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 June 30, 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 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: July 24, 2003 -
13,649,350 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 June 30, 2003 (Unaudited) and September 30, 2002
June 30, September 30,
2003 2002
------------- ------------
Assets
Current assets:
Cash $ 26,419 $ 699,234
Accounts receivable - trade 56,059 56,160
Accounts receivable - other - 581,800
Prepaid expenses 16,012 24,388
Current portion of notes receivable 302,796 64,716
------------- ------------
Total current assets 401,286 1,426,298
------------- ------------
Property and equipment, net 63,633 68,090
------------- ------------
Other assets:
Goodwill 3,752,761 3,752,761
Deferred loan costs, net 130,928 180,023
Notes receivable, net of current portion 2,519,401 3,291,653
Investment securities 535,389 95,024
Other 980,760 186,787
------------- ------------
Total other assets 7,919,239 7,506,248
------------- ------------
Total assets $ 8,384,158 $ 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 June 30, 2003 (Unaudited) and September 30, 2002, Continued
June 30, September 30,
2003 2002
------------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 964,319 $ 888,493
Accounts payable 225,646 160,413
Deferred revenue 354,168 2,013
Accrued expenses 463,731 408,973
Accrued preferred stock dividends 52,092 43,642
------------- ------------
Total current liabilities 2,059,956 1,503,534
------------- ------------
Long-term debt, less current portion 2,017,426 2,241,580
------------- ------------
Total liabilities 4,077,382 3,745,114
------------- ------------
Minority interest 202,902 242,911
------------- ------------
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,
13,649,350, and 8,695,864 shares issued and outstanding,
respectively 30,599,215 31,096,152
Accumulated deficit (26,908,341) (25,809,041)
Less: Stock subscriptions receivable - (687,500)
------------- ------------
Total stockholders' equity 3,810,874 4,719,611
------------- ------------
Total liabilities and stockholders' equity $ 8,384,158 $ 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 Nine and Three Months Ended June 30, 2003 and 2002 (Unaudited)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
- --------------------------------------------------------------- ---------------- --------------- ----------------- ---------------
Revenues:
Franchise operations $ 1,259,283 $ 2,482,823 $ 482,525 $ 716,562
Retail sales - company-owned stores 614,469 122,831 188,050 122,831
------------- ------------- ---------- ----------
1,873,752 2,605,654 670,575 839,393
Operating costs and expenses:
Franchise servicing costs 594,125 1,024,902 163,521 330,576
Cost of retail sales and operating costs - stores 671,505 122,236 242,612 122,236
General and administrative 987,783 789,041 340,564 260,053
Consulting and investor relations 172,825 67,541 33,333 33,215
Amortization and depreciation 13,108 252,501 7,060 84,572
------------- ------------- ---------- ----------
2,439,346 2,256,221 787,090 830,652
------------- ------------- ---------- ----------
Income (loss) from operations (565,594) 349,433 (116,515) 8,741
Other income (expense):
Interest, net (277,014) (232,069) (105,837) (108,151)
Impairment of notes receivable and other assets (325,000) (27,051) (325,000) -
Minority interest in income of subsidiary 40,008 7,741 26,786 2,322
Other, net 40,000 109,248 - (472)
------------- ------------- ---------- ----------
(522,006) (142,131) (404,051) (106,301)
------------- ------------- ---------- ----------
Income (loss) from continuing operations before discontinued
operations (1,087,600) 207,302 (520,566) (97,560)
Discontinued operations:
Income (loss) from operations of discontinued operations - (10,748) - -
Gain from disposal of discontinued operations - 215,695 - -
------------- ------------- ---------- ----------
Net income (loss) (1,087,600) 412,249 (520,566) (97,560)
------------- ------------- ---------- ----------
Preferred stock dividends (11,700) (11,700) (3,900) (3,900)
------------- ------------- ---------- ----------
Net income (loss) applicable to common stock $ (1,099,300) $ 400,549 $ (524,466) $ (101,460)
=============== ============= ============ ============
Weighted average number of common shares outstanding 13,228,338 8,819,050 13,630,689 9,022,563
Earnings (loss) per basic and diluted common share:
Income (loss) from continuing operations - basic $ (.08) $ .02 $ (.04) $ (.01)
Income (loss) from continuing operations - diluted N/A .01 N/A (.01)
Income (loss) from discontinued operations - basic (.08) .02 (.04) .00
Income (loss) from discontinued operations - diluted N/A .01 N/A .00
Net income (loss) per common share - basic (.08) .05 (.04) (.01)
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 Nine and Three Months Ended June 30, 2003 and 2002 (Unaudited)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
---------------- -------------- ---------------- ---------------
Operating activities:
Net income (loss) $ (1,087,600) $ 412,249 $ (520,566) $ (97,560)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization and depreciation 13,108 266,726 7,061 84,572
Write down of note receivable 250,000 - 250,000 12,000
Permanent impairment of long-lived assets - 27,051 - -
Gain on settlement of long-term debt (40,000) - - -
Costs associated with sale of note receivable 25,000 - 25,000 -
Write down of non-refundable deposit - - 75,000 -
Gain on sale of discontinued operations - (215,695) - -
Stock and stock options issued for services 53,000 (112,409) - -
Capitalized interest on notes receivable (54,000) - (18,000) -
Excess of par value of stock issued in majority
owned subsidiary 8,563 - 8,563 -
Minority interest in income (loss) of subsidiary (40,008) (7,740) (27,414) (2,322)
Amortized discounts on financial instruments (2,058) 7,575 3,321 2,525
Amortization of deferred loan costs 49,095 49,095 16,365 16,365
Loss on disposal of investment securities 2,635 - - -
Amortization of prepaid costs - 68,231 - 36,071
Stock issued for interest due on long-term debt 29,000 - 15,000 -
(Increase) decrease in:
Accounts receivable 101 (20,015) - 132,897
Prepaid expenses 11,333 (85,607) 37,222 (10,387)
Inventory - - - -
Other assets - (20,331) - (9,935)
Increase (decrease) in:
Accounts payable 65,233 (155,660) 98,453 (17,809)
Deferred revenue (147,845) 37,196 (102,286) (105,846)
Accrued liabilities 54,757 (114,230) (4,081) (34,458)
-------------- ----------- ----------- ----------
Net cash provided (used) by operating activities (809,686) 136,436 (136,362) 6,113
-------------- ----------- ----------- ----------
Investing activities:
Purchase of property and equipment (2,550) (28,495) (564) (10)
Proceeds from sale of marketable securities 57,000 4,600 57,000 4,600
Cash used for formation of joint venture (650,000) - - -
Proceeds from return on equity in joint venture 75,000 - 45,000 -
Issuance of notes receivable - (9,452) - (250)
Proceeds from collection of dividends 15,000 - 10,000 -
Proceeds from collection of notes receivable and accounts
receivable other 672,000 207,449 - 200,093
-------------- ----------- ----------- ----------
Net cash provided (used) by investing activities 166,450 174,102 111,436 204,433
-------------- ----------- ----------- ----------
Financing activities:
Borrowings on long-term debt 300,000 85,000 - -
Proceeds on sale of stock and stock options 100,000 5,000 - 5,000
Dividends paid on preferred stock (3,250) (21,125) - (11,375)
Payments on long-term debt (426,329) (371,649) (132,966) (204,558)
-------------- ----------- ----------- ----------
Net cash provided (used) by financing activities (29,579) (302,774) (132,966) (210,933)
-------------- ----------- ----------- ----------
Net increase in cash and cash equivalents (672,815) 7,764 (157,892) (387)
Cash and cash equivalents, beginning of period 699,234 60,927 184,311 69,078
-------------- ----------- ----------- ----------
Cash and cash equivalents, end of period $ 26,419 $ 68,691 $ 26,419 $ 68,691
============== =========== =========== ==========
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 Nine Months Ended June 30, 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 subsidiary - 5,000 - - - - 5,000
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 securities 1,851,852 500,000 - - - - 500,000
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 200,000 29,000 - - - - 29,000
Stock returned to the treasury
of the company (50,065) (687,500) - - - 687,500 -
Excess of par value of subsidiary
common stock issued for services - 8,563 - - - - 8,563
Stock issued for services 350,000 53,000 - - - - 53,000
Preferred dividends - - - - (11,700) - (11,700)
Net income - - - - (1,087,600) - (1,087,600)
---------- ----------- --- -------- ------------ --------- -----------
Balance, June 30, 2003 13,649,350 $30,599,215 120 $120,000 $(26,908,341) $ - $ 3,810,874
========== =========== === ======== ============ ========= ===========
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
June 30, 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
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, 2002. The results of
operations for the nine and three months ended June 30, 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.
7
Note 5. Management Agreements
In December 2002, we entered into 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.
8
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"
We have begun our transition from a restaurant franchising company with
exclusive ownership of five restaurant concepts into a franchise management and
venture company with minority interests in numerous franchised brands. As part
of the strategy we have continued to sell portions of our equity interests in
some of our brands in order to redeploy our assets into additional concepts. We
feel these assets may be positioned in more exciting categories or companies
that have a greater chance of exponential growth. Our new partners in these
ventures are strong entrepreneurs who we believe will grow these brands and
therefore. increase the value of our now smaller ownership. Management hopes by
increasing our portfolio of brands and the strength of our joint venture
partners that we will be able to increase shareholder value. In line with this
transition, during the year ended September 30, 2002 we sold 80% interests in
our Li'L Dino and Jreck Subs restaurant concepts for $3,100,000. We received
$1,278,005 in cash and notes receivable aggregating $1,800,000. We used this
capital to acquire minority interests in other franchise concepts. $650,000 was
used to acquire a 50% interest in a mall based hamburger concept with 55 units
located in eight states on the east coast. Additionally, we have entered into
management agreements with Weight Loss Forever, Inc. and Topper's Brick Oven
Pizza, Inc. These agreements required us to provide franchising services in
exchange for 20% equity ownership interests in these publicly traded companies.
The company received six million shares of common stock in each company.
9
As a result of this significant change in our business model, our
company has sustained considerable operating losses during the nine months ended
June 30, 2003. During this period we have made substantial changes to our
corporate overhead structure which will reduce our overhead costs by $450,000
annually. Additionally, we have several possible acquisitions or management
agreements that would provide the company with significant recurring revenue
streams. First, we have the potential to consummate a management agreement with
a quick casual restaurant concept. This management agreement would pay the
company a significant management fee in return for services we would provide to
assist in franchise development and general franchise management. Secondly, we
have an opportunity to acquire a minority interest in a 70 unit deli concept
operating in the Mid-Atlantic states. The terms of this transaction are
currently being negotiated, but will likely consist of an exchange of common
stock in each company. In addition, we would also enter into a management
agreement which would pay the company a substantial fee in exchange for
services. Finally, we have an opportunity to acquire a significant ownership
interest in a management company with over 350 units under several trade names.
This acquisition would be similar to the others mentioned above to include some
exchange of stock and cash for services.
As we complete these restructuring efforts we feel confident that the
financial condition of the company will improve significantly. We believe that
these restructuring efforts will be completed by the 2nd quarter of fiscal year
2004 and expect to see substantial signs of growth and financial improvement at
that time.
10
Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 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:
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Revenues:
Franchise operations 100.00% 100.00% 100.00% 100.00%
------ ------ ------ ------
100.00% 100.00% 100.00% 100.00%
Operating costs and expenses:
Franchise servicing costs 47.20% 41.30% 33.90% 46.10%
General and administrative 78.40% 31.80% 70.60% 36.30%
Consulting and investor relations 13.70% 2.70% 6.90% 4.60%
Amortization and depreciation 1.00% 10.20% 1.50% 11.80%
------ ------ ------ ------
140.30% 86.00% 112.90% 98.80%
------ ------ ------ ------
Income (loss) from operations (40.30%) 14.00% (12.90%) 1.20%
Other income (expense):
Interest, net (22.00%) (9.30%) (21.90%) (15.10%)
Debt discount from the beneficial conversion feature of
convertible debentures 0.00% 0.00% 0.00% 0.00%
Permanent impairment of long-lived assets (25.80%) (1.10%) (67.40%) 0.00%
Gain (loss) on disposal of property and equipment 0.00% 0.00% 0.00% 0.00%
Minority interest in income of subsidiary 3.20% 0.30% 5.60% 0.30%
Other, net 3.20% 4.40% 0.00% (0.10%)
------ ------ ------ ------
(41.40%) (5.70%) (83.7%) (14.90%)
------ ------ ------ ------
Income from continuing operations before discontinued
operations (81.70%) 8.30% (96.60%) (13.70%)
Discontinued operations:
Income (loss) from operations of discontinued operations 0.00% (0.40%) 0.00% 0.00%
Gain from disposal of discontinued operations 0.00% 8.70% 0.00% 0.00%
------ ------ ------ ------
Preferred stock dividends (0.90%) (0.50%) (0.80%) (0.50%)
------ ------ ------ ------
Net income (loss) (82.60%) 16.10% (97.40%) (14.20%)
11
We had a net loss of $1,099,300 for the nine months ended June 30, 2003
compared to net income of $400,549 for the same period in 2002, a change of
$1,499,849 or 374.4%. 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 nine
months ended June 30, 2002, these concepts had net income of $305,991 and
$123,139, respectively. In addition, we sold our bakery operation Pastry
Products Producers, LLC in March 2002 and recorded a gain of $215,695. We also
received approximately $300,000 from major preferred proprietary vendors in 2002
to convert our concepts to new food products. We have also experienced a
$152,574 decline in royalty revenue from our Central Park concept which is the
result of two factors. First, we implemented a redesign program that reduces
royalties for up to one year for franchisee's that participate in one of three
approved remodel plans for their franchised location. Also, we have experienced
an 8% decline in same store sales compared to 2002.
Our total revenue decreased $ 731,902 or 28.1% to $1,873,752 for the
nine months ended June 30, 2003 from $2,605,654 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 nine months ended June 30,
2002 these divisions had revenue of $305,991 and $123,139, respectively. We have
also experienced a decline in royalty revenue of $152,574 in our Central Park
concept which is the result of two factors. First, we implemented a redesign
program that reduces royalties for up to one year for franchisee's that
participate in one of three approved remodel plans for their franchised
location. Also, we have experienced a decline in same store sales of 8% from
2002. We believe that this negative trend will be corrected in the forth 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 are currently
working 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. We also received $300,000 from
major preferred proprietary vendors in 2002 to convert our concepts to new food
products. Finally, we operated two corporately owned restaurants during the nine
months ended June 30, 2003 which generated $578,516 in total retail revenue.
During the same period in 2002 we operated one corporately owned location which
generated $122,831 in revenue.
Total operating expenses increased $183,125 or 8.1% to $2,439,346 for
the nine months ended June 30, 2003 compared to $2,256,221 for the same period
in 2002. This increase can be attributed to several factors. First, we incurred
expenses of $671,505 during the nine months ended June 30, 2003 to operate our
two corporately owned Central Park restaurants. During the same period in 2002
we operated only one location which incurred expenses of $122,236. The result is
an increase in expense of $549,269 or 449.4%. Secondly, General and
Administrative costs increased $198,742 or 25.2% to $987,783 for the nine months
ended June 30, 2003 compared to $789,041 for the same period in 2002. This
increase is primarily the result of additional corporate payroll and related
expenses associate with the addition of our Chief Concept Officer in September
2002. Franchise servicing costs decreased $430,777 or 42% to $594,125 during the
nine months ended June 30, 2003 compared to $430,777 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 $260,558 and $190,931 in Franchise Servicing
costs during the nine months ended June 30, 2002. Amortization and Depreciation
decreased $239,393 or 94.8% to $13,108 during the nine months ended June 30,
2003 compared to $252,501 in 2002. This decrease is the result of amortization
expense on three non-compete agreements which were fully amortized in July,
2002.
12
Other expenses increased $379,875 to $522,006 or 267.3% for the nine
months ended June 30, 2003. This was primarily due to two factors. First, we
expensed a $75,000 non-refundable deposit which was being held for a potential
acquisition of a gourmet coffee concept located in Northern California. In July
2003 we were unable to agree upon acceptable financing terms in our efforts to
acquire this concept and the $75,000 deposit was expensed. In addition, in June
2003 we agreed to sell a note receivable with a carrying value of $500,000 for
$250,000 in cash and in turn incurred $25,000 in other costs related to this
transaction. The cash will be received in July 2003 and the book value of this
note was reduced to $225,000. This resulted in a one-time impairment expense of
$250,000 which was recorded during the period ended June 30, 2003.
Minority interest in the income of our Sobik's International
Franchising, Inc. subsidiary was $40,008 for the nine months ended June 30, 2002
which represented a 17.37% minority interest.
Liquidity and Capital Resources
Net cash used by operating activities was $809,686 for the nine months
ended June 30, 2003 compared to $136,436 provided by operations for the same
period in 2002. The change of $946,122 is primarily the result of the $250,000
impairment on the sale of a $500,000 note receivable that was sold for $250,000
in cash. Additionally, we experienced an operating loss of $1,087,600 during the
nine months ended June 30, 2003 which resulted in the use of cash reserves to
subsidize the operations of the company.
Net cash provided by investing activities was $166,450 for the nine
months ended June 30, 2003 resulting from the collection of $672,000 on notes
receivable and accounts receivable other, $75,000 received on equity payments
received from the COAC II joint venture, $57,000 from the sale of one of our
marketable securities, and $15,000 received in dividends from a minority owned
subsidiary. In addition, we used $650,000 to form the COAC II joint venture in
October 2002.
Net cash used by financing activities was $29,579 for the nine months
ended June 30, 2003 compared to net cash used of $302,774 for the same period in
2002, a decrease of $273,195. During the nine months ended June 30, 2003 we
received $300,000 from additional borrowings of long-term debt compared to
$85,000 for the same period in 2002. We also, received $100,000 during 2003 on
the sale of our common stock compared to $5,000 during 2002. During the nine
months ended June 30, 2003 we made principal payments of $426,329 on long-term
debt compared to $371,649 paid in 2002. Additionally, dividends of $3,250 were
paid to the holders of our Series C preferred class of stock during the nine
months ended June 30, 2003 compared to $21,125 paid in 2002.
Working capital deficit at June 30, 2003 was $1,658,670 compared with a
deficit of $74,236 at September 30, 2002, an increase in deficit of $1,584,434.
Three significant items contributed to the increase in our working capital
deficit. The first was the use of $650,000 in cash that was invested in the
acquisition of a 50% joint venture interest in COAC II. The second was an
increase in non-cash deferred revenue of $354,168 which relates to the
unamortized balance of services required to be provided to Weight Loss Forever,
Inc. and Topper's Brick Oven Pizza, Inc. In December, 2002 we received 6 million
shares of common stock in each company in exchange for services to be provided
through November 2004. A third factor was the collection of $581,800 in
receivables that helped fund our operations.
13
The current working capital deficit of $1,658,570 includes several
items that will not require any cash within the next 12 months. Our deferred
revenue of $354,168 will be earned by providing management services for two
unconsolidated affiliates. The cost of this support is already in place and will
require no marginal incremental costs. Our accrued expenses of $463,731 includes
other deferred revenue items of $260,416 requiring no cash outlay and accrued
interest of $151,200 on which payments are not scheduled to begin until August
2005. We are also negotiating modified terms on $540,000 of our current debt. In
the aggregate, these three items as adjusted results in an actual cash working
capital deficit of $300,671.
As of the date of this report we have generated $250,000 through the
collection of a non-current note receivable to apply toward the cash required
deficit of $300,761. Our accounts payable increased by $65,233 of which $20,485
was a result of pre-opening and operating costs incurred in our second company
owned Central Park store.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002.
Results of Operations
We had a net loss of $524,466 for the three months ended June 30, 2003
compared to a net loss of $101,460 for the same period in 2002, a change of
$423,006 or 416.9%. 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 and September 2002, respectively. During the three months
ended June 30, 2002, these concepts had net income of $107,132 and $42,657,
respectively. In addition, we incurred one-time charges of $350,000 relating the
write down of notes receivable of $275,000 and the write down of a
non-refundable deposit of $75,000.
Total revenue decreased $168,818 or 20.1% to $670,575 for the three
months ended June 30, 2003 from $839,393 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 and September 2002,
respectively. During the three months ended June 30, 2002, these concepts had
revenue of $210,790 and $109,965, respectively. We have also experienced a
decline in royalty revenue of $23,199 in our Central Park concept which is the
result of two factors. First, we implemented a redesign program that reduces
royalties for up to one year for franchisee's that participate in one of three
approved remodel plans for their franchised location. Also, we have experienced
a decline in same store sales of 8% from 2002.
Total operating expenses decreased $43,562 or 5.2% to $787,090 for the
three months ended June 30, 2003 compared to $830,652 for the same period in
2002. The decrease is due to several factors. First, we incurred expenses of
$242,612 during the three months ended June 30, 2003 to operate our two
corporately owned Central Park restaurants, compared to $122,236 during the same
period in 2002. Secondly, General and Administrative costs increased $80,511 or
31.0% to $340,564 during the three months ended June 30, 2003 compared to
$260,053 for the same period in 2002. This increase is the result of additional
corporate payroll costs associated with the hiring of our Chief Concept Officer
in September 2002. Franchise Servicing costs decreased $167,055 or 50.5% to
$163,521 for the three months ended June 30, 2003 compared to $330,576 for the
same period in 2002. This decrease is the result of the sale of 80% of the Jreck
Subs and Li'L Dino restaurant concepts. These concepts incurred $117,505 and
$64,345 in Franchise Servicing costs during the three months ended June 30,
2002. Amortization and Depreciation decreased $77,512 or 91.7% to 7,060 during
the three months ended June 30, 2003 compared to $84,572 during the same period
in 2002. This decrease is the result of amortization expense on three
non-compete agreements that were fully amortized in July, 2002.
14
Other expenses increased $297,750 to $404,051 or 280.1% for the three
months ended June 30, 2003 compared to $106,301 for the same period in 2002.
This was primarily due to two factors. First, we expensed a $75,000
non-refundable deposit which was being held for a potential acquisition of a
gourmet coffee concept located in Northern California. In July 2003 we were
unable to agree upon acceptable financing terms in our efforts to acquire this
concept and the $75,000 deposit was expensed. In addition, in June 2003 we
agreed to sell a note receivable with a carrying value of $500,000 for $250,000
in cash and in turn incurred $25,000 in other costs related to this transaction.
The cash will be received in July 2003 and the book value of this note was
reduced to $225,000. This resulted in a one-time impairment expense of $250,000
which was recorded during the period ended June 30, 2003.
Minority interest in the income of the Company's Sobik's International
Franchising, Inc. subsidiary was $26,786 for the three months ended June 30,
2003 which represented a 17.37% minority interest.
Liquidity and Capital Resources
Cash used by operating activities was $136,362 during the three months
ended June 30, 2003 compared to $6,113 provided in the prior year. The increase
in cash used of $142,475 during the three months ended June 30, 2003 compared to
the same period in 2002 was primarily due to decreases in operating income and
one-time expenses related to the sale of a $500,000 note receivable at a
discount of $250,000 and the write down of a non-refundable deposit of $75,000
associated with an attempted concept acquisition.
Net cash provided by investing activities was $111,436 for the three
months ended June 30, 2003 resulting from the sale of one of our investment
securities of $57,000, dividends received of $10,000, and equity distributions
from our joint venture with COAC II of $45,000.
Net cash used by financing activities was $132,966 for the three months
ended June 30, 2003 compared to net cash used of $210,933 for the same period in
2002, a change of $77,967. The Company made principal payments on long-term debt
of $132,966 for the three months ended June 30, 2003 compared to $204,558 for
the same period in 2002. There were no dividend payments made during the three
months ended June 30, 2003 compared to $11,375 paid for preferred stock
dividends for the three months ended June 30, 2002.
15
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 our 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 April 1, 2003 to June
30, 2003:
Exempt From
1933 Act
Shares Type of Value of Registration In
Issued Security Consideration Date Issued To Whom Issued Business Purpose Reliance of:
------- -------- ------------- ------------ ------------------ -------------------- ------------
100,000 Common $ 15,000 Apr 17, 2003 BARKA MAT S.A. 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.
None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits. The following exhibits are included as part of this report
at the location indicated:
31.1 Certification by Christopher M. Swartz under Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by Michael F. Cronin under Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Christopher M. Swartz pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Michael F. Cronin pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. During the quarter ended June 30, 2003,
Ultimate Franchise Systems, Inc. did not file any reports on Form 8-K.
16
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
08/14/03 Christopher M. Swartz Authorized Officer /s/ Christopher M. Swartz
- -------- --------------------- ------------------ -------------------------
Date Print Name Title Signature
Chief Financial
Officer & Chief
08/14/03 Michael F. Cronin Operating Officer /s/ Michael F. Cronin
- -------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
17