U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[As last amended in Release No. 34-38850, July 18, 1997,
effective September 2, 1997, 62 F.R. 39755]
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
0-23545
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Commission File Number
Ultimate Franchise Systems, Inc. (formerly Jreck Subs Group, Inc.)
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(Exact name of small business issuer as specified in its charter)
Colorado 84-1317674
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(state or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
300 International Parkway, Suite 100, Heathrow, Florida, 32746
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(Address of principal executive offices)
(407) 682-6363
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the post 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the most recent practicable date: January 28, 2002 -
8,695,864 Shares
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
Ultimate Franchise Systems, Inc. and Subsidiaries
Consolidated Balance Sheets as of December 31, 2001
(Unaudited) and September 30, 2001
December 31, September 30,
2001 2001
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Assets
Current assets:
Cash and cash equivalents, including restricted cash of
$38,068, for both periods $ 179,769 $ 60,927
Accounts receivable - trade, net of allowance for doubtful
accounts of $36,536, for both periods 150,358 136,092
Prepaid expenses 67,337 10,319
Current portion of notes receivable 168,020 167,776
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Total current assets 565,484 375,114
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Property and equipment, net 460,831 469,188
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Other assets:
Goodwill 6,565,104 6,565,104
Covenants not to compete, net of accumulated amortization of
$435,000 and $360,000, respectively 165,000 240,000
Deferred loan costs, net 229,118 245,483
Notes receivable, net of current portion 333,123 330,033
Investment securities 69,675 69,675
Other 127,450 96,814
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Total other assets 7,489,470 7,547,109
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Total assets $ 8,515,785 $ 8,391,411
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The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not misleading. 2
Ultimate Franchise Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2001 (Unaudited) and September 30, 2001, Continued
December 31, September 30,
2001 2001
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Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 930,020 $ 878,166
Accounts payable 411,766 481,674
Deferred revenue 297,507 199,397
Accrued expenses 283,044 450,306
Accrued preferred stock dividends 267,265 263,365
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Total current liabilities 2,189,602 2,272,908
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Long-term debt, less current portion 2,626,290 2,713,641
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Total liabilities 4,815,892 4,986,549
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Minority interest 265,737 257,875
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Redeemable common stock 293,000 293,000
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Stockholders' equity:
Series C convertible preferred stock, no par value, 120 shares
authorized, issued and outstanding 120,000 120,000
Common stock, no par value, 100,000,000 shares authorized,
8,695,864 shares issued and outstanding, for both periods
30,144,864 30,113,718
Accumulated deficit (26,436,208) (26,692,231)
Less: Stock subscriptions receivable (687,500) (687,500)
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Total stockholders' equity 3,141,156 2,853,987
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Total liabilities and stockholders' equity $ 8,515,785 $ 8,391,411
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The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not misleading. 3
Ultimate Franchise Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended December 31, 2001 and 2000 (Unaudited)
Three Months Three Months
Ended Ended
December 31, 2001 December 31, 2000
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Revenues:
Continuing royalty revenues $ 502,385 $ 433,686
Initial franchising fees 6,000 7,500
Retail sales - company-owned stores - 573,375
Retail sales - bakery and other products 244,876 202,741
Other revenues 358,374 243,518
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1,111,635 1,460,820
Operating costs and expenses:
Franchise servicing costs 348,622 379,213
Cost of retail sales and operating costs - stores - 520,130
Cost of retail sales and operating costs - bakery 219,915 165,698
General and administrative 244,234 440,597
Consulting and investor relations 3,582 214,358
Amortization and depreciation 94,606 183,749
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910,959 1,903,745
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Income (loss) from operations 200,676 (442,925)
Other income (expense):
Interest, net (71,635) (74,832)
Debt discount from the beneficial conversion feature of
convertible debentures - (309,615)
Permanent impairment of long-lived assets - (87,622)
Gain (loss) on disposal of property and equipment - (76,572)
Minority interest in income of subsidiary (7,862) -
Other, net 138,744 155,485
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59,247 (393,156)
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Net income (loss) 259,923 (836,081)
Preferred stock dividends (3,900) (20,358)
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Net income (loss) applicable to common stock $ 256,023 $ (856,439)
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Weighted average number of common shares outstanding 8,695,864 3,303,672
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Net income (loss) per common share - basic $ .03 $ (.26)
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Net income (loss) per common share - diluted $ .02 $ (.26)
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The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not misleading. 4
Ultimate Franchise Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 2001 and 2000 (Unaudited)
Three Months Three Months
Ended Ended
December 31, 2001 December 31, 2000
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Operating activities:
Net income (loss) $ 259,923 $ (836,081)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization and depreciation 94,606 183,749
Permanent impairment of long-lived assets - 87,622
Loss on disposal of property and equipment - 76,572
Stock and stock options issued for services - 163,268
Minority interest in income of subsidiary 7,862 -
Amortized discounts on financial instruments 2,525 -
Amortization of deferred loan costs to interest expense 16,365 16,638
Prepaid consulting fees amortized to consulting and investor
relations expense 3,582 108,744
Beneficial conversion feature of convertible debentures - 309,615
(Increase) decrease in:
Accounts receivable (14,266) (16,488)
Prepaid expenses (52,621) (76,131)
Inventory - 1,533
Other assets 2,331 -
Increase (decrease) in:
Accounts payable (69,908) 66,351
Deferred revenue 98,110 (14,325)
Accrued liabilities (179,095) (212,003)
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Net cash provided (used) by operating activities 169,414 (140,936)
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Investing activities:
Purchase of property and equipment (9,216) (3,992)
Proceeds from collection of notes receivable 2,145 114,851
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Net cash provided (used) by investing activities (7,071) 110,859
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Financing activities:
Borrowings on long-term debt - 575,000
Payments on partial redemption of preferred stock - (500,000)
Payments on long-term debt (43,501) (42,417)
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Net cash provided (used) by financing activities (43,501) 32,583
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Net increase in cash and cash equivalents 118,842 2,506
Cash and cash equivalents, beginning of period 60,927 148,072
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Cash and cash equivalents, end of period $ 179,769 $ 150,578
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The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not misleading. 5
Ultimate Franchise Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Three Months Ended December 31, 2001 (Unaudited)
and the Year Ended September 30, 2001
Accumulated
Common Preferred Series C Other
----------------------- ------------------- Accumulated Subscription Comprehensive Total
Shares Amount Shares Amount Deficit Notes Income (Loss) Equity
- ------------------------------ ---------- ----------- -------- -------- ------------- ------------- -------------- ----------
Balance, September 30, 2000 3,188,718 $26,830,014 120 $120,000 $(22,885,674) $ (687,500) $ 83,316 $3,460,156
Stock issued for current and
prepaid services 1,262,067 349,869 - - - - - 349,869
Issuance of options for
services - 16,109 - - - - - 16,109
Stock issued for preferred
dividends 32,918 49,375 - - - - - 49,375
Stock issued for Series F
preferred stock 1,975,000 1,968,750 - - - - - 1,968,750
Beneficial conversion feature
on convertible debentures - 309,615 - - - - - 309,615
Conversion of Series G
debenture 2,173,661 225,000 - - - - - 225,000
Common stock issued for
consideration in formation
of joint venture 40,000 4,000 - - - - - 4,000
Stock issued to reduce
liability to issue common
stock 23,500 54,050 - - - - - 54,050
Proceeds in excess of par on
stock of majority owned
subsidiary - 306,936 - - - - - 306,936
Preferred dividends - - - - (64,975) - - (64,975)
Net loss - - - - (3,741,582) - - (3,741,582)
Reclassification for
adjustment for permanent
impairment of investment
securities - - - - - - (83,316) (83,316)
- ------------------------------ ---------- ----------- -------- -------- ------------- ------------- -------------- ----------
Balance, September 30, 2001 8,695,864 $30,113,718 120 $120,000 $(26,692,231) $ (687,500) $ - $2,853,987
Issuance of options for
prepaid services - 42,979 - - - - - 42,979
Cost in excess of par on
retirement of stock of
majority owned subsidiary - (11,833) - - - - - (11,833)
Preferred dividends - - - - (3,900) - - (3,900)
Net income - - - - 259,923 - - 259,923
- ------------------------------ ---------- ----------- -------- -------- ------------- ------------- -------------- ----------
Balance, December 31, 2001 8,695,864 $30,144,864 120 $120,000 $(26,436,208) $ (687,500) $ - $3,141,156
============================== ========== =========== ======== ======== ============= ============= ============== ==========
The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not misleading. 6
Ultimate Franchise Systems, Inc.
Notes to Interim Financial Statements
Form 10-QSB
December 31, 2001
Note 1. The unaudited financial statements and notes are presented as permitted
by Form 10-QSB. Accordingly, certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted. The
accompanying financial statements and notes should be read in
conjunction with the audited financial statements and notes of the
Company for the fiscal year ended September 30, 2001. The results of
operations for the three months ended December 31, 2001 are not
necessarily indicative of those to be expected for the entire year.
Note 2. As of October 1, 2001, we elected early adoption of Statement of
Financial Accounting Standards No. 142 (SFAS 142). As a result, the net
loss reported during the three months ended December 31, 2000 would
have decreased from $856,439 to $758,572 had SFAS 142 been in effect
during the three month period ending December 31, 2000. This change
excludes the effect of previously recognized goodwill amortization in
the amount of $97,867. Additionally, net loss per share would have
changed from $(.26) to $(.23).
As of December 31, 2001, we have recorded goodwill in the amount of
$6,565,104. Amortization of this goodwill, in the amount of $97,867,
would have been recorded, and net income would have been reduced to
$158,156 during the three month period ended December 31, 2001 had we
not elected the early adoption of SFAS 142. There would not have been
any change in earnings per share, basic or diluted.
As permitted by SFAS 142, we have up to six months from the date of
adoption to complete a transitional goodwill impairment test. We intend
to complete this test during the quarter ended March 31, 2002. We do
not anticipate the results of this test to have a material adverse
effect of our financial position.
Note 3. On October 1, 2001, we granted 1,800,000 stock options to our employees
under our incentive stock option plan. These options were granted with
an exercise price of $.08 per share which was equal to the market value
of our stock on that day. 900,000 options will vest on October 1, 2002,
with the remaining 900,000 vesting on October 1, 2003. These options
will expire on October 1, 2007, and October 1, 2008, respectively.
We choose to value these options using the intrinsic value based method
of accounting prescribed in APB Opinion No 25, Accounting for Stock
Issued to Employees. Under this method, compensation expense is
recorded on the difference between the exercise price of the options
and the market value of the stock on the date stock options are issued.
Since these options were issued with an exercise price equal to market
value, we did not record any expense related to the issuance of these
options.
Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation requires company's who choose
to value options issued to employees using the intrinsic value based
method of accounting to disclose the Pro forma effect of stock options
issued to employees using the fair value based method of accounting. As
required by SFAS 123, the stock options issued to employees would have
resulted in compensation expense of $142,859 under this method. As a
result, net income for the three months ended December 31, 2001 would
have been reduced from $256,023 as reported to $113,164 on a Pro forma
basis. Additionally, basic and diluted earnings per share would have
decreased from $.03 to $.01.
7
Item 2. Management's Discussion and Analysis.
Forward Looking Statements
The following discussion contains certain forward-looking statements
subject to the safe harbor created by the "Private Securities Litigation Reform
Act of 1995". These statements use such words as "may," "will," "expect,"
"believe," "plan," "anticipate" and other similar terminology. These statements
reflect management's current expectations and involve a number of risks and
uncertainties. Actual results could differ materially due to changes in global
and local business and economic conditions; legislation and government
regulation; competition; success of operating, initiatives including advertising
and promotional efforts; changes in food, labor and other operating costs;
availability and cost of land and construction; adoption of new or changes in
accounting policies and practices; changes in consumer preferences, spending
patterns and demographic trends and changes in the political or economic
climate.
Overview
We derive our revenue from several sources: royalties, franchise fees
and other franchise related activities as well as a bakery to supply sandwich
rolls to certain franchisees. We have approximately 145 franchised units at
December 31, 2001. Also, we continue to have financial interests in our former
subsidiaries Mountain Mike's Pizza and Seawest Subs franchise concepts which
have approximately 80 restaurants and 30 restaurants, respectively. We also have
a joint venture agreement with Gator's Dockside Licensing, LLC. which has
approximately 20 restaurants in Florida.
8
Three Months Ended December 31, 2001 Compared to Three Months Ended
December 31, 2000.
Results of Operations
We had net income of $256,023 for the three months ended December 31,
2001 compared to a net loss of $856,439 for the same period in 2000. The
increase in net income is the result of our efforts to restructure the
operations of the company in an effort to minimize overhead costs and eliminate
one-time charges resulting from investor relations and consulting. In addition,
we reported a $309,615 charge to earnings during the three months ended December
31, 2000 associated with the debt discount from the beneficial conversion
feature of our Series G debentures. These items were reflected in a basic
earnings per share of $0.03 for the three months ended December 31, 2001
compared to a loss per share of $0.26 for the same period in 2000.
Total revenues decreased $349,185 or 23.9% to $1,111,635 for the three
months ended December 31, 2001 compared to $1,460,820 for the same period in
2000. $573,375 of this decrease is from sales from our corporately-owned
restaurants. For the three months ended December 31, 2001 there were no
corporately-owned restaurants compared to nine restaurants for the same period
in 2000. This decrease was offset by an increase in continuing franchise
revenues of $68,699 to $502,385 for the three months ended December 31, 2000
compared to $433,686 for the same period in 2000. Revenues from bakery sales
increased $42,135 or 20.8% to $244,876 for the three months ended December 31,
2001 compared to $202,741 for the comparable period in 2000. Other revenues also
increased $114,856 or 47.2% for the period ending December 31, 2001 compared to
$243,518 for the same period in 2000.
Total expenses decreased $992,786 or 52.1% to $910,959 for the three
months ended December 31, 2001 compared to $1,903,745 for the same period in
2000. The decrease is primarily due to cost of sales and operating costs of
$520,130 relating to the nine corporately-owned restaurants we operated in 2000.
General and administrative expenses decreased $196,363 or 44.6% to $244,234 for
the three months ended December 31, 2001 compared to $440,597 for the same
period in 2000 due to the restructuring of our franchise operations in June of
2001. With the sale of our nine corporately-owned Central Park restaurants, we
were able to restructure our workforce, and reduce our overhead. In addition, an
employment agreement with the former owner of Central Park expired in July 2001.
Consulting and investor relations expense decreased $210,776 or 98.3% to $3,582
during the three months ended December 31, 2001 compared to $214,358 for the
same period in 2000. We entered into several investor relations contracts during
2000 which required us to issue common stock, or stock options. The issuance of
stock and stock options for services was curtailed in 2001. Amortization and
depreciation expenses decreased $89,143 or 48.5% to $94,606 during the three
months ended December 31, 2001 compared to $183,749 for the same period in 2000.
This decrease relates to our decision to early adopt the Financial Accounting
Standards Board Statement of Financial Standards No. 142, "Goodwill and other
Intangible Assets" (SFAS 142). SFAS 142 mandates that acquired goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized.
Rather, these intangibles will be subject to regular impairment tests. As a
result, no amortization expense was recorded for the period ended December 31,
2001 compared to $97,867 for the same period in 2000.
9
Liquidity and Capital Resources
Net cash provided by operating activities was $169,414 for the three
months ended December 31, 2001 compared to net cash used by operating activities
of $140,936 for the comparable period in 2000, a total increase of $310,350. The
increase in cash provided by operating activities is primarily attributable to
the improvements in operations described above.
Net cash used by investing activities was $7,071 for the three months
ended December 31, 2001 compared to net cash provided by investing activities of
$110,859 for the comparable period in 2000 as we collected $2,145 on notes
receivable associated with the sale of our corporately-owned restaurants during
the three months ended December 31, 2001 compared to $114,851 in 2000.
Net cash of $43,501 was used by financing activities for the three
months ended December 31, 2001 compared to net cash provided of $32,583 for the
comparable period in 2000. In December 2000, the Company issued $575,000 in
convertible debt, using $500,000 of the proceeds along with the issuance of
1,975,000 shares of its common stock to retire all of the outstanding Series F
preferred stock with a carrying value of $2,468,750.
Working capital deficit at December 31, 2001 was $1,624,118 compared
with a deficit of $1,897,794 at September 30, 2001, a decrease in deficit of
$273,676. The decrease in deficit is primarily due to an increase in cash of
$118,842 and the decrease in accrued expenses of $167,262.
We believe that cash flow from operations will continue to fund our
operations. We may seek other sources of financing, restructure and/or pay off
all our current obligations in 2002. There is no assurance that additional
funding will be available, or if available, it can be obtained on terms
favorable to us. Failure to obtain such funding could adversely affect our
financial condition.
10
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
We may be involved in various other lawsuits and litigation, from time
to time, as a result of its day to day operations. Management does not
believe that any of these other threatened or pending lawsuits or
litigation will have an adverse effect on our financial position or
results of operations.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
In November 2001, we issued a letter of intent to purchase 100% of the
outstanding common stock of a franchisor of a Mexican fast-food
concept, consisting of approximately 70 stores throughout the United
States.
In December 2001, we entered into a one year agreement with Noble
International Investments, Inc. ("Noble"), whereby Noble will become a
market maker in our stock, and will assist us in meeting our obligation
associated with the Series G convertible debentures which mature in
January 2002. As consideration for these services we have agreed to pay
$5,000 each month beginning in December 2001. In addition, Noble will
receive five year "cashless exercise" warrants to purchase 5% of our
outstanding common stock at $.10 per share. Half of these options vest
immediately, and the remainder will vest in March 2002.
Item 6. Exhibits and Reports on Form 8-K.
None
11
SIGNATURES
In accordance with all the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Ultimate Franchise Systems, Inc.
--------------------------------
(Registrant)
President & Duly
02/13/02 Christopher M. Swartz Authorized Officer /s/ Christopher M. Swartz
- -------- --------------------- ------------------ -------------------------
Date Print Name Title Signature
Chief Financial
Officer & Chief
02/13/02 Michael E. Cronin Operating Officer /s/ Michael E. Cronin
- -------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
12