As filed with the Securities and Exchange Commission on February 10, 1998
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
JRECK SUBS GROUP, INC.
(Name of registrant as specified in its charter)
Colorado 84-1317674
(State or Jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24685 New York State Route 37 Christopher M. Swartz
Watertown, New York 13601 24685 New York State Route 37
(315) 782-0760 Watertown, New York 13601
(Address, including zip code, and telephone number, including area code
of Registrant's principal executive offices)(Name, address, including zip code
and telephone number, including
area code, of
(315) 782-0760
agent for service)
COPY TO:
Jehu Hand, Esq.
Hand & Hand
24901 Dana Point Harbor Drive, Suite 200
Dana Point, California 92629
(714) 489-2400
Facsimile (714) 489-0034
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule
415 under the Securities Act of 1933 other than securities offered only in
connection with dividend or interest
reinvestment plan, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [
]
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered Be Registered Per Share(1) Offering Price Registration Fee
Common Stock issuable upon
conversion of Series D
Convertible Preferred Stock(2)....... 1,440,901 $2.5625 $ 3,692,308.80 $ 1,118.88
Common Stock offered by
selling shareholders(3).............. 3,594,637 $2.5625 $ 9,211,257.30 $ 2,791.29
Total(4)............................... $12,903,566.10 $ 3,910.17
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 1,440,901 shares issuable upon conversion of 2,400 shares
($2,400,000 aggregate principal amount) of Series D Convertible Preferred
Stock at the lower of $1.96875 or 65% of the closing bid price of the
Common Stock averaged over the five trading days prior to the date of
conversion. The maximum offering price per share is based upon the
closing price of the Common Stock on February 6, 1998, or $2.5625 since
it is higher than the estimated conversion price per share of the Series
D Convertible Preferred Stock (in accordance with Rule 457(g)).
(3) Includes shares issued or issuable upon satisfaction of certain
contingencies, as follows:
Transaction or Already Future
Shareholder Issued Issuances
Laura Robinette 44,445
Thomas Eccleston 5,555
Thomas Daniel 1,110
James Lewis 25,000
Hymie's Bagels 337,500
Georgio's 93,794
Little King's 500,000 750,000
Quality Franchise Systems, Inc. 899,967 650,000
Sobik's 187,266
Mitchell Day (options at $.001) 100,000
-------------- ------------
TOTALS 1,907,371 1,687,266
(4) Includes in each case reoffers of the Common Stock offered hereby and
shares issuable pursuant to antidilution provisions pursuant to
Rule 416.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION
PROSPECTUS
JRECK SUBS GROUP, INC.
5,035,538 Shares of Common Stock
(no par value)
The estimated 5,035,538 shares (the "Shares") of Common Stock, no par
value (the "Common Stock") of JRECK Subs Group, Inc., a Colorado corporation
(the "Company") are being offered by the selling stockholders (the "Selling
Stockholders") and include an estimated 1,440,901 shares issuable upon
conversion of $2,400,000 in principal amount of Series D Convertible Preferred
Stock (the "Series D Preferred"), and 3,594,637 shares offered by other Selling
Stockholders. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders. See "Selling Stockholders." The expenses of
the offering, estimated at $30,000, will be paid by the Company.
The Common Stock currently trades on the Electronic Bulletin Board under
the symbol "JSUB." On February 6, 1998, the last sale price of the Common Stock
as reported on the Electronic Bulletin Board was $2.5625 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PURCHASE OF THESE SECURITIES INVOLVES RISKS.
See "Risk Factors."
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Prospectus is ___________, 1998
No person has been authorized in connection with this offering to give any
information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities covered by this Prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such state
or jurisdiction. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement under the Securities Act
with respect to the securities offered hereby with the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. This Prospectus, which is a part of the
Registration Statement, does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement,
including all exhibits and schedules thereto, which may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at its Regional Offices
located at 7 World Trade Center, New York, New York 10048, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 at
prescribed rates during regular business hours. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in its entirety by such reference. The Company
will provide, without charge upon oral or written request of any person, a copy
of any information incorporated by reference herein. Such request should be
directed to the Company at 24685 New York State Route 37, Watertown, New York
13601, telephone (315) 782-0760.
As of the date of this Prospectus, the Company became a reporting company
under the Exchange Act and in accordance therewith in the future will file
reports and other information with the Commission. All of such reports and other
information may be inspected and copied at the Commission's public reference
facilities described above. The Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of such site
is http://www.sec.gov. In addition, the Company intends to provide its
shareholders with annual reports, including audited financial statements,
unaudited semi-annual reports and such other reports as the Company may
determine.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
The Company
In the summer of 1969 five school teachers from the Carthage, New York
Central School System - named Jerry, Richard, Ellis, Charles and Keith - JRECK -
commenced a business of preparing and serving submarine style sandwiches from an
old school bus just outside of the main gate of Camp Drum. The business was
incorporated in 1974 in the State of New York under the name JRECK Subs, Inc.
In May, 1996 the Company concluded a reverse acquisition wherein all of
its capital stock was acquired by Circa Media, Inc., a Colorado corporation
formerly engaged in reproducing archival, public domain art and photographs in
digital form. Circa Media, Inc. was incorporated on July 19, 1995, and changed
its name to JRECK Subs Group, Inc. ("Company") on May 7, 1996. The former common
shareholders of JRECK Subs, Inc. received 5,000,000 shares of Common Stock of
the Company in the acquisition, or 56% of the outstanding shares, and the former
Series A and Series B Preferred Stockholders of Jreck Subs, Inc. received
700,000 shares of Series A Preferred Stock and 350,000 shares of Series B
Preferred Stock of the Company, respectively.
The Company consists of JRECK Subs Group, Inc. and its wholly-owned
subsidiaries including JRECK Subs,
Inc., a New York corporation, Leovera, Inc. ("Leovera"), a Florida corporation,
Admiral Subs of Washington, Inc.
("ASWI"), a Washington corporation, Little King, Inc. ("Little King"), a
Delaware corporation, Pastry Products
Producers, LLC, a New York limited liability company ("Pastry Products"), and
Admiral's Fleet, Inc. ("AFI"), a
Washington corporation and AFI's wholly-owned subsidiaries, Richey Enterprises,
Inc., a Washington corporation,
and Quality Franchise Systems, Inc., a Delaware corporation.
The corporate offices of the Company are located at 24685 New York State,
Route 37, Watertown, New York 13601, and its telephone number is (315) 782-0760.
Securities Offered:...................... An estimated 5,095,576 shares of
Common Stock, no par value per share,
including an estimated 1,440,901 shares
issuable upon conversion of 2,400 shares
of Series D Preferred Stock at a
conversion price per share of Preferred
Stock equal to $1,000 divided by the
lower of $1.986875 or 65% of the
average closing bid price of the Common
Stock on the five trading days prior to
conversion; 100,000 shares issuable upon
exercise of options; 1,587,266 shares
issuable upon satisfaction of certain
contingencies; and 1,907,371 shares
currently outstanding.
Risk Factors........................................................... The securities offered hereby involve a
high degree of risk and immediate
substantial dilution and should not be
purchased by investors who cannot afford
the loss of their entire investment. See
"Risk Factors."
Common Stock Outstanding(1) Before Offering:........................... 13,437,444(1) shares
Common Stock Outstanding After Offering:............................... 16,565,611(1) shares
NASD Electronic Bulletin Board Symbol.................................. JSUB
(1) Based on shares outstanding as of November 21, 1997.
Risk Factors
The securities offered hereby are highly speculative and involve a high
degree of risk, including, but not necessarily limited to the risk factors
described below. Prospective purchasers should carefully consider the following
risk factors, among others, as well as the remainder of this prospectus, prior
to making an investment in the Company.
RISK FACTORS
An investment in the securities offered hereby is speculative in nature
and involves a high degree of risk. In addition to the other information in this
Prospectus, the following factors should be considered carefully in evaluating
the Company and its business.
Additional Financing Requirements of the Company
At September 30, 1997, the Company had a working capital (deficit) of
approximately $616,294. The Company's operations have been financed to date
through sales of its securities, most recently through the sale of $2,500,000 in
principal amount of Series D Preferred Stock in January 1998. The Company
requires significant additional capital for the expansion of its franchising and
restaurant operations. The Company believes that the net proceeds from this
Preferred Stock offering will be sufficient to fund its operations for the next
12 months. However, no assurance can be given that additional funds will not be
required prior to the expiration of such period or that any funds which may be
required will be available, if at all, on acceptable terms. If additional funds
are required, the inability of the Company to raise such funds will have an
adverse effect upon its operations. To the extent that additional funds are
obtained by the sale of equity securities, the stockholders may sustain
significant dilution. If adequate capital is not available the Company will have
to reduce or eliminate its planned expansion activities, which could otherwise
ultimately provide significant revenue to the Company. Even if such additional
financing is available on satisfactory terms, it, nonetheless, could entail
significant additional dilution of the equity ownership of the Company to
existing shareholders and the book value of their outstanding shares.
Competition
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing restaurants. Factors such as
inflation, increases in food, labor and energy costs, the availability and cost
of suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements and the availability of an adequate
number of hourly paid employees can also adversely affect the fast food
restaurant industry. Multi-unit restaurant chains like the Company can also be
substantially adversely affected by publicity resulting from food quality,
illness, injury, or other health concerns. Major chains, which have
substantially greater financial resources and longer operating histories than
the Company, dominate the fast food restaurant industry. The Company competes
primarily on the basis of location, food quality and price. Changes in pricing
or other marketing strategies by these competitors can have an adverse impact on
the Company's sales, earnings and growth. There can be no assurance that the
Company will be able to compete effectively against its competitors. In
addition, with respect to the sale of franchises, the Company competes with many
franchisors of restaurants and other business concepts for qualified and
financially capable franchisees.
Continued Control by Management and Present Stockholders
As of the date of this Prospectus, approximately 37.6% of the
outstanding shares of Common Stock were owned by the Company's officers and
directors. Following completion of this Offering, and conversions of the
Preferred Shares into common stock, such persons will likely continue to own a
significant portion of the outstanding Common Stock, will likely be able to
elect all of the directors and will thus be able to continue to control the
Company.
No Prior Public Broad Market
Prior to this Offering, the Company's Common Stock has traded on the
NASDAQ OTC Bulletin Board under the symbol "JSUB." Although the Company intends
to apply at some future time to have the Common Stock included in the Nasdaq
SmallCap(R) Market, it does not currently meet the requirements for such listing
and there can be no assurance that the application will be successful nor that a
broad market in the Common Stock will develop, or, if such a market develops,
that it will be sustained. There can therefore be no assurance as to when, if at
all, investors will be able to liquidate their investment in the Company.
Nasdaq Stock Market and Market Illiquidity
The Company's Common Stock does not currently meet the current Nasdaq
listing requirements for the SmallCap(R) Market. If the Company is unable to
satisfy Nasdaq's requirements for listing, trading, if any, the Common Stock
will continue to be conducted on the NASD's OTC Bulletin Board, established for
securities that do not meet the Nasdaq SmallCap(R) Market listing requirements.
Consequently, the liquidity of the Company's securities could be impaired, not
only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions, reduction in security analysts'
and the news media's coverage of the Company, and lower prices for the Company's
securities than might otherwise be attained.
Risks of Low-priced Stocks; Penny Stock Regulations
Until such time, if any, that the Company's securities are listed on
The Nasdaq SmallCap(R) Market or a registered U.S. securities exchange they will
continue to be subject to Rule 15g-9 under the 1934 Act, which imposes
additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and institutional
accredited investors. For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's Common Stock and may affect the ability of purchasers in this Offering
to sell any of the Common Stock acquired pursuant to this Memorandum in the
secondary market. The Commission's regulations define a "penny stock" to be any
equity security that has a market price (as therein defined) less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. The penny stock restrictions will not apply to the Company's Common
Stock if the Common Stock is listed on The Nasdaq SmallCap(R) Market and has
certain price and volume information provided on a current and continuing basis,
or meets certain minimum net tangible assets and other criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. If the Company's Common Stock continues to be subject to the rules
on penny stocks, the market liquidity for the Common Stock could be severely
adversely affected.
No Common Stock Dividends Anticipated
The Company presently intends to retain future earnings, if any, in
order to provide funds for use in the operation and expansion of its business
and, accordingly, does not anticipate paying cash dividends on its Common Stock
in the foreseeable future.
Shares Eligible for Future Sale
All but 1,536,000 of the presently issued and outstanding shares of
Common Stock are "restricted securities" as that term is defined under Rule 144
promulgated under the Securities Act. Rule 144 governs resales of such
restricted securities for the account of any person (other than an issuer), and
restricted and unrestricted securities for the account of an "affiliate" of the
issuer. Restricted securities generally include any securities acquired directly
or indirectly from an issuer of its affiliates which were not issued or sold in
connection with a public offering registered under the Securities Act. An
affiliate of the issuer is any person who directly or indirectly controls, is
controlled by, or is under common control with, the issuer. Affiliates of the
Company may include its directors, executive officers and persons directly or
indirectly owning 10% or more of the outstanding Common Stock. Under Rule 144
unregistered resales of restricted Common Stock cannot be made until it has been
held for one year from the later of its acquisition from the Company or an
affiliate of the Company. Thereafter, shares of Common Stock may be resold
without registration subject to Rule 144's volume limitation, aggregation,
broker transaction, notice filing requirements, and requirements concerning
publicly available information about the Company (the "Applicable
Requirements"). Resales by the Company's affiliates of restricted and
unrestricted Common Stock are subject to the Applicable Requirements. The volume
limitations provide that a person (or persons who must aggregate their sales)
cannot, within any three-month period, sell more than the greater of (i) one
percent of the then outstanding shares, or (ii) the average weekly reported
trading volume during the four calendar weeks preceding each such sale. A person
who is not deemed an "affiliate" of the Company and who has beneficially owned
shares for at least one year would be entitled to sell such shares under Rule
144 without regard to the Applicable Requirements. If a broad public market
develops for the Company's Common Stock, the Company is unable to predict the
effect that sales made under Rule 144 or other sales may have on the then
prevailing market price of the Common Stock.
Management of Growth
The Company's growth to date has required and is expected to continue
to require, the full utilization of the Company's management, financial and
other resources, to date without adequate working capital. The Company's ability
to manage growth effectively will depend on its ability to improve and expand
its operations, including its financial and management information systems, and
to recruit, train and manage executive staff and employees. There can be no
assurance that management will be able to manage growth effectively, and the
failure to effectively manage growth may have a materially adverse effect on the
Company's results of operations.
Dependence on Key Personnel
The Company is dependent upon Christopher M. Swartz, President and
Bradley L. Gordon, Chief Operating Officer and other key employees with respect
to its operations. The Company has not entered into an employment agreement with
Christopher M. Swartz although it has obtained key men life insurance on his
life in the amount of $3,000,000. The Company's future success also depends on
its ability to attract and retain other qualified personnel, for which
competition is intense. The loss of certain key employees or the Company's
inability to attract and retain other qualified employees could have a material
adverse effect on the Company's results of operations.
Risks Associated with Forward-looking Statements
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act") and the Company
intends that such forward-looking statements be subject to the safe harbors for
such statements under such sections. The Company's forward-looking statements
include the plans and objectives of management for future operations, including
plans and objectives relating to the Company's planned national marketing
campaign and future economic performance of the Company. The forward-looking
statements and associated risks set forth in this Prospectus include or relate
to: (i) the ability of the Company to maintain market share in its current
operating markets, (ii) the ability of the Company to integrate its
acquisitions, (iii) the ability of the Company to develop product
identification, (iv) the ability of the Company to make additional acquisitions
on advantageous terms and (v) the ability of the Company to obtain and retain
sufficient capital for its future operations.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that there will be no material adverse
competitive changes in conditions in the Company's business, and that there will
be no material adverse change in the Company's operations or business or in
governmental regulations affecting the Company or its suppliers. The foregoing
assumptions are based on judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the Company's control. Accordingly, although the Company believes that
the assumptions underlying the forward-looking statements are reasonable, any
such assumption could prove to be inaccurate and therefore there can be no
assurance that the results contemplated in forward-looking statements will be
realized. In addition, as disclosed elsewhere in the "Risk Factors" section of
this Prospectus, there are a number of other risks inherent in the Company's
business and operations which could cause the Company's operating results to
vary markedly and adversely from prior results or the results contemplated by
the forward-looking statements. Growth in absolute and relative amounts of cost
of goods sold and selling, general and administrative expenses or the occurrence
of extraordinary events could cause actual results to vary materially from the
results contemplated by the forward-looking statements. Management decisions,
including budgeting, are subjective in many respects and periodic revisions must
be made to reflect actual conditions and business developments, the impact of
which may cause the Company to alter its marketing, capital investment and other
expenditures, which may also materially adversely affect the Company's results
of operations. In light of significant uncertainties inherent in the
forward-looking information included in this Prospectus, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives or plans will be achieved.
See "Management's Discussion and Analysis" and "Business."
MARKET PRICES AND DIVIDENDS
The Company's Common Stock has been listed on the Electronic
Bulletin Board sponsored by the National Association of Securities Dealers, Inc.
since October, 1996. The prices reported reflect inter-dealer prices and are
without adjustments for retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.
Bid Price
High Low
1996
October 1, 1996-
December 31, 1996 3 7/8 1 1/8
1997
January 1, 1997-
March 31, 1997 4 3/8 1 3/4
April 1, 1997-
June 30, 1997 8 1/4 3 1/4
July 1, 1997-
September 30, 1997 4 1/8 3
October 1, 1997-
December 31, 1997 3 3/16 2 1/8
(b) Holders
As of November 21, 1997, there were approximately 1,700
record holders of the Company's
common stock.
(c) Dividends
The Company has not paid any dividends on its common stock.
The Company currently intends to retain any earnings for use in its business,
and therefore does not anticipate paying cash dividends to holders of common
stock holders in the foreseeable future. Holders of Series A Convertible
Preferred Stock are entitled to annual cash dividends of $.09 per share. Holder
of Series C Convertible Preferred Stock are entitled to annual cash dividends of
$130.00 per share. Holders of Series D Convertible Preferred Stock are entitled
to annual cash dividends of $80.00 per share. Pursuant to the Company's Articles
of Incorporation, holders of Common Stock are not entitled to receive dividends
unless dividends have been paid for prior calendar years and paid and set aside
for the then current calendar year on the Series A Preferred Stock and Series C
Preferred Stock. The Company is under no other contractual restrictions on the
payment of dividends.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Jreck Subs Group, Inc.
The following discussion regarding the financial statements of the
Company should be read in conjunction with the financial statements and notes
thereto.
The following discussion and analysis contains forward-looking
statements involving risks and uncertainties that may cause the Company's actual
results to differ materially. Those risks and uncertainties include, but are not
limited to, economic, competitive, industry and market factors affecting the
operations, market products and prices of not only the company but also its
franchisees.
Results of Operations
The results of operations for the nine and three months ended September
30, 1997 reflect three months of operations from Hymie's Bagels, and one month
each from Little King Subs and Georgio's Subs. The results of operations do not
reflect any results from the Company's acquisitions of Mountain Mike's Pizza and
Seawest Sub since they were completed near or after September 30, 1997 and are
considered immaterial.
The Company had a net loss of $1,662,887 for the nine months ended
September 30, 1997, compared to a net loss of $41,231 for the same period in
1996. The increase in the net loss is primarily the result of costs associated
with acquisitions and equity financing during the first nine months of 1997.
The revenue of the Company increased $202,195 or 51.5% to $594,453 for
the nine months ended September 30, 1997, from $392,258 for the same period in
1996. The revenue of the Company increased $256,885 or 182.7% to $397,468 for
the three months ended September 30, 1997, from $140,583 for the same period in
1996. The increase is primarily due to the acquisitions of businesses made
during the quarter.
Cost and expenses applicable to revenue increased $107,262 or 700.0% to
$122,658 for the nine months ended September 30, 1997 from $15,396 for the same
period in 1996. Cost and expenses applicable to revenue increased $106,965 or
1707.1% to $113,231 for the three months ended September 30, 1997 from $6,266
for the same period in 1996. This increase is primarily due to the acquisitions
of businesses made during the quarter.
Selling, general and administrative costs increased $285,001, or
108.3%, to $548,144 for the nine months ended September 30, 1997 from $263,143
for the same period in 1996. Selling, general and administrative costs increased
$252,650 or 215.6% to $369,818 for the three months ended September 30, 1997
from $117,168 for the same period in 1996. The increase is primarily due to
increased costs associated with the acquisitions of businesses made during the
quarter.
Income from the Company's bakery subsidiary was $22,680 for the nine
months ended September 30, 1997 and $0 for the quarter ended September 30, 1997.
There was no income from that source during the same periods in 1996.
Liquidity and Capital Resources
Working capital at September 30, 1997 was a deficit of $616,294
compared with $541,873 at December 31, 1996, an increase of $74,421 or 13.7%.
The increase is attributable to increases in accounts payable and accrued
expenses of $566,438 and an increase in loans payable of $514,030 resulting from
the assumption of certain liabilities in connection with the Company's
acquisitions of businesses during the quarter.
Goodwill and other assets at September 30, 1997 were $6,281,916
compared with $2,812,294 at December 31, 1996, an increase of $3,469,622. The
increase is primarily attributable to the Company's acquisition of Hymie's
Bagel, Georgio's Subs, Little King and Mountain Mike's Pizza.
The Company's primarily capital requirements are for repayment of
$1,250,042 in loans payable. The Company's capital requirements are anticipated
to be funded through debt and/or equity financing. There is no assurance that
additional funding will be available, or that, if available, it can be obtained
on terms favorable to the Company. Failure to obtain such funding could
adversely affect the Company's financial condition.
Little King:
Operations as the Little King subsidiary of the Company commenced on
September 1, 1997. Income for the month of September 1997 amounts to $34,526.
There were no costs and expenses applicable to revenue for the period. Selling,
general and administrative costs were $45,547. Amortization of goodwill amounted
to $16,635.
Georgio's:
Operations of the Georgio's subsidiary (through the Company's AFI
subsidiary) commenced in August 1997. Sales for the period ended September 30,
1997 were $61,551. Costs and expenses applicable to revenue for the period
amounted to $25,736. Selling, general and administrative costs were $30,302.
Other income totaled $2,954.
Hymie's Bagels:
In July 1997, the Company acquired the stock of Leovera which owned
eight Hymie's Bagels along with a bakery that principally produces bagels. Sales
for the period ended September 30, 1997 totaled $174,703. Costs and expenses
applicable to revenue for the period amounted to $70,367. Selling, general and
administrative costs were $197,591. Amortization of goodwill was $6,310.
Mountain Mike's Pizza:
In September 1997, the Company, through its AFI subsidiary, acquired
Mountain Mike's Pizza. Operations commenced on October 1, 1997 and therefore
there was no operations for the period ended September 30, 1997.
Quality Franchise Systems, Inc.
As of September 30, 1997 and
for the Nine Months Ended September 30, 1997 and 1996
The following discussion should be read in conjunction with the Quality
Franchise's consolidated financial statements and notes thereto included herein.
BACKGROUND
Quality Franchise Systems, Inc. ("Quality") is the franchisor of Mountain Mike's
Pizza Restaurants. Quality franchises casual sit-down family-dining restaurants
serving high-quality pizza, sandwiches, salads, soft drinks, and beer and wine.
The restaurants also provide delivery and take-out service in all of Quality's
operating markets.
At September 30, 1997, Quality had seventy-five (75) restaurants in operation in
the states of California, Oregon, Nevada, Arizona, Michigan and Florida.
Quality engages in Area Development as its primary growth strategy. Using this
strategy Quality markets and sells the rights to develop a major geographic
market to a Development Agent. The Development Agent, with Quality's assistance
and approval, is responsible for developing his market through establishing
locations, selling franchises and providing franchises with ongoing supervision
and operational support. Quality believes that it will franchise and open
restaurants more rapidly throughout a broader geographic range because of its
strategic alignment with Development Agents and that by entering Area
Development Agreements, it will sell and develop franchises more rapidly at less
cost than could be accomplished by directly franchising restaurants on its own.
Quality also believes that this will result in providing a greater franchise fee
and royalty revenue stream.
Development Agents acquire the rights to a specific geographic market for a fee
payable to Quality. The fee is determined based upon the population of the
specific market. The Development Agent is responsible for 1.) sourcing
franchisee prospects for approval by the Company, 2.) developing and opening the
restaurant within the market; and 3.) providing the ongoing operational support.
The Development Agent receives 50% of the initial franchise fee for all
franchises sold in the market and 40% of the royalty payment (2% of restaurant
sales) for the operational support services.
In late September 1997, Quality was merged with Admiral's Fleet, Inc., a
Washington corporation, and wholly-owned subsidiary of Jreck Subs Group, Inc.
("JSGI"). JSGI is a franchising company with seven concepts encompassing
approximately 300 restaurants.
Results of Operations
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996.
Revenues of $1,478,038 for the nine months ended September 30, 1997 increased
11.4% compared to revenues of $1,326,726 for the same period in the prior year.
The increase was primarily attributable to more franchise royalties and initial
franchise and transfer fees from more franchised restaurants in 1997 compared to
1996. Vendor funds from manufacturers increased 126.5% to $229,850 from $101,496
resulting from a one time fee of $85,000 received from Pepsi from the Mountain
Mike's Pizza restaurants changing their fountain beverages from Coca Cola
products.
With respect to franchise royalties, the increase was attributed to the net
increase of four restaurants to 75 restaurants at September 30, 1997 compared to
71 and 65 restaurants at December 31, 1997 and 1996, respectively, and the
better performance of the restaurants opened under the Area Development Program.
Operating expenses decreased 29.1% to $1,168,010 for the nine months ended
September 30, 1997 from $1,647,158 for the same period in the prior year
resulting primarily from the decrease in general and administrative expenses and
area development expenses.
General and administrative expenses decreased 21.9% to $496,581 for the nine
months ended September 30, 1997 from $636,093 for the same period in the prior
year generally as a result of two fewer employees in 1997 and reduced
professional expenses. Area development expense decreased to $43,125 from
$364,664 as Quality focused its expansion on existing areas as opposed to
marketing and developing new areas as was the case in the previous
year. Restaurant servicing and area developer share of fees decreased to
$581,553 from $600,020 as Quality reduced its operating staff but is sharing
more of its franchise royalties with area developers for servicing the expanded
locations where Quality has restaurants.
As a result of the increased revenues and the decreased operating expenses,
operating income was $310,028 compared to an operating loss of $(320,432) for
the nine months ended September 30, 1997 and 1996, respectively.
Other non-operating expenses for the nine months ended September 30, 1997
included $84,010 from the operation and disposition of a corporately-owned
restaurant located in Boulder, Colorado which Quality disposed in April 1997 and
$98,630 related to costs associated with unsuccessful business combinations
prior to the successful merger with JSGI's Admiral's Fleet, Inc. subsidiary.
Interest expense decreased to $92,430 from $121,247 as a result of the
conversion of $495,000 of 12.75% convertible notes to preferred stock in June
1996.
Preferred dividends increased to $52,992 from $21,957 as the $545,000 in
preferred stock which accrues dividends at 13% was outstanding for the entire
period of the nine months ended September 30, 1997 compared to only 4 months for
the same period in 1996.
Liquidity and Capital Resources
Working capital at September 30, 1997 was a deficit $(469,355) compared to a
deficit $(705,008) at December 31, 1996. The decrease in deficit was primarily
the result of a compromise of a $185,000 note due to the Chairman of Quality as
payment to Quality for shares acquired by the Chairman in 1996 and the
negotiation and reduction of approximately $95,000 from amounts Quality owed to
two creditors.
Quality's primary capital requirements include debt service on negotiated
payables and interest on the Company's convertible notes and working capital.
Quality's ability to make scheduled payments of principal, interest or to fund
working capital, will depend upon its future performance, which, in turn, is
subject to various factors both with and beyond its control. In connection with
Quality's acquisition by JSGI, Quality is due $250,000 from JSGI which Quality
expects to receive in full by the first quarter of 1998. Based upon current
levels of operations and anticipated growth in revenues and cost savings,
Quality believes that Quality's cash flow from operations and from the amounts
due from JSGI will be adequate to meet its anticipated future requirements for
working capital, interest on its convertible notes payable of $530,000 due in
April 2000 and scheduled payments on its negotiated indebtedness.
Seawest Sub Shops, Inc.
As of June 30, 1997 and
for the Six Months Ended June 30, 1997 and 1996
The following discussion should be read in conjunction with the Seawest's
financial statements and notes thereto included herein.
Background
Seawest Sub Shops, Inc. ("Seawest") is the franchisor of Seawest Sub Shops
Restaurants. Seawest sells franchise rights, primarily in and around the Seattle
area, and provides guidance and assistance to the franchisees in areas such as
the preparation, packaging and sale of products; purchasing equipment; marketing
and administrative support and conducting employee training programs.
At June 30, 1997, Seawest had fifty-four (54) restaurants in operation primarily
in and around the Seattle area of which one was corporately owned and managed.
In late June 1997, Seawest was acquired by Admiral's Subs of Washington, Inc.
("ASWI"), a Washington corporation, and wholly-owned subsidiary of Jreck Subs
Group, Inc. ("JSGI"). JSGI is a franchising company with seven concepts
encompassing approximately 300 restaurants.
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Revenues of $339,354 for six nine months ended June 30, 1997 increased 2.6%
compared to revenues of $330,704
for the same period in the prior year. The increase was primarily attributable
to more franchise royalties from more franchised restaurants in 1997 and the
revenues of one corporately owned restaurant of $151,044. The increase in
these two items more than offset the decrease in initial franchise fees of
$20,500, the decrease in territorial
franchising rights of $32,225, and the decrease in marketing fees and marketing
rebates totaling $85,142.
The increase in revenues with the decrease in costs and expenses applicable to
sales revenue resulted in gross profit increasing 14.1% to $278,937 for the six
months ended June 30, 1997 compared to $244,413 for the same period in the prior
year.
Selling, general and administrative expenses increased 54.9% to $311,669 for the
six months ended June 30, 1997 compared to $201,241 for the same period in the
prior year as a result of costs associated with litigation and disputes with
franchisees.
Net other expenses decreased to $32,335 from $103,234 for the six months ended
June 30, 1997 and 1996, respectively, as a result of a non-recurring expense of
$87,811 for costs associated with store repossessions and closures in 1996.
Liquidity and Capital resources
Working capital at June 30, 1997 was a deficit $(266,727) compared to a deficit
$(174,322) at December 31, 1996. The increase in deficit was primarily the
result of $54,000 borrowed from Seawest's new parent, JSGI.
Seawest's primary capital requirements include debt service on negotiated
payables and interest on the Company's long-term debt and working capital.
Seawest's ability to make scheduled payments of principal, interest or to fund
working capital, will depend upon its future performance, which, in turn, is
subject to various factors both with and beyond its control. Based upon current
levels of operations and anticipated growth in revenues and cost savings,
Seawest believes that the Company's cash flow from operations and from
borrowings from JSGI will be adequate to meet its anticipated future
requirements for working capital, debt service and scheduled payments on its
negotiated indebtedness.
Pastry Products Producers, LLC
As of June 30, 1997 and
for the Six Months Ended June 30, 1997 and 1996
The following discussion should be read in conjunction with Pastry Products'
financial statements and notes thereto included herein.
Background
Pastry Products Producers, LLC ("Pastry Products") commenced operations in the
second quarter of 1996 and was 50% owned by Jreck Subs Group, Inc. ("JSGI"), a
franchising company with seven concepts encompassing approximately 300
restaurants. One of JSGI's concepts is the Jreck Subs Sandwiches. Pastry
Products supplies the Jreck Sub franchises with all of its bakery products.
Pastry Products sells approximately 95% of its products to Jreck Sub
franchisees.
In October 1997, JSGI completed its acquisition of Pastry Products and now owns
100%of Pastry Products.
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Revenues of 454,989 for six nine months ended June 30, 1997 increased 145.2%
compared to revenues of $185,595 for the same period in the prior year (Pastry
Products commenced operations in the second quarter of 1996). Gross profit was
$270,993 and $121,866 for the six months ended June 30, 1997 and 1996,
respectively, or 59.6% and 65.7% of revenues, respectively.
Liquidity and Capital Resources
Working capital at June 30, 1997 was a $9,725 compared to $33,947 at December
31, 1996. The decrease in working capital is due to financing on Pastry
Products' bakery equipment which matures in 1998. Pastry Products' primary
capital requirements include debt service including principal and interest on
the Company's long-term debt and working capital. Pastry Products' ability to
make scheduled payments of principal, interest or to fund working capital, will
depend upon its future performance, which, in turn, is subject to various
factors both with and beyond its control. Based upon current levels of
operations and anticipated growth in revenues and cost savings, Pastry Products
believes that Pastry Products' cash flow from operations, the expansion of the
Jreck Subs franchise concept which should increase the demand for bakery
products will be adequate to meet its anticipated future requirements for
working capital and debt service.
BUSINESS
Background
In the summer of 1969 five school teachers from the Carthage, New York
Central School System - named Jerry, Richard, Ellis, Charles and Keith - JRECK -
commenced a business of preparing and serving submarine style sandwiches from an
old school bus just outside of the main gate of Camp Drum. The business was
incorporated in 1974 in the State of New York under the name JRECK Subs, Inc.
In May, 1996 the Company concluded a reverse acquisition wherein all of
its capital stock was acquired by Circa Media, Inc., a Colorado corporation
formerly engaged in reproducing archival, public domain art and photographs in
digital form. Circa Media, Inc. was incorporated on July 19, 1995, and changed
its name to JRECK Subs Group, Inc. ("Company") on May 7, 1996. The former common
shareholders of JRECK Subs, Inc. received 5,000,000 shares of Common Stock of
the Company in the acquisition, or 56% of the outstanding shares, and the former
Series A and Series B Preferred Stockholders of Jreck Subs, Inc. received
700,000 shares of Series A
Preferred Stock and 350,000 shares of Series B Preferred Stock of the Company,
respectively.
The Company consists of JRECK Subs Group, Inc. and its wholly-owned
subsidiaries including JRECK
Subs, Inc., a New York corporation, Leovera, Inc. ("Leovera"), a Florida
corporation, Admiral Subs of Washington,
Inc. ("ASWI"), a Washington corporation, Little King, Inc. ("Little King"), a
Delaware corporation, Pastry Products
Producers, LLC, a New York limited liability company ("Pastry Products"), and
Admiral's Fleet, Inc. ("AFI"), a
Washington corporation and AFI's wholly-owned subsidiaries, Richey Enterprises,
Inc., a Washington corporation,
and Quality Franchise Systems, Inc., a Delaware corporation.
Company Operations
The Company is a multiple-concept franchisor. The Company began with
the JRECK Subs franchise which currently has 51 restaurants. JRECK Subs offers a
menu of high quality, fresh submarine sandwiches, soups and hot and cold side
order items as well as a full line of bagel offerings in selected franchise
locations based on the Lox, Stock & Bagel menu which certain proprietary rights
were acquired by the Company in 1990.
During 1997, the Company commenced a growth strategy through strategic
alliances and acquisitions which included the following:
o Hymie's Bagels, a 8 unit chain of company owned bagel shops in Tampa,
Florida along with a bakery;
o Seawest Subs, a 54 unit submarine sandwich chain primarily located in
Seattle, Washington;
o Little King, a 51 unit submarine sandwich chain primarily located in
Nebraska;
o Georgio's, a 6 unit submarine sandwich chain primarily located in
Seattle, Washington;
o Mountain Mike's Pizza, a 75-unit pizza chain primarily located in
northern and central California; and
o The completed acquisition of a 100% interest in Pastry Products
Producers, LLC which supplies the JRECK Subs restaurants with all of
their bakery products.
JRECK Subs Menu and Stores
The Company's JRECK Subs franchises offer a menu of different submarine
sandwiches, as well as a full line of bagel offerings and additional breakfast
items in selected franchise locations based on the Lox, Stock & Bagel menu.
JRECK Subs' emphasis in the submarine sandwich business is to offer a wider
selection of menu items and higher quality ingredients (such as rib-eye steak)
cooked on the premises. The food preparation area is open to customer view to
engage customer interest and to showcase freshness and cleanliness. The food
preparation process is designed to deliver a completed food order within 60
seconds. Sandwich menu prices range from $2.50 to $5.00. In addition, JRECK Subs
offers a selection of soft drinks, on-premises baked cookies and deep fried
items such as french fries, mushrooms, and cheese sticks.
As of September 30, 1997 there were 51 JRECK Subs franchisees, all of
which are located in New York State. Each location is designed as a "dine in"
location, although a number of franchises have drive up windows as well. Located
in strip shopping centers, shopping malls, and free standing buildings,
restaurants generally range from 1,000 to 2,000 square feet in size with 1,400
to 1,500 square feet being typical. The typical JRECK Subs store is decorated
with wood, brass tables and chairs, and brass lamps with green shades to impart
a friendly and cozy atmosphere. The green and white color scheme of the JRECK
"Admiral" signage is carried throughout the interior.
As is typical in sandwich shops, a majority of store sales occur during
lunch and the remainder during the dinner hours. Dine in and take out (including
delivery) typically comprise 60% and 40% of sales, respectively.
Individual franchisees can elect to offer catering services or home delivery.
Each franchisee leases or owns store facilities. Neither the Company
nor any of its affiliates leases store premises to franchisors.
Franchise Program
As of September 30, 1997 the Company had approximately 250 restaurants
of which 230 are franchised locations. The Company obtains prospective
franchisees, from its current and former employees, from referrals from existing
franchisees and from franchise shows.
With respect to its JRECK Subs store, the Company assists franchisees
with selecting suitable locations by the use of demographic and traffic pattern
analysis, an analysis of the proximity of business and community resources, and
competition; advises on the negotiation of lease terms and store design; assists
with sourcing of food product supply; and purchase of furniture and fixtures.
The Company's experience is that smaller towns with populations under 10,000 are
prime locations for its franchisees due to the lack of competition from larger
fast food chains and the high quality of its products. Franchisees are required
to purchase all their baked goods from the Company, such as submarine sandwich
rolls. Bakery products are supplied by the Company's bakeries in Watertown, New
York and Tampa, Florida to franchises in those states.
The current franchise fee for a JRECK Subs restaurant is $10,000, plus
a continuing franchise royalty equal to 6% of revenues. A JRECK Subs restaurant
typically requires an additional $35,000 to $50,000 in equipment, furniture,
fixtures, advertising, inventory and other pre-opening costs.
The Company's future growth will be focused on increasing the number of
franchised Restaurants, through both traditional and non-traditional
Restaurants.
The primary criteria considered by the Company in the review and
approval of franchisees are prior experience in operating restaurants or other
comparable business experience, and capital available for investment.
The Company maintains a staff of operations personnel to train and
assist franchisees in opening new Restaurants and to monitor the operations of
existing Restaurants. These services are provided as part of the Company's
franchise program. New franchisees are required to complete a two-week training
program which consists of formal classroom training and in--restaurant training,
including human resources, accounting, purchasing and labor and food handling
laws. Upon the opening of a new franchised Restaurant, Company representatives
are typically sent to the Restaurant to assist the franchisee during the opening
period. These Company representatives work in the Restaurant to monitor
compliance with the Company's standards and provide additional on-site training
of the franchisee's restaurant personnel.
The Company also provides development and construction support services
to its franchisees. Plans and specifications for the restaurants must be
approved by the Company before improvements begin. The Company's personnel
typically visit the facility during construction of leasehold improvements to
meet with the franchisee's site contractor and to verify that construction
standards are met.
To maintain uniformly high standards of appearance, service, food and
beverage quality, the Company has adopted policies and implemented a monitoring
program. Franchisees are required to adhere to the Company's specifications and
standards in connection with the selection and purchase of products used in the
operation of the Restaurant. Detailed specifications are provided for the
products used, and franchisees must request the Company's approval for any
deviations. Except for submarine sandwich rolls, and other baked goods, the
Company does not generally sell equipment, supplies or products to its
franchisees. The various franchise agreements require franchisees to operate
their restaurants in accordance with the Company's requirements. Ongoing advice
and assistance is provided to franchisees in connection with the operation and
management of each restaurant.
Suppliers
In October 1997, the Company completed its acquisition of Pastry
Products in Watertown, New York. Pastry Products supplies the Company's JRECK
Subs franchises with all of its bakery products. Pastry Products sells
approximately 95% of its products to JRECK Subs franchises. The Company does not
believe that it would have difficulty in obtaining an alternate supplier to
Pastry Products due to the large number of alternate bakeries in New York State.
In connection with the Company's purchase of Hymie's Bagels, the
acquisition included a bakery which provides the bagels for all of the Hymie's
Bagel shops. The Company does not believe that it would have difficulty in
obtaining an alternate supplier to the Hymie's Bagels chain due to the large
number of alternate bakeries in Florida.
The Company's various franchisees obtain meat, cheese, vegetable and
paper products from several suppliers. Other than rolls used at the Company's
Little King and Seawest Subs restaurants, only fresh, never frozen, and Grade A
products are used.
Recent Acquisitions
In June 1997, the Company acquired all of the outstanding shares of
Leovera, a company which operates the Hymie's Bagel 8 unit chain and a bagel
bakery in Tampa, Florida, for $200,000 in cash and the issuance of 367,500
shares of the Company's Common Stock. The Company is adding submarine sandwich
counters to each location. In connection with acquisition, the Company entered
in a five-year management agreement with a principal of Leovera with an initial
management fee of $85,000 for the first year.
In June 1997, the Company, through its ASWI subsidiary, acquired all of
the outstanding shares of Seawest Sub Shops, Inc., headquartered in Bellevue,
Washington. Seawest Subs has 53 franchised submarine sandwich shops and one
company-owned store. The consideration included $172,000 in cash, the issuance
of options to purchase 100,000 shares of the Company's common stock at a price
of $.001 per share for 15 years (valued at $350,000) and the assumption of
certain liabilities personally guaranteed by the former president of Seawest Sub
Shops, Inc. The optionees have the right to require the Company to repurchase
these shares at the greater of their "fair market value" (defined to be the
average of the high and low sales prices on a public market) or $3.25 per share,
but in no event more than 10,000 shares per month. The optionees were also
granted piggy back registration rights. The options become exercisable on a
cumulative basis at 25% on each of December 19, 1997, May 19, 1998, November 19,
1998 and May 19, 1999. In connection with this acquisition, the Company entered
into a noncompete agreement with the former president of Seawest Sub which calls
for monthly payments of $8,000 which commenced in June 1997 for a twelve month
period.
In June 1997, ASWI sold the net assets of Seawest Sub to Admiral's Subs
Group, Inc. ("ASGI"), a company wholly-owned by a director of the Company. The
Company also issued a $350,000 note to ASGI personally guaranteed by this
director. In October 1997, ASGI defaulted on the note and the Company accepted
the net assets of Seawest Sub for satisfaction of the note and the release of
the personal guarantee of this director.
In July 1997, the Company acquired all of the outstanding stock of
Little King, Inc., a 51-unit submarine
shop including the assets of nine corporately-owned restaurants. The
consideration consisted of $250,000 cash, 500,000 shares of the Company's common
stock immediately issued, 700,000 shares of the Company's common stock to be
issued within 12 months plus 50,000 contingent shares based on Little King
franchising revenues or total revenues exceeding certain parameters for the year
ending December 31, 1998. The acquisition also provided the principal of Little
King an option to repurchase Little King from the Company if the stock price of
the Company is not at least $1.50 per share on the second anniversary of the
closing with the repurchase based on the Company receiving back all of the
Company's shares issued, any funds invested by the Company into Little King and
a fair market value determination. The term of the acquisition also provided
that in the event the Company files bankruptcy within three years of the closing
and the bankruptcy is not dismissed within 90 days, the principal of Little King
is granted the first option to repurchase the Little King stock from the Company
for $25,000. In connection with the acquisition of Little King, the company
entered into employment agreements with Sid Wertheim and Robert Wertheim to act
as president and vice-president of Little King respectively. Mr. Sid Wertheim's
employment agreement is for a seven-year period with an initial salary of
$54,000 subject to annual increases up to 20% based on operating performance.
Mr. Robert Wertheim's employment agreement is for a ten-year period with an
initial salary of $45,000 subject to annual increases up to 20% based on
operating performance.
In August 1997, the Company through its AFI subsidiary acquired all of
the outstanding stock of Richey Enterprises, Inc., a Washington corporation,
which operates 6 Georgio's Sub shops of which two are corporately-owned. The
consideration consisted of 93,794 shares of the Company's common stock and a
stock price guarantee if any sale of the Company's stock by the seller within 30
days after the anniversary of the date of the close of escrow is less than 80%
of the price of the stock at the close of escrow. In connection with the
acquisition of Georgio's Sub, the Company entered into a consulting/noncompete
agreement with William and Colleen Richey which calls for a sixty-day agreement
with an initial fee of $10,000 and a monthly consulting fee of $3,750. After the
initial sixty-days, the agreement is subject to mutual renewal on a
month-to-month basis. The noncompete agreement is in effect during the period of
the consulting agreement and two years after any termination of the consulting
agreement.
In September 1997 the Company, through its AFI subsidiary acquired all
of the outstanding shares of Quality Franchise Systems, Inc., the franchisor of
Mountain Mike's Pizza, a 75-unit pizza chain located primarily in northern and
central California. The consideration consisted of 899,967 shares of the
Company's common stock, 120 shares of the Company's Series C preferred stock and
$250,000 cash. In addition, the shareholders of QFS are eligible to receive
150,000 additional shares of the Company's common stock if the stock price does
not exceed $3.50 for 21 consecutive days between October 1, 1997 and January 31,
1998, and up to 500,000 additional shares if the Mountain Mike's income from
franchising operations, as defined, exceed $500,000 for any consecutive
twelve-month period from October 1, 1997 to December 31, 1998.
In December 1997, the Company agreed to acquire Li'l Dino Management
Corporation, franchiser of 43 Li'l Dino's Bagel Deli Grill Stores located
primarily in North Carolina. The purchase price consists of a $400,000 note and
approximately 735,000 shares of the Company's common stock. The completion of
the acquisition is pending a fairness ruling by the North Carolina Department of
Corporations.
The Company has also entered into co-branding agreements with Manhattan
Bagels, and with two convenience store chains in New York State: Expressmart and
Pit Stop. The Company's experience with co-branding has been favorable, with the
Lox, Stock & Bagels food menu which was incorporated as the breakfast menu for
its JRECK Subs locations. Management believes that co-branding will enable it to
achieve penetration in additional markets with relatively little capital
expenditure.
Starbucks Coffee is currently test marketing its products in five JRECK
Subs franchised locations. If this test marketing is successful, the Company
will expand the Starbucks program to additional JRECK Subs franchised locations.
Competition
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing restaurants. Factors such as
inflation, increases in food, labor and energy costs, the availability and cost
of suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements and the availability of an adequate
number of hourly paid employees can also adversely affect the fast food
restaurant
industry. Multi-unit restaurant chains like the Company can also be
substantially adversely affected by publicity resulting from food quality,
illness, injury, or other health concerns. Major chains, which have
substantially greater
financial resources and longer operating histories than the Company, dominate
the fast food restaurant industry. The
Company competes primarily on the basis of location, food quality and price.
Changes in pricing or other marketing
strategies by these competitors can have an adverse impact on the Company's
sales, earnings and growth. There can
be no assurance that the Company will be able to compete effectively against
its competitors. In addition, with
respect to the sale of franchises, the Company competes with many franchisors
of restaurants and other business
concepts for qualified and financially capable franchisees.
Regulation
The Company is subject to a variety of federal, state, and local laws
affecting the conduct of its business. Operating restaurants are subject to
various sanitation, health, fire and safety standards and restaurants under, or
proposed for construction, are subject to state and local building codes, zoning
restrictions and alcoholic beverage regulations. Difficulties in obtaining or
failure to obtain required licenses or approvals could delay or prevent the
development or opening of a new restaurant in a particular area. The Company is
also subject to the Federal Fair Labor Standards Act, which governs minimum
wages, overtime, working conditions and other matters, and the Americans with
Disabilities Act, which became effective in January 1992. The Company believes
that it is in compliance with such laws, and that its Restaurants have all
applicable licenses as required by governmental authorities.
The Company believes that it is in compliance with the applicable
federal and state laws concerning designated non-smoking and smoking areas in
its Company operated restaurants.
The Company is subject to regulations of the Federal Trade Commission
(the "FTC") and various states
relating to disclosure and other requirements in the sale of franchises and
franchise operations. The FTC's regulations require the Company to timely
furnish prospective franchisees a franchise offering circular containing
prescribed information. Certain state laws also require registration of the
franchise offering with state authorities. Other states regulate the franchise
relationship, particularly concerning termination and renewal of the franchise
agreement. The Company believes that it is in compliance with the applicable
franchise disclosure and registration regulations of the FTC and the various
states that it operates in.
While the Company intends to comply with all federal, state and foreign
laws and regulations, there can be no assurance that it will continue to meet
the requirements of such laws and regulations, which, in turn, could result in a
withdrawal of approval to franchise in one or more jurisdictions. Any such loss
of approval may have a material adverse effect upon the Company's ability to
successfully market its franchises. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing business in a
particular state could subject the Company and its affiliates to rescission
offers, monetary damages, penalties, and/or injunctive proceedings. The state
laws and regulations concerning termination and non-renewal of franchisees are
not expected to have a material impact on the Company's operations. In addition,
under court decisions in certain states, absolute vicarious liability may be
imposed upon franchisors based upon claims, there can be no assurance that
existing or future franchise regulations will not have any adverse effect on the
Company's ability to expand its franchise program.
Business Strategy
The Company's business strategy is to increase its franchise revenue
base through continuing franchising of JRECK Subs shops and the affiliated
regional companies it has acquired. Each of these companies has a strong track
record of regional franchise brand recognition and long-term franchise operating
history in their respective markets.
The Company's core business, JRECK Subs, will continue to expand in New
York, Florida and other eastern seaboard areas. The Company seeks to be the
dominant sub chain in the New York state region. It believes there is
significant opportunity to increase store sales penetration and franchise
revenue through its existing franchisees.
The typical fast food customer frequents one franchise for the majority
of purchases but also relies on one or two additional concepts and a number of
specialty restaurants. Increasing sales and franchise revenues through existing
franchisees is generally more profitable than through new franchises because
they do not require significant additional financing expenses, training calls or
other additional administrative expenses.
The Company intends to continue to supplement internal growth with
strategic acquisitions of existing fast food franchisees. The strategic
acquisition of complementary brands which are proven revenue generators in their
established markets allows the Company to grow more rapidly at less cost than
would be possible through internal growth alone. The Company has the facilities
and the management to support a larger distribution operation, therefore it
believes that it can reduce the operating expenses of the acquired businesses as
well as use economies of scale to increase gross sales, franchise revenue,
market share, and net profits. The Company is currently seeking attractive fast
food franchise businesses to acquire, but there are no assurances that the
Company will be able to acquire an ongoing business at a favorable price or that
any such acquisition would ultimately be successful.
Employees
As of September 30, 1997, the Company had approximately 170 employees
consisting of 30 administrative employees, 110 employees in the Company's 20
corporate restaurants and 30 employees in bakery operations.
Trademarks
The Company markets several products under the JRECK Subs, Seawest Sub
Shops, Little King and Mountain Mike's Pizza labels in addition to the Georgio's
and Hymie's Bagel labels.
With respect to the "JRECK Subs" label, the Company has registered this
Mark on the Principal Register of the United States and Trademark Office ("PTO")
on October 14, 1975 (Registration No. 1,022,898) and the Company has filed all
required affidavits for, and has renewed, this Mark. On May 9, 1997, the Company
filed an application with the PTO for registration of one of its principal
trademarks, the "Admiral J" logo (Application 75/289578). As of September 30,
1997, the Company has yet to receive Principal Register federal registration for
the "Admiral J" logo.
The "Seawest Sub Shops" has registered trademarks, names, symbols and
designs on the Principal Register
of the PTO on the following: "Original Deli Taste Without The Cost Logo"
(Registration No. 1,675,510, dated
February 11, 1992), "Full Boat" (Registration No. 1,761,574, dated March 30,
1993), "Destroyer" (Registration No.
1,761,573, dated March 30, 1993), "Enough for two or just for you" (Registratio
No. 1,764,733, dated April 13,
1993), "Seawest Sub Shops" (Registration No. 1,703,897, dated July 28, 1992),
"Substantially More:" (Registration
No. 1,772,028, dated May 18, 1993 and "Sub Shop" (and Design) (Registration No.
1,862,112, dated November 8,
1994). In addition the trade name "Seawest Sub Shops" is registered as a
service mark with the State of Washington,
under Registration Number 020443 as of March 29, 1991. The Company has also
registered in Canada its
"Submarine Design Logo" (TMA 407,629), dated February 5, 1993.
The "Little King" service mark and design was registered on the
Principal Register of the PTO on April 12, 1977 (Service Mark No. 1,063,555).
The service mark "Royal Treat" was registered on the Principal Register of the
PTO on October 29, 1991 (Service Mark No. 1,662,623). The service mark "Little
King B America's Greatest Hero" was registered in Nebraska on February 2, 1983.
The service mark "The Little King - Where a Sandwich is a Complete Meal" and
design was registered in Iowa on December 22, 1975 and in California on December
30, 1975.
All required affidavits of use and renewals have been filed.
The "Mountain Mike's" name, service mark and design was registered on
the Principal Register of the PTO on September 15, 1992 (Registration Nos.
1,716,962 and 1,716,963). The Company's new mark and design for "Mountain Mike's
Pizza" was registered on the Principal Register of the PTO on October 1, 1996
(Registration No. 2,004,536). The Company filed for registration the slogan
"Pizza the way it oughta be" on the PTO in September 1996 (Application No.
75/174377). The Company has been informed by the PTO of a potential conflict
between its slogan and the slogan "Pizza, the way Pizza was meant to be" used by
Godfather's Pizza. The Company and its trademark counsel are evaluating options
regarding the registration of this slogan. The slogan is still in use in the
Mountain Mike's Pizza system.
Property
The Company's corporate offices and Pastry Products bakery are located
in a 15,000 square foot facility in Watertown, New York which the Company
completed acquiring in October 1997. Under the terms of the acquisition, the
Company assumed an existing note on the facility of $150,222 at 10% payable in
84 equal installments of $2,494 beginning December 1, 1997. The Company also
leases corporate space for the operations of its restaurant concepts through its
subsidiaries. These leases generally are less than two year leases, except for
one lease in Omaha, Nebraska which expires in 2008 and calls for annual lease
payments of $39,000. Total annual lease payments for 1998 for these corporate
leases are approximately $80,000.
The Company also leases the space for its 20 corporate restaurants (1 Seawest
Sub Shop, 2 Georgio's, 9 Little King Subs and 8 Hymie's Bagels. Minimum lease
payments due for the next 5 years are as follows:
1998 $ 429,000
1999 285,000
2000 237,000
2001 181,000
2002 176,000
---------
TOTAL $ 1,308,000
MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and directors of the Company. Each director holds such
position until the next annual meeting of the Company's shareholders and until
his respective successor has been elected and qualifies. Any of the Company's
officers may be removed with or without cause at any time by the Company's Board
of Directors.
Name Age Office
Christopher M. Swartz 26 Chairman, President and Chief Executive Officer
Bradley L. Gordon 45 Chief Operating Officer and Director
Eric T. Swartz 29 Secretary and Director
Kelly A. Swartz 27 Director
Jeremiah J. Haley 59 Director
Gary E. Rowe 44 Controller
Peter J. Whitmore 36 Franchise Director
Gary P. Baker 44 Financial Coordinator
James M. Cook 29 Operations Director
Christopher M. Swartz has been President, Chief Executive Officer, and
Chairman of the Company since
April 1996 and of JRECK Subs, Inc. since September 1995. From 1992 to September
1995, he was Director of
Operations of Lox, Stox & Bagels of Liverpool, Inc. Prior to 1992 Mr. Swartz
was a student at Syracuse University
where his concentration was in the field of management. Mr. Swartz is a magna
cum laude graduate of Syracuse
University who grew up in the subs business. He has worked in construction,
building sub shops and has managed
sub shops. He is the second generation of his family involved with JRECK. Mr.
Swartz is also the President of Tri-
Emp Enterprises, Inc. and the brother of Eric T. Swartz and Kelly A. Swartz.
Bradley L. Gordon has been Chief Operating Officer and Director of the
Company since September 1997. Prior to joining the Company, he was president
from September 1993 to September 1997 of Quality Franchise Systems, Inc.
("QFS"), the franchisor of Mountain Mike's Pizza, QFS's chief executive officer
since September 1992 and one of its directors since January 1993. Before joining
QFS, he held various positions at Pace Membership Warehouse, Inc. in Denver,
Colorado beginning in November 1983, including executive vice president - sales,
senior vice-president B operations and vice president B human resources.
Eric T. Swartz has been a Director and Secretary of the Company since
April 1996. He was awarded his
J.D. degree from Syracuse University College of Law and his Bachelor's Degree
from Syracuse University. He has
been a partner in the Swartz Law Firm, P.C. from October 1993 to the present.
From September 1992 to May 1993
he was associated with the law firm of Pease & Willer, which he joined after hi
graduation from law school in
1992. Mr. Swartz is the brother of Christopher M. Swartz and Kelly A. Swartz.
Kelly A. Swartz has been a Director of the Company since April 1996.
She is a graduate of the State University of New York, at Plattsburgh. Ms.
Swartz is an elementary school teacher at Apollo Elementary in Titusville,
Florida, where she has been employed since September, 1991. From May 1990 to
September 1991 she was employed in various capacities with JRECK Subs, Inc.,
including the management of several sub shops. Ms.
Swartz is the sister of Eric T. Swartz and Christopher M. Swartz.
Jeremiah J. Haley has been a Director of the Company since April 1996.
He was one of the original
founders of JRECK Subs, Inc. (the "J" in the name JRECK stands for the first
letter of Mr. Haley's first name). Mr.
Haley has a B.S. degree from Mansfield State College in Mansfield, Pennsylvania.
He also holds a Master's degree
from the State University of New York at Cortland. Mr. Haley has been Presiden
of Haley Enterprises, Inc., a
JRECK Subs, Inc. franchisee, from 1975 to the present. He had also been a
teacher with the Carthage, New York
Central School District from 1965 until he retired in June 1993.
Gary Rowe has been the Corporate Controller since September 1993.
Prior to joining the Company, Mr.
Rowe was the controller of the quasi-independent New York State government
agency, the Development Authority
of the North Country. Mr. Rowe graduated from the State University of New York
at Albany in 1974 where he
received a Bachelor of Science Degree in accounting. Mr. Rowe is a Certified
Public Accountant.
Peter J. Whitmore has been the Franchise Director of the JRECK chain
since 1982. Mr. Whitmore is also
an instructor for the Watertown City School District and the Jefferson Community
College. Mr. Whitmore graduated
from the State University of New York at Cortland with a Bachelor of Arts degree
in history in 1982. Mr. Whitmore
is a member of the National Restaurant Association.
Gary P. Baker has been the Director of Operations of JRECK Subs chain
since 1990. Prior to joining the Company, he was the President and Chief
Executive Officer of U.S. Linen Systems, Inc., in Watertown, New York, from 1980
to 1990.
James Cook has been the Director of Operations of the Lox, Stocks &
Bagels division of JRECK Subs since November 1992. As such, Mr. Cook is
responsible for all aspects of wholesale production and sales. Prior to joining
the Company, Mr. Cook was the Operations Manager of a four store retail
submarine and roast beef sandwich chain located in Albany, New York from 1989 to
November 1992. Mr. Cook received his Bachelor of Science Degree in the field of
economics from the State University of New York at Cortland in 1988.
Executive Compensation
The following table sets forth the cash compensation of the Company's
executive officers and directors during each of the last three fiscal years. The
remuneration described in the table does not include the cost to the Company of
benefits furnished to the named executive officers, including premiums for
health insurance and other benefits provided to such individual that are
extended in connection with the conduct of the Company's business. The value of
such benefits cannot be precisely determined, but the executive officers named
below did not receive other compensation in excess of the lesser of $25,000 or
10% of such officer's cash compensation.
Summary Compensation Table
ANNUAL COMPENSATION LONG TERM COMPENSATION
Name and Other Annual Awards Payouts All
Principal Position Year Salary Bonus Compensation Other
RestrictedOptions/ LTIP
Stock ($)SARs(#) Payouts ($)
Christopher M. Swartz 1996 26,000 0 0 0 0 0 0
President and CEO 1995 0 0 0 0 0 0
1994 0 0 0 0 0 0
Gary E. Rowe 1996 46,350 0 0 0 0 0
Controller
1995 39,000 0 0 0 0 0
1994 37,250 0 0 0 0 0
The Company carries no officers and directors liability insurance or
disability insurance benefits. The Company maintains a $3,000,000 key man life
insurance policy on Mr. Christopher Swartz of which the Company is the
beneficiary. No executive officer or director is currently covered by an
employment agreement except for Bradley L. Gordon. The Company does not maintain
any pension plan, profit sharing plan or similar retirement or employee benefit
plans.
Mr. Bradley L. Gordon joined the Company as chief operating officer in
September 1997. Under the terms of his three-year employment agreement
commencing, Mr. Gordon receives an initial annual compensation of $150,000
subject to annual increases consistent with other executives of the Company. If
the employment agreement is terminated by the Company, Mr. Gordon continues to
receive his base salary until the earlier of Mr. Gordon finding new employment
or twelve months after such termination date. Mr. Gordon was also granted a
right to purchase 500,000 shares of the Company's common stock at a price of
$3.00 per share which shares were issued in November 1997. The purchase price of
$1,500,000 was paid in the form of a promissory note to the Company which calls
for 10% with principal and interest due in September 2000. At any time prior to
September 2000, Mr. Gordon has the right to require the Company to repurchase
the 500,000 shares as consideration for the cancellation of the promissory note.
Directors currently receive no compensation for their duties as
directors. At the Company board of director's meeting on December 29, 1997, the
board approve an option grant to its chairman and chief executive officer
Christopher Swartz for the purchase of 1,000,000 shares of the Company's common
stock at a price to be no less than 110% of the closing price on the date of the
grant. The options are to be exercisable immediately and to expire on December
29, 2000.
PRINCIPAL STOCKHOLDERS
The following table sets forth information relating to the beneficial
ownership of Company common stock by those persons beneficially holding more
than 5% of the Company's common stock, by the Company's directors and executive
officers, and by all of the Company's directors and executive officers as a
group as of November 30, 1997. The address of each person is care of the Company
unless noted.
Percentage
Name of Number of of Outstanding
Stockholder Shares Owned(1) Common Stock
Christopher M. Swartz(2)(3) 4,422,500 32.1%
Bradley L. Gordon 589,160 4.2%
Eric T. Swartz -0- --
Kelly A. Swartz -0- --
Jeremiah J. Haley(4) 175,000 1.3%
All executive officers and
directors as a group (5 persons)(2)(3)(4) 5,186,660 37.6%
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
shared investment power with respect to a security (i.e., the power to
dispose of, or to direct the disposition of, a security). In addition,
for purposes of this table, a person is deemed, as of any date, to have
"beneficial ownership" of any security that such person has the right
to acquire within 60 days after such date.
(2) Includes 350,000 shares (100%) of the Class B Preferred Stock which is
convertible at the option of the Company into 350,000 shares of Common
Stock.
(3) Includes 4,072,500 shares of common stock owned by Tri-Emp Enterprises,
Inc. Mr. Christopher M. Swartz
is President and the sole shareholder of Tri-Emp Enterprises, Inc and
as such is deemed to have beneficial
ownership of the shares of the Company's stock owned by Tri-Emp
Enterprises, Inc.
(4) Mr. Haley owns 25,000 shares of Common Stock and 150,000 shares (25%)
of the Series A Preferred Stock, each of which is convertible at the
option of the Company into one share of common stock.
* less than 1%
SELLING SHAREHOLDERS
The shares of Common Stock of the Company offered by the Selling
Stockholders (the "Shares") will be offered at market prices, as reflected on
the Electronic Bulletin Board, or on the Nasdaq Small Cap Market if the Common
Stock is then traded on Nasdaq. The shares include 1,907,371 shares currently
outstanding as well as 1,500,939 shares being offered by the holders upon
conversion of the Series D Preferred, 1,587,266 shares issuable upon
satisfaction of certain contingencies, and 100,000 shares being issued upon
exercise of options. The aggregate number of shares offered for resale upon
conversion of the Series A Preferred will be based on the conversion rate in
effect at the time of conversion. It is anticipated that registered
broker-dealers will be allowed the commissions which are usual and customary in
open market transactions.
The number of shares of Common Stock issuable upon conversion of each
of the 2,400 shares of Series D Preferred, and the consequent number of shares
of Common Stock available for resale under this Prospectus, is based upon a
conversion ratio which is the lower of $1,000 divided by 65% of the closing bid
price of the Common Stock on NASDAQ averaged over the five trading days
immediately prior to the date of conversion, or $1,665,625. Based upon the bid
price on the date of this Prospectus, or $2.5625, 600.41128 shares of Common
Stock would be issuable per share of Series D Preferred. The Selling
Stockholders do not own any Common Stock except as registered hereby and will
own no shares after the completion of the offering. The relationship, if any,
between the Company and any Selling Stockholder is set forth below.
Percent of
Number of Common Stock
Series A Number of Before
Name Preferred Shares Common Shares Offering
Olympus Capital, Inc. 200 120,075 *
Barry Seidman 1,000 600,375 4.3%
Ed Leinster 100 60,038 *
Edwards Capital 50 30,019 *
John Mitchell 100 60,038 *
Jimmy Dean Dowda 75 45,028 *
Bruce Knox 100 60,038 *
Dominic Viccari 25 15,009 *
Arcadia Mutual Fund 250 150,094 1.1%
Paril Holding 100 90,056 *
Passy Holding 100 60,038 *
Philip M. Holstein, Jr. 40 24,015 *
Joseph Sloves 30 18,011 *
James Skalko 50 30,019 *
Tops Holding, Ltd. 75 45,028 *
Fred Lenz 25 15,009 *
Laura Robinette 44,445 *
Thomas Eccleston 5,555 *
Thomas Daniel 1,110 *
James Lewis 25,000 *
Hymie's Bagels 337,500 2.4%
Howard and Maryann Cagin JTEN 16,000 *
Chai Enterprises 173,000 *
Anthony George and Charlene George JTEN 8,000 *
Marilyn Gordon 8,000 *
Adam Greenberg 1,250 *
Carol Greenberg 2,000 *
Harold Greenberg 91,000 *
Renee Jones 500 *
Michael Klein 8,000 *
Roy & Sheryl Quinn 8,000 *
Steve Ratzer 8,000 *
Charlie Brown 750 *
21,000 *
Little Kings(1) 1,250,000
Don Pistillo 1,000 *
Geoffrey Wertheim 10,000 *
Lauren Wertheim 10,000 *
Robert Wertheim 25,000 *
Sid Wertheim 454,000 3.1%
Quality Franchise Systems, Inc. Acquisition(2) 1,549,967
David L. Eisenberg 2,895 *
Kevin and Donna Ellis 14,165 *
Larry I. Emdur Retirement Trust 4,875 *
Michael and Kathleen Feinstein 15,947 *
Seth Flam and Flora Calen 8,499 *
Samuel Golding 5,787 *
Vanessa Golding 5,787 *
Gordon Family Trust(affiliate of officer/director) 20,087 *
Bradley L. Gordon (officer/director) 69,073 *
Hassman Family Trust 7,098 *
Infants Children & Youth Ltd. 9,750 *
Money Purchase Pension Trust
AB Laffer, VA Canto & Associates 9,216 *
Lisa Layne 28,937 *
Samuel Lizerbram 3,537 *
Lizerbram Family Trust 24,761 *
Joseph A. Lozito, Jr.
Employee Pension Plan & Trust 9,750 *
Barbara Mandel Trust 7,082 *
Blaine Quick 368,390 *
Robert Quick 32,363 *
James Ringrose 4,875 *
Murray H. Rosenthal
Pension Profit Sharing Plan 14,626 *
Craig Silberman 5,787 *
Jeffrey Silberman 5,787 *
Richard Silberman 115,747 *
Harold Stephens 7,082 *
Ernest Stewart 52,982 *
Karen Tomasello 5,787 *
Irene Wetsman 14,165 *
25,130 *
Sobiks Acquistion(3) 187,266 1.4%
Mitchell R. Day and Julie A. Day(4) 100,000 *
Georgio's Acquisition
Colleen Richey 39,993 *
William C. Richey 39,993 *
13,808 *
TOTALS 2,400 5,035,538 27.2%
* less than 1%
(1) Includes 750,000 contingent shares not yet issued, or 60% of the shares
listed for each person.
(2) Includes 650,000 contingent shares not yet issued which are not listed
below by individual.
(3) Not yet issued as of the date of this prospectus.
(4) Includes 100,000 shares issuable upon exercise of options at $.001 per
share commencing on December 14, 1997, May 19, 1998, December 19, 1998
and May 19, 1999 as to 25,000 shares on each such date..
CERTAIN TRANSACTIONS
Kalin Enterprises, Inc. ("Kalin") is the franchisee for five JRECK Subs
restaurants. Mr. Christopher Swartz
is a 25% shareholder and an officer of Kalin.
Restaurant Management Corporation of New York, Inc. ("RMC") is the
franchisee for three JRECK Subs
restaurants. RMC is controlled by Mr. Christopher Swartz.
Mr. Jeremiah Haley, a director, received 175,000 shares of Series A
Preferred Stock in exchange for his shares of Jreck Subs, Inc. Series A
Preferred Stock on May 6, 1996. Mr. Haley was elected to the Board of Directors
pursuant to the right of holders of Series A Preferred Stock to elect one member
of the Board of Directors. Pursuant to the dividend rights of holders of Series
A Preferred Stock, Mr. Haley received $15,750 in dividends on his shares in
fiscal 1996.
Mr. Christopher Swartz, chairman and the Company's president and chief
executive officer, received (through Tri-Emp Enterprises, a company of which he
is the sole shareholder) 5,000,000 shares of Company Common Stock and 350,000
shares of Company Series B Preferred Stock in exchange for all of the Common
Stock and Series B Preferred Stock of Jreck Subs, Inc. on May 6, 1996. Mr.
Swartz was elected to the Board of Directors pursuant to the right of holders of
Series B Preferred Stock to elect one member of the Board of Directors.
Mr. Bradley Gordon, director and the Company's chief operating officer,
purchased 500,000 shares of the Company's common stock for $1,500,000. The
Company received a promissory note from Mr. Gordon with interest at 10% per
annum with principal and interest due in September 2000. At any time prior to
September 2000, Mr. Gordon has the right to require the Company to repurchase
the 500,000 shares as consideration for the cancellation of the promissory note.
Mr. R.T. Silberman, a shareholder of the Company, purchased 300,000
shares of the Company's common
stock for $900,000. The Company received a promissory note from Mr. Silberman
with interest at 10% per annum
with principal and interest due in September 2000. At any time prior to
September 2000, Mr. Silberman has the right
to require the Company to repurchase the 300,000 shares as consideration for
the cancellation of the promissory note.
In June 1997, Mr. Eric Swartz, director of the Company and the sole
shareholder of Admiral Subs Group,
Inc. ("ASGI") acquired the net assets of Seawest Subs from the Company's
wholly-owned subsidiary ASWI. The
Company also issued a $350,000 note to ASGI personally guaranteed by Mr. Eric
Swartz. In October 1997, ASGI
defaulted on the note and the Company accepted the net assets of Seawest Sub
for satisfaction of the note and the
release of the personal guarantee of Mr. Eric Swartz.
In connection with the acquisition of Little King, Inc., the Company
provided Mr. Sid Wertheim, the principal of Little King an option to repurchase
Little King from the Company if the stock price of the Company is not at least
$1.50 per share on the second anniversary of the closing with the repurchase
based on the Company receiving back all of the Company's shares issued, any
funds invested by the Company into Little King and a fair market value
determination. The term of the acquisition also provided that in the event the
Company files bankruptcy within three years of the closing and the bankruptcy is
not dismissed within 90 days, Mr. Wertheim of Little King is granted the first
option to repurchase the Little King stock from the Company for $25,000. The
agreement also provided the selling shareholders of Little King, Inc. with full
piggyback registration rights in the event the Company decides to register any
of its stock. The agreement also provides that in the event the Company
completes a secondary offering of its common stock on or prior to March 31,
1998, the Company will invest an amount equal to 4% of the proceeds the Company
receives for the development of the Little King concept. Mr. Sid Wertheim also
has an agreement with Tri-Emp Enterprises, Inc. ("Tri-Emp"). Tri-Emp is
controlled by Mr. Christopher Swartz, chairman, president and chief executive
officer of the Company. Under this agreement, if Tri-Emp receives an offer to
purchase its controlling interest during the first three years after the
Company's acquisition of Little King, Inc., Tri-Emp will obtain an acceptable
stock sale for Mr. Sid Wertheim. If Mr. Sid Wertheim receives an offer for a
substantial of all of his stock position, he shall grant Tri-Emp or its designee
a first option to make such purchase. The option shall be on the same terms and
conditions as a third party bona fide purchaser.
In connection with the company's acquisition of Seawest Sub Shop, Inc.,
the Company issued options to
purchase 100,000 shares of the Company's common stock at a price of $.001 per
share for 15 years (valued at $350,000) and the assumption of certain
liabilities personally guaranteed by the former president of Seawest Sub. The
optionees have the right to require the Company to repurchase these shares at
the greater of their "fair market value" (defined to be the average of the high
and low sales prices on a public market) or $3.25 per share, but in no event
more than 10,000 shares per month. The optionees were also granted piggy back
registration rights. The options become exercisable on a cumulative basis at 25%
on each of December 19, 1997, May 19, 1998, November 19, 1998 and May 19, 1999.
December 1997, the Company entered into a consulting agreement with
George Naddaff, a shareholder, which calls for a base monthly fee of $10,000.
The term of the consulting agreement is for twelve months subject to a
twenty-four month extension if the Company obtains $5,000,000 in capital during
the initial term of the consulting agreement.
On December 30, 1997, the Company issued a warrant to George Naddaff
and Carl Youngman to acquire the greater of (a) 375,000 shares of the Company's
Common Stock or (b) the number of shares equal to 3% of the fully diluted
outstanding shares of the Company as of December 30, 1997. The option expires on
December 29, 2002 and the exercise price per share is equal to 75% of the
average market price for the five preceding days prior to December 30, 1997. The
exercise price is subject to adjustment if the Company issues shares of its
common stock for less than the exercise price.
DESCRIPTION OF SECURITIES
Common Stock
The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of common stock, no par value per share, of which 13,437,444
shares were outstanding as of November 21, 1997. Holders of shares of common
stock are entitled to one vote for each share on all matters to be voted on by
the stockholders, subject to the right of holders of Series A Preferred Stock
and Series B Preferred Stock to each elect one member of the Board of Directors.
Holders of common stock have no cumulative voting rights. Holders of shares of
common stock are entitled to share ratably in dividends, if any, as may be
declared, from time to time, by the Board of Directors in its discretion, from
funds legally available therefor, after dividends are first paid on Series A
Preferred Stock and Series C Preferred Stock. In the event of a liquidation,
dissolution or winding up of the Company, the holders of shares of common stock
are entitled to share pro rata all assets remaining after payment in full of all
liabilities. Holders of common stock have no preemptive rights to purchase the
Company's common stock. There are no conversion rights or redemption or sinking
fund provisions with respect to the common stock. All of the outstanding shares
of common stock are fully paid and non-assessable except for 500,000 shares of
the Company's common stock issued to Mr. Bradley Gordon and 300,000 shares of
the Company's common stock issued to Mr. R.T.
Silberman.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
no par value per share (the "Preferred Stock"). The Preferred Stock may be
issued from time to time in one or more classes or series, each class or series
of which shall have the voting rights, designations, preferences and relative
rights as fixed by resolution of the Company's Board of Directors, without the
consent or approval of the Company's shareholders. The Preferred Stock may rank
senior to the Common Stock as to dividend rights, liquidation preferences, or
both, and may have extraordinary or limited voting rights. There are currently
700,000 shares of Series A Voting Nonredeemable Cumulative Convertible Preferred
Stock (the "Series A Preferred Stock") 350,000 shares of Series B Voting
Nonredeemable Convertible Preferred Stock (the "Series B Preferred Stock") and
120 shares of Series C Non-voting Nonredeemable Convertible Preferred Stock (the
"Series C Preferred Stock") outstanding.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Articles of Incorporation would avoid the possible delay and expense
of a shareholder's meeting, except as may be required by law or regulatory
authorities. Issuance of the preferred stock could result, however, in a series
of securities outstanding that will have certain preferences with respect to
dividends and liquidation over the Common Stock which would result in dilution
of the income per share and net book value of the Common Stock. Issuance of
additional Common Stock pursuant to any conversion right which may be attached
to the terms of any series of preferred stock may also result in dilution of the
net income per share and the net book value of the Common Stock. The specific
terms of any series of preferred stock will depend primarily on market
conditions, terms of a proposed acquisition or financing, and other factors
existing at the time of issuance. Therefore, it is not possible at this time to
determine in what respect a particular series of preferred stock will be
superior to the Company's Common Stock or any other series of preferred stock
which the Company may issue. The Board of Directors may issue additional
preferred stock in future financings.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Florida law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions are intended to enable the Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of the Company's stock in the future.
The Company's Board of Directors has the authority to issue the
authorized shares of Preferred Stock in one or more series and to fix the
designations, relative powers, preferences, rights, qualifications, limitations
and restrictions of all shares of each such series, including without limitation
dividend rates, conversion rights, voting
rights, redemption and sinking fund provisions, liquidation preferences and the
number of shares constituting each such series, without any further vote or
action by the stockholders. The issuance of Preferred Stock could decrease
the amount of earnings and assets available for distribution to holders of
Common Stock or adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. The
issuance of Preferred Stock also could
have the effect of delaying, deterring or preventing a change in control of the
Company without further action by
the shareholders.
Series A Preferred Stock
The Company is authorized to issue 700,000 shares of Series A Preferred
Stock, all of which are issued and of which 600,000 shares are outstanding after
the conversion of 100,000 shares of the Series A Preferred Stock to Common Stock
in July 1997. The relative rights, preferences and limitations of the Series A
Preferred Stock are as follows.
Voting. The holders of Series A Preferred Stock are entitled to one
non-cumulative vote per share on all
matter on which shareholders may vote at all meetings of shareholders. In
addition, such holders as a group are
entitled to elect one director to the Company's Board of Directors. Mr.
Jeremiah Haley is the current director
holding this position.
Dividends. The holders of the Series A Preferred Stock are entitled to
a cumulative annual dividend of $.09 per share payable weekly out of funds
legally available therefor, which dividend shall have preference as to all other
dividends paid or declared by the Company. Such dividend shall be cumulative and
shall be paid in advance of any dividend paid to holders of Common Stock, Series
B Preferred Stock or Series C Preferred Stock.
Liquidation. The Series A Preferred Stock has a liquidation preference
over all classes of common stock and the Series B Preferred Stock and the Series
C Preferred Stock as to $1,200,000, together with the amount of any unpaid
dividends thereon, in the event of any dissolution, liquidation, or winding up
of the Company. If, upon any such dissolution, liquidation, or winding up of the
Company, the assets of the Company is distributable to the holders of the Series
A Preferred Stock shall be insufficient to permit payment in full of the
preferential amount aforesaid, then the entire assets of the Company shall be
distributed ratably among the holders of the Series A Preferred Stock according
to the respective number of shares of Series A Preferred Stock held by them.
Right to Convert. Each holder of Series A Preferred Stock may, only at
the discretion of the Board of Directors of the Company and upon surrender to
the Company of the certificate therefor at the principal office of the Company
or at such other place as the Company shall designate, convert all of such
holder's Series A Preferred Stock at the rate of one share of Series A Preferred
Stock for one share of Common Stock (the "Series A Conversion Ratio"). In the
event of either an increase or decrease in the number of the shares of the
Company's Common Stock as a result of a stock dividend, stock split,
recapitalization, combination, or reclassification, the Series A Conversion
Ratio shall be equitably adjusted.
Series B Preferred Stock
The Company is authorized to issue 350,000 shares of Series B Preferred
Stock, all of which are issued and outstanding and are owned by Tri-Emp
Enterprises, a corporation controlled by the Company's president and chief
executive officer. The relative rights, preferences and limitations of the
Series B Preferred Stock are as follows.
Voting. The holders of Series B Preferred Stock are entitled to one
non-cumulative vote per share on all
matters on which stockholders may vote at all meetings of shareholders. In
addition, such holders as a group are
entitled to elect one director to the Company's Board of Directors. Mr. Swartz
is the current designee of the holders
of the Series B Preferred Stock.
Dividends. The holders of the Series B Preferred Stock are entitled to
dividends only if and when declared
by the Company.
Liquidation. The Series B Preferred Stock has a liquidation preference
over all classes of common stock and the Series C Preferred Stock, but not
Series A Preferred Stock, as to $700,000, together with the amount of any unpaid
dividends thereon, in the event of any dissolution, liquidation, or winding up
of the Company. If, upon any such dissolution, liquidation, or winding up of the
Company, the assets of the Company is distributable to the holders
of the Series B Preferred Stock shall be insufficient to permit payment in full
of the preferential amount aforesaid, then the entire assets of the Company,
after payment of the holders of the Series A Preferred Stock, shall be
distributed ratably among the holders of the Series B Preferred Stock according
to the respective number of shares of Series B Preferred Stock held by them.
Right to Convert. Each holder of Series B Preferred Stock may, only at
the discretion of the Board of Directors of the Company and upon surrender to
the Company of the certificate therefor at the principal office of the Company
or at such other place as the Company shall designate, convert all of such
holder's Series B Preferred Stock into shares of Common Stock at the rate of one
share of Series B Preferred Stock for one share of Common Stock (the "Series B
Conversion Ratio"). In the event of either an increase or decrease in the number
of the shares of the Company's Common Stock as a result of a stock dividend,
stock split, recapitalization, combination, or reclassification, the Series B
Conversion Ratio shall be equitably adjusted.
Series C Preferred Stock
The Company is authorized to issue 120 shares of Series C Preferred
Stock, all of which were issued in connection with the Company's acquisition of
QFS. The relative rights, preferences and limitations of the Series C Preferred
Stock are as follows.
Voting. The holders of Series C Preferred Stock are not entitled to
any vote on all matters on which
stockholders may vote at all meetings of shareholders.
Dividends. The holders of the Series C Preferred Stock are entitled to
a cumulative annual dividend of $130 per share payable out of funds legally
available therefor, which dividend shall be subordinate to all other dividends
on the Series A and Series B Preferred Stock.
Liquidation. The Series C Preferred Stock has a liquidation preference
over all classes of common stock, but not to the Series A Preferred Stock and
Series B Preferred Stock, as to $120,000, together with the amount of any unpaid
dividends thereon, in the event of any dissolution, liquidation, or winding up
of the Company. If, upon any such dissolution, liquidation, or winding up of the
Company, the assets of the Company is distributable to the holders of the Series
C Preferred Stock shall be insufficient to permit payment in full of the
preferential amount aforesaid, then the entire assets of the Company, after
payment of the holders of the Series A Preferred Stock and Series B Preferred
Stock, shall be distributed ratably among the holders of the Series C Preferred
Stock according to the respective number of shares of Series C Preferred Stock
held by them.
Right to Convert. Each holder of Series C Preferred Stock may and upon
surrender to the Company of the certificate therefor at the principal office of
the Company or at such other place as the Company shall designate, convert all
of such holder's Series C Preferred Stock into shares of Common Stock at the
rate of 133.23 shares of the Company's Common Stock for each share of Series C
Preferred Stock (the "Series C Conversion Ratio"). In the event of either an
increase or decrease in the number of the shares of the Company's Common Stock
as a result of a stock dividend, stock split, recapitalization, combination, or
reclassification, the Series C Conversion Ratio shall be equitably adjusted.
Series D Preferred Stock
The Company is authorized to issue 2,500 shares of Series D Preferred
Stock, of which 2,400 shares were issued in January 1998 for $1,000 per share.
The relative rights, preferences and limitations of the Series D Preferred Stock
are as follows:
Voting. The holders of Series D Preferred Stock have no voting rights
on matters for which stockholder
may generally vote.
Dividends. The holders of the Series D Preferred Stock are entitled to
a cumulative annual dividend of $80 per share payable out of funds legally
available therefor.
Right to Convert. Each holder of Series D Preferred Stock may and upon
surrender to the Company of the certificate therefor at the principal office of
the Company or at such other place as the Company shall designate, convert all
of such holder's Series D Preferred Stock into shares of Common Stock at the
lower of (a) 65% of the closing bid, price averaged over the 5 trading days
before the date of conversion, or (b) $1.96875. In the event of
either an increase or decrease in the number of the shares of the Company's
Common Stock as a result of a stock dividend, stock split, recapitalization,
combination, or reclassification, the Series D Conversion Ratio shall be
equitably adjusted.
Transfer Agent
The transfer agent for the Common Stock is Atlas Stock Transfer
Corporation, 5899 South State Street, Salt Lake City, Utah 84107, and its
telephone number is (801) 266-7151.
Shares Eligible for Future Sale
Of the outstanding shares of the Company, all but 1,536,000 shares are
subject to resale restrictions and, unless registered under the Securities Act
of 1933 (the "Act) or exempted under another provision of the Act, will be
ineligible for sale in the public market until one year from their issuance,
following which sales may be made under Rule 144.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares privately
acquired or indirectly from the Company or from an affiliate, for at least two
years, or who is an affiliate, is entitled to sell within any three-month
period, a number of such shares that do not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock (approximately 139,000 shares)
or the average weekly trading volume in the Company's Common Stock during the
four calendar weeks immediately preceding such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
at any time during the 90 days preceding a sale, and who has beneficially owned
shares for at least three years, is entitled to sell all such shares under Rule
144 without regard to the volume limitations, current public information
requirements, manner of sale provisions or notice requirements.
Sales of substantial amounts of the Common Stock of the Company in the
public market could adversely affect prevailing market prices.
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Hand & Hand, a law corporation, Dana Point, California.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Cronin & Co., independent certified public accountants, to the extent
and for the periods set forth in their report thereon and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Board of Directors
Jreck Subs Group, Inc.
Watertown, New York
I have audited the accompanying consolidated balance sheet of Jreck Subs Group,
Inc. as of December 31, 1996 and 1995 and the related consolidated statements of
income, cash flows and stockholders' equity for the years then ended. The
financial statements are the responsibility of the directors. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Jreck Subs Group, Inc. as of
December 31, 1996 and 1995 and the results of its operations, its cash flows and
changes in stockholders' equity for the years then ended in conformity with
generally accepted accounting principles.
January 22, 1997
Cronin & Co.
Certified Public Accountants
F-1
Jreck Subs Group, Inc.
Consolidated Balance Sheet
ASSETS
September 30, December 31,
1997 1996
Current Assets: (unaudited)
Cash and Cash Equivalents $ 226,552 $ 47,368
Royalty and Advertising Receivable 290,970 146,685
Stock Subscriptions Receivable 10,000 10,000
Prepaid Expenses 20,948 25,666
Area Development Fees 49,357 0
Inventory 4,858 0
Loans Receivable 644,660 0
Other Current Assets 9,022 0
Total Current Assets 1,256,367 229,719
Investment in Unconsolidated Subsidiary
(Note A and I) 729,679 729,679
Property & Equipment, Net of Accumulated
Depreciation (Note A) 1,714,021 50,188
Goodwill, Net of Accumulated Amortization 4,914,477 0
Other Assets (Note D) 1,367,439 2,812,294
Total Assets $ 9,981,983 $3,821,880
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses 582,018 15,580
Accrued Dividends 20,601 0
Loans Payable (Note B) 1,250,042 736,012
Current Portion of Long Term Debt (Note C) 20,000 20,000
Total Current Liabilities 1,872,661 771,592
Long Term Debt (Note C) 2,514,661 46,456
Deferred Income (Note D) 0 2,294,041
Stockholders' Equity:
Common Stock 12,248,834 and 8,781,000
shares outstanding) 3,279,178 999,664
NonRedeemable Preferred Stock (Note F) 2,020,000 2,100,000
Treasury Stock (8,000,000 shares of Subsidiary) (1,600,000) (1,600,000)
Accumulated Deficit (2,497,331) (789,873)
Total Stockholder's Equity 5,594,661 709,791
Total Liabilities & Stockholders' Equity $ 9,981,983 $ 3,821,880
See Notes to Financial Statements
F-2
Jreck Subs Group, Inc.
Consolidated Statement of Operations
Nine Months Ended
September 30, Fiscal Year Ended
1997 1996 1996 1995
Net Sales (Note A) $ 594,453 $ 392,258 $ 557,738 $ 435,639
Costs and Expenses Applicable to
Sales & Revenue 122,658 15,396 23,946 16,548
Gross Profit 471,795 376,862 533,792 419,091
Provision for Doubtful Accounts Receivable 0 0 0 137
Selling, General & Administrative Expenses 548,144 263,143 392,542 310,315
Income (Loss) From Operations (76,349) 113,719 141,250 108,639
Parent Share of Income (Loss) of Unconsolidated
Subsidiary (Note A-4) 22,680 0 (4,819) 0
Other Income:
Gain Recognized on Extinguishment of Debt
(Note C-2,3) 0 57,969 126,001 384,815
Miscellaneous Income 3,531 0 0 0
Other Expense:
Interest and Amortization 79,928 92,925 186,800 85,544
Loss on Disposal of Fixed Assets 3,980 0 0 0
Write off Territorial Rights, Rent Guarantees
& Other Payments (Note H) 0 120,000 126,082 128,978
Costs Associated with Mergers and Acquisitions1,528,492 0 0 0
Income (Loss) Before Income Taxes (1,662,538) (41,237) (50,450) 278,932
Income Tax Expense (Benefit) (Notes E) 349 0 (10,973) 121,891
Net Income (Loss) $ (1,662,887) $ (41,237) $ (39,657) $ 157,041
Loss Per Share $ (0.17) $ (0.01) $ 0.00 $ 0.02
See Notes to Financial Statements
F-3
Jreck Subs Group, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended
September 30, Fiscal Year Ended
1997 1996 1996 1995
Operating Activities:
Net Income (Loss) $ (1,662,887) $ (41,237) $ (39,657) $ 157,041
Adjustments to Reconcile Net Income (Loss)
to Cash Provided (Consumed) by
Operating Activities:
Depreciation and Amortization of
Intangible Assets 72,945 89,164 14,518 21,763
Write off of Intangible Assets 0 0 0 128,978
Loss on Disposal of Property & Equipment 3,980 0 0 0
Interest in Income of Subsidiary 0 0 4,819 0
Adjustment for Tax Benefit of Net Operating
Loss Carryover 0 0 (11,135) 121,135
Forgiveness of Debt 0 0 (126,001) (384,815)
Issuance of common stock for services rendered 1,116,898 0 0 0
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Current Assets (942,997) (83,195) (104,576) (13,300)
Increase (Decrease) in Accounts Payable &
Accrued Expenses 74,374 (364,443) 13,277 (19,301)
Net Cash Provided (Consumed) by Operating Activities(1,337,687) (399,711) (248,755) 11,501
Investing Activities:
Purchase of Property & Equipment (18,673) 0 (5,172) (40,721)
Other Investments Made 0 0 (34,498) 0
Payment of Promissory Note Offering Costs 0 0 (14,786) (70,710)
Payment for Acquisitions, net of Cash Acquired (331,984) 0 0 0
Net Cash Used in Investing Activities (350,657) 0 (54,456) (111,431)
Financing Activities:
Proceeds of Common Stock Offering net of Costs 715,000 548,305 681,650 0
Increase (Decrease) in Debt 1,197,099 (126,130) (281,914) 105,573
Dividends Paid on Preferred Shares (44,571) (26,400) (54,800) 0
Net Cash Provided (Used) by Financing Activities 1,867,528 395,775 344,936 105,573
Net Change in Cash 179,184 (3,936) 41,725 5,643
Cash & Cash Equivalents at the Beginning of Period 47,368 5,643 5,643 0
Cash & Cash Equivalents at the End of Period $ 226,552 $ 1,707 $ 47,368 $ 5,643
Supplemental Disclosure of Cash Flow Information:
Decrease in Series A Preferred Stock $ (200,000)
F-4
Increase in Common Stock $ 200,000
Acquisition of Equipment from the Issuance
of Common Stock $ 500,000
Schedule of Non-cash Investing and Financing Activity:
Fair Value of Assets Acquired $ 6,855,215
Liabilities Assumed (2,297,801)
Fair Value of Common Stock Issued (4,225,430)
Cash Paid, net of Cash Acquired $ 331,984
See Notes to Financial Statements
F-5
Jreck Subs Group, Inc.
Statements of Changes in Stockholders' Equity
Treasury
Stock of Retained
Common Stock Preferred Stock Jreck Subs Earnings
Shares Amount Shares Amount Inc. (Deficit)
Inception July 14, 1995
Issuance of Shares Aug. 1995 net of Offering
Costs of $3,700 1,100,000 $ 0 $ 0
Net income December 31, 1995
December 31, 1995 1,100,000 0 0
Issuance of Shares May 1996 1,100,000 11,000
Issuance of Shares May 1996 in Exchange for 100%
of the common stock of Jreck Subs, Inc. 5,000,000 318,014 $(1,600,000)
Consolidated Retained Earnings of Subsidiary (695,416)
Issuance of Series A NonRedeemable Convertible
Preferred Stock May 1996 in exchange for 100%
of Jreck Subs, Inc. Series A Preferred Stock 700,000 $ 1,400,000
Issuance of Series B NonRedeemable Convertible
Preferred Stock May 1996 in exchange for 100%
of Jreck Subs, Inc. Series B Preferred Stock 350,000 $ 700,000
Issuance of Shares pursuant to Section 504 Offering
under Regulation D, June 1996, net of offering costs 1,536,000 648,150
Issuance of Shares in Exchange for Cancellation of Debt 45,000 22,500
Payment of Preferred Dividends (54,800)
Consolidated net Loss Year Ended December 31, 1996 (39,657)
December 31, 1996 8,781,000 999,664 1,050,000 $ 2,100,000 $(1,600,000) $ (789,873)
Issuance of Shares for Purchase of Equipment 230,000 535,000
Conversion of Series A Preferred Stock to Common Stock 100,000 200,000 (100,000) (200,000)
Issuance of Shares for Services 391,478 1,116,898
Issuance of Shares 915,095 715,000
Issuance of Shares for Acquisitions 1,831,261 4,105,430 120 120,000
Payment of Preferred Dividends (44,571)
Net Loss for the Nine Months Ended September 30, 1997 (1,662,887)
September 30, 1997 12,248,834 $ 7,671,992 950,120 $ 2,020,000 $(1,600,000) $(2,497,331)
See Notes to Financial Statements
F-6
JRECK SUBS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
1. The Company was organized April 25, 1994. Previous operations focus
primarily on servicing 51 submarine sandwich shops (known as Jreck Subs) as the
parent franchising organization. During 1997, the Company through a series of
acquisitions purchased Hymie's Bagels, Little King Subs, Georgio's Subs and
Mountain Mike's Pizza and as of September 30, 1997 had approximately 250
restaurants of which 230 are franchised locations. The Company sells territorial
rights and provides guidance and assistance to the franchisees in areas such as
the preparation, packaging and sale of products; purchasing equipment, marketing
and administrative support and conducting employee training.
2. Revenue and Expense Recognition: Royalty revenue is recognized weekly
as a percentage of franchise net sales. Expenses
are charged to operations as incurred.
3. Property & Equipment are recorded on the basis of cost. Depreciation is
computed using either the straight-line method or double declining balance
method over the estimated useful lives of the assets. Depreciation expense for
the year ended December 31, 1996 was $14,518. Expenditures for renewals and
betterments are capitalized. Expenditures for repairs and maintenance are
charged to operations as incurred. Gain or loss upon sale or retirement due to
obsolescence is reflected in the operating results in the period the event takes
place. Details of the Property & Equipment are as follows:
Sep 30, 1997 Dec. 31, 1996
Machinery & Equipment $ 1,756,875 $ 21,703
Vehicles 63,175 58,591
1,820,050 80,294
Less Accumulated Depreciation 106,029 30,106
Net Property & Equipment $ 1,714,021 $ 50,188
4. Principles of Consolidation: Investments in affiliates that are 50% or
less owned are accounted for by the equity method of accounting. This requires
that the Company's share of the affiliate's net income be included in its income
statement and that it carry its investment at cost plus its interest in
undistributed net earnings.
5. Goodwill: The Company classifies as goodwill the cost in excess of fair
value of assets of the companies acquired in purchase
transactions. Goodwill is amortized over periods ranging from 20 to 40 years.
F-7
B. Notes Payable:
A summary of the various obligations are as follows:
Sep 30, 1997 Dec 31, 1996
Promissory Notes $ 618,929 $ 399,679
FDIC 0 259,334
Ed Mahar 57,008 76,999
Commercial Paper 314,680 0
Noncompete Agreement 72,000 0
Other 187,425 0
Total $ 1,250,042 $736,012
C. Long Tern Debt:
A summary of obligations is as follows:
Description of Obligation: Sep 30, 1997 Dec 31, 1996
--------------------------
Convertible Notes Payable $ 530,000 0
Due to Christopher Swartz (President) 549,677 0
Iseman and Kane 360,000 0
Deegan Group 180,000 0
SRW, Inc. 100,000 0
Sid Wertheim - Little King, Inc. 427,076 0
First National Bank - Little King, Inc. 135,000 0
Other Little King, Inc. obligations 70,603 0
Georgio's obligations 121,760 0
Other 60,545 66,456
2,534,661 66,456
Less Current Portion 20,000 20,000
Total Long Term Debt $ 2,514,661 $ 46,456
The convertible notes payable of $530,000 bears interest at 12.75% payable
quarterly and are due in April 2000. The notes are convertible into the
Company's common stock at $11.82 per share.
F-8
D. Other Assets:
Deferred Offering Costs are the capitalized expenses incurred in connection
with the Company's efforts to raise financing through the issuance of its 10.5%
Promissory Notes. These expenses are amortized over the life of the notes, In
1996 the Company restate its Franchise Agreement to require an annual minimum
franchise royalty payment for 10 years for all of its franchisees. The present
value of these minimum payments has been imputed at 9% and reflected as
Franchise Agreements in Other Assets and, correspondingly, Deferred Income under
Other Liabilities. In 1997, the Company decided to not carry the present value
of the minimum payments in Other Assets and Deferred Income.
Description: Sep 30, 1997 Dec. 31, 1996
------------
Franchise Agreements $ 0 2,294,041
Deferred Offering Costs 0 14,786
Advances to Former Officer 257,114 115,641
Deferred Income Taxes (Note E) 387,846 387,846
Covenant Note to Compete 96,000 0
Other Intangibles 586,848 0
Miscellaneous 39,631 0
Total $ 1,367,439 $ 2,812,314
E. Income Taxes:
The net non-current deferred tax asset as presented on the accompanying
balance sheets consist of the following deferred tax assets
Sep 30, 1997 Dec 31, 1996
Federal and State Deferred Income Taxes $ 387,846 $ 387,846
Less Valuation Allowance 0 0
Total $ 387,846 $ 387,846
The corporations have net operating loss carryforwards available of
$1,224,000 that may be used to offset future taxable income. These carryforwards
begin to expire in the fiscal year ending December 31, 2005.
F. Preferred Stock:
On November 22, 1995 the Company concluded an exchange offer in which
holders of the Notes Payable on the purchase of Treasury Stock would exchange
their notes for the Company's Series A nonredeemable Preferred Stock. 700,000
shares were issued and the notes, together with accrued interest of $363,165
were retired. Each shares of the Preferred Stock is convertible, at the
discretion of the Board of Directors, into one share of the Company's Common
Stock. Dividends on the Series A Preferred Stock accrue and become payable
weekly at the annual rate of 9 cents per share. The shares are nonredeemable.
The Company also issued its Series B Preferred Stock in exchange for 50% of the
voting common stock of its unconsolidated subsidiary (Note J). the rights and
preferences of the Series B preferred shares are similar to those of the series
A. In July 1997, 100,000 shares of the Series A Preferred Stock was converted
into 100,000 shares of the Company's Common Stock. In connection with the
Company's acquisition of Mountain Mike's Pizza, it issued 120 shares of the
Company's Series C nonredeemable Preferred Stock with a liquidation value of
$120,000. Dividends on the Series C Preferred Stock are $130 per share per
annum.
G. Common Stock Offering:
At December 31, 1996 the Company was actively engaged in a public offering
of its common stock. The offering is exempt from S.E.C. registration under Rule
504 of Regulation D. As of December 31, 1996 the Company had received $768,000
in cash and issued 1,536,000 shares of its common stock. The offering was
concluded in February, 1997 after receiving an additional $220,000 in cash.
All costs of the offering have been reflected as a reduction of the total amount
received.
F-9
H. Payment of Contingent Liability:
In February, 1989, Jreck Subs, Inc. entered into an agreement to purchase
four stores from HLS Enterprises, Inc. In November, 1989 these stores were
subsequently resold to Bundeswehr, Inc. The sales agreement stipulated that all
debt owed by Jreck Subs, Inc. to HLS would be assumed and become an obligation
of Bundeswehr, Inc. In 1996 the Company paid $120,000 for full and complete
satisfaction of this liability. This payment has been charged against revenues
in the current period.
I. Investment in Unconsolidated Subsidiary:
In November, 1995 the Company acquired 50% of the voting common and 40% of
the preferred shares of Pastry Product Producers, LLC. This company currently
supplies the Jreck franchise stores with their baked goods and holds a 10 year
contract to supply submarine sandwich rolls for Jreck Subs, Inc. The investment
has been accounted for by the equity method (Note A). The Company also leases
its office space from its subsidiary for $500/month under a 10 year lease
agreement.
F-10
Pastry Product Producers, LLC
Balance Sheet
June 30, 1997 and December 31, 1996 (Unaudited)
Assets
June 30, 1997 Dec. 31, 1996
Current Assets:
Cash $ 3,264 $ 3,326
Accounts Receivable-Net 81,317 75,455
Prepaid Expenses 0 5,000
Total Current Assets 84,581 83,781
Property and Equipment (Note A):
Machinery and Equipment 218,250 218,250
Delivery Vehicles 13,180 13,180
Real Estate & Improvements 184,502 184,502
Total Cost of Property and Equipment 415,932 415,932
Less Accumulated Depreciation (105,113) (105,113)
Property and Equipment (Net) 310,819 310,819
Other Assets:
Organization Costs 8,680 8,680
Capitalized Franchise Fees (Note D) 1,655,564 1,655,564
Total Other Assets 1,664,244 1,664,244
Total Assets $ 2,059,644 $ 2,058,844
See Notes to Financial Statements
F-11
Pastry Product Producers, LLC
Balance Sheet
June 30, 1997 and December 31, 1996 (Unaudited)
Liabilities and Stockholder's Equity
June 30, 1997 Dec. 31, 1996
Current Liabilities:
Accounts Payable $ 8,306 $ 0
Current Portion of Long Term Debt 66,550 49,834
Total Current Liabilities 74,856 49,834
Deferred Franchise Contract Income (Note D) 1,655,564 1,655,564
Long Term Debt (Note C) 0 26,550
Stockholders' Equity:
Stockholders' Equity 329,224 326,896
Total Liabilities and Stockholder's Equity $ 2,059,644 $ 2,058,844
See Notes to Financial Statements
F-12
Pastry Products Producers, LLC
Statement of Operations and Stockholders' Equity
For the Six Months Ended June 30, 1997 and 1996 and
the Years Ended December 31, 1996 and 1995 (Unaudited)
June 30, 1997 June 30, 1996 Dec. 31, 1996 Dec. 31, 1995
Sales $ 454,989 $ 185,595 $ 708,296 $ 93,784
Cost of Sales:
Materials and Supplies 183,996 64,729 178,795 36,282
Gross Profit 270,993 121,866 529,501 57,502
Selling, General and
Administrative Expenses 221,029 130,403 539,438 57,502
Income (Loss) Before Other
Income and Income Taxes 49,964 (8,537) (9,937) 0
Other Income:
Gain on Sale of Equipment 0 0 300 0
Income (Loss) Before Taxes 49,964 (8,537) (9,637) 0
Income Taxes (Note B) 0 0 0 0
Net Income (Loss) 49,964 (8,537) (9,637) 0
Stockholders' Equity -Beginning of Year 326,896 231,625 231,625 0
Capital Contributions
net of Repayments (47,636) 0 104,908 231,625
Stockholders' Equity - End of Year $ 329,224 $ 223,088 $ 326,896 $ 231,625
See Notes to Financial Statements
F-13
Pastry Product Producers, LLC
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996 and
the Years Ended December 31, 1996 and 1995 (Unaudited)
June 30, 1997 June 30, 1996 Dec. 31, 1996 Dec. 31, 1995
Operating Activities:
Net Income (Loss) $ 49,964 $ (8,537) $ (9,637) $ 0
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 0 0 38,294 0
Changes in operating assets
and liabilities:
(Increase) Decrease in
accounts receivable (5,862) (9,301) (75,455) (13,288)
(Increase) in prepaid expenses 5,000 0 (5,000) (4,000)
Increase in current liabilities 25,022 19,941 0 7,689
Total Cash Provided by Operating
Activities 74,124 2,103 (51,798) (9,599)
Investing Activities:
Purchase of equipment 0 0 0 (361,815)
Payment of Organization Costs Filing
Fees on Building 0 0 (10,811) 0
Cash Received on Sale of Equipment 0 0 157 0
Total Cash Used in Investing
Activities 0 0 (10,654) (361,815)
Financing Activities:
Increase in debt 0 0 0 375,176
Capital Contributions From Stockholders
(net of repayments) (47,636) 6,798 104,908 0
Principal payments on long term debt (26,550) 0 (42,892) 0
Total Cash Provided (Used) by
Financing Activities (74,186) 6,798 62,016 375,176
Increase (decrease) in cash (62) 8,901 (436) 3,762
Beginning cash 3,326 0 3,762 0
Ending Cash $ 3,264 $ 8,901 $ 3,326 $ 3,762
Other cash flow information -Interest paid $15,023
See Notes to Financial Statements
F-14
Pastry Product Producers, LLC
Schedule of Selling, General and Administrative Expenses
Year Ended December 31, 1996 (Unaudited)
Year Ended
Dec. 31, 1996
Commissions $ 37,547
Delivery 37,008
Depreciation and Amortization 38,294
Insurance 14,490
Interest 15,023
Legal and Accounting 2,176
Office and Miscellaneous 17,464
Payroll and Fringe Benefits 274,739
Real Estate Taxes 5,516
Repair and Maintenance (Facilities) 22,132
Sales Tax Portion of Lease Payments 4,886
Supplies 39,911
Telephone 4,222
Utilities & Water 26,030
Total Selling, General and Administrative Expenses $ 539,438
See Notes to Financial Statements
F-15
Pastry Product Producers, LLC
Notes to Financial Statements
Year Ended December 31, 1996
A. Summary of Significant Accounting Policies:
Property and Equipment. All property is stated at original cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful life of the related assets as follows:
Bakery Equipment 7 years
Building & Improvements 39 years
Trucks 7 years
Depreciation expense is computed using IRS guidelines for the types of
assets owned by the Company. For the year ended December 31, 1996 depreciation
expense was $37,674.
B. Income Taxes:
In April of 1996 the Company converted its tax form of ownership from a
"C" corporation to a Limited Liability Corporation (LLC). New York State as well
as the U.S. Government taxes LLC's as partnerships. Partnerships, acting as a
flow through entity, normally do not incur any income tax. Therefore no
provision for income tax expense has been made.
C. Long Term Debt:
Long term debt consists of six separate financing arrangements made for
the acquisition of (and secured by) a substantial portion of the Company's
bakery equipment. Monthly payments total approximately $5,092. A summary of
maturities is as follows:
Year Ended Amount
December 31, 1997 $ 49,834
December 31, 1998 26,546
December 31, 1999 0
TOTAL $ 76,830
D. Contract Values/Deferred Income:
The Company has secured about 50 long term contracts for commitments of
a minimum amount of rolls & bagels to be delivered over a 10 year period. The
Company has computed the present value of these minimum deliveries over the 10
year period and reflected the corresponding value as an asset and deferred
income on the balance sheet.
F-16
Cronin & Co.
Certified Public Accountants
12 Blandford Lane
Fairport, NY 14450
Board of Directors and Shareholders
Seawest Sub Shops, Inc.
Bellevue, WA
I have audited the accompanying balance sheet of Seawest Sub Shops, Inc. as of
December 31, 1996 and the related statements of income, cash flows and
stockholders' equity for the year then ended. The financial statements are the
responsibility of the directors. My responsibility is to express an opinion on
these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Seawest Sub shops, Inc. as of
December 31, 1996 and the results of its operations, in cash flows and changes
in the stockholder's equity for the year then ended in conformity with the
generally accepted accounting principles.
The December 31, 1995 financial statements were audited by other auditors, whose
report dated March 22, 1996, state that the balance sheet and related statements
of operations and cash flows as of and for the years then ended, were presented
fairly and in conformity with generally accepted accounting principles applied
on a consistent basis.
July 13, 1997
Cronin & Co.
Certified Public Accountants
F-17
SEAWEST SUB SHOPS, INC.
BALANCE SHEETS
ASSETS
June 30 December 31,
1997 1996
Current Assets:
Cash and Cash Equivalents $ 24,424 $ 11,421
Receivables:
Trade 93,332 69,290
Employees 0 0
Related Parties 0 0
Inventories 76,262 3,561
Prepaid Expenses 5,000 5,179
Current Portion of Notes Receivable 4,397 59,265
Total Current Assets 203,415 148,716
Property & Equipment, Net of Accumulated
Depreciation (Note A) 64,241 64,241
Other Assets (Note B) 625,364 598,059
Total Assets $ 893,020 $ 811,016
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 95,365 $ 146,118
Deposits from Franchisees 11,750 6,750
Accrued Expenses 170,327 31,470
Jreck Subs 54,000 0
Current Portion of Long Term Debt (Note C) 138,700 138,700
Total Current Liabilities 470,142 323,038
Long Term Debt (Note C) 402,004 402,004
Deferred Income (Note D) 100,000 100,000
Contingent Liabilities (Note F)
Stockholders' Equity:
Common Stock (No par value, 5,000,000 shares authorized
2,271,000 shares outstanding) 220,497 220,497
Retained Earnings (Deficit) (299,623) (234,523)
Total Stockholders' Equity (79,126) (14,026)
Total Liabilities & Stockholders' Equity $ 893,020 $ 811,016
F-18
SEAWEST SUB SHOPS, INC.
STATEMENTS of OPERATIONS
Six Months Ended Fiscal Year Ended
June 30, December 31,
1997 1996 1996 1995
Revenue (Note A):
Initial Franchise Fees $ 0 $ 20,500 $ 41,000 $ 88,501
Continuing Franchise Fees 188,310 164,755 329,510 522,818
Territorial Franchising Rights 0 32,225 64,450 0
Marketing Fees 0 47,350 94,700 0
Marketing Co-op Rebates 0 37,792 75,583 0
Sales Generated by Corporate Operated
Sub Shops (Note G) 151,044 28,082 56,165 138,114
Total Revenues 339,354 330,704 661,408 749,433
Costs and Expenses Applicable to Sales Revenue:
Commissions on Sale & Resale of Franchises 0 6,811 13,622 29,281
Marketing and Advertising Expenditures 0 65,069 130,136 142,612
Food Costs Applicable to Sub Shop
Operations (Note G) 60,417 14,411 28,822 62,271
Total Costs & Expenses
Applicable to Sales 60,417 86,291 172,580 234,164
Gross Profit 278,937 244,413 488,828 515,269
Provision for Doubtful Accounts Receivable 33 0 20,177 64,515
Selling, General & Administrative Expenses 311,669 201,241 402,483 505,415
Income (Loss) From Operations (32,765) 43,172 66,168 (54,661)
Other Income:
Interest 3,924 10,668 21,335 35,416
Miscellaneous 1,750 24,027 48,056 36,099
Gains on Resale of Reacquired Stores 0 0 0 77,706
Other Expense:
Interest 5,009 11,281 22,562 50,305
Amortization of Intangibles 33,000 38,837 77,674 72,250
Losses on Store Repossessions and
Closures (Note G) 0 87,811 245,013 0
Total Other Income (Expense) (32,335) (103,234) (275,858) 26,666
Income (Loss) Before Income Taxes (65,100) (60,062) (209,690) (27,995)
Income Tax Expense (Benefit) (Notes E) 0 0 0 0
Net Income (Loss) $ (65,100) $ (60,062) $ (209,690) $ (27,995)
F-19
SEAWEST SUB SHOPS, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended Fiscal Year Ended
June 30, December 31,
1997 1996 1996 1995
Operating Activities:
Net Income (Loss) $ (65,100) $ (60,062) $ (209,690) $ (27,995)
Adjustments to Reconcile Net Income (Loss) to
Cash Provided (Consumed) by Operating Activities:
Depreciation and Amortization of
Intangible Assets 33,000 33,000 82,201 72,250
Write off Uncollectible Trade Accounts
Receivable 33 0 20,177 0
Loss on Sub Shops Sold/Closed 0 0 245,013 67,175
Expenses Recognized Through Issuance of
Common Stock 0 0 0 7,500
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts & Notes
Receivable (24,042) (27,366) 62,933 45,619
(Increase) Decrease in Other
Current Assets (17,654) 27,877 9,954 12,830
Increase (Decrease) in Accounts Payable &
Accrued Expenses 147,085 (20,212) 42,909 (37,326)
Net Cash Provided (Consumed)
by Operating Activities 73,322 (46,763) 253,497 140,053
Investing Activities:
Purchase of Property & Equipment 0 0 (28,070) (30,431)
Collections on Notes Receivable 0 16,806 82,962 0
Increases on Notes Receivable (60,319) 0 (201,500) 0
Net Cash Used in Investing Activities (60,319) 16,806 (146,608) (30,431)
Financing Activities:
Payments on Long Term Debt 0 0 (105,213) (108,847)
Financing Proceeds 0 0 0 0
Net Cash Provided (Used) by
Financing Activities 0 0 (105,213) (108,847)
Net Change in Cash 13,003 (29,957) 1,676 775
Cash & Cash Equivalents at the
Beginning of Period 11,421 9,745 9,745 8,970
Cash & Cash Equivalents at the
End of Period $ 24,424 $ (20,212) $ 11,421 $ 9,745
See Notes to Financial Statements
F-20
SEAWEST SUB SHOPS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
Shares Amount
Additional Retained
Paid-In Paid-In Earnings
Capital Capital (Deficit)
December 31, 1993 2,162,000 $ 0 $ 157,917 $ 223,586
Issuance of Shares in Exchange for Cancellation of Debt 79,000 45,080
Issuance of Shares in Exchange for Professional Services 15,000 7,500
Net Loss December 31, 1994 (220,424)
December 31, 1994 2,256,000 0 212,997 (3,162)
Issuance of Shares in Exchange for Professional Services 15,000 7,500
Net Income December 31, 1995 (27,995)
December 31, 1995 2,271,000 0 220,497 (24,833)
Net Loss December 31, 1996 (209,690)
December 31, 1996 2,271,000 0 220,497 (234,523)
Net Loss for the Six Months Ended June 30, 1997 (65,100)
June 30, 1997 2,271,000 $ 0 $ 220,497 $ (299,623)
See Notes to Financial Statements
F-21
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
1. The Company was organized December 30, 1985. Current operations focus
primarily servicing is chain of franchised submarine sandwich shops (known as
"Sub Shops") as the parent franchising organization. The Company sells franchise
rights, primarily in and around the Seattle area, and provides guidance and
assistance to the franchisees in areas such as the preparation, packaging and
sale of products; purchasing equipment; marketing and administrative support and
conducting employee training programs.
2. Revenue and Expense Recognition: Continuing franchise fee revenue is
recognized quarterly, monthly or weekly and is charged to the franchisees at 5%
of franchise net sales (a monthly or quarterly flat fee is required in
agreements made prior to 1992). Initial Franchise Fee revenue is recognized upon
the execution of the Franchise Agreement and is generally nonrefundable. In
addition to the continuing franchise fees, franchisees are required to remit 2%
of their sales in the form of a pooled marketing contribution. The Company has
no "Trust Fund" obligation with respect to these funds and, accordingly,
recognizes this form of revenue in the period in which the franchise obligation
becomes due and payable. The Company also receives marketing incentives, in the
form of rebates, from its major suppliers. Expenses, including
advertising/marketing, are charged to operations as incurred.
3. Property & Equipment are recorded on the basis of cost. Depreciation is
computed using either the straight-line method or double declining balance
method over the estimated useful lives of the assets. Depreciation expense for
the year ended December 31, 1996 was $4,527. Expenditures for renewals and
betterments are capitalized. Expenditures for repairs and maintenance are
charged to operations as incurred. Gain or loss upon sale or retirement due to
obsolescence is reflected in the operating results in the period the event takes
place.
B. Other Assets:
Other Assets consist of a 10 year covenant not to compete from former
shareholders pursuant to a 1991 stock sale agreement (see note C-1). The
covenant is amortized annually at a rate exactly equal to annual principal
reductions in the corresponding obligations to the former shareholders as
reflected in long-term debt; notes receivable on the sale/resale of its stores
and a 5 year non-compete covenant arising from the acquisition of 7 stores in
1993. This covenant is being amortized over the 5 year period.
F-22
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 Dec. 31, 1996
Description of Asset:
Notes Receivable $ 373,047 $ 342,734
Less Valuation Allowance 124,379 124,739
Net Realizable Value of Notes Receivable 248,668 217,995
Equipment Lease Security Deposits 9,981 9,981
Corporate Covenant Not to Compete 700,000 700,000
Store Covenants Not to Compete 58,369 58,369
Less Accumulated Amortization 362,021 329,021
Net Carrying Value of Non-Compete Covenants 396,348 429,348
Total Other Assets 654,997 657,324
Less Current Portion of Notes Receivable 29,633 59,265
Total $ 625,364 $ 598,059
C. Long Term Debt:
1. Due to Former Shareholders: On February 25, 1991 a stock purchase and sale
agreement was executed between Messrs. Kane & Isemen (the former shareholders
and sellers) and Mitchell Day (the current majority shareholder and purchaser).
This agreement bound the Company to pay $700,000 over 10 years for a 10 year
covenant not to compete from the former shareholders. The Notes are non-interest
bearing and are secured by the pledged stock of the purchaser. Minimum payments
over the 10 year period of the covenant are as follows:
PERIOD AMOUNT
April 1, 1991 - March 31, 1996 $ 4,000/Month
April 1, 1996 - March 31, 2001 $ 6,000/Month
May 1, 2001 $ 100,000
2. Note Payable - Graham & Dunn: On March 26, 1996 the Company converted unpaid
legal fees in the amount of $35,524 to an unsecured promissory note in the
amount of $20,524. The note bears interest at 12% and is payable over 16 months
commencing April 1, 1996.
3. Note Payable - Sternfeld: Arising from the settlement of a lawsuit in
1993, the note is unsecured,
F-23
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
payable in monthly installments of $1,000 and bear interest at 12%.
4. Notes Payable on Store Reacquisitions: The Company engages in the
repossession, acquisition, reacquisition and resale of franchised Sub Shops
Stores from time to time. As a result of this activity, the Company may be
obligated to assume certain debts of the repossessed store or will incur an
obligation upon the outright purchase of a Sub Shop Store. These notes are
services by the Corporation during its term of ownership and may be secured by
certain equipment or be unsecured. The capitalized costs associated with the
acquisition of a store are reflected as an asset. Upon the subsequent sale or
closure of a store, these costs are treated as a reduction in the total amount
realized or as charge against earnings in the period the store is closed.
A summary of obligations is as follows:
June 30, 1997 Dec. 31, 1996
Description of Obligation:
Due to Former Shareholders $ 406,000 $ 406,000
Graham & Dunn 11,707 11,707
Sternfeld 24,428 24,428
Payable on Store Reacquisitions 98,569 98,569
540,704 540,704
Less Current Portion 138,700 138,700
Total Long Term Debt $ 402,004 $ 402,004
Five Year Maturities For Fiscal Years Ending December 31 Are As Follows:
1997 $ 138,700
1998 98,088
1999 78,837
2000 78,379
2001 79,056
2002 and After 67,644
Total $ 540,704
D. Deferred Income:
In 1996 the Company sold territory franchise rights covering Japan. The
contract calls for 3 annual installments of $50,000 each payable in November
1996, 1997 and 1998. Seawest has received the 1996
F-24
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
payment and recognized $50,000 as income on the 1996 financial statements.
Management has elected to defer recognition of income on the balance until
collection can be reasonably assured.
E. Income Taxes:
The Corporation has net operating loss carryforwards available of
$317,690 that may be used to offset future taxable income. These carryforwards
begin to expire in the fiscal year ending December 31, 2011. The deferred tax
benefit arising from these loss carryforwards has been fully reserved.
F. Leases, Commitment and Contingent Liabilities:
The Company rents its current office space under a month to month
agreement. Rent expense for the year ended December 31, 1996 was $17,628. In
addition to its corporate offices, the Company pays rent on corporately owned
and operated Sub Shops and make payments on store equipment leases while these
stores are under corporate management. Store rent and equipment lease expense
for 1996 was $33,156. The Company is also contingently liable for equipment &
facility leases and rents as part of its franchise agreements.
Contingent future minimum lease payments are as follows:
1997 $ 213,376
1998 120,801
1999 121,672
2000 100,609
2001 50,146
$ 606,604
The Company is currently a defendant in several lawsuits and has 3
items in arbitration. Approximately 16 stores have asserted claims of franchisee
discrimination under the Franchise Investment Protection Act and are seeking a
recision of the franchise agreement along with damages in an unspecified sum.
Settlement discussions are likely whereby all parties will agree to dismiss
their respective claims without cost. Seawest is reviewing a $20,000 offer in
settlement of a store lease guarantee claim of $34,222. The Company is also a
defendant in several other legal actions regarding store lease breaches and
guarantees aggregating in the amount of $364,795. Management is unable to
estimate the amount of loss, if any, on these lease guarantees.
F-25
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
G. Franchises Sold, Purchased or Operated:
During 1996 the Company wrote off the carrying value of 5 stores
previously sold for a total amount of $242,045. These write offs were the result
of store closures and the subsequent default on notes receivable. The Company
resold 1 store in its inventory for $18,000 realizing a loss of $2,968. Seawest
currently operates 1 store due to a foreclosure in July 1996. Summary operating
results of franchisor operated stores for 1996 are:
Sales $ 56,165
Food Costs 28,822
Gross Profit 27,343
Operating Expenses 56,014
Net Loss $ (28,671)
F-26
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
Quality Franchise Systems, Inc. and Subsidiary
Consolidated Balance Sheet
September 30, 1997 (Unaudited) and December 31, 1996
ASSETS
1997 1996
---- ----
Cash $ 125,233 $ 126,089
Royalties receivable, net 114,028 160,792
Current portion of area development fees receivable 10,795 25,991
Other current assets 8,040 25,110
------------ -----------
Total current assets 258,096 337,982
Interest-bearing deposit in bank 0 750,000
Notes and long-term royalties receivable, net 0 24,481
Area development fees receivable, less current portion 38,562 348,424
Deferred financing costs, net 38,635 63,805
Franchising rights, contracts and trademarks, net 203,278 249,910
Merger costs (Jreck Subs Group, Inc.) 64,777 0
Investment in restaurant 0 45,001
Furniture and equipment, net 9,622 41,840
------------ -----------
$ 612,970 $1,861,443
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 527,934 $ 633,595
Current portion of notes payable 6,667 26,545
Notes payable to shareholders 172,850 312,850
Deferred franchise fees 20,000 70,000
---------- ----------
Total current liabilities 727,451 1,042,990
Deferred area development fees 74,500 424,500
Convertible notes payable 530,000 530,000
----------
Total liabilities 1,331,951 1,997,490
--------- ---------
Shareholders' Equity (Deficit):
Preferred stock ($.001 par value, 2,000,000 shares
authorized, 545 shares issued and outstanding) 1 1
Common stock ($.001 par value, 10,000,000 shares
authorized, 353,650 shares issued and outstanding) 354 354
Class B common stock ($.001 par value, 10,000,000 shares
authorized, 2,229,496 and 2,464,100 shares issued and
outstanding) 2,229 2,464
Additional paid-in capital 1,859,472 2,588,845
Accumulated deficit (2,581,037) (2,563,003)
Treasury stock, at cost, 73,204 shares 0 (164,708)
------------- ----------
Total shareholders' equity (deficit) (718,981) (136,047)
---------- ----------
$ 612,970 $1,861,443
========== =========
See notes to consolidated financial
statements.
F-27
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
Quality Franchise Systems, Inc. and Subsidiary
Consolidated Statement of Operations
For the Nine and Three Months Ended September 30, 1997 and 1996 (Unaudited)
Nine Month Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenue:
Franchise royalties $ 905,337 $ 848,897 $ 315,787 $ 311,776
Initial franchise and transfer fees 160,260 111,000 80,260 10,000
Area development fees 45,000 171,987 (15,000) (70,153)
Vendor funds 229,850 101,496 138,005 44,311
Other 137,591 93,346 57,491 32,335
----------- ----------- -------- -----------
1,478,038 1,326,726 576,543 327,909
Expenses:
General and administrative 496,581 636,093 157,846 233,430
Restaurant servicing and area developer
share of fees 581,553 600,020 208,269 246,042
Area development expense 43,125 364,664 (23,079) 126,294
Other 46,751 46,381 26,828 14,498
---------- ---------- -------- ----------
1,168,010 1,647,158 369,864 620,264
---------
Operating income (loss) 310,028 (320,432) 206,679 (292,355)
Other income (expense):
Loss from operation and (84,010) (23,807) (8,361) (23,807)
disposition of restaurant
Business expansion expense (98,630) - (98,630) -
Interest expense (92,430) (121,247) (32,642) (33,332)
-------- --------- -------- --------
Net income (loss) $ 34,958 $ (465,486) $ 67,046 $ (349,494)
Preferred stock dividends (52,992) (21,957) (17,858) (17,550)
-------- ---------- -------- ----------
Net income (loss) to common shareholders $ (18,034) $ (487,443) $ 49,188 $ (367,044)
======== ========= ======= =========
See notes to consolidated financial
statements.
F-28
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
Quality Franchise Systems, Inc. and Subsidiary
Statement of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996 (Unaudited)
1997 1996
---- ----
Cash Flows from Operating Activities:
Net loss $ (18,034) $(487,443)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities:
Provision for uncollectible amounts and write-offs 84,481 50,000
Amortization of discount on non-interest bearing notes 27,514 31,823
Amortization and depreciation expense 61,176 49,198
Increase in current and long-term royalties receivable (13,236) (80,076)
(Increase) decrease in area development fees receivable (24,942) 28,159
(Increase) decrease in other current assets 17,070 (26,999)
Increase (decrease) in accounts payable and accrued (105,661) 11,970
expenses
Increase (decrease) in deferred area development fees - 304,500
Increase (decrease) in deferred franchise fees (50,000) (25,000)
--------- ----------
Net Cash Used in Operating Activities (21,632) (143,868)
Cash Flows from Investing Activities:
Net increase (decrease) in interest-bearing deposit 750,000 (800,000)
Merger costs (64,777)
Investment in restaurant 45,001 (45,508)
Sale (purchase) of equipment 17,674 (20,021)
--------- --------
Net Cash Provided (Used) in Investing Activities 747,898 (865,529)
Cash Flows from Financing Activities:
Issuance (repurchase) of common stock 564,900 805,000
Issuance of preferred stock for cash and conversion of
notes payable, net of costs - 8,716
Payments on notes payable (22,222) (22,222)
Borrowings (repayment) of notes payable to shareholders (140,000) 90,000
--------- --------
Net Cash Provided by (Used in) Financing Activities (727,122) 881,494
--------- -------
Net Increase (Decrease) in Cash (856) (127,903)
Cash at Beginning of Period 126,089 193,848
------- -------
Cash at End of Period $125,233 $ 65,945
======= ========
The accompanying notes are an integral part of
these statements.
F-29
NOTE A - ORGANIZATION AND NATURE OF BUSINESS
Quality Franchise Systems, Inc. (the "Company"), a Delaware corporation was
formed on February 10, 1995. On February 15, 1995, the Company was merged
with Q & S Management with the Company being the surviving entity.
Shareholders of Q & S Management are now the shareholders of the Company.
Quality Marketing Systems, Inc., a Delaware corporation, is a wholly-owned
subsidiary of the Company. It commenced operations on June 5, 1996 and was
formed to operate the Mountain Mike's Pizza restaurant in Boulder, Colorado
which was subsequently sold in April 1997.
On April 1, 1996, the Company filed a Restated Certificate of Incorporation
which increased its authorized shares of capital stock from 10,000,000
shares to 22,000,000 shares consisting of 2,000,000 shares of Preferred
Stock, 10,000,000 shares of Common Stock and 10,000,000 shares of Class B
Common Stock. All existing shareholders of the Company's capital stock at
April 1, 1996 became shareholders of the Company's Class B Common Stock. In
addition, at any time prior to July 2, 1996, each Class B Common Stock
shareholder could convert each share of Class B Common Stock into 1.1
shares of Common Stock. The shareholders of Class B Common Stock are
entitled to one vote per share and the shareholders of Common Stock are
entitled to one-tenth of one vote per share. Shareholders for 321,500
shares of Class B Common Stock converted to 353,650 shares of Common Stock.
The Company is a franchisor which enters into franchise agreements with
various franchisees to own and operate pizza restaurants, within defined
territories, under the name of Mountain Mike's Pizza. There are 75 and 71
franchised restaurants at September 30, 1997 and December 31, 1996,
respectively. The Company also enters into agreements with area developers
whereby the developer performs substantially all of the Company's
obligations under the franchise agreement in exchange for a portion of the
initial franchise fee and ongoing franchise royalties. These agreements
generally provide for the area developer to open a specified number of
franchises in each 12 month period in order for the agreement to remain in
force.
The Company is expanding into other national regions; however, the Company
currently derives substantially all of its revenues from restaurants
operating in the state of California.
F-30
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
NOTE B - SUMMARY OF ACCOUNTING POLICIES
1. Principles of consolidation
The consolidated financial statements include the accounts of Quality
Franchise Systems, Inc. and its wholly-owned subsidiary Quality Marketing
Systems, Inc. All material intercompany accounts and transactions have been
eliminated.
2. Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from
those estimates.
3. Revenue recognition
Franchise royalties are generally between 4% and 5% of the individual
franchisee's monthly gross sales (i.e., sales less promotions and
discounts) and are recognized as income when earned.
Initial franchise fees are recognized as income when the Company has
completed substantially all of its obligations in opening the restaurant.
Initial franchise fees are $20,000 to first time franchisees and $10,000 to
existing franchisees opening another restaurant. Deferred franchise fees at
September 30, 1997 and December 31, 1996 are $20,000 and $70,000,
respectively, for unopened restaurants.
Fees received in exchange for area development agreements are recognized as
income when the Company has performed substantially all of the initial
services required under the area development agreement and has no further
obligations to perform services or refund any fees received from the
developer. Fees for area development agreements which are dependent on the
establishment of future franchises or for which collectibility is not
reasonably estimable are deferred and recognized as income when received.
F-31
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
4. Amortization
Amortization of franchising rights, contracts and trademarks (original
amount of $559,824) is provided on a straight-line basis over ten years.
Accumulated amortization at September 30, 1997 and December 31, 1996 is
$356,546 and $309,914, respectively.
5. Income Taxes
On June 5, 1996, the Company became a C corporation for purposes of
computing corporate Federal and state taxes. Prior to June 5, 1996, the
shareholders have elected to have the Company taxed pursuant to subchapter
S of the Internal Revenue Code which provides that, in lieu of Federal
corporate income taxes, the shareholders recognize their proportionate
share of the Company's taxable revenue and deductible expenses on their
individual tax returns. For California state purposes a corporate tax is
imposed on S corporations at the rate of 1.5% of taxable income.
The Company utilizes an asset and liability approach in accounting for
income taxes. This approach requires the recognition of the deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial statements carrying amounts and
tax basis of assets and liabilities. Deferred tax assets and liabilities
are reflected as currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income
taxes.
6. Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the presentation used in the current year.
NOTE C - CASH/INTEREST BEARING DEPOSIT IN BANK
In connection with the issuance of the convertible notes payable in 1995,
there were provisions which designated certain uses of the proceeds. One
provision was to set aside one quarter's interest payment on the
convertible notes payable (see note E). Another provision was to reserve
funds sufficient for the amortizing payments on the Second Priority Note
(see note D). Restricted cash at September 30, 1997 for the interest
reserve and for the retirement of the Second Priority Note was $17,291 and
$6,667, respectively. The savings account of $750,000 at December 31, 1996
was pledged as collateral for a personal loan of the Company's chairman
(see note H).
F-32
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
September 30, 1997 (Unaudited) and December 31, 1996
NOTE D - NOTES PAYABLE
Notes payable consist of a Second Priority Note in the original amount of
$80,000. The Second Priority Note does not bear interest and is secured by
the assets of the Company. The Second Priority Note is payable in 36 equal
monthly installments with the last installment due in January 1998. The
unpaid balance on the second priority note is $6,667 and $28,889 at
September 30, 1997 and December 31, 1996, respectively. Unamortized
discount at September 30, 1997 and December 31, 1996 is $0 and $2,344,
respectively.
NOTE E - CONVERTIBLE NOTES PAYABLE/CONVERTIBLE PREFERRED STOCK
In 1995, the Company issued $1,025,000 of promissory notes in conjunction
with the Company's private placement including the conversion of a $100,000
note payable to a shareholder (see note H). The promissory notes are due on
March 24, 2000 and are secured by 22 specific franchise agreements of the
Company. The promissory notes call for interest at 12.75% payable quarterly
and are convertible into Class B Common Stock of the Company at $5.48 per
share.
The proceeds from the promissory notes less offering commissions and
expenses were used to retire indebtedness associated with the Company's
1991 acquisition of the "Mountain Mike's Pizza" restaurant chain and for
working capital purposes.
In connection with the issuance of the convertible promissory notes, the
Company granted the placement manager the right to purchase 18,704 shares
of the Company's Class B Common Stock at a price equal to $5.48 per share
at any time prior to December 5, 1997.
In 1996, the Company offered its convertible note holders to exchange their
notes for convertible preferred stock. The Company offered one share of its
Series A preferred stock for each $1,000 principal of notes. The Series A
preferred stock has a cumulative dividend rate of 13% and each $1,000
principal is convertible into 287.36 shares of the Company's Class B Common
Stock or 316.09 shares of Common Stock. On June 5, 1996, 495 shares of the
Company's Series A preferred stock were issued in exchange for $495,000 of
promissory notes. In July 1996, the Company issued 50 shares of its Series
A preferred stock for $50,000.
F-33
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
NOTE F - INCOME TAXES
At December 31, 1996, the Company has accumulated net operating losses of
approximately $370,000. These losses can be carried forward and applied
against future income of the Company for federal and state income tax
purposes. The net operating losses will begin to expire in 2011. Management
has provided a valuation allowance for the net deferred tax asset due to
their assessment that this asset will "more likely than not" not be
realized.
Deferred taxes at December 31, 1996 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 148,800
Accounts payable and accrued liabilities 253,400
Franchise fees collected 28,000
----------
430,200
Deferred tax liabilities:
Royalties receivable and other (84,200)
Depreciation (3,000)
(87,200)
Net deferred tax asset 343,000
Valuation allowance (343,000)
$ -
=============
NOTE G - EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan in which any eligible employee may
participate. The plan is a defined contribution plan 401(k) qualified under
the Internal Revenue Code. The Company made no discretionary contributions
to the plan in 1997, 1996 and 1995.
NOTE H - RELATED PARTY TRANSACTIONS
In May 1995, the Company amended its personal services contract with a
shareholder and the former president which contract was originally entered
in September 1993. Under the terms
F-34
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
of the amended contract, the Company engages the former president to
provide consulting services to develop the "Mountain Mike's" Pizza
restaurant chain and compensates the former president through a base
monthly fee and a portion of certain other fees collected by the Company.
For the years ended December 31, 1996 and 1995, the Company paid $84,000
and $109,733, respectively, to the former president under the personal
services contract. In 1997, the Company and the former president mutually
agreed to cancel the personal services contract.
The Company had expended amounts and provided services to the former
president and companies controlled by the former president. In April 1995,
the Company and the former president agreed that the total amounts due to
the Company including those due from companies controlled by the former
president was $164,708. In April 1995, the Company acquired 73,204 shares
of Class B Common Stock owned by the former president at $2.25 per share
for satisfaction of the amounts due to the Company by the former president.
The Company has a month-to-month agreement with a shareholder to provide
general consulting services to the Company. The Company paid the
shareholder $84,000 in each of the two years ended December 31, 1996 for
consulting services.
Notes payable to shareholder of $172,850 at September 30, 1997 are payable
to the president of the Company and bears interest at 10%. In connection
with the merger of the Company with and into Admiral's Fleet, Inc., a
Washington corporation (and wholly-owned subsidiary of Jreck Subs Group,
Inc. ("JSGI"), the president accepted JSGI stock for satisfaction of this
note.
The Chairman of the Company personally obtained an $800,000 loan from a
bank with which he acquired 230,000 shares of the Company's Class B Common
Stock at $3.50 per share on June 4, 1996. The Company had pledged as
collateral a $750,000 savings account for the Chairman's loan. In September
1997, the Chairman returned 161,400 shares of the Company's Class B Common
Stock.
NOTE I - COMPANY-OPERATED RESTAURANT
In June 1996, the Company's wholly-owned subsidiary, Quality Marketing
Systems, Inc.
began operating a restaurant in Boulder, Colorado which was sold in April
1997.
F-35
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
September 30, 1997 (Unaudited) and December 31, 1996
From June 5, 1996 through December 31, 1996, the restaurant had a net loss
of approximately $70,100. For the period January 1, 1997 until the
restaurant was sold in April 1997, the restaurant had a net loss of
approximately $77,400 which included the loss on disposition.
F-36
JRECK SUBS GROUP, INC.
UNAUDITED PROFORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
Seawest Mountain Pastry
Jreck Subs Sub Shops Little King's Mike's Products Proforma Proforma
Historical Historical Historical Historical Historical Adjustments Combined
ASSETS:
Current Assets:
Cash 206,529 24,424 (27,791) 67,520 3,264 500,000 c 773,946
Royalty & advertising receivable 145,413 93,332 10,145 154,028 81,317 484,235
Prepaid expenses 20,948 5,000 4,749 30,697
Stock subscriptions receivable 10,000 10,000
Inventories 0 76,262 4,243 80,505
Other current assets 0 4,397 8,729 49,031 62,157
Total Current Assets 382,890 203,415 75 270,579 84,581 500,000 1,441,540
Investment in unconsolidated subsidiary 729,679 (729,679) b 0
Fixed assets (net of depreciation) 46,558 64,241 94,171 31,653 310,819 547,442
Goodwill 2,542,981 0 217,268 1,967,500 b,d4,727,749
Other assets 2,812,314 625,364 596,683 438,586 1,664,244 (3,949,605) a 2,187,586
6,514,422 893,020 690,929 958,086 2,059,644 (2,211,784) 8,904,317
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and accrued expenses 874 277,442 124,655 749,472 8,306 (250,000) c 910,749
Loans payable 1,309,276 54,000 149,699 172,850 1,685,825
Current portion of long-term debt 20,000 138,700 14,533 66,550 239,783
Total Current Liabilities 1,330,150 470,142 274,354 936,855 74,856 (250,000) 2,836,357
Long-term debt 43,547 402,004 443,898 530,000 1,419,449
Deferred income 2,294,041 100,000 55,450 259,500 1,655,564 (3,949,605) a 414,950
Total Liabilities 3,667,738 972,146 773,702 1,726,355 1,730,420 (4,199,605) 4,670,756
Stockholders' Equity:
Common stock 3,202,858 220,497 267,914 1,436,503 329,224 1,925,774 b 7,382,770
Preferred stock 2,100,000 425,453 (305,453) b 2,220,000
Treasury stock (1,600,000) (1,600,000)
Accumulated deficit (856,174) (299,623) (350,687) (2,630,225) 367,500 (3,769,209)
Total Stockholders' Equity 2,846,684 (79,126) (82,773) (768,269) 329,224 1,987,821 4,233,561
6,514,422 893,020 690,929 958,086 2,059,644 (2,211,784) 8,904,317
F-37
JRECK SUBS GROUP, INC.
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
Seawest Mountain Pastry
Jreck Subs Sub Shops Little King's Mike's Products Proforma Proforma
Historical Historical Historical Historical Historical Adjustments Combined
Revenues:
Franchising revenues 557,738 434,960 263,146 1,456,992 2,712,836
Sales from corporate restaurants/bakery 56,165 630,444 708,296 1,394,905
Other 170,283 291,193 461,476
Total Revenues 557,738 661,408 893,590 1,748,185 708,296 0 4,569,217
Costs and Expenses Applicable to Revenue:
Cost of sales 28,822 542,553 178,795 750,170
General and administrative 392,542 402,483 449,238 894,364 539,438 (500,000) c 2,178,065
Franchising servicing cost 23,946 163,935 1,423,822 1,611,703
Total Costs and Expenses 416,488 595,240 991,791 2,318,186 718,233 (500,000) 4,539,938
Operating Income 141,250 66,168 (98,201) (570,001) (9,937) 500,000 29,279
Other Income (Expense):
Gain on Sale of Store/Debt Extinguishment 126,001 (245,013) 138,836 19,824
Interest Income 21,335 9,462 30,797
Interest and Amortization of Debt (186,800) (22,562) (98,635) (142,325) (450,322)
Write off on Intangibles (126,082) (77,674) (255,000) d (458,756)
Other (4,819) 48,056 26,731 (120,030) 300 (49,762)
Total Other Income (Expense) (191,700) (275,858) 76,394 (262,355) 300 (255,000) (908,219)
Income Before Income Taxes (50,450) (209,690) (21,807) (832,356) (9,637) 245,000 (878,940)
Income Tax (Benefit) (10,793) (3,658) (14,451)
Net Income (Loss) (39,657) (209,690) (18,149) (832,356) (9,637) 245,000 (864,489)
F-38
JRECK SUBS GROUP, INC.
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Seawest Mountain Pastry
Jreck Subs Sub Shops Little King's Mike's Products Proforma Proforma
Historical Historical Historical Historical Historical Adjustments Combined
Revenues:
Franchising revenues 196,985 188,310 169,452 729,550 1,284,297
Sales from corporate restaurants/bakery 151,044 139,198 454,989 745,231
Other 171,945 171,945
Total Revenues 196,985 339,354 308,650 901,495 454,989 0 2,201,473
Costs and Expenses Applicable to Revenue:
Cost of sales 60,450 206,439 183,996 450,885
General and administrative 291,160 311,669 129,318 338,735 221,029 (250,000) c 1,041,911
Franchising servicing cost 18,801 439,488 458,289
Total Costs and Expenses 309,961 372,119 335,757 778,223 405,025 (250,000) 1,951,085
Operating Income (112,976) (32,765) (27,107) 123,272 49,964 250,000 250,388
Other Income (Expense):
Gain on Sale of Store/Debt Extinguishment 0
Interest Income 3,924 3,924
Interest and Amortization of Debt (19,769) (5,009) (37,496) (59,788) (122,062)
Write off on Intangibles (33,000) (127,500) d (160,500)
Other 20,435 1,750 2,910 (95,573) (70,478)
Total Other Income (Expense) 666 (32,335) (34,586) (155,361) 0 (127,500) (349,116)
Income Before Income Taxes (112,310) (65,100) (61,693) (32,089) 49,964 122,500 (98,728)
Income Tax (Benefit) 349 349
Net Income (Loss) (112,659) (65,100) (61,693) (32,089) 49,964 122,500 (99,007)
F-39
Jreck Subs Group, Inc.
Notes to the Unaudited Proforma Combined Financial Statements
The unaudited proforma combined financial statements have been prepared using
the following assumptions:
1. Jreck Subs Group, Inc. ("JSGI") acquires Seawest Subs Shops, Inc., Little
King, Inc., Quality
Franchise Systems, Inc. (dba Mountain Mike's Pizza) and the remaining 50%
of the Pastry
Products Producers bakery effective January 1, 1996 with an estimated
aggregate
consideration value of approximately $4,800,000.
2. The aggregate consideration value has been preliminarily allocated to the
net assets (tangible and intangible) based on the estimated fair values at
the date of acquisition with the excess of cost over fair value of the
identifiable tangible and intangible assets to goodwill. Goodwill is
amortized over 20 to 40 years.
3. The proforma assumes that there are some general, selling and
administrative cost savings from the consolidation of similar functions and
that costs associated with mergers and acquisitions are nonrecurring and
eliminated for the proforma.
a. Certain of the subsidiaries record the present value of the minimum royalty
payments due from the franchise agreements as an assets with a
corresponding deferred income liability. To be consistent, the Company's
policy is to not record this asset and liability. The total adjustment to
both assets and liabilities is $3,949,605.
b. To record the acquisition of subsidiaries including recognizing goodwill
for the aggregate purchase price exceeding the fair value of assets
acquired. The initial goodwill is approximately $5,100,000 before
amortization.
c. The Company estimates that there is approximately $500,000 in annual cost
reductions from consolidating similar administrative functions.
d. Annual amortization of goodwill is estimated at $255,000 based on a
conservative twenty year
amortization period.
F-40
No dealer, salesman or other person is authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer made hereby, and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or a solicitation
to an offer to buy the securities offered hereby to any person in any state or
other jurisdiction in which such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information contained herein
is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Additional Information......................
Prospectus Summary..........................
Risk Factors................................
Market Prices and Dividends.................
Management's Discussion and Analysis........
Business....................................
Management..................................
Principal Shareholders......................
Selling Shareholders........................
Certain Transactions........................
Description of Securities...................
Legal Matters...............................
Experts.....................................
JRECK SUBS GROUP, INC.
PART II
Item 24. Indemnification of Directors and Officers.
The Company has adopted provisions in its articles of incorporation and
bylaws that limit the liability of its directors and provide for indemnification
of its directors and officers to the full extent permitted under the Colorado
Business Corporation Act. Under the Company's articles of incorporation, and as
permitted under the Colorado Business Corporation Act, directors are not liable
to the Company or its stockholders for monetary damages arising from a breach of
their fiduciary duty of care as directors. Such provisions do not, however,
relieve liability for breach of a director's duty of loyalty to the Company or
its stockholders, liability for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, liability for transactions
in which the director derived as improper personal benefit or liability for the
payment of a dividend in violation of Florida law. Further, the provisions do
not relieve a director's liability for violation of, or otherwise relieve the
Company or its directors from the necessity of complying with, federal or state
securities laws or affect the availability of equitable remedies such as
injunctive relief or recision.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim for indemnification by any director or
officer.
Item 25. Other Expenses of Issuance and Distribution.
Filing fee under the Securities Act of 1933 $ 3,910.17
Printing and engraving(1) 1,000.00
Legal Fees(1) 20,000.00
Accounting Fees(1) 3,000.00
Miscellaneous(1) 2,089.83
TOTAL $ 30,000.00
(1) Estimates
Item 26. Recent Sales of Unregistered Securities.
On May 6, 1996, the Company issued the following securities in exchange
for all of the capital stock of JRECK Subs, Inc.:
Company JRECK Subs, Inc.
Securities Issued Securities Exchanged
5,000,000 8,000,000 shares of
shares of common stock common stock
700,000 shares of 700,000 shares of
Series A Preferred Series A Preferred
350,000 shares of 350,000 shares of
Series B Preferred Series B Preferred
The sales were made in compliance with Section 4(2) of the Securities
Act of 1933. As a condition to each of the above sales, the purchaser consented
to a placement of a restrictive legend on the certificate representing the
securities.
In May 1996 the Company issued 1,100,000 restricted shares for $11,000
cash. No underwriter was involved and the holders agreed that a restrictive
legend would be placed upon the certificates representing the Shares. The
Company believes that this transaction was exempt under Section 4(2) of the Act
as a transaction not involving a public offering.
From May 1996 to December, 1996 the Company issued 1,536,000 shares of
Common Stock in a private offering under Rule 504 of Regulation D to
approximately 70 purchasers. Net proceeds of the offering were $648,150. No
underwriter was involved.
In December 1996, the Company issued 45,000 shares to Gerharz
Equipment, Inc. for the cancellation of a debt of approximately $90,533.
In January 1997, the Company issued 415,095 shares of common stock in a
private offering under Rule 504 of Regulation D to 2 purchasers. Net proceeds of
the offering were $220,000. No underwriter was involved.
In February 1997, the Company issued 230,000 shares of common stock to
two individuals in connection with the purchase of bakery equipment located in
Missouri.
In April 1997, the Company issued 39,118 shares of common stock for
services.
On June 19, 1997 and August 5, 1997 the Company issued 270,000 and
67,500 shares of the Company's common stock, respectively, to approximately 20
individuals in connection with the acquisition of Hymie's Bagel Chain.
In July 1997, 4 shareholders of the Company's Series A Preferred Stock
converted 100,000 total Series A preferred shares into 100,000 shares of the
Company's common stock.
In July 1997, the Company issued 500,000 shares of its common stock for
$495,000.
In August 1997, the Company acquired all of the outstanding shares of
Richey Enterprises, Inc. (Georgio's Subs) for 93,794 shares of its common stock.
During the nine months ended September 30, 1997, the Company issued
391,478 shares of its common stock as payment for services performed during the
year in connection with the Company's merger and acquisition activities and
capital raising efforts.
In September 1997, the Company acquired all of the outstanding shares
of Little King, Inc. by the initial issuance of 500,000 shares of its common
stock, and 750,000 shares to be issued in the future upon due satisfaction of
certain criteria.
On October 8, 1997 the Company acquired all of the outstanding shares
of Quality Franchise Systems, Inc. (Mountain Mike's Pizza) by the issuance of
120 shares of the Company's Series C preferred stock and 899,967 shares of the
Company's common stock. The Company has agreed to issue up to an additional
650,000 shares, including 150,000 contingent shares in this acquisition.
On October 27, 1997, the Company issued 212,500 shares of its common
stock for the completion of the acquisition of Pastry Products.
In November 1997, the Company issued 60,000 shares of its common stock
in consideration with the obtaining a $250,000 loan. In November 1997, the
Company issued 12,110 shares of its common stock for net proceeds of $167,500.
In November 1997, the Company issued 800,000 shares of its common stock
to two individuals for total consideration of $2,400,000 paid in the form of
promissory notes with interest at 10% with interest and principal due in
September 2000. At any time prior to September 2000, these individuals may
require the Company to repurchase the 800,000 shares as consideration for the
cancellation of the notes.
In January 1998, the Company issued 2,400 shares of Series D
Convertible Preferred Stock for $1,000 per
share.
The above sales (except as noted for sales under Rule 504) were made in
compliance with Section 4(2) of the Securities Act of 1933. As a condition to
each of the above sales, the purchaser consented to a placement of a restrictive
legend on the certificate representing the securities.
Item 27. Exhibits
The following exhibits required by Item 601 of Regulation
S-B are filed herewith:
Exhibit No. Document Description
2. Plan of purchase, sale, reorganization, arrangement,
liquidation or succession.(1)
2.1 Agreement and Plan of Reorganization and Merger among
Jreck Subs Group, Inc.,
Admiral's Fleet, Inc. and Quality Franchise Systems,
Inc. ("Quality Agreement")(1)
2.2 Amendment to Quality Agreement(1)
2.3 Agreement between the Company and CHAI Enterprises,
Inc. ("Hymie's Bagel Chain")(1)
2.4 Stock Option Grants to acquire Seawest Sub Shops,
Inc.(1)
3. Articles of Incorporation and Bylaws
3.1. Articles of Incorporation(1)
3.2 Articles of Amendment changing corporate name(1)
3.3 Articles of Amendment dated May 2, 1996 and filed
May 7, 1996(1)
3.4 Certificate of Correction to Articles of Amendment
filed July 24, 1996.(1)
3.5 Bylaws. (2)
5. Opinion of Hand & Hand (2)
10. Material Contracts
10.1 Jreck Franchise Agreement.(2)
21 Subsidiaries of the Registrant(1)
23 Consents of Experts and Counsel
23.1 Consent of Hand & Hand. Included in Exhibit 5
23.2 Consent of Cronin & Co.(2)
24. Powers of Attorney
24.1 Powers of Attorney are included on signature page(1)
(1) Incorporated by reference to the COmpany's Registration Statement on
Form 10-SB, file No. 0-23545
(2) To be filed by amendment.
All other Exhibits called for by Rule 601 of Regulation S-B are not
applicable to this filing.
Item 17. Undertakings.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(I) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii)
Reflect in the prospectus any facts or events which, individually or together
represent a fundamental change in the information in the registration statement;
(iii)
Include any material or changed information the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities as at that time to be the initial
bona fide offering thereof.
(3) File a post effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(d) To provide to the underwriter at the Closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as may be required by the underwriter to permit prompt delivery to each
purchaser.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel that matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(f) The undersigned small business issuer hereby undertakes that
it will:
(1) For purposes of determining any liability under the
Securities Act that the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time the Commission declared it effective.
(2) For the purpose of determining any liability under the
Securities Act, that each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Watertown,
State of New York on February 4, 1998.
JRECK SUBS GROUP, INC.
By: /s/ Christopher M. Swartz
Christopher M. Swartz
President
The undersigned officer and/or director of JRECK Subs Group, a Florida
corporation (the "Corporation"), hereby constitutes and appoints Christopher
Swartz and Eric Swartz, and each of them, with full power of substitution and
resubstitution, as attorney to sign for the undersigned in any and all
capacities this Registration Statement and any and all amendments thereto, and
any and all applications or other documents to be filed pertaining to this
Registration Statement with the Securities and Exchange Commission or with any
states or other jurisdictions in which registration is necessary to provide for
notice or sale of all or part of the securities to be registered pursuant to
this Registration Statement and with full power and authority to do and perform
any and all acts and things whatsoever required and necessary to be done in the
premises, as fully to all intents and purposes as the undersigned could do if
personally present. The undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or any of his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof and incorporate such changes as
any of the said attorneys-in-fact deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on February 4, 1998.
By: /s/ Christopher M. Swartz President and Director
Christopher M. Swartz (principal executive officer)
By: /s/ Gary Rowe Controller
Gary Rowe (principal accounting and financial officer)
By: /s/ Bradley L. Gordon Chief Operating Officer and Director
Bradley L. Gordon
By: /s/ Kelly A. Swartz Secretary and Director
Kelly A. Swartz
By: /s/ Jeremiah J. Haley Director
Jeremiah J. Haley
2