UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19623
MIAMI SUBS CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0249329
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 N.W. 31st Avenue, Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(Zip Code)
(954) 973-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 8, 1999
Common Stock, $.01 par value 6,779,835
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 30, May 31,
ASSETS 1998 1998
- --------------------------------------------------------------------- -------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund
contributions of $1,620,000 and $970,000, respectively) $ 4,340,000 $ 3,457,000
Notes and accounts receivable - net 1,497,000 1,743,000
Food and supplies inventories 179,000 179,000
Other 69,000 77,000
Total Current Assets 6,085,000 5,456,000
Notes receivable 6,237,000 6,076,000
Property and equipment - net 11,132,000 11,612,000
Intangible assets - net 6,513,000 6,718,000
Other 433,000 464,000
TOTAL $ 30,400,000 $30,326,000
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 4,858,000 $ 4,276,000
Current portion of notes payable and capitalized lease obligations 957,000 1,092,000
Total Current Liabilities 5,815,000 5,368,000
Long-term portion of notes payable and capitalized lease obligations 5,167,000 5,613,000
Deferred franchise fees and other deferred income 1,412,000 1,577,000
Accrued liabilities and other 1,450,000 1,735,000
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 (6,685,000) (7,208,000)
18,163,000 17,640,000
Note receivable from sale of stock (563,000) (563,000)
Treasury Stock (1,044,000) (1,044,000)
-------------- ------------
Total Shareholders' Equity 16,556,000 16,033,000
-------------- ------------
TOTAL $ 30,400,000 $30,326,000
===================================================================== ============== ============
See accompanying notes to consolidated financial statements.
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<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended November 30,
------------------- -------------
REVENUES 1998 1997
- ------------------------------------------------------------ ------------------- -------------
<S> <C> <C>
Restaurant sales $ 4,407,000 $ 4,354,000
Revenues from franchised restaurants 1,044,000 1,215,000
Net gain from sales of restaurants 8,000 5,000
Interest income 133,000 190,000
Other revenues 113,000 83,000
------------------- -------------
Total 5,705,000 5,847,000
------------------- -------------
EXPENSES
- ------------------------------------------------------------
Restaurant operating costs 4,131,000 4,251,000
General, administrative and franchise costs 803,000 819,000
Depreciation and amortization 353,000 361,000
Interest expense 163,000 198,000
------------------- -------------
Total 5,450,000 5,629,000
------------------- -------------
Income before provision for income taxes 255,000 218,000
Provision for income taxes 48,000 76,000
------------------- -------------
Net income $ 207,000 $ 142,000
=================== =============
Net income per share:
Basic $ .01 $ .01
=================== =============
Diluted $ .01 $ .01
=================== =============
Shares used in computing net income per share:
============================================================
Basic 27,119,000 27,119,000
============================================================ =================== =============
Diluted 27,119,000 27,119,000
============================================================ =================== =============
See accompanying notes to consolidated financial statements.
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<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended November 30,
----------- -------------------
REVENUES 1998 1997
- ------------------------------------------------------------ ----------- -------------------
<S> <C> <C>
Restaurant sales $ 9,329,000 $ 9,132,000
Revenues from franchised restaurants 2,242,000 2,355,000
Net gain from sales of restaurants 51,000 16,000
Interest income 297,000 387,000
Other revenues 169,000 175,000
Total 12,088,000 12,065,000
EXPENSES
- ------------------------------------------------------------
Restaurant operating costs 8,714,000 8,801,000
General, administrative and franchise costs 1,680,000 1,719,000
Depreciation and amortization 716,000 729,000
Interest expense 333,000 406,000
----------- -------------------
Total 11,443,000 11,655,000
Income before provision for income taxes 645,000 410,000
Provision for income taxes 122,000 143,000
----------- -------------------
Net income $ 523,000 $ 267,000
Net income per share:
Basic $ .02 $ .01
=========== ===================
Diluted $ .02 $ .01
=========== ===================
Shares used in computing net income per share:
============================================================
Basic 27,119,000 27,119,000
============================================================ =========== ===================
Diluted 27,119,000 27,130,000
============================================================ =========== ===================
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended November 30,
OPERATING ACTIVITIES: 1998 1997
------------------ --------------
<S> <C> <C>
Net income $ 523,000 $ 267,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 496,000 510,000
Amortization of intangible assets 220,000 219,000
Net gain and franchise fees from sales of restaurants (76,000) (16,000)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 104,000 (316,000)
Decrease in food and supplies inventories - 12,000
Decrease in other current assets 8,000 23,000
Decrease in other assets 16,000 19,000
Increase (decrease) in accounts payable and accrued liabilities 621,000 (150,000)
Decrease in deferred fees and accrued liabilities (120,000) (257,000)
Net Cash Provided By Operating Activities 1,792,000 311,000
INVESTMENT ACTIVITIES:
Purchase of restaurant, property, and equipment (622,000) (171,000)
Proceeds from sales of restaurants 80,000 20,000
Payments received on notes receivable 214,000 570,000
Cash (Used For) Provided By Investment Activities (328,000) 419,000
FINANCING ACTIVITIES:
Repayment of debt (581,000) (681,000)
Cash (Used For) Financing Activities (581,000) (681,000)
INCREASE IN CASH 883,000 49,000
CASH AT BEGINNING OF PERIOD 3,457,000 2,940,000
CASH AT END OF PERIOD $ 4,340,000 $ 2,989,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 329,000 $ 407,000
================================================================================= ================== ==============
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
================================================================================= ================== ==============
See accompanying notes to consolidated financial statements.
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MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the Company's financial position
and results of operations for the periods presented. The financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required for annual financial statements. The
financial statements included herein should be read in conjunction with the
financial statements presented in the Company's Annual Report on Form 10-K for
the year ended May 31, 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
NOVEMBER 30, November 30,
-------------------- -------------------
1998 1997
-------------------- -------------------
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Royalties $ 958,000 $ 885,000
Franchise and development fees 96,000 94,000
Sublease rental income (net) (57,000) 46,000
Cancellation of development agreements 47,000 190,000
-------------------- -------------------
Total $ 1,044,000 $ 1,215,000
==================== ===================
SIX MONTHS ENDED Six Months Ended
NOVEMBER 30, November 30,
-------------------- -------------------
1998 1997
-------------------- -------------------
Royalties $ 1,995,000 $ 1,807,000
Franchise and development fees 227,000 246,000
Sublease rental income (net) (27,000) 112,000
Cancellation of development agreements 47,000 190,000
-------------------- -------------------
Total $ 2,242,000 $ 2,355,000
==================== ===================
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3. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
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November 30, May 31,
1998 1998
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<S> <C> <C>
Notes receivable $ 7,147,000 $ 7,112,000
Royalties and other receivables due from franchisees 670,000 666,000
Other 64,000 229,000
-------------- ------------
Total 7,881,000 8,007,000
Less allowance for doubtful accounts (147,000) (188,000)
-------------- ------------
7,734,000 7,819,000
Less notes receivable due after one year (6,237,000) (6,076,000)
-------------- ------------
Notes and accounts receivable-current portion $ 1,497,000 $ 1,743,000
==================================================== ============== ============
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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. REVERSE STOCK SPLIT
Effective on November 9, 1998, the Company's common stock was moved from The
Nasdaq National Market to The Nasdaq SmallCap Market, and the Company was
granted a temporary exception to the minimum bid price requirement of The
Nasdaq SmallCap Market. On December 23, 1998, the Company was notified by
Nasdaq that, on or before January 7, 1999, the Company must effect a reverse
stock split sufficient to evidence a minimum closing bid price of at least $1
per share and that the Company's closing bid price immediately thereafter must
meet or exceed $1 per share for a minimum of ten consecutive trading days.
The Company must also demonstrate compliance with all requirements for
continued listing on The Nasdaq SmallCap Market and satisfy certain other
conditions as specified by Nasdaq. In response to this action, 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.
6. PROPOSED MERGER
On November 25, 1998, the Company and Nathan's Famous, Inc. ("Nathan's)
entered into a letter of intent 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 execution of a merger agreement and approval by the
stockholders' of both Nathan's and Miami Subs.
Through a direct purchase on November 25, 1998, Nathan's acquired all of the
approximate 8.1 million shares of Miami Subs common stock which was
beneficially owned by Mr. Gus Boulis, the Company's former chairman and chief
executive officer.
Wayne Norbitz, president and chief operating officer of Nathan's, and Robert
Eide, a director of Nathan's, were appointed to the Miami Subs board of
directors, and Howard M. Lorber, chairman and chief executive officer of
Nathan's, was appointed chairman and chief executive officer of Miami Subs.
7. LITIGATION
On January 5, 1999, the Company was served with a class action law suit
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, as contemplated by
the companies non-binding letter of intent, 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 November
30, 1998, 26 Miami Subs Grill restaurants (including six Company operated
restaurants) have implemented the co-branding program and were selling
Treacher's products.
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 six months ended November 30, 1998 are not necessarily indicative of
the results that may be expected for the Company's fiscal year.
During the six months ended November 30, 1998, seven franchised restaurants
opened and five franchised restaurants closed. In addition, the Company
sold/transferred six restaurants to franchisees and acquired five restaurants
from franchisees. At November 30, 1998, there were 193 restaurants in the
system, consisting of 16 Company operated restaurants and 177 franchised
restaurants. At November 30, 1997, there were 193 restaurants in the system,
consisting of 15 Company operated restaurants and 178 franchised restaurants.
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1998 TO NOVEMBER 30, 1997
Total Revenues
Total Company revenues declined 2.4% to approximately $5.7 million in the
second quarter of the current year, as compared to $5.8 million in the second
quarter of the prior year. The decrease in total revenues resulted
principally from a decrease in franchise revenues and interest income.
Restaurant Sales
The Company's total restaurant sales increased 1.2% to $4,407,000 in the
current quarter, as compared to $4,354,000 in the prior year quarter. The
increase in sales resulted principally from an increase in same store sales.
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) increased by approximately 1.8% in the current quarter.
Same-store-sales for the Company's restaurants in the year earlier quarter
were down approximately 4.6%. 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 November
30, 1998, had been added to six of the Company's restaurants.
During the current quarter the Company reacquired two restaurants from a
franchisee in exchange for notes payable to the Company, completed the
purchase of one restaurant from a franchisee, and transferred the operations
of two restaurants to a franchisee. At November 30, 1998, Company operated
restaurants were located in Florida (11); Texas (4), and New York (1). The
Company currently plans to sell or transfer to franchisees up to seven of the
restaurants that it operated at November 30, 1998. 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 approximately $1.0 million in
the current quarter, as compared to $1.2 million in the prior year quarter.
In the current year's second quarter, three franchised restaurants opened, the
Company transferred the operations of two restaurants to franchisees and
acquired/reacquired three restaurants from franchisees, and two franchised
restaurants closed. At quarter end there were 177 franchised restaurants, as
compared to 178 franchised restaurants one year ago.
Royalty income in the current quarter increased to $958,000, as compared to
$885,000 in the prior year quarter, principally from the opening of new
restaurants since the prior year quarter and collections of delinquent royalty
fees. At November 30, 1998, 24% 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 continued the trend
of improvement, declining by approximately 1.7% in the current year's second
quarter (as compared to a decline of approximately 8.0% 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 November 30, 1998, had been
added to 20 franchised restaurants.
During the current year's second quarter, 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's second quarter, the Company recognized
$190,000 from such terminations.
The Company leases/subleases principally Miami Subs restaurant facilities to
franchisees and revenues (net of related lease costs) have been adversely
affected from the delinquency and non-payment of certain of these
leases/subleases. At November 30, 1998, nine restaurant facilities which are
leased/subleased to franchisees were two or more months delinquent. During
the current quarter, the Company reacquired two restaurants from a franchisee
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 $36.1 million in the
current quarter, as compared to $35.9 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 November 30, 1998, had been
added to 26 Miami Subs restaurants. Same-store-sales for all comparable
restaurants in the system declined by approximately 1.3% in the current
quarter. Same-store-sales for the system in the prior year quarter were down
approximately 7.3%. 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 26 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 transferred the operations of two restaurants to
franchisees during the current quarter pursuant to management agreements which
give the franchisees the option to purchase the restaurants in the future. No
gain is recognized by the Company at the time of transfer of operations to the
franchisee. Any ultimate gains to be realized will be 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 or 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.
Total notes receivable amounted to approximately $7.1 million at November 30,
1998, as compared to $8.9 million at November 30, 1997. At November 30, 1998,
six individual notes receivable which are due from franchisees with
outstanding balances totaling approximately $1.3 million (net of deferred fees
and credits) were delinquent in monthly payments due to the Company. As a
result of these delinquencies and the lower average balance of notes
receivable outstanding during the quarter, interest income declined to
$133,000 in the current quarter, as compared to $190,000 in the year earlier
quarter.
Restaurant Operating Costs
Restaurant operating costs in Company operated restaurants amounted to
approximately $4.1 million or 93.7% of sales in the current quarter, as
compared to 97.6% of sales in the prior year's second quarter. 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
current quarter.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to $803,000 or 14.1% of
total revenue in the current quarter, as compared to $819,000 or 14.0% of
total revenue in the prior year quarter. Costs in the prior year quarter
included certain non-recurring reductions to expenses totaling approximately
$125,000. The reduction in costs in the current quarter as compared to the
year earlier quarter (before the impact of the non-recurring reductions to
expenses) principally resulted from 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 $7.3 million at November 30, 1997 to $6.1 million at November
30, 1998, interest expense decreased to $163,000 in the current quarter, as
compared to $198,000 in the prior year quarter.
Provision for Income Taxes
The Company's effective tax rate for the three months ended November 30, 1998
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 SIX MONTHS ENDED NOVEMBER 30, 1998 TO NOVEMBER 30, 1997
Total Revenues
Total Company revenues amounted to approximately $12.1 million in both the
first half of the current year and the first half of the prior year. For the
current six month period, an increase in Company restaurant sales was offset
by a decrease in franchise revenues and interest income.
Restaurant Sales
The Company's total restaurant sales increased 2.2% to approximately $9.3
million in the current six month period, as compared to $9.1 million in the
prior year six month period. The increase in sales resulted from an increase
in same store sales and a change in the units 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
periods) increased by approximately 1.0% in the current six month period.
Same-store-sales for the Company's restaurants in the year earlier period
were down approximately 5.0%. 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 November
30, 1998, had been added to six of the Company's restaurants.
During the first half of the current year the Company reacquired four
restaurants from franchisees in exchange for notes payable to the Company,
purchased one restaurant from a franchisee, and sold/transferred six
restaurants to franchisees. At November 30, 1998, Company operated
restaurants were located in Florida (11); Texas (4), and New York (1). The
Company currently plans to sell or transfer to franchisees up to seven of the
restaurants that it operated at November 30, 1998. 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 $2,242,000 in the current six
month period, as compared to $2,355,000 in the prior year period.
During the current six month period, seven franchised restaurants opened, the
Company sold/transferred six restaurants to franchisees and
acquired/reacquired five restaurants from franchisees, and five franchised
restaurants closed. At November 30, 1998, there were 177 franchised
restaurants, as compared to 178 franchised restaurants one year ago.
Royalty income in the current six month period increased by 10.4% to
$1,995,000, as compared to $1,807,000 in the prior year period, principally
from the opening of new restaurants since the prior year period and
collections of delinquent royalty fees. At November 30, 1998, 24% 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 continued the
recent trend of improvement, declining by approximately 1.6% in the current
six month period (as compared to a decline of approximately 9.3%in the prior
year six 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 November 30, 1998,
had been added to 20 franchised restaurants.
During the current six 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 six month period, the Company recognized
$190,000 from such terminations.
The Company leases/subleases principally Miami Subs restaurant facilities to
franchisees and revenues (net of related lease costs) have been adversely
affected from the delinquency and non-payment of certain of these
leases/subleases. At November 30, 1998, nine restaurant facilities which are
leased/subleased to franchisees were two or more months delinquent. During
the current six month period, the Company reacquired four 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 $74.3 million in the
current six month period, as compared to $73.6 million in the year earlier six
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 November 30,
1998, had been added to 26 Miami Subs restaurants. Same-store-sales for all
comparable restaurants in the system declined by approximately 1.3% in the
current six month period. Same-store-sales for the system in the prior year
six month period were down approximately 8.9%. 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 26 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 six restaurants to franchisees
during the first half of the current year, as compared to three restaurants
that were sold 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 six month period, loans in the amount of $1,015,000 were
made to franchisees in connection with the sale of four restaurants during the
period. Total notes receivable amounted to approximately $7.1 million at
November 30, 1998, as compared to $8.9 million at November 30, 1997. At
November 30, 1998, six individual notes receivable which are due from
franchisees with outstanding balances totaling approximately $1.3 million (net
of deferred fees and credits) were delinquent in monthly payments due to the
Company. As a result of these delinquencies and the lower average balance
of notes receivable outstanding during the current period, interest income
declined to $297,000 in the current six month period, as compared to $387,000
in the year earlier period.
Restaurant Operating Costs
Restaurant operating costs in Company operated restaurants amounted to
approximately $8.7 million or 93.4% of sales in the current six month period,
as compared to 96.4% 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
current six month period.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to $1,680,000 or 13.9% of
total revenue in the current six month period, as compared to $1,719,000 or
14.2% of total revenue in the prior year period. Costs in the prior year
period included certain non-recurring reductions to expenses totaling
approximately $125,000. The reduction in costs in the current period as
compared to the year earlier period (before the impact of the non-recurring
reductions to expenses) principally resulted from 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 $7.3 million at November 30, 1997 to $6.1 million at November
30, 1998, interest expense decreased to $333,000 in the current six month
period, as compared to $406,000 in the prior year period.
Provision for Income Taxes
The Company's effective tax rate for the six months ended November 30, 1998 is
lower than the rate in the prior year perioddue 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 first half of the current year, the Company's principal sources of
cash were from operating activities totaling approximately $1.8 million and
principal payments received on notes receivable of $214,000. The Company's
principal uses of cash in the current six month period were for scheduled debt
repayments of $581,000 and the acquisition of a franchised restaurant and
property renovations and improvements totaling approximately $622,000. Cash
and cash equivalents at November 30, 1998, amounted to $4,340,000 (which
includes unexpended marketing fund contributions of $1,620,000), as compared
to $3,457,000 (including $970,000 in unexpended marketing fund contributions)
at May 31, 1998. At November 30, 1998, the Company's working capital position
was $270,000, as compared to $88,000 at May 31, 1998, and a deficit of
$662,000 one year ago. The Company's working capital position has improved
principally as a result of improved operating results 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 $524,000, 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, the completion of the acquisition of a
restaurant, and certain enhancements to corporate and restaurant management
information systems. The estimated cost of these planned capital expenditures
is not expected to exceed approximately $325,000.
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 $440,000.
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., is currently
offering Arthur Treacher's products in 26 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 May
31, 1999. Following initial testing, additional remedial action may be
necessary and further testing will be performed. The Company has not yet
determined the cost of completing its Year 2000 plan on its internal systems,
but currently does not estimate that such costs will 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 ensure that 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 July 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 L. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, Legal Proceedings, in the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 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, as contemplated by the companies non-binding letter of intent, 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 dated November 10, 1998 was filed by the Company to report
that the Company's common stock was moved to the Nasdaq SmallCap Market
pursuant to a temporary exception that the Company received to the minimum bid
price requirement and as explained in such Report.
A Form 8-K dated December 4, 1998 was filed by the Company 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 (comprising approximately 30% thereof) 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIAMI SUBS CORPORATION
Date: January 8, 1999 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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<FISCAL-YEAR-END> MAY-31-1999 MAY-31-1999
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<CASH> 4,340,000 4,340,000
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<RECEIVABLES> 1,644,000 1,644,000
<ALLOWANCES> (147,000) (147,000)
<INVENTORY> 179,000 179,000
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