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, 1998
-------------------
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 6, 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)
February 28, May 31,
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------- -------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund contributions of. . . . . $ 3,092,000 $ 2,940,000
$1,040,000 and $683,000, respectively)
Notes and accounts receivable (net of allowances for uncollectible accounts of $188,000. 1,755,000 2,000,000
and $289,000, respectively)
Food and supplies inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,000 192,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,000 191,000
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,198,000 5,323,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,665,000 8,073,000
Property and equipment - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,012,000 11,500,000
Intangible assets - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,821,000 7,128,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416,000 457,000
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,112,000 $32,481,000
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . $ 4,254,000 $ 4,737,000
Current portion of notes payable and capitalized lease obligations . . . . . . . . . . . 1,242,000 1,706,000
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,496,000 6,443,000
Long-term portion of notes payable and capitalized lease obligations . . . . . . . . . . 5,776,000 6,288,000
Deferred franchise fees and other deferred income. . . . . . . . . . . . . . . . . . . . 1,733,000 2,088,000
Accrued liabilities and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,210,000 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,344,000) (7,733,000)
17,504,000 17,115,000
Note receivable from sale of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (563,000) (563,000)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,044,000) (1,044,000)
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,897,000 15,508,000
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,112,000 $32,481,000
- ---------------------------------------------------------------------------------------- -------------- ------------
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended February 28,
--------------------------------
REVENUES 1998 1997
- -------------------------------------------------------------------------- -------------------------------- -----------
<S> <C> <C>
Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,209,000 $ 6,397,000
Revenues from franchised restaurants . . . . . . . . . . . . . . . . . . . 907,000 1,116,000
Net gain from sales of restaurants . . . . . . . . . . . . . . . . . . . . 1,000 227,000
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,000 139,000
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,000 116,000
-------------------------------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,379,000 7,995,000
----------- -----------
EXPENSES
- --------------------------------------------------------------------------
Restaurant operating costs (including lease costs paid to Kavala, Inc. of
$41,000 and $39,000, respectively). . . . . . . . . . . . . . . . . . . . 3,948,000 6,041,000
General, administrative and franchise costs. . . . . . . . . . . . . . . . 688,000 1,225,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 357,000 446,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,000 221,000
-------------------------------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,187,000 7,933,000
----------- -----------
Income before provision for income taxes . . . . . . . . . . . . . . . . . 192,000 62,000
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . 71,000 -
-------------------------------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,000 $ 62,000
=========== ===========
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .00 $ .00
================================ ===========
Weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . 27,119,000 28,244,000
========================================================================== ================================ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended February 28,
-------------------------------
REVENUES 1998 1997
- -------------------------------------------------------------------------- ------------------------------- -----------
<S> <C> <C>
Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,341,000 $22,818,000
Revenues from franchised restaurants . . . . . . . . . . . . . . . . . . . 3,262,000 3,337,000
Net gain from sales of restaurants . . . . . . . . . . . . . . . . . . . . 17,000 884,000
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,000 395,000
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278,000 215,000
----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,444,000 27,649,000
----------- -----------
EXPENSES
- --------------------------------------------------------------------------
Restaurant operating costs (including lease costs paid to Kavala, Inc. of
$124,000 and $137,000, respectively). . . . . . . . . . . . . . . . . . . 12,749,000 21,186,000
General, administrative and franchise costs. . . . . . . . . . . . . . . . 2,406,000 4,043,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 1,086,000 1,440,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 694,000
------------------------------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,841,000 27,363,000
------------ -----------
Income before provision for income taxes . . . . . . . . . . . . . . . . . 603,000 286,000
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . 214,000
------------------------------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 389,000 $ 286,000
=========== ===========
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .01 $ .01
=============================== ===========
Weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . 27,119,000 28,244,000
========================================================================== =============================== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended February 28,
--------------------------------
OPERATING ACTIVITIES: 1998 1997
-------------------------------- ------------
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 389,000 $ 286,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 760,000 1,095,000
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . 326,000 345,000
Net gain from sales of restaurants. . . . . . . . . . . . . . . . . . . . . . (17,000) (884,000)
Changes in assets and liabilities:
(Increase) in accounts receivable . . . . . . . . . . . . . . . . . . . . . . (153,000) (68,000)
Decrease in food and supplies inventories . . . . . . . . . . . . . . . . . . 20,000 137,000
Decrease (increase) in other current assets . . . . . . . . . . . . . . . . . 12,000 (60,000)
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . 22,000 76,000
(Decrease) in accounts payable and accrued liabilities. . . . . . . . . . . . (483,000) (1,874,000)
Decrease (increase) in deferred fees and accrued liabilities. . . . . . . . . (272,000) 263,000
----------- ------------
Net Cash Provided By (Used For) Operating Activities. . . . . . . . . . . . . 604,000 (684,000)
----------- ------------
INVESTMENT ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (215,000) (534,000)
Proceeds from sales of restaurants. . . . . . . . . . . . . . . . . . . . . . 20,000 807,000
Payments received on notes receivable . . . . . . . . . . . . . . . . . . . . 719,000 830,000
-------------------------------- ------------
Cash Provided By Business Investment Activities . . . . . . . . . . . . . . . 524,000 1,103,000
---------- ------------
FINANCING ACTIVITIES:
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,400,000) (1,183,000)
New borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424,000
Cash (Used For) Financing Activities. . . . . . . . . . . . . . . . . . . . . (976,000) (1,183,000)
------------ ------------
INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . 152,000 (764,000)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . 2,940,000 3,103,000
----------- ------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,092,000 $ 2,339,000
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 604,000 $ 696,000
================================ ============
Loans to franchisees in connection with sales of restaurants. . . . . . . . . $ 345,000 $ 3,270,000
============================================================================= ================================ ============
Acquisition of restaurants in exchange for notes receivable . . . . . . . . . $ 432,000
============================================================================= ================================ ============
See accompanying notes to consolidated financial statements.
</TABLE>
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 FEBRUARY 28,
-------------------------------
1998 1997
----------- ----------
<S> <C> <C> <C>
Royalties $ 930,000 $ 896,000
Franchise and development fees 51,000 220,000
Sublease rental income (expense) - net (74,000) -
----------- ----------
Total $ 907,000 $1,116,000
=========== ==========
Nine Months Ended February 28,
-------------------------------
1998 1997
----------- ----------
Royalties $2,738,000 $2,796,000
Franchise and development fees 296,000 474,000
Sublease rental income - net 38,000 67,000
Cancellation of development agreements 190,000 -
----------- ----------
Total $3,262,000 $3,337,000
=========== ==========
</TABLE>
3. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
-------------- ------------
<S> <C> <C>
Notes receivable . . . . . . . . . . . . . . . . . . $ 8,684,000 $ 9,437,000
Royalties and other receivables due from franchisees 817,000 867,000
Other. . . . . . . . . . . . . . . . . . . . . . . . 107,000 58,000
-------------- ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . 9,608,000 10,362,000
Less allowance for doubtful accounts . . . . . . . . (188,000) (289,000)
-------------- ------------
9,420,000 10,073,000
Less notes receivable due after one year . . . . . . (7,665,000) (8,073,000)
-------------- ------------
Notes and accounts receivable-current portion. . . . $ 1,755,000 $ 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 11%.
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 2,457,500 of such options subsequently
expired or were terminated. There are currently 2,543,200 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, 2.1 million
of the currently outstanding options are principally exercisable at $ .75 per
share, and the remaining options outstanding under the plan are exercisable at
prices between $2.00 and $2.69 per share (average exercise price of $2.32 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).
6. EARNINGS PER SHARE
In the third quarter of the current fiscal year, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), for
all periods presented. Under FAS 128, earnings per share is computed by
dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Earnings per share under FAS 128 for all prior periods presented was the same
as the previously reported amounts. Diluted earnings per share was the same
as earnings per share for all periods presented since the exercise price of
outstanding options and warrants to purchase common shares was greater than
the average market price of the common shares.
7. RELATED PARTY TRANSACTIONS
In February 1998, the Company entered into a management agreement with Mr. Gus
Boulis, chairman of the board and chief executive officer of the Company,
whereby the Company will manage an existing Miami Subs Grill restaurant owned
by Mr. Boulis for a fee of 5.0% of the restaurant's gross restaurant sales.
The agreement can be cancelled by either party upon notice.
In November 1997, an existing Miami Subs Grill restaurant which had been
closed by the Company, was reopened as a co-branded test unit with Arthur
Treacher's, Inc. ("Treacher's"). Treacher's is operating and managing the
restaurant, and the Company and Treacher's will share in the net profits (if
any) from operation of the restaurant based on the percentage relationship of
each concept's sales in the unit to total unit sales. Treacher's and the
Company have also agreed to expand the co-branding test to an additional six
to nine restaurants. Mr. Bruce Galloway, who is a director of the Company, is
also chairman of the board and a director of Treacher's.
8. SUBSEQUENT EVENT
On March 3, 1998, the Company reported that it had received a letter of intent
containing an offer to be acquired by Arthur Treacher's, Inc. in a stock for
stock merger. In order to fully consider the offer, the Company's board of
directors has engaged Raymond James & Associates, Inc. to advise the board on
the financial aspects of the offer.
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 25 at February 28, 1997, to 15 at February 28, 1998. 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 and operate then the traditional free-standing restaurants, and sales
at these non-traditional restaurants, and resulting royalties payable to the
Company, are typically less than those of traditional restaurants. During the
nine months ended February 28, 1998, 10 new non-traditional restaurants were
opened by franchisees, and at February 28, 1998, 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 nine months ended February 28, 1998 are not necessarily indicative
of the results that may be expected for the Company's fiscal year.
During the nine months ended February 28, 1998, 14 franchised restaurants
opened (of which ten were non-traditional restaurants), and eight 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 February 28, 1998, there were 192
restaurants in the system, consisting of 15 Company operated restaurants and
177 franchised restaurants. At February 28, 1997, there were 185 restaurants
in the system, consisting of 25 Company operated restaurants and 160
franchised restaurants.
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1998 TO FEBRUARY 28, 1997
- ------------------------------------------------------------------------------
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 32.7% to $5.4 million in the third quarter of the current
year, as compared to $8.0 million in the third quarter of the prior year.
Restaurant Sales
- -----------------
The Company's total restaurant sales decreased approximately 34.2% to $4.2
million in the current quarter, as compared to $6.4 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 25 at February 28, 1997, to 15 at February
28, 1998.
"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 0.9% in the current quarter (an improvement
from (6.4)% in the first quarter and (4.6)% in the second quarter of the
current year). Since March 1997, the Company has implemented strategic
changes to its operating and marketing programs, provided alternative
lower-priced menu items, and focused on improving the level of service in its
restaurants. Principally as a result of these changes, the Company's core
Florida restaurants have experienced weekly comparable increases in unit guest
counts throughout the current quarter, and improved unit volumes and
comparable sales levels as compared to earlier periods. Although there can be
no assurances that these efforts will continue to be successful, the Company
intends to continue these strategies and efforts in order to improve unit
sales volumes and profitability.
At February 28, 1998, Company operated restaurants were located in Florida
(8), Texas (6), and New York (1). Five of the Company operated restaurants
located in Texas are currently under contract to be sold, however, there can
be no assurance that the sale of these restaurants will be consummated.
Revenues From Franchised Restaurants
- ---------------------------------------
Revenues from franchised restaurants amounted to $907,000 in the current
quarter, as compared to $1,116,000 in the prior year quarter.
In the current year's third quarter, one non-traditional franchised restaurant
opened and three franchised restaurants closed. In the year earlier quarter,
seven new franchised restaurants opened, and four restaurants previously
operated by the Company were franchised. Total initial franchise fees from
the opening/sale of franchised restaurants were $51,000 in the current
quarter, as compared to $220,000 in the prior year quarter. Royalty income in
the current quarter amounted to $930,000, as compared to $896,000 in the prior
year quarter. Although royalty income increased in the current quarter, a
decrease of approximately 5.8% 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 February 28, 1998, approximately
22% of franchised units have been granted a temporary reduction or waiver from
paying royalty fees, and royalty fees were not paid or accrued on 18% of
certain other franchised units due to delinquency in the payment of royalties
to the Company.
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, in order to improve guest
counts and unit sales in the restaurants and become more competitive on price
points with other fast-food operators. Principally as a result of these
efforts, same store sales at franchised restaurants improved to (5.8)% in the
current quarter, as compared to (10.4)% and (8.0)% in the first and second
quarters, respectively, of the current year. 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 efforts will ultimately be successful in reversing the same store sales
trends, increasing unit volumes, or improving restaurant profitability.
At February 28, 1998, the Company subleased/leased 18 properties to
franchisees which were delinquent in their lease payments to the Company, and
the Company leased two properties from landlords which are currently vacant,
resulting in net rental expense in the current quarter. Eight of the
delinquent leases are in formal default and the Company is pursuing lease
termination and eviction of the tenants. Subsequent to February 28, 1998, the
Company terminated five of the leases that were in default and reacquired
possession of the restaurants. The Company is currently evaluating the
reacquired restaurants and plans to sell the restaurants and re-lease the
properties to new franchisees. However, there can be no assurance that the
restaurants will be sold or leased on terms acceptable to the Company.
System-Wide Sales
- ------------------
System-wide sales, which includes sales from Company operated and franchised
restaurants, amounted to approximately $36.1 million in the current quarter,
as compared to $36.5 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 5.6% in the current
quarter (an improvement from (10.1)% in the first quarter and (7.3)% in the
second 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.
Net Gain From Sales of Restaurants
- ---------------------------------------
Although no Company operated restaurants were sold in the current quarter,
five Company operated
restaurants are under contract to be sold. As a part of the Company's
strategy to focus growth and operations in franchising, the Company sold four
Company restaurants to franchisees in the year earlier quarter, resulting in
net gains recognized by the Company of $227,000. 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 February 28, 1998, total deferred gains from the sales of
restaurants amounted to $847,000, and notes receivable from the sale of
restaurants totaled approximately $8.6 million. Five Company operated
restaurants are currently under contract to be sold, however, there can be no
assurance that the sale of these restaurants will be consummated.
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 $159,000 in the
current quarter, as compared to $139,000 in the year earlier quarter. At
February 28, 1998 fifteen notes receivable were delinquent, of which eight
notes were formally in default. Subsequent to February 28, 1998, the Company
reacquired five restaurants from franchisees whose notes payable to the
Company were in default. The Company is currently evaluating the reacquired
restaurants and plans to sell the restaurants to new franchisees. However,
there can be no assurance that the restaurants will be sold or leased on terms
acceptable to the Company. The Company is pursuing collection of the
remaining notes which are in default or delinquent, which may result in the
reacquisition of additional restaurants 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.
Restaurant Operating Costs
- ----------------------------
Restaurant operating costs in Company operated restaurants amounted to $3.9
million or 93.8% of sales in the current quarter, as compared to $6.0 million
or 94.4% of sales in the prior year quarter. The modest improvement in
restaurant operating costs as a percent of sales in the current quarter is
principally the result of a change in the mix of Company restaurants resulting
from sales of restaurants. Company restaurant margins in the current quarter
have been affected by higher food and paper costs as a result of certain lower
prices currently being offered in the restaurants, and higher labor costs as
the Company has increased staffing in order to improve customer service.
General, Administrative and Franchise Costs
- -----------------------------------------------
General, administrative and franchise costs amounted to $688,000 or 12.8% of
total revenue in the current quarter, as compared to approximately $1.2
million or 15.3% of total revenue in the prior year quarter. As discussed in
Item 1. Legal Proceedings, in connection with the court's ruling on the appeal
of a pending legal matter, the Company reduced its legal accrual by $159,000
in the current quarter, which reduced general and administrative expenses in
the current quarter.
Effective in the third quarter 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
resulting in a decrease in recurring operating costs as compared to the year
earlier level. The Company is maintaining strict cost controls in all areas
of its business, and does not currently expect any significant increases to
current levels.
Depreciation and Amortization
- -------------------------------
Depreciation and amortization decreased in the current quarter due to the
reduction in the number of restaurants operated by the Company in the current
quarter as compared to the year earlier period. At February 28, 1998, the
Company operated 15 restaurants as compared to 25 restaurants at February 28,
1997.
Interest Expense
- -----------------
Interest expense decreased to $194,000 in the current quarter, as compared to
$221,000 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 NINE MONTHS ENDED FEBRUARY 28, 1998 TO FEBRUARY 28, 1997
- ------------------------------------------------------------------------------
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 36.9% to $17.4 million for the current nine
month period, as compared to $27.6 million for the nine month period last
year.
Restaurant Sales
- -----------------
The Company's total restaurant sales decreased approximately 41.5% to $13.3
million in the current nine month period, as compared to $22.8 million in the
prior year nine 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 25 at February
28, 1997, to 15 at February 28, 1998.
"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 4.0% in the current period. Since March 1997,
the Company has implemented strategic changes to its operating and marketing
programs, provided alternative lower-priced menu items, and focused on
improving the level of service in its restaurants. Principally as a result of
these changes, the Company's core Florida restaurants have experienced weekly
comparable increases in unit guest counts since August 1997, and improved unit
volumes and comparable sales levels as compared to earlier periods. Same
store sales in Company operated restaurants has improved from (6.4)% and
(4.6)% in the current year's first and second quarters, respectively, to
(0.9)% in the third quarter of this year. Although there can be no assurance
that these efforts will continue to be successful, the Company intends to
continue these strategies and efforts in order to improve unit sales volumes
and profitability.
At February 28, 1998, Company operated restaurants were located in Florida
(8), Texas (6), and New York (1). Five of the Company operated restaurants
located in Texas are currently under contract to be sold, however, there can
be no assurance that the sale of these restaurants will be consummated.
Revenues From Franchised Restaurants
- ---------------------------------------
Revenues from franchised restaurants amounted to $3,262,000 in the current
nine month period, as compared to $3,337,000 in the prior year period.
In the current nine month period, 14 franchised restaurants opened (of which
10 were non-traditional restaurants), two franchised restaurants were acquired
by the Company, three Company operated restaurants were sold/transferred to
franchisees, and nine franchised restaurants closed. In the prior year nine
month period, 14 franchised restaurants opened, and 12 restaurants operated by
the Company were franchised. Total initial franchise fees from the
opening/transfer of franchised restaurants were $296,000 in the current
period, as compared to $474,000 in the year earlier period. Royalty income in
the current period amounted to $2,738,000, as compared to $2,796,000 in the
prior year period. A decrease of approximately 8.3% 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 has adversely affected royalty income in the current nine
month period. At February 28, 1998, approximately 22% of franchised
restaurants have been granted a temporary reduction or waiver from paying
royalty fees, and royalty fees were not paid or accrued on 18% of certain
other franchised restaurants due to delinquency in the payment of royalties to
the Company.
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, in order to improve guest counts and
unit sales in the restaurants and become more competitive on price points with
other fast-food operators. Principally as a result of these efforts, same
store sales at franchised restaurants improved to (5.8)% in the current
quarter, as compared to (10.4)% and (8.0)% in the first and second quarters,
respectively, of the current year. 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.
At February 28, 1998, the Company subleased/leased 18 properties to
franchisees which were delinquent in their lease payments to the Company, and
the Company leased two properties from landlords which are currently vacant,
resulting in a reduction in net rental income in the current period. Eight of
the delinquent leases are in formal default and the Company is pursuing lease
termination and eviction of the tenants. Subsequent to February 28, 1998, the
Company terminated five of the leases that were in default and reacquired
possession of the restaurants. The Company is currently evaluating the
reacquired restaurants and plans to sell the restaurants and re-lease the
properties to new franchisees. However, there can be no assurance that the
restaurants will be sold or leased on terms acceptable to the Company.
Included in franchise fee income in the current nine month 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 $109.7 million in the current nine
month period, as compared to $112.8 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 7.8% in the current
nine 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.
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/transferred three restaurants to franchisees
during the current nine month period. Twelve Company restaurants were sold to
franchisees in the year earlier period. Total net gains recognized from sales
of Company restaurants in the current period amounted to $17,000, as compared
to $884,000 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 February 28,
1998, total deferred gains from the sales of restaurants amounted to $847,000,
and notes receivable from the sale of restaurants totaled approximately $8.6
million. Five Company operated restaurants are currently under contract to be
sold, however, there can be no assurance that the sale of these restaurants
will be consummated.
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 $546,000 in the
current nine month period, as compared to $395,000 in the year earlier period.
At February 28, 1998 fifteen notes receivable were delinquent, of which eight
notes were formally in default. Subsequent to February 28, 1998, the Company
reacquired five restaurants from franchisees whose notes payable to the
Company were in default. The Company is currently evaluating the reacquired
restaurants and plans to sell the restaurants to new franchisees. However,
there can be no assurance that the sale of these restaurants will be
consummated. The Company is pursuing collection of the remaining notes which
are in default or delinquent, which may result in the reacquisition of
additional restaurants 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.
Restaurant Operating Costs
- ----------------------------
Restaurant operating costs in Company operated restaurants amounted to $12.7
million or 95.6% of sales in the current nine month period, as compared to
$21.2 million or 92.8% 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.
General, Administrative and Franchise Costs
- -----------------------------------------------
General, administrative and franchise costs amounted to $2.4 million or 13.8%
of total revenue in the current nine month period, as compared to $4.0 million
or 14.6% 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
resulting in a 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, and a reduction of
$159,000 in the accrual for a pending legal matter (see Item 1. Legal
Proceedings). 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 nine 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 February 28, 1998,
the Company operated 15 restaurants as compared to 25 restaurants at February
28, 1997.
Interest Expense
- -----------------
Interest expense decreased to $600,000 in the current nine month period, as
compared to $694,000 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 current nine month period, the Company's principal sources of cash
were from principal payments received on notes receivable of $719,000, net
cash provided by operating activities of $604,000, and new borrowings of
$424,000. The Company's principal uses of cash in the current nine month
period were for scheduled debt repayments and payoffs of $1,400,000, and
capital expenditures of $215,000. Cash and cash equivalents at February 28,
1998, amounted to $3,092,000 (which includes unexpended marketing fund
contributions of $1,040,000), as compared to $2,940,000 (including $683,000 in
unexpended marketing fund contributions) at May 31, 1997, and $2,339,000
(including $651,000 in unexpended marketing fund contributions) at February
28, 1997. At February 28, 1998, the Company's working capital deficiency
improved to $298,000, as compared to $1,120,000 at May 31, 1997, and
$1,706,000 one year ago. The Company has been able to operate with a working
capital deficiency because restaurant sales are conducted primarily on a cash
basis, rapid turnover and frequent deliveries allow a limited investment in
inventories, and food, beverages and supplies are purchased on credit.
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. Accordingly, in addition to scheduled debt maturities/repayments
for the remainder of fiscal year 1998 of approximately $398,000, the Company's
capital requirements for the balance of the current fiscal year relate
primarily to necessary or required capital improvements to 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 $8.7
million at February 28, 1998 (of which approximately $780,000 is due within
one year), principally consist of notes arising from sales of restaurants to
franchisees. Fifteen notes receivable at February 28, 1998 were delinquent,
of which eight notes were formally in default. Subsequent to February 28,
1998, the Company reacquired five restaurants from franchisees whose notes
payable to the Company were in default. The Company is pursuing collection of
the remaining notes which are in default or delinquent, which may result in
the reacquisition of additional restaurants by the Company. At February 28,
1998, the Company 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 32.7% and 36.9% in
the current quarter and nine month periods, respectively, as compared to the
year earlier periods. At February 28, 1998, the Company had five Company
operated restaurants under contract to be sold. If the Company consummates
the sale of these 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. Additionally, the Company has
co-branded a Miami Subs Grill restaurant with Arthur Treacher's, Inc., and has
agreed to expand the co-branding test to an additional six to nine
restaurants.
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 such 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 5. OTHER INFORMATION
On February 27, 1998, the Company received a letter from the NASDAQ Stock
Market, Inc. ("NASDAQ") notifying the company that its common stock is not in
compliance with the new bid price requirement, pursuant to NASD Marketplace
Rule 4450(a)(5), which became effective February 23, 1998. The letter
provides the Company 90 calendar days, which expires May 28, 1998, in order to
regain compliance with this standard. The Company may regain compliance if
its common stock trades at or above the minimum requirement of $1.00 per share
for at least 10 consecutive trade days. If the stock does not regain
compliance within 90 days, NASDAQ will issue a de-listing letter which will
identify the review procedures available to the Company. The Company's board
of directors is considering available alternatives in order to come into
compliance with this new requirement.
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: April 6, 1998 By: /s/ Jerry W. Woda
-----------------------
JERRY W. WODA
Senior Vice President,
Chief Financial Officer,
and Principal Accounting
Officer
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<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1998
<PERIOD-END> FEB-28-1998 FEB-28-1998
<CASH> 3,092,000 3,092,000
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<RECEIVABLES> 1,943,000 1,943,000
<ALLOWANCES> (188,000) (188,000)
<INVENTORY> 172,000 172,000
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<PP&E> 15,101,000 15,101,000
<DEPRECIATION> (4,089,000) (4,089,000)
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<TOTAL-LIABILITY-AND-EQUITY> 31,112,000 31,112,000
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