UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended FEBRUARY 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19623
MIAMI SUBS CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0249329
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 N.W. 31st Avenue, Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(Zip Code)
(954) 973-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 12, 1999
Common Stock, $.01 par value 6,667,335
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
February 28, May 31,
ASSETS 1999 1998
- --------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund
contributions of $1,617,000 and $970,000, respectively) $ 4,206,000 $ 3,457,000
Notes and accounts receivable - net 1,766,000 1,743,000
Food and supplies inventories 164,000 179,000
Other 60,000 77,000
------------ ----------
Total Current Assets 6,196,000 5,456,000
------------ ----------
Notes receivable 5,915,000 6,076,000
Property and equipment - net 10,998,000 11,612,000
Intangible assets - net 6,405,000 6,718,000
Other 538,000 464,000
----------- -----------
TOTAL $ 30,052,000 $30,326,000
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 4,770,000 $ 4,276,000
Current portion of notes payable and capitalized lease obligations 914,000 1,092,000
----------- -----------
Total Current Liabilities 5,684,000 5,368,000
----------- -----------
Long-term portion of notes payable and capitalized lease obligations 4,962,000 5,613,000
Deferred franchise fees and other deferred income 1,301,000 1,577,000
Accrued liabilities and other 1,467,000 1,735,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 12,500,000 shares 71,000 71,000
Additional paid-in capital 24,777,000 24,777,000
Accumulated deficit (6,603,000) (7,208,000)
----------- ----------
18,245,000 17,640,000
Note receivable from sale of stock - (563,000)
Treasury Stock (1,607,000) (1,044,000)
-------------- ------------
Total Shareholders' Equity 16,638,000 16,033,000
-------------- ------------
TOTAL $ 30,052,000 $30,326,000
===================================================================== ============== ============
See accompanying notes to consolidated financial statements.
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MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Three Months Ended
February 28, February 28,
------------------- -------------------
REVENUES 1999 1998
- ------------------------------------------------------------ ------------------- -------------------
<S> <C> <C>
Restaurant sales $ 4,387,000 $ 4,209,000
Revenues from franchised restaurants 1,034,000 907,000
Net gain from sales of restaurants 12,000 1,000
Interest income 159,000 159,000
Other revenues 115,000 103,000
------------------- -------------------
Total 5,707,000 5,379,000
EXPENSES
- ------------------------------------------------------------
Restaurant operating costs 4,166,000 3,948,000
General, administrative and franchise costs 770,000 688,000
Depreciation and amortization 379,000 357,000
Interest expense 146,000 194,000
Merger costs 144,000 -
------------------- -------------------
Total 5,605,000 5,187,000
Income before provision for income taxes 102,000 192,000
Provision for income taxes 19,000 71,000
------------------- -------------------
Net income $ 83,000 $ 121,000
=================== ===================
Net income per share:
Basic $ .01 $ .02
=================== ===================
Diluted $ .01 $ .02
=================== ===================
Shares used in computing net income per share:
Basic 6,705,000 6,780,000
=================== ===================
Diluted 6,705,000 6,780,000
=================== ===================
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended Nine Months Ended
February 28, February 28,
------------------ ------------------
REVENUES 1999 1998
- ------------------------------------------------------------ ------------------ ------------------
<S> <C> <C>
Restaurant sales $ 13,716,000 $ 13,341,000
Revenues from franchised restaurants 3,276,000 3,262,000
Net gain from sales of restaurants 63,000 17,000
Interest income 455,000 546,000
Other revenues 283,000 278,000
Total 17,793,000 17,444,000
EXPENSES
- ------------------------------------------------------------
Restaurant operating costs 12,880,000 12,749,000
General, administrative and franchise costs 2,450,000 2,406,000
Depreciation and amortization 1,093,000 1,086,000
Interest expense 479,000 600,000
Merger costs 144,000 -
Total 17,046,000 16,841,000
Income before provision for income taxes 747,000 603,000
Provision for income taxes 142,000 214,000
------------------ ------------------
Net income $ 605,000 $ 389,000
================== ==================
Net income per share:
Basic $ .09 $ .06
================== ==================
Diluted $ .09 $ .06
================== ==================
Shares used in computing net income per share:
Basic 6,755,000 6,780,000
================== ==================
Diluted 6,755,000 6,780,000
================== ==================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended Nine Months Ended
February 28, February 28,
------------------- -------------------
OPERATING ACTIVITIES: 1999 1998
------------------- -------------------
<S> <C> <C>
Net income $ 605,000 $ 389,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 765,000 760,000
Amortization of intangible assets 328,000 326,000
Net gain and franchise fees from sales of restaurants (88,000) (17,000)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 15,000 (153,000)
Decrease in food and supplies inventories 15,000 20,000
Decrease in other current assets 17,000 12,000
(Increase) decrease in other assets (89,000) 22,000
Increase (decrease) in accounts payable and accrued liabilities 533,000 (483,000)
(Decrease) in deferred fees and accrued liabilities (202,000) (272,000)
------------- -------------
Net Cash Provided By Operating Activities 1,899,000 604,000
------------- -------------
INVESTMENT ACTIVITIES:
Purchase of restaurant, property, and equipment (757,000) (215,000)
Proceeds from sales of restaurants 80,000 20,000
Payments received on notes receivable 356,000 719,000
------------------- -------------------
Cash (Used In) Provided By Business Investment Activities (321,000) 524,000
------------------- -------------------
FINANCING ACTIVITIES:
Repayment of debt ( 829,000) (1,400,000)
New borrowings 424,000
------------------- -------------------
Cash (Used For) Financing Activities (829,000) (976,000)
------------------- -------------------
INCREASE IN CASH 749,000 152,000
CASH AT BEGINNING OF PERIOD 3,457,000 2,940,000
CASH AT END OF PERIOD $ 4,206,000 $ 3,092,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 481,000 $ 604,000
=================== ===================
Loans to franchisees in connection with sales of restaurants $ 1,015,000 $ 345,000
=================== ===================
Reacquisition of restaurants/equipment in exchange for notes receivable - net $ 597,000 $ 432,000
=================== ===================
Acquisition of treasury stock in exchange for note receivable $ 563,000
===================
See accompanying notes to consolidated financial statements.
</TABLE>
MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the Company's financial position
and results of operations for the periods presented. The financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required for annual financial statements. The
financial statements included herein should be read in conjunction with the
financial statements presented in the Company's Annual Report on Form 10-K for
the year ended May 31, 1998.
Results of operations reported for interim periods are not necessarily
indicative of results for the entire fiscal year.
2. REVENUES FROM FRANCHISED RESTAURANTS
Revenues from franchised restaurants consist of the following:
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THREE MONTHS ENDED Three Months Ended
FEBRUARY 28, February 28,
-------------------- --------------------
1999 1998
-------------------- --------------------
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Royalties $ 1,014,000 $ 930,000
Franchise and development fees 69,000 51,000
Sublease rental income (expense) - net (49,000) (74,000)
-------------------- --------------------
Total $ 1,034,000 $ 907,000
==================== ====================
NINE MONTHS ENDED Nine Months Ended
FEBRUARY 28, February 28,
-------------------- --------------------
1999 1998
-------------------- --------------------
Royalties $ 3,009,000 $ 2,738,000
Franchise and development fees 296,000 296,000
Sublease rental income (expense) - net (76,000) 38,000
Cancellation of development agreements 47,000 190,000
-------------------- --------------------
Total $ 3,276,000 $ 3,262,000
==================== ====================
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3. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
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February 28, May 31,
1999 1998
-------------- ------------
<S> <C> <C>
Notes receivable $ 6,949,000 $ 7,112,000
Royalties and other receivables due from franchisees 711,000 666,000
Other 92,000 229,000
-------------- ------------
Total 7,752,000 8,007,000
Less allowance for doubtful accounts ( 71,000) (188,000)
-------------- ------------
7,681,000 7,819,000
Less notes receivable due after one year (5,915,000) (6,076,000)
-------------- ------------
Notes and accounts receivable-current portion $ 1,766,000 $ 1,743,000
==================================================== ============== ============
</TABLE>
Notes receivable principally result from sales of restaurant businesses to
franchisees and are generally guaranteed by the purchaser and collateralized
by the restaurant businesses and assets sold. The notes are generally due in
monthly installments of principal and interest, with interest rates ranging
principally between 8% and 12%.
4. INCOME TAXES
The Company's federal income tax returns for fiscal years 1991 through 1996,
inclusive, have been examined by the Internal Revenue Service, and the IRS has
issued reports for such years reflecting substantial adjustments to previously
filed tax returns. The Company 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. The Company has recently been
notified that its federal income tax return for fiscal year 1997 will also be
examined by the IRS.
5. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
On December 29, 1998, the Company's Board of Directors unanimously adopted a
resolution to amend the Company's Articles of Incorporation to effect, as of
the close of business on January 7, 1999, a one-for-four reverse stock split
of the Company's common stock, pursuant to which each four shares of common
stock were converted into one share of common stock. All amounts in the
accompanying unaudited consolidated financial statements have been adjusted to
reflect the reverse stock split.
In January 1999, the Company acquired as treasury stock 112,500 shares of its
common stock as a result of the non-payment of a note due to the Company. The
note receivable was included in shareholders' equity at May 31, 1998.
6. PROPOSED MERGER
On January 15, 1999, the Company and Nathan's Famous, Inc. ("Nathan's")
entered into a definitive merger agreement pursuant to which Nathan's has
proposed to acquire all of the outstanding shares of common stock of the
Company for shares of Nathan's common stock. The proposed merger is subject
to certain conditions, including completion of due diligence and approval by a
majority of the shareholders of both Nathan's and Miami Subs. In November
1998, Nathan's acquired, in a private transaction, approximately 30% of the
outstanding common stock of the Company.
7. LITIGATION
In January 1999, the Company was served with a class action law suit which was
filed against the Company, its directors and Nathan's in a Florida state court
by a shareholder of the Company. The suit alleges that the proposed merger
between the Company and Nathan's is unfair to the Company's shareholders and
constitutes a breach by the defendants of their fiduciary duties to the
shareholders of the Company. The plaintiff seeks among other things (i) class
action status, (ii) preliminary and permanent injunctive relief against
consummation of the proposed merger and (iii) unspecified damages to be
awarded to the shareholders of the Company. The Company believes that the
suit is without merit and intends to defend against it vigorously.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Company's revenues are derived principally from operating, franchising,
and financing Miami Subs restaurants. Franchise revenues consist principally
of initial franchise fees and area development fees, 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 August 1998, the Company finalized a co-branding licensing agreement with
Arthur Treacher's, Inc. ("Treacher's"). Under the agreement, franchised and
Company owned Miami Subs Grill restaurants may become franchisees of
Treacher's and sell Treacher's products in the restaurants. As of February
28, 1999, 34 Miami Subs Grill restaurants (including six Company operated
restaurants) have implemented the co-branding program and were selling
Treacher's products.
Miami Subs also has co-branding arrangements with Baskin-Robbins and BAB
Holdings, Inc., which provide for Miami Subs restaurants to sell
Baskin-Robbins ice cream products and Big Apple Bagels, My Favorite Muffins
and Brewster's Coffee. In January, a Company operated restaurant also began
selling Nathan's Famous all-beef frankfurters and fresh, crinkle-cut french
fries.
The Company's ability to sustain and improve profitability will, among other
factors, be dependent on the continuing 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 operation of existing and new restaurants on a profitable basis by
franchisees.
The Company's fiscal year ends on May 31. The results of operations for the
three and nine months ended February 28, 1999 are not necessarily indicative
of the results that may be expected for the Company's fiscal year.
During the nine months ended February 28, 1999, nine franchised restaurants
opened and eight franchised restaurants closed. In addition, the Company
sold/transferred seven restaurants to franchisees and acquired/reacquired five
restaurants from franchisees. At February 28, 1999 and 1998, there were 192
restaurants in the system, consisting of 15 Company operated restaurants and
177 franchised restaurants.
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1999 TO FEBRUARY 28, 1998
Total Revenues
Total Company revenues increased 6.1% to approximately $5.7 million in the
third quarter of the current year, compared to $5.4 million in the third
quarter of the prior year. The increase in total revenues resulted
principally from increased restaurant sales and franchise revenues.
Restaurant Sales
Total Company restaurant sales increased 4.2% to approximately $4.4 million in
the current quarter, as compared to $4.2 million in the prior year quarter.
The increase in sales resulted from a change in restaurants operated by the
Company as a result of sales/transfers and acquisitions of restaurants between
the periods.
Same-store-sales for all comparable Company operated restaurants (computed for
13 restaurants operated by the Company in both the current and prior year
quarters) decreased by approximately 0.5% in the current quarter.
Same-store-sales for the Company's restaurants in the year earlier quarter
were down approximately 0.9%. The Company is attempting to improve sales in
its restaurants through various marketing programs and operational changes.
The Company may also implement price increases on certain products in the
future.
During the current quarter the Company transferred the operations of one
restaurant to a franchisee. At February 28, 1999, Company operated
restaurants were located in Florida (10); Texas (4), and New York (1). The
Company currently plans to sell or transfer to franchisees up to six of the
restaurants that it operated at February 28, 1999. However, there can be no
assurance that sales of these restaurants will be consummated on terms
acceptable to the Company.
Revenues From Franchised Restaurants
Revenues from franchised restaurants amounted to $1,034,000 in the current
quarter, as compared to $907,000 in the prior year quarter.
In the current year's third quarter, two franchised restaurants opened, the
Company transferred the operations of one restaurant to a franchisee, and
three franchised restaurants closed. At February 28, 1999 and 1998, there
were 177 franchised restaurants in the system.
Royalty income in the current quarter increased to $1,014,000, as compared to
$930,000 in the prior year quarter, principally from the opening of new
restaurants since the prior year quarter and collections of delinquent royalty
fees. At February 28, 1999, approximately 23% of restaurants operated by
franchisees have been granted a temporary waiver from paying royalty fees or
were delinquent and not paying royalty fees to the Company.
Same-store-sales for all comparable franchised restaurants continued the
recent trend of improvement and increased by approximately 0.3% in the current
year's third quarter (as compared to a decline of approximately 5.8% in the
prior year quarter). The Company attributes the change in same-store-sales
trends principally to the changes which were implemented during the prior
fiscal year to pricing, marketing, and operations and to sales from
co-branding with Arthur Treacher's, which, as of February 28, 1999, had been
added to 34 franchised restaurants.
The Company leases/subleases principally Miami Subs restaurant facilities to
franchisees and revenues (presented net of related lease costs in the
accompanying financial statements) have been adversely affected from the
delinquency and non-payment of certain of these leases/subleases. For the
three months ended February 28, 1999, revenues do not include approximately
$134,000 in delinquent lease payments, and at February 28, 1999, nine
restaurant facilities which are leased/subleased to franchisees were two or
more months delinquent in monthly lease payments due to the Company.
Subsequent to February 28, 1999, the Company reacquired two restaurants from
franchisees as a result of the default of the leases and notes payable to the
Company.
System-Wide Sales
System-wide sales, which includes sales from all Company operated and
franchised restaurants, increased to approximately $36.6 million in the
current quarter, as compared to $36.1 million in the prior year quarter. The
increase in system wide sales principally reflects sales from new franchised
restaurants which opened since the prior year quarter and sales from
co-branding with Arthur Treacher's which, as of February 28, 1999, had been
added to 34 Miami Subs restaurants. Sales for all comparable restaurants in
the system were approximately the same as sales in the prior year quarter.
Same-store-sales for the system in the prior year quarter were down
approximately 5.6%. The Company attributes the improvement in
same-store-sales trends principally to the changes which were implemented
during the prior fiscal year relating to pricing, marketing, and operations
and to the sale of Arthur Treacher's products in 34 restaurants.
Interest Income
In connection with its strategy of focusing growth in franchising, the Company
has sold restaurants to franchisees and has provided financing for such sales.
Total notes receivable amounted to approximately $6.9 million at February 28,
1999, as compared to $8.7 million at February 28, 1998. At February 28, 1999,
six individual notes receivable from the sale of restaurants which are due
from franchisees with outstanding balances totaling approximately $1.2 million
(net of deferred fees and credits) were delinquent in monthly payments due to
the Company, and unpaid interest income of approximately $39,000 for the three
months ended February 28, 1999 had not been accrued on delinquent notes.
Subsequent to February 28, 1999, the Company reacquired two of these
restaurants in lieu of payment of the notes.
Restaurant Operating Costs
Restaurant operating costs in Company operated restaurants amounted to
approximately $4.2 million or 95.0% of sales in the current quarter, as
compared to 93.8% of sales in the prior year's third quarter. The increase in
restaurant operating costs as a percent of sales was principally due to higher
food and labor costs during the current quarter.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to $770,000 or 13.5% of
total revenue in the current quarter, as compared to $688,000 or 12.8% of
total revenue in the prior year quarter. Costs in the prior year quarter
included a non-recurring reduction to expenses totaling approximately
$159,000. Recurring general and administrative costs were lower than the
prior year quarter (excluding the impact of the non-recurring reduction to
expense), principally due to the elimination of certain corporate office
positions since the year earlier period and to strict costs controls in all
areas of the Company's business.
Interest Expense
Principally as a result of the repayment of outstanding debt from
approximately $7.0 million at February 28, 1998 to $5.9 million at February
28, 1999, interest expense decreased to $146,000 in the current quarter, as
compared to $194,000 in the prior year quarter.
Merger Costs
Expenses in the quarter ended February 28, 1999 include costs incurred to date
of $144,000 in connection with the proposed merger with Nathan's Famous, Inc.
(See footnote 6.).
Provision for Income Taxes
The Company's effective tax rate for the three months ended February 28, 1999
is lower than the rate in the prior year period due to a decrease in the
Company's valuation allowance.
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.
COMPARISON OF NINE MONTHS ENDED FEBRUARY 28, 1999 TO FEBRUARY 28, 1998
Total Revenues
Total Company revenues increased by 2.0% to approximately $17.8 million in the
current nine month period, as compared to 17.4 million in the prior year
period. The increase in total revenues resulted principally from an increase
in restaurant sales and gain on sales of restaurants, which was partially
offset by a reduction in interest income.
Restaurant Sales
The Company's total restaurant sales increased 2.8% to approximately $13.7
million in the current nine month period, as compared to $13.3 million in the
prior year period. The increase in sales resulted principally from a change
in the restaurants operated by the Company as a result of sales/transfers and
acquisitions of restaurants between the periods.
Same-store-sales for all comparable Company operated restaurants (computed for
13 restaurants operated by the Company in both the current and prior year nine
month periods) increased by approximately 0.5% in the current nine month
period. Same-store-sales for the Company's restaurants in the year earlier
period were down approximately 4.0%. The Company attributes the change in
same-store-sales trends principally to the changes which were implemented
during the prior fiscal year relating to pricing, marketing, and operations
and to sales from co-branding with Arthur Treacher's, which, as of February
28, 1999, had been added to six of the Company's restaurants.
During the current nine month period, the Company reacquired four restaurants
from franchisees in exchange for notes payable to the Company, purchased one
restaurant from a franchisee, and sold/transferred seven restaurants to
franchisees. At February 28, 1999, Company operated restaurants were located
in Florida (10); Texas (4), and New York (1). The Company currently plans to
sell or transfer to franchisees up to six of the restaurants that it operated
at February 28, 1999. However, there can be no assurance that sales of these
restaurants will be consummated on terms acceptable to the Company.
Revenues From Franchised Restaurants
Revenues from franchised restaurants amounted to $3,276,000 in the current
nine month period, as compared to $3,262,000 in the prior year period.
During the current nine month period, nine franchised restaurants opened, the
Company sold/transferred seven restaurants to franchisees and
acquired/reacquired five restaurants from franchisees, and eight franchised
restaurants closed. At February 28, 1999 and 1998, there were 177 franchised
restaurants in the system.
Royalty income in the current nine month period increased by 9.9% to
$3,009,000, as compared to $2,738,000 in the prior year period, principally
from the opening of new restaurants since the prior year period and
collections of delinquent royalty fees. At February 28, 1999, approximately
23% of franchised restaurants have been granted a temporary waiver from paying
royalty fees or were delinquent and not paying royalty fees to the Company.
Same-store-sales for all comparable franchised restaurants declined by
approximately 1.1% in the current nine month period (as compared to a decline
of approximately 8.3% in the prior year nine month period). The Company
attributes the change in same-store-sales trends principally to the changes
which were implemented during the prior fiscal year to pricing, marketing, and
operations and to sales from co-branding with Arthur Treacher's, which, as of
February 28, 1999, had been added to 28 franchised restaurants.
During the current nine month period, the Company recognized $47,000 in
revenues from the cancellation of certain area development agreements with
franchisees which were not in compliance with the terms of the development
agreements. In the prior year nine month period, the Company recognized
$190,000 in revenues from such terminations.
The Company leases/subleases principally Miami Subs restaurant facilities to
franchisees and revenues (which are presented net of related lease costs in
the accompanying financial statements) have been adversely affected from the
delinquency and non-payment of certain of these leases/subleases. For the
nine months ended February 28, 1999, revenues do not include approximately
$294,000 in delinquent lease payments and at February 28, 1999, nine
restaurant facilities which are leased/subleased to franchisees were two or
more months delinquent in monthly payments to the Company. During the current
nine month period, the Company reacquired four restaurants from franchisees as
a result of the default of the leases and notes payable to the Company, and
subsequent to February 28, 1999, the Company reacquired two additional
restaurants.
System-Wide Sales
System-wide sales, which includes sales from all Company operated and
franchised restaurants, increased to approximately $110.9 million in the
current nine month period, as compared to $109.7 million in the year earlier
nine month period. The increase in system wide sales principally reflects
sales from new franchised restaurants which have opened since the prior year
period, and to sales from co-branding with Arthur Treacher's which, as of
February 28, 1999, had been added to 34 Miami Subs restaurants.
Same-store-sales for all comparable restaurants in the system declined by
approximately 0.9% in the current nine month period. Same-store-sales for the
system in the prior year nine month period were down approximately 7.8%. The
Company attributes the change in same-store-sales trends principally to the
changes which were implemented during the prior fiscal year relating to
pricing, marketing, and operations and to the sale of Arthur Treacher's
products in 34 restaurants.
Net Gain From Sales of Restaurants
As a part of the Company's strategy to focus future growth and operations in
franchising, the Company sold/transferred seven restaurants to franchisees
during the current nine month period, as compared to three restaurants that
were sold/transferred in the year earlier period. Gains on the sale of
restaurants are dependent on the Company's basis in and the overall
performance of such units. Gains realized are recorded as income when the
sales are consummated and other conditions are met, including the adequacy of
the down payment and the completion by the Company of its obligations under
the contracts. Although the Company intends to sell/transfer other existing
Company operated restaurants in the future, there can be no assurance that any
such sales will be consummated on terms acceptable to the Company. In
addition, it is not anticipated that significant gains will be realized from
such sales.
Interest Income
In connection with its strategy of focusing growth in franchising, the Company
has sold restaurants to franchisees and has provided financing for such sales.
During the current nine month period, loans in the amount of $1,015,000 were
made to franchisees in connection with the sale of restaurants to
franchisees. Total notes receivable amounted to approximately $6.9 million at
February 28, 1999, as compared to $8.7 million at February 28, 1998. At
February 28, 1999, six individual notes receivable which are due from
franchisees with outstanding balances totaling approximately $1.2 million (net
of deferred fees and credits) were delinquent in monthly payments due to the
Company, and unpaid interest income of approximately $149,000 for the nine
months ended February 28, 1999 had not been accrued on delinquent notes. As a
result of these delinquencies and the lower average balance of notes
receivable outstanding during the current period, interest income declined to
$455,000 in the current nine month period, as compared to $546,000 in the year
earlier period. Subsequent to February 28, 1999, the Company reacquired two
restaurants in lieu of payment of the notes.
Restaurant Operating Costs
Restaurant operating costs in Company operated restaurants amounted to
approximately $12.9 million or 93.9% of sales in the current nine month
period, as compared to 95.6% of sales in the prior year period. The reduction
in restaurant operating costs as a percent of sales was principally due to
improved supervision and controls over food, paper, and labor costs in the
first six months of the current period, which was in part offset by an
increase in such costs during the last three months of the period.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to $2,450,000 or 13.8% of
total revenue in the current nine month period, as compared to $2,406,000 or
13.8% of total revenue in the prior year period. Costs in the prior year
period included certain non-recurring reductions to expenses totaling
approximately $284,000. Recurring general and administrative costs were lower
than the prior year period (excluding the impact of the non-recurring
reductions to expenses), principally due to the elimination of certain
corporate office positions since the year earlier period and to strict costs
controls in all areas of the Company's business.
Interest Expense
Principally as a result of the repayment of outstanding debt from
approximately $7.0 million at February 28, 1998 to $5.9 million at February
28, 1999, interest expense decreased to $479,000 in the current nine month
period, as compared to $600,000 in the prior year period.
Merger Costs
Expenses in the nine month period ended February 28, 1999 include costs
incurred to date of $144,000 in connection with the proposed merger with
Nathan's Famous, Inc. (see footnote 6.).
Provision for Income Taxes
The Company's effective tax rate for the nine months ended February 28, 1999
is lower than the rate in the prior year period due to a decrease in the
Company's valuation allowance.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended February 28, 1999, the Company's principal
sources of cash were from operating activities totaling approximately $1.9
million and principal payments received on notes receivable of $356,000. The
Company's principal uses of cash in the current nine month period were for
scheduled debt repayments of $829,000 and the acquisition of a franchised
restaurant and property renovations and improvements totaling $757,000. Cash
and cash equivalents at February 28, 1999, amounted to $4.2 million (which
includes unexpended marketing fund contributions of $1.6 million), as compared
to $3,457,000 (including $970,000 in unexpended marketing fund contributions)
at May 31, 1998. At February 28, 1999, the Company's working capital position
was $512,000, as compared to $88,000 at May 31, 1998, and a deficit of
$298,000 one year ago. The Company's working capital position has improved
principally as a result of improved cash flow from operations over the past
year. 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.
In addition to scheduled debt maturities/repayments for the remainder of
fiscal year 1999 of $253,000, the Company's projected capital requirements
for the balance of the current fiscal year relate primarily to planned capital
expenditures to additional Company operated restaurants in connection with
co-branding with Arthur Treacher's, Inc., other renovations or planned capital
improvements to existing restaurants and certain enhancements to corporate and
restaurant management information systems. The estimated cost of these
planned capital expenditures is not expected to exceed approximately $150,000.
The Company's principal expected source of funds over the remainder of fiscal
year 1999 will be from operations and scheduled repayments of notes receivable
of approximately $188,000.
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, through a
co-branding licensing agreement with Arthur Treacher's, Inc., offers Arthur
Treacher's products in 34 Company and franchised restaurants, and has recently
begun testing the sale of Big Apple Bagels, My Favorite Muffins, and
Brewster's Coffee products in a Company restaurant. The Company also intends
to pursue other co-branding opportunities in the future. Continued emphasis
will also 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
Miami Subs concept.
Seasonality
The Company does not expect seasonality to affect its operations in a
materially adverse manner. However, the Company's restaurant sales during its
first and fourth fiscal quarters have historically been higher than its second
and third quarters.
Year 2000
The Company is continuing its evaluation and assessment of its various
information technology and non-information technology systems, including
software, hardware and equipment that may be potentially affected by the Year
2000 issue. The Company estimates that its evaluation and assessment of these
various systems will be completed shortly. Based on its preliminary
assessment of these systems and discussions with its third-party providers,
the Company currently believes that such internal systems are or will be Year
2000 compliant with minimum modifications, which should be completed by August
31, 1999. Following initial testing, additional remedial action may be
necessary and further testing will be performed. The Company currently
estimates that the costs of completing its Year 2000 plan will not be
material.
The Company is currently in the process of contacting critical suppliers of
products and services to determine the extent to which the Company may be
vulnerable to such parties failure to resolve their own Year 2000 issues. The
Company will assess and attempt to mitigate its risks with respect to the
failure of these third parties to be Year 2000 compliance. The effect, if
any, on the Company's results of operations from the failure of third parties
to be Year 2000 compliant can not be reasonably estimated.
The Company will also be working with and assisting its independent
franchisees to assit them in determining if their point of sale and other
equipment is capable of handling the Year 2000 issue. In the event that such
systems are not adequately modified as necessary, it may adversely affect the
franchisees operations which would adversely affect the Company's results of
operations.
Based on the Company's current assessment to date, no matters have been
identified and the Company does not currently believe that the Year 2000 issue
will have a material adverse effect on the Company's financial condition or
results of operations. The Company's beliefs and expectations, however, are
based on certain assumptions and expectations that may ultimately prove to be
inaccurate. Potential sources of risk include the inability of suppliers to
be Year 2000 compliant, which could result in delays in product deliveries
from suppliers, and disruption of the distribution channel.
The Company has not yet established a contingency plan, but intends to develop
a plan to mitigate the effects of problems experienced by vendors or service
providers in regard to the timely implementation of Year 2000 programs. This
contingency plan is expected to be developed and in place by August 31, 1999.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, Legal Proceedings, in the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 1998 for a
description of legal proceedings involving the Company. Since May 31, 1998,
there have been no material developments in these legal proceedings.
On January 5, 1999, the Company was served with a class action law suit
(Robert J. Feeney, on behalf of himself and all others similarly situated vs.
Miami Subs Corporation, et al., Broward County Circuit Court, Case No.
98-19824-CACE (14)) which was filed against the Company, its directors and
Nathan's Famous, Inc. in a Florida state court by a shareholder of the
Company. The suit alleges that the proposed merger between the Company and
Nathan's is unfair to the Company's shareholders and constitutes a breach by
the defendants of their fiduciary duties to the shareholders of the Company.
The plaintiff seeks among other things (i) class action status, (ii)
preliminary and permanent injunctive relief against consummation of the
proposed merger and (iii) unspecified damages to be awarded to the
shareholders of the Company. The Company believes that the suit is without
merit and intends to defend against it vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
NONE
(b) Reports on Form 8-K
A Form 8-K was filed by the Company on December 4, 1998 to report that
Nathan's Famous, Inc. (NASDAQ:NATH) had purchased from the Company's then
chairman and chief executive officer, approximately 8.1 million shares of
common stock of the Company (approximately 2.0 million shares adjusted for the
Company's one-for-four reverse stock split in January 1999), comprising
approximately 30% of the Company's outstanding shares, for a purchase price of
$4.2 million, and that the Company and Nathan's had entered into a letter of
intent pursuant to which Nathan's Famous, Inc. intends to acquire through a
merger the remaining outstanding shares of common stock of the Company in
exchange for common stock and warrants of Nathan's.
A Form 8-K was filed by the Company on February 3, 1999 to report that the
Company and Nathan's Famous, Inc. ("Nathan's"), and Miami Acquisition Corp. (a
newly formed Florida corporation and wholly-owned subsidiary of Nathan's
("Sub")), entered into an Agreement and Plan of Merger pursuant to which Subs
will merge with and into the Company, with Miami Subs Corporation thereafter
becoming a wholly-owned subsidiary of Nathan's.
A Form 8-K was filed by the Company on March 5, 1999 to report that Miami Subs
Corporation reported in a press release dated March 4, 1999 that due to the
denial by the Nasdaq Listing Qualifications Panel (the "Panel") of the
Company's request to extend the period of time to comply with the final
condition specified by the Panel to maintain its listing on the Nasdaq Small
Cap Market, trading in its common stock on such market ceased as of the close
of business on March 2, 1999. The Company's common stock commenced trading on
the OTC Bulletin Board on March 3, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
April 12, 1999 MIAMI SUBS CORPORATION
By: /s/ Donald L. Perlyn
DONALD L. PERLYN
President and Chief Operating Officer
By: /s/ Jerry W. Woda
JERRY W. WODA
Senior Vice President, Chief Financial
Officer, and Principal Accounting and
Financial Officer
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