Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 28, 1998 Commission File Number: 0-18668
----------------- --------
MAIN STREET AND MAIN INCORPORATED
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2948370
- ------------------------------------------------ -------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
5050 NORTH 40TH STREET
SUITE 200, PHOENIX, ARIZONA 85018
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(602) 852-9000
------------------------------------------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 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. [ ]
At March 23, 1999, there were outstanding 10,011,052 shares of the registrant's
Common Stock, $.001 par value. The aggregate market value of Common Stock held
by nonaffiliates of the registrant based on the closing sale price of the
Common Stock as reported on the Nasdaq National Market on March 23, 1999, was
$22,636,000. For purposes of this computation, all officers, directors, and 10%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors,
or 10% beneficial owners are, in fact, affiliates of the registrant.
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement for the 1999 Annual Meeting of Stockholders are incorporated by
reference into Part III.
MAIN STREET AND MAIN INCORPORATED
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 28, 1998
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 18
ITEM 11. EXECUTIVE COMPENSATION 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 19
SIGNATURES 21
------------
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF APPLICABLE
SECURITIES LAWS. FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING THE
COMPANY'S "EXPECTATIONS," "ANTICIPATION," "INTENTIONS," "BELIEFS," OR
"STRATEGIES" REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS ALSO INCLUDE
STATEMENTS REGARDING REVENUE, MARGINS, EXPENSES, AND EARNINGS ANALYSIS FOR
FISCAL 1999 AND THEREAFTER; FUTURE RESTAURANT OPERATIONS AND NEW RESTAURANT
ACQUISITIONS OR DEVELOPMENT; THE RESTAURANT INDUSTRY IN GENERAL; AND LIQUIDITY
AND ANTICIPATED CASH NEEDS AND AVAILABILITY. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF
THE FILING DATE OF THIS REPORT, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.
i
PART I
ITEM 1. BUSINESS
GENERAL
The Company is the world's largest franchisee of T.G.I. Friday's
restaurants, currently owning 40 and managing 10 T.G.I. Friday's restaurants and
owning one Redfish restaurant. The Company owns the exclusive rights to develop
additional T.G.I. Friday's restaurants in territories encompassing most of the
states of Arizona, Nevada, and New Mexico and the Kansas City, Kansas, Kansas
City, Missouri and El Paso, Texas metropolitan areas. The Company also has the
exclusive right, together with TGI Friday's Inc., to develop additional T.G.I.
Friday's restaurants in the Northern and Southern California territories. The
Company plans to develop additional T.G.I. Friday's restaurants in its existing
development territories, in which it is required to open 44 additional
restaurants by December 31, 2003. In addition, the Company has a 52% ownership
interest in Redfish America, LLC, a cajun-themed restaurant and bar concept,
which currently owns and operates an additional four Redfish Looziana Roadhouse
& Seafood Kitchen restaurants.
The Company's strategy is to (i) capitalize on the brand-name recognition
and goodwill associated with T.G.I. Friday's restaurants; (ii) expand the
Company's restaurant operations through the development of additional T.G.I.
Friday's restaurants in its existing development territories and through the
development of new restaurant concepts, including Redfish, and the acquisition
of restaurants operating under other restaurant concepts; and (iii) increase
its profitability by continuing to enhance the dining experience of its guests
and improving operating efficiency.
The Company was incorporated in December 1988. The Company maintains its
principal executive offices at 5050 North 40th Street, Suite 200, Phoenix,
Arizona 85018, and its telephone number is (602) 852-9000. As used in this
Report, the term "Company" refers to Main Street and Main Incorporated and its
subsidiaries.
TGI FRIDAY'S INC.
TGI Friday's Inc. is a wholly owned subsidiary of the Carlson Companies
Inc., a diversified company with business interests in the restaurant and
hospitality industries. The first T.G.I. Friday's restaurant was opened in 1965
in New York City. TGI Friday's Inc. has conducted a business since 1972 that is
substantially similar to the business currently conducted by its franchisees.
As of March 1, 1999, TGI Friday's Inc. had 192 franchisor-operated and 357
franchised restaurants operating worldwide. System-wide sales exceeded $1.4
billion in 1998. TGI Friday's Inc. currently owns approximately 2.6% of the
Company's outstanding Common Stock. Holders of the Company's Common Stock do
not have any financial interest in TGI Friday's Inc., and TGI Friday's Inc. has
no responsibility for the contents of this Report.
CONCEPT
T.G.I. Friday's restaurants are full-service, casual dining establishments
featuring a wide selection of high quality, freshly prepared popular foods and
beverages, including a number of innovative and distinctive menu items. The
restaurants feature quick, efficient, and friendly table service designed to
minimize customer waiting time and facilitate table turnover. Service personnel
are dressed in traditional red-and-white striped knit shirts and casual slacks
and are encouraged to individualize their outfits with decorative pins and
headwear, which enhance the T.G.I. Friday's theme and entertaining dining
atmosphere. The Company's restaurants generally are open seven days a week
between the hours of approximately 11:00 a.m. and 1:00 a.m. The Company
believes that the design and operational consistency of all T.G.I. Friday's
restaurants enable the Company to benefit significantly from the name
recognition and goodwill associated with T.G.I. Friday's restaurants.
MENU
The Company attempts to capitalize on the innovative and distinctive menu
items that have been an important attribute of T.G.I. Friday's restaurants. The
menu consists of more than 90 food items, including appetizers (such as
mushrooms, jalapeno poppers, buffalo wings, stuffed potato skins, quesadillas,
fried onion rings, and pot stickers); a variety of soups, salads, sandwiches,
wrappers, burgers,
1
pizzadillas, and pasta; southwestern, oriental, and American specialty
items; beef, seafood, and chicken entrees; a kids' menu; and desserts. Beverages
include a full bar featuring wines, beers, classic and specialty cocktails and
after dinner drinks, soft drinks, milk, milk shakes, malts, hot chocolate,
coffee, tea, frozen fruit drinks known as Friday's Smoothies,(TM) and sparkling
fruit juice combinations known as Friday's Flings(R).
Menu prices range from $6 to $17 for beef, chicken, and seafood entrees;
$6 to $10 for pizzadillas, pasta, wrappers, and oriental and southwestern
specialty items; $4 to $9 for salads, sandwiches, and burgers; and $3 to $10
for appetizers and soups. Each restaurant offers a separate children's menu
with food entrees ranging from $2 to $3. Alcoholic beverage sales currently
account for approximately 23.3% of total revenue.
RESTAURANT LAYOUT
Each of the Company's restaurants is similar in terms of exterior and
interior design. Each restaurant features a distinctive decor accented by
red-and-white striped awnings, brass railings, stained glass, and eclectic
memorabilia. Each restaurant has interior dining areas and bar seating.
Most of the restaurants are located in free-standing buildings. The
restaurants contain an average of 60 dining tables, seating an average of 210
guests, and a bar area seating an average of approximately 30 additional
guests.
The restaurants normally contain between 5,500 and 9,000 square feet of
space and average approximately 7,500 square feet. Most of the Company's
recently developed restaurants, however, contain 5,800 to 6,500 square feet of
space.
UNIT ECONOMICS
The Company estimates that its total cost of opening a new T.G.I. Friday's
restaurant currently ranges from $1,900,000 to $2,200,000, exclusive of annual
operating expenses and assuming that the underlying real estate is obtained
under a lease arrangement. These costs include approximately (i) $1,150,000 to
$1,450,000 for building, improvements, and permits, including liquor licenses,
(ii) $550,000 for furniture, fixtures, and equipment, (iii) $150,000 in
pre-opening expenses, including hiring expenses, wages for managers and hourly
employees, and supplies, and (iv) $50,000 for the initial franchise fee. Actual
costs, however, may vary significantly depending upon a variety of factors,
including the site and size of the restaurant and conditions in the local real
estate and employment markets. The Company's T.G.I. Friday's restaurants open
during all of fiscal 1998 generated an average of approximately $3,079,000 in
annual revenue.
SITE SELECTION
When evaluating whether and where to seek expansion of the Company's
restaurant operations, the Company analyzes a restaurant's profit potential.
The Company considers the location of a restaurant to be one of the most
critical elements of the restaurant's long-term success. Accordingly, the
Company expends significant time and effort in the investigation and evaluation
of potential restaurant sites. In conducting the site selection process, the
Company obtains and examines detailed demographic information (such as
population characteristics, density, and household income levels), evaluates
site characteristics (such as visibility, accessibility, and traffic volume),
considers the restaurant's proximity to demand generators (such as shopping
malls, lodging, and office complexes), and analyzes potential competition.
Senior corporate management evaluates and approves each restaurant site prior
to its acquisition after extensive consultation with all levels of the
operations group. TGI Friday's Inc. provides site selection guidelines and
criteria as well as site selection counseling and assistance. The selection of
a restaurant site by the Company requires the consent of TGI Friday's Inc.
2
CURRENT RESTAURANTS
The following table sets forth certain information relating to each of
restaurants owned or managed by the Company as of March 23, 1999.
Owned or
Square Seating In Operation Managed by the
Location Footage Capacity Since Company Since
-------- ------- -------- ----- -------------
ACQUIRED T.G.I. FRIDAY'S RESTAURANTS (OWNED)
Phoenix, Arizona ........................... 9,396 298 1985 1990
Mesa, Arizona ........................... 9,396 298 1985 1990
Tucson, Arizona ........................... 7,798 290 1982 1990
Las Vegas, Nevada ........................ 9,194 298 1982 1990
Kansas City, Missouri ..................... 8,500 270 1983 1993
Overland Park, Kansas ..................... 6,000 220 1992 1993
San Diego, California ..................... 8,002 234 1979 1993
Costa Mesa, California .................. 8,345 232 1980 1993
Woodland Hills, California ............... 8,358 283 1980 1993
Valencia, California ..................... 6,500 232 1993 1993
Torrance, California ..................... 8,923 237 1982 1993
La Jolla, California ..................... 9,396 225 1984 1993
Palm Desert, California .................. 9,194 235 1983 1993
West Covina, California .................. 9,396 232 1984 1993
North Orange, California .................. 9,194 213 1983 1993
Ontario, California ..................... 5,700 190 1993 1993
Laguna Niguel, California ............... 6,730 205 1990 1993
San Bernardino, California ............... 9,396 236 1986 1993
Brea, California ........................ 6,500 195 1991 1993
Riverside, California ..................... 6,500 172 1991 1993
Pleasanton, California ..................... 8,000 255 1995 1998
Salinas, California ........................ 6,500 240 1994 1998
Oakland, California ........................ 5,966 230 1994 1998
Sacramento, California ..................... 6,200 230 1979 1998
Citrus Heights, California ............... 8,500 270 1982 1998
Fresno, California ........................ 5,950 230 1978 1998
DEVELOPED T.G.I. FRIDAY'S RESTAURANTS (OWNED)
Scottsdale, Arizona ..................... 8,507 281 1991 1991
Glendale, Arizona ........................ 5,200 230 1993 1993
Albuquerque, New Mexico .................. 5,975 270 1993 1993
Reno, Nevada .............................. 6,500 263 1994 1994
Oxnard, California ........................ 6,500 252 1994 1994
Carmel Mountain, California ............... 6,500 252 1995 1995
Rancho Santa Margarita, California ......... 6,548 252 1995 1995
Cerritos, California ..................... 6,250 223 1996 1996
Las Vegas, Nevada ........................ 6,700 251 1997 1997
San Francisco, California .................. 6,700 251 1998 1998
El Paso, Texas #2 ........................ 5,491 206 1998 1998
Superstition Springs (Mesa), Arizona ...... 6,250 240 1998 1998
Puente Hills, California .................. 5,800 272 1999 1999
San Diego, California ..................... 6,800 277 1999 1999
(Table continued on next page)
3
(Table continued from previous page)
Owned or
Square Seating In Operation Managed by the
Location Footage Capacity Since Company Since
-------- ------- -------- ----- -------------
MANAGED T.G.I. FRIDAY'S RESTAURANTS
San Bruno, California ......... 8,345 200 1980 1993
San Francisco, California ...... 4,748 161 1989 1993
San Jose, California ............ 8,002 228 1977 1993
San Mateo, California ......... 9,396 252 1984 1993
San Ramon, California ......... 6,000 182 1990 1993
Lafayette, Louisana ............ 6,800 277 1993 1996
Metairie, Louisiana ............ 9,000 290 1978 1996
New Orleans, Louisiana ......... 7,100 258 1994 1996
El Paso, Texas #1 ............... 4,800 198 1997 1997
Monterey, California ............ 6,800 250 1997 1998
REDFISH RESTAURANTS
Chicago, Illinois ............... 6,200 214 1996 1997
Wheaton, Illinois ............... 7,133 210 1997 1997
Denver, Colorado ............... 7,925 321 1997 1997
Cincinnati, Ohio ............... 7,133 239 1997 1997
San Diego, California ............ 11,994 347 1999 1999
The average size of the Company's acquired restaurants is approximately
8,000 square feet, and the average size of the Company's developed T.G.I.
Friday's restaurants is approximately 6,300 square feet.
RESTAURANT OPERATIONS
THE T.G.I. FRIDAY'S SYSTEM
T.G.I. Friday's restaurants are developed and operated pursuant to a
specified system (the "T.G.I. Friday's System" or the "System"). TGI Friday's
Inc. maintains detailed standards, specifications, procedures, and operating
policies to facilitate the success and consistency of all T.G.I. Friday's
restaurants. To ensure that the highest degree of quality and service is
maintained, each franchisee of TGI Friday's Inc. (including the Company) must
operate each T.G.I. Friday's restaurant in strict conformity with these
methods, standards, and specifications. The T.G.I. Friday's System includes
* distinctive exterior and interior design, decor, color scheme, and
furnishings;
* uniform specifications and procedures for operations;
* standardized menus featuring special recipes and menu items;
* procedures for inventory and management control;
* formal training and assistance programs;
* advertising and promotional programs;
* requirements for quality and uniformity of products and services
offered;
* requirements for the purchase or lease and use of equipment, fixtures,
furnishings, signs, inventory, recorded music, ingredients, and other
products and materials required for the development and operation of
restaurants conforming with the standards and specifications of TGI
Friday's Inc. from approved suppliers; and
* standards for the maintenance, improvement, and modernization of
restaurants, equipment, furnishings, and decor.
TGI Friday's Inc. has committed to its franchisees to continue to improve
and further develop the T.G.I. Friday's System and to provide such new
information and techniques to the franchisees by means of confidential franchise
operating manuals. The T.G.I. Friday's System is identified by means of certain
trade names, service marks, trademarks, logos, and emblems, including the marks
T.G.I. Friday's(R) and Friday's(R). The Company believes the support as well as
the standards, specifications, and operating
4
procedures of TGI Friday's Inc. are important elements in its restaurant
operations. The Company's policy is to execute these specifications,
procedures, and policies to the highest level of the standards of TGI Friday's
Inc.
Once a restaurant is integrated into the Company's operations, the Company
provides a variety of corporate services to assure the proper execution of the
T.G.I. Friday's System and the operational success of the restaurant. The
Company's executive management
* continually monitors restaurant operations;
* maintains management controls;
* inspects individual restaurants to assure the quality of products and
services and the maintenance of facilities;
* develops employee programs for efficient staffing, motivation,
compensation, and career advancement;
* institutes procedures to enhance efficiency and reduce costs; and
* provides centralized support systems.
The Company also maintains quality assurance procedures designed to assure
compliance with the high quality of products and services mandated by the
Company and TGI Friday's Inc. The Company responds to and investigates
inquiries and complaints, initiates on-site resolution of deficiencies, and
consults with each restaurant's staff to assure that proper action is taken to
correct any deficiency. Company personnel and contracted third-party quality
assurance professionals make unannounced visits to restaurants to evaluate the
facilities, products, and services. The Company believes that its quality
review program and executive oversight enhance restaurant operations, reduce
operating costs, improve customer satisfaction, and facilitate the highest
level of compliance with the T.G.I. Friday's System.
RESTAURANT MANAGEMENT
The Company's regional and restaurant management personnel are responsible
for complying with the operational standards of the Company and TGI Friday's
Inc. The Company's eight regional managers are responsible for between five and
eleven of the Company's restaurants within their region and report to one of
the Company's two Directors of Operations who in turn report to the Company's
Vice President of Restaurant Operations. The Vice President of Restaurant
Operations reports to the Executive Vice President of Operations and Chief
Operating Officer, who has complete responsibility for the operations of the
Company. Restaurant managers are responsible for day-to-day restaurant
operations, including customer relations, food preparation and service, cost
control, restaurant maintenance, and personnel relations. The Company typically
staffs its restaurants with an on-site general manager, two or three assistant
managers, a kitchen manager, and approximately 90 hourly employees.
RECRUITMENT AND TRAINING
The Company attempts to hire employees who are committed to the standards
maintained by the Company and TGI Friday's Inc. The Company also believes that
its high unit sales volume, the image and atmosphere of the T.G.I. Friday's
restaurant concept, and its career advancement and employee benefit programs
enable it to attract high quality management and restaurant personnel and to
enjoy a low level of employee turnover relative to the industry.
The Company emphasizes participation in continuing training programs
maintained by TGI Friday's Inc. and supplements those programs through the
employment of personnel devoted solely to employee training. Each restaurant
general and assistant manager completes a formal training program conducted by
the Company and TGI Friday's Inc., receiving between 10 and 15 weeks of
training depending on the prior experience and ability of the trainee. The
training covers all aspects of management philosophy and overall restaurant
operations, including supervisory skills, operating and performance standards,
accounting procedures, and employee selection and training necessary for
restaurant operations.
5
Management believes that the Company's incentive, motivation, and training
programs enhance employee performance, result in better customer service, and
increase restaurant efficiency. The Company has implemented incentive programs
that reward restaurant managers when the restaurant's operating results surpass
designated goals and a reward and recognition program for outstanding
achievements by employees.
MAINTENANCE AND IMPROVEMENT OF RESTAURANTS
The Company maintains its restaurants and all associated fixtures,
furnishings, and equipment in conformity with the T.G.I. Friday's System. The
Company also makes necessary additions, alterations, repairs, and replacements
to its restaurants as required by TGI Friday's Inc., including periodic
repainting or replacement of obsolete signs, furnishings, equipment, and decor.
The Company may be required, subject to certain limitations, to modernize its
restaurants to the then-current standards and specifications of TGI Friday's
Inc.
MANAGEMENT INFORMATION SYSTEMS
The Company has devoted considerable resources to develop and implement
management information systems that complement proprietary systems developed
and maintained by TGI Friday's Inc. Inventory control and transaction
processing are effected by means of a computerized sales system, which is
integrated into data processing systems the Company utilizes for financial and
management control, centralized accounting, and management information systems.
The Company uses five to six touchscreen computer registers located
conveniently throughout each of its restaurants. Servers enter guest orders by
touching the appropriate sections of the register's computer screen, which
transfers the information electronically to the kitchen and bar for
preparation. These registers also are connected to a personal computer in the
restaurant office and to the Company's corporate information system via modem.
Management receives detailed comparative reports on each restaurant's sales and
expense performance daily, weekly, and monthly.
The Company believes that its management information systems enable it to
increase the speed and accuracy of order taking and pricing, to better assess
guest preferences, to efficiently schedule labor to better serve guests, to
quickly and accurately monitor food and labor costs, to promptly access
financial and operating data, and to improve the accuracy and efficiency of
store-level information and reporting.
EQUIPMENT, FOOD PRODUCTS, AND OTHER SUPPLIES
The Company leases or purchases all fixtures, furnishings, equipment,
signs, recorded music, food products, supplies, inventory, and other products
and materials required for the development and operation of its T.G.I. Friday's
restaurants from suppliers approved by TGI Friday's Inc. In order to be
approved as a supplier, a prospective supplier must demonstrate to the
reasonable satisfaction of TGI Friday's Inc. its ability to meet the
then-current standards and specifications of TGI Friday's Inc. for such items,
possess adequate quality controls, and have the capacity to provide supplies
promptly and reliably. The Company is not required to purchase supplies from
any specified suppliers, but the purchase or lease of any items from an
unapproved supplier requires the prior approval of TGI Friday's Inc.
TGI Friday's Inc. maintains a list of approved suppliers and a set of the
T.G.I. Friday's System standards and specifications. TGI Friday's Inc. receives
no commissions on direct sales to its franchisees, but may receive rebates and
promotional discounts from manufacturers and suppliers, which are generally
passed on proportionately to the Company. TGI Friday's Inc. is an approved
supplier of various kitchen equipment and store fixtures, decorative
memorabilia, and various paper goods, such as menus and in-store advertising
materials and items. However, the Company is not required to purchase such
items from TGI Friday's Inc. If the Company elects to purchase such items from
TGI Friday's Inc., TGI Friday's Inc. derives revenue as a result of such
purchases.
Although not required to do so, the Company purchases from a single
national food supplier most of the Company's key food products (with the
exception of produce, dairy products, and bread, which it purchases from
approved local suppliers) as well as many of its other restaurant supplies. TGI
Friday's Inc. and many of its other franchisees also purchase from this
supplier, which is not affiliated with the
6
Company or TGI Friday's Inc. The Company does not have a supply agreement or
other contractual arrangement with the supplier and effects purchases through
purchase orders.
The Company's restaurants utilize a simple bar code system for daily
ordering of their primary food and merchandise items. Orders are sent
electronically to the supplier. The supplier guarantees 100% product delivery,
either overnight or same day, and has comprehensive warehouse/delivery outlets
servicing each of the Company's markets.
The Company believes that its purchases from the supplier enable the
Company to maintain a high level of quality consistent with T.G.I. Friday's
restaurants; to realize convenience and dependability in the receipt of its
supplies; to avoid the costs of maintaining a large purchasing department,
large inventories, and product warehouses; and to attain cost advantages as the
result of volume purchases. The Company believes, however, that all essential
products are available from other national suppliers as well as from local
suppliers in the cities in which the Company's restaurants are located in the
event the Company determines to purchase its supplies from other suppliers.
ADVERTISING AND MARKETING
The Company participates in the national marketing and advertising
programs conducted by TGI Friday's Inc. See Item 1, "Business -- Franchise
Agreements." The programs primarily utilize network television and national
publications and feature new menu innovations and various promotion programs.
In addition, the Company from time to time supplements the marketing and
advertising programs conducted by TGI Friday's Inc. through local radio,
newspaper, and magazine advertising media and sponsorship of community events.
In conjunction with TGI Friday's Inc., the Company maintains a frequent diner
program that includes awards of food, merchandise, and travel to frequent
diners based upon points accumulated through purchases.
As a franchisee of TGI Friday's Inc., the Company is able to utilize the
trade names, service marks, trademarks, emblems, and indicia of origin of TGI
Friday's Inc., including the marks T.G.I. Friday's(R) and Friday's(R). The
Company advertises in various media utilizing these marks to attract new
customers to its restaurants.
EXPANSION OF OPERATIONS
Since 1990, the Company has acquired 36 existing T.G.I. Friday's
restaurants as well as the exclusive rights to develop restaurants in specified
territories. The acquisitions include 26 restaurants in California, three in
Arizona, and one in each of Colorado, Kansas, Missouri, Nebraska, Nevada,
Oregon, and Washington. The Company also has developed 19 new T.G.I. Friday's
restaurants. These include seven in California, three in each of Washington and
Arizona, two in each of Nevada and Texas, and one in each of Colorado and New
Mexico. See Item 1, "Business -- Current Restaurants." The Company subsequently
sold five of the restaurants it acquired in California, which it continues to
manage, and sold eight restaurants in Colorado, Nebraska, Oregon, and
Washington. In addition, the Company developed one Friday's Front Row Sports
Grill in Portland, Oregon (which it closed in June 1998) and in 1997 acquired a
52% ownership interest in Redfish America, LLC, which currently owns and
operates four Redfish Looziana Roadhouse & Seafood Kitchen restaurants. In May
1998, the Company acquired six T.G.I. Friday's restaurants in northern
California along with the related T.G.I. Friday's development agreement. As
part of this acquisition, the Company agreed to manage an additional location
in Monterey, California through April 1999.
The Company plans to expand its restaurant operations through the
development of additional restaurants in the Company's existing development
territories. The Company opened a T.G.I. Friday's restaurant in Puente Hills,
California on February 15, 1999, a T.G.I. Friday's restaurant in the Gaslamp
district of San Diego, California on March 22, 1999, and a Redfish restaurant
in the Gaslamp district of San Diego, California on March 23, 1999. The Company
plans to open 12 to 13 additional restaurants over the next year and to meet or
exceed its development requirements thereafter. The Company has signed leases
or purchased building pads for 13 additional restaurants scheduled to be
developed during 1999. The Company has identified two additional sites for
development in 1999 and currently is negotiating site acquisitions for these
restaurants. The Company currently is considering other sites for additional
restaurants, but has not entered into leases or purchase agreements for such
sites.
7
The opening of new restaurants will depend on the Company's ability to
* locate suitable sites in terms of favorable population characteristics,
density and household income levels, visibility, accessibility, traffic
volume, and proximity to demand generators (including shopping malls,
lodging, and office complexes) and potential competition;
* obtain financing for construction, tenant improvements, furniture,
fixtures, equipment, and other expenditures;
* negotiate acceptable leases or terms of purchase;
* secure zoning, environmental, health and similar regulatory approvals and
liquor licenses;
* recruit and train qualified personnel; and
* manage successfully the rate of expansion and expanded operations.
The opening of new restaurants also may be affected by increased
construction costs and delays resulting from governmental regulatory approvals,
strikes or work stoppages, adverse weather conditions, and various acts of God.
Newly opened restaurants may operate at a loss for a period following their
opening. The length of this period will depend upon a number of factors,
including the time of year the restaurant is opened, sales volume, and
operating costs.
The acquisition of existing restaurants will depend upon the Company's
ability to identify and purchase restaurants that meet its criteria on
satisfactory terms and conditions. There can be no assurance that the Company
will be successful in achieving its expansion goals through the development or
acquisition of additional restaurants or that any additional restaurants that
are developed or acquired will be profitable. In addition, the opening of
additional restaurants in an existing market may have the effect of drawing
customers from and reducing the sales volume of existing restaurants.
DEVELOPMENT AGREEMENTS
The Company is a party to four development agreements with TGI Friday's
Inc. Each development agreement grants the Company the exclusive right to
develop additional T.G.I. Friday's restaurants in a specified territory and
obligates the Company to develop additional T.G.I. Friday's restaurants in that
territory in accordance with a specified development schedule.
The Company owns the exclusive rights to develop additional T.G.I.
Friday's restaurants in territories encompassing most of the states of Arizona,
Nevada, and New Mexico and the Kansas City, Kansas, Kansas City, Missouri and
El Paso, Texas metropolitan areas. The Company also has the exclusive right,
together with TGI Friday's Inc., to develop additional T.G.I. Friday's
restaurants in the Northern and Southern California territories.
The following table sets forth information regarding the Company's minimum
requirements to open new T.G.I. Friday's restaurants under its current
development agreements as well as the number of existing restaurants in each of
the Company's development territories.
Southern Northern
California California Southwest Midwest
Year Territory(1) Territory(1) Territory(2) Territory(3) Total
- ---- ------------ ------------ ------------ ------------ -----
1999 ................. 3 4 1 1 9
2000 ................. 4 5 1 1 11
2001 ................. 4 4 1 1 10
2002 ................. 4 4 1 1 10
2003 ................. 3 3 (TBD) (TBD) 6
--- --- ---- ---- ---
18 20 4 4 46
Existing Restaurants.. 21 7 (4) 11 (5) 2 41
- ------------
(1) TGI Friday's Inc. also will develop restaurants in these regions.
(2) Includes the states of Arizona, Nevada, and New Mexico and the El Paso,
Texas metropolitan area.
(3) Includes metropolitan Kansas City, Kansas and Kansas City, Missouri.
(4) Does not include six restaurants managed in the Northern California
Territory.
(5) Does not include one restaurant managed in the Southwest Territory.
(TBD) To be determined by negotiation between T.G.I. Friday's Inc. and the
Company during 2002.
8
Each development agreement gives TGI Friday's Inc. certain remedies in the
event that the Company fails to comply in a timely manner with its schedule for
restaurant development, if the Company otherwise defaults under the development
agreement or any franchise agreement relating to a restaurant within that
development territory as described below, or if the Company's officers or
directors breach the confidentiality or noncompete provisions of the
development agreement. The remedies available to TGI Friday's Inc. include (i)
the termination of the Company's exclusive right to develop restaurants in the
related territory; (ii) a reduction in the number of restaurants the Company
may develop in the related territory; (iii) the termination of the development
agreement; and (iv) an acceleration of the schedule for development of
restaurants in the related territory pursuant to the development agreement.
FRANCHISE AGREEMENTS
The Company enters into or assumes a separate franchise agreement with
respect to each T.G.I. Friday's restaurant that it develops pursuant to a
development agreement or acquires. Each franchise agreement grants the Company
an exclusive license to operate a T.G.I. Friday's restaurant within a
designated geographic area (generally a three-mile limit from each restaurant)
and obligates the Company to operate such restaurant in accordance with the
requirements and specifications established by TGI Friday's Inc. relating to
the preparation of food products and quality of service as well as general
operating procedures, advertising, maintenance of records, and protection of
trademarks. The franchise agreements restrict the ability of the Company to
transfer its interest in its T.G.I. Friday's restaurants without the consent of
TGI Friday's Inc.
Each franchise agreement requires the Company to pay to TGI Friday's Inc.
an initial franchise fee, generally in the amount of $50,000. In addition, the
Company is obligated to pay TGI Friday's Inc. a royalty in the amount of 4% of
the gross revenue as defined in the franchise agreement for each restaurant.
Royalty payments under these agreements totaled $4,850,000, $4,120,000, and
$3,929,000 during fiscal 1996, 1997, and 1998, respectively. Each franchise
agreement also requires the Company to spend at least 2% of gross sales as
defined in the franchise agreement on local marketing and to contribute up to
4% of gross sales to a national marketing pool that is administered by TGI
Friday's Inc. During fiscal 1998, however, TGI Friday's Inc. generally required
the Company as well as all other franchisees to contribute up to 1.9% of gross
sales to the national marketing pool. Marketing expenses totaled $1,554,000,
$1,919,000, and $1,805,000, during fiscal 1996, 1997, and 1998, respectively.
All funds contributed in excess of 2% of gross sales to the national
advertising fund may be credited against the local advertising requirement.
A default under any franchise agreement will not constitute a default
under any other franchise agreement. A default under the franchise agreement
for a restaurant in a development territory may constitute a default under the
development agreement for that development territory.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to licensing and regulation
by state and local departments and bureaus of alcohol control, health,
sanitation, and fire and to periodic review by the state and municipal
authorities for areas in which the restaurants are located. In addition, the
Company is subject to local land use, zoning, building, planning, and traffic
ordinances and regulations in the selection and acquisition of suitable sites
for constructing new restaurants. Delays in obtaining, or denials of, or
revocation or temporary suspension of, necessary licenses or approvals could
have a material adverse impact upon the Company's development of restaurants.
The Company also is subject to regulation under the Fair Labor Standards
Act, which governs such matters as working conditions and minimum wages. An
increase in the minimum wage rate or changes in tip-credit provisions, employee
benefit costs (including costs associated with mandated health insurance
coverage) or other costs associated with employees could adversely affect the
Company.
In addition, the Company is subject to the Americans with Disabilities Act
of 1990 that among other things, may require certain installations in new
restaurants or renovations to existing restaurants to meet federally mandated
requirements. To the Company's knowledge, the Company is in compliance in all
material respects with all applicable federal, state, and local laws affecting
its business.
9
COMPETITION
The restaurant business is highly competitive with respect to price,
service, food type and quality. In addition, restaurants compete for the
availability of restaurant personnel and managers. The Company's restaurants
compete with a large number of other restaurants, including national and
regional restaurant chains and franchised restaurant systems, many of which
have greater financial resources, more experience, and longer operating
histories than the Company, as well as with locally owned, independent
restaurants.
The Company's casual dining business also competes with various types of
food businesses, as well as other businesses, for restaurant locations. The
Company believes that site selection is one of the most crucial decisions
required in connection with the development of restaurants. As the result of
the presence of competing restaurants in the Company's development territories,
management devotes great attention to obtaining what it believes will be
premium locations for new restaurants, although the Company cannot provide any
assurance that it will be successful in this regard.
EMPLOYEES
The Company employs approximately 1,863 persons on a full-time basis, of
whom 52 are corporate management and staff personnel and 1,811 are restaurant
personnel. The Company also employs approximately 3,364 part-time employees.
Except for corporate and management personnel, employees generally are paid on
an hourly basis. The Company employs at each of its restaurants an average of
approximately 90 full-time and part-time hourly employees. None of the
Company's employees are covered by a collective bargaining agreement with the
Company. The Company never has experienced a major work stoppage, strike, or
labor dispute. The Company considers its relations with its employees to be
good.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
executive officers:
NAME AGE POSITION
- ---- --- --------
Bart A. Brown, Jr....... 67 President, Chief Executive Officer, and Director
William G. Shrader...... 51 Executive Vice President, Chief Operating Officer,
and Director
James Yeager............ 48 Vice President-Finance, Secretary, and Treasurer
BART A. BROWN, JR. has been the President and Chief Executive Officer of
the Company since December 1996. Mr. Brown was affiliated with Investcorp
International, N.A., an international investment banking firm, from April 1996
until December 1996. Mr. Brown served as the Chairman and Chief Executive
officer of Color Tile, Inc. at the request of Investcorp International, Inc.,
which owned all of that company's common stock, from September 1995 until March
1996, shortly after Color Tile, Inc. filed under Chapter 11 of the United
States Bankruptcy Code. Mr. Brown served as Chairman of the Board of the Circle
K Corporation from June 1990, shortly after filing for reorganization under
Chapter 11 of the United States Bankruptcy Code, until September 1995. From
September 1994 until September 1996, Mr. Brown served as the Chairman and Chief
Executive Officer of Spreckels Industries, Inc. Mr. Brown engaged in the
private practice of law from 1963 through 1990 after seven years of employment
with the Internal Revenue Service.
WILLIAM G. (BILL) SHRADER has served as Executive Vice President, Chief
Operating Officer and Director of the Company since March 1, 1999. Prior to
joining the Company, Mr. Shrader was Senior Vice President of Marketing for
Tosco Marketing Company from February 1997 to March 1999. From August 1992 to
February 1997, Mr. Shrader served in several capacities at Circle K Stores,
Inc., including President of the Arizona Region, President of the Petroleum
Products/Services Division, Vice President of Gasoline Operations and Vice
President of Gasoline Marketing. Mr. Shrader began his career in 1976 at The
Southland Corporation and departed in 1992 as National Director of Gasoline
Marketing.
10
JAMES YEAGER has served as Vice President-Finance of the Company since
January 1999 and as Secretary and Treasurer of the Company since April 1998. Mr.
Yeager served as Corporate Controller of the Company from June 1997 to January
1999. Prior to joining the Company, Mr. Yeager was Chief Financial Officer of
Restaurants of America, Inc., a multiple concept restaurant company. Previously,
he was Chief Financial Officer of an engineering and high tech manufacturing
company, a multi-office law firm, a 160 unit chain of retail drug stores, a 60
unit chain of retail drug stores, and a full-service real estate investment and
management company. Mr. Yeager began his career as a manager and a partner in a
local public accounting firm in Dallas, Texas from 1972 to 1983.
ITEM 2. PROPERTIES
In December 1998, the Company entered into a five-year lease for space to
serve as its corporate offices. The Company believes that the leased space is
adequate for its current and reasonably anticipated needs and that it will be
able to secure adequate space upon the expiration of the lease.
The Company leases space for all its restaurants. The initial lease terms
range from 10 to 20 years and contain renewal options for up to 20 years. The
leases typically provide for a fixed rental plus percentage rental. See Note 7
to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to routine contract, negligence,
employment related, and other litigation in the ordinary course of business.
The Company does not believe that it is subject to any pending litigation that
will have a material adverse effect on its business or financial condition that
is not otherwise reserved for in the Company's consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "MAIN" since October 30, 1992. The following table sets forth
the quarterly high and low sales prices of the Company's Common Stock for the
periods indicated as reported by the Nasdaq Stock Market.
HIGH LOW
---- ---
1997
First Quarter .............................. $2 9/16 $1 9/16
Second Quarter.............................. 2 25/32 1 5/8
Third Quarter .............................. 3 7/8 2 5/16
Fourth Quarter.............................. 4 3/8 2 5/8
1998
First Quarter .............................. $4 $2 9/16
Second Quarter.............................. 3 15/16 3 1/8
Third Quarter .............................. 4 5/16 3 5/16
Fourth Quarter.............................. 3 7/8 2 15/16
1999
First Quarter (through March 23, 1999)...... $3 5/8 $2 31/32
On March 23, 1999, there were 782 holders of record of the Company's
Common Stock. On March 23, 1999, the closing sale price of the Common Stock on
the Nasdaq National Market was $3.125 per share.
The Company has never declared or paid any cash dividends. The Company
intends to retain any earnings to fund the growth of its business and does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's existing debt obligations prohibit the Company from paying cash
dividends.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company for the periods indicated. The selected consolidated financial data
for each of the five fiscal years in the period ending December 28, 1998 has
been derived from the Company's consolidated financial statements, which have
been audited by Arthur Andersen LLP, independent accountants. This data should
be read in conjunction with, and are qualified by reference to, the Company's
consolidated financial statements and the notes thereto and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Report.
Fiscal Year Ended
---------------------------------------------------------
(In thousands, except per share amounts)
Dec. 26, Dec. 25, Dec. 30, Dec. 29 Dec. 28
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue .................................. $111,262 $119,508 $122,563 $107,997 $115,324
Restaurant operating expenses:
Cost of sales ........................... 30,516 34,005 35,089 30,995 33,242
Payroll and benefits .................... 34,849 36,769 38,858 32,469 34,353
Depreciation and amortization ........... 3,884 4,353 4,586 3,552 4,391
Other operating expenses ................ 31,621 35,250 36,944 30,589 31,083
-------- -------- -------- -------- --------
Total restaurant operating expenses .... 100,870 110,377 115,477 97,605 103,069
-------- -------- -------- -------- --------
Income from restaurant operations ........ 10,392 9,131 7,086 10,392 12,255
Depreciation and amortization ........... 1,014 1,331 1,450 953 983
General and administrative expenses ..... 4,191 4,410 4,388 4,559 4,906
Restructuring and reorganization ........ -- -- 20,208 (2,390) (17)
-------- -------- -------- -------- --------
Operating income (loss) .................. 5,187 3,390 (18,960) 7,270 6,383
Interest expense, net ................... 3,902 4,424 3,206 2,466 2,218
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations before income taxes and
extraordinary item ...................... 1,285 (1,034) (22,166) 4,804 4,165
Provision for income taxes ............... -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations before extraordinary item .... 1,285 (1,034) (22,166) 4,804 4,165
Net income (loss)(1) ..................... $ 1,285 $ (1,034) $(22,166) $ 3,166 $ 4,165
DILUTED EARNINGS PER SHARE:
Net income (loss) from continuing
operations before extraordinary item.... $ 0.35 $ (0.22) $ (2.73) $ 0.47 $ 0.39
Net income (loss)(1) .................... $ 0.35 $ (0.22) $ (2.73) $ 0.31 $ 0.39
Weighted average shares outstanding --
diluted ................................. 3,692 4,621 8,110 10,098 10,608
BALANCE SHEET DATA:
Working capital ......................... $(10,905) $ (7,848) $ (1,343) $ (1,330) $ (2,807)
Total assets ............................ 84,503 88,605 70,848 61,168 70,255
Long-term debt, net of current portion... 41,265 31,204 33,809 24,308 28,264
Stockholders' equity .................... 22,601 37,261 16,585 22,203 26,372
- ------------
(1) Fiscal 1997 includes an extraordinary loss from debt extinguishment of
$1,638,000, or $0.16 per share.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company commenced its restaurant operations in May 1990 with the
acquisition of four T.G.I. Friday's restaurants in Arizona and Nevada. During
the past eight years, the Company has grown through acquisitions and
development of new restaurants and currently manages 55 restaurants.
During 1996, the Company had a change in management and implemented a
long-term business strategy to enhance its financial position, to place more
emphasis on its casual dining business in certain designated areas, and to
dispose of underperforming assets.
The first step was to strengthen the Company's financial position. This
was accomplished by (i) the sale of 1,250,000 shares of Common Stock for
$2,500,000 through a private placement transaction in January 1997; (ii) the
sale of five restaurants in northern California in January 1997 for
$10,800,000, of which $8,000,000 in proceeds were used to repay debt (see Notes
3 and 5 to Notes to Consolidated Financial Statements); and (iii) new
borrowings of $21,300,000 with a repayment period of 15 years. Proceeds from
the new borrowings were used primarily to pay off debt with shorter repayment
periods (see Note 5 to Notes to Consolidated Financial Statements).
The Company also has renegotiated its development agreements with T.G.I.
Friday's Inc. to reduce the number of T.G.I. Friday's restaurants it is
required to build with the intent to focus on those development territories
that are most economically favorable (see Note 7 to Notes to Consolidated
Financial Statements). In addition, the Company has recorded net restructuring
and reorganization gains of $17,000 in 1998, $2,390,000 in 1997 and a loss of
$20,208,000 in 1996 to dispose of various non-core assets and write down
certain core assets to realizable values (see Note 2 to Notes to Consolidated
Financial Statements).
The Company's current strategy is to reduce operating costs and expand its
restaurant operations. This will entail continuing to build T.G.I. Friday's and
Redfish restaurants and evaluating other concepts in the casual dining segment.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
that certain items of income and expense bear to total revenue:
Fiscal Year Ended
----------------------------------------
December 30, December 29, December 28,
1996 1997 1998
----------- ------------ ------------
Revenue ................................ 100.0% 100.0% 100.0%
Restaurant operating expenses:
Cost of sales ......................... 28.6 28.7 28.8
Payroll and benefits .................. 31.7 30.1 29.8
Depreciation and amortization ......... 3.7 3.3 3.8
Other operating expenses .............. 30.2 28.3 27.0
----- ----- -----
Total restaurant operating expenses ... 94.2 90.4 89.4
----- ----- -----
Income from restaurant operations ...... 5.8 9.6 10.6
Depreciation and amortization ......... 1.2 0.9 0.9
General and administrative expenses ... 3.6 4.2 4.2
Restructuring and reorganization ...... 16.5 (2.2) --
----- ----- -----
Operating income (loss) ................ (15.5) 6.7 5.5
Interest expense, net .................. 2.6 2.3 1.9
----- ----- -----
Net income (loss) before income taxes
and extraordinary item ................ (18.1)% 4.4% 3.6%
===== ===== =====
14
FISCAL 1998 COMPARED TO FISCAL 1997
Revenue for the fiscal year ended December 28, 1998 increased 6.8% to
$115,324,000 as compared with $107,997,000 for the fiscal year ended December
29, 1997. This increase was due primarily to the acquisition of six restaurants
in May 1998, the development of three new restaurants during the year, and an
increase in same store sales of 4.7% for the year. Additionally, management
fees from restaurants in Louisiana, El Paso, Texas and northern California
increased from $979,000 in 1997 to $1,083,000 in 1998. Sales of alcoholic
beverages accounted for 23.3% of revenue for the year as compared with 23.6%
for the year ended December 29, 1997.
Cost of sales increased as a percentage of revenue to 28.8% in 1998 as
compared with 28.7% in 1997. This increase was the result of the introduction of
Jack Daniels Grill menu items in mid-1997, which have higher food costs, as well
as higher food costs associated with the Redfish restaurants, which were
acquired by the Company in April 1997. Additionally, certain dairy and potato
products had higher costs in 1998 as compared with 1997.
Labor costs decreased as a percentage of revenue to 29.8% in 1998 as
compared with 30.1% in 1997. A $0.40 per hour increase in the minimum wage rate
in September 1997 and an additional $0.60 per hour increase in the minimum wage
rate in California in March 1998 was more than offset by menu price increases
and better management of labor costs in 1998.
Other operating expenses include rent, real estate taxes, advertising,
insurance, maintenance, supplies, and utilities. Also included in other
operating expenses is a 4% royalty fee paid to TGI Friday's Inc. pursuant to
the franchise agreements, as well as payments to a national marketing fund
managed by the franchisor. The franchise agreements require the Company to pay
up to 4% of revenue to this marketing fund, although the Company was required
to only pay approximately 1.9% in 1997. The Company is required to pay 2.1% of
revenue into the marketing fund in 1999. The decrease in other operating
expenses is attributable to lower insurance costs and to the Company's on-going
cost reduction efforts in supply, maintenance and advertising costs.
Depreciation and amortization increased as a percentage of revenue to 4.7%
in 1998 as compared with 4.2% in 1997 due primarily to amortization of
pre-opening costs of three new restaurants developed in 1997, as well as
additional depreciation associated with these three new restaurants and the six
northern California restaurants purchased in May 1998.
General and administrative expenses as a percentage of revenue remain
unchanged at 4.2% for both 1997 and 1998.
Interest expense decreased as a percentage of revenue to $2,218,000, or
1.9% of revenue, in 1998 as compared with $2,466,000, or 2.3% of revenue, in
1997. This decrease was primarily due to the capitalization of financing costs
associated with restaurants developed during 1998. Additionally, the percentage
decrease is attributable to the relatively fixed nature of these financing
costs as compared with increasing revenues from 1997 to 1998.
No income tax provision was recorded in 1998 or 1997 due to the
availability of net operating loss carryforwards.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenue for the fiscal year ended December 29, 1997 decreased 11.9% to
$107,997,000 compared to $122,563,000 in the fiscal year ended December 30,
1996. This decrease was due primarily to an additional week of revenue in the
53-week period ended December 30, 1996 compared to the normal 52 week period in
1997, the sale of five restaurants in northern California in January 1997, and
the sale of eight restaurants in Washington, Oregon, Colorado and Nebraska in
October 1997. The Company currently manages the five restaurants it sold in
northern California, along with four other T.G.I. Friday's restaurants in
Louisiana and El Paso, Texas, generating management fee revenue of $979,000 for
the fiscal year ended December 29, 1997. Revenue for the nine restaurants that
the Company manages totaled $23,500,000 for the year ended December 29, 1997.
The decrease in revenue was partially offset by a 2% increase in same store
sales and revenue from the Redfish restaurants of $4,693,000 for the fiscal
year ended December 29, 1997. Revenue from alcoholic beverages accounted for
23.6% of revenue for the fiscal year ended December 29, 1997 which is unchanged
from the prior year.
15
Cost of sales as a percentage of revenue increased to 28.7% in 1997 from
28.6% in 1996. The increase resulted from a lower-priced lunch menu introduced
in April 1997, the introduction of Jack Daniels Grill menu items, which have
higher food costs, and the consolidation of the Redfish restaurants, which have
higher food costs than T.G.I. Friday's restaurants. This increase was partially
offset by $979,000 in management fees included in 1997 revenue which has no
corresponding cost of sales.
Labor costs decreased as a percentage of revenue to 30.1% in 1997 from the
31.7% in 1996. A $.50 per hour increase in minimum wage in October 1996 was
more than offset by a menu price increase and better controls on managing labor
costs. Minimum wage in California, which restaurants in California account for
60% of the Company's revenue, has increased to $5.75 in March 1998. The Company
increased its menu prices in 1998 to offset this increased labor cost.
Other operating expenses include rent, real estate taxes, common area
maintenance charges, advertising, insurance, maintenance, and utilities. In
addition, the franchise agreements between TGI Friday's Inc. and the Company
require a 4% royalty and a contribution to a national marketing pool of up to
4% of gross sales, although the Company was only required to pay 1.9% and 1.7%
during 1997 and 1996, respectively, and will contribute 2.2% for 1998. Other
operating expenses decreased as a percentage of revenue to 28.3% in 1997 from
30.2% in 1996. The decreases were a result of lower advertising costs,
specifically related to the Company's frequency program, and lower supplies and
insurance costs, which were partially offset by an increase in contributions to
a national marketing pool administered by TGI Friday's Inc.
In total, depreciation and amortization decreased as a percentage of
revenue to 4.2% in 1997 from 4.9% in 1996. The decrease was due primarily to
the write-offs in the fourth quarter of 1996 related to asset impairments.
General and administrative expenses as a percentage of revenue increased
to 4.2% in 1997 from 3.6% in 1996. These increases relate primarily to the
relative fixed nature of these expenses in comparison to the overall decline in
revenue.
Interest expense was approximately $2,466,000 in 1997 compared to
$3,206,000 in 1996. These decreases were a result of the retirement of $8.0
million of indebtedness with proceeds from the sale of five restaurants in
northern California in January 1997.
No income tax provision was recorded in 1997 or 1996 due to the
availability of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary use of funds over the past five years has been for
the acquisition of existing T.G.I. Friday's restaurants and exclusive
development rights. These acquisitions were financed principally through the
issuance of long-term debt and Common Stock. The Company has also expended
funds for the development of new restaurants. The principal source of these
funds has been operating cash flow, supplemented by bank and lease financing.
Net cash flows from operating activities were $4,444,000 in 1996,
$1,050,000 in 1997, and $9,062,000 in 1998. These were supplemented by net cash
flows from financing of $4,092,000 and $2,051,000, for the years ended 1998 and
1996, respectively, to fund the Company's acquisitions and development of new
restaurants. In 1997, the Company used $8,287,000 of net cash flows for
financing activities which came primarily from the sale of assets.
The Company's current liabilities exceed its current assets due in part to
cash expended on the Company's development requirements and also because the
restaurant business receives substantially immediate payment for sales, while
payables related to inventories and other current liabilities normally carry
longer payment terms, usually 15 to 30 days. At December 28, 1998 the Company
had a cash balance of $7,294,000. Monthly cash receipts have been sufficient to
pay all obligations as they become due.
At December 28, 1998, the Company had long-term debt of $28,264,000 and
current portion of long-term debt of $1,365,000.
16
Approximately $19,118,000 of this debt is a Term Loan comprised of five
notes from one lender, three of the notes bear interest at 9.457% per annum and
two of the notes bear interest at the one month LIBOR rate plus 320 basis
points and are payable in equal monthly installments of principal and interest
of approximately $222,000 (combined) until the notes are paid in full on May 1,
2012.
The Company plans to develop at least 14 additional restaurants over the
next year. The Company's primary lender has committed $30,000,000 to finance the
development of these new restaurants and has given the Company different
alternatives under which this financing would be provided for each new
restaurant.
The Company leases all of its restaurants with terms ranging from 10 to 20
years. Minimum payments on the Company's existing lease obligations are
approximately $5,800,000 per year.
YEAR 2000
The Company continues to assess and quantify the impact that the Year 2000
issue will have on its information systems, imbedded systems and business
processes. The systems that might be affected by the Year 2000 issue are (1)
the Company's internal corporate support systems, including a mid-range
computer system the Company relies upon to assimilate accounting information
and produce internal and external accounting reports; (2) the Company's
internal personal computer network and related software that it relies upon to
produce correspondence and daily and weekly financial data; (3) the Com-pany's
point-of-sale and restaurant back-office accounting systems that it relies upon
to process guest orders, track the status of orders, schedule and track time
and attendance information and related labor costs, and produce store-level
operating data; (4) restaurant equipment necessary to prepare the guests'
orders; and (5) third-party systems such as computer systems used by the
banking, telephone, utility, food preparation and distribution industries, all
of which are necessary to the basic operation of the Company's restaurants.
In 1998, the Company began identifying those most critical areas that
might be deficient and established a time line to complete the necessary
analysis and remediation plans. The Company has begun correcting the
deficiencies identified in all affected areas and anticipates completion of the
remediation plans by September 30, 1999. The established cost of the analysis
and remediation plans related to the Year 2000 issues is approximately
$450,000.
As part of this process, the Company has assessed the role of critical
suppliers of products and services to determine the extent that the Company
might be vulnerable in the event that these suppliers have failures due to the
Year 2000 issue. A questionnaire has been provided to, and research is being
conducted on, critical suppliers to determine their state of Year 2000
readiness.
When critical suppliers or processes might not be compliant, or compliance
is uncertain, the Company is establishing contingency plans in the event that
such suppliers or processes fail to perform after December 31, 1999. Such
contingency plans might consist of converting to manual systems or changing to
alternative processes or suppliers that will function properly after December
31, 1999. The Company anticipates that it will complete these contingency plans
by September 30, 1999. As of the filing date of this Report, the Company is
unable to reasonably estimate the effect, if any, on its consolidated financial
position, results of operations or cash flows from the failure of its
significant vendors to be Year 2000 ready.
The Company has determined that the worst case scenario related to the
Year 2000 issue would be a complete failure of the Company's systems and those
of the Company's critical suppliers of products and services. The failure of
the Company's information systems, embedded systems, or business processes or
the systems of third parties to timely achieve Year 2000 compliance could have
a material adverse effect on the Company's business, financial condition and
operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the
notes thereto and the supplementary data commencing at page F-1 of this report,
which financial statements, report, notes and data are incorporated by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to the Company's directors
is incorporated by reference to the Company's Proxy Statement to be filed for
its 1999 Annual Meeting of Stockholders. The information required by this Item
relating to the Company's executive officers is included in Item 1, "Busniess
- -- Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed for its 1999 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed for its 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed for its 1999 Annual Meeting of
Stockholders.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) Financial Statements are listed in the Index to Consolidated Financial
Statements on page F-1 of this Report.
(2) No Financial Statement Schedules are included because they are not
applicable or are not required or the information required to be set
forth therein is included in the consolidated financial statements or
notes thereto.
(b) REPORTS ON FORM 8-K.
Not applicable.
(c) EXHIBITS
Exhibit
Number Exhibit
- ------ -------
3.1 Certificate of Incorporation of the Registrant(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation(1)
3.3 Amended and Restated Bylaws of the Registrant(1)
10.1 Registrant's 1990 Stock Option Plan(2)
10.5 Form of Franchise Agreement between the Registrant and TGI Friday's
Inc.(3)
10.7 Asset Conveance Agreement among CNL California Restaurants, LTD., Main
St. California, Inc. and Registrant.(4)
10.8 Stock Purchase Agreement among CNL California Restaurants, LTD., Main
St. California, Inc. and Registrant.(4)
10.9 Form of Management Agreement between Main St. California II, Inc. and
Main St. California, Inc., a wholly owned subsidiary of Registrant.(4)
10.10 Master Incentive Agreements between Main St. California II, Inc. and
Main St. California, Inc., a wholly owned subsidiary of Registrant.(4)
10.11 Employment Agreement with Bart A. Brown, Jr.(5)
10.11A Employment Agreement dated January 1, 1999 between Main Street and Main
Incorporated and Bart A. Brown, Jr.
10.13 Promissory Note between Registrant and CNL Financial I, Inc.(5)
10.14 Promissory Note between Registrant and CNL Financial I, Inc.(5)
10.15 Promissory Note between Registrant and CNL Financial I, Inc.(5)
10.16 Registrant's 1995 Stock Option Plan(6)
10.17 Amended and Restated Development Agreement between TGI Friday's Inc. and
Cornerstone Productions, Inc., a wholly owned subsidiary of the
Registrant.(7)
10.18 Amended and Restated Development Agreement between TGI Friday's Inc. and
Main St. California, Inc., a wholly owned subsidiary of the
Registrant.(7)
10.18A First Amendment to Development Agreement dated February 10, 1999,
between TGI Friday's, Inc. and Main St. California, Inc.
10.19 Amended and Restated Development Agreement between TGI Friday's Inc. and
Main St. Midwest, Inc., a wholly owned subsidiary of the Registrant.(7)
10.20 Amended and Restated Purchase Agreement between RJR Holdings, Inc. and
Main St. California, Inc., a wholly owned Subsidiary of the
Registrant.(7)
10.21 Development Agreement dated April 22, 1998 between Main St. California,
Inc. and TGI Friday's, Inc., and First Amendment to Development
Agreement dated February 10, 1999 between TGI Friday's, Inc. and Main
St. California, Inc., a wholly owned subsidiary of the Registrant.
19
Exhibit
Number Exhibit
- ------ -------
21 List of Subsidiaries(7)
23 Consent of Independent Public Accountants
27 Financial Data Schedule
- ------------
(1) Incorporated by reference to the Registrant's Form 10-K for the year ended
December 30, 1991, filed with the Securities and Exchange Commission on or
about March 31, 1992.
(2) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-40993) which became effective in September 1991.
(3) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on or about April 15, 1994.
(4) Incorporated by reference to the Registrant's Form 8-K Report filed with the
Commission in January 1997.
(5) Incorporated by reference to the Registrant's Form 10-K for the year ended
December 30, 1996, filed with the Securities and Exchange Commission on or
about April 14, 1997.
(6) Incorporated by reference to Registrant's Proxy Statement for its 1995
Annual Meeting of Stockholders.
(7) Incorporated by reference to the Registrant's Form 10-K for the year ended
December 29, 1997, filed with the Securities and Exchange Commission on
March 27, 1998.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MAIN STREET AND MAIN INCORPORATED
Date: March 23, 1999 By: /s/ Bart A. Brown, Jr.
-------------------------------------
Bart A. Brown, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities 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.
/s/ John F. Antioco Chairman of the Board March 23, 1999
- --------------------------
John F. Antioco
/s/ Bart A. Brown, Jr. President, Chief Executive Officer, March 23, 1999
- -------------------------- and Director (Principal Executive
Bart A. Brown, Jr. Officer)
/s/ William G. Shrader Executive Vice President, Chief March 23, 1999
- -------------------------- Operating Officer and Director
William G. Shrader
/s/ James Yeager Vice President-Finance (Principal March 23, 1999
- -------------------------- Financial and Accounting Officer),
James Yeager Secretary and Treasurer
/s/ Jane Evans Director March 23, 1999
- --------------------------
Jane Evans
/s/ John C. Metz Director March 23, 1999
- --------------------------
John C. Metz
/s/ Steven A. Sherman Director March 23, 1999
- --------------------------
Steven A. Sherman
21
MAIN STREET AND MAIN INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets at December 29, 1997 and December 28, 1998..... F-3
Consolidated Statements of Operations for the fiscal years ended
December 30, 1996, December 29, 1997, and December 28, 1998............... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended December 30, 1996, December 29, 1997, and
December 28, 1998......................................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 30, 1996, December 29, 1997, and December 28, 1998............... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Main Street and Main Incorporated:
We have audited the accompanying consolidated balance sheets of MAIN STREET AND
MAIN INCORPORATED (a Delaware corporation) and subsidiaries as of December 28,
1998, and December 29, 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 28, 1998, December 29, 1997, and December 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of Main Street and Main
Incorporated and subsidiaries as of December 28, 1998 and December 29, 1997,
and the results of their operations and their cash flows for the years ended
December 28, 1998, December 29, 1997, and December 30, 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
February 19, 1999
F-2
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 28, December 29,
1998 1997
-------- --------
ASSETS
Current Assets
Cash and cash equivalents ....................... $ 7,294 $ 6,850
Accounts receivable, net ........................ 2,096 3,293
Inventories ..................................... 840 1,043
Prepaid expenses ................................ 593 289
Assets held for disposal, net ................... -- 363
-------- --------
Total current assets ......................... 10,823 11,838
Property and equipment, net ........................ 39,195 30,194
Other assets, net .................................. 2,337 3,091
Franchise costs, net ............................... 17,900 15,288
Note receivable .................................... -- 757
-------- --------
$ 70,255 $ 61,168
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt ............... $ 1,365 $ 1,233
Accounts payable ................................ 4,183 3,890
Other accrued liabilities ....................... 8,082 8,045
-------- --------
Total current liabilities .................... 13,630 13,168
-------- --------
Long-term debt, net of current portion ............. 28,264 24,308
-------- --------
Other liabilities and deferred credits ............. 1,989 1,489
-------- --------
Commitments and contingencies
Stockholders' Equity
Common stock, $.001 par value, 25,000,000 shares
authorized; 9,976,416 and 9,970,691 shares issued
and outstanding in 1998 and 1997, respectively .... 10 10
Additional paid-in capital ......................... 44,149 44,145
Accumulated deficit ................................ (17,787) (21,952)
-------- --------
26,372 22,203
-------- --------
$ 70,255 $ 61,168
======== ========
The accompanying notes are an integral
part of these consolidated balance sheets.
F-3
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended
-----------------------------------------
December 28, December 29, December 30,
1998 1997 1996
--------- --------- ---------
Revenue ...................................... $ 115,324 $ 107,997 $ 122,563
--------- --------- ---------
Restaurant Operating Expenses
Cost of sales ............................... 33,242 30,995 35,089
Payroll and benefits ........................ 34,353 32,469 38,858
Depreciation and amortization ............... 4,391 3,552 4,586
Other operating expenses .................... 31,083 30,589 36,944
--------- --------- ---------
Total restaurant operating expenses ...... 103,069 97,605 115,477
--------- --------- ---------
Income from restaurant operations ............ 12,255 10,392 7,086
Depreciation and amortization ............... 983 953 1,450
General and administrative expenses ......... 4,906 4,559 4,388
Restructuring and reorganization ............ (17) (2,390) 20,208
--------- --------- ---------
Operating income (loss) ...................... 6,383 7,270 (18,960)
Interest expense, net ........................ 2,218 2,466 3,206
--------- --------- ---------
Net income (loss) before income taxes and
extraordinary item ....................... 4,165 4,804 (22,166)
Provision for income taxes ................... -- -- --
--------- --------- ---------
Net income (loss) before extraordinary
item .................................... 4,165 4,804 (22,166)
Extraordinary loss from debt
extinguishment .......................... -- 1,638 --
--------- --------- ---------
Net income (loss) ............................ $ 4,165 $ 3,166 $ (22,166)
========= ========= =========
Basic Earnings Per Share
Income (loss) before extraordinary item ..... $ 0.42 $ 0.48 $ (2.73)
Extraordinary item .......................... -- (0.16) --
--------- --------- ---------
Net income (loss) ......................... $ 0.42 $ 0.32 $ (2.73)
========= ========= =========
Diluted Earnings Per Share
Income (loss) before extraordinary item ..... $ 0.39 $ 0.47 $ (2.73)
Extraordinary item .......................... -- (0.16) --
--------- --------- ---------
Net income (loss) ......................... $ 0.39 $ 0.31 $ (2.73)
========= ========= =========
Weighted Average Number Of Shares Outstanding
-- Basic ................................... 9,976 9,918 8,110
========= ========= =========
Weighted Average Number Of Shares Outstanding
-- Diluted ................................. 10,608 10,098 8,110
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-4
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Common Stock
-------------- Additional
Par Paid-In Accumulated
Shares Value Capital Deficit Total
------ ----- ------- ------- -----
BALANCE, December 25, 1995 ..... 7,952 $ 8 $40,205 $ (2,952) $ 37,261
Shares issued in connection
with private placement ....... 766 1 1,489 -- 1,490
Net loss ...................... -- -- -- (22,166) (22,166)
----- --- ------- -------- --------
BALANCE, December 30, 1996 ..... 8,718 9 41,694 (25,118) 16,585
Shares issued in connection
with private placement ....... 1,250 1 2,447 -- 2,448
Shares issued in connection
with options exercised ....... 3 -- 4 -- 4
Net income .................... -- -- -- 3,166 3,166
----- --- ------- -------- --------
BALANCE, December 29, 1997 ..... 9,971 10 44,145 (21,952) 22,203
Shares issued in connection
with options exercised ....... 5 -- 4 -- 4
Net income .................... -- -- -- 4,165 4,165
----- --- ------- -------- --------
BALANCE, December 28, 1998 ..... 9,976 $10 $44,149 $(17,787) $ 26,372
===== === ======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-5
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
------------------------------------------
December 28, December 29, December 30,
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................... $ 4,165 $ 3,166 $(22,166)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ................... 5,374 4,505 6,036
Restructuring and reorganization ................ (17) (2,391) 20,208
Extraordinary loss from debt extinguishment ..... -- 1,638 --
Changes in assets and liabilities
Accounts receivable, net ....................... (865) 122 1,104
Inventories .................................... 203 124 57
Prepaid expenses ............................... (304) (116) 288
Other assets, net .............................. (341) (1,288) (1,380)
Accounts payable ............................... 293 57 207
Other accrued liabilities ...................... 554 (4,767) 90
-------- -------- --------
Net Cash Flows -- Operating Activities ....... 9,062 1,050 4,444
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to acquire assets through business
combination .................................... -- (880) --
Cash received from note receivable .............. 757 -- --
Net additions to property and equipment ......... (19,002) (6,613) (8,623)
Cash paid to acquire franchise rights ........... (3,318) -- --
Sale of assets .................................. 2,062 17,326 --
Cash received from sale-leaseback transactions... 6,791 1,641 --
-------- -------- --------
Net Cash Flows -- Investing Activities ....... (12,710) 11,474 (8,623)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock .............. 4 2,504 1,490
Financing and offering costs paid ............... -- (52) --
Long term debt borrowings ....................... 5,620 21,554 4,506
Principal payments on long term debt ............ (1,532) (32,293) (3,945)
-------- -------- --------
Net Cash Flows -- Financing Activities ....... 4,092 (8,287) 2,051
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS .......... 444 4,237 (2,128)
CASH AND CASH EQUIVALENTS, BEGINNING ............. 6,850 2,613 4,741
-------- -------- --------
CASH AND CASH EQUIVALENTS, ENDING ................ $ 7,294 $ 6,850 $ 2,613
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest .......... $ 2,557 $ 3,404 $ 2,987
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-6
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Main Street and Main Incorporated (the "Company") is a Delaware
corporation engaged in the business of acquiring, developing and operating
restaurants. The Company currently owns 38 T.G.I. Friday's restaurants and
operates 10 T.G.I. Friday's restaurants under management agreements. The
Company has a 52% ownership interest in Redfish America, LLC which currently
owns and operates four Redfish restaurants.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, and Redfish America, LLC. All material
intercompany transactions have been eliminated in consolidation.
FISCAL YEAR
The Company's restaurants operate on a fiscal year which ends on the Monday
closest to December 31.
USE OF 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,
disclosure 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.
2. RESTRUCTURING AND REORGANIZATION
The Financial Accounting Standards Board has issued 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 " which the
Company adopted in 1996. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of the asset may not be recoverable. If the sum of the expected
future cash flows (undiscounted and without interest charges) from an asset to
be held and used in operations is less than the carrying value of the asset, an
impairment loss must be recognized in the amount of the difference between the
carrying value and the fair value. Assets to be disposed of must be valued at
the lower of carrying value or fair value less costs to sell.
During 1996, the Company implemented a long-term business strategy to
place more emphasis on the core business and to dispose of underperforming core
assets and non-core assets. As a result of implementing this strategy, combined
with certain events occurring during fiscal years ended 1996, 1997 and 1998,
the Company recognized a gain on sale of assets, a restructuring charge, and
impairment of certain assets as follows (in thousands):
December 28, December 29, December 30,
1998 1997 1996
----------- ----------- -----------
Gain on sale of assets ............. $ -- $(5,231) $ --
Impairment of non-core assets ...... -- 1,660 6,985
Impairment of core assets held for
disposal ......................... (648) -- 8,674
Impairment of core assets used in
operations ....................... -- 842 3,141
Other restructuring costs .......... 631 339 1,408
----- ------- -------
$ (17) $(2,390) $20,208
===== ======= =======
GAIN ON SALE OF ASSETS
In January 1997, the Company sold five restaurants in northern California
(the "Northern California Sale") for $10,800,000 in cash and entered into a
management agreement with the buyer to manage
F-7
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the restaurants. This transaction resulted in a gain before taxes of
approximately $1,595,000. Of the total proceeds, $8,000,000 was used to reduce
the Company's Term Loan I with the balance used for working capital purposes.
In addition, the Company sold eight T.G.I. Friday's restaurants in Washington,
Oregon, Colorado and Nebraska. The sale price of these restaurants totaled
$8,877,000 and resulted in a gain before taxes of approximately $3,636,000.
IMPAIRMENT OF NON-CORE ASSETS
In December 1993, the Company sold its dairy and food distribution
business for $7,500,000, including a promissory note in the amount of
$6,000,000 due on December 31, 1996. During the second quarter of 1996, the
debtor on the $6,000,000 promissory note sold assets related to its dairy
operations, which represented a significant portion of the collateral securing
the note. The debtor used cash from the sale to pay down senior debt and to
provide working capital for its ice cream novelty production facility. Due to
uncertainty of the business, the Company's promissory note, net of the deferred
gain booked at the time of the initial sale, was written down by $4,136,000
during 1996. During 1997, the Company wrote off the remaining carrying value of
$1,000,000 due to further adverse developments with the dairy and food
distribution business.
In May 1991, the Company entered into a five-year management assistance
agreement with AsianStar Co., Ltd. (AsianStar), a Korean company affiliated
with a former director of the Company, to provide management services and
expertise relative to the development and operation of T.G.I. Friday's
restaurants in the Republic of Korea. The management assistance agreement
provided for the Company to receive a fee of 3% of the net revenue of the first
two restaurants developed in Seoul, Korea. In 1996, the Company finalized an
agreement with AsianStar to exchange its receivable for a $1,660,000 ownership
interest in AsianStar. Due to uncertainty of the Korean venture and the
estimated length of time before the Company will receive any return on its
investment, a $1,000,000 impairment loss was taken during 1996. The Company's
investment in the Korean venture was approximately $660,000 as of December 30,
1996. During 1997, the Company wrote off the remaining carrying value of this
investment due to further uncertainty of the Korean venture resulting from a
down turn in the Korean economy.
In addition, during 1996, the Company determined that property and
equipment related to its indoor entertainment center being leased to a third
party exceeded its realizable value based on the level of lease payments to be
received over the remaining life of the lease, which resulted in an impairment
loss of $582,000. The remaining balance of the 1996 impairment of non-core
assets is comprised primarily of write downs of real estate that the Company
was holding for future restaurant development or sale.
IMPAIRMENT OF CORE ASSETS HELD FOR DISPOSAL
During 1996, the Company recorded a $5,541,000 charge to write off
property and equipment and pre-opening costs associated with two of the
Company's recently developed restaurants. One of the restaurants was a Front
Row Sports Grill in Portland, Oregon and the other was a T.G.I. Friday's
restaurant in Denver, Colorado. In addition, the Company took a $1,096,000
impairment loss charge in 1996 related to a 20 year old T.G.I. Friday's
restaurant in southern California which was closed in 1997. The remaining
balance of the 1996 impairment loss of $2,037,000 of core assets held for
disposal relates to assets of three T.G.I. Friday's restaurants that were
written down to fair value and disposed of during 1997. During 1998 a favorable
lease payoff was negotiated related to the Front Row Sports Grill. A $648,000
gain was recognized in connection with the lease settlement resulting in a
reversal of the remaining reserve.
F-8
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
IMPAIRMENT OF CORE ASSETS USED IN OPERATIONS
In accordance with SFAS No. 121, the Company recorded a charge of
$3,141,000 during 1996 related to three of its T.G.I. Friday's restaurants
where undiscounted cash flows over the remaining term of the lease did not
support the carrying value of the assets. During 1997, the Company recorded a
charge of $874,000 related primarily to two Redfish restaurants where
undiscounted cash flows did not support the carrying value of the assets.
OTHER RESTRUCTURING COSTS
Other restructuring costs include severance, contract termination,
professional services costs incurred in conjunction with the restructuring and
estimated costs of litigation.
RESERVES
In connection with the restructuring and reorganization charge of
approximately $20,208,000 taken in 1996, the Company recorded a reserve for
projected losses of approximately $2,318,000 in other accrued liabilities.
In 1997, the Company recorded a gain on the sale of assets of approximately
$5,231,000 and restructuring and reorganizing charges of $2,841,000. Of the
$2,841,000 in charges, $2,269,000 was recorded as a reduction against certain
impaired assets and $572,000 was recorded as an increase in the reserve for
projected losses. The balance in the reserve for projected losses at December
29, 1997 was approximately $2,115,000.
In 1998, the Company increased the reserve for projected losses by
approximately $631,000. The reserve was decreased by approximately $648,000
related to a favorable lease settlement and approximately $731,000 in other
costs associated with terminating the lease and legal fees. The reserve balance
in other accrued liabilities at December 28, 1998 was approximately $1,367,000
for the remaining severance, legal, and condemnation costs.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements reflect the application of the
following accounting policies:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include funds on hand, short-term money market
investments and certificate of deposit accounts with original maturities within
91 days of purchase.
INVENTORIES
Inventories consist primarily of food, beverages and supplies and are
stated at cost using the first-in, first-out (FIFO) method.
F-9
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, depreciated on a straight-line
basis over the estimated useful lives, and consist of the following (in
thousands):
December 28, December 29,
Useful Lives 1998 1997
------------ ----------- -----------
Land.................................. -- $ 897 $ 534
Building and leasehold improvements... 5-20 24,324 20,924
Kitchen equipment..................... 5-7 10,354 7,418
Restaurant equipment.................. 5-10 4,555 3,162
Smallwares and decor.................. 5-10 4,678 4,017
Office equipment and furniture........ 5-7 1,687 1,487
Equipment under capital leases........ 7 315 315
-------- --------
46,810 37,857
Less: Accumulated depreciation and
amortization......................... (14,914) (11,340)
-------- --------
31,896 26,517
Construction in progress.............. 7,299 3,677
-------- --------
Total.............................. $ 39,195 $ 30,194
======== ========
ASSETS HELD FOR DISPOSAL
At December 29, 1997, assets held for disposal consisted of one parcel of
land. During 1998, management determined the parcel of land was suitable for
development and has made plans to construct a T.G.I. Friday's restaurant at
this location during 1999. The $363,000 carrying value of the land was
reclassified and included in land at December 28, 1998.
FRANCHISE COSTS
The Company has paid certain franchise costs for the exclusive right to
operate restaurants in its franchise territories. These costs are being
amortized on a straight-line basis and consist of the following (in thousands):
Amortization December 28, December 29,
Period 1998 1997
------------- ----------- ------------
Franchise fees and license costs.... 20-30 $ 21,093 $ 17,775
Prepaid franchise fees.............. -- 100 100
-------- --------
21,193 17,875
Less: Accumulated amortization...... (3,293) (2,587)
-------- --------
Total............................ $ 17,900 $ 15,288
======== ========
Franchise fees and license costs represent the value assigned to the
franchise agreements in the regions acquired and to the licenses to operate the
restaurants. These agreements provide for an initial term of 20 years with two
renewal terms of 10 years each. Prepaid franchise fees relate to the
restaurants the Company is committed to develop under the terms of the
development agreements (Note 7).
PRE-OPENING COSTS
The Company defers certain start-up costs directly related to the opening
of new restaurants. Pre-opening costs of approximately $168,000 and $227,000 as
of December 28, 1998 and December 29, 1997, respectively, are included in other
assets in the consolidated balance sheets.
The Company's policy is to amortize pre-opening costs over 12 months
commencing with the opening of each new restaurant. Amortization of pre-opening
costs (excluding amounts included in the restructuring charge), was
approximately $661,000, $287,000 and $318,000 in 1998, 1997, and 1996,
respectively.
F-10
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
Reporting of the Costs of Start-up Activities effective for financial
statements issued for years beginning after December 15, 1998. SOP 98-5 is
effective for the Company's first quarter financial statements in fiscal 1999.
Under the new accounting requirement, the costs of start-up activities will be
expensed as incurred. The adoption of SOP 98-5 will result in deferred
preopening costs on the Company's consolidated balance sheet being charged to
operations as the cumulative effect of a change in accounting principle. As of
December 28, 1998, the balance of deferred preopening costs was approximately
$168,000. The ultimate impact of the adoption of SOP 98-5 on the accounting for
preopening costs is contingent upon the number of future restaurant openings,
and thus cannot be reasonably estimated at this time.
OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following ( in thousands):
December 28, December 29,
1998 1997
------------ ------------
Bank overdraft...................... $ 76 $ --
Accrued payroll..................... 2,079 2,074
Reserve for projected losses........ 1,367 2,116
Accrued sales tax................... 899 669
Accrued interest.................... -- 7
Other accrued liabilities........... 3,661 3,179
------ -------
Total............................. $8,082 $ 8,045
====== =======
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes
as set forth in SFAS No.109, Accounting for Income Taxes. Under the liability
method, deferred taxes are provided based on the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities, using enacted tax rates in the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income during the period that includes the enactment date.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which supersedes Accounting Principles Board ("APB")
Opinion No. 15, the existing authoritative guidance. The statement modifies the
calculation of primary and fully diluted earnings per share ("EPS") and
replaces them both with basic and diluted EPS. SFAS No. 128 is effective for
financial statements for both interim and annual periods presented after
December 15, 1997 and as a result, all prior period EPS data have been
restated. The following table sets forth basic and diluted EPS computations for
the years ended December 28, 1998, December 29, 1997, and December 30, 1996 (in
thousands, except per share amounts):
1998 1997 1996
---------------------------- ----------------------------- ----------------------------
Per Share Per Share Per Share
Net Income Shares Amount Net Income Shares Amount Net Loss Shares Amount
---------- ------ ------ ---------- ------ ------ -------- ------ ------
Basic EPS ..... $4,165 9,976 $0.42 $3,166 9,918 $0.32 $(22,166) 8,110 $(2.73)
Effect of stock
options ...... -- 632 -- -- 180 -- -- -- --
------ ------ ----- ------ ------ ----- -------- ----- ------
Diluted EPS ... $4,165 10,608 $0.39 $3,166 10,098 $0.31 $(22,166) 8,110 $(2.73)
====== ====== ===== ====== ====== ===== ======== ===== ======
F-11
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective December 30, 1997, the Company adopted SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements.
The Company has determined that it has one reportable operating segment.
Although the Company has two operating segments which are managed based on its
restaurant concepts, T.G.I. Friday's and Redfish, the Redfish operating segment
is immaterial to the Company as a whole and does not meet the reportable
thresholds of SFAS No. 131.
As a result of the foregoing, the Company has determined that it is
appropriate to present one reportable segment consistent with the guidance in
SFAS No. 131. Accordingly, the Company has not presented separate financial
information for each of its operating segments as the Company's consolidated
financial statements present its one reportable segment.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current year presentation.
4. INCOME TAXES
Deferred income taxes arise due to differences in the treatment of income
and expense items for financial reporting and income tax purposes. In prior
years, the Company generated net operating losses and in 1998 and 1997, the
Company utilized net operating losses. The effect of temporary differences and
carryforwards that gave rise to deferred tax balances at December 28, 1998 and
December 29, 1997 were as follows (in thousands):
Temporary Differences
--------------------- Tax Carry Net Deferred
December 28, 1998 Deductible Taxable Forwards Tax Assets
- ----------------- ---------- ------- -------- ----------
Excess tax over book depreciation
and amortization ................. $ -- $(3,296) $ -- $(3,296)
Provision for estimated expenses .. 1,290 -- -- 1,290
Restructuring and reorganization .. 2,481 -- -- 2,481
Other ............................. -- (438) -- (438)
General business and AMT credits... -- -- 3,403 3,403
Net operating loss carryforward ... -- -- 4,849 4,849
Valuation reserve ................. -- -- (7,921) (7,921)
------ ------- ------- -------
Total ....................... $3,771 $(3,734) $ 331 $ 368
====== ======= ======= =======
F-12
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Temporary Differences
--------------------- Tax Carry Net Deferred
December 29, 1997 Deductible Taxable Forwards Tax Assets
- ----------------- ---------- ------- -------- ----------
Excess tax over book depreciation
and amortization ............... $ -- $(2,757) $ -- $(2,757)
Provision for estimated expenses.. 1,207 -- -- 1,207
Restructuring and reorganization.. 3,673 -- -- 3,673
Other ........................... -- (491) -- (491)
General business and AMT credits -- -- 2,668 2,668
Net operating loss carryforward -- -- 5,905 5,905
Valuation reserve ............... -- -- (9,837) (9,837)
------ ------- ------- -------
Total ..................... $4,880 $(3,248) $ 1,264 $ 368
====== ======= ======= =======
The amounts recorded as net deferred tax assets at December 28, 1998 and
December 29, 1997 are included as a component of other assets in the
consolidated balance sheets. The remaining net deferred tax asset as of
December 28, 1998 consists primarily of the benefits to be obtained from the
use of net operating loss carryforwards and credits expected to be realized in
the future.
In 1998, the Company's tax provision was fully offset by the reversal of
prior year valuation
allowances.
At December 28, 1998, the Company had approximately $12,100,000 of net
operating and capital loss carryforwards to be used to offset future income for
income tax purposes. These carryforwards expire in the years 2002 to 2012.
Reconciliations of the federal income tax rate to the Company's effective
tax rate were as follows:
December 28, December 29,
1998 1997
----------- -----------
Statutory federal rate .................. 34.0% 34.0%
State taxes, net of federal benefit ...... 6.0 6.0
Nondeductible expenses .................. 6.3 7.5
Benefit of FICA credit .................. (15.2) (18.0)
Change in valuation allowance ............ (31.1) (29.5)
------ ------
0.0% 0.0%
====== ======
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Maturity December 28, December 29,
Dates Interest Rates 1998 1997
----- -------------- ---- ----
Term Loan I.................. 2002 2.8% over LIBOR $ -- $ --
Term Loan II................. 2012 9.457% and the one 19,118 20,839
month LIBOR rate
plus 320 basis points
Other notes payable.......... 1999-2015 8.75 - 11% 10,511 4,639
Capital leases............... 1999 11.5% -- 63
-------- --------
29,629 25,541
Less current portion......... (1,365) (1,233)
-------- --------
Total........................ $ 28,264 $ 24,308
======== ========
F-13
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In March 1997, the Term Loan I was repaid with $8,000,000 of proceeds from
the Northern California sale (Note 2) and with proceeds from new borrowings. The
new borrowings ("Term Loan II") consist of five notes from one lender. Three of
the notes bear interest at 9.457% and two of the notes bear interest at the one
month LIBOR rate plus 320 basis points. All of the notes are payable in equal
monthly installments of principal and interest of approximately $222,000
(combined) until the notes are paid in full on May 1, 2012. Proceeds from the
Term Loan II were also used to repay the TGI Friday's, Inc. note including
accrued interest of $301,000, with the remaining proceeds used for general
corporate purposes. The early extinguishment of the Term Loan I resulted in an
extraordinary loss of $1,638,000, before income taxes.
The Term Loan II is secured by the assets of 16 T.G.I. Friday's
restaurants and contains one financial covenant relative to a fixed charge
coverage ratio, which the Company currently is in compliance with. Assets at 11
T.G.I. Friday's restaurants and at one Redfish restaurant have been pledged as
collateral for other notes payable.
In May 1998 the Company acquired six T.G.I. Friday's restaurants in
northern California for approximately $6,800,000, funded in part by the
assumption of existing long-term debt and the addition of new long-term debt
for a total increase in debt of $5,737,000.
Maturities of long-term debt, giving effect to the new borrowings
discussed above, are as follows at December 28, 1998 (in thousands):
1999............... $ 1,365
2000............... 1,569
2001............... 1,723
2002............... 1,772
2003............... 1,735
Thereafter......... 21,465
-------
Total.............. $29,629
=======
6. STOCKHOLDERS' EQUITY
During 1996, the Company sold 766,666 shares of its Common Stock to two
officers of the Company for $1,500,000. In January 1997, the Company sold
1,250,000 shares of its Common Stock to various investors, including 500,000
shares purchased by two officers of the Company, for total proceeds of
$2,500,000.
STOCK OPTIONS
In July 1990, the Company's Board of Directors approved a stock option
plan ("the 1990 Plan"). The 1990 Plan provides for issuance of up to 250,000
options to acquire shares of the Company's Common Stock. The options are
intended to qualify as incentive stock options within the meaning of Section
422A of the Internal Revenue Code of 1986 or as options which are not intended
to meet the requirements of such section (non-statutory stock options) and may
include stock appreciation rights, restricted stock awards, phantom stock,
performance shares or non-employee director options.
The exercise price of all incentive stock options granted under the 1990
Plan must be at least equal to the fair market value of such shares as of the
date of grant or, in the case of incentive stock options granted to the holder
of 10% or more of the Company's Common Stock, at least 110% of the fair market
value of such shares on the date of grant. The exercise price of all
non-statutory stock options granted under the 1990 Plan shall be determined by
the Board of Directors of the Company at the time of grant. The maximum
exercise period for which the options may be granted is 10 years from the date
of grant (five years in the case of incentive stock options granted to an
individual owning more than 10% of the Company's Common Stock).
F-14
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In January 1996, the Company adopted a new stock option plan ("the 1995
Plan"), with terms comparable to the 1990 Plan, covering 325,000 shares of
Common Stock.
During 1997, the Company canceled substantially all outstanding options
and granted new options under the 1990 and 1995 Plans. In addition, the
Company's Board of Directors approved the issuance of 1,250,000 non-statutory
stock options to three of the Company's officers during 1996, the issuance of
425,000 non-statutory stock options to two of the Company's officers during
1997, and the issuance of 210,000 non-statutory stock options to two of the
Company's officers during 1998.
Stock option information as of December 28, 1998, December 29, 1997, and
December 30, 1996 is as follows:
1998 1997 1996
----------------- ----------------- -----------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding at beginning of
period .................................. 2,077,500 $2.90 1,596,500 $3.40 118,413 $12.93
Granted .................................. 416,000 3.27 781,950 2.46 1,668,500 3.25
Exercised ............................... (2,500) 2.50 (2,200) 2.50 -- --
Canceled ............................... (110,000) 2.54 (298,750) 3.51 (190,413) 9.42
--------- --------- ----------
Options outstanding at end of period .... 2,381,000 2.98 2,077,500 2.90 1,596,500 3.40
========= ========= =========
Exercisable at end of period ............. 1,590,577 2.56 1,224,291 3.40 350,000 2.00
========= ========= =========
Weighted average fair value of options
granted ............................... $ 1.87 $ 1.44 $ 0.59
========= ========= =========
Entities electing to remain with the accounting in APB Opinion No. 25 must
make pro forma disclosures of net income and earnings per share, as if the fair
value based method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25; therefore, no compensation cost is recognized in the
accompanying financial statements for stock-based employee awards. The Company
had computed, for pro forma disclosure purposes, the value of all options
granted during 1998 and 1997, using the Black-Scholes option pricing model with
the following weighted average assumptions:
1998 1997
Options Options
------- -------
Risk free interest rate ...... 5.42% 6.2%
Expected dividend yield ...... 0.0% 0.0%
Expected lives in years ...... 4.0% 4.0
Expected volatility ......... 70.6% 71.3%
If the Company had accounted for its stock-based compensation plans using
a fair value based method of accounting, the Company's year end net income and
earnings per share would have been reported as follows (in thousands, except
per share amounts):
December 28, December 29,
1998 1997
------------ ------------
Net income (loss):
Pro Forma .................. $3,351 $2,442
Earnings per share:
Pro Forma -- Basic ......... 0.34 0.25
Pro Forma -- Diluted ...... 0.32 0.24
F-15
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 1998 and 1997 are not likely to be representative of the effects on
reported net income and earnings per common stock and common stock equivalent
for future years, because options vest over several years and additional awards
are made each year.
COMMON STOCK WARRANTS
As of December 28, 1998 and December 29, 1997 the Company had outstanding
warrants to acquire its securities as follows:
1998 1997
---- ----
Common Stock to be acquired by warrants issued to
lenders in connection with the Term Loan I;
exercisable at $9.08 through March 2004; callable.......... 231,277 231,277
======= =======
7. COMMITMENTS AND CONTINGENCIES
DEVELOPMENT AGREEMENTS
The Company is obligated under four separate development agreements to
open 46 new T.G.I. Friday's restaurants through 2003. The development
agreements give TGI Friday's Inc. certain remedies in the event the Company
fails to timely comply with the development agreements, including the right
under certain circumstances, to reduce the number of restaurants the Company
may develop in the related franchised territory, or terminate the Company's
exclusive rights to develop restaurants in the related franchised territory.
The Company's development territories include Arizona, Nevada, New Mexico,
California and the Kansas City and El Paso metropolitan areas.
FRANCHISE, LICENSE AND MARKETING AGREEMENTS
In accordance with the terms of the T.G.I. Friday's restaurant franchise
agreements, the Company is required to pay franchise fees of $50,000 for each
restaurant opened. The Company is also required to pay a royalty of up to 4% of
gross sales. Royalty expense was approximately $3,929,000, $4,120,000 and
$4,850,000 under these agreements during 1998, 1997 and 1996, respectively. In
addition, the Company could be required to spend up to 4% of gross sales on
marketing, although during 1998 it was only required to pay up to 1.9% of gross
sales. Marketing expense under these agreements was approximately $1,805,000,
$1,919,000 and $1,554,000 during 1998, 1997 and 1996, respectively.
OPERATING LEASES
The Company leases land and restaurant facilities under operating leases
having terms expiring at various dates through January 2021. The restaurant
leases have from two to three renewal clauses of five years each at the option
of the Company and have provisions for contingent rentals based upon percentage
of gross sales as defined. The Company's minimum future lease payments as of
December 28, 1998 were as follows (in thousands):
1999 ............ $ 5,782
2000 ............ 5,864
2001 ............ 5,907
2002 ............ 5,783
2003 ............ 5,480
Thereafter ...... 43,289
-------
Total ............ $72,105
=======
F-16
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Rental expense during 1998, 1997 and 1996 was approximately $5,604,000,
$5,081,000, and $6,299,000, respectively. In addition, the Company paid
contingent rentals of $523,000, $499,000 and $539,000 during 1998, 1997 and
1996, respectively.
CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
The Company is also subject, from time to time, to audit by various taxing
authorities reviewing the Company's income, property, sales, use and payroll
taxes. Management believes that any findings from such audits will not have a
material impact on its financial statements.
8. BENEFIT PLANS
The Company maintains a 401(k) Savings Plan for all of its employees. The
Company currently matches 25% of the participants' contributions for the first
6% of the participants' compensation. Contributions by the Company were
approximately $100,000, $78,000 and $79,000 during 1998, 1997 and 1996,
respectively.
9. RELATED PARTY TRANSACTIONS
In October 1997, the Company sold three T.G.I. Friday's restaurants in
Colorado and Nebraska to Sherman Restaurants, LLC for $2,768,000 (Note 2).
Sherman Restaurants, LLC is controlled by Samuel Sherman, the brother of Steven
Sherman who serves as a director of the Company.
In December 1993, the Company entered into a five year lease agreement for
corporate office space with an entity controlled by a director of the Company.
During 1998 the lease was amended to extend the original term through January
31, 2004. The lease provides for annual rent of approximately $236,000 in 1999.
Approximately $177,000, $172,000 and $169,000 was paid in rent during 1998,
1997 and 1996, respectively.
F-17