FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
As of August 23, 1999, 6,667,335 shares of common stock were outstanding. On
such date, the aggregate market value of the common stock held by
non-affiliates of the Registrant, was approximately $7,386,876 (amount
computed based on the closing price on August 23, 1999).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement which the Registrant will file
with the Securities and Exchange Commission in connection with the Company's
fiscal 2000 annual meeting of shareholders, are incorporated by reference in
Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Miami Subs Corporation (hereinafter referred to as "Miami Subs") develops,
owns, operates and franchises restaurants under the name "Miami Subs" and
"Miami Subs Grill". The Miami Subs restaurants are designed to offer fresh
quality food delivered in a fast-food environment similar to other fast food
restaurants, and the quality, freshness and variety found at casual dining
restaurants.
Miami Subs historically expanded principally through a strategy of leasing
existing free-standing fast food restaurants and other properties, and
converting them to Miami Subs restaurants. Although Miami Subs still believes
that the strategy of converting existing properties will continue, competition
for closed and under-performing properties has increased significantly in
recent years, and fewer sites suitable for conversion have been available.
In order to supplement its traditional free-standing unit growth, Miami Subs
has developed various programs for franchisees involving smaller,
non-traditional restaurants. At May 31, 1999, there were 31 non-traditional
franchise restaurants in the system.
As of May 31, 1999, the Miami Subs restaurant system consisted of 182
restaurants, of which 124 of the restaurants were located in Florida, 49
restaurants were located in 15 other states, and nine restaurants were located
in Ecuador, Puerto Rico, Peru and the Dominican Republic. Of the total
restaurants in the system at May 31, 1999, 15 were company-operated and 167
were operated by franchisees. Miami Subs intends to focus its future growth
on franchise development, with the objective of expanding the franchise system
principally in existing markets through development of traditional and
non-traditional restaurants, including expansion of co-branding opportunities
with Arthur Treacher's Inc. and Nathan's Famous, Inc. In part due to the
limited number of restaurants located in other states and the impact that this
has on the ability to advertise, the restaurants operating outside of Florida
have generally not been as successful as the restaurants operating in Florida.
Additionally, as a result of the current concentration of restaurants in
Florida, Miami Subs and its Florida franchisees could be more severely
affected by any adverse economic conditions in Florida than would a more
geographically diversified restaurant company.
Miami Subs receives royalty and advertising fees from its franchised
restaurants, and also receives lease/sub-lease rental income from some of the
franchised restaurants (see Item 2. "Properties"). In addition, Miami Subs
has guaranteed certain third party equipment and property leases for some
franchisees and has financed the sale of restaurants to franchisees.
Accordingly, Miami Subs' success and future profitability will be
substantially dependent on the management skills and success of its
franchisees. In addition, expansion of the chain will be dependent on Miami
Subs' ability to attract qualified franchisees who will be able to
successfully develop and operate restaurants.
Miami Subs was incorporated in the State of Florida by Gus Boulis, the founder
of the concept, during August 1990, and, through a series of transactions,
Miami Subs acquired the worldwide rights to develop, own, operate, and
franchise Miami Subs restaurants from Boulis and from privately-owned
companies owned by or affiliated with him. The remaining rights were acquired
during 1991 through a merger with QSR, Inc. In November 1998, Boulis sold all
of the shares of Miami Subs common stock beneficially owned by him,
representing approximately 30% interest in the company, to Nathan's Famous,
Inc., and in January 1999, Miami Subs and Nathan's entered into a definitive
merger agreement whereby Nathan's has proposed to acquire all of the
outstanding shares of Miami Subs for shares in Nathan's. Completion of the
merger is subject to approval of both companies' shareholders and the
satisfaction of other customary closing conditions.
THE MIAMI SUBS CONCEPT
Miami Subs restaurants feature moderately priced lunch, dinner and snack
foods, including hot and cold submarine sandwiches, various ethnic foods such
as gyros, pita sandwiches and Greek salads, flame grilled hamburgers and
chicken breasts, chicken wings, fresh salads, ice cream and other desserts.
Soft drinks, iced tea, coffee, beer and wine are also offered. Menu items are
generally priced between $1.49 and $5.29.
In addition to offering standard Miami Subs products for sale, Miami Subs has
agreements with Arthur Treacher's, Inc. and Baskin-Robbins which enable
approved Miami Subs restaurants to co-brand with these companies and sell
their products in the restaurants.
Freshness and quality of breads, produce and other ingredients are strongly
emphasized. The menu includes low-fat selections such as salads, grilled
chicken breasts, vegetarian items and non-fat frozen yogurt which Miami Subs
believes are perceived as nutritious and appealing to health conscious
consumers. Miami Subs believes it has become known for certain "signature"
foods, such as grilled chicken on pita bread, cheese steak subs, and gyros on
pita bread.
Miami Subs restaurants feature a distinctive decor unique to the Miami Subs
concept. The exterior of free-standing restaurants feature an unusual roof
design and neon pastel highlights for easy recognition. Interiors have a
tropical motif in a neon pink and blue color scheme with murals of fish,
mermaids, flamingos and tropical foliage. Exteriors and interiors are
brightly lit to create an inviting, active ambience to distinguish the
restaurants from its competitors. At May 31, 1999, 145 of the existing Miami
Subs restaurants were located in freestanding buildings, consisting of
approximately 2,000 to 5,000 square feet.
Miami Subs restaurants are typically open seven days a week, generally open at
10:30 am, and many of the restaurants have extended late-night hours. Indoor
service is provided at a walk-up counter where the customer places an order
and is given an order number and a drink cup. The customer then proceeds to a
self service soda bar while the food is prepared to order. Typical time from
order to pick-up is approximately five minutes.
Drive-thru service is provided at principally all free-standing restaurants.
All standard menu items are generally available at the drive-thru, but the
drive-thru menu board is simplified to speed ordering. After ordering via
intercom, the customer proceeds to the first of two windows. At the first
window, drinks are served and payments taken. This allows the customer to
enjoy a soft drink while proceeding to the next window for the completion of
the order. Miami Subs estimates that drive-thru sales account for
approximately 35% - 45% of sales.
NON-TRADITIONAL RESTAURANTS
Miami Subs has developed and initiated various programs for franchisees
involving non-traditional restaurant development, consisting of smaller
restaurants that could be located on tollroads, at airports, in convenience
stores, retail and office buildings, and other non-traditional locations.
Typically, these restaurants are smaller and less costly to develop and
operate than the traditional restaurants. With the exception of many of the
airport locations, the sales in the non-traditional restaurants are typically
significantly lower than the standard free-standing restaurant. In addition,
where appropriate, certain modifications have been made to food preparation
and delivery procedures and the standard menu has been revised.
During fiscal year 1999, seven of the 10 new restaurants opened by franchisees
were non-traditional restaurants. At May 31, 1999, there were 31
non-traditional restaurants in the system, including four restaurants located
in convenience store/gas stations, 12 restaurants located in airport
facilities, five restaurants located in retail locations, two located in
turnpike facilities, two located in universities, three located in strip
shopping centers, and three other locations.
CO-BRANDING
Under an agreement with Baskin-Robbins, Baskin-Robbins ice cream products may
be sold in approved restaurants pursuant to a separate franchise agreement
with Baskin-Robbins. Under the agreement, Miami Subs performs training,
operational monitoring and guidance over the Baskin-Robbins products being
sold in the restaurants. As of May 31, 1999, six of the company-operated
restaurants and 25 franchised restaurants sell Baskin-Robbins ice cream
products. Branded ice cream products, including Edy's, McArthur's, Hershey's,
Blue Bunny, Colombo, Bressler's, Haagen-Daz, and other local brands, are also
sold in many of the other restaurants.
During fiscal year 1998, Miami Subs began a co-branding test with Arthur
Treacher's, Inc. providing for the sale of certain of Arthur Treacher's
signature products in approved Miami Subs restaurants. In August 1998, Miami
Subs entered into a co-branding licensing agreement with Arthur Treacher's and
in April 1999, the licensing agreement was amended to grant Miami Subs the
exclusive right to co-brand the Arthur Treacher's concept and products in the
United States to include future developed Miami Subs restaurants and other
fast food restaurants. At May 31, 1999, 45 Miami Subs restaurants were
selling Arthur Treacher's signature products.
In January 1999, Miami Subs began selling "Nathan's Famous" all-beef
frankfurters and fresh, crinkle-cut french fries in a company-operated
restaurant located in New York. Miami Subs anticipates expanding this
co-branding opportunity to other Miami Subs restaurants in the future.
COMPANY OPERATED RESTAURANTS
Since 1997, Miami Subs has focused its growth and operating strategy on
franchising, and as part of this strategy, Miami Subs sold/transferred many of
its company-operated restaurants to franchisees. At May 31, 1999, Miami Subs
operated 15 restaurants, of which 10 are located in Florida, four are located
in Texas, and one is located in New York. Miami Subs currently plans on
selling up to six of the company-operated restaurants that it operated at May
31, 1999.
Miami Subs operated restaurants are utilized for many purposes which are
integral to the entire system. New menu items are tested and restaurant
management and operating personnel are trained in standardized procedures. In
addition, operating standards are further refined, and Miami Subs acquires a
better understanding of day-to-day management and operating concerns of its
franchisees.
In an effort to improve operating profits and to enhance product quality in
all restaurants, Miami Subs maintains a purchasing department that works with
suppliers on behalf of the entire system to obtain high quality products and
services at competitive prices. The purchasing department approves all
products and product specifications, and has also private labeled certain
products. Miami Subs utilizes Multifoods Distribution Group, Inc., a
subsidiary of International Multifoods Corporation, a national food
distributor, which enables Miami Subs and its franchisees to order and receive
deliveries of most of its food and paper products directly through the
distributor. Miami Subs believes that this arrangement is efficient and cost
effective and facilitates quality control. A franchisee may use an alternate
source for its supply needs that complies with specifications upon approval by
Miami Subs.
Miami Subs utilizes kitchen equipment in its restaurants which is designed to
be versatile, improve product consistency, and facilitate menu modifications.
In conjunction with a major supplier, Miami Subs assisted in the development
of a four-chain broiler intended to replace chargrills and convection ovens.
Miami Subs also utilizes computerized fryers with automatic lift-arms. The
equipment is programmed to follow instructions for cooking temperatures and
times. Fresh meats and other products, which are purchased in pre-weighed
individual servings, can be consistently cooked-to-order automatically. Miami
Subs requires that its franchisees also utilize this kitchen equipment to
maximize consistency and speed of food preparation.
FRANCHISE OPERATIONS
Strategy. Miami Subs planned future growth will be focused on increasing
the number of franchised restaurants, through both traditional and
non-traditional restaurants, and through its co-branding development agreement
with Arthur Treacher's.
The primary criteria considered by Miami Subs in the review and approval of
franchisees are prior experience in operating restaurants or other comparable
business experience, and capital available for investment. Miami Subs
believes that it has attracted a number of franchisees with significant
experience in the restaurant industry as a result of the unique aspects of the
concept.
Franchisee Support Services. Miami Subs maintains a staff of operations
personnel to train and assist franchisees in opening new restaurants and to
monitor the operations of existing restaurants. These services are provided
as part of Miami Subs franchise program. New franchisees are required to
complete a six-week training program. Upon the opening of a new franchised
restaurant, Miami Subs representatives are typically sent to the restaurant to
assist the franchisee during the opening period. These company
representatives work in the restaurant to monitor compliance with Miami Subs
standards and provide additional on-site training of the franchisee's
restaurant personnel.
Miami Subs also provides development and construction support services to its
franchisees. Plans and specifications for the restaurants are reviewed and
approved by Miami Subs before improvements begin. Miami Subs' personnel
typically visit the facility during construction to meet with the franchisee's
site contractor and to verify that construction standards are met.
Training. New franchisees are required to complete a six-week program that
features various aspects of day-to-day operations and certification in all
functioning positions. The program consists of formal classroom training and
in--restaurant training, including human resources, accounting, purchasing and
labor and food handling laws. Generally, a team of Miami Subs' employed
personnel is provided for new restaurants to conduct hands-on training and to
ensure compliance with standards. Standard operating manuals are provided to
each franchisee.
Quality Assurance. To maintain uniformly high standards of appearance,
service, food and beverage quality, Miami Subs has adopted policies and
implemented a monitoring program. Franchisees are expected to adhere to Miami
Subs' specifications and standards in connection with the selection and
purchase of products used in the operation of the restaurant. Detailed
specifications are provided for the products used, and franchisees must
request approval for any deviations. Miami Subs does not generally sell
equipment, supplies or products to its franchisees. The franchise agreement
requires franchisees to operate their restaurants in accordance with Miami
Subs' requirements. Ongoing advice and assistance is provided to franchisees
in connection with the operation and management of each restaurant. Miami
Subs' area consultants are responsible for oversight of franchisees and
periodically visit each restaurant. During such visits, the area consultant
completes a report which contains evaluations on speed of preparation for menu
items, quality of delivered product, cleanliness of restaurant facilities as
well as evaluations of managers and other personnel. The area consultants
also make unannounced follow-up visits to ensure adherence to operational
specifications.
Miami Subs also utilizes information about the restaurants which is received
from customers on Miami Subs' standardized "comment card" and maintains a
toll-free telephone number to receive customer comments.
Franchise Agreements. Franchisees are required to execute a standard
franchise agreement or other agreement with Miami Subs relating to the
operation of each restaurant. Currently, the term of the franchise agreement
is between five and 20 years, and the initial franchise fee is $25,000 for
traditional restaurants and $15,000 for certain non-traditional restaurants.
The franchise agreement provides for the payment of a monthly royalty fee
based on gross sales for the term of the franchise agreement, and additional
charges based on a percentage of sales to support various system-wide and
local advertising funds.
Development Agreements. In addition to individual franchise agreements,
Miami Subs from time to time has entered into development agreements with
certain franchisees. The development agreement establishes a minimum number
of restaurants that the franchisee is committed to open in an agreed upon
exclusive area during the term of the agreement. In addition to receiving a
franchise fee for each restaurant opened, Miami Subs also receives a
non-refundable fee based upon the number of restaurants committed to be opened
under the agreement.
During fiscal year 1999, ten new franchised restaurants opened, including
three traditional restaurants and seven non-traditional restaurants, and 19
franchised restaurants closed. At May 31, 1999, there were 167 franchise
restaurants operating in the system, including 31 non-traditional restaurants.
RESTAURANT LOCATIONS
At May 31, 1999, there were 182 Miami Subs restaurants operating in the
system, of which 15 were operated by Miami Subs and 167 were operated by
franchisees. The following table sets forth the locations of such
restaurants.
<TABLE>
<CAPTION>
Company
Operated Franchised
-------- ----------
<S> <C> <C>
Florida 10 114
North Carolina - 14
South Carolina - 2
Georgia - 3
Tennessee - 2
Virginia - 1
Kentucky - 1
Texas 4 6
New Jersey - 4
New York 1 1
Pennsylvania - 5
Indiana - 1
Connecticut - 1
Nebraska - 1
Kansas - 1
Minnesota - 1
Ecuador - 4
Puerto Rico - 2
Peru - 2
Dominican Republic - 1
-------- ----------
Total 15 167
================== ======== ==========
</TABLE>
MARKETING
The physical facility of each Miami Subs restaurant represents a key component
of Miami Subs' marketing strategy. The restaurants have well-lit exteriors
featuring a distinctive roof design, an abundance of pastel neon lights and a
lively interior featuring a tropical motif which Miami Subs believes creates
strong appeal during the day and night.
Miami Subs' advertising programs principally utilize radio and print, and
carries the theme that Miami Subs offers a variety of menu selections at
competitive, fast food prices. Miami Subs' radio advertisements are broadcast
principally in markets where there are sufficient restaurants to benefit from
such advertisements.
EMPLOYEES
At May 31, 1999, Miami Subs employed 199 full-time and 267 part-time
employees. 435 of the employees work in Miami Subs operated restaurants and
the remaining 31 are administrative, supervision, and support personnel. None
of the employees belong to a labor union, and Miami Subs believes its employee
relations to be good.
As the operation and expansion of the Miami Sub's restaurant business is
dependent upon attracting, training and keeping competent employees,
restaurant management applicants receive screening and training. Miami Subs
emphasizes continuing restaurant management and crew training and holds
various meetings stressing communications and skill development for managers.
Benefit programs for eligible employees include group life, health,
hospitalization, paid vacations and a bonus plan for restaurant managers.
TRADEMARKS
Miami Subs believes its trademarks and service marks are of significant value
and an important marketing tool. Miami Subs has registered the marks "Miami
Subs and Design" and "Miami Subs Grill and Design" with the United States
Patent and Trademark Office. In addition, the marks have been registered in
the states of Florida, Georgia, South Carolina, and Louisiana, and various
foreign countries.
COMPETITION
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional
or national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the
number of, and particular locations of, competing restaurants. Factors such
as inflation, increases in food, labor and energy costs, the availability and
cost of suitable sites, fluctuating interest and insurance rates, state and
local regulations and licensing requirements and the availability of an
adequate number of hourly paid employees can also adversely affect the fast
food restaurant industry. Multi-unit restaurant chains like Miami Subs can
also be substantially adversely affected by publicity resulting from food
quality, illness, injury, or other health concerns. Major chains, which have
substantially greater financial resources and longer operating histories than
Miami Subs, dominate the fast food restaurant industry. Miami Subs competes
primarily on the basis of location, food quality, price and menu diversity.
Changes in pricing or other marketing strategies by these competitors can have
an adverse impact on Miami Subs' sales, earnings and growth. In addition,
with respect to the sale of franchises, Miami Subs competes with many
franchisors of restaurants and other business concepts for qualified and
financially capable franchisees.
REGULATION
Miami Subs is subject to a variety of federal, state, and local laws affecting
the conduct of its business. Operating restaurants are subject to various
sanitation, health, fire and safety standards and restaurants under, or
proposed for construction, are subject to state and local building codes,
zoning restrictions, alcoholic beverage regulations, and compliance with the
Americans With Disabilities Act of 1990. Difficulties in obtaining or failure
to obtain required licenses or approvals could delay or prevent the
development or opening of a new restaurant in a particular area. Miami Subs
is also subject to the Federal Fair Labor Standards Act, which governs minimum
wages, overtime, working conditions and other matters, and the Americans with
Disabilities Act, which became effective in January 1992. Miami Subs believes
that it is in compliance with such laws, and that its restaurants have all
applicable licenses as required by governmental authorities.
Alcoholic beverage control regulations require each of the restaurants that
sell such products to apply to a state authority and, in certain locations,
county and municipal authorities for a license or permit to sell alcoholic
beverages on the premises. Typically, licenses must be renewed annually and
may be revoked or suspended for cause at any time. Miami Subs has never had
an alcoholic beverage license revoked. Alcoholic beverage control regulations
relate to numerous aspects of the daily operations of the restaurants,
including minimum age of customers and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. At May 31, 1999, Miami Subs offered for
sale beer and wine in 11 of its existing company-operated restaurants. Each
of these restaurants have current alcoholic beverage licenses permitting the
sale of these beverages.
Miami Subs may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to
recover damages from an establishment which wrongfully served alcoholic
beverages to such person. Miami Subs carries liquor liability coverage as
part of its existing comprehensive general liability insurance and has never
been named as a defendant in a lawsuit involving "dram-shop" statutes.
Miami Subs believes that it is in compliance with the applicable federal and
state laws concerning designated non-smoking and smoking areas in its
company-operated restaurants.
Miami Subs is subject to regulations of the Federal Trade Commission (the
"FTC") and various states relating to disclosure and other requirements in the
sale of franchises and franchise operations. The FTC's regulations require
Miami Subs to timely furnish prospective franchisees a franchise offering
circular containing prescribed information. Certain state laws also require
registration of the franchise offering with state authorities. Other states
regulate the franchise relationship, particularly concerning termination and
renewal of the franchise agreement. Miami Subs believes that it is in
compliance with the applicable franchise disclosure and registration
regulations of the FTC and the various states that it operates in.
ITEM 2. PROPERTIES
At May 31, 1999, Miami Subs leased or owned the following number of restaurant
properties which are used in its operations:
<TABLE>
<CAPTION>
Miami Subs Operated Franchisee and Third Party Operated Restaurants
-----------------------------------------------
Restaurants
-------------------
<S> <C> <C>
Lease land and building 11 51
Lease land and own building 3 3
Own land and building 1 2
------------------- -----------------------------------------------
Total 15 56
=========================== =================== ===============================================
</TABLE>
Properties leased by Miami Subs generally provide for an initial term of up to
20 years and renewal terms of five to 20 years. The leases generally provide
for fixed rentals plus adjustments based on changes in the consumer price
index or percentage rentals on gross sales. Restaurants and other facilities
are leased/sub-leased to franchisees or others on terms which are generally
similar to the terms in Miami Subs' lease with the third-party landlord,
except that in certain cases the rent has been increased. Miami Subs remains
liable for all lease costs when properties are sub-leased to franchisees or
others. Not included in the above table are five restaurants leased by Miami
Subs (including one non Miami Subs restaurant) which were closed as of May 31,
1999. Five of Miami Subs operated restaurants and 14 of the franchisee
operated restaurants included in the above table are located outside of
Florida.
Miami Subs owns its executive headquarters, an approximate 8,500 square foot
facility located in Fort Lauderdale, Florida, and believes that this facility
is adequate and suitable for its current needs.
ITEM 3. LEGAL PROCEEDINGS
In January, 1992, Miami Subs filed a Petition for Declaratory Judgment against
the Murray Family Trust/Kenneth Dash Partnership ("F/D"), case number 91-E1077
filed in the Superior Court Northern District of Hillsborough County, New
Hampshire. Miami Subs sought to dissolve an alleged joint venture between
Miami Subs and F/D to develop Miami Subs restaurants in New England. F/D
opposed the dissolution, counterclaimed, and sought damages arising from
amounts expended in developing new locations and lost profits from the
termination of the joint venture. A bench trial was completed in April 1995,
and although the court issued its ruling in favor of Miami Subs on virtually
all of F/D's counterclaims, it awarded F/D damages in the amount of $241,000
plus costs and attorney fees. The case was appealed by both Miami Subs and
F/D, and in November 1996, the appeal was argued before the Supreme Court of
New Hampshire. In December 1997, the Supreme Court ruled in favor of Miami
Subs, vacated the damage award, reversed the award of attorney fees, and
remanded to a trial court for a determination of damages for the alleged
breach of fiduciary duty to F/D. In May 1998, the trial court awarded F/D
compensatory damages in the amount of $200,000, which is being appealed by
Miami Subs.
On January 5, 1999, Miami Subs was served with a class action lawsuit entitled
Robert J. Feeney, on behalf of himself and all others similarly situated vs.
Miami Subs Corporation, et al., in Circuit Court in Broward County, Florida,
which was filed against Miami Subs, its directors and Nathan's in a Florida
state court by a shareholder of Miami Subs. The suit alleges that the
proposed merger between Miami Subs and Nathan's, as contemplated by the
companies non-binding letter of intent, is unfair to Miami Subs' shareholders
and constitutes a breach by the defendants of their fiduciary duties to the
shareholders of Miami Subs. The plaintiff seeks among other things:
class action status;
preliminary and permanent injunctive relief against consummation of the
proposed merger; and
unspecified damages to be awarded to the shareholders of Miami Subs.
On March 19,1999, the Court granted the plaintiff leave to amend the
complaint, and on April 8, 1999, the plaintiff filed an amended complaint.
Miami Subs filed a motion to dismiss the complaint on April 13, 1999 while
Nathan's filed a motion to dismiss on April 29, 1999. On May 21, 1999, the
court considered these motions to dismiss, but has yet to make a ruling. All
discovery has been stayed pending the court's ruling. Miami Subs intends to
defend against the suit vigorously.
Miami Subs and its subsidiaries are parties to various other legal actions
arising in the ordinary course of business. Miami Subs is vigorously
contesting these actions, and currently believes that the outcome of such
cases will not have a material adverse effect on Miami Subs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Miami Subs common stock has been trading on the OTC Bulletin Board under
the symbol "SUBS" since March 3, 1999. Prior to March 3, 1999, the Miami Subs
common stock had been conditionally trading on The Nasdaq SmallCap Market
after being removed from The Nasdaq National Market on November 8, 1998. From
November 9, 1998 until March 2, 1999, the Miami Subs common stock was traded
on the SmallCap Market pending Miami Subs' satisfaction of various conditions
imposed by Nasdaq during that period, including Miami Subs having to effect by
January 7, 1999 a reverse stock split sufficient to satisfy the SmallCap
Market's minimum bid price requirement and hold by March 1, 1999 a special
shareholders' meeting to approve the proposed merger with Nathan's Famous,
Inc. On January 7, 1999, Miami Subs effected a 1-for-4 reverse stock split of
the common stock bringing the common stock in compliance with such minimum bid
price requirement. However, Miami Subs was not able to hold the special
meeting by March 1, 1999 because the negotiation and execution of the merger
agreement took longer than anticipated. Consequently, on March 2, 1999, the
Miami Subs common stock was delisted from the SmallCap Market. Miami Subs is
appealing the delisting.
There are approximately 1,600 holders of record of Miami Subs common stock.
Miami Subs has never declared or paid cash dividends on the Miami Subs common
stock and does not anticipate paying any cash dividends in the foreseeable
future. Miami Subs currently intends to retain future earnings, if any, to
fund the development of its business. The following table sets forth for the
fiscal quarter indicating the high and low closing prices per share reported
by The Nasdaq National Market, The Nasdaq SmallCap Market and OTC Bulletin
Board, as applicable and as adjusted for Miami Subs' 1-for-4 reverse stock
split in January 1999.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, 1998 High Low
<S> <C> <C>
First quarter $4.625 $ 2.56
Second quarter 4.125 2.50
Third quarter 2.50 1.50
Fourth quarter 3.00 2.25
FISCAL YEAR ENDED MAY 31, 1999
First quarter $ 2.75 $1.375
Second quarter 1.75 1.00
Third quarter 1.78 1.375
Fourth quarter 1.75 1.06
- ------------------------------ ------ ------
</TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data in the following table is qualified
in its entirety by, and should be read in conjunction with the consolidated
financial statements and notes thereto and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
------------ ------------ ------------ ------------ ------------
MAY 31, May 31, May 31, May 31, May 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Restaurant sales $ 18,369 $ 18,088 $ 28,180 $ 32,398 $ 27,148
Franchise revenues 4,462 4,293 4,514 4,720 3,920
Net gain from sales of restaurants/other 70 25 868 117 112
Interest income and other revenues 958 1,028 871 677 716
------------ ------------ ------------ ------------ ------------
Total 23,859 23,434 34,433 37,912 31,896
------------ ------------ ------------ ------------ ------------
Restaurant operating costs 17,042 17,138 26,042 28,573 23,942
General, administrative and franchise costs 3,485 3,336 5,667 6,351 6,390
Depreciation and amortization 1,494 1,444 1,837 1,942 1,544
Interest expense - net 611 780 903 741 581
Loss on impairment of restaurants 220 - 375 - -
Merger and related costs 299 - - - -
------------ ------------ ------------ ------------ ------------
Total 23,151 22,698 34,824 37,607 32,457
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes 708 736 (391) 305 (561)
Provision for income taxes 134 211 - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 574 $ 525 $ (391) $ 305 $ (561)
============ ============ ============ ============ ============
Basic and diluted net income (loss) per share $ 0.09 $ 0.08 $ (0.06) $ 0.04 $ (0.09)
============ ============ ============ ============ ============
BALANCE SHEET DATA
Total assets $ 29,188 $ 30,326 $ 32,106 $ 36,361 $ 33,042
Current assets 6,513 5,456 5,209 6,066 5,180
Notes receivable - long term 4,867 6,076 8,073 3,778 3,530
Current liabilities 5,949 5,368 6,443 7,645 6,785
Long-term portion of notes payable and capitalized leases 4,764 5,613 6,288 7,955 6,249
Deferred franchise fees and other deferred income 903 1,577 2,088 1,712 2,241
Shareholders' equity 16,607 16,033 15,508 16,943 15,053
OTHER DATA
Restaurants opened during the year 10 19 18 24 21
============ ============ ============ ============ ============
Restaurants at year end:
Company operated 15 17 17 37 30
Franchised 167 174 170 140 130
------------ ------------ ------------ ------------ ------------
Total 182 191 187 177 160
============ ============ ============ ============ ============
System-wide sales $ 149,361 $ 148,637 $ 151,201 $ 145,517 $ 138,963
Average annual sales per restaurant(1) $ 886 $ 841 $ 869 $ 888 $ 920
Percent change in "same store sales" 0.4% (7.0)% (5.5)% (3.8)% (3.6)%
========================================================== ============ ============ ============ ============ ============
</TABLE>
(All dollar amounts in thousands, except for per share amounts)
(1) Computed for all restaurants that were in operation for the entire 12
months during the year, except for certain non-traditional restaurants.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Miami Subs' revenues are derived principally from operating, franchising, and
financing Miami Subs restaurants. Franchise revenues consist principally of
initial franchise fees, area development fees, monthly royalty fees, and net
sublease rental income. In the normal course of its business, Miami Subs 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-operated restaurants and franchising
operations.
Miami Subs' 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.
COMPARISON OF FISCAL YEAR 1999 TO 1998
Total Revenues
Miami Subs' total revenues increased 1.8% to approximately $23.9 million in
fiscal year 1999, as compared to $23.4 million in 1998. The increase in total
revenues resulted principally from an increase in restaurant sales, franchise
revenues, and other revenues, which was partially offset by a reduction in
interest income.
Restaurant Sales
Total company-operated restaurant sales increased 1.6% to approximately $18.4
million in 1999, as compared to $18.1 million in 1998. The increase in sales
resulted principally from a change in company-operated restaurants as a result
of sales/transfers and acquisitions of restaurants since the prior year and to
an increase in same-store-sales.
Same-store-sales for 13 restaurants operated by Miami Subs in both the current
and prior year increased by approximately 0.7% in 1999. Same-store-sales for
Miami Subs' operated restaurants in 1998 were down approximately 2.6%. Miami
Subs attributes the change in same-store-sales for 1999 principally to the
changes which were implemented during 1998 relating to pricing, marketing, and
operations, and to sales from co-branding with Arthur Treacher's in 1999,
which, as of May 31, 1999, had been added to seven of the company-operated
restaurants.
During 1999, Miami Subs reacquired four restaurants from franchisees in
exchange for notes payable to Miami Subs, purchased one restaurant from a
franchisee, and sold/transferred seven restaurants to franchisees. At May 31,
1999, Miami Subs operated 10 restaurants located in Florida, four in Texas and
one in New York. Miami Subs currently plans to sell or transfer to
franchisees up to six of the restaurants that it operated at May 31, 1999.
However, there can be no assurance that sales of these restaurants will be
consummated on terms acceptable to Miami Subs.
Revenues From Franchised Restaurants
Revenues from franchised restaurants increased 3.9% to approximately $4.5
million in 1999, as compared to $4.3 million in 1998.
During fiscal year 1999, 10 franchised restaurants opened, Miami Subs
sold/transferred seven restaurants to franchisees and acquired/reacquired five
restaurants from franchisees, and 19 franchised restaurants closed. At May
31, 1999, there were 167 franchised restaurants in the system, as compared to
174 at May 31, 1998.
Royalty income in 1999 increased by 11.1% to $4.1 million, as compared to $3.7
million in 1998, principally from the opening of new franchised restaurants
and collections of delinquent and unaccrued royalty fees. At May 31, 1999,
approximately 20% of franchised restaurants have been granted a temporary
waiver from paying royalty fees or were delinquent and not paying royalty fees
to Miami Subs. Delinquent royalty fees are not accrued by Miami Subs until
they are considered collectible.
Same-store-sales for all comparable franchised restaurants increased by
approximately 0.3% in 1999, as compared to a decline of approximately 7.5% in
the prior year. Miami Subs attributes the change in same-store-sales
principally to the changes which were implemented during 1998 to pricing,
marketing, and operations, and to sales from co-branding with Arthur
Treacher's in 1999, which, as of May 31, 1999, had been added to 38 franchised
restaurants.
In 1999, Miami Subs 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,
Miami Subs recognized $190,000 in revenues from such terminations.
Miami Subs 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. At May 31,
1999, four restaurant facilities which are leased/subleased to franchisees
were two or more months delinquent in monthly lease payments to Miami Subs,
and during 1999, Miami Subs reacquired four restaurants from franchisees and
four restaurants were closed and reacquired by Miami Subs as a result of the
default of the leases and in some cases notes payable to Miami Subs. Of these
restaurants reacquired or closed, one is operated by Miami Subs, three were
sold/transferred to franchisees, and four were closed as of May 31, 1999.
System-Wide Sales
System-wide sales, which includes sales from all Miami Subs operated and
franchised restaurants, increased to approximately $149.4 million in 1999, as
compared to $148.6 million in 1998. The increase in system wide sales
principally reflects sales from new franchised restaurants and sales from
co-branding with Arthur Treacher's which, as of May 31, 1999, had been added
to 45 Miami Subs restaurants. Same-store-sales for all comparable restaurants
in the system increased by approximately 0.4% in 1999. Same-store-sales for
the system in 1998 were down approximately 7.0%. Miami Subs attributes the
change in same-store-sales principally to the changes which were implemented
during 1998 relating to pricing, marketing, and operations and to the sale of
Arthur Treacher's products in co-branded restaurants.
Net Gain From Sales of Restaurants
As a part of Miami Subs' strategy to focus future growth and operations in
franchising, Miami Subs sold/transferred seven restaurants to franchisees
during 1999, as compared to five restaurants that were sold/transferred in
1998. Gains on the sale of restaurants are dependent on Miami Subs' 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 Miami Subs of its
obligations under the contracts. Although Miami Subs 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 acceptable terms. 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, Miami Subs
has sold restaurants to franchisees and has provided financing for such sales.
During 1999, loans in the amount of $1,015,000 were made to franchisees in
connection with the sale of restaurants to franchisees. Principally, as a
result of the reacquisition of restaurants in 1999 from franchisees due to a
default of the notes payable to Miami Subs, total notes receivable decreased
to approximately $5.8 million at May 31, 1999, as compared to $7.1 million at
May 31, 1998. At May 31, 1999, three individual notes receivable which are due
from franchisees with outstanding balances totaling approximately $657,000
were delinquent in monthly note payments due to Miami Subs. Subsequent to May
31, 1999, one of these delinquent notes was paid off in full and the
restaurant closed and one restaurant closed and was reacquired by Miami Subs.
As a result of unpaid interest on notes receivable during 1999 and the lower
average balance of notes receivable outstanding, interest income declined to
$584,000 in 1999, as compared to $678,000 in 1998.
Restaurant Operating Costs
Restaurant operating costs in Miami Subs operated restaurants amounted to
approximately $17.0 million or 92.8% of sales in 1999, as compared to 94.7% of
sales in 1998. 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 during 1999.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $3.5
million or 14.6% of total revenue in 1999, as compared to $3.3 million or
14.2% of total revenue in 1998. Costs in 1999 included a provision for
doubtful accounts of $114,000 and a charge of $166,000 for closed and
underperforming restaurants. Costs in 1998 included certain non-recurring
reductions to expenses totaling approximately $284,000. Recurring general and
administrative costs in 1999 were lower than recurring costs in 1998,
principally due to the elimination of certain corporate office positions and
to strict cost controls in all areas of operations.
Interest Expense
Principally as a result of the repayment of outstanding debt from
approximately $6.7 million at May 31, 1998 to $5.7 million at May 31, 1999,
interest expense decreased to $611,000 in 1999, as compared to $780,000 in
1998.
Loss on Impairment of Restaurants
In 1999, Miami Subs recognized an impairment loss of $220,000 to write-down
the basis of certain restaurants operated by the Company.
Merger and Related Costs
Expenses in 1999 include costs incurred to date totaling $299,000 in
connection with the proposed merger with Nathan's Famous, Inc. Such costs
consist of fees paid to attorneys, investment bankers, and accountants.
Provision for Income Taxes
Miami Subs' effective tax rate for 1999 is lower than the rate in 1998 due to
a decrease in the deferred tax asset valuation allowance.
Miami Subs' federal income tax returns for fiscal years 1991 through 1996,
inclusive, have been examined by the Internal Revenue Service. The reports of
the examining agent issued in connection with these examinations indicate that
additional taxes and penalties totaling approximately $2.4 million are due for
such years. Miami Subs is appealing substantially all of the proposed
adjustments. Due to net operating losses anticipated to be lost in connection
with the examination, Miami Subs has accrued $345,000 for this matter and
believes that such accruals are adequate.
COMPARISON OF FISCAL YEAR 1998 TO 1997
Total Revenues
Miami Subs total revenues declined 31.9% to $23.4 million in fiscal year 1998,
as compared to $34.4 million in fiscal year 1997. The decrease in total
revenues was primarily due to the conversion from company to franchise
operations and the resulting sales of company-operated restaurants to
franchisees, which in large part occurred during the second half of fiscal
year 1997.
Restaurant Sales
Miami Subs total restaurant sales decreased approximately 35.8% to $18.1
million in 1998, as compared to $28.2 million in 1997. The decrease in sales
resulted principally from franchising during the second half of 1997 many of
the restaurants previously operated by Miami Subs. During 1997, Miami Subs
sold/transferred 19 restaurants to franchisees, and during 1998, Miami Subs
sold/transferred five restaurants to franchisees.
In order to address declining unit level sales and customer counts in its
restaurants, in 1998 Miami Subs implemented strategic changes to its marketing
programs, added alternative, lower-priced items to its menu, and focused on
improving customer service. As a result of these strategic changes, Miami
Subs experienced overall higher guest counts in many of its core restaurants
during the year and a lower per customer check average. Throughout the year,
same-store-sales in company-operated restaurants improved each quarter during
1998, from negative 6.4% in the first quarter of the year to positive 2.6% in
the fourth quarter. For the year, same store sales for company-operated
restaurants (computed for Miami Subs operated restaurants since December 1995)
was negative 2.6%.
At May 31, 1998, Miami Subs operated eight restaurants located in Florida, six
in Texas, two in Georgia, and one in New York. Miami Subs plans to sell to
franchisees the restaurants located in Texas and Georgia. There can be no
assurance that these restaurants will be sold on terms acceptable to Miami
Subs.
Revenues From Franchised Restaurants
Revenues from franchised restaurants declined approximately 4.9% to $4.3
million in 1998, as compared to $4.5 million in 1997. Franchise revenues in
1997 included $400,000 in franchise fees from the sale of restaurants to
franchisees, and franchise revenues in 1998 included $190,000 resulting from
the expiration and termination of an area development agreement with a former
franchisee.
In 1998, 19 franchised restaurants opened, 12 of which were non-traditional
restaurants, five restaurants were sold/transferred to franchisees, seven
restaurants were reacquired from franchisees, and 13 franchised restaurants
closed. At May 31, 1998, there were 174 franchised restaurants in the system,
as compared to 170 at May 31, 1997.
In August 1997, Miami Subs began to initiate throughout the system strategic
changes to marketing programs, additions to the standard menu to add certain
lower-priced items, and implemented programs to improve customer service.
Miami Subs believes that these programs were largely responsible for an
improvement in same-store-sale trends at franchised restaurants experienced
each quarter during the year, from negative 10.4% in the first quarter of the
year to negative 5.1% in the fourth quarter. For the year, same-store-sales
at franchised restaurants, computed for restaurants operated by franchisees
since December 1995, was negative 7.5%.
Royalty revenues in 1998 and 1997 were adversely affected due to the
non-payment and non-accrual of royalty fees from a number of franchised
restaurants. At May 31, 1998, 24% of the franchised units in operation have
been granted a temporary waiver from paying royalty fees or were delinquent
and not paying royalty fees to Miami Subs. Such fees are not accrued by Miami
Subs until they are considered collectible.
Miami Subs leases/subleases principally Miami Subs restaurant facilities to
franchisees and revenues were adversely affected in 1998 from the delinquency
and default of certain of these leases/subleases. During 1998, Miami Subs
defaulted and terminated seven delinquent leases and acquired possession of
the restaurants. Six of these restaurants were subsequently sold/transferred
and released to new franchisees and one restaurant closed as a result of an
eminent domain proceeding. At May 31, 1998, 10 restaurants which were
leased/subleased to franchisees were in various stages of delinquency.
Although Miami Subs expects that these delinquencies will be satisfactorily
resolved by the franchisees, there can be no assurance that it will not be
necessary for Miami Subs to acquire possession of these or other restaurants
in the future.
System-Wide Sales
System-wide sales, which includes sales from company-operated and franchised
restaurants, decreased approximately 1.7% to $148.6 million in 1998, as
compared to $151.2 million in 1997. "Same store sales" for all units in the
system improved each quarter during the year, from negative 10.1% in the first
quarter, to negative 4.5% in the fourth quarter. For the year,
same-store-sales for all restaurants, which was computed for restaurants open
since December 1995, declined by approximately 7.0%.
Net Gain From Sales of Restaurants
In connection with Miami Subs' strategy to focus growth and operations in
franchising, Miami Subs sold/transferred five restaurants to franchisees
during 1998, as compared to 19 restaurants in 1997. Gains on the sales of
restaurants are dependent on Miami Subs 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 Miami Subs of its obligations under the
contracts. Losses on the sale of restaurants are recognized at the time of
sale. As a result of sales of restaurants, Miami Subs recognized net gains of
$25,000 in 1998, as compared to $868,000 in 1997. Total deferred gains on the
sales of restaurants amounted to $757,000 at May 31, 1998 and total notes
receivable, principally resulting from sales of restaurants, amounted to $7.1
million at May 31, 1998. Nine individual notes receivable which were due from
four franchisees and totaling approximately $1.8 million, net of deferred fees
and credits, were delinquent in monthly payments due to Miami Subs at May 31,
1998. Although Miami Subs intends to sell other existing restaurants in the
future, there can be no assurance that any such sales will be consummated or
that gains will be realized.
Restaurant Operating Costs
Restaurant operating costs amounted to $17.1 million or 94.7% of
company-operated restaurant sales in 1998, as compared to $26.0 million or
92.4% of sales in 1997. The increase in restaurant operating costs as a
percent of sales was principally due to the higher food cost percentage
incurred at Miami Subs restaurants as a result of certain lower priced menu
items that Miami Subs began offering in the restaurants in connection with
Miami Subs' efforts during the year to increase guest counts and stimulate
sales.
General, Administrative and Franchise Costs
General, administrative and franchise costs amounted to approximately $3.3
million or 14.2% of total revenue in 1998, as compared to $5.7 million or
16.5% of total revenue in 1997. General, administrative and franchise costs
in 1998 reflect a reduction in accruals for certain legal matters which were
resolved during the year and other non-recurring reductions totaling
approximately $284,000. Included in general, administrative and franchise
costs in 1997 are accrued severance costs payable to Miami Subs' former
president, an accounting charge associated with the resolution of an
outstanding note receivable, and costs associated with relocating and
consolidating an administrative facility. These costs and other charges
amounted to approximately $601,000 in 1997.
In connection with Miami Subs' strategy of focusing growth and operations in
franchising and as a result of the sale of Miami Subs' restaurants to
franchisees, Miami Subs has been able to restructure and reduce its corporate
infrastructure and the number of non-restaurant employees, and has taken other
cost control measures resulting in a decrease in recurring administrative
costs in 1998 as compared to 1997. Miami Subs continues to maintain strict
cost controls in all areas of its business.
Depreciation Expense
Depreciation expense, which principally relates to company-operated
restaurants, declined by 21.4% to 1.4 million in 1998 as a result of sales of
restaurants to franchisees.
Interest Expense
Interest expense decreased 13.6% to $780,000 in 1998, as compared to $903,000
in 1997, principally reflecting lower average debt levels outstanding in
1998.
Loss on Impairment of Restaurants
During 1997 and in conjunction with Miami Subs franchise strategy, several
company-operated restaurants were identified for sale to franchisees. At May
31, 1997, Miami Subs provided a reserve of $375,000 to provide for the
intended sale of certain of these restaurants.
Provision for Income Taxes
Miami Subs' federal income tax returns for fiscal years 1991 through 1996,
inclusive, have been examined by the Internal Revenue Service. The reports of
the examining agent issued in connection with these examinations indicate that
additional taxes and penalties totaling approximately $2.4 million are due for
such years. Miami Subs is appealing substantially all of the proposed
adjustments. Due to net operating losses anticipated to be lost in connection
with the examination, Miami Subs accrued approximately $211,000 for this
matter in 1998 and believes that such accruals are adequate.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, Miami Subs' principal sources of cash were from net cash provided
by operating activities of approximately $2.7 million and principal payments
received on notes receivable of $560,000. Miami Subs' principal uses of cash
in 1999 were for scheduled debt repayments and maturities of $1.1 million and
property additions of $941,000. Cash and cash equivalents at May 31, 1999,
amounted to approximately $4.8 million (which includes unexpended marketing
fund contributions of approximately $1.7 million) as compared to $3.5 million
(including $970,000 in unexpended marketing fund contributions) at May 31,
1998. At May 31, 1999, Miami Subs' working capital increased to $564,000, as
compared to $88,000 at May 31, 1998. Miami Subs is able to operate with a low
working capital position 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.
For fiscal year 2000, Miami Subs' primary sources of liquidity are expected to
be cash flows from operations, principal payments on notes receivable, and
cash from the possible sale of existing restaurants to franchisees. Miami Subs
does not currently intend to acquire or develop new Miami Subs operated
restaurants. Therefore, Miami Subs' expected principal use of funds in fiscal
year 2000 will be to maintain, improve and refurbish existing restaurants,
repayment of debt, and for general operating purposes. Planned capital
expenditures for fiscal year 2000 are not expected to exceed approximately
$400,000, and scheduled debt maturities/repayments are $908,000 in 2000.
Based upon the current and expected level of operations and expected sources
of funds, together with the current level of liquidity and cash on hand, Miami
Subs expects that it will have sufficient liquidity to fund its expected
operating cash needs through the year 2000. Miami Subs currently does not
anticipate any events which would materially affect its long term liquidity
position. There can be no assurance that Miami Subs will be able to achieve
or increase its projected sources of funds in 2000.
Miami Subs currently plans to sell to franchisees six of the restaurants that
it operates at May 31, 1999. If Miami Subs consummates the planned sale of
these restaurants, Miami Subs future total revenues would decline.
Miami Subs 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. Miami Subs intends to
continue to pursue co-branding with Arthur Treacher's, Inc. and Nathan's
Famous, Inc. In addition to pursing these opportunities, continued emphasis
will be placed on franchising non-traditional restaurants and certain of the
company-operated restaurants, improving the financial and operating
performance of restaurants, developing new products, enhancing the
effectiveness of marketing programs, and overall improvement and possible
refinements to the entire system. Miami Subs' ability to significantly expand
and develop additional company-operated restaurants will ultimately depend on
a number of factors, including unit level profitability and Miami Subs'
overall profitability and cash flow, the availability and cost of suitable
locations, and the availability of adequate equity or debt financing. There
can be no assurance that Miami Subs will be successful in achieving these
objectives.
Inflation
Miami Subs does not believe that inflationary factors have had a significant
effect on its operations in the past three years. Any significant increase in
inflation could affect Miami Subs operations as a result of increased costs
for food and labor, as well as increased occupancy and equipment costs.
Seasonality
Miami Subs does not expect seasonality to affect its operations in a
materially adverse manner. However, Miami Subs' restaurant sales during its
first and fourth fiscal quarters are generally higher than its second and
third quarters due to the location of the majority of its restaurants in
Florida.
New Accounting Pronouncements
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP 98-5) "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred and is effective for financial statements for
fiscal years beginning after December 15, 1998. Under these new requirements,
pre-opening costs associated with the opening of new restaurants would be
required to be expensed as incurred. Although no such costs were incurred in
1999, the Company previously capitalized and amortized such costs over a one
year period. Since the Company does not currently intend to open new Company
operated restaurants, the adoption of this statement is not expected to have a
significant impact on the Company's operations.
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance in determining capitalizable costs incurred in connection with the
development or acquisition of internal use software. SOP 98-1 states that
certain costs incurred during the "Application Development Stage," (design of
chosen path, coding, installation to hardware, and testing) be capitalized.
These costs include external direct costs of materials and services consumed
in developing or obtaining internal use software, payroll and payroll-related
costs for employees who are directly associated with and who devote time to
the internal-use software project, and interest cost in accordance with
Statement of Financial Accounting Standards No. 34, "Capitalization of
Interest Costs." SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. Initial application should be as of the beginning of the
fiscal year and applied to costs incurred for all projects during that fiscal
year, including projects in progress upon initial application of SOP 98-1.
The Company does not believe that the adoption of SOP 98-1 will have a
material impact on the Company's consolidated financial statements and notes
thereto.
Year 2000
Miami Subs 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. Miami Subs estimates that its evaluation and assessment of these
various systems will be completed shortly. Based on this preliminary
assessment of these systems and discussions with its third-party providers,
Miami Subs currently believes that such internal systems are or will be Year
2000 compliant with minimum modifications, which should be completed by
September 30, 1999. Following initial testing, additional remedial action may
be necessary and further testing will be performed. To date, Miami Subs has
incurred approximately $12,000 in addressing its Year 2000 plan and estimates
the entire cost not to exceed approximately $50,000.
Miami Subs has recently contacted and is receiving replies from its critical
suppliers of products and services to determine the extent to which Miami Subs
may be vulnerable to these parties' failure to resolve their own Year 2000
issues. Miami Subs will assess and attempt to mitigate its risks with respect
to the failure of these third parties to be Year 2000 compliant. The effect,
if any, on Miami Subs' results of operations from the failure of third parties
to be Year 2000 compliant cannot be reasonably estimated.
Miami Subs is also 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. Franchisees have been notified by Miami Subs of the steps
necessary to ensure that this equipment is adequately modified to handle the
Year 2000 issues. In the event that these systems are not adequately modified
as necessary, it may adversely affect the franchisees' operations which would
adversely affect Miami Subs' results of operations.
Based on Miami Subs' current assessment to date, no matters have been
identified and Miami Subs does not currently believe that the Year 2000 issue
will have a material adverse effect on Miami Subs' financial condition or
results of operations. Miami Subs' 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 most likely
worst case scenario for the Company if its suppliers of products and services
are not Year 2000 compliant is that a significant number of the Company and
its franchised restaurants would be temporarily unable to operate due to
public infrastructure failures and/or food supply problems. Some restaurants
may have problems for extended periods of time. The failure of restaurants to
operate would result in reduced revenues and cash flows for the Company during
the disruption period. Loss of restaurant sales may, however, be partially
offset by reduced costs.
Miami Subs 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 October 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 Miami Subs 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 Miami Subs'
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 Miami
Subs' ability to attract competent restaurant and managerial personnel.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Form 10-K are the consolidated
financial statements and the consolidated financial statement schedule listed
in the Index to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these items is omitted because Miami Subs intends
to file a proxy statement with the Commission pursuant to Regulation 14A not
later than 120 days after the close of the fiscal year in accordance with
General Instruction G(3) to Form 10-K. The information called for by these
items is incorporated herein by reference to the proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements. See Index to Consolidated
Financial Statements on page 18 of this Report on Form 10-K.
(2) Consolidated Financial Statement Schedule. See Index to
Consolidated Financial Statements on page 18 of this Report on Form 10-K.
(b) Reports on Form 8-K.
None
(3) Exhibits.
Exhibit No. Description
2.1 Plan and Agreement of Merger made and entered into as
of January 15, 1999 among Nathan's Famous, Inc., Miami Acquisition Corp., and
the Company (incorporated by reference to exhibit 2.1 of the Company's Form
8-K dated January 15, 1999).
23 Accountants' Consent regarding Registration Statement
on Form S-8.
MIAMI SUBS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of the Registrant are included
in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of May 31, 1999 and 1998
Consolidated Statements of Operations for each of the years in the three
year period ended May 31, 1999
Consolidated Statements of Shareholders' Equity for each of the years in
the three year period ended May 31, 1999
Consolidated Statements of Cash Flows for each of the years in the three
year period ended May 31, 1999
Notes to Consolidated Financial Statements
The following financial information is provided as consolidated financial
statement schedules under Item 14(d) to this Form 10-K:
(i) MIAMI SUBS CORPORATION CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable regulation
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Miami Subs Corporation:
We have audited the accompanying consolidated balance sheets of Miami Subs
Corporation and subsidiaries as of May 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended May 31, 1999. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as of May 31, 1999 and 1998, and
for each of the years in the three-year period ended May 31, 1999. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Miami Subs
Corporation and subsidiaries as of May 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
KPMG LLP
Fort Lauderdale, Florida
August 6, 1999
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
May 31, May 31,
ASSETS 1999 1998
- --------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund
contributions of $1,680,000 and $970,000, respectively) $ 4,775,000 $ 3,457,000
Notes and accounts receivable - net 1,382,000 1,743,000
Food and supplies inventories 173,000 179,000
Other 183,000 77,000
---------- ------------
Total Current Assets 6,513,000 5,456,000
Notes receivable 4,867,000 6,076,000
Property and equipment - net 11,003,000 11,612,000
Intangible assets - net 6,304,000 6,718,000
Other 501,000 464,000
---------- ------------
TOTAL $29,188,000 $30,326,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 5,041,000 $ 4,276,000
Current portion of notes payable and capitalized lease obligations 908,000 1,092,000
----------- ------------
Total Current Liabilities 5,949,000 5,368,000
Long-term portion of notes payable and capitalized lease obligations 4,764,000 5,613,000
Deferred franchise fees and other deferred income 903,000 1,577,000
Accrued liabilities and other 965,000 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 (6,634,000) (7,208,000)
----------- ------------
18,214,000 17,640,000
Note receivable from sale of stock - (563,000)
Treasury Stock (1,607,000) (1,044,000)
------------ ------------
Total Shareholders' Equity 16,607,000 16,033,000
------------ ------------
TOTAL $29,188,000 $30,326,000
===================================================================== ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31, Year Ended May 31, Year Ended May 31,
1999 1998 1997
------------------- ------------------- --------------------
<S> <C> <C> <C>
REVENUES
- -------------------------------------------------------------
Restaurant sales $ 18,369,000 $ 18,088,000 $ 28,180,000
Revenues from franchised restaurants 4,462,000 4,293,000 4,514,000
Net gain from sales of restaurants 70,000 25,000 868,000
Interest income 584,000 678,000 612,000
Other revenues 374,000 350,000 259,000
------------------- ------------------- --------------------
Total 23,859,000 23,434,000 34,433,000
------------------- ------------------- --------------------
EXPENSES
- -------------------------------------------------------------
Restaurant operating costs 17,042,000 17,138,000 26,042,000
General, administrative and franchise costs 3,485,000 3,336,000 5,667,000
Depreciation and amortization 1,494,000 1,444,000 1,837,000
Interest expense 611,000 780,000 903,000
Loss on impairment of restaurants 220,000 - 375,000
Merger and related costs 299,000 - -
------------------- ------------------- --------------------
Total 23,151,000 22,698,000 34,824,000
------------------- ------------------- --------------------
Income (loss) before provision for income taxes 708,000 736,000 (391,000)
Provision for income tax 134,000 211,000 -
------------------- ------------------- --------------------
Net income (loss) $ 574,000 $ 525,000 $ (391,000)
=================== =================== ====================
Net income (loss) per share:
Basic $ 0.09 $ 0.08 $ (0.06)
=================== =================== ====================
Diluted $ 0.09 $ 0.08 $ (0.06)
=================== =================== ====================
Shares used in computing net income (loss) per share:
=============================================================
Basic 6,733,000 6,780,000 7,061,000
=================== =================== ====================
Diluted 6,733,000 6,780,000 7,061,000
============================================================= =================== =================== ====================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1999, 1998, AND 1997
Preferred Preferred Common Common
Stock Shares Stock Amount Stock Shares Stock Amount
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1996 251,375 $ 2,000 6,809,710 $ 69,000
============================================================ ============= ============== ============ =============
Preferred stock conversions (251,375) (2,000) 251,375 2,000
Acquisition of treasury stock - at cost
Net loss
BALANCE AT MAY 31, 1997 - - 7,061,085 71,000
============================================================ ============= ============== ============ =============
Net income
BALANCE AT MAY 31, 1998 - - 7,061,085 71,000
============================================================ ============= ============== ============ =============
Acquisition of treasury stock
Net income
BALANCE AT MAY 31, 1999 - - 7,061,085 $ 71,000
============================================================ ============= ============== ============ =============
See accompanying notes to consolidated financial statements.
Additional Note
Paid-In Accumulated Receivable - Treasury
Capital Deficit Stock Sale Stock Total
----------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1996 $24,777,000 $ (7,342,000) $ (563,000) $16,943,000
============================================================ =========== ============= ============== ============
Preferred stock conversions
Acquisition of treasury stock - at cost $(1,044,000) (1,044,000)
Net loss (391,000) (391,000)
------------- ------------ ------------
BALANCE AT MAY 31, 1997 24,777,000 (7,733,000) (563,000) (1,044,000) 15,508,000
============================================================ =========== ============= ============== ============ ============
Net income 525,000 525,000
------------- ------------
BALANCE AT MAY 31, 1998 24,777,000 (7,208,000) (563,000) (1,044,000) 16,033,000
============================================================ =========== ============= ============== ============ ============
Acquisition of treasury stock 563,000 (563,000)
Net income 574,000 574,000
------------- ------------- ------------ ------------
BALANCE AT MAY 31, 1999 $24,777,000 $ (6,634,000) - $(1,607,000) $16,607,000
============================================================ =========== ============= ============== ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
May 31, 1999 May 31, 1998 May 31, 1997
--------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 574,000 $ 525,000 $ (391,000)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,055,000 1,010,000 1,382,000
Amortization of intangible assets 439,000 434,000 455,000
Net gain and franchise fees on sales of restaurants (95,000) (25,000) (1,268,000)
Charge associated with note receivable - - 257,000
Loss on impairment of restaurants 220,000 - 375,000
Provision for doubtful accounts 114,000 - 150,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 86,000 21,000 (284,000)
Decrease in food and supplies inventories 6,000 13,000 189,000
(Increase) decrease in other current assets (106,000) - 141,000
(Increase) decrease in other assets (62,000) 83,000 101,000
Increase (decrease) in accounts payable and accrued liabilities 792,000 (415,000) (1,425,000)
Decrease in deferred franchise fees and other deferred income (306,000) (441,000) (44,000)
--------------- -------------- --------------
Net Cash Provided By (Used In) Operating Activities 2,717,000 1,205,000 (362,000)
--------------- -------------- --------------
INVESTING ACTIVITIES:
Purchase of restaurants, property, and equipment (941,000) (264,000) (794,000)
Proceeds from sales of restaurants 80,000 20,000 1,487,000
Payments received on notes receivable 560,000 845,000 997,000
--------------- -------------- --------------
Net Cash (Used In) Provided By Investing Activities (301,000) 601,000 1,690,000
--------------- -------------- --------------
FINANCING ACTIVITIES:
Repayment of debt (1,098,000) (1,714,000) (1,491,000)
Proceeds from borrowings - 425,000 -
--------------- -------------- --------------
Net Cash Used In Financing Activities (1,098,000) (1,289,000) (1,491,000)
--------------- -------------- --------------
INCREASE (DECREASE) IN CASH 1,318,000 517,000 (163,000)
CASH AT BEGINNING OF PERIOD 3,457,000 2,940,000 3,103,000
-------------- ------------- --------------
CASH AT END OF PERIOD $ 4,775,000 $ 3,457,000 $ 2,940,000
=============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 615,000 $ 784,000 $ 904,000
Loans to franchisees in connection with sales of restaurants $ 1,015,000 $ 345,000 $ 6,207,000
Debt assumed in acquisition of restaurant $ 65,000 - $ 184,000
Acquisition of restaurants in exchange for notes receivable $ 1,331,000 $ 1,814,000 $ 180,000
Acquisition of treasury stock in exchange for note receivable $ 563,000 - $ 1,044,000
============================================================================ =============== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MIAMI SUBS CORPORATION (the "Company") operates and franchises quick service
restaurants under the names "Miami Subs" and "Miami Subs Grill". At May 31,
1999, there were 182 restaurants operating in the Miami Subs system, of which
15 were operated by the Company and 167 were operated by franchisees. Ten of
the Company operated restaurants and 114 of the franchised restaurants are
located in Florida.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and on deposit, highly liquid
instruments with maturities of three months or less, and unexpended marketing
fund contributions of $1,680,000 and $970,000 at May 31, 1999 and 1998,
respectively.
FRANCHISE OPERATIONS
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to marketing funds,
and in certain cases, revenue from sub-leasing restaurant properties to
franchisees. Initial franchise fees are recognized as income when
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied, which generally occurs when the
franchised restaurant commences operations. Development fees are
non-refundable and the related agreements require the franchisee to open a
specified number of restaurants in the development area within a specified
time period or the agreements may be canceled by the Company. Revenue from
development agreements is deferred and recognized as restaurants in the
development area commence operations on a pro rata basis to the minimum number
of restaurants required to be open, or at the time the development agreement
is effectively canceled. Royalties, which are based upon a percentage of the
franchisee's gross sales, are recognized as income when the fees are earned
and become receivable and collectible. Revenue from sub-leasing properties to
franchisees is recognized as income as the revenue is earned and becomes
receivable and collectible. Sub-lease rental income is presented net of
associated lease costs in the accompanying consolidated financial statements.
Marketing contributions are offset against the related costs incurred.
Contributions received in excess of expenditures are classified as current
liabilities in the accompanying consolidated financial statements.
Revenues from franchised restaurants consist of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
May 31, 1999 May 31, 1998 May 31, 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Royalties $ 4,098,000 $ 3,687,000 $ 3,680,000
Franchise and development fees 414,000 598,000 707,000
Sublease rental income (expense) - net (50,000) 8,000 127,000
-------------- ------------- -------------
Total $ 4,462,000 $ 4,293,000 $ 4,514,000
====================================== ============== ============= =============
</TABLE>
SALES OF RESTAURANTS
Gains on the sale of restaurants are recorded as income when the sales are
consummated and other conditions are met, including adequacy of down payment
and the completion by the Company of its obligations under the contracts.
Until such conditions are met, such gains are included in deferred income.
Losses on the sale of restaurants are recognized at the time of sale.
FOOD AND SUPPLIES INVENTORIES
Food and supplies inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Additions and renewals are charged to the property accounts and
expenditures for maintenance and repairs are charged to operations as
incurred. Depreciation and amortization are expensed on the straight-line
method over the lesser of the lease term or the estimated useful lives of the
assets. Property and equipment at May 31, 1999 includes the carrying value of
restaurants totaling $2,321,000 which are operated by third party franchisees
pursuant to management agreements with the Company. The management agreement
grants to the franchisee the option to acquire the restaurant and its assets
generally within a period of one year or less.
INTANGIBLE ASSETS
Costs incurred to acquire the trademark and franchise rights to the Miami Subs
concept and other intangibles, consisting principally of royalty rights
acquired, are amortized over a twenty year period on a straight line basis.
Restaurants acquired are accounted for under the purchase method and recorded
at the estimated fair value of the equipment and building improvements
acquired. The excess of cost over the fair value of the assets acquired,
including goodwill if any, is amortized using the straight-line method over
the remaining term of the underlying property leases, but not in excess of 20
years. At each balance sheet date, the Company evaluates the realizability of
goodwill based upon expectations of operating income for each restaurant
having a material goodwill balance. Should the Company determine it probable
that future estimated undiscounted related operating income from any of its
acquired restaurants will be less than the carrying amount of the associated
goodwill, an impairment of goodwill would be recognized, and goodwill would be
reduced to the amount estimated to be recoverable. The Company believes that
no material impairment of goodwill exists at May 31, 1999 and 1998.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for the possible impairment of long-lived assets under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting For the Impairment of Long-Lived Assets and For Long-Lived Assets
to be Disposed Of." Under SFAS No. 121, the Company evaluates whether events
and circumstances have occurred that indicate revision to the remaining useful
life or the remaining balances of long-lived assets, including intangible
assets and goodwill, may be appropriate. When factors indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, the Company will recognize an impairment loss equal to the
excess of the carrying amount over the fair value of the asset. The Company
recognized an impairment loss of $220,000 in 1999 and $375,000 in 1997 to
write-down the basis of certain restaurants operated by the Company.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109").
Under Statement 109, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on deferred taxes of a change
in tax rates is recognized in income in the year that includes the enactment
date.
EMPLOYEE STOCK OPTIONS
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for employee stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and accordingly, no compensation cost is recognized for stock
options issued to employees in the consolidated financial statements.
NET INCOME (LOSS) PER SHARE
Basic and diluted earnings per share are calculated in accordance with the
provisions of SFAS No. 128, "Earnings per Share." Under SFAS 128, basic
earnings per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised. Options
and warrants to purchase 1,084,554 shares of common stock at a
weighted-average exercise price of $4.44 per share were outstanding at May 31,
1999, but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price
of the common shares.
Earnings per share amounts have been adjusted for all years presented to
reflect a one-for-four reverse split of the Company's common stock effective
January 1999.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined based on
available information and appropriate valuation methodologies. The carrying
amounts of accounts receivable, accounts payable and accrued liabilities
approximate fair value due to the short-term nature of the accounts. The fair
value of long-term notes receivable and notes payable approximate the carrying
value of such assets and liabilities as of May 31, 1999.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about a company's operating segments and related disclosures about
its products, services, geographic areas of operations and major customers.
The Company adopted SFAS No. 131 effective May 31, 1999. Management operates
the business of the Company as a single segment. As a result, no additional
disclosure was required.
RECLASSIFICATION
Certain 1998 and 1997 balances have been reclassified to conform to the 1999
presentation.
2. 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 Miami
Subs for shares of Nathan's common stock plus warrants to acquire additional
shares of Nathan's common stock. Consummation of the merger is subject to
approval by a majority of the shareholders of both Miami Subs and Nathan's and
satisfaction of other customary closing conditions. Costs incurred through
May 31, 1999 in connection with the merger amounted to $299,000 which have
been expensed in the accompanying 1999 Statement of Operations. In November
1998, Nathan's acquired in a private transaction approximately 30% of the
outstanding common stock of the Company.
3. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Notes receivable from franchisees $ 5,762,000 $ 7,112,000
Royalties and other receivables due from franchisees 429,000 666,000
Other 243,000 229,000
------------ ------------
Total 6,434,000 8,007,000
Less allowance for doubtful accounts (185,000) (188,000)
------------ ------------
6,249,000 7,819,000
Less notes receivable due after one year (4,867,000) (6,076,000)
------------ ------------
Notes and accounts receivable-current portion $ 1,382,000 $ 1,743,000
==================================================== ============ ============
</TABLE>
Notes receivable at May 31, 1999 and 1998, principally result from sales of
restaurant businesses to franchisees and are generally guaranteed by the
purchaser and collateralized by the restaurant businesses and assets sold.
The notes are generally due in monthly installments of principal and interest,
with interest rates ranging principally between 8% and 12%.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 2,231,000 $ 2,231,000
Buildings and leasehold improvements 7,546,000 7,919,000
Furniture and equipment 5,953,000 5,154,000
Property held under capitalized leases 632,000 632,000
------------ ------------
Property and equipment at cost 16,362,000 15,936,000
Less accumulated depreciation and amortization (5,359,000) (4,324,000)
------------ ------------
Property and equipment - net $11,003,000 $11,612,000
============================================== ============ ============
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Trademark and franchise rights $ 2,797,000 $ 2,774,000
Excess of costs over fair value of net assets acquired
and other intangibles 5,903,000 5,903,000
------------ ------------
8,700,000 8,677,000
Less accumulated amortization (2,396,000) (1,959,000)
------------ ------------
Intangible assets - net $ 6,304,000 $ 6,718,000
====================================================== ============ ============
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Accounts payable $1,165,000 $1,113,000
Accrued wages and related liabilities 535,000 459,000
Accrued real estate and sales taxes 480,000 564,000
Accrued legal fees and litigation 281,000 211,000
Marketing fund contributions 1,680,000 970,000
OTHER 900,000 959,000
---------- ----------
TOTAL $5,041,000 $4,276,000
===================================== ========== ==========
</TABLE>
7. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Various notes payable to banks at prime plus 1.5% (9.25% at May 31,
1999), secured by accounts and notes receivable, land, restaurant
property and equipment and due in monthly payments through 2004 $3,863,000 $ 4,420,000
Note payable at 11.5%, secured by five restaurants and equipment,
payable in equal monthly installments through 2001 500,000 744,000
8.75% - 11.5% mortgages and notes payable, secured by
various restaurant properties and equipment and due in
varying monthly installments through 2004 694,000 743,000
10 3/8% mortgage note payable, secured by corporate
office building, due in monthly payments through 2007 417,000 451,000
Note payable at prime plus 2.0% (9.75% at May 31, 1999),
secured by leased restaurant properties and equipment, due in
monthly payments through 2001 113,000 160,000
Capitalized lease obligations 85,000 187,000
----------- ------------
Total 5,672,000 6,705,000
Less current portion (908,000) (1,092,000)
----------- ------------
Long-term portion $4,764,000 $ 5,613,000
====================================================================== =========== ============
</TABLE>
The above notes are secured by property and equipment with a book value of
approximately $6,038,000 at May 31, 1999, and notes and accounts receivable of
approximately $2,000,000.
At May 31, 1999, the approximate annual maturities of notes payable and
capitalized lease obligations for each of the five years ending May 31, 2004,
are $908,000, $1,611,000, $316,000, $696,000, and $323,000, respectively, and
$1,818,000 thereafter.
8. DEFERRED FRANCHISE FEES AND OTHER DEFERRED INCOME
Deferred franchise fees and other deferred income consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Development fees $298,000 $ 390,000
Franchise fees 102,000 135,000
Deferred gains and vendor rebates 503,000 1,052,000
-------- ----------
TOTAL $903,000 $1,577,000
================================= ======== ==========
</TABLE>
9. INCOME TAXES
The primary components that comprise the deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts and notes receivable $ 67,000 $ 68,000
Other liabilities and reserves 671,000 796,000
Deferred income and franchise deposits 108,000 142,000
Other 72,000 75,000
Net operating loss and other carry-forwards 2,289,000 2,604,000
Less valuation allowance (2,118,000) (2,761,000)
------------ ------------
Net deferred tax assets 1,089,000 924,000
------------ ------------
Deferred tax liabilities:
Property and equipment 545,000 466,000
Intangible assets 247,000 217,000
Other 297,000 241,000
------------ ------------
Total deferred tax liabilities 1,089,000 924,000
------------ ------------
Net deferred tax assets $ - $ -
============================================== ============ ============
</TABLE>
The net change in the valuation allowance for the year ended May 31, 1999 was
a decrease of $643,000.
At May 31, 1999 and 1998, the Company had no deferred tax assets or
liabilities reflected on its consolidated financial statements since net
deferred tax assets are offset by a valuation allowance. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the level of
historical operating results, scheduled reversal of deferred tax liabilities,
and projected future taxable income in making this assessment.
The difference between the actual tax provision and the tax provision by
applying the statutory federal income tax rate is attributable to the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% (34.0)%
Intangible costs amortized 5.4 4.9 12.5
Merger costs 14.4 - -
Charge associated with note receivable - - 22.3
Other 11.2 3.4 3.8
Change in valuation allowance (46.1) (16.4) (4.6)
------ ------ -------
Effective income tax rate 18.9% 25.9% - %
====== ====== =======
</TABLE>
At May 31, 1999, the Company's tax returns reflect net operating loss
carry-forwards of approximately $5.5 million which are available to reduce
future taxable income through 2012 (subject to limitations imposed under the
Internal Revenue Code regarding changes in ownership which limits utilization
of $2.8 million of the carry-forwards on an annual basis to approximately
$340,000). The Company also has general business credit carry-forwards of
approximately $274,000 which can be used to offset tax liabilities through
2010. The Company's federal income tax returns for fiscal years 1991 through
1996, inclusive, have been examined by the Internal Revenue Service. The
reports of the examining agent issued in connection with these examinations
indicate that additional taxes and penalties totaling approximately $2.4
million are due for such years. The Company is appealing substantially all of
the proposed adjustments. Due to net operating losses anticipated to be lost
in connection with the examination, the Company has accrued $345,000 for this
matter and believes that such accruals are adequate.
10. COMMITMENTS AND CONTINGENCIES
The Company is the prime lessee under various land and building leases for
restaurants operated by the Company and its franchisees. The leases generally
have initial terms ranging from five to 20 years and usually provide for
renewal options ranging from five to 20 years. Most of the leases contain
escalation clauses and common area maintenance charges (including taxes and
insurance). Certain of the leases require additional (contingent) rental
payments if sales volumes at the related restaurants exceed specified limits.
Base rent expense for Company operated restaurants for the years ended May 31,
1999, 1998, and 1997, was approximately $1,667,000, $1,561,000, and
$2,214,000, respectively. Additional (contingent) rental payments were
approximately $43,000, $44,000, and $54,000, respectively, in 1999, 1998, and
1997.
The Company also owns or leases sites which it leases or subleases to
franchisees. The Company remains liable for all lease costs when properties
are subleased to franchisees. In addition, the Company guarantees the lease
payments of two franchised locations, aggregating approximately $82,000
through June 2000.
The Company also subleases non-Miami Subs locations to third parties. Such
sub-leases provide for minimum annual rental payments by the Company
aggregating approximately $118,000 and expire on various dates through 2004
exclusive of renewal options.
The Company's future minimum rental commitments and sublease rental income as
of May 31, 1999 for all noncancellable capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating Sublease
Fiscal Year Leases Leases Rental Income
- ---------------------------------------------- --------- ----------- --------------
<S> <C> <C> <C>
2000 $ 89,000 $ 5,354,000 $ 3,214,000
2001 12,000 5,180,000 3,045,000
2002 12,000 4,690,000 2,626,000
2003 12,000 3,981,000 2,218,000
2004 12,000 3,222,000 2,002,000
Thereafter 69,000 19,299,000 11,614,000
--------- ----------- --------------
Total 206,000 $41,726,000 $ 24,719,000
=========== ==============
Less amount representing interest (46,000)
---------
Present value of future minimum lease payments $160,000
============================================== =========
</TABLE>
The Company guarantees certain equipment financing for franchisees with a
third party lender. The Company's maximum obligation for loans funded by the
lender as of May 31, 1999, was approximately $1.2 million.
LITIGATION
In January, 1992, the Company filed a Petition for Declaratory Judgment
against a third party seeking to dissolve an alleged joint venture between the
Company and the third party. The third party opposed the dissolution,
counterclaimed, and sought damages arising from amounts expended in developing
new locations and lost profits from the termination of the joint venture. A
bench trial was completed in April 1995, and the court subsequently awarded
the defendant damages in the amount of $241,000 plus costs and attorney fees.
The case was appealed by both the Company and the third party, and in November
1996, the appeal was argued before the Supreme Court of New Hampshire. In
December 1997, the Supreme Court ruled in favor of the Company, vacated the
damage award, reversed the award of attorney fees, and remanded to a trial
court for a determination of damages for the alleged breach of fiduciary duty
to the partnership. In May 1998, the trial court awarded the third party
compensatory damages in the amount of $200,000, which is being appealed by the
Company. The Company is fully accrued for this matter at May 31, 1999.
In connection with the above case and the favorable resolution of other legal
matters, in 1998 the Company reduced its legal accrual by $219,000.
In January 1999, the Company was served with a class action lawsuit 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. In March 1999, the
court granted the plaintiff leave to amend the complaint and on April 8, 1999,
the plaintiff filed an amended complaint. Miami Subs filed a motion to
dismiss the complaint on April 13, 1999 while Nathan's filed a motion to
dismiss on April 29, 1999. On May 21, 1999, the court considered these
motions to dismiss, but has yet to make a ruling. All discovery has been
stayed pending the court's ruling. The Company believes that the suit is
without merit and intends to defend against it vigorously.
The Company and its subsidiaries are parties to various other legal actions
arising in the ordinary course of business. The Company is vigorously
contesting these actions and currently believes that the outcome of such cases
will not have a material adverse effect on the Company.
11. STOCK OPTION PLAN AND WARRANTS
The Company's stock option plan provides for the granting of non-qualified
stock options for the purchase of up to 1,875,000 shares of common stock of
the Company by directors, officers, employees and consultants. Under the
terms of the plan, options have been granted for a term of 10 years at a price
not less than the market value of the common stock on the date of grant. The
options vest at the date of grant or at varying rates over a two or three year
period from the date of grant.
The following is a summary of stock option activity under the plan during each
of the last three years:
<TABLE>
<CAPTION>
Shares Under Weighted Average
Option Price Per Share
------------- -----------------
<S> <C> <C>
Balance at May 31, 1996 1,443,025 $ 11.16
Granted 23,500 3.40
Canceled (362,350) 8.44
=================================== ------------- -----------------
Balance at May 31, 1997 1,104,175 11.96
Granted and repriced 487,500 3.00
Canceled (962,250) 12.48
=================================== ------------- -----------------
Balance at May 31, 1998 629,425 $ 4.24
Granted 344,104 2.07
Canceled (16,375) 3.00
=================================== ------------- -----------------
Balance at May 31, 1999 957,154 $ 3.49
============= =================
Options exercisable at May 31, 1999 957,154 $ 3.49
============= =================
</TABLE>
At May 31, 1999, the weighted average remaining contract life of all
outstanding options under the plan was 6.29 years and the range of exercise
prices was $2.07 - $10.76.
The weighted average fair value of options granted during 1999, 1998, and 1997
was $1.48, $1.72, and $1.91, respectively.
During 1998, 341,500 outstanding stock options at an average exercise price of
$8.80 per share were amended to reduce the exercise price to $3.00 per share,
representing the market value of the common stock at the time of the
amendment.
The Company accounts for employee stock options in accordance with the
intrinsic value method prescribed in APB No. 25. Accordingly, no compensation
cost is recognized at the time stock options are granted. Had employee
compensation expense been determined based on the fair value at the grant date
for options granted in each of the last three years consistent with the
provisions of SFAS No. 123, net income (loss) would have been $162,000,
$(57,000), and $(334,000), and basic and diluted net income (loss) per share
would have been $ .02, $( .01), and $( .05), respectively. The fair market
value of each option grant was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions: expected option
term of 10 years; expected volatility of 58.2% in 1999 and 27.1% in 1998 and
1997; risk free interest rate of 6.25% in 1999 and 6.75% in 1998 and 1997; and
zero dividend yield.
At May 31, 1999, 102,400 options and 25,000 warrants are outstanding outside
of the Company's stock option plan at average exercise prices of $8.64 and
$24.00 per share, respectively.
12. RELATED PARTY TRANSACTIONS
At May 31, 1999, the Company leased five restaurant properties from Kavala,
Inc., a private company owned by the Company's former chairman of the board
and chief executive officer, Gus Boulis. Rent expense for all leases between
the Company and Kavala was $381,000 in 1999, $424,000 in 1998, and $412,000 in
1997. Future minimum rental commitments due to Kavala at May 31, 1999 under
these existing leases was approximately $1.5 million. In fiscal year 1997,
the Company leased a then vacant, non-Miami Subs property to a company owned
by Boulis. The Company believes that rents charged under these leases are not
materially different from the rents that would have been incurred or obtained
from leasing arrangements with unaffiliated parties or on a stand alone basis.
In November 1998, Boulis resigned all positions with the Company.
In February 1998, the Company entered into a management agreement with Boulis
providing for the Company to manage an existing Miami Subs Grill restaurant
owned by Boulis for a fee of 5.0% of the restaurant's gross restaurant sales.
The agreement was terminated in June 1998 upon the sale of the restaurant to a
third party franchisee.
Mr. Bartsocas, a former officer of the Company, is also an officer and
director of Subies Enterprises, Inc. ("Subies"), a franchisee of the Company.
Under an agreement which was entered into in 1991 between the Company and
Subies, Subies paid a franchise fee of $5,000 for each of five restaurants
developed by Subies, and Subies was exempt from paying royalty fees on the
restaurants as long as the restaurants were owned by Subies. Two of the five
restaurants developed by Subies have been sold to independent franchisees as
of May 31, 1999.
Mr. Donald L. Perlyn has been an officer of the Company since 1990, a director
since 1997, and president and chief operating officer of the Company since
July 1998. Mr. Perlyn is also an officer and principal of DEMAC Restaurant
Corp. which owned and operated a Miami Subs Grill restaurant in Florida. In
connection with his appointment as president in July 1998, Miami Subs acquired
the restaurant from DEMAC for existing indebtedness on the restaurant totaling
approximately $270,000 which was paid by the Company.. In December 1998, the
Company canceled a loan to Mr. Perlyn in the principal amount of approximately
$85,000. The loan had accrued interest at a rate of prime plus 1.5% and was
due in full in June 1999.
Mr. Bruce Galloway, a member of the board of directors of Miami Subs, is the
chairman of the board of Arthur Treacher's, Inc. In 1998, Miami Subs and
Arthur Treacher's entered into a co-branding test agreement which provided for
a test of the sale of Arthur Treacher's products in certain existing Miami
Subs restaurants. In August 1998, Miami Subs and Arthur Treacher's entered
into an agreement which provides for the sale of Arthur Treacher's products in
all existing Miami Subs restaurants pursuant to the terms of the agreement.
In April 1999, the agreement was amended to grant Miami Subs the exclusive
right to co-brand the Arthur Treacher's concept and products in the United
States and to include future developed Miami Subs restaurants and other fast
food restaurants. At May 31, 1999, seven Company-operated restaurants and 38
franchised restaurants were selling Arthur Treacher's products.
In January 1999, a Company-operated restaurant began selling Nathan's all-beef
frankfurters and fresh, crinkle-cut french fries on a test basis. A franchise
agreement was executed in February 1999.
<TABLE>
<CAPTION>
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. C COL. D COL. E
Additions
charged Additions
Balance at to costs charged Balance at
beginning and to other end of
Description of period expenses account Deductions period
- --------------------------------- ----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1997:
Allowance for doubtful
accounts -
notes and accounts receivable $ 390,000 - $ 101,000 $ 289,000
Year ended May 31, 1998:
Allowance for doubtful
accounts -
notes and accounts receivable $ 289,000 - $ 101,000 $ 188,000
Year ended May 31, 1999:
Allowance for doubtful
accounts -
notes and accounts receivable $ 188,000 $ 114,000 $ 117,000 $ 185,000
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT LIST
Location in this report or
Reg. S-K incorporated by reference
Item No. Document to prior Filing
- -------- ----------------------------------------------------------- --------------------------
<C> <S> <C>
23 Accountants' Consent re Registration Statement on Form S-8. Filed herewith on page 36
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MIAMI SUBS CORPORATION
Dated: August 25, 1999 By: /s/ Donald L. Perlyn
DONALD L. PERLYN
President and
Chief Operating Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Donald L. Perlyn Dated: August 25, 1999
DONALD L. PERLYN, President and
Chief Operating Officer
(Principal Executive Officer)
By: /s/ Bruce R. Galloway Dated: August 25, 1999
BRUCE R. GALLOWAY, Director
By: /s/ Peter Nasca Dated: August 25, 1999
PETER NASCA, Director
By: /s/ Joseph Zappala Dated: August 25, 1999
JOSEPH ZAPPALA, Director
By: /s/ Howard Lorber Dated: August 25, 1999
HOWARD LORBER, Director
By: /s/ Wayne Norbitz Dated: August 25, 1999
WAYNE NORBITZ, Director
By: /s/ Robert J. Eide Dated: August 25, 1999
ROBERT J. EIDE, Director
By: /s/ Jerry W. Woda Dated: August 25, 1999
JERRY W. WODA,
Senior Vice President,
Chief Financial Officer,
and Principal Accounting
and Financial Officer
ACCOUNTANTS' CONSENT
The Board of Directors and Shareholders
Miami Subs Corporation:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Miami Subs Corporation of our report dated August 6, 1999, relating to
the consolidated balance sheets of Miami Subs Corporation and subsidiaries as
of May 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended May 31, 1999, and related schedule which report
appears in the May 31, 1999 annual report on Form 10-K of Miami Subs
Corporation.
KPMG LLP
Fort Lauderdale, Florida
August 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 4,775,000
<SECURITIES> 0
<RECEIVABLES> 1,567,000
<ALLOWANCES> (185,000)
<INVENTORY> 173,000
<CURRENT-ASSETS> 6,513,000
<PP&E> 16,362,000
<DEPRECIATION> (5,359,000)
<TOTAL-ASSETS> 29,188,000
<CURRENT-LIABILITIES> 5,949,000
<BONDS> 0
0
0
<COMMON> 71,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,188,000
<SALES> 18,369,000
<TOTAL-REVENUES> 23,859,000
<CGS> 17,042,000
<TOTAL-COSTS> 23,151,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 220,000
<INTEREST-EXPENSE> 611,000
<INCOME-PRETAX> 708,000
<INCOME-TAX> 134,000
<INCOME-CONTINUING> 574,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 574,000
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
