was sold to a
franchisee in June 1996, was reacquired by the Company in February 1997. 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 approximately $313,000 (and approximately $1.7 million
in fiscal year 1998), 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 continuing to franchise Company restaurants, expanding
non-traditional franchised restaurants, improving operations in all
restaurants, developing new products, revising and enhancing the effectiveness
of marketing programs, and overall improvement and possible refinements to the
entire system.
As of February 28, 1997, the Miami Subs restaurant system consisted of 185
restaurants, of which 126 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, 25 were Company operated and 160 were
franchised. The Company plans to continue to reduce the current number of
Company operated restaurants by selling certain 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 February 28, 1997, franchisees operated 160 of the 185 restaurants in the
system, and the Company currently plans on franchising up to 16 of its Company
operated restaurants (five of which were franchised subsequent to February 28,
1997). The Company receives royalty and advertising fees from 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 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 than 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, and 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 5. OTHER INFORMATION
The Boards of the Nasdaq Stock Market and the National Association of
Securities Dealers ("NASD") have recently approved substantial changes to
Nasdaq's listing qualification standards. One of the changes approved by the
Boards was the elimination of the alterative to the $1.00 minimum bid price
requirement, which would require all Nasdaq-listed issues to trade for at
least $1.00. Previously, companies whose stock fell below $1.00 could remain
listed if they met certain alternative tests. The new listing standard
changes are to be phased in over a six-month period and such changes are
subject to approval by the Securities and Exchange Commission ("SEC"). The
Company currently does not meet the new recommended standard and if the new
standard is approved by the SEC, the Company's securities would be subject to
de-listing if it is unable to come into compliance within recommended time
periods.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Index to Exhibits on Page 20.
(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: April 7, 1997 By: /s/ Jerry W. Woda
JERRY W. WODA
Senior Vice President,
Chief Financial Officer, and
Pricipal Accounting Officer
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
- ------- ---------------------------------------------------------- --------
<C> <S> <C>
10. Letter Agreement Dated March 13, 1997 Concerning the 21 - 23
Resignation of Thomas J. Russo as an Officer, Director,
and Employee of the Company
======= ========================================================== ========
</TABLE>
Exhibit 10
March 13, 1997
Mr. Thomas J. Russo
c/o Miami Subs Corporation
6300 N. W. 31st Avenue
Ft. Lauderdale, FL 33309
Dear Tom:
This letter agreement is intended to set forth the arrangements between
you and Miami Subs Corporation (the "Company") with respect to the termination
of your employment with the Company.
1. The parties hereby acknowledge and agree that you resigned as an
officer, director and employee of the Company effective March 13, 1997.
2. a) For a period of twelve months from the date hereof or until you
obtain other employment, whichever first occurs, you will be paid at the rate
of $12,000 per month (or a pro rata portion thereof for any period of less
than a month) and the Company will continue to provide you with your current
benefits (except that your car allowance will be a the rate of $500 per
month), all on the same basis as payments are made and benefits provided to
officers of the Company.
b) Notwithstanding the terms thereof, options to acquire shares of Company
stock will be exercisable for a period of 180 days from the date hereof.
c) Notwithstanding the terms thereof, your $562,500 Non-Recourse Promissory
Note dated March 17, 1995 payable to the Company need not be repaid until
January 19, 1999.
d) You shall be entitled to recover from the Company your fees and
expenses (including attorneys' fees) in the event you bring suit alleging
breach of any provisions of this Section 2.
3. You hereby release, remise and forever discharge the Company, its
legal representatives, successors and assigns, past, present and future
directors, officers, employees, trustees, shareholders and affiliates from and
against any and all claims, cross-claims, third-party claims, counterclaims,
contribution claims, debts, demands, actions, promises, judgments, trespasses,
extents, executions, causes of action, suits, accounts, covenants, sums of
money, dues, reckonings, bonds, bills, liens, attachments, trustee process,
specialists, contracts, controversies, agreements, promises, damages, and all
other claims of every kind and nature in law, equity, arbitration, or other
forum which you now have or ever had up to and including the date of this
Agreement, whether absolute or contingent, direct or indirect, known or
unknown. Additionally, you hereby waive and release the Company from any and
all claims which you have, your successors or assigns have or may have against
the Company for, upon or by reason of any matter, cause or thing whatsoever,
including, but not limited to a) those that might arise in your capacity as a
shareholder of the Company (both individually and derivatively), or b) in any
way related to your employment or termination of your employment by the
Company (including, without limitation, arising under the Employment Agreement
dated January 14, 1994, as amended, whether or not you know them to exist at
the present time, including, but not limited to, rights under federal, state
or local laws prohibiting age or other forms of discrimination, including
Title VII of the Civil Rights Act of 1964, as amended; Sections 1981 through
1988 of Title 42 of the United States Code; the Age Discrimination in
Employment Act of 1967, as amended; the Employee Retirement Income Security
Act of 1974, as amended; the Fair Labor Standards Act, the Americans with
Disabilities Act, as amended; the Family and Medical Leave Act; the National
Labor Relations Act, as amended; the Immigration Reform Control Act, as
amended; the Occupational Safety and Health Act, as amended; and any public
policy, contract or common law. Notwithstanding the foregoing, nothing herein
shall be deemed to release, remise or discharge the Company from any claims
arising out of, relating to or asserted a) under this Agreement, b) under any
employee benefit or benefit plan provided to you (including, without
limitation, stock options) or with respect to reimbursement of expenses in
accordance with Company policy, c) for accrued vacation pay through the date
of this Agreement, or d) with respect to any right of indemnification as a
director, officer or employee of the Company, whether arising under the
Company's charter or by-laws, by operation of law, or otherwise.
4. The Company, on its own behalf and on behalf of its predecessors,
successors and assigns, hereby releases, remises and forever discharges you
for yourself, your heirs, executors, administrators, legal representatives,
successors and assigns, from and against any and all claims, crossclaims,
third party claims, counter claims, contribution claims, indemnity claims,
debts, demands, actions, promises, judgments, trespasses, extents, executions,
causes of action, suits, accounts, covenants, sums of money, dues, reckonings,
bonds, bills, liens, attachments, trustee process, specialities, covenants,
sums of money, dues, reckonings, bonds, bills, liens, attachments, trustee
process, specialities, contracts, controversies, agreements, promises,
damages, and all other claims of every kind and nature in law, equity,
arbitration, or other forum which Company now has or ever had up to and
including the date of this Agreement, whether absolute or contingent, direct
or indirect, known or unknown. Notwithstanding the foregoing, nothing herein
shall be deemed to release, remise or discharge you from any claims arising
out of, relating to or asserted under this Agreement.
5. For a period of seven days following your execution of this
Agreement, you may revoke this Agreement, and this Agreement shall not become
effective or enforceable until this seven-day revocation period has expired.
The Company may not revoke this Agreement during the seven-day revocation
period.
6. You hereby acknowledge and agree that a) you understand the
provisions of this Agreement, b) your agreement hereunder is knowing and
voluntary, c) you have been afforded a full and reasonable opportunity of at
least twenty-one days to consider its terms and to consult with or seek advice
from any attorney or any other persons of your choosing and d) you have been
advised by the Company to consult with an attorney prior to executing this
Agreement.
If the foregoing is in accordance with your understanding, please sign
and return the enclosed copy of this letter, whereupon this letter and such
copy win constitute a binding agreement between you and the Company on the
basis set forth above.
Very truly yours,
MIAMI SUBS CORPORATION
By
Acknowledged and Agreed to:
Thomas J. Russo
March 13, 1997
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