FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
As of August 21, 1998, 28,244,340 shares of common stock were outstanding. On
such date, the aggregate market value of the common stock held by
non-affiliates of the Registrant, was approximately $7,121,000 (amount
computed based on the closing price on August 21, 1998).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement which the Registrant will file
with the Securities and Exchange Commission in connection with the Company's
1998 annual meeting of shareholders, are incorporated by reference in Part III
of this Form 10-K.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Miami Subs Corporation (hereinafter referred to as "Miami Subs" or the
"Company") develops, owns, operates and franchises restaurants under the name
"Miami Subs" and "Miami Subs Grill" ("Restaurants"). The Restaurants are
designed to offer fresh quality food delivered in a fast-food environment
similar to other fast food restaurants, and the quality, freshness and variety
found at casual dining restaurants. The Restaurants feature fresh food
prepared and cooked to order including hot and cold submarine sandwiches,
various ethnic foods such as gyros, pita sandwiches and greek salads, flame
grilled hamburgers and chicken breasts, chicken wings, fresh salads, ice cream
and other desserts. The diverse, moderately priced menu is designed to
attract a broad customer base and to encourage frequent visits. The
Restaurants feature a distinct exterior highlighted with pink and blue neon
and an interior decorated in tropical motif. The appearance is intended to
create strong guest appeal and serves as an effective marketing tool.
The Company historically expanded principally through a strategy of leasing
existing free-standing fast food restaurants and other properties, and
converting them to Miami Subs Restaurants. Although the Company still
believes that the strategy of converting existing properties will continue,
competition for closed and under-performing properties has increased
significantly in recent years, and fewer sites suitable for conversion are
available. Accordingly, growth of traditional free-standing Restaurants
requires more costly unit development, including the acquisition of raw land
and construction of buildings. In order to supplement its traditional
free-standing unit growth, the Company has developed various programs for
franchisees involving non-traditional development, consisting of smaller
Restaurants that could be located on tollroads, at airports, in convenience
stores, retail and office buildings, and other non-traditional outlets.
Typically, these Restaurants are smaller than the traditional Miami Subs Grill
Restaurants and, where necessary, have involved modifications to food
preparation and the menu. Because of the size and menu changes, sales at
these non-traditional Restaurants typically are less than those of traditional
Restaurants. During 1998, 19 Miami Subs restaurants opened, of which 12 were
new non-traditional restaurants. At May 31, 1998, there were 28
non-traditional franchise restaurants in the system.
In addition to focusing its growth principally in non-traditional franchise
development, the Company intends to pursue co-branding opportunities in the
future. Since 1994, the Company has been involved in a co-branding agreement
with Baskin-Robbins USA, Co. ("Baskin-Robbins) whereby certain Baskin-Robbins
ice cream products are sold in approved Restaurants pursuant to a separate
franchise agreement with Baskin-Robbins. As of May 31, 1998, 34 Company and
franchised Restaurants sold Baskin-Robbins ice cream products. In August
1998, the Company entered into a co-branding licensing agreement with Arthur
Treacher's, Inc. ("Arthur Treacher's), the third largest quick service seafood
chain in the United States. Currently five existing Restaurants are selling
Arthur Treacher's signature products. The Company intends to expand this
arrangement during fiscal year 1999 to enable additional approved Restaurants
to co-brand with Arthur Treacher's. Also in August 1998, the Company entered
into a co-branding licensing agreement with BAB Holdings, Inc. which will
provide for Miami Subs to sell Big Apple Bagels, My Favorite Muffins and
Brewster's Coffee in the Restaurants. The Company intends to begin a test of
the sale of such products in a Company Restaurant during fiscal year 1999.
Competition in the quick service restaurant industry has been and continues to
be intense and is expected to remain so in the future. In response to intense
industry competition, aggressive pricing and marketing by larger national
chains, and in an attempt to mitigate same-store-sales declines and lower
average unit volumes that the Miami Subs Grill system has been experiencing,
in 1998 the Company implemented strategic changes to its marketing programs,
began offering alternative, lower-priced menu items in the Restaurants, and
focused on improving customer service. Although these programs resulted in a
lower check average and higher food costs as a percentage of sales during
1998, overall guest counts increased significantly and same-store-sales trends
improved throughout the year. The Company intends to continue to pursue this
strategic operating direction, however, there can be no assurance that these
strategies, or other marketing and operating strategies that the Company may
take, will be successful.
As of May 31, 1998, the Company's restaurant system consisted of 191
Restaurants, of which 130 of the Restaurants were located in Florida, 53
Restaurants were located in 15 other states, and eight Restaurants were
located in Ecuador, Puerto Rico, and the Dominican Republic. Of the total
Restaurants in the system, 17 were Company operated and 174 were operated by
franchisees. The Company intends to focus its future growth on franchise
development, with the objective of expanding the franchise system principally
in existing markets, as well as nationally and internationally. In part due
to the limited number of Restaurants located in other states and the impact
that this has on the ability to advertise, the Restaurants operating outside
of Florida have generally not been as successful as the Restaurants operating
in Florida. Additionally, as a result of the current concentration of
restaurants in Florida, the Company and its Florida franchisees could be more
severely affected by any adverse economic conditions in Florida than would a
more geographically diversified restaurant company.
At May 31, 1998, franchisees operated 174 of the 191 Restaurants in the
system. The Company receives royalty and advertising fees from its franchised
Restaurants, and also receives lease/sub-lease rental income from certain of
the franchised Restaurants (see Item 2. "Properties"). In addition, the
Company has guaranteed certain third party equipment and property leases for
certain franchisees and has financed the sale of Restaurants to franchisees.
Accordingly, the Company's success and future profitability will be
substantially dependent on the management skills and success of its existing
franchisees. In addition, expansion of the chain will be dependent on the
Company's ability to attract qualified franchisees who will be able to
successfully develop and operate Restaurants.
Miami Subs Corporation was incorporated in the State of Florida by Mr. Gus
Boulis ("Boulis") during August 1990, and, through a series of transactions,
the Company acquired the worldwide rights to develop, own, operate, and
franchise Miami Subs restaurants from Boulis, the founder of the concept, and
from privately-owned companies owned by or affiliated with him. The remaining
rights were acquired during 1991 through a merger with QSR, Inc.
THE MIAMI SUBS CONCEPT
Miami Subs Restaurants feature moderately priced lunch, dinner and snack
foods, including hot and cold submarine sandwiches, various ethnic foods such
as gyros, pita sandwiches and Greek salads, flame grilled hamburgers and
chicken breasts, chicken wings, fresh salads, ice cream and other desserts.
Soft drinks, iced tea, coffee, beer and wine are also offered. Menu items are
generally priced between $1.49 and $5.29.
Freshness and quality of breads, produce and other ingredients are strongly
emphasized. The menu includes low-fat selections such as salads, grilled
chicken breasts, vegetarian items and non-fat frozen yogurt which the Company
believes are perceived as nutritious and appealing to health conscious
consumers. The Company believes it has become known for certain "signature"
foods, such as grilled chicken on pita bread, cheese steak subs, and gyros on
pita bread.
Pursuant to an agreement with Baskin-Robbins, Baskin-Robbins ice cream
products may be sold in approved Restaurants pursuant to a separate franchise
agreement with Baskin-Robbins. Under the agreement, the Company performs
training, operational monitoring and guidance over the Baskin-Robbins products
being sold in the Restaurants. As of May 31, 1998, seven of the Company
operated Restaurants and 27 franchised Restaurants sell Baskin-Robbins ice
cream products. Branded ice cream products, including Edy's, McArthur's,
Hershey's, Blue Bunny, Colombo, Bressler's, Haagen-Daz, and other local
brands, are also sold in 50 other Restaurants.
The Restaurants feature a distinctive decor unique to the Miami Subs concept.
The exterior of free-standing restaurants feature an unusual roof design and
neon pastel highlights for easy recognition. Interiors have a tropical motif
in a neon pink and blue color scheme with murals of fish, mermaids, flamingos
and tropical foliage. Exteriors and interiors are brightly lit to create an
inviting, active ambience to distinguish the Restaurants from its competitors.
At May 31, 1998, 155 of the existing Miami Subs Restaurants are located in
freestanding buildings, consisting of approximately 2,000 to 5,000 square
feet.
Miami Subs Restaurants are typically open seven days a week, generally open at
10:30 am, and many of the Restaurants have extended late-night hours. Indoor
service is provided at a walk-up counter where the customer places an order
and is given an order number and a drink cup. The customer then proceeds to a
self service soda bar while the food is prepared to order. Typical time from
order to pick-up is approximately five minutes.
Drive-thru service is provided at principally all free-standing Restaurants.
All standard menu items are generally available at the drive-thru, but the
drive-thru menu board is simplified to speed ordering. After ordering via
intercom, the customer proceeds to the first of two windows. At the first
window, drinks are served and payments taken. This allows the customer to
enjoy a soft drink while proceeding to the next window for the completion of
the order. The Company estimates that drive-thru sales account for
approximately 35% - 45% of sales.
NON-TRADITIONAL RESTAURANTS
Restaurants in the Miami Subs system historically were developed primarily
through conversions of existing, free-standing properties. Although the
Company still believes that the strategy of converting existing properties
will continue, competition for closed and under-performing properties has
increased significantly in recent years, and fewer acceptable sites suitable
for conversion have been available. Accordingly, the Company has developed
and initiated various programs for franchisees involving non-traditional
restaurant development, consisting of smaller Restaurants that could be
located on tollroads, at airports, in convenience stores, retail and office
buildings, and other non-traditional locations. Typically, these Restaurants
are smaller and less costly to develop and operate than the traditional Miami
Subs Grill Restaurants. With the exception of many of the airport locations,
the sales in the non-traditional Restaurants are typically significantly lower
than the standard free-standing Restaurant. In addition, where appropriate,
certain modifications have been made to food preparation and delivery
procedures and the standard menu has been revised.
During fiscal year 1998, 12 of the 19 new Restaurants opened by franchisees
were non-traditional Restaurants. At May 31, 1998, there were 28
non-traditional Restaurants in the system, including five Restaurants located
in convenience store/gas stations; eight Restaurants located in airport
facilities; seven Restaurants located in retail locations; two located in
turnpike facilities; and two "in-line" locations.
CO-BRANDING
In addition to co-branding with Baskin-Robbins in 34 Restaurants, and selling
branded ice cream products in 50 other Restaurants, in 1998 the Company began
a co-branding test with Arthur Treacher's providing for the sale of certain of
Arthur Treacher's signature products in Miami Subs restaurants. Currently
five existing Restaurants are selling Arthur Treacher's products, and several
additional Company and franchised Restaurants have been approved and are
scheduled to introduce Arthur Treacher's products over the next several
months. Depending on the initial results from these co-branded Restaurants,
the Company may expand the program throughout the system.
Also in August 1998, the Company entered into a co-branding licensing
agreement with BAB Holdings, Inc. which will provide for Miami Subs to sell
Big Apple Bagels, My Favorite Muffins and Brewster's Coffee in the
Restaurants. The Company intends to begin a test of the sale of such products
in a Company Restaurant during fiscal year 1999.
The Company intends to consider additional co-branding opportunities to sell
branded products in the Restaurants in the future.
COMPANY OPERATED RESTAURANTS
During the past two years, the Company has focused its growth and operating
strategy on franchising, and as part of this strategy, the Company
sold/franchised many of its Company operated Restaurants to franchisees. At
May 31, 1998, the Company operated 17 Restaurants, of which eight are located
in Florida, six are located in Texas, two are located in Georgia, and one is
located in New York. The Company currently plans on franchising the
Restaurants located in Texas and Georgia.
The Company's Restaurants are utilized for many purposes which are integral to
the entire system. New menu items are tested and restaurant management and
operating personnel are trained in the Company's procedures. In addition, the
Company's operating standards are further refined, and the Company acquires a
better understanding of day-to-day management and operating concerns of its
franchisees.
In an effort to maximize operating profits and to enhance product quality for
Company operated and franchised Restaurants, the Company maintains a
purchasing department that works with suppliers on behalf of the entire system
to obtain high quality products and services at competitive prices. The
purchasing department approves all products and product specifications, and
has also private labeled certain products. The Company utilizes a national
food distributor which enables the Company and its franchisees to order and
receive deliveries of most of its food and paper products directly through the
distributor. The Company believes that this arrangement is efficient and cost
effective and facilitates quality control. The Company believes that a
majority of its franchisees use the Company's suppliers; however, a franchisee
may use an alternate source for its supply needs that complies with Company
specifications upon approval by the Company.
The Company utilizes kitchen equipment in its Restaurants which is designed to
be versatile, improve product consistency, and facilitate menu modifications.
In conjunction with a major supplier, the Company assisted in the development
of a four-chain broiler intended to replace chargrills and convection ovens.
The Company also utilizes computerized fryers with automatic lift-arms. The
equipment is programmed to follow instructions for cooking temperatures and
times. Fresh meats and other products, which are purchased in pre-weighed
individual servings, can be consistently cooked-to-order automatically. The
Company requires that its franchisees also utilize this kitchen equipment to
maximize consistency and speed of food preparation.
FRANCHISE OPERATIONS
Strategy. The Company's future growth will be focused on increasing the
number of franchised Restaurants, through both traditional and non-traditional
Restaurants.
The primary criteria considered by the Company in the review and approval of
franchisees are prior experience in operating restaurants or other comparable
business experience, and capital available for investment. The Company
believes that it has attracted a number of franchisees with significant
experience in the restaurant industry as a result of the unique aspects of the
concept.
Franchisee Support Services. The Company maintains a staff of operations
personnel to train and assist franchisees in opening new Restaurants and to
monitor the operations of existing Restaurants. These services are provided
as part of the Company's franchise program. New franchisees are required to
complete a six-week training program. Upon the opening of a new franchised
Restaurant, Company representatives are typically sent to the Restaurant to
assist the franchisee during the opening period. These Company
representatives work in the Restaurant to monitor compliance with the
Company's standards and provide additional on-site training of the
franchisee's restaurant personnel.
The Company also provides development and construction support services to its
franchisees. Plans and specifications for the Restaurants are reviewed and
approved by the Company before improvements begin. The Company's personnel
typically visit the facility during construction to meet with the franchisee's
site contractor and to verify that construction standards are met.
Training. New franchisees are required to complete a six-week program that
features various aspects of day-to-day operations and certification in all
functioning positions. The program consists of formal classroom training and
in--restaurant training, including human resources, accounting, purchasing and
labor and food handling laws. Generally, a team of Company employed personnel
is provided for new Restaurants to conduct hands-on training and to ensure
compliance with Company standards. Standard operating manuals are provided to
each franchisee. Classroom training is performed in the Company's training
center located in Fort Lauderdale, Florida.
Quality Assurance. To maintain uniformly high standards of appearance,
service, food and beverage quality, the Company has adopted policies and
implemented a monitoring program. Franchisees are expected to adhere to Miami
Sub's specifications and standards in connection with the selection and
purchase of products used in the operation of the Restaurant. Detailed
specifications are provided for the products used, and franchisees must
request Company approval for any deviations. The Company does not generally
sell equipment, supplies or products to its franchisees. The franchise
agreement requires franchisees to operate their Restaurants in accordance with
the Company's requirements. Ongoing advice and assistance is provided to
franchisees in connection with the operation and management of each
Restaurant. The Company's area consultants are responsible for oversight of
franchisees and periodically visit each Restaurant. During such visits, the
area consultant completes a report which contains evaluations on speed of
preparation for menu items, quality of delivered product, cleanliness of
Restaurant facilities as well as evaluations of managers and other personnel.
The area consultants also make unannounced follow-up visits to ensure
adherence to the Company's operational specifications.
The Company also utilizes information about the Restaurants which is received
from customers on the Company's standardized "comment card" and maintains a
toll-free telephone number to receive customer comments.
Franchise Agreements. Each franchisee is required to execute a standard
franchise agreement with the Company relating to the operation of each
Restaurant. Currently, the term of the franchise agreement is between five
and 20 years, and the initial franchise fee is $25,000 for traditional
Restaurants and $15,000 for certain non-traditional Restaurants. The
franchise agreement provides for the payment of a monthly royalty fee based on
gross sales for the term of the franchise agreement, and additional charges
based on a percentage of sales to support various system-wide and local
advertising funds.
Development Agreements. In addition to individual franchise agreements,
the Company from time to time has entered into development agreements with
certain franchisees. The development agreement establishes a minimum number
of Restaurants that the franchisee is committed to open in an agreed upon
exclusive area during the term of the agreement. In addition to receiving a
franchise fee for each Restaurant opened, the Company also receives a
non-refundable fee based upon the number of Restaurants committed to be opened
under the agreement.
During fiscal year 1998, 19 new franchised Restaurants opened, including seven
traditional Restaurants and 12 non-traditional Restaurants, and thirteen
franchised restaurants closed. At May 31, 1998, there were 174 franchise
Restaurants in the system, including 28 non-traditional Restaurants.
Restaurant Locations
At May 31, 1998, there were 191 Miami Subs Restaurants operating in the
system, of which 17 were operated by the Company and 174 were operated by
franchisees. The following table sets forth the locations of such
Restaurants.
<TABLE>
<CAPTION>
Company
Operated Franchised
-------- ----------
<S> <C> <C>
Florida 8 122
North Carolina - 14
South Carolina - 5
Georgia 2 1
Tennessee - 3
Virginia - 2
Kentucky - 2
Texas 6 3
New Jersey - 3
New York 1 1
Pennsylvania - 5
Indiana - 1
Connecticut - 1
New Hampshire - 1
Kansas - 1
Minnesota - 1
Ecuador - 5
Puerto Rico - 2
Dominican Republic - 1
-------- ----------
Total 17 174
================== ======== ==========
</TABLE>
MARKETING
The physical facility of each Miami Subs Restaurant represents a key component
of the Company's marketing strategy. The Restaurants have well-lit exteriors
featuring a distinctive roof design, an abundance of pastel neon lights and a
lively interior featuring a tropical motif which the Company believes creates
strong appeal during the day and night.
The Company's advertising programs principally utilize radio and print, and
carries the theme that Miami Subs offers a variety of menu selections at
competitive, fast food prices. The Company's radio advertisements are
broadcast principally in markets where there are sufficient Restaurants to
benefit from such advertisements.
EMPLOYEES
At August 1, 1998, the Company employed 243 full-time and 251 part-time
employees. 464 of the employees work in the Company's Restaurants and the
remaining 30 are administrative, supervision, and support personnel. None of
the employees belong to a labor union, and the Company believes its employee
relations to be good.
As the operation and expansion of the Miami Sub's restaurant business is
dependent upon attracting, training and keeping competent employees,
restaurant management applicants receive screening and training. The Company
emphasizes continuing restaurant management and crew training and holds
various meetings stressing communications and skill development for managers.
Benefit programs for eligible employees include group life, health,
hospitalization, paid vacations and a bonus plan for restaurant managers.
TRADEMARKS
The Company believes its trademarks and service marks are of significant value
and an important marketing tool. The Company has registered the marks "Miami
Subs and Design" and "Miami Subs Grill and Design" with the United States
Patent and Trademark Office. In addition, the marks have been registered in
the states of Florida, Georgia, South Carolina, and Louisiana, and various
foreign countries.
COMPETITION
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional
or national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the
number of, and particular locations of, competing restaurants. Factors such
as inflation, increases in food, labor and energy costs, the availability and
cost of suitable sites, fluctuating interest and insurance rates, state and
local regulations and licensing requirements and the availability of an
adequate number of hourly paid employees can also adversely affect the fast
food restaurant industry. Multi-unit restaurant chains like the Company can
also be substantially adversely affected by publicity resulting from food
quality, illness, injury, or other health concerns. Major chains, which have
substantially greater financial resources and longer operating histories than
the Company, dominate the fast food restaurant industry. The Company competes
primarily on the basis of location, food quality, price and menu diversity.
Changes in pricing or other marketing strategies by these competitors can have
an adverse impact on the Company's sales, earnings and growth. In response to
intense industry competition and aggressive pricing and marketing by larger
national chains and in an attempt to mitigate same-store-sales declines that
the Miami Subs Grill system has been experiencing, in 1998 the Company
introduced lower-priced items on its menu and competitively priced new
products. There can be no assurance that these strategies will be successful
or that the Company will be able to compete effectively against its
competitors. In addition, with respect to the sale of franchises, the Company
competes with many franchisors of restaurants and other business concepts for
qualified and financially capable franchisees.
REGULATION
The Company is subject to a variety of federal, state, and local laws
affecting the conduct of its business. Operating restaurants are subject to
various sanitation, health, fire and safety standards and restaurants under,
or proposed for construction, are subject to state and local building codes,
zoning restrictions and alcoholic beverage regulations. Difficulties in
obtaining or failure to obtain required licenses or approvals could delay or
prevent the development or opening of a new Restaurant in a particular area.
The Company is also subject to the Federal Fair Labor Standards Act, which
governs minimum wages, overtime, working conditions and other matters, and the
Americans with Disabilities Act, which became effective in January 1992. The
Company believes that it is in compliance with such laws, and that its
Restaurants have all applicable licenses as required by governmental
authorities.
Alcoholic beverage control regulations require each of the Restaurants that
sell such products to apply to a state authority and, in certain locations,
county and municipal authorities for a license or permit to sell alcoholic
beverages on the premises. Typically, licenses must be renewed annually and
may be revoked or suspended for cause at any time. The Company has never had
an alcoholic beverage license revoked. Alcoholic beverage control regulations
relate to numerous aspects of the daily operations of the Restaurants,
including minimum age of customers and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. At May 31, 1998, the Company offered for
sale beer and wine in 13 of its existing Company operated Restaurants. Each
of these Restaurants have current alcoholic beverage licenses permitting the
sale of these beverages.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to
recover damages from an establishment which wrongfully served alcoholic
beverages to such person. The Company carries liquor liability coverage as
part of its existing comprehensive general liability insurance and has never
been named as a defendant in a lawsuit involving "dram-shop" statutes.
The Company believes that it is in compliance with the applicable federal and
state laws concerning designated non-smoking and smoking areas in its Company
operated Restaurants.
The Company is subject to regulations of the Federal Trade Commission (the
"FTC") and various states relating to disclosure and other requirements in the
sale of franchises and franchise operations. The FTC's regulations require
the Company to timely furnish prospective franchisees a franchise offering
circular containing prescribed information. Certain state laws also require
registration of the franchise offering with state authorities. Other states
regulate the franchise relationship, particularly concerning termination and
renewal of the franchise agreement. The Company believes that it is in
compliance with the applicable franchise disclosure and registration
regulations of the FTC and the various states that it operates in.
ITEM 2. PROPERTIES
At May 31, 1998, the Company owned or leased the following number of
restaurant properties which are used in its operations:
<TABLE>
<CAPTION>
Company
Restaurants(1)
--------------
<S> <C>
Lease land and building 14
Lease land and own building 4
Own land and building 1
--------------
Total 19
============================================================================================ ==============
(1) Includes two restaurants which were temporarily closed for renovations at May 31, 1998.
Restaurants
Leased/Sub-Leased to
Franchisees or Others
---------------------
<S> <C>
Lease land and building 56
Lease land and own building 2
Own land and building 2
---------------------
Total 60
============================================================================================ =====================
(1) Includes two restaurants which were temporarily closed for renovations at May 31, 1998.
</TABLE>
Properties leased by the Company generally provide for an initial term of up
to 20 years and renewal terms of five to 20 years. The leases generally
provide for fixed rentals plus adjustments based on changes in the consumer
price index or percentage rentals on gross sales. Restaurants and other
facilities are leased/sub-leased to franchisees or others on terms which are
generally similar to the terms in the Company's lease with the third-party
landlord, except that in certain cases the rent has been increased. The
Company remains liable for all lease costs when properties are sub-leased to
franchisees or others. Ten of the Company restaurants and 11 of the
restaurants leased/subleased to franchisees are located outside of Florida.
The Company owns its executive headquarters, an approximate 8,500 square foot
facility located in Fort Lauderdale, Florida and leases an approximate 4,200
square foot facility in Fort Lauderdale which is used for training and product
development and testing. The Company believes that these facilities are
adequate and suitable for its current needs.
ITEM 3. LEGAL PROCEEDINGS
In January, 1992, the Company filed a Petition for Declaratory Judgment
against the Murray Family Trust/Kenneth Dash Partnership ("F/D"), case number
91-E1077 filed in the Superior Court Northern District of Hillsborough County,
New Hampshire. The Company sought to dissolve an alleged joint venture
between the Company and F/D to develop Miami Subs restaurants in New England.
F/D opposed the dissolution, counterclaimed, and sought damages arising from
amounts expended in developing new locations and lost profits from the
termination of the joint venture. A bench trail was completed in April 1995,
and although the court issued its ruling in favor of the Company on virtually
all of F/D's counterclaims, it awarded F/D damages in the amount of $241,000
plus costs and attorney fees. The case was appealed by both the Company and
F/D, and in November 1996, the appeal was argued before the Supreme Court of
New Hampshire. In December 1997, the Supreme Court ruled in favor of the
Company, vacated the damage award, reversed the award of attorney fees, and
remanded to a trial court for a determination of damages for the alleged
breach of fiduciary duty to F/D. In May 1998, the trial court awarded F/D
compensatory damages in the amount of $200,000, which is being appealed by the
Company.
The Company and its subsidiaries are parties to various other legal actions
arising in the ordinary course of business. The Company is vigorously
contesting these actions, and currently believes that the outcome of such
cases will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A - not applicable
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Marketsm under the symbol "SUBS." The following table shows high
and low sales price information as quoted by Nasdaq for the two most recent
fiscal years. Such quotations reflect inter-dealer prices, without retail
mark-ups, markdowns or commissions, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ------
<S> <C> <C>
Fiscal Year Ended May 31, 1997
First Quarter $1 13/16 $31/32
Second Quarter 1 15/16 9/16
Third Quarter 31/32 19/32
Fourth Quarter 1 5/32 1/2
Fiscal Year Ended May 31, 1998
First Quarter $ 1 5/32 $41/64
Second Quarter 1 1/32 5/8
Third Quarter 5/8 3/8
Fourth Quarter 3/4 9/16
</TABLE>
There are approximately 1,800 holders of record of the Company's Common Stock.
This number includes shareholders of record who may hold stock for the
benefit of others. The Company does not consider it practical to attempt to
determine the number of individuals who are beneficial owners of its shares.
The Company has never paid cash dividends on its Common Stock and does not
expect to pay such dividends in the foreseeable future. Management currently
intends to retain all available funds for the development of its business and
for use as working capital.
The Company's common stock is subject to delisting from the Nasdaq National
Market since it is not in compliance with the minimum bid price requirement
pursuant to NASD Marketplace Rule 4450(a)(5), which became effective February
23, 1998. The Company requested a temporary exception to the new listing
requirement, which was denied by the Nasdaq Listing Qualifications Panel. On
August 4, 1998, the Company requested an oral hearing to appeal the decision
of the Panel. Pending the outcome of the oral hearing, delisting of the
Company's common stock has been stayed. There can be no assurance of the
outcome of the oral hearing. If the Company's Common Stock were delisted, it
would likely begin trading on the OTC Bulletin Board.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data in the following table is qualified
in its entirety by, and should be read in conjunction with the consolidated
financial statements and notes thereto and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
------------ ------------ ------------ ------------
MAY 31, May 31, May 31, May 31,
1998 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Restaurant sales $ 18,088 $ 28,180 $ 32,398 $ 27,148
Franchise revenues 4,293 4,514 4,720 3,920
Net gain from sales of restaurants/other 25 868 117 112
Interest income and other revenues 1,028 871 677 716
------------ ------------ ------------ ------------
Total 23,434 34,433 37,912 31,896
------------ ------------ ------------ ------------
Restaurant operating costs 17,138 26,042 28,573 23,942
General, administrative and franchise costs 3,336 5,667 6,351 6,390
Depreciation and amortization 1,444 1,837 1,942 1,544
Interest expense - net 780 903 741 581
Loss on impairment of restaurants - 375 - -
------------ ------------ ------------ ------------
Total 22,698 34,824 37,607 32,457
------------ ------------ ------------ ------------
Income (loss) before taxes 736 (391) 305 (561)
Provision for income taxes 211 - - -
------------ ------------ ------------ ------------
Net income (loss) $ 525 $ (391) $ 305 $ (561)
============ ============ ============ ============
Basic and diluted net income (loss) per share $ .02 $ ( .01) $ .01 $ ( .02)
============ ============ ============ ============
BALANCE SHEET DATA
Total assets $ 30,326 $ 32,481 $ 36,361 $ 33,042
Current assets 5,456 5,323 6,066 5,180
Notes receivable - long term 6,076 8,073 3,778 3,530
Current liabilities 5,368 6,443 7,645 6,785
Long-term portion of notes payable and capitalized leases 5,613 6,288 7,955 6,249
Deferred franchise fees and other deferred income 1,577 2,088 1,712 2,241
Shareholders' equity 16,033 15,508 16,943 15,053
OTHER DATA
Restaurants opened during the year 19 18 24 21
============ ============ ============ ============
Restaurants at year end:
Company operated 17 17 37 30
Franchised 174 170 140 130
------------ ------------ ------------ ------------
Total 191 187 177 160
============ ============ ============ ============
System-wide sales $ 148,637 $ 151,201 $ 145,517 $ 138,963
Average annual sales per restaurant(1) $ 841 $ 869 $ 888 $ 920
============ ============ ============ ============
Percent decrease in "same store sales" (7.0)% (5.5)% (3.8)% (3.6)%
=============================================================== ============ ============ ============ ============
(All dollar amounts in thousands, except for per share amounts)
Year Ended
------------
May 31,
1994
------------
<S> <C>
OPERATIONS STATEMENT DATA
Restaurant sales $ 22,190
Franchise revenues 3,207
Net gain from sales of restaurants/other 332
Interest income and other revenues 513
------------
Total 26,242
------------
Restaurant operating costs 19,925
General, administrative and franchise costs 5,936
Depreciation and amortization 1,318
Interest expense - net 381
Loss on impairment of restaurants 2,452
------------
Total 30,012
------------
Income (loss) before taxes (3,770)
Provision for income taxes -
------------
Net income (loss) $ (3,770)
============
Basic and diluted net income (loss) per share $ ( .16)
============
BALANCE SHEET DATA
Total assets $ 26,102
Current assets 6,832
Notes receivable - long term 2,197
Current liabilities 5,964
Long-term portion of notes payable and capitalized leases 2,832
Deferred franchise fees and other deferred income 2,185
Shareholders' equity 13,403
OTHER DATA
Restaurants opened during the year 29
============
Restaurants at year end:
Company operated 19
Franchised 129
------------
Total 148
============
System-wide sales $ 125,706
Average annual sales per restaurant(1) $ 945
Percent decrease in "same store sales" (3.1)%
=============================================================== ============
(All dollar amounts in thousands, except for per share amounts)
<FN>
(1) Computed for all Restaurants that were in operation for the entire 12 months during the year, except for certain
non-traditional restaurants.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
INTRODUCTION
The Company's revenues are derived principally from operating, franchising,
and financing Miami Subs restaurants. Franchise revenues consist principally
of initial franchise fees, area development fees, monthly royalty fees, and
net sublease rental income. In the normal course of its business, the Company
also derives revenues from the sale of restaurants to franchisees, and
interest income from financing the sale of restaurants to franchisees.
Restaurant operating costs include food and paper costs, direct restaurant
labor and benefits, marketing fees and costs, and all other direct costs
associated with operating the restaurants. General, administrative and
franchise costs relate both to Company owned restaurants and the Company's
franchising operations.
The Company's revenues and expenses are directly affected by the number, sales
volumes, and profitability of its Company operated restaurants. Revenues, and
to a lesser extent expenses, are also affected by the number and sales volumes
of franchised restaurants. Initial franchise fees and the net gain on sales
of restaurants are directly affected by the number of restaurants opened by
franchisees and the number of restaurants sold to franchisees during the
period.
In connection with the Company's strategy of focusing growth and operations in
franchising, the Company restructured and reduced its corporate infrastructure
and sold or transferred 24 Company operated restaurants to franchisees during
fiscal years 1998 and 1997. As a result of the reduction in the number of
Company operated restaurants, the Company's revenues declined by 31.9% and
9.2% in 1998 and 1997, respectively, and as a result of the corporate
restructuring, the Company reduced its general and administrative costs by
41.1% in 1998. The Company currently plans on franchising up to eight of the
restaurants that it operates at May 31, 1998. Upon the consummation of the
sale of these restaurants, the Company's future revenues would also decline.
The Company's ability to sustain profitability will, among other factors, be
dependent on improvement of sales and operating margins in existing Company
and franchised restaurants, successful expansion of its franchise base, its
ability to control future operating costs, and the successful opening and
operation of new restaurants by franchisees.
During fiscal year 1998, the Company reacquired seven restaurants from
franchisees, sold/transferred five restaurants to franchisees, and franchisees
opened 19 new restaurants. Also during 1998, two Company operated restaurants
and 13 franchised restaurants closed. At May 31, 1998, there were 191
restaurants in the system, consisting of 17 Company operated and 184
franchised restaurants.
COMPARISON OF FISCAL YEAR 1998 TO 1997
Total Revenues
Total Company revenues declined 31.9% to $23.4 million in fiscal year 1998, as
compared to $34.4 million in fiscal year 1997. The decrease in total revenues
was primarily due to the conversion from Company to franchise operations and
the resulting sales of Company operated restaurants to franchisees, which in
large part occurred during the second half of fiscal year 1997.
Restaurant Sales
The Company's total restaurant sales decreased approximately 35.8% to $18.1
million in 1998, as compared to $28.2 million in 1997. The decrease in sales
resulted principally from franchising during the second half of 1997 many of
the restaurants previously operated by the Company. During 1997, the Company
sold/transferred 19 restaurants to franchisees, and during 1998, the Company
sold/transferred five restaurants to franchisees.
In order to address declining unit level sales and customer counts in its
restaurants, in 1998 the Company implemented strategic changes to its
marketing programs, added alternative, lower-priced items to its menu, and
focused on improving customer service. As a result of these strategic
changes, the Company experienced overall higher guest counts in many of its
core restaurants during the year and a lower per customer check average.
Throughout the year, same-store-sales in Company operated restaurants improved
each quarter during 1998, from negative 6.4% in the first quarter of the year
to positive 2.6% in the fourth quarter. For the year, same store sales for
Company operated restaurants (computed for restaurants operated by the Company
since December 1995) was negative 2.6%. There can be no assurance that these
strategic changes will continue to result in an improvement in same store
sales.
At May 31, 1998, Company operated restaurants were located in Florida (8);
Texas (6), Georgia (2), and New York (1). The Company currently plans to sell
to franchisees the restaurants located in Texas and Georgia, and three of
these restaurants are under contract for sale to franchisees. There can be no
assurance that the remaining restaurants will be sold on terms acceptable to
the Company.
Revenues From Franchised Restaurants
Revenues from franchised restaurants declined approximately 4.9% to $4.3
million in 1998, as compared to $4.5 million in 1997. Franchise revenues in
1997 included $400,000 in franchise fees from the sale of Company restaurants
to franchisees, and franchise revenues in 1998 included $190,000 resulting
from the expiration and termination of an area development agreement with a
former franchisee.
In 1998, 19 franchised restaurants opened (of which 12 were non-traditional
restaurants), the Company sold/transferred five restaurants to franchisees and
reacquired seven restaurants from franchisees, and 13 franchised restaurants
closed. At May 31, 1998, there were 174 franchised restaurants in the system,
as compared to 170 at May 31, 1997.
In August 1998, the Company began to initiate throughout the system strategic
changes to marketing programs, additions to the standard menu to add certain
lower-priced items, and implemented programs to improve customer service. The
Company believes that these programs were largely responsible for an
improvement in same-store-sale trends at franchised restaurants experienced
each quarter during the year, from negative 10.4% in the first quarter of the
year to negative 5.1% in the fourth quarter. For the year, same-store-sales
at franchised restaurants (computed for restaurants operated by franchisees
since December 1995) was negative 7.5%.
Royalty revenues have been adversely affected in 1998 and 1997 due to the
non-payment and non-accrual of royalty fees from a number of franchised
restaurants. At May 31, 1998, 24% of the franchised units in operation have
been granted a temporary waiver from paying royalty fees or were delinquent
and not paying royalty fees to the Company.
The Company leases/subleases principally Miami Subs restaurant facilities to
franchisees and revenues have been adversely affected in 1998 from the
delinquency and default of certain of these leases/subleases. During 1998,
the Company defaulted and terminated seven delinquent leases and acquired
possession of the restaurants. Six of these restaurants were subsequently
sold/transferred and released to new franchisees and one restaurant closed as
a result of an eminent domain proceeding. At May 31, 1998, 10 restaurants
which are leased/subleased to franchisees are in various stages of
delinquency. Although the Company currently expects that these delinquencies
will be satisfactorily resolved by the franchisees, there can be no assurance
that it will not be necessary for the Company to acquire possession of these
or other restaurants in the future.
System-Wide Sales
System-wide sales, which includes sales from Company operated and franchised
restaurants, decreased approximately 1.7% to $148.6 million in 1998, as
compared to $151.2 million in 1997. "Same store sales" for all units in the
system improved each quarter during the year, from negative 10.1% in the first
quarter, to negative 4.5% in the fourth quarter. For the year,
same-store-sales for all restaurants (which was computed for restaurants open
since December 1995) declined by approximately 7.0%.
Net Gain From Sales of Restaurants
In connection with the Company's strategy to focus growth and operations in
franchising, the Company sold/transferred five restaurants to franchisees
during 1998, as compared to 19 restaurants in 1997. Gains on the sales 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. As a result of sales of restaurants, the Company recognized net
gains of $25,000 in 1998, as compared to $868,000 in 1997. Total deferred
gains on the sales of restaurants amounted to $757,000 at May 31, 1998 and
total notes receivable (principally resulting from sales of restaurants)
amounted to $7.1 million at May 31, 1998. Nine individual notes receivable
which are due from four franchisees and totaling approximately $1.8 million
(net of deferred fees and credits) were delinquent in monthly payments due to
the Company at May 31, 1998. Although the Company intends to sell other
existing restaurants in the future, there can be no assurance that any such
sales will be consummated or that gains will be realized.
Restaurant Operating Costs
Restaurant operating costs amounted to $17.1 million or 94.7% of Company
restaurant sales in 1998, as compared to $26.0 million or 92.4% of sales in
1997. The increase in restaurant operating costs as a percent of sales was
principally due to the higher food cost percentage incurred at the Company's
restaurants as a result of certain lower priced menu items that the Company
began offering in the restaurants in connection with the Company's efforts
during the year to increase guest counts and stimulate sales.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $3.3
million or 14.2% of total revenue in 1998, as compared to $5.7 million or
16.5% of total revenue in 1997. General, administrative and franchise costs
in 1998 reflect a reduction in accruals for certain legal matters which were
resolved during the year and other non-recurring reductions totaling
approximately $284,000. Included in general, administrative and franchise
costs in 1997 are accrued severance costs payable to the Company's former
president, an accounting charge associated with the resolution of an
outstanding note receivable, and costs associated with relocating and
consolidating an administrative facility. Such costs and other charges
amounted to approximately $601,000 in 1997.
In connection with the Company's strategy of focusing growth and operations in
franchising and as a result of the sale of Company restaurants to franchisees,
the Company has been able to restructure and reduce its corporate
infrastructure and the number of non-restaurant employees, and has taken other
cost control measures resulting in a decrease in recurring administrative
costs in 1998 as compared to 1997. The Company is maintaining strict cost
controls in all areas of its business, and does not currently expect any
significant increase to current operating levels.
Depreciation Expense
Depreciation expense, which principally relates to Company operated
restaurants, declined by 21.4% to 1.4 million in 1998 as a result of sales of
Company restaurants to franchisees.
Interest Expense
Interest expense decreased 13.6% to $780,000 in 1998, as compared to $903,000
in 1997, principally reflecting lower average debt levels outstanding in
1998.
Loss on Impairment of Restaurants
During 1997 and in conjunction with the Company's franchise strategy, several
Company operated restaurants were identified for sale to franchisees. At May
31, 1997, the Company provided a reserve of $375,000 to provide for the
intended sale of certain of these restaurants which have not yet been sold.
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. The Company believes that the accruals that
it has provided in connection with this matter are adequate. 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 FISCAL YEAR 1997 TO 1996
Total Revenues
Total Company revenues declined 9.2% to $34.4 million in fiscal year 1997, as
compared to $37.9 million in fiscal year 1996. The decrease in total revenues
was primarily due to fewer Company operated restaurants which was in part
offset by a significant increase in net gains from the sale of restaurants to
franchisees, and to lower average sales in Company operated restaurants.
Restaurant Sales
The Company's total restaurant sales decreased approximately 13.0% to $28.2
million in 1997, as compared to $32.4 million in 1996. The decrease in sales
resulted principally from a reduction in the number of Company operated
restaurants, from 37 at the end of 1996, to 17 at the end of 1997. During
1997, the Company sold 19 restaurants to franchisees and closed one
restaurant.
"Same-store-sales" in Company operated Restaurants (which is computed for
restaurants open since December 1994) declined by approximately 3.1% in 1997.
The Company attributes the decline in same-store-sales in large part to
intense industry competition and aggressive price discounting and marketing by
larger national chains. In response to such conditions, the Company
introduced lower priced "combo meals" and utilized extensive discounting and
couponing programs in an effort to increase customer traffic and sales. In
the fourth quarter of the current year, the Company ceased the couponing
programs, lowered prices of certain products on its menu, introduced a
selection of lower priced products, and commenced direct local store marketing
efforts.
At May 31, 1997, Company operated restaurants were located in Florida (9);
Texas (6), South Carolina (1), and New York (1).
Revenues From Franchised Restaurants
Revenues from franchised restaurants declined approximately 4.4% to $4.5
million in 1997, as compared to $4.7 million in 1996. Franchise revenues in
1997 included $400,000 in franchise fees from the sale of Company restaurants
to franchisees, and franchise revenues in 1996 included $324,000 resulting
from the termination of nine area development agreements with franchisees.
In 1997, 18 franchised restaurants opened (of which 11 were non-traditional
restaurants), the Company sold 19 of its restaurants to franchisees, and seven
franchised restaurants closed. Royalty income in 1997 amounted to $3,680,000,
as compared to $3,752,000 in 1996. Although the number of franchised
restaurants increased during 1997, a decrease of approximately 5.6% in
"same-store-sales" at franchised restaurants, lower average unit sales at
franchised restaurants, and the non-payment and non-accrual of royalty fees
from an increased number of franchisees adversely affected royalty income in
the current year. At May 31, 1997, 19% of the franchised units in operation
had been granted a temporary waiver from paying royalty fees or were
delinquent and not paying royalty fees to the Company.
System-Wide Sales
System-wide sales, which includes sales from Company operated and franchised
restaurants, increased by approximately 3.9% to $151.2 million in 1997, as
compared to $145.5 million in 1996. "Same store sales" for all units in the
system (which is computed for restaurants open since December 1994) declined
by approximately 5.5% in 1997 reflecting continuation of intense industry-wide
competition and aggressive price discounting and marketing by large national
chains, and extensive price discounting and couponing by the Company and its
franchisees.
Net Gain From Sales of Restaurants
As a part of its strategy to focus future growth and operations in franchising
restaurants, the Company sold/transferred 19 restaurants to franchisees during
1997. Gains on the sale of restaurants are 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. As a result of these sales, the Company
recognized net gains of $868,000 in 1997, as compared to $117,000 in 1996.
Total deferred gains on the sales of restaurants amounted to $839,000 at May
31, 1997. Although the Company intends to sell other existing restaurants in
the future, there can be no assurance that any such sales will be consummated
or that gains will be realized.
Restaurant Operating Costs
Restaurant operating costs amounted to $26.0 million or 92.4% of sales in
1997, as compared to $28.6 million or 88.2% of sales in 1996. The increase in
restaurant operating costs as a percent of sales was a result of lower average
unit sales, the impact of price discounting and couponing promotions, and
higher direct operating costs, including cost of sales and labor.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $5.7
million or 16.5% of total revenue in 1997, as compared to $6.4 million or
16.8% of total revenue in 1996. Included in general, administrative and
franchise costs in 1997 are accrued severance costs payable to the Company's
former president, an accounting charge associated with the resolution of an
outstanding note receivable, and costs associated with relocating and
consolidating an administrative facility. Such costs and other charges
amounted to $601,000 in 1997.
During the second half of 1997, the Company eliminated certain administrative
and support positions, implemented a reduction in office/administration
facilities, and took other cost control measures resulting in a significant
decrease in such costs over the year earlier levels.
Interest Expense
Interest expense increased to $903,000 in 1997, as compared to $741,000 in the
prior year, principally reflecting higher average debt levels outstanding in
1997.
Loss on Impairment of Restaurants
During 1997 and in conjunction with the Company's franchise strategy, several
Company operated restaurants were identified for sale to franchisees. At May
31, 1997, the Company provided a reserve of $375,000 to provide for the
intended sale of certain restaurants.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company's principal sources of cash were from net cash
provided by operating activities of $1,205,000, principal payments received on
notes receivable of $845,000, and borrowings of $425,000. The Company's
principal uses of cash in 1998 were for scheduled debt repayments and
maturities of $1,714,000 and property renovations and improvements of
$264,000. Cash and cash equivalents at May 31, 1998, amounted to $3,457,000
(which includes unexpended marketing fund contributions of $970,000), as
compared to $2,940,000 (including $683,000 in unexpended marketing fund
contributions) at May 31, 1997. At May 31, 1998, the Company's working
capital improved to $88,000, as compared to a deficiency of $1,234,000 at May
31, 1997. The Company is able to operate with a low working capital position
or 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.
The principal sources of funds for fiscal year 1999 are expected to be derived
from operating activities and principal payments due on notes receivable. The
Company's ability to achieve or increase its projected sources of funds in
1999 will be dependent on a number of factors, including improvement of sales
and restaurant operating margins in both Company and franchised restaurants,
improved collections of royalty fees, the timely payment of lease/sublease
obligations of certain franchisees, and the timely repayment of principal and
interest on notes payable to the Company. There can be no assurance that the
Company will be able to achieve or increase its projected sources of funds in
1999.
Although the Company does not currently plan to develop any new Company
restaurants in fiscal year 1999, it does intend to make certain capital
expenditures to certain Company operated restaurants in connection with a
co-branding agreement with Arthur Treacher's, Inc. and BAB Holdings, Inc. The
estimated cost of these improvements, other planned capital improvements and
funds required for the acquisition of a restaurant from a franchisee are not
expected to exceed approximately $650,000. In addition to these planned
capital expenditures, the Company's scheduled debt maturities/repayments are
approximately $1.1 million in 1999.
During fiscal years 1998 and 1997, and in connection with its strategy of
focusing growth and operations in franchising, the Company sold/transferred 24
restaurants to franchisees. The Company provided financing for such sales
totaling approximately $6.5 million, and total notes receivable amounted to
$7.1 million at May 31, 1998, of which approximately $1.1 million is due in
1999. During 1998, the Company reacquired seven restaurants which had
previously been sold to franchisees and financed by the Company as a result of
defaults under the notes payable to the Company. Six of these restaurants
were subsequently sold/transferred to new franchisees and one restaurant
closed. Nine individual notes receivable which are due from four franchisees
and totaling approximately $1.8 million (net of deferred fees and credits)
were delinquent in monthly payments due to the Company at May 31, 1998. The
Company currently plans to sell to franchisees eight of the restaurants that
it operates at May 31, 1998, and it is expected that such sales, when and if
consummated, will also be financed by the Company.
Principally as a result of the sale of Company operated restaurants over the
past two years, the Company's total revenues declined by 31.9% in 1998 and
9.2% in 1997. The Company currently plans to sell to franchisees eight of the
restaurants that it operates at May 31, 1998. If the Company consummates the
sale of additional planned restaurants, the Company's future total revenues
would decline.
The Company expects that competition in the quick-service restaurant industry
will continue to be intense and will remain so in the foreseeable future,
resulting in continued pressure on sales and operating profit, and slower
development of traditional restaurants by franchisees. The Company intends to
pursue a co-branding licensing agreement with Arthur Treacher's, Inc. which
would enable both Company and franchised restaurants to sell certain Arthur
Treacher's signature products in Miami Subs restaurants. The Company also
intends to pursue other co-branding opportunities. In addition to pursing
these opportunities, continued emphasis will be placed on franchising
non-traditional restaurants and certain of the Company's existing restaurants,
improving the performance of Company and franchised restaurants, developing
new products, enhancing the effectiveness of marketing programs, and overall
improvement and possible refinements to the entire system. The Company's
ability to significantly expand and develop additional Company restaurants
will ultimately depend on a number of factors, including unit level
profitability and the Company's overall profitability and cash flow, the
availability and cost of suitable locations, and the availability of adequate
equity or debt financing. There can be no assurance that the Company will be
successful in achieving these objectives.
Inflation
The Company does not believe that inflationary factors have had a significant
effect on Company operations in the past three years. Any significant
increase in inflation could affect Company operations as a result of increased
costs for food and labor, as well as increased occupancy and equipment costs.
During 1998, the Company introduced certain new, lower-priced products and
lowered the price of certain existing products on its menu. Principally as a
result of these changes, the Company experienced lower profit margins in its
restaurants in 1998. The Company expects that greater volume purchase
discounts on food and supplies may be available in the future as the
restaurant chain grows, which could partially offset the impact of these
changes and any future cost increases.
Seasonality
The Company does not expect seasonality to affect its operations in a
materially adverse manner. However, the Company's restaurant sales during its
first and fourth fiscal quarters are generally higher than its second and
third quarters due to the location of the majority of its restaurants in
Florida.
New Accounting Pronouncements
In April 1998, the Financial Accounting Standards Board issued Statement of
Position (SOP 98-5) "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. Under these new requirements, pre-opening costs
associated with the opening of new restaurants would be required to be
expensed as incurred. Although no such costs were incurred in 1998, the
Company previously capitalized and amortized such costs over a one year
period. Since the Company does not currently intend to open new Company
operated restaurants, the adoption of this statement is not expected to have a
significant impact on the Company's operations.
Year 2000
The Company has undergone an internal evaluation of its computer systems and
has determined that its existing computer systems are or will be Year 2000
compliant with minimum modifications. The Company expects that these
modifications will be completed during fiscal year 1999 and they are not
expected to have a material impact on the Company's business, operations or
its financial condition. Additionally, the Company has addressed the Year
2000 issue with its point of sale providers and understands that these systems
will also be Year 2000 compliant. The Company cannot predict the effect of
the Year 2000 problem on the vendors and others with which the Company
transacts business and there can be no assurance that the effect of the Year
2000 problem on such entities will not have a material adverse effect on the
Company's business.
Forward-Looking Statements
Certain statements contained in this report are forward-looking statements
which are subject to a number of known and unknown risks and uncertainties
that could cause the Company's actual results and performance to differ
materially from those described or implied in the forward-looking statements.
These risks and uncertainties, many of which are not within the Company's
control, include, but are not limited to economic, weather, legislative and
business conditions; the availability of suitable restaurant sites on
reasonable rental terms; changes in consumer tastes; ability to continue to
attract franchisees; the ability to purchase primary food and paper products
at reasonable prices; no material increases in the minimum wage; and the
Company's ability to attract competent restaurant and managerial personnel.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Form 10-K are the consolidated
financial statements and the consolidated financial statement schedule listed
in the Index to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these items is omitted because the Company intends
to file a proxy statement with the Commission pursuant to Regulation 14A not
later than 120 days after the close of the fiscal year in accordance with
General Instruction G(3) to Form 10-K. The information called for by these
items is incorporated herein by reference to the proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements. See Index to Consolidated
Financial Statements on page 19 of this Report on Form 10-K.
(2) Consolidated Financial Statement Schedule. See Index to
Consolidated Financial Statements on page 19 of this Report on Form 10-K.
(b) Reports on Form 8-K.
None
(3) Exhibits.
Exhibit No. Description
23 Accountants' Consent regarding Registration Statement
on Form S-8.
MIAMI SUBS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of the Registrant are included
in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of May 31, 1998 and 1997
Consolidated Statements of Operations for each of the years in the three
year period ended May 31, 1998
Consolidated Statements of Shareholders' Equity for each of the years in
the three year period ended May 31, 1998
Consolidated Statements of Cash Flows for each of the years in the three
year period ended May 31, 1998
Notes to Consolidated Financial Statements
The following financial information is provided as consolidated financial
statement schedules under Item 14(d) to this Form 10-K:
(i) MIAMI SUBS CORPORATION CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable regulation
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Miami Subs Corporation:
We have audited the accompanying consolidated balance sheets of Miami Subs
Corporation and subsidiaries as of May 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended May 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as of May 31, 1998 and 1997, and
for each of the years in the three-year period ended May 31, 1998. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Miami Subs
Corporation and subsidiaries as of May 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
July 31, 1998
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
May 31, May 31,
ASSETS 1998 1997
- -------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,457,000 $ 2,940,000
Notes and accounts receivable - net 1,743,000 2,000,000
Food and supplies inventories 179,000 192,000
Other 77,000 77,000
---------- ------------
Total Current Assets 5,456,000 5,209,000
Notes receivable 6,076,000 8,073,000
Property and equipment - net 11,612,000 11,125,000
Intangible assets - net 6,718,000 7,128,000
Other 464,000 571,000
---------- ------------
TOTAL $30,326,000 $32,106,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 4,276,000 $ 4,737,000
Current portion of notes payable and capitalized lease obligations 1,092,000 1,706,000
----------- ------------
Total Current Liabilities 5,368,000 6,443,000
Long-term portion of notes payable and capitalized lease obligations 5,613,000 6,288,000
Deferred franchise fees and other deferred income 1,577,000 2,088,000
Accrued liabilities and other 1,735,000 1,779,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 50,000,000 shares 283,000 283,000
Additional paid-in capital 24,565,000 24,565,000
Accumulated deficit (7,208,000) (7,733,000)
----------- ------------
17,640,000 17,115,000
Note receivable from sale of stock (563,000) (563,000)
Treasury Stock (1,044,000) (1,044,000)
------------ ------------
Total Shareholders' Equity 16,033,000 15,508,000
------------ ------------
TOTAL $30,326,000 $32,106,000
==================================================================== ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Ended May 31, Ended May 31, Ended May 31,
1998 1997 1996
--------------- --------------- --------------
REVENUES
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Restaurant sales $ 18,088,000 $ 28,180,000 $ 32,398,000
Revenues from franchised restaurants 4,293,000 4,514,000 4,720,000
Net gain from sales of restaurants 25,000 868,000 117,000
Interest income 678,000 612,000 469,000
Other revenues 350,000 259,000 208,000
-------------- --------------- --------------
Total 23,434,000 34,433,000 37,912,000
--------------- -------------- --------------
EXPENSES
- --------------------------------------------------------------------------
Restaurant operating costs (including lease costs paid to Kavala, Inc. of
$175,000, $108,000 and $130,000, respectively) 17,138,000 26,042,000 28,573,000
General, administrative and franchise costs 3,336,000 5,667,000 6,351,000
Depreciation and amortization 1,444,000 1,837,000 1,942,000
Interest expense 780,000 903,000 741,000
Loss on impairment of restaurants - 375,000 -
--------------- --------------- --------------
Total 22,698,000 34,824,000 37,607,000
--------------- --------------- --------------
Income (loss) before income taxes 736,000 (391,000) 305,000
Provision for income tax (211,000) - -
--------------- --------------- --------------
Net income (loss) $ 525,000 $ (391,000) $ 305,000
=============== =============== ==============
Net income (loss per share):
Basic $ .02 $ ( .01) $ .01
=============== =============== ==============
Diluted $ .02 $ ( .01) $ .01
=============== =============== ==============
Shares used in computing net income (loss) per share:
==========================================================================
Basic 27,119,000 28,244,000 27,235,000
=============== =============== ==============
Diluted 27,119,000 28,244,000 27,235,000
========================================================================== =============== =============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Preferred Common Common Additional
Stock Stock Stock Stock Paid-In
----------- ----------- ---------- --------
Capital
------------
Shares Amount Shares Amount
----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1995 1,230,095 $ 13,000 25,664,245 $257,000 $22,993,000
============================================================ =========== =========== ========== ======== ============
Preferred stock conversions (224,595) (3,000) 224,595 3,000
Exercise of options and warrants 25,000 13,000
Stock issued to acquire restaurants 1,325,000 13,000 1,909,000
MG III, Inc. purchase accounting adjustment (350,000)
Net income
BALANCE AT MAY 31, 1996 1,005,500 10,000 27,238,840 273,000 24,565,000
============================================================ =========== =========== ========== ======== ============
Preferred stock conversions (1,005,500) (10,000) 1,005,500 10,000
Acquisition of treasury stock - at cost
Net loss
BALANCE AT MAY 31, 1997 28,244,340 283,000 24,565,000
============================================================ =========== ========== ========== ======== ============
Net income
BALANCE AT MAY 31, 1998 - - 28,244,340 $283,000 $24,565,000
============================================================ =========== =========== ========== ======== ============
See accompanying notes to consolidated financial statements.
Accumulated Note Receivable -
Deficit Stock Sale Treasury
------------- -----------------------------
Stock Total
------------ ---------
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1995 $ (7,647,000) $ (563,000) $15,053,000
============================================================ ============= ============================= ============
Preferred stock conversions
Exercise of options and warrants 13,000
Stock issued to acquire restaurants 1,922,000
MG III, Inc. purchase accounting adjustment (350,000)
Net income 305,000 305,000
------------- ------------
BALANCE AT MAY 31, 1996 (7,342,000) (563,000) 16,943,000
============================================================ ============= ============================= ========= ============
Preferred stock conversions
Acquisition of treasury stock - at cost $(1,044,000)(1,044,000)
Net loss (391,000) (391,000)
------------- ------------
BALANCE AT MAY 31, 1997 (7,733,000) (563,000) (1,044,000)15,508,000
============================================================ ============= ============================= ========================
Net income 525,000 525,000
------------- -----------
BALANCE AT MAY 31, 1998 $ (7,208,000) $ (563,000) $(1,044,000) $16,033,000
============================================================ ============= ========================== ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
May 31, May 31, May 31,
------------ ------------ ------------
OPERATING ACTIVITIES: 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $ 525,000 $ (391,000) $ 305,000
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,010,000 1,382,000 1,438,000
Amortization of intangible assets 434,000 455,000 504,000
Net gain and franchise fees on sales of restaurants (25,000) (1,268,000) (117,000)
Charge associated with note receivable - 257,000 -
Loss on impairment of restaurants and other charges - 525,000 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 21,000 (284,000) 330,000
Decrease (increase) in food and supplies inventories 13,000 189,000 (43,000)
Decrease (increase) in other current assets - 141,000 (7,000)
Decrease (increase) in other assets 83,000 101,000 (39,000)
(Decrease) increase in accounts payable and accrued liabilities (415,000) (1,425,000) 288,000
(Decrease) in deferred franchise fees and other deferred income (441,000) (44,000) (442,000)
------------ ------------ ------------
Net Cash Provided By (Used In) Operating Activities 1,205,000 (362,000) 2,217,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (264,000) (794,000) (3,718,000)
Proceeds from sales of restaurants 20,000 1,487,000 296,000
Payments received on notes receivable 845,000 997,000 888,000
Loans to franchisees and other - - (29,000)
------------ ------------ ------------
Net Cash Provided By (Used In) Investing Activities 601,000 1,690,000 (2,563,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 425,000 - 1,803,000
Repayment of debt (1,714,000) (1,491,000) (1,512,000)
Proceeds from exercise of stock options and warrants - net - - 13,000
------------ ------------ ------------
Net Cash (Used In) Provided By Financing Activities (1,289,000) (1,491,000) 304,000
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 517,000 (163,000) (42,000)
CASH AT BEGINNING OF PERIOD 2,940,000 3,103,000 3,145,000
------------ ------------
CASH AT END OF PERIOD $ 3,457,000 $ 2,940,000 $ 3,103,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 784,000 $ 904,000 $ 806,000
Loans to franchisees in connection with sales of restaurants $ 345,000 $ 6,207,000 $ 818,000
============================================================================ ============ ============ ============
Debt assumed in acquisition of restaurant - $ 184,000 -
Acquisition of restaurants in exchange for notes receivable $ 1,814,000 $ 180,000 -
Acquisition of treasury stock in exchange for note receivable - $ 1,044,000 -
============================================================================ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MIAMI SUBS CORPORATION (the "Company") operates and franchises quick service
restaurants under the names "Miami Subs" and "Miami Subs Grill". At May 31,
1998, there were 191 restaurants operating in the Miami Subs system, of which
17 were operated by the Company and 174 were operated by franchisees. Eight
of the Company operated restaurants and 122 of the franchised restaurants are
located in Florida.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and on deposit, highly liquid
instruments with maturities of three months or less, and unexpended marketing
fund contributions of $970,000 and $683,000 at May 31, 1998 and 1997,
respectively.
FRANCHISE OPERATIONS
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to marketing funds,
and in certain cases, revenue from sub-leasing restaurant properties to
franchisees. Initial franchise fees are recognized as income when
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied, which generally occurs when the
franchised restaurant commences operations. Development fees are
non-refundable and the related agreements require the franchisee to open a
specified number of restaurants in the development area within a specified
time period or the agreements may be canceled by the Company. Revenue from
development agreements is deferred and recognized as restaurants in the
development area commence operations on a pro rata basis to the minimum number
of restaurants required to be open, or at the time the development agreement
is effectively cancelled. Royalties, which are based upon a percentage of the
franchisee's gross sales, are recognized as income when the fees are earned
and become receivable and collectible. Revenue from sub-leasing properties to
franchisees is recognized as income as the revenue is earned and becomes
receivable and collectible. Sub-lease rental income is presented net of
associated lease costs in the accompanying consolidated financial statements.
Marketing contributions are offset against the related costs incurred.
Contributions received in excess of expenditures are classified as current
liabilities in the accompanying consolidated financial statements.
Revenues from franchised restaurants consist of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
May 31, May 31, May 31,
----------- ----------- -----------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Royalties $ 3,687,000 $ 3,680,000 $ 3,752,000
Franchise and development fees 598,000 707,000 936,000
Sublease rental income (net) 8,000 127,000 32,000
----------- ----------- -----------
Total $ 4,293,000 $ 4,514,000 $ 4,720,000
=============================== =========== =========== ===========
</TABLE>
SALES OF RESTAURANTS
Gains on the sale of restaurants are recorded as income when the sales are
consummated and other conditions are met, including adequacy of down payment
and the completion by the Company of its obligations under the contracts.
Until such conditions are met, such gains are included in deferred income.
Losses on the sale of restaurants are recognized at the time of sale.
FOOD AND SUPPLIES INVENTORIES
Food and supplies inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Additions and renewals are charged to the property accounts and
expenditures for maintenance and repairs are charged to operations as
incurred. Depreciation and amortization are expensed on the straight-line
method over the lesser of the lease term (including option periods) or the
estimated useful lives of the assets.
INTANGIBLE ASSETS
Costs incurred to acquire the trademark and franchise rights to the Miami Subs
concept and other intangibles, consisting principally of royalty rights
acquired, are amortized over a twenty year period on a straight line basis.
Restaurants acquired are accounted for under the purchase method and recorded
at the estimated fair value of the equipment and building improvements
acquired. The excess of cost over the fair value of the assets acquired,
including goodwill if any, is amortized using the straight-line method over
the remaining term of the underlying property leases, but not in excess of 20
years. At each balance sheet date, the Company evaluates the realizability of
goodwill based upon expectations of operating income for each restaurant
having a material goodwill balance. Should the Company determine it probable
that future estimated undiscounted related operating income from any of its
acquired restaurants will be less than the carrying amount of the associated
goodwill, an impairment of goodwill would be recognized, and goodwill would be
reduced to the amount estimated to be recoverable. The Company believes that
no material impairment of goodwill exists at May 31, 1998 and 1997.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for the possible impairment of long-lived assets under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting For the Impairment of Long-Lived Assets and For Long-Lived Assets
to be Disposed Of." Under SFAS No. 121, the Company evaluates whether events
and circumstances have occurred that indicate revision to the remaining useful
life or the remaining balances of long-lived assets, including intangible
assets and goodwill, may be appropriate. When factors indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, the Company will recognize an impairment loss equal to the
excess of the carrying amount over the fair value of the asset. The Company
provided a reserve of $375,000 in 1997 to provide for the planned future sale
of certain restaurants which are currently operated by the Company.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109").
Under Statement 109, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on deferred taxes of a change
in tax rates is recognized in income in the year that includes the enactment
date.
EMPLOYEE STOCK OPTIONS
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for employee stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and accordingly, no compensation cost has been recognized for
stock options issued to employees in the consolidated financial statements.
NET INCOME (LOSS) PER SHARE
In February 1998, the Company adopted the provisions of SFAS No. 128, Earnings
per Share, which establishes new guidelines for the calculation of earnings
per share. Under SFAS 128, basic earnings per share is computed by dividing
net income (loss) 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. Basic earnings per share under SFAS 128 for 1997 and 1996 was the
same as the previously reported amounts. Diluted earnings per share was the
same as basic 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.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined based on
available information and appropriate valuation methodologies. The carrying
amounts of accounts receivable, accounts payable and accrued liabilities
approximate fair value due to the short-term nature of the accounts. The fair
value of long-term notes receivable and notes payable approximate the carrying
value of such assets and liabilities as of May 31, 1998.
RECLASSIFICATION
Certain 1997 and 1996 balances have been reclassified to conform to the 1998
presentation.
2. ACQUISITION
On March 1, 1996, the Company acquired from a franchisee five existing Miami
Subs Grill restaurants located in the Dallas, Texas metropolitan area, along
with the development rights for the Dallas and Fort Worth Texas markets. The
acquisition was accounted for as a purchase and the accompanying Consolidated
Statements of Operations includes the results of these operations from the
date of the acquisition. The purchase price was allocated principally to
property and equipment of the restaurants acquired. As consideration for the
acquisition, the Company issued 1,325,000 shares of its common stock and
assumed existing indebtedness on the restaurants of $1,467,000. In addition,
the Company received a non-interest bearing and non-recourse promissory note
secured by the common stock in the original amount of $1,500,000, which was
reduced by cash and equivalents (principally transferable inventories,
supplies, and deposits) in the amount of $200,000 at closing. In lieu of
payment of this note and settlement of other matters, the Company released
200,000 shares of the common stock to the former franchisee and the Company
retained the remaining 1,125,000 shares of stock as treasury stock, recorded
at cost. A charge of $257,000 which is included in General, Administrative,
and Franchise expenses in the accompanying 1997 Consolidated Statement of
Operations, was taken as a result of this settlement.
3. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Notes receivable $ 7,112,000 $ 9,437,000
Royalties and other receivables due from franchisees 666,000 867,000
Other 229,000 58,000
------------ ------------
Total 8,007,000 10,362,000
Less allowance for doubtful accounts (188,000) (289,000)
------------ ------------
7,819,000 10,073,000
Less notes receivable due after one year (6,076,000) (8,073,000)
------------ ------------
Notes and accounts receivable-current portion $ 1,743,000 $ 2,000,000
==================================================== ============ ============
</TABLE>
Notes receivable at May 31, 1998 and 1997, principally result from sales of
restaurant businesses to franchisees and are generally guaranteed by the
purchaser and collateralized by the restaurant businesses and assets sold.
The notes are generally due in monthly installments of principal and interest,
with interest rates ranging principally between 8% and 12%.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land $ 2,231,000 $ 2,231,000
Buildings and leasehold improvements 7,919,000 7,300,000
Furniture and equipment 5,154,000 4,487,000
Property held under capitalized leases 632,000 632,000
Construction in progress - 50,000
============================================== ------------ ------------
Property and equipment at cost 15,936,000 14,700,000
Less accumulated depreciation and amortization (4,324,000) (3,575,000)
------------ ------------
Property and equipment - net $11,612,000 $11,125,000
============================================== ============ ============
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Trademark and franchise rights $ 2,774,000 $ 2,750,000
Excess of costs over fair value of net assets acquired 5,903,000 5,903,000
------------ ------------
8,677,000 8,653,000
Less accumulated amortization (1,959,000) (1,525,000)
------------ ------------
Intangible assets - net $ 6,718,000 $ 7,128,000
====================================================== ============ ============
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable $1,113,000 $1,036,000
Accrued wages and related liabilities 459,000 658,000
Accrued real estate and sales taxes 564,000 643,000
Legal and related 211,000 470,000
Marketing fund contributions 970,000 683,000
Other 959,000 1,247,000
---------- ----------
Total $4,276,000 $4,737,000
===================================== ========== ==========
</TABLE>
7. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Various notes payable to banks at prime plus 1.5% (10.0% at May 31,
1998), secured by accounts and notes receivable, land, restaurant
property and equipment and due in monthly payments through 2003 $ 4,420,000 $ 5,141,000
Note payable at 11.5%, secured by five restaurants and equipment,
payable in equal monthly installments through 2001 744,000 961,000
8.75% - 11.5% mortgages and notes payable, secured by
various restaurant properties and equipment and due in
varying monthly installments through 2003 743,000 876,000
10 3/8% mortgage note payable, secured by corporate
office building, due in monthly payments through 2007 451,000 481,000
Note payable at prime plus 2.0% (10.5% at May 31, 1998),
secured by leased restaurant properties and equipment, due in
monthly payments through 2001 160,000 205,000
Capitalized lease obligations 187,000 330,000
------------ ------------
Total 6,705,000 7,994,000
Less current portion (1,092,000) (1,706,000)
------------ ------------
Long-term portion $ 5,613,000 $ 6,288,000
====================================================================== ============ ============
</TABLE>
The above notes are secured by property and equipment with a book value
of approximately $6,700,000 at May 31, 1998, and notes and accounts receivable
of approximately $2,000,000.
At May 31, 1998, the approximate annual maturities of notes payable and
capitalized lease obligations for each of the five years ending May 31, 2003,
are $1,092,000, $857,000, $3,076,000, $151,000 and $530,000, respectively, and
$999,000 thereafter.
Total interest costs incurred for the years ended May 31, 1998, 1997 and 1996
was $780,000, $903,000, and $798,000, respectively. Capitalized interest cost
with respect to qualifying new restaurant construction was $57,000 in 1996.
8. DEFERRED FRANCHISE FEES AND OTHER DEFERRED INCOME
Deferred franchise fees and other deferred income consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Development fees $ 390,000 $ 661,000
Franchise fees 135,000 110,000
Deferred gains and vendor rebates 1,052,000 1,317,000
---------- ----------
Total $1,577,000 $2,088,000
================================= ========== ==========
</TABLE>
9. INCOME TAXES
The primary components that comprise the deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts and notes receivable $ 68,000 $ 154,000
Other liabilities and reserves 796,000 1,069,000
Deferred income and franchise deposits 142,000 241,000
Other 75,000 13,000
Net operating loss and other carry-forwards 2,604,000 2,500,000
------------ ------------
Total deferred tax assets 3,685,000 3,977,000
------------ ------------
Deferred tax liabilities:
Property and equipment 466,000 446,000
Intangible assets 217,000 185,000
Other 241,000 91,000
------------ ------------
Total deferred tax liabilities 924,000 722,000
------------ ------------
Subtotal 2,761,000 3,255,000
Less valuation allowance (2,761,000) (3,255,000)
------------ ------------
Net deferred tax assets $ - $ -
============================================== ============ ============
</TABLE>
The net change in the valuation allowance for the year ended May 31, 1998 was
a decrease of $494,000.
At May 31, 1998 and 1997, the Company had no deferred tax assets or
liabilities reflected on its consolidated financial statements since net
deferred tax assets are offset by a valuation allowance. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the level of
historical operating results, scheduled reversal of deferred tax liabilities,
and projected future taxable income in making this assessment.
The difference between the actual tax provision and the tax provision by
applying the statutory federal income tax rate is attributable to the
following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% (34.0)% 34.0%
Intangible costs amortized 4.9 12.5 21.3
Charge associated with note receivable - 22.3 -
Other 1.8 3.8 2.4
Operating losses utilized (14.8) (4.6) (57.7)
------ ------- ------
Effective income tax rate 25.9% - % - %
====== ======= ======
</TABLE>
At May 31, 1998, the Company's tax returns reflect net operating loss
carry-forwards of approximately $6.4 million which are available to reduce
future taxable income through 2012 (subject to limitations imposed under the
Internal Revenue Code regarding changes in ownership which limits utilization
of $2.8 million of the carry-forwards on an annual basis to approximately
$340,000). The Company also has general business credit carry-forwards of
approximately $274,000 which can be used to offset tax liabilities through
2010. The Company's federal income tax returns for fiscal years 1991 through
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 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, interest, and
penalties would be due. The Company believes that the accruals that it has
provided in connection with this matter are adequate.
10. COMMITMENTS AND CONTINGENCIES
The Company is the prime lessee under various land and building leases for
restaurants operated by the Company and its franchisees. The leases generally
have initial terms ranging from five to 20 years and usually provide for
renewal options ranging from five to 20 years. Most of the leases contain
escalation clauses and common area maintenance charges (including taxes and
insurance). Certain of the leases require additional (contingent) rental
payments if sales volumes at the related restaurants exceed specified limits.
Base rent expense for Company operated restaurants for the years ended May 31,
1998, 1997, and 1996 was approximately $1,561,000, $2,214,000, and $2,455,000,
respectively. Additional (contingent) rental payments were approximately
$44,000, $54,000, and $100,000, respectively, in 1998, 1997, and 1996.
The Company also owns or leases sites which it leases or subleases to
franchisees. The Company remains liable for all lease costs when properties
are subleased to franchisees. In addition, the Company guarantees the lease
payments of certain franchised locations, aggregating approximately $173,000
for each of the next two years, and approximately $60,000 per year thereafter
through 2014.
The Company also subleases non-Miami Subs locations to third parties. Such
sub-leases provide for minimum annual rental payments by the Company
aggregating approximately $205,000 and expire on various dates through 2004
exclusive of renewal options.
The Company's future minimum rental commitments and sublease rental income as
of May 31, 1998 for all noncancellable capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating Sublease
Fiscal Year Leases Leases Rental Income
- ---------------------------------------------- --------- ----------- --------------
<S> <C> <C> <C>
1999 $113,000 $ 5,276,000 $ 3,808,000
2000 12,000 5,164,000 3,674,000
2001 12,000 4,999,000 3,485,000
2002 12,000 4,774,000 3,319,000
2003 12,000 4,232,000 2,944,000
Thereafter 81,000 24,623,000 22,392,000
--------- ----------- --------------
Total 242,000 $49,068,000 $ 39,622,000
=========== ==============
Less amount representing interest (55,000)
---------
Present value of future minimum lease payments $187,000
============================================== =========
</TABLE>
The Company guarantees certain equipment financing for franchisees with a
third party lender. The Company's maximum obligation for all loans funded by
the lender as of May 31, 1998, was approximately $1,263,000.
LITIGATION
In January, 1992, the Company filed a Petition for Declaratory Judgment
against a third party seeking to dissolve an alleged joint venture between the
Company and the third party. The third party opposed the dissolution,
counterclaimed, and sought damages arising from amounts expended in developing
new locations and lost profits from the termination of the joint venture. A
bench trial was completed in April 1995, and the court subsequently awarded
the defendant damages in the amount of $241,000 plus costs and attorney fees.
The case was appealed by both the Company and the third party, and in November
1996, the appeal was argued before the Supreme Court of New Hampshire. In
December 1997, the Supreme Court ruled in favor of the Company, vacated the
damage award, reversed the award of attorney fees, and remanded to a trial
court for a determination of damages for the alleged breach of fiduciary duty
to the partnership. In May 1998, the trial court awarded the third party
compensatory damages in the amount of $200,000, which is being appealed by the
Company. The Company is fully accrued for this matter at May 31, 1998.
In connection with the above case and the favorable resolution of other legal
matters, in 1998 the Compnay reduced its legal accrual by $219,000.
The Company and its subsidiaries are parties to various other legal actions
arising in the ordinary course of business. The Company is vigorously
contesting these actions and currently believes that the outcome of such cases
will not have a material adverse effect on the Company.
11. STOCK OPTION PLAN AND WARRANTS
The Company's stock option plan provides for the granting of non-qualified
stock options for the purchase of up to 7,500,000 shares of common stock of
the Company by directors, officers, employees and consultants. Under the
terms of the plan, options may be granted for a term of up to 10 years at a
price not less than the market value of the common stock on the date of grant.
The following is a summary of stock option activity under the plan during each
of the last three years:
<TABLE>
<CAPTION>
Shares Under Weighted Average
Option Price Per Share
------------- -----------------
<S> <C> <C>
Balance at May 31, 1995 4,708,100 $ 3.03
Granted 1,289,000 1.81
Exercised (25,000) .50
Cancelled (200,000) 2.67
=================================== ------------- -----------------
Balance at May 31, 1996 5,772,100 2.79
Granted 94,000 .85
Exercised - -
Cancelled (1,449,400) 2.11
=================================== ------------- -----------------
Balance at May 31, 1997 4,416,700 2.99
Granted and repriced 1,950,000 .75
Exercised - -
Cancelled (3,849,000) 3.12
=================================== ------------- -----------------
Balance at May 31, 1998 2,517,700 $ 1.06
============= =================
Options exercisable at May 31, 1998 2,517,700 $ 1.06
=================================== ============= =================
</TABLE>
During 1998, 1,366,000 outstanding stock options at an average exercise price
of $2.20 per share were amended to reduce the exercise price to $ .75 per
share, representing the market value of the common stock at the time of the
amendment.
The Company accounts for employee stock options in accordance with the
intrinsic value method prescribed in APB No. 25. Accordingly, no compensation
cost is recognized at the time stock options are granted. Had employee
compensation expense been determined based on the fair value at the grant date
for options granted in each of the last three years consistent with the
provisions of SFAS No. 123, net income (loss) would have been $(57,000),
$(334,000), and $(90,000), and basic and diluted net income (loss) per share
would have been $ .00, $( .01), and $ .00, respectively. The fair market
value of each option grant was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions: expected option
term of 10 years; expected volatility of 58.2% in 1998 and 27.1% in 1997 and
1996; risk free interest rate of 6.75%; and zero dividend yield.
At May 31, 1998, 409,600 options and 100,000 warrants are outstanding at
average exercise prices of $2.16 and $6.00 per share, respectively.
12. RELATED PARTY TRANSACTIONS
At May 31, 1998, the Company leased six restaurant properties from Kavala,
Inc., a private company owned by the Company's chairman of the board and chief
executive officer, Gus Boulis. Rent expense for all leases between the
Company and Kavala was $424,000 in 1998, $412,000 in 1997, and $491,000 in
1996. Future minimum rental commitments due to Kavala at May 31, 1998 under
existing leases was approximately $414,000 for each of the next four years,
$337,000 for 2003, and $1,938,000 for all remaining years thereafter. In
fiscal year 1997, the Company leased a vacant, non-Miami Subs property to a
company owned by Boulis. The Company believes that rents charged under these
leases are not materially different from the rents that would have been
incurred or obtained from leasing arrangements with unaffiliated parties or on
a stand alone basis.
In February 1998, the Company entered into a management agreement with Boulis
providing for the Company to manage an existing Miami Subs Grill restaurant
owned by Boulis for a fee of 5.0% of the restaurant's gross restaurant sales.
The agreement was terminated in June 1998 upon the sale of the restaurant to a
third party franchisee.
Mr. Bartsocas, an officer of the Company, is also an officer and director of
Subies Enterprises, Inc. ("Subies"), a franchisee of the Company. Under an
agreement which was entered into in 1991 between the Company and Subies,
Subies paid a franchise fee of $5,000 for each of five restaurants developed
by Subies, and Subies was exempt from paying royalty fees on the restaurants
as long as the restaurants were owned by Subies. Three of the restaurants
were subsequently sold to independent franchisees.
Mr. Donald L. Perlyn, who has been an officer of the Company since 1990 and a
director since 1997, was appointed president and chief operating officer of
the Company in July 1998. Mr. Perlyn is also an officer and principal of
DEMAC Restaurant Corp. which owns and operates a Miami Subs Grill restaurant
in Florida. In connection with his appointment in July, Mr. Perlyn agreed to
sell to the Company the Miami Subs restaurant owned by DEMAC for approximately
$260,000. Mr. Perlyn is also indebted to the Company in the amount of
$85,000. The loan incurs interest at an interest rate of prime plus 1.5%, and
is due in full in June 1999.
In November 1997, an existing Miami Subs Grill restaurant owned by the Company
was reopened as a co-branded unit with Arthur Treacher's, Inc. ("Treacher's").
Treacher's is operating and managing the restaurant pursuant to an agreement
with the Company. Under the terms of the agreement, the Company and
Treacher's share in the operating profits of the restaurant, and Treacher's
has an option to acquire the restaurant from the Company. Mr. Bruce Galloway
is a member of the board of directors of the Company and is Chairman of the
Board of Treacher's.
In March 1995, the Company's former chairman of the board and president
exercised options to acquire 450,000 shares of common stock of the Company.
As payment for the stock, the Company received a non-interest bearing note in
the amount of $563,000 which is collateralized by the stock and due in full in
January 1999.
<TABLE>
<CAPTION>
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. C COL. D COL. E
DESCRIPTION Additions
charged Additions
Balance at to costs charged Balance at
beginning and to other end of
of period expenses account Deductions period
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1996:
Allowance for doubtful
accounts and discounts -
Notes and Accounts Receivable $ 489,000 - $ 99,000 $ 390,000
Year ended May 31, 1997:
Allowance for doubtful
accounts and discounts -
Notes and Accounts Receivable $ 390,000 - $ 101,000 $ 289,000
Year ended May 31, 1998:
Allowance for doubtful
accounts and discounts -
Notes and Accounts Receivable $ 289,000 - $ 101,000 $ 188,000
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT LIST
Location in this report or
Reg. S-K incorporated by reference
Item No. Document to prior Filing
- -------- ----------------------------------------------------------- --------------------------
<C> <S> <C>
23 Accountants' Consent re Registration Statement on Form S-8. Filed herewith on page 36
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MIAMI SUBS CORPORATION
Dated: August 21, 1998 By: /s/ Gus Boulis
GUS BOULIS, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Gus Boulis Dated: August 21, 1998
GUS BOULIS, Chairman of the Board
and Chief Executive Officer (Principal Executive Officer)
By: /s/ Donald L. Perlyn Dated: August 21, 1998
DONALD L. PERLYN, President,
Chief Operating Officer and Director
By: /s/ Bruce R. Galloway Dated: August 21, 1998
BRUCE R. GALLOWAY, Director
By: /s/ Greg Karan Dated: August 21, 1998
GREG KARAN, Director
By: /s/ Peter Nasca Dated: August 21, 1998
PETER NASCA, Director
By: /s/ Joseph Zappala Dated: August 21, 1998
JOSEPH ZAPPALA, Director
By: /s/ Jerry W. Woda Dated: August 21, 1998
JERRY W. WODA, Senior Vice President, Chief
Financial Officer, and Principal Accounting and
Financial Officer
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Miami Subs Corporation:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Miami Subs Corporation of our report dated July 31, 1998, relating to
the consolidated balance sheets of Miami Subs Corporation and subsidiaries as
of May 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended May 31, 1998, and related schedule which report
appears in the May 31, 1998 annual report on Form 10-K of Miami Subs
Corporation.
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
August 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 3,457,000
<SECURITIES> 0
<RECEIVABLES> 1,931,000
<ALLOWANCES> (188,000)
<INVENTORY> 179,000
<CURRENT-ASSETS> 5,456,000
<PP&E> 15,936,000
<DEPRECIATION> (4,324,000)
<TOTAL-ASSETS> 30,326,000
<CURRENT-LIABILITIES> 5,368,000
<BONDS> 0
0
0
<COMMON> 283,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,326,000
<SALES> 18,088,000
<TOTAL-REVENUES> 23,434,000
<CGS> 17,138,000
<TOTAL-COSTS> 22,698,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 780,000
<INCOME-PRETAX> 736,000
<INCOME-TAX> 211,000
<INCOME-CONTINUING> 525,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 525,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
