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, 1997
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19623
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MIAMI SUBS CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0249329
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 N.W. 31st Avenue, Fort Lauderdale, Florida 33309
------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(954) 973-0000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 7, 1998
----- -------------------------------
Common Stock, $.01 par value 28,244,340
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 30, May 31,
ASSETS 1997 1997
- ---------------------------------------------------------------------------------------- -------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund contributions of. . . . . $ 2,989,000 $ 2,940,000
$951,000 and $683,000, respectively)
Notes and accounts receivable (net of allowances for uncollectible accounts of $244,000. 1,831,000 2,000,000
and $289,000, respectively)
Food and supplies inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 192,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,000 191,000
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,168,000 5,323,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,901,000 8,073,000
Property and equipment - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,224,000 11,500,000
Intangible assets - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,921,000 7,128,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426,000 457,000
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,640,000 $32,481,000
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . $ 4,587,000 $ 4,737,000
Current portion of notes payable and capitalized lease obligations . . . . . . . . . . . 1,243,000 1,706,000
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,830,000 6,443,000
Long-term portion of notes payable and capitalized lease obligations . . . . . . . . . . 6,070,000 6,288,000
Deferred franchise fees and other deferred income. . . . . . . . . . . . . . . . . . . . 1,806,000 2,088,000
Accrued liabilities and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,159,000 2,154,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 50,000,000 shares; 28,244,340
shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,000 283,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,565,000 24,565,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,466,000) (7,733,000)
17,382,000 17,115,000
Note receivable from sale of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (563,000) (563,000)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,044,000) (1,044,000)
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,775,000 15,508,000
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,640,000 $32,481,000
- ---------------------------------------------------------------------------------------- -------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Three Months Ended
November 30, November 30,
REVENUES 1997 1996
- -------------------------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,354,000 $ 7,369,000
Revenues from franchised restaurants . . . . . . . . . . . . . . . . . . . 1,215,000 1,088,000
Net gain from sales of restaurants . . . . . . . . . . . . . . . . . . . . 5,000 484,000
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000 140,000
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,000 38,000
------------------- -------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,847,000 9,119,000
------------------- -------------------
EXPENSES
- --------------------------------------------------------------------------
Restaurant operating costs (including lease costs paid to Kavala, Inc. of
$42,000 and $29,000, respectively) . . . . . . . . . . . . . . . . . . . 4,251,000 6,902,000
General, administrative and franchise costs. . . . . . . . . . . . . . . . 819,000 1,351,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 361,000 480,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,000 229,000
------------------- -------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,629,000 8,962,000
------------------- -------------------
Income before provision for income taxes . . . . . . . . . . . . . . . . . 218,000 157,000
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . 76,000 -
------------------- -------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 142,000 $ 157,000
------------------- -------------------
Net income per common share and common share equivalents . . . . . . . . . $ .01 $ .01
=================== ===================
Weighted average number of common share and common share
equivalents outstanding. . . . . . . . . . . . . . . . . . . . . . . . . 27,119,000 28,249,000
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended Six Months Ended
November 30, November 30,
REVENUES 1997 1996
- -------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,132,000 $ 16,422,000
Revenues from franchised restaurants . . . . . . . . . . . . . . . . . . . 2,355,000 2,220,000
Net gain from sales of restaurants . . . . . . . . . . . . . . . . . . . . 16,000 657,000
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387,000 256,000
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 99,000
----------------- -----------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,065,000 19,654,000
----------------- -----------------
EXPENSES
- --------------------------------------------------------------------------
Restaurant operating costs (including lease costs paid to Kavala, Inc. of
$83,000 and $70,000, respectively) . . . . . . . . . . . . . . . . . . . 8,801,000 15,145,000
General, administrative and franchise costs. . . . . . . . . . . . . . . . 1,719,000 2,818,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 729,000 995,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,000 472,000
----------------- -----------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,655,000 19,430,000
----------------- -----------------
Income before provision for income taxes . . . . . . . . . . . . . . . . . 410,000 224,000
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . 143,000 -
----------------- -----------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,000 $ 224,000
================= =================
Net income per common share and common share equivalents . . . . . . . . . $ .01 $ .01
================= =================
Weighted average number of common share and common share
equivalents outstanding. . . . . . . . . . . . . . . . . . . . . . . . . 27,119,000 28,250,000
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended Six Months Ended
November 30, November 30,
OPERATING ACTIVITIES: 1997 1996
------------------ ------------------
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,000 $ 224,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 510,000 762,000
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . 219,000 233,000
Net gain from sales of restaurants. . . . . . . . . . . . . . . . . . . . . . (16,000) (657,000)
Changes in assets and liabilities:
(Increase) in accounts receivable . . . . . . . . . . . . . . . . . . . . . . (316,000) (635,000)
Decrease in food and supplies inventories . . . . . . . . . . . . . . . . . . 12,000 74,000
Decrease (increase) in other current assets . . . . . . . . . . . . . . . . . 23,000 (17,000)
Decrease in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 19,000 53,000
(Decrease) in accounts payable and accrued liabilities. . . . . . . . . . . . (150,000) (627,000)
(Decrease) in deferred fees and accrued liabilities . . . . . . . . . . . . . (257,000) (206,000)
Net Cash Provided By (Used For) Operating Activities. . . . . . . . . . . . . 311,000 (796,000)
INVESTMENT ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . . . . . . . . . . . (171,000) (381,000)
Proceeds from sales of restaurants. . . . . . . . . . . . . . . . . . . . . . 20,000 650,000
Payments received on notes receivable . . . . . . . . . . . . . . . . . . . . 570,000 246,000
Cash Provided By Investment Activities. . . . . . . . . . . . . . . . . . . . 419,000 515,000
FINANCING ACTIVITIES:
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (681,000) (879,000)
Cash (Used For) Financing Activities. . . . . . . . . . . . . . . . . . . . . (681,000) (879,000)
INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . 49,000 (1,160,000)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . 2,940,000 3,103,000
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,989,000 $ 1,943,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 407,000 $ 474,000
============================================================================= ================== ==================
Loans to franchisees in connection with sales of restaurants. . . . . . . . . $ 345,000 $ 2,067,000
============================================================================= ================== ==================
Acquisition of restaurants in exchange for notes receivable . . . . . . . . . $ 432,000
============================================================================= ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the Company's financial position
and results of operations for the periods presented. The financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required for annual financial statements. The
financial statements included herein should be read in conjunction with the
financial statements presented in the Company's Annual Report on Form 10-K for
the year ended May 31, 1997.
Results of operations reported for interim periods are not necessarily
indicative of results for the entire fiscal year.
2. REVENUES FROM FRANCHISED RESTAURANTS
Revenues from franchised restaurants consist of the following:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
November 30, November 30,
1997 1996
------------------- -------------------
<S> <C> <C>
Royalties . . . . . . . . . . . . . . . $ 885,000 $ 915,000
Franchise and development fees. . . . . 94,000 137,000
Sublease rental income (net). . . . . . 46,000 36,000
Cancellation of development agreements. 190,000 -
------------------- -------------------
Total . . . . . . . . . . . . . . . . . $ 1,215,000 $ 1,088,000
- --------------------------------------- =================== ===================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
November 30, November 30,
1997 1996
----------------- -----------------
<S> <C> <C>
Royalties . . . . . . . . . . . . . . . $ 1,807,000 $ 1,900,000
Franchise and development fees. . . . . 246,000 253,000
Sublease rental income (net). . . . . . 112,000 67,000
Cancellation of development agreements. 190,000 -
----------------- -----------------
Total . . . . . . . . . . . . . . . . . $ 2,355,000 $ 2,220,000
================= =================
</TABLE>
3. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
<TABLE>
<CAPTION>
November 30, May 31,
1997 1997
-------------- ------------
<S> <C> <C>
Notes receivable . . . . . . . . . . . . . . . . . . $ 8,886,000 $ 9,437,000
Royalties and other receivables due from franchisees 1,025,000 867,000
Other. . . . . . . . . . . . . . . . . . . . . . . . 65,000 58,000
-------------- ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . 9,976,000 10,362,000
Less allowance for doubtful accounts . . . . . . . . (244,000) (289,000)
-------------- ------------
9,732,000 10,073,000
Less notes receivable due after one year . . . . . . (7,901,000) (8,073,000)
-------------- ------------
Notes and accounts receivable-current portion. . . . $ 1,831,000 $ 2,000,000
==================================================== ============== ============
</TABLE>
Notes receivable principally result from sales of restaurant businesses to
franchisees and are generally guaranteed by the purchaser and collateralized
by the restaurant businesses and assets sold. The notes are generally due in
monthly installments of principal and interest, with interest rates ranging
principally between 8% and 12%.
4. INCOME TAXES
The Company's federal income tax returns for fiscal years 1991 through 1996,
inclusive, have been examined by the Internal Revenue Service and the IRS has
issued reports for such years reflecting substantial adjustments to previously
filed tax returns. The Company, through its outside counsel, has appealed
many of the proposed adjustments. If the Company is not successful in its
appeal, the Company's net operating loss carryovers would be substantially
absorbed by the proposed adjustments and significant amounts of additional
taxes and penalties would be due. The Company is unable at this time to
determine the ultimate potential impact of the proposed adjustments on the
carryovers and on its overall tax liability.
5. STOCK OPTIONS AND WARRANTS
At May 31, 1997, there were 4,416,700 stock options outstanding under the
Company's stock option plan, of which 2,362,500 of such options subsequently
expired. There are currently 2,638,200 options outstanding under the plan.
As a result of a repricing of certain options to current market value and
grants of 584,000 new options during June 1997, 2,055,500 of the currently
outstanding options are exercisable at prices between $ .59 and $ .75 per
share (average exercise price of $ .747 per share), and the remaining options
outstanding under the plan are exercisable at prices between $2.00 and $3.00
per share (average exercise price of $2.40 per share). In addition to options
outstanding under the plan, there are 509,600 additional warrants and options
outstanding which are exercisable at prices between $2.00 and $6.00 per share
(average exercise price $2.91 per share).
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
- ------------
The Company's revenues are derived principally from operating, franchising,
and financing Miami Subs restaurants. Franchise revenues consist principally
of initial franchise fees and area development fees, royalty fees, and
sublease rental income, which is presented in the financial statements net of
direct lease expenses. In the normal course of its business, the Company also
derives income from the sale of restaurants to franchisees, and interest
income from financing the sale of restaurants to franchisees.
Restaurant operating costs include food and paper costs, direct restaurant
labor and benefits, marketing fees and costs, and all other direct costs
associated with operating the Company's restaurants. General, administrative
and franchise costs relate both to Company operated restaurants and the
Company's franchising operations.
The Company's revenues and expenses are directly affected by the number, sales
volumes, and profitability of its Company operated restaurants. Revenues, and
to a lesser extent expenses, are also affected by the number and sales volumes
of franchised restaurants. Initial franchise fees and any gain on sales of
restaurants are directly affected by the number of restaurants opened by
franchisees, and the number, price and cost of Company restaurants sold to
franchisees during the period.
Since the first quarter of the prior year, the Company has embarked upon a
strategy aimed at expanding its franchise system, which has included the sale
to franchisees of many Company-operated restaurants. As a result of this
strategy, the Company has reduced the number of Company operated restaurants
from 28 at November 30, 1996, to 15 at November 30, 1997. As a result of this
conversion from Company to franchise operations, the Company's restaurant
sales and total revenues have declined significantly from prior periods.
In order to supplement its growth of traditional free-standing restaurants,
the Company has continued to focus growth on franchising non-traditional
restaurants. Such restaurants are typically smaller and less costly to
develop then the traditional free-standing restaurants, and sales at these
non-traditional restaurants are typically less than those of traditional
restaurants. During the six months ended November 30, 1997, 9 new
non-traditional restaurants were opened by franchisees, and at November 30,
1997, there were 30 non-traditional restaurants in the system.
Although the Company has recently achieved a level of profitability, the
Company's ability to sustain profitability in the future will, among other
factors, be dependent on improvement of sales and operating margins in
existing Company and franchised restaurants, sustaining and improving the
collection of royalty fees, note payments, and lease obligations due to the
Company from franchisees, successful expansion of its franchise base, its
ability to control future operating costs, and the successful operation of
existing and new restaurants on a profitable basis.
The Company's fiscal year ends on May 31. The results of operations for the
three and six months ended November 30, 1997 are not necessarily indicative of
the results that may be expected for the Company's fiscal year.
During the six months ended November 30, 1997, 13 franchised restaurants
opened (of which 9 were non-traditional restaurants), and six franchised
restaurants and one Company restaurant closed. In addition, the Company
sold/transferred three Company-operated restaurants to franchisees, and
reacquired two restaurants from former franchisees in exchange for outstanding
notes payable to the Company. At November 30, 1997, there were 193
restaurants in the system, consisting of 15 Company operated restaurants and
178 franchised restaurants. At November 30, 1996, there were 181 restaurants
in the system, consisting of 28 Company operated restaurants and 153
franchised restaurants.
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1997 TO NOVEMBER 30, 1996
- ------------------------------------------------------------------------------
Total Revenues
- ---------------
Principally as a result of the conversion from Company to franchise operations
and resulting sales of Company restaurants to franchisees, total Company
revenues declined 36% to $5.8 million in the second quarter of the current
year, as compared to $9.1 million in the second quarter of the prior year.
Restaurant Sales
- -----------------
The Company's total restaurant sales decreased approximately 41% to $4.4
million in the current quarter, as compared to $7.4 million in the prior year
quarter. The decrease in sales resulted principally from the sale of Company
operated restaurants to franchisees, resulting in a reduction in the number of
Company operated restaurants from 28 at November 30, 1996, to 15 at November
30, 1997.
"Same-store-sales" in Company operated restaurants (computed for those
restaurants which have been open 18 months or more at the beginning of the
quarter) declined by approximately 4.6% in the current quarter (an improvement
from (6.4)% in the first quarter of the current year). To address the decline
in same-store-sales, average unit volumes and lower guest counts that the
Company's restaurants have been experiencing, and in response to aggressive
advertising and lower pricing of the major fast food chains, in March 1997 the
Company made a strategic change in its marketing strategy, and revised its
pricing structure and menu. At the same time, the Company ceased the
extensive use of couponing in its restaurants. The Company also began a test
of certain operational and marketing changes to increase guest counts and
become more competitive on price points with other fast-food operators, and
began a system-wide program to bring all restaurants up to current standards
and image. During this test period, system-wide advertising and marketing
activities were placed on hold. The Company's initiatives to date have
included an integrated program to address image improvements to restaurants,
crew and manager training and retraining, sales and customer service
incentives, an introduction of new lower-priced products and lower prices on
certain existing products, and new local-store marketing programs. Following
the test period and introduction of the changes to the system, the Company
recommenced radio and print advertising in August 1997. As a result of these
changes, many of the Company's restaurants located in its core Florida market,
have recently experienced an increase in guest counts and improved sales.
However, as a result of the lower check average resulting from lower priced
products, overall sales to date, although improved, continue to be lower than
comparable sales in the year earlier period. There can be no assurance that
these recent efforts will ultimately be successful in reversing the
same-store-sales trends or significantly increasing unit volumes.
At November 30, 1997, Company operated restaurants were located in Florida
(8); Texas (6), and New York (1). The Company currently plans to sell to
franchisees up to seven of these restaurants. However, there can be no
assurance that any such sales will be consummated at terms acceptable to the
Company.
Revenues From Franchised Restaurants
- ---------------------------------------
Revenues from franchised restaurants amounted to $1,215,000 in the current
quarter, as compared to $1,088,000 in the prior year quarter.
In the current year's second quarter, six franchised restaurants opened (of
which three were non-traditional restaurants), the Company sold/transferred
one restaurant to a franchisee, and three franchised restaurants closed.
Royalty income in the current quarter amounted to $885,000, as compared to
$915,000 in the prior year quarter. Although the number of franchised
restaurants have increased, a decrease of approximately 8.0% in
"same-store-sales" at franchised restaurants (computed for franchised
restaurants which have been open 18 months or more at the beginning of the
quarter), lower average unit sales, and the non-payment and non-accrual of
royalty fees due from franchisees adversely affected royalty income in the
current quarter. At November 30, 1997, approximately 21% of franchised units
have been granted a temporary reduction or waiver from paying royalty fees,
and royalty fees were not paid or accrued on 17% of certain other franchised
units due to delinquency in the payment of royalties to the Company.
As discussed in "Restaurant Sales" above, by the end of the first quarter of
the current year, the Company had initiated throughout the franchise system
significant and strategic changes to its marketing strategy, pricing structure
and menu, and recommenced radio and print advertising in order to improve
guest counts and unit sales in the restaurants and become more competitive on
price points with other fast-food operators. Although recent sales results
have shown improvement, overall franchised sales continue to be lower than
comparable sales in the year earlier period. There can be no assurance that
these recent efforts will ultimately be successful in reversing the same store
sales trends, increasing unit volumes, or improving restaurant profitability.
Included in franchise fee income in the current quarter was $190,000 resulting
from the termination of an area development agreement. No such income was
recognized in the year earlier period.
System-Wide Sales
- ------------------
System-wide sales, which includes sales from Company operated and franchised
restaurants, amounted to approximately $35.9 million in the current quarter,
as compared to $36.3 million in the prior year quarter. The decrease in
system-wide sale reflects a decline in "same store sales" for both Company
operated and franchised restaurants of approximately 7.3% in the current
quarter (an improvement from (10.1)% in the first quarter of the current
year), the increased number of non-traditional restaurants in the system which
typically have lower sales volumes than traditional restaurants, and
continuation of intense industry-wide competition and aggressive price
discounting and marketing by large national chains.
As discussed in "Restaurant Sales" above, by the end of the first quarter of
the current year, the Company had initiated throughout the system significant
and strategic changes to its marketing strategy, pricing structure and menu,
and recommenced radio and print advertising in order to improve unit sales in
the restaurants and become more competitive on price points with other
fast-food operators. Although recent sales results have shown improvement,
overall system-wide unit sales continue to be lower than comparable sales in
the year earlier period. There can be no assurance that these recent efforts
will ultimately be successful in reversing the same store sales trends,
increasing unit volumes, or improving restaurant profitability.
Net Gain From Sales of Restaurants
- ---------------------------------------
As a part of the Company's strategy to focus future growth and operations in
franchising, the Company sold one restaurant to a franchisee during the second
quarter of the current year. Four Company restaurants were sold to
franchisees in the year earlier quarter. Gains on the sale of restaurants are
dependent on the Company's basis in and the overall performance of such units.
Gains realized are recorded as income when the sales are consummated and other
conditions are met, including the adequacy of the down payment and the
completion by the Company of its obligations under the contracts. Losses on
the sale of restaurants are recognized at the time of sale. At November 30,
1997, total deferred gains from the sales of restaurants amounted to $853,000,
and notes receivable from the sale of restaurants totaled approximately $8.7
million. Although the Company intends to sell other existing Company operated
restaurants in the future, there can be no assurance that any such sales will
be consummated on terms acceptable to the Company or that gains will be
realized.
Interest Income
- ----------------
In connection with its strategy of focusing growth and operations in
franchising, the Company has sold restaurants to franchisees and provided
financing for such sales. Principally as a result of the increase in notes
receivable from such sales, interest income increased to $190,000 in the
current quarter, as compared to $140,000 in the year earlier quarter. The
Company currently plans to sell additional restaurants to franchisees, and it
is expected that such sales, when and if consummated, will also be financed by
the Company.
Restaurant Operating Costs
- ----------------------------
Restaurant operating costs in Company operated restaurants amounted to $4.3
million or 97.6% of sales in the current quarter, as compared to $6.9 million
or 93.7% of sales in the prior year quarter. The increase in restaurant
operating costs as a percent of sales in the current quarter reflects higher
food and paper costs as a result of the lower prices currently being offered
in the restaurants, higher labor costs as the Company has increased staffing
in order to improve customer service, and also reflects the impact of lower
average unit volumes, especially in certain units that are held for sale.
General, Administrative and Franchise Costs
- -----------------------------------------------
General, administrative and franchise costs amounted to $819,000 or 14.0% of
total revenue in the current quarter, as compared to approximately $1.4
million or 14.8% of total revenue in the prior year quarter.
During the second half of the prior year, the Company eliminated certain
administrative and support positions, implemented a reduction in
office/administration facilities, and took other cost control measures which
have resulted in an approximate 30% decrease in recurring operating costs as
compared to the year earlier level. Costs in the current quarter also reflect
certain non-recurring reductions to expenses totaling approximately $125,000.
The Company is maintaining strict cost controls in all areas of its business,
and does not currently expect any significant increases to current levels.
Depreciation and Amortization
- -------------------------------
Depreciation and amortization decreased in the current quarter due to the
reduction in the number of restaurants operated by the Company in the current
quarter as compared to the year earlier period. At November 30, 1997, the
Company operated 15 restaurants as compared to 28 restaurants at November 30,
1996.
Interest Expense
- -----------------
Interest expense decreased to $198,000 in the current quarter, as compared to
$229,000 in the prior year quarter, principally reflecting lower average debt
levels outstanding in the current quarter.
Provision for Income Taxes
- -----------------------------
The Company's federal income tax returns for fiscal years 1991 through 1996,
inclusive, have been examined by the Internal Revenue Service and the IRS has
issued reports for such years reflecting substantial adjustments to previously
filed tax returns. The Company, through its outside counsel, has appealed
many of the proposed adjustments. If the Company is not successful in its
appeal, the Company's net operating loss carryovers would be substantially
absorbed by the proposed adjustments and significant amounts of additional
taxes and penalties would be due. Due to the possible loss of net operating
loss carryovers, the Company is providing for estimated income taxes on its
current operating results.
COMPARISON OF SIX MONTHS ENDED NOVEMBER 30, 1997 TO NOVEMBER 30, 1996
- ------------------------------------------------------------------------------
Total Revenues
- ---------------
Principally as a result of the conversion from Company to franchise operations
and resulting sales of Company restaurants to franchisees, total Company
revenues declined approximately 39% to $12.1 million in the first half of the
current year, as compared to $19.7 million in the first half of the prior
year.
Restaurant Sales
- -----------------
The Company's total restaurant sales decreased approximately 44% to $9.1
million in the current six month period, as compared to $16.4 million in the
prior year six month period. The decrease in sales resulted principally from
the sale of Company operated restaurants to franchisees, resulting in a
reduction in the number of Company operated restaurants from 28 at November
30, 1996, to 15 at November 30, 1997.
"Same-store-sales" in Company operated restaurants (computed for those
restaurants which have been open 18 months or more at the beginning of the
year) declined by approximately 5.0% in the current period. To address the
decline in same-store-sales, average unit volumes and lower guest counts that
the Company's restaurants have been experiencing, and in response to
aggressive advertising and lower pricing of the major fast food chains, in
March 1997 the Company made a strategic change in its marketing strategy, and
revised its pricing structure and menu. At the same time, the Company ceased
the extensive use of couponing in its restaurants. The Company also began a
test of certain operational and marketing changes to increase guest counts and
become more competitive on price points with other fast-food operators, and
began a system-wide program to bring all restaurants up to current standards
and image. During this test period and throughout most of the first quarter
of the current year, system-wide advertising and marketing activities were
essentially placed on hold. The Company's initiatives to date have included
an integrated program to address image improvements to restaurants, crew and
manager training and retraining, sales and customer service incentives, an
introduction of new lower-priced products and lower prices on certain existing
products, and new local-store marketing programs. Following the test period
and introduction of the changes to the system, the Company recommenced radio
and print advertising in August 1997. As a result of these changes, many of
the Company's restaurants located in its core Florida market, have recently
experienced an increase in guest counts and improved sales. However, as a
result of the lower check average resulting from lower priced products,
overall sales to date continue to be lower than comparable sales in the year
earlier period. There can be no assurance that these recent efforts will
ultimately be successful in reversing the same-store-sales trends or
significantly increasing unit volumes.
At November 30, 1997, Company operated restaurants were located in Florida
(8); Texas (6), and New York (1). The Company currently plans to sell to
franchisees up to seven of these restaurants. However, there can be no
assurance that any such sales will be consummated at terms acceptable to the
Company.
Revenues From Franchised Restaurants
- ---------------------------------------
Revenues from franchised restaurants amounted to $2,355,000 in the current six
month period, as compared to $2,220,000 in the prior year period.
In the current six month period, 13 franchised restaurants opened (of which
nine were non-traditional restaurants), the Company acquired two restaurants
from franchisees and sold/transferred three restaurants to franchisees, and
six franchised restaurants closed. Royalty income in the current period
amounted to $1,807,000, as compared to $1,900,000 in the prior year period.
Although the number of franchised restaurants have increased, a decrease of
approximately 9.3% in "same-store-sales" at franchised restaurants (computed
for franchised restaurants which have been open 18 months or more at the
beginning of the year), lower average unit sales at franchised restaurants,
and the non-payment and non-accrual of royalty fees due from franchisees
adversely affected royalty income in the current six month period. At
November 30, 1997, approximately 21% of franchised units have been granted a
temporary reduction or waiver from paying royalty fees, and royalty fees were
not paid or accrued on 17% of certain other franchised units due to
delinquency in the payment of royalties to the Company.
As discussed in "Restaurant Sales" above, by the end of the first quarter of
the current year, the Company had initiated throughout the system significant
and strategic changes to its marketing strategy, pricing structure and menu,
and recommenced radio and print advertising in order to improve guest counts
and unit sales in the restaurants and become more competitive on price points
with other fast-food operators. Although recent sales results have shown
improvement, overall franchised sales continue to be lower than comparable
sales in the year earlier period. There can be no assurance that these recent
efforts will ultimately be successful in reversing the same store sales
trends, increasing unit volumes, or improving restaurant profitability.
Included in franchise fee income in the current period was $190,000 resulting
from the termination of an area development agreement. No such income was
recognized in the year earlier period.
System-Wide Sales
- ------------------
System-wide sales, which includes sales from Company operated and franchised
restaurants, amounted to approximately $73.6 million in the current six month
period, as compared to $76.3 million in the prior year period. The decrease
in system-wide sale reflects a decline in "same store sales" for both Company
operated and franchised units of approximately 8.9% in the current six month
period, the increased number of non-traditional restaurants in the system
which typically have lower sales volumes than traditional restaurants, and
continuation of intense industry-wide competition and aggressive price
discounting and marketing by large national chains.
As discussed in "Restaurant Sales" above, by the end of the first quarter of
the current year, the Company had initiated throughout the system significant
and strategic changes to its marketing strategy, pricing structure and menu,
and recommenced radio and print advertising in order to improve unit sales in
the restaurants and become more competitive on price points with other
fast-food operators. Although recent sales results have shown improvement,
overall system-wide unit sales continue to be lower than comparable sales in
the year earlier period. There can be no assurance that these recent efforts
will ultimately be successful in reversing the same store sales trends,
increasing unit volumes, or improving restaurant profitability.
Net Gain From Sales of Restaurants
- ---------------------------------------
As a part of the Company's current strategy to focus future growth and
operations in franchising, the Company sold/transferred three restaurants to
franchisees during the current six month period. Eight Company restaurants
were sold to franchisees in the year earlier period. Gains on the sale of
restaurants are dependent on the Company's basis in and the overall
performance of such units. Gains realized are recorded as income when the
sales are consummated and other conditions are met, including the adequacy of
the down payment and the completion by the Company of its obligations under
the contracts. Losses on the sale of restaurants are recognized at the time
of sale. At November 30, 1997, total deferred gains from the sales of
restaurants amounted to $853,000, and notes receivable from the sale of
restaurants totaled approximately $8.7 million. Although the Company intends
to sell other existing Company operated restaurants in the future, there can
be no assurance that any such sales will be consummated on terms acceptable to
the Company or that gains will be realized.
Interest Income
- ----------------
In connection with its strategy of focusing growth and operations in
franchising, the Company has sold restaurants to franchisees and provided
financing for such sales. Principally as a result of the increase in notes
receivable from such sales, interest income increased to $387,000 in the
current six month period, as compared to $256,000 in the year earlier period.
The Company currently plans to sell additional restaurants to franchisees, and
it is expected that such sales, when and if consummated, will also be financed
by the Company.
Restaurant Operating Costs
- ----------------------------
Restaurant operating costs in Company operated restaurants amounted to $8.8
million or 96.4% of sales in the current six month period, as compared to
$15.1 million or 92.2% of sales in the prior year period. The increase in
restaurant operating costs as a percent of sales in the current period
reflects higher food and paper costs as a result of the lower prices currently
being offered in the restaurants, higher labor costs as the Company has
increased staffing in order to improve customer service, and also reflects the
impact of lower average unit volumes, especially in certain units that are
held for sale.
General, Administrative and Franchise Costs
- -----------------------------------------------
General, administrative and franchise costs amounted to $1,719,000 or 14.2% of
total revenue in the current six month period, as compared to approximately
$2,818,000 or 14.3% of total revenue in the prior year period.
During the second half of the prior year, the Company eliminated certain
administrative and support positions, implemented a reduction in
office/administration facilities, and took other cost control measures which
have resulted in an approximate 35% decrease in recurring operating costs as
compared to the year earlier level. Costs in the current period also reflect
certain non-recurring reductions to expenses totaling approximately $125,000.
The Company is maintaining strict cost controls in all areas of its business,
and does not currently expect any significant increases to current levels.
Depreciation and Amortization
- -------------------------------
Depreciation and amortization decreased in the current six month period due to
the reduction in the number of restaurants operated by the Company in the
current period as compared to the year earlier period. At November 30, 1997,
the Company operated 15 restaurants as compared to 28 restaurants at November
30, 1996.
Interest Expense
- -----------------
Interest expense decreased to $406,000 in the current six month period, as
compared to $472,000 in the prior year period, principally reflecting lower
average debt levels outstanding in the current period.
Provision for Income Taxes
- -----------------------------
The Company's federal income tax returns for fiscal years 1991 through 1996,
inclusive, have been examined by the Internal Revenue Service and the IRS has
issued reports for such years reflecting substantial adjustments to previously
filed tax returns. The Company, through its outside counsel, has appealed
many of the proposed adjustments. If the Company is not successful in its
appeal, the Company's net operating loss carryovers would be substantially
absorbed by the proposed adjustments and significant amounts of additional
taxes and penalties would be due. Due to the possible loss of net operating
loss carryovers, the Company is providing for estimated income taxes on its
current operating results.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
During the first half of the current year, the Company's principal sources of
cash were from principal payments received on notes receivable of $570,000,
and from operating activities totaling $311,000. The Company's principal uses
of cash in the current six month period were for scheduled debt repayments and
payoffs of $681,000, and property renovations and improvements of $171,000.
Cash and cash equivalents at November 30, 1997, amounted to $2,989,000 (which
includes unexpended marketing fund contributions of $951,000), as compared to
$2,940,000 (including $683,000 in unexpended marketing fund contributions) at
May 31, 1997, and $1,943,000 (including $647,000 in unexpended marketing fund
contributions) at November 30, 1996. At November 30, 1997, the Company's
working capital deficiency was $662,000, as compared to $1,120,000 at May 31,
1997, and $1,793,000 one year ago. The Company has been able to operate with
a working capital deficiency because restaurant operations are conducted
primarily on a cash basis, rapid turnover and frequent deliveries allow a
limited investment in inventories, and accounts payable for food, beverages
and supplies usually become due after the receipt of cash from the related
sales.
Due to the high cost of suitable real estate and sites, the intense
competition in the industry, and the Company's strategy of focusing on
franchising, the Company does not currently plan to develop new Company
restaurants in fiscal year 1998. Accordingly, in addition to scheduled debt
maturities/repayments for the remainder of fiscal year 1998 of approximately
$642,000, the Company's capital requirements for the balance of the current
fiscal year relate primarily to necessary or required capital improvements to
existing restaurants and certain enhancements to corporate and restaurant
management information systems. Such capital expenditures will be made as
required, and will take into consideration the Company's current liquidity and
working capital positions, as well as anticipated future cash flows from
operations and other sources.
In connection with its strategy of focusing future growth in franchising
restaurants, the Company has sold restaurants to franchisees and provided
financing for such sales. Total notes receivable, which amounted to $8.9
million at November 30, 1997 (of which approximately $985,000 is due within
one year), principally consist of notes arising from the sale of 39
restaurants to franchisees. Nine of these notes were delinquent at November
30, 1997, and during the current six month period, the Company reacquired two
restaurants from former franchisees in exchange for notes receivable. In
certain cases, the Company has instituted proceedings for the collection of
such delinquent notes, which may result in the reacquisition of the restaurant
by the Company. The Company currently plans to sell additional restaurants to
franchisees, and it is expected that such sales, when and if consummated, will
also be financed by the Company.
As a result of fewer restaurants operated by the Company and a decline in
same-store-sales, the Company's total revenues declined by 36% and 39% in the
current quarter and six month periods, respectively, as compared to the year
earlier periods. The Company currently plans to sell to franchisees up to
seven of the restaurants that it operated at November 30, 1997. If the
Company consummates the sale of additional planned restaurants, the Company's
future total revenues would decline.
The Company expects that competition in the quick-service restaurant industry
will continue to be intense and will remain so in the foreseeable future,
resulting in continued pressure on sales and restaurant operating profit.
Accordingly, continued emphasis will be placed on franchising non-traditional
restaurants and certain of the Company's existing restaurants, improving the
performance of Company and franchised restaurants, developing new products,
enhancing the effectiveness of marketing programs, and overall improvement and
possible refinements to the entire system. The Company's ability to sustain
profitability and improve cash flow and liquidity, will, among other factors,
be dependent on improvement of sales and operating margins in existing Company
and franchised restaurants, sustaining and improving the collection of royalty
fees, note payments, and lease obligations due to the Company from
franchisees, successful expansion of its franchise base, its ability to
control future operating costs, and the successful operation of existing and
new restaurants on a profitable basis.
Seasonality
- -----------
The Company does not expect seasonality to affect its operations in a
materially adverse manner. However, the Company's restaurant sales during its
first and fourth fiscal quarters have historically been higher that its second
and third quarters.
PART II. OTHER INFORMATION
ITEM L. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, Legal Proceedings, in the Company's
Annual Report on Form
10-K for the fiscal year ended May 31, 1997 for a description of certain
pending legal matters involving the Company. Other than as described
below, there have been no material developments in the other legal matters
since May 31, 1997.
In November 1996, an appeal was argued before the Supreme Court of New
Hampshire following a bench trial and ruling in July 1995 that the Company had
breached its fiduciary duty to a partnership resulting in the award of damages
to the partnership in the amount of $241,000 plus costs and attorney fees
(case number 91-E1077 filed in the Superior Court Northern District of
Hillsborough County, New Hampshire). On December 30, 1997, the Supreme Court
issued its opinion on the appeal ruling in favor of the Company, vacating the
damage award against the Company, and remanding to a trial court for a
determination of damages, if any, for the alleged breach of fiduciary duty to
the partnership. The Supreme Court also reversed the award of costs and
attorney fees.
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 7, 1998 By: /s/ Jerry W. Woda
----------------- --------------------
JERRY W. WODA
Senior Vice President,
Chief Financial Officer, and
Principal Accounting Officer
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