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 March 31, 2003
[ ] 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.)
----------------------
(Exact name of small business issuer as specified in its charter)
Nevada 84-1317674
-------- ----------
(state or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
300 International Parkway, Suite 100, Heathrow, Florida, 32746
-------------------------------------------------------------
(Address of principal executive offices)
(407) 333-8998
--------------
(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 past 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: April 23, 2003 -
14,564,926 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 March 31, 2003
(Unaudited) and September 30, 2002
March 31, September 30,
2003 2002
------------- ------------
Assets
Current assets:
Cash $ 184,311 $ 699,234
Accounts receivable - trade 56,059 56,160
Accounts receivable - other - 581,800
Prepaid expenses 53,235 24,388
Current portion of notes receivable 77,796 64,716
------------- ------------
Total current assets 371,401 1,426,298
------------- ------------
Property and equipment, net 68,095 68,090
------------- ------------
Other assets:
Goodwill 3,752,761 3,752,761
Deferred loan costs, net 147,293 180,023
Notes receivable, net of current portion 2,998,350 3,291,653
Investment securities 1,287,389 95,024
Other 418,165 186,787
------------- ------------
Total other assets 8,603,958 7,506,248
------------- ------------
Total assets $ 9,043,454 $ 9,000,636
============= ============
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 March 31, 2003
(Unaudited) and September 30, 2002, Continued
March 31, September 30,
2003 2002
------------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,028,209 $ 888,493
Accounts payable 127,193 160,413
Deferred revenue 39,787 2,013
Accrued expenses 708,761 254,707
Accrued interest expense 175,717 154,266
Accrued preferred stock dividends 48,192 43,642
------------- ------------
Total current liabilities 2,127,859 1,503,534
------------- ------------
Long-term debt, less current portion 2,080,501 2,241,580
------------- ------------
Total liabilities 4,208,360 3,745,114
------------- ------------
Minority interest 230,317 242,911
------------- ------------
Redeemable common stock 293,000 293,000
------------- ------------
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,
9,022,563, and 8,695,864 shares issued and outstanding,
respectively 30,575,652 31,096,152
Accumulated deficit (26,383,875) (25,809,041)
Less: Stock subscriptions receivable - (687,500)
------------- ------------
Total stockholders' equity 4,311,777 4,719,611
------------- ------------
Total liabilities and stockholders' equity $ 9,043,454 $ 9,000,636
============= ============
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 Six and Three Months Ended March 31, 2003 and 2002 (Unaudited)
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
Revenues:
Franchise operations $ 776,758 $ 1,766,261 $ 479,401 $ 899,502
Retail sales - company-owned stores 426,419 - 230,691 -
-------------- ------------ ------------ -----------
1,203,177 1,766,261 710,092 899,502
Operating costs and expenses:
Franchise servicing costs 430,604 694,326 216,900 345,704
Cost of retail sales and operating costs - stores 428,893 - 264,257 -
General and administrative 647,219 528,988 348,854 284,754
Consulting and investor relations 139,492 34,326 103,329 30,744
Amortization and depreciation 6,048 167,929 3,832 85,180
-------------- ------------ ------------ -----------
1,652,256 1,425,569 937,172 746,382
-------------- ------------ ------------ -----------
Income (loss) from operations (449,079) 340,692 (227,080) 153,120
Other income (expense):
Interest, net (171,177) (123,918) (125,869) (55,102)
Permanent impairment of long-lived assets - (27,051) - (27,051)
Minority interest in income of subsidiary 13,222 5,419 - 13,281
Other, net 40,000 109,720 (20,833) (29,024)
-------------- ------------ ------------ -----------
(117,955) (35,830) (146,702) (97,896)
-------------- ------------ ------------ -----------
Income (loss) from continuing operations before discontinued
operations (567,034) (373,782) 55,224
304,862
Discontinued operations:
Income (loss) from operations of discontinued operations - (10,748) - (21,033)
Gain from disposal of discontinued operations - 215,695 - 215,695
-------------- ------------ ------------ -----------
Net income (loss) (567,034) 509,809 (373,782) 249,886
-------------- ------------ ------------ -----------
Preferred stock dividends (7,800) (7,800) (3,900) (3,900)
-------------- ------------ ------------ -----------
Net income (loss) applicable to common stock $ (574,834) $ 502,009 $ (377,682) $ 245,986
============== ============ ============ ===========
Weighted average number of common shares outstanding 13,027,162 8,717,293 13,222,193 8,739,198
Earnings (loss) per basic and diluted common share:
Income (loss) from continuing operations - basic $ (.04) $ .04 $ (.03) $ .01
Income (loss) from continuing operations - diluted N/A .02 N/A .00
Income (loss) from discontinued operations - basic (.04) .02 (.03) .02
Income (loss) from discontinued operations - diluted N/A .01 N/A .01
Net income (loss) per common share - basic (.04) .06 (.03) .03
Net income (loss) per common share - diluted N/A .03 N/A .01
============== ============ ============ ===========
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 Six and Three Months Ended March 31, 2003 and 2002 (Unaudited)
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
Operating activities:
Net income (loss) $ (567,034) $ 509,809 $ (373,782) $ 249,886
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization and depreciation 6,048 182,154 3,832 87,548
Permanent impairment of long-lived assets - 27,051 - 27,051
Gain on settlement of long-term debt (40,000) - - -
Gain on sale of discontinued operations - (215,695) - (215,695)
Stock and stock options issued for services 53,000 (112,409) 53,000 (23,665)
Stock issued for interest payment 14,000 - 14,000 -
Minority interest in income of subsidiary (13,222) (5,418) - (13,280)
Capitalized interest on notes receivable (36,000) - (18,000) -
Amortized discounts on financial instruments (5,379) 5,050 (2,390) 2,525
Amortization of deferred loan costs to interest expense 32,730 32,730 16,365 16,365
Amortization of prepaid costs - 32,160 - 28,578
Loss on disposal of investment securities 2,635 - 2,635 -
(Increase) decrease in:
Accounts receivable 100 (152,912) 100 (138,646)
Prepaid expenses (25,889) (75,220) (11,555) (22,599)
Other assets - (10,396) - (12,727)
Increase (decrease) in:
Accounts payable (33,220) (137,851) 15,984 (67,943)
Deferred revenue (45,559) 143,042 (26,833) 44,932
Accrued liabilities 59,466 (79,329) (196,083) 11,022
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities (598,324) 142,766 (522,727) (26,648)
----------- ----------- ----------- -----------
Investing activities:
Purchase of property and equipment (1,986) (38,625) (556) (29,409)
Cash used for deposit on potential acquisition (75,000) - (75,000) -
Cash used for formation of joint venture (650,000) - - -
Issuance of notes receivable - (40,245) - (40,245)
Proceeds from return on equity in joint venture 30,000 30,000
Proceeds from collection of dividends 5,000 - - -
Proceeds from collection of notes receivable and accounts
receivable other 672,000 6,913 89,058 4,768
----------- ----------- ----------- -----------
Net cash provided (used) by investing activities (19,986) (71,957) 43,502 (64,886)
----------- ----------- ----------- -----------
Financing activities:
Borrowings on long-term debt 300,000 114,183 300,000 114,183
Proceeds from sale of common stock 100,000 - - -
Dividends paid on preferred stock (3,250) (9,750) (3,250) (9,750)
Payment of loan financing costs - - - -
Payments on long-term debt (293,363) (167,091) (225,349) (123,590)
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities 103,387 (62,658) 71,401 (19,157)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (514,923) 8,151 (407,824) (110,691)
Cash and cash equivalents, beginning of period 699,234 60,927 592,135 179,769
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 184,310 $ 69,078 $ 184,310 $ 69,078
=========== =========== =========== ===========
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 Six Months Ended March 31, 2003 (Unaudited)
and the Year Ended September 30, 2002
Common Preferred Series C
---------------------- ------------------ Accumulated Subscription Total
Shares Amount Shares Amount Deficit Notes Equity
------ ------ ------ ------ ----------- ------------ ------
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
Issuance of options of majority owned - 5,000 - - - - 5,000
subsidiary
Cost in excess of par on retirement of stock
of majority owned subsidiary - (35,498) - - - - (35,498)
Conversion of Series G debenture 1,600,000 175,000 - - - - 175,000
Issuance of common stock for cash and
investment 1,851,852 500,000 - - - - 500,000
securities
Stock issued for acquisitions 375,000 75,000 - - - - 75,000
Stock issued for conversion of debt 226,699 34,005 - - - - 34,005
Preferred dividends - 185,948 - - (15,600) - 170,348
Net income - - - - 898,790 - 898,790
---------- ----------- --- -------- ------------ --------- ----------
Balance, September 30, 2002 12,749,415 $31,096,152 120 $120,000 $(25,809,041) $(687,500) $4,719,611
Stock issued for cash 400,000 100,000 - - - - 100,000
Stock issued as interest on long-term debt 100,000 14,000 - - - - 14,000
Stock returned to treasury of company (50,005) (687,500) - - - 687,500 -
Stock issued for services 350,000 53,000 - - - - 53,000
Preferred dividends - - - - (7,800) - (7,800)
Net income - - - - (567,034) - (567,034)
---------- ----------- --- -------- ------------ --------- ----------
Balance, March 31, 2003 13,549,410 $30,575,652 120 $120,000 $(26,383,875) $ - $4,311,777
========== =========== === ======== ============ ========= ==========
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
March 31, 2003
Note 1. Basis of Presentation
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
accounting principles generally accepted in the United States 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, 2002. The results of
operations for the six and three months ended March 31, 2003 are not
necessarily indicative of those to be expected for the entire year.
Note 2. Reclassifications
Certain reclassifications have been made to 2002 financial statement
amounts to conform to the 2003 presentation.
Note 3. Formation of Joint Venture
In October 2002, we formed a joint venture with Concept Acquisitions,
LLC., ("COAC") The joint venture has purchased 100% of the assets in a
mall based hamburger concept with 55 units throughout the Mid-Atlantic
United States. The purchase price will consist of $1,000,000 in cash
and a note payable for $1,600,000 which will require principal and
interest payments over a three year period with a balloon payment due
thereafter. The transaction was funded as follows:
UFSI COAC Total
----------- ------------ -------------
Cash for equity 50% equity position in Joint Venture 350,000 350,000 700,000
Cash for note receivable 300,000 - 300,000
----------- ------------ -------------
Total cash used for acquisition 650,000 350,000 1,000,000
=========== ============ =============
Note 4. Conversion of Note Receivable to Equity
In March 2003, we converted our $300,000 note receivable issued to form
the joint venture in note 3 into equity. Under the terms of the
agreement, Ultimate Franchise Systems, Inc. will receive the greater of
$15,000 per month or 50% of the cash distributions or sales proceeds of
COAC II until December 31, 2005. Thereafter, Ultimate Franchise Systems
will be entitled to a 25% interest in cash distributions and sales
proceeds.
In addition, and in connection with this transaction we converted our
note receivable of $265,000 due from COAC into an equity interest in
COAC. This equity interest provides for UFSI to receive 18% of the cash
distributions and sales proceeds of COAC commencing after repayment by
COAC of all outstanding debt obligations which is expected to occur in
April 2007.
Note 5. Management Agreements
In December 2002, we entered into a letter agreements with Topper's
Brick Oven Pizza, Inc. ("Topper's") and Weight Loss Forever,
International Inc. ("Weight Loss Forever") whereby we will offer our
expertise in purchasing, marketing, franchise legal services, franchise
sales, and general management to each company in exchange for 6,000,000
shares of common stock of each company. The value of these services is
$500,000 and will be amortized over a 24 month period beginning in
December 2002.
Note 6. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in
the earnings of the Company.
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 are a multi-brand restaurant franchisor and restaurant venture
company with significant equity interests in numerous franchise companies.
In total, we have financial investments in 445 restaurants. Our equity
interests include the following:
State of
Ownership Predominant Restaurant
Corporation Name Incorporation Percentage Concept
- ---------------- ------------- ---------- ----------------------
Central Park of America, Inc. Delaware 100% "Central Park"
Sobik's International Franchising, Inc. Florida 79% "Sobik's Subs"
Gator's Dockside Int'l Franchising, LLC Florida 30% "Gator's Dockside"
Uptown Restaurant Group Colorado 29% "New York Buritto"
Jreck Subs, Inc. New York 20% "Jreck Subs"
Li'l Dino Corporation North Carolina 20% "Li'l Dino"
Concept Acquisitions, Inc. Florida 18% "Mountain Mike's"
Weight Loss Forever Int'l, Inc. Colorado 26% "Weight Loss Forever"
Toppers Brick Oven Pizza, Inc. Delaware 20% "Toppers"
Concept Acquisitions II, LLC California 50% "Burgers"
Pancake Cabin, Inc. Tennessee 50% "Pancake Cabin"
8
Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002.
Results of Operations
The following table sets forth for the periods presented the percentage
relationship to franchise operation revenue of certain items included in the
consolidated statements of operations for the periods presented:
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
Revenues:
Franchise operations 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Franchise servicing costs 55.4% 39.3% 45.2% 38.4%
General and administrative 83.3% 29.9% 72.8% 31.7%
Consulting and investor relations 18.0% 1.9% 21.6% 3.4%
Amortization and depreciation 0.8% 9.5% 0.8% 9.5%
----- ----- ----- -----
157.5% 80.7% 140.4% 83.0%
----- ----- ----- -----
Income (loss) from operations (57.5%) 19.3% (40.4%) 17.0%
Other income (expense):
Interest, net (22.0%) (7.0%) (26.3%) (6.1%)
Permanent impairment of long-lived assets 0.0% (1.5%) 0.0% (3.0%)
Minority interest in income of subsidiary 1.7% 0.3% 0.0% 1.5%
Other, net 5.1% 6.2% (4.3%) (3.2%)
----- ----- ----- -----
(15.2%) (2.0%) (30.6%) (10.9%)
----- ----- ----- -----
Income from continuing operations before discontinued
operations (72.7%) 17.3% (71.0%) 6.1%
Discontinued operations:
Income (loss) from operations of discontinued operations 0.0% (0.6%) 0.0% (2.3%)
Gain from disposal of discontinued operations 0.0% 12.2% 0.0% 24.0%
----- ----- ----- -----
Preferred stock dividends (1.0%) (0.4%) (0.8%) (0.4%)
===== ===== ===== =====
Net income (loss) (73.7%) 28.4% (71.8%) 27.3%
9
We had a net loss of $574,834 for the six months ended March 31, 2003
compared to net income of $502,009 for the same period in 2002, a change of
$1,076,843 or 214.5%. This significant change resulted from several factors.
First, we sold 80% equity interests in our Jreck Subs and Li'L Dino restaurant
concepts in August 2002 and September 2002, respectively. During the six months
ended March 31, 2002, these divisions had net income of $198,859 and $80,482,
respectively. In addition, we sold our bakery operation Pastry Products
Producers, LLC in March 2002. The gain on the sale of this discontinued
operation was $215,695. In addition, we have experienced a decline in same store
sales for our Central Park and Sobik's brands which has resulted in decreased
royalty revenue of approximately $139,000 for the six months ended March 31,
2003. Finally, we received approximately $300,000 from major preferred
proprietary vendors during the six months ended March 31, 2002 to convert our
concepts to new food products.
Our total revenue decreased $563,084 or 31.9% to $1,203,177 for the six
months ended March 31, 2003 from $1,766,261 for the same period in 2002. The
decrease in the current year is due to several factors. First, we sold 80%
equity interests in our Jreck Subs and Li'L Dino restaurant concepts in August
2002 and September 2002, respectively. During the six months ended March 31,
2002, these divisions had revenue of $368,633 and $217,959, respectively.
Secondly, we have experienced a decline in same store sales for our Central Park
and Sobik's brands which has resulted in decreased royalty revenue of
approximately $139,000 for the six months ended March 31, 2003. We believe that
this negative trend will be corrected in the third quarter of 2003. In April we
opened two new franchise locations which have performed well since their
opening. One of these locations is our traditional double drive-thru style
located in Dayton Tennessee; the other is located inside a Golden Gallon
convenient store in Chattanooga Tennessee. We recently formed a partnership with
the Golden Gallon convenient store chain and expect an additional four units to
open by the end of 2003. These stores offer customers the ability place their
orders in the traditional drive-thru manner, but also give them the opportunity
to dine inside the store itself. Additionally, we received approximately
$300,000 from major preferred proprietary vendors during the six months ended
March 31, 2002 to convert our concepts to new food products. There were no
conversions of proprietary vendors in 2003. Finally, we operated two corporately
owned Central Park restaurants during the six months ended March 31, 2003 which
generated $426,419 in total retail revenue. There were no corporately owned
restaurants during the six months ended March 31, 2002.
Total operating expenses increased $226,687 or 15.9% to $1,652,256 for
the six months ended March 31, 2003 compared to $1,425,569 for the same period
in 2002. This increase can be attributed to several factors. First, we incurred
expenses of $428,893 during the six months ended March 31, 2003 to operate our
two corporately owned Central Park restaurants. There were no corporately owned
restaurants in 2002. Secondly, General and Administrative costs increased
$118,231 or 22.4% to $647,219 during the six months ended March 31, 2003
compared to $528,988 for the same period in 2002. This increase is the result of
additional corporate payroll $78,000 associated with hiring of our Chief Concept
Officer in September 2002. Additionally, we issued 450,000 shares of our common
stock for services which resulted in $67,000 of expense in 2003. Franchise
Servicing costs decreased $263,722 or 38.0% to $430,604 during the six months
ended March 31, 2003 compared to $694,326 during 2002. This decrease is the
result of the sale of 80% of the Jreck Subs and Li'L Dino franchise concepts.
These concepts incurred $143,053 and $126,586 in Franchise Servicing costs
during the six months ended March 31, 2002. Amortization and Depreciation
decreased $161,881 or 96.4% to $6,048 during 2003 compared to $167,929 in 2002.
This decrease is the result of amortization expense on several non-compete
agreements which were fully amortized in July, 2002.
Other expenses increased $82,125 to $117,955 or 229.2% for the six
months ended March 31, 2003. This increase is attributed to the return of
475,000 shares of common stock of our publicly traded subsidiary in 2002. The
return of these shares to treasury resulted in $111,556 in other income during
the six months ended March 31, 2002.
Minority interest in the income of our Sobik's International
Franchising, Inc. subsidiary was $13,222 for the six months ended March 31, 2003
which represented a 19.71% minority interest.
10
Liquidity and Capital Resources
Net cash used by operating activities was $598,324 for the six months
ended March 31, 2003 compared to $142,766 provided by operations for the same
period in 2002. This was primarily the result of a net operating loss of
$567,034 during the six months ended March 31, 2003.
Net cash used by investing activities was $19,986 for the six months
ended March 31, 2003 resulting from $650,000 used to form the COAC II joint
venture, $75,000 used to fund a potential subsequent acquisition, and $672,000
collected on notes receivable and other accounts receivable.
Net cash provided by financing activities was $103,387 for the six
months ended March 31, 2003 compared to net cash used of $62,658 for the same
period in 2002, an increase of $166,045. During the six months ended March 31,
2003 we received $300,000 from new borrowings of long-term debt, and $100,000
from the sale of 400,000 shares of common stock. Additionally, we paid $293,363
in principal payments on long-term debt and paid $3,250 in preferred stock
dividends.
Working capital deficit at March 31, 2003 was $1,756,458 compared with
a deficit of $77,236 at September 30, 2002, an increase in deficit of
$1,679,222.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002.
Results of Operations
We had a net loss of $377,682 for the three months ended March 31, 2003
compared to net income of $245,986 for the same period in 2002, a change of
$623,668 or 253.5% This significant change resulted from several factors. First,
we sold 80% equity interests in our Jreck Subs and Li'L Dino restaurant concepts
in August 2002 and September 2002, respectively. During the three months ended
March 31, 2002, these divisions had net income of $89,031 and $32,758,
respectively. In addition, we sold our bakery operation Pastry Products
Producers, LLC in March 2002. A gain on the sale of this discontinued operation
was $215,695. In addition, we have experienced a decline in same store sales for
our Central Park and Sobik's brands which has resulted in decreased in royalty
revenue of approximately $75,000 for the three months ended March 31, 2003.
Finally, we received approximately $125,000 from major preferred proprietary
vendors during the three months ended March 31, 2002 to convert our concepts to
new food products.
Our total revenue decreased $189,410 or 21.1% to $710,092 for the three
months ended March 31, 2003 from $899,502 for the same period in 2002. The
decrease in the current year is primarily due to the sale of 80% of our Jreck
Subs and Li'L Dino restaurant concepts in August 2002 and September 2002,
resepectivly. During the three months ended March 31, 2002, these divisions had
revenue of $171,922 and $109,265, respectively. Secondly, we have experienced a
decline in same store sales for our Central Park and Sobik's brands which has
resulted in decreased royalty revenue of approximately $75,000 for the three
months ended March 31, 2003. We believe that this negative trend will be
corrected in the third quarter of 2003. In April we opened two new franchise
locations which have performed well since their opening. One of these locations
is our traditional double drive-thru style located in Dayton Tennessee; the
other is located inside a Golden Gallon convenient store in Chattanooga
Tennessee. We recently formed a partnership with the Golden Gallon convenient
store chain and expect an additional four units to open by the end of 2003.
These stores offer customers the ability place their orders in the traditional
drive-thru manner, but also give them the opportunity to dine inside the store
itself. Additionally, we received approximately $125,000 from major preferred
proprietary vendors during the three months ended March 31, 2002 to convert our
concepts to new food products. There were no conversions of proprietary vendors
in 2003. Finally, we operated two corporately owned Central Park restaurants
during the three months ended March 31, 2003 which generated $230,691 in total
retail revenue. There were no corporately owned restaurants during the six
months ended March 31, 2002.
11
Total operating expenses increased $190,790 or 25.6% to $937,172 for
the three months ended March 31, 2003 compared to $746,382 for the same period
in 2002. This increase can be attributed to several factors. First, we incurred
expenses of $264,257 during the three months ended March 31, 2003 to operate our
two corporately owned Central Park restaurants. There were no corporately owned
restaurants in 2002. Secondly, General and Administrative costs increased
$64,100 or 22.5% to $348,854 during the three months ended March 31, 2003
compared to $284,754 for the same period in 2002. This increase is the result of
additional corporate payroll $18,000 associated with hiring of our Chief Concept
Officer in September 2002. Franchise Servicing costs decreased $128,804 or 37.3%
to $216,900 during the three months ended March 31, 2003 compared to $345,704
during 2002. This decrease is the result of the sale of 80% of the Jreck Subs
and Li'L Dino franchise concepts. These concepts incurred $60,952 and $73,020 in
Franchise Servicing costs during the three months ended March 31, 2002.
Amortization and Depreciation decreased $81,348 or 95.5% to $3,832 during 2003
compared to $85,180 in 2002. This decrease is the result of amortization expense
on several non-compete agreements which were fully amortized in July, 2002.
Other expenses increased $48,806 to $146,702 for the three months ended
March 31, 2003.
Minority interest in the income of our Sobik's International
Franchising, Inc. subsidiary was $13,222 for the three months ended March 31,
2003 which represented a 19.71% minority interest.
Liquidity and Capital Resources
Net cash used by operating activities was $522,728 for the three months
ended March 31, 2003 compared to $26,648 for the same period in 2002. This was
primarily the result of a net operating loss of $227,080 during the three months
ended March 31, 2003.
Net cash provided by investing activities was $43,502 for the three
months ended March 31, 2003 resulting from $89,058 received on the collection of
notes receivable and $30,000 received from equity distributions of our COAC II
joint venture. In addition, we used $75,000 to fund a potential subsequent
acquisition.
Net cash provided by financing activities was $71,401 for the three
months ended March 31, 2003 compared to net cash used of $19,157 for the same
period in 2002, an increase of $90,558. During the three months ended March 31,
2003 we received $300,000 on from a new borrowing of long-term debt. $225,349
was used to make principal payments on long-term debt, and $3,250 was paid on
preferred stock dividends.
12
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.
The following table sets forth information with respect to the sale or
issuance of unregistered securities by the Company between January 1,
2003 to March 31, 2003:
Exempt From
1933 Act
Shares Type of Value of Business Registration In
Issued Security Consideration Date Issued To Whom Issued Purpose Reliance of:
------ -------- ------------- ------------ ------------------ ----------- ------------
100,000 Common $ 17,000 Jan 24, 2003 4 individuals Services Section 4(2)
50,000 Common $ 8,000 Feb 12, 2003 Gary Pereira Services Section 4(2)
100,000 Common $ 14,000 Mar 24, 2003 JAS Investments Services Section 4(2)
200,000 Common $ 28,000 Mar 31, 2003 Wall Street Inc. Services Section 4(2)
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
In March 2003, we signed a letter of intent to purchase a double
drive-thru gourmet coffee company with 25 units located in northern
California. At this time the terms of this purchase agreement have not
been finalized. We expect the negotiations to move quickly and expect
to consummate the purchase within 60 days. A non-refundable deposit of
$75,000 was made in March 2003.
Item 6. Exhibits and Reports on Form 8-K.
None
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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
05/15/03 Christopher M. Swartz Authorized Officer /s/ Christopher M. Swartz
- -------- --------------------- ------------------ -------------------------
Date Print Name Title Signature
Chief Financial
Officer & Chief
05/15/03 Michael E. Cronin Operating Officer /s/ Michael E. Cronin
- -------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
14