U.S Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from January 1, 1999 to September 30, 1999
0-23545
-------
Commission File Number
JRECK Subs Group, Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
Colorado 84-1317674
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2101 West State Road 434, Suite 100, Longwood, Florida, 32779
--------------------------------------------------------------
(Address of principal executive offices)
(407) 682-6363
--------------
(Issuer's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ]
The Registrant's revenue for the fiscal year ended September 30, 1999:
$3,296,378.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity) as of
December 10, 1999 was $2,994,736 (for purposes of the foregoing calculation
only, each of the registrant's officers and directors is deemed to be an
affiliate).
There were 28,917,147 shares of the registrant's common stock outstanding as of
December 10, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I
Item 1. Description of Business.
Form and Year of Organization
In May, 1996 the Company concluded a reverse acquisition wherein all of its
capital stock was acquired by Circa Media, Inc., a Colorado corporation,
incorporated on July 19, 1995 and formerly engaged in reproducing archival,
public domain art and photographs in digital form. Pursuant to an agreement and
Plan of Reorganization between JRECK Subs, Inc. and Circa Media, Inc., Circa
Media, Inc. changed its name to JRECK Subs Group, Inc. (the Company) on May 7,
1996 and the former shareholders of JRECK Subs, Inc. received 5,000,000 common
shares of the Company in the transaction or 56% of the outstanding shares. In
addition the former Series A Preferred shareholders of JRECK Subs, Inc. received
700,000 shares of the Company's Series A Preferred stock. The former business of
Circa Media, Inc. was discontinued.
The Company grew through acquisitions in 1997 and 1998 and now consists of JRECK
Subs Group, Inc. (JRECK) and its wholly owned subsidiaries as follows:
- --------------------------------------------------------------------------------
State of
Corporation Name Incorporation Predominant Restaurant Concept
- ---------------- ------------- ------------------------------
JRECK Subs, Inc. New York "JRECK Subs","Lox, Stox & Bagel"
Admiral's Fleet, Inc. Washington "Mountain Mike's"
Admiral Subs Group, Inc. Washington "Seawest Sub Shops"
SBK Franchise Systems, Inc. Florida "Sobik's"
Li'l Dino Corporation North Carolina "Li'l Dino"
Pastry Product Producers, LLC New York Bakery Operations
- --------------------------------------------------------------------------------
Recent Acquisition
In March of 1998 the Company acquired Li'l Dino Corporation, a 43 unit sandwich
shop franchisor located in North Carolina. The Company paid the purchase price
of $2,400,000 by assuming $400,000 in existing bank debt and issuing 735,294
common shares valued at $2.72 per share. The Company also issued 43,290
additional shares valued at $100,000 to two individuals as brokerage fees for
their assistance in arranging the transaction.
General Description of Business
The Company is a multiple concept franchisor of submarine sandwich restaurants
and sit-down pizza restaurants. Through its concepts, JRECK Subs Group, Inc.
offers a menu of high quality, fresh submarine sandwiches, soups and hot and
cold side order items, a full range of gourmet pizza selections and a full line
of bagel offerings at selected franchise locations.
Submarine Sandwich Menu and Stores
Through four of its subsidiaries, JRECK offers a lunch and dinner menu of
different submarine sandwiches, soups and hot and cold side orders as well as a
line of bagels and additional breakfast items. JRECK's submarine shop philosophy
is to offer a wider selection of menu items and higher quality ingredients (such
as rib eye steak) cooked on the premises. The food preparation area is open to
customer view to engage customer interest and to showcase cleanliness and
freshness. The food preparation process is designed to deliver a completed food
order within 60 seconds. Sandwich menu prices range from $2.50-$5.95. In
addition, JRECK offers a selection of soft drinks, deep fried mushrooms, cheese
sticks and french fries as well as dessert items such as cookies. Certain
restaurant concepts also offer signature rolls baked fresh on the premises.
As of September 30, 1999 there was an aggregate of 137 franchised locations
under various submarine sandwich concepts as follows:
Concept: Number of Units Geographic Area
-------- --------------- ---------------
"JRECK Subs","Lox, Stox & Bagel" 45 Upstate New York
"Sub Shops" 28 Pacific Northwest
"Sobik's" 26 Central Florida
"Li'l Dino" 38 Central North Carolina
Each location is designed as a "dine in" location (with many offering a drive up
window). Restaurants range in size from 1,000 square feet to 2,000 square feet
(1,400 to 1,500 square feet being typical), and are located in strip shopping
centers, shopping malls and free standing buildings.
2
<PAGE>
As is typical in sandwich shops, the majority of store sales occur during lunch
with the balance during the dinner hours. Dine in and take out (including
delivery) comprise 60% and 40% of sales respectively. Individual franchisees may
also offer catering services for special events and also may provide a full line
of products on a temporary site basis by utilizing authorized mobile facilities.
Each franchisee leases or owns its own store facilities. Neither the Company,
nor any of its affiliates, engage in leasing any store premises to any
franchisees.
Pizza Menu and Stores
Mountain Mike's provides high quality, fresh (never frozen) pizza made of the
finest ingredients available in the industry. Mountain Mike's uses only whole
milk mozzarella cheese, natural casing pepperoni and fresh "made in store daily"
pizza dough. The dough is never frozen and is always used the day it is made.
This gives Mountain Mike's pizza the "Signature Dough" quality for which it is
famous. Among Mountain Mike's pizzas are specialties such as the "Classic
Pepperoni", the "Robber's Roost" (tangy garlic chicken), or the mountain sized
"Mt. Everest", over five pounds of pizza with 8 toppings. Mountain Mike's has
been a regional innovator in the pizza industry for over 21 years.
The Mountain Mike's locations are designed for casual family dining in a fun
filled environment. The restaurants have large screen TV's, a children's game
room, and a menu offering pizza, salad bar, sandwiches, beer, wine and soft
drinks. Restaurants range in size from 2,500 square feet to 4,500 square feet
and typically seat 80-120 diners. Each franchisee leases or owns its own store
facilities. Neither the Company, nor any of its affiliates, engage in leasing
any of these store premises to any franchisees.
Mountain Mike's offers take out and delivery of its complete menu and currently
derives approximately 35%-40% of its revenue from such sales.
As of September 30, 1999 there were 72 franchised locations under the pizza
concept as follows:
Concept: Number of Units Geographic Area
-------- --------------- ---------------
"Mountain Mike's" 72 Northern California
Franchise Programs
Through the terms of its "Franchise Agreement" the Company authorizes
individuals and/or companies to form or establish and operate concept
restaurants at approved locations. Under the agreement, the company is obligated
to provide certain services both for the opening of, and the ongoing support of,
each restaurant. Those services generally include:- review and approval of
restaurant location
-review and approval of plans and layout design
-identification of sources of supply of food purveyors and
other suppliers -provide an operations manual with respect
to service guidelines and restaurant management techniques
-provide initial and ongoing training in acceptable methods
of operations, food preparation techniques, management
controls, accounting functions, legal framework of
restaurant operations, human resources, promotional programs
and public relations
-provide ongoing support with respect to maintaining quality
products and insuring such products are offered at
competitive prices -perform ongoing consistency and quality
inspections of restaurants in order to maintain uniform
acceptable standards
As of September 30, 1999 the Company had a combined 209 submarine sandwich and
pizza restaurants, all of which are franchised.
JRECK obtains prospective franchisees primarily from the ranks of its current
and former franchisees and employees, referrals from existing franchisees and
from selected marketing efforts such as restaurant trade shows. The Company
intends to develop new franchise locations primarily through existing
franchisees. The primary selective criteria considered by the Company in the
review and approval of new franchisees is prior experience in operating
restaurants or comparable business acumen and the existence of sufficient
capital resources to reasonably insure success.
3
<PAGE>
Management believes the Company has a national presence which it intends to
strengthen by developing each of its regional concepts.
From time to time the Company will take over the operations of a store from a
franchisee before the contract term has expired. The Company may operate such
stores until a suitable franchisee can be found, at which time all or part of
the Company's investment in such operations may be recovered, or it may choose
to close the location.
Initial franchise fees are considered to be within industry norms and currently
range from $10,000-$12,500 for new locations in the sandwich segment and are
$20,000 in the pizza segment. Initial franchise fees are due upon the execution
of the Franchise Agreement. Ongoing royalties are also considered to be within
industry norms ranging from 4%-7% of sales. In addition to ongoing royalties,
all franchisees are required to contribute 2%-4% of sales to a concept based
pooled marketing fund. The following table sets forth and summarizes certain
information about the Company's Concepts and current franchise agreements:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
No. of Avg. Royalty Royalty
Franchised Rate on Rate on Currently
Units at Avg. Yrs. Existing Current Price of Selling
Sept 30, Remaining Franchise Franchise New New
Concept 1999 On Contract Agreements Agreement Franchise Franchises
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
"JRECK Subs","Lox, Stox & Bagel" 45 8.2 4.3% 5.0% $ 10,000 Yes
"Sub Shops"(1) 28 5.5 5.0% 5.0% 10,000 Yes
"Sobik's" 26 5.8 4.6% 5.0% 12,500 Yes
"Li'l Dino" 38 15.0 5.9% 7.0% 12,500 Yes
"Mountain Mike's" 72 9.0 4.6% 5.0% 20,000 Yes
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In connection with the Company's mandatory monitoring program, all franchisees
are required to adhere to the Company's specifications and standards on the
selection and purchase of products used in the operation of the restaurant. The
Company provides a detailed "product profile" of acceptable food, paper and
supply items for each concept. Franchisees requesting to use products not
falling under the concept "product profile" must first receive permission from
the Company.
Area Development Agreements
The Company offers to Area Developers a "Territory" within which to sell
franchised restaurants pursuant to the terms of an Area Development Agreement.
Territories are generally based on defined geographic areas and generally
require the Area Developer to increase the number of restaurants within that
territory and to provide continuing operational support.
As of September 30, 1999, the Company had an aggregate of twelve agreements with
area developers under the Mountain Mike's and Li'l Dino's concepts covering
areas of California and North Carolina, respectively.
Each Area Developer pays the Company a negotiated fee for the non-exclusive
right to sell and open franchises in its defined geographic territory and also
requires the Area Developer to be responsible for marketing, soliciting and
screening prospective franchisees as well as identifying possible site
selections, providing on-site opening assistance and providing ongoing
operational support. The agreements also require the Area Developer to open a
minimum number of new franchised restaurants each year or forfeit future rights
to the territory. In some situations, the Company requires the Area Developer to
own and operate at least one franchised restaurant in their territory.
The Area Development Agreement does not grant the Area Developer the exclusive
right to market or solicit franchisees in the territory. The Company reserves
the right, under the agreements, to market and sell franchises and/or establish
company owned restaurants in any territory.
The Company pays the area developer 50% of the initial franchise fee for any
franchises it sells in its respective territory. The Area Developers are also
entitled to an ongoing fee of 40% to 50% of continuing franchise royalties as
consideration for providing ongoing support. Ongoing support includes many of
the tasks required to be performed by the franchisor and are described above.
The company believes the shared ongoing revenue approach rewards the area
developer for selecting higher quality franchisees and higher quality locations
while discouraging the area developer from selecting sites that may have an
adverse effect on current locations.
4
<PAGE>
The Area Development Agreements set increasing "Minimum Performance Levels" that
require the area developer to sell and open a specified number of franchised
restaurants each year. The Company's experience with the area development
program indicates that while some area developers will exceed their development
schedules, others will fail. Delays in the sale and opening of restaurants can
occur for many reasons. The most common reasons are delays in locating desirable
sites, in negotiating acceptable site lease terms or in obtaining project
financing.
Suppliers
The Company has entered into distribution and pricing agreements with national
and regional food product manufacturers and distributors that allow owners to
obtain meat products, produce, cheeses, condiments, spices, paper products and
supplies at prices more favorable than those that could be obtained by
individual owners.
The Company believes that if such regional and national distributors could no
longer provide such goods and services, adequate alternate suppliers or
distributors are available to provide such goods and services without a
significant increase in costs.
In October, 1997 the Company completed its acquisition of Pastry Product
Producers, LLC (PPPI). PPPI is a bakery in Watertown, NY, and consists of a
plant, offices and equipment. PPPI produces the JRECK signature roll that is
supplied fresh (never frozen) to JRECK franchisees in upstate NY. PPPI produces
other baked goods such as bagels and cookies, however the rolls supplied to
JRECK franchisees account for 99% of sales. In 1997, JRECK franchisees committed
to purchase their sub rolls exclusively from PPPI over a 10 year period.
Government Regulation
The Company's principal activity of selling restaurant franchises is regulated
by the Federal Trade Commission (the "FTC") and various states. Such regulations
govern disclosure, performance and procedure in the sale and transfer of new and
existing franchises. In general the FTC's regulations require the Company to
timely furnish a franchise offering circular to prospective franchisees
containing prescribed information. Certain state laws also require registration
of the franchise offering circular with applicable state authorities. Other
states monitor or regulate the franchise relationship, particularly the sale,
renewal and termination of an agreement. The Company believes it is in
compliance with the applicable franchise disclosure and registration regulations
of the FTC and the various states that it operates in.
The Company is also subject to "Federal Fair Labor Standards Act", which governs
minimum wages, overtime, working conditions and other matters as well as the
"Americans With Disabilities Act".
From time to time the Company will operate company owned stores. While operating
stores, the Company is subject to a variety of federal, state and local laws
regarding minimum wage standards, sanitation, health, fire, alcoholic beverage
and safety codes. The Company does not currently operate any stores.
While the Company believes it is in compliance with all applicable federal,
state and local laws and regulations, there can be no assurance that it will
continue to meet the requirements of such laws and regulations. Such a default
could result in a withdrawal of approval to market franchises in one or more
jurisdictions. Any such loss of approval may have a material adverse effect upon
the Company's ability to successfully market its franchises. Violations of
federal and state franchising laws and/or regulations regulating substantive
aspects of the Company's business activity could subject the Company and its
affiliates to rescission offers, monetary damages, penalties or injunctive
proceedings. In addition, under court decisions in certain states, absolute and
vicarious liability may be imposed upon franchisors based upon the facts and
circumstances of the claim. Current expected changes in federal and individual
state laws and regulations concerning the sale, termination and non-renewal of
franchises are not expected to have a material impact on the Company's
operation. There can be no assurance that existing or future franchise
regulations will not have an adverse effect on the Company's ability maintain
and expand its franchise program.
Competition
The Company competes in the fast food sandwich and pizza segments of the
restaurant industry. As a franchisor of fast food sandwich and dine in-pizza
restaurants, the company competes on two fronts. First it must attract
successful franchisees; and, second, it must assist its franchisees in
attracting customers in each of those two niches of the restaurant industry. The
Company and its franchisees compete with an increasing number of national chains
of quick service outlets, several of which have dominant market positions, and
possess substantially greater financial resources and longer operating histories
than the Company.
5
<PAGE>
The segments of the restaurant industry that the Company and its franchisees
compete in are highly competitive with respect to price, service, outlet
location, and food quality and are often affected by changes in consumer taste,
local and national economic conditions, population trends and local traffic
patterns.
The three most prolific submarine sandwich chains the Company and its
franchisees compete with are Subway, Blimpie and Quiznos. Subway currently has
approximately 14,000 units while Blimpie and Quiznos each have about 2,000 and
500 units respectively. The Company's franchisees operate 200 units. Both Subway
and Blimpie offer a low cost product in a fast food style environment while
Quiznos is positioned between the traditional fast food style of Subway and
Blimpie and full service dining. Through its regional concepts, the Company
offers a comfortable, fast food style, family atmosphere in which to dine on
higher quality food products.
A number of companies have adopted "value pricing" strategies in response to
flattening growth rates and/or declines in average sale per restaurant. Such
strategies could draw customers away from companies that do not engage in "value
pricing", or discount pricing, and could also negatively impact the operating
margins by attempting to match competition pricing points.
In addition to competing with these chains as restaurants, the Company also
competes with these and other fast food chains for qualified franchisees. Many
franchisors, including but not limited to, those in the restaurant industry,
have greater market recognition and financial resources than the Company. The
Company believes its well established regional concepts offer prospective
franchisees the balance of a moderately priced alternative with which to enter
the fast food restaurant industry and the pride of ownership in a well
established and recognized name.
Trademarks
The Company, through its affiliates, currently owns the following trademarks or
service marks, each of which is registered and listed on the Principal Register
of the United States Patent and Trademark Office:
<TABLE>
<CAPTION>
Registration
Number or Registration
Application or Renewal
Trademark Type Number Date
--------- ---- ------ ----
<S> <C> <C> <C>
"JRECK Subs" Service Mark 1,022,898 Oct 14, 1975
"Admiral J" Service Mark 2,237,548 Feb 27, 1999
"Original Deli Taste Without Deli Cost" Service Mark 1,675,510 Feb 11, 1992
"Full Boat" Service Mark 1,761,574 March 30, 1999
"Destroyer" Service Mark 1,761,573 March 30, 1999
"Enough for two or just for you" Service Mark 1,764,733 April 13, 1999
"Seawest Sub Shops" Name, Service Mark & Design 1,703,894 July 28, 1992
"Substantially More" Service Mark 1,772,028 May 18, 1999
"Sub Shop" Name, Service Mark & Design 1,862,112 Nov 8, 1994
020443 (Wash) March 29, 1991
407629 (Canada) Feb 5, 1993
"Mountain Mike's" Name, Service Mark & Design 1,716,962 Sept 15, 1992
"Mountain Mike's Pizza" Service Mark 2,004,536 Oct 1, 1996
"Pizza The Way It Oughta Be" Service Mark 75/174377 Sept 1, 1996
"Li'l Dino" Name, Service Mark & Design 1,411,762 Sept 30, 1986
"Li'l Dino Bagel Deli and Grille" Name, Service Mark & Design 2,101,316 Sept 30, 1997
"Sobik's Subs" Name, Service Mark & Design 2,087,639 Aug 12, 1997
</TABLE>
Employees
As of September 30, 1999 the Company had approximately 35 full time employees
consisting of 15 administrative employees and 20 employed in the Watertown
bakery.
Item 2. Description of Property
The Company owns its bakery plant in Watertown, NY. The land and building that
comprise that facility include 2,064 square feet of office space and 8,651
square feet of bakery facilities. The remainder of the Company's office space is
leased at terms varying from month to month or monthly expiring on various dates
up to June 30, 2002.
6
<PAGE>
A summary of all real estate locations owned or leased by the Company at
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
If Owned: If Owned: If Leased: If Leased:
Owned Current Current Base Lease
or Square Book Value Mortgage Monthly Expiration
Address of Property Type Leased Footage Balance Rent Date
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
24685 NYS Rte 37 Office Owned 2,064 $ 354,661 $ 120,369
Watertown, NY 13601 Bakery 8,561
2101 W. State Road 434 Suite 100 Office Leased 3,064 $ 5,359 12/31/00
Longwood, FL 32779
4212 Freeway Blvd. Suite 6 Office Leased 1,830 1,309 10/31/00
Sacramento, CA 95834
4858 Mercury St. Suite 109 Office Leased 450 672 Mo.- Mo.
San Diego, CA 92111
5601 Roanne Way Suite 100 Office Leased 864 825 06/30//02
Greensboro, NC 27409
------ --------- --------- --------
TOTALS 16,833 $ 354,661 $ 120,369 $ 8,165
====== ========= ========= ========
</TABLE>
The Company believes it has obtained, and currently carries, adequate liability
insurance on all the properties it owns or leases.
Item 3. Legal Proceedings
On August 2, 1999, the shareholders of Li'l Dino Management Corporation filed a
complaint against the Company and two of its officers in Civil Action Number
1:99:CV631 in the United States District Court for the Middle District of North
Carolina, Greensboro Division. The Company was served with this complaint on
August 5, 1999. This complaint alleges damages of $4.5 million for securities
fraud, misappropriation of corporate opportunities and negligent
misrepresentation and seeks treble damages, interest and attorney's fees. The
allegations in the complaint relate to the Company's acquisition of
substantially all the assets of Li'l Dino Management Corporation.
The Company believes the claims made in the complaint are without merit and
intends to defend itself vigorously in this matter.
The Company 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 the Company's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual shareholder meeting on October 23, 1998 in Orlando,
Florida. Two matters were submitted to a vote of the common shareholders of
record on September 1, 1998. One was the election of Directors Christopher M.
Swartz, Bradley L. Gordon, Eric T. Swartz, Kelly A. Swartz and Jeremiah J.
Haley. The second matter was for approval of the Employee Stock Option Incentive
Plan. The Stock Option Plan (as included in the Company's Proxy statement and
filed with the Securities and Exchange Commission and incorporated by reference
herein) was approved by the shareholders and all the directors were elected by
the following vote tabulation:
- -----------------------------------------------------------------------------
Votes Votes
Cast Cast Votes Broker
Director For Against Withheld Non-Votes
- -----------------------------------------------------------------------------
Christopher M. Swartz 10,558,337 Not Tallied 194,538 5,900,000
Bradley L. Gordon 10,620,925 Not Tallied 131,950 5,900,000
Eric T. Swartz 10,552,737 Not Tallied 200,138 5,900,000
Kelly A. Swartz 10,551,613 Not Tallied 201,262 5,900,000
Jeremiah J. Haley 10,620,925 Not Tallied 131,950 5,900,000
- -----------------------------------------------------------------------------
Both Kelly Swartz and Jeremiah Haley have resigned as of December 31, 1998.
7
<PAGE>
PART II
Item 5. Market for Common Equity
The Company's Common Stock is listed on the OTC Bulletin Board under the symbol
"JSUB". The prices reported below reflect inter-dealer prices and are without
adjustments for retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.
High Bid Low Bid
-------- -------
Fiscal Year Ended December 31, 1997 First Quarter 4 1/8 1 3/4
Second Quarter 8 1/4 3 1/4
Third Quarter 4 1/8 3
Fourth Quarter 3 7/16 2 1/8
Fiscal Year Ended December 31, 1998 First Quarter 3 1/8 1 13/16
Second Quarter 2 11/16 1 3/4
Third Quarter 1 1/16 9/16
Fourth Quarter 7/8 1/4
Fiscal Year Ended September 30, 1999 First Quarter 17/32 1/16
Second Quarter 5/8 1/8
Third Quarter 3/8 3/16
Stockholders:
As of December 10, 1999 there were approximately 8,200 record holders of the
Company's common stock.
Dividends:
The Company has never paid any dividends on its Common Stock and does not expect
to pay any dividends on its common stock in the foreseeable future. Management
currently intends to retain all available funds for working capital and the
development of its business. Dividends, if declared, must be from funds legally
available after dividends are first paid to any senior series of equity
securities such as the Company's Preferred Stock. Currently no surplus exists.
Recent Sale of Unregistered Securities
On January 5, 1998 the Company concluded its Preferred "D" stock offering. The
Company raised $2,500,000 through the offering. Eighteen investors purchased
2,500 shares for $1,000 each. The holders of the Series "D" Preferred Stock have
no voting rights and are entitled to cumulative dividends of $80 per share, per
year, payable in cash or common stock. Holders of the Series "D" may convert a
portion or all of their holdings into common stock based upon a conversion rate
formula of 65% of the average five day closing bid price five trading days
before conversion. The conversion rate was further adjusted by two five percent
penalty increments for the Company's failure to file and make effective a Form
SB-2 within certain time parameters. As of June 10, 1999 the Company has issued
5,303,574 common shares as conversion shares under this agreement.
On June 10, 1999, the holders of the Preferred "D" converted their entire
holding to the Company's newly created Preferred "F" series. The Series D was
canceled and 197.5 shares of the Series F were issued in its place. The holders
of Series F are each entitled to receive an annual dividend of $1,000. The
dividend is payable quarterly beginning August 1, 1999. The holders may require
the Company to repurchase the outstanding shares at a 25% premium over the face
value of $10,000 no sooner than June 1, 2000 and no later than August 1, 2000.
The Company may also redeem the shares at any time prior to February 1, 2000 at
$12,500 per share. In the event of liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, the Series F holders are
entitled to receive $13,000 per share.
The following table sets forth information with respect to the sale or issuance
of unregistered securities by the Company over the last three fiscal years:
8
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Exempt From
1933 Act
Value or Registration
Shares Type of Consider- To Whom In
Issued Security Date ation Issued Business Purpose Reliance of:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
415,095 Common Jan 20, 1997 220,000 Public Offering Cash Investment Rule 504 Reg D
230,000 Common Feb 5, 1997 424,003 Certified Food Service Acquire Bakery Equipment Section 4(2)
94,650 Common Feb 28, 1997 336,954 4 Individuals Consulting Services Section 4(2)
39,118 Common Apr 1, 1997 114,248 400 Wstrn FF Shhldrs Investors in Predecessor Company Section 4(2)
60,000 Common May 23, 1997 30,000 Deegan Group Exercise of Options Section 4(2)
289,500 Common Jun 19, 1997 1,331,156 Chai Entrp. etal Acquisition of "Hymies" Bagel Chain Section 4(2)
100,000 Common Jul 8, 1997 200,000 Pref "A" Holders Conversion to Common Stock Section 4(2)
300,000 Common Jul 10, 1997 225,000 Corp. Relations Group Exercise of Options Section 4(2)
198,000 Common Jul 25, 1997 198,000 Public Offering Cash Investment Rule 504 Reg D
59,710 Common Jul 30, 1997 227,227 4 Individuals Consulting & Settlement of Debt Section 4(2)
93,794 Common Aug 15, 1997 340,000 W. & C Richey Acquisition of "Georgio's" Restaurant Section 4(2)
Chain
500,000 Common Sep 3, 1997 1,531,250 Sidney Wertheim etal Acquisition of "Little King" Restaurant Section 4(2)
Chain
75.000 Common Sep 17, 1997 229,286 Olympus Capital Consulting Services Section 4(2)
495,000 Common Oct 15, 1997 547,800 20 Individuals Conversion of Debt to Equity-Cash Section 4(2)
Investment
120 Preferred "C" Oct 8, 1997 120,000 12 Individuals Acquisition of "Mtn Mike's" Restaurant Section 4(2)
Chain
899,967 Common Oct 8, 1997 2,643,653 QFS Shareholders Acquisition of "Mtn Mike's" Restaurant Section 4(2)
Chain
262,500 Common Oct 27, 1997 658,594 3 Individuals Acquire 50% Pastry Product Producers, Section 4(2)
LLC
60,000 Common Nov 30, 1997 146,400 1 Investor Loan Inducement Section 4(2)
500,000 Common Sep 24, 1997 1,500,000 Bradley Gordon Issued for Promissory Note-Corp Officer Section 4(2)
300,000 Common Sep 24, 1997 900,000 Richard Silberman Issued for Promissory Note Section 4(2)
61,111 Common Nov 6, 1997 137,500 3 Individuals Cash Investment Section 4(2)
25,000 Common Nov 6, 1997 50,000 1 Individual Cash Investment Section 4(2)
187,266 Common Dec 4, 1997 526,686 Interfoods of America LLC Acquisition of "Sobik's" Restaurant Section 4(2)
Chain
138,889 Common Dec 31, 1997 250,000 Nadaff &Youngmann Cash Investment Section 4(2)
150,003 Common Mar 26, 1998 309,375 QFS Shareholders Acquisition of "Mtn Mike's" Restaurant Section 4(2)
Chain
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Exempt From
1933 Act
Value or Registration
Shares Type of Consider- To Whom In
Issued Security Date ation Issued Business Purpose Reliance of:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2,500 Preferred "D" Jan 5, 1998 2,500,000 18 Investors Cash Investment Section 4(2)
25,000 Common Feb 5, 1998 25 Mitchell Day Exercise of Seawest Options Section 4(2)
11,550 Common Feb 9, 1998 30,319 Andrew Caffey Legal Services Section 4(2)
40,000 Common Mar 16, 1998 97,500 Allan Richman Consulting Services Section 4(2)
9,400 Common Mar 16, 1998 22,913 Francis Jenne Consulting Services Section 4(2)
52,631 Common Mar 26, 1998 125,000 Frmr Seawest Shhdrs Acquisition of "Seawest" Restaurant Section 4(2)
Chain
112,793 Common Apr 29, 1998 277,404 Sidney Wertheim etal Settlement of Debt Section 4(2)
735,294 Common May 18, 1998 2,000,000 Li'l Dino Shareholders Acquisition of "Li'l Dino" Restaurant Section 3(a)(10)
Chain
115,000 Common May 27, 1998 251,563 Pat Gerrard Consulting Services Section 4(2)
350,000 Common Jun 3, 1998 700,000 Preferred "B" Hldrs Conversion to Common Section 4(2)
43,290 Common Jun 16, 1998 100,000 R. Berg & S. Wemple Finder's Fee on Acquisition of Section 4(2)
"Li'l Dino"
660,000 Common Jul 6, 1998 1,320,000 Preferred "A" Hldrs Conversion to Common Section 4(2)
6,857 Common Jul 21, 1998 9,000 Interfoods of America Extend Due Date on Puts Section 4(2)
500,000 Common Jul 31, 1998 687,500 Bradley Gordon Issued for Promissory Note-Corp Officer Section 4(2)
300,000 Common Jul 31, 1998 412,500 Richard Silberman Issued for Promissory Note Section 4(2)
500,000 Common Jul 31, 1998 687,500 Michael Cronin Issued for Promissory Note-Corp Officer Section 4(2)
10,000 Common Aug 5, 1998 13,125 W. & C. Richey Extend Due Date on Puts Section 4(2)
70,000 Common Sep 16, 1998 70,000 5 Investors Loan Inducement Section 4(2)
33,333 Common Oct 1, 1998 29,166 Mitchell Day Acquisition of "Food Court" Concept Section 4(2)
20,000 Common Oct 31, 1998 10,000 JG Partners L.P. Consulting Services Section 4(2)
500,000 Common Nov 6, 1998 250,000 QFS Shareholders Acquisition of "Mtn Mike's" Restaurant Section 4(2)
Chain
615,384 Common Nov 25, 1998 150,000 Barry Seidman Conversion of 150 Sh of Preferred "D" Section 4(2)
39,727 Common Nov 25, 1998 25,652 Barry Seidman Dividends on Preferred "D" Section 4(2)
50,000 Common Dec 4, 1998 21,875 Interfoods of America Inducement to Extend Loan Due Date Section 4(2)
300,000 Common Dec 14, 1998 75,000 Sidney Wertheim etal Acquisition of "Little King" Restaurant Section 4(2)
Chain
75,000 Common Dec 22, 1998 75 Mitchell Day Exercise of Seawest Options Section 4(2)
- -----------------------------------------------------------------------------------------------------------------
9
<PAGE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Exempt From
1933 Act
Value or Registration
Shares Type of Consider- To Whom In
Issued Security Date ation Issued Business Purpose Reliance of:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
491,980 Common Jan 6, 1999 139,810 Preferred "D" Holders Conversion of 80 shares of Preferred "D" Section 4(2)
361,766 Common Jan 25, 1999 52,546 Preferred "D" Holders Conversion of 30 shares of Preferred "D" Section 4(2)
1,346,463 Common Feb 19, 1999 254,731 Preferred "D" Holders Conversion of 145 shares of Preferred Section 4(2)
"D"
307,151 Common Feb 22, 1999 70,308 Preferred "D" Holders Conversion of 40 shares of Preferred "D" Section 4(2)
241,159 Common Mar 5, 1999 44,007 Preferred "D" Holders Conversion of 25 shares of Preferred "D" Section 4(2)
248,138 Common Apr 27, 1999 35,320 Preferred "D" Holders Conversion of 20 shares of Preferred "D" Section 4(2)
1,000,000 Common May 28, 1999 250,000 Norstarr Services Consulting Services Section 4(2)
1,456,679 Common May 10, 1999 194,868 Preferred "D" Holders Conversion of 110 shares of Preferred Section 4(2)
500,000 Common Apr 14, 1999 150,000 Three Investors Cash Investment Section 4(2)
96,154 Common May 14, 1999 25,000 Phoenix Capital Conversion of Debt Section 4(2)
96,154 Common May 14, 1999 25,000 C.A. Opportunidad Conversion of Debt Section 4(2)
130,000 Common May 29, 1999 48,100 Gulf Atlantic Publishng Consulting Services Section 4(2)
769,230 Common May 14, 1999 174,563 2 Investors Sale of Stock for cash Section 4(2)
37,500 Common May 14, 1999 0 P. Truax, R. Longely Exercise of Options Section 4(2)
197.5 Preferred "F" Jun 10, 1999 2,468,500 19 Investors Conversion of Preferred "D" to "F" Section 4(2)
700,187 Common Jun 11, 1999 329,088 Interfoods Modification of Terms of SBK acquisition Section 4(2)
20,000 Common Jun 21, 1999 4,400 Barry Seidman Penalty on Loan Default Section 4(2
50,000 Common Jun 24, 1999 12,500 Blaine Quick Consulting Services Section 4(2)
187,266 Common Jun 11, 1999 335,206 Interfoods Conversion from redeemable to fully Section 4(2)
issued
66,667 Common Jun 28, 0999 20,000 Thornbury Associates Consulting Services Section 4(2)
100,000 Common Aug 11, 1999 21,880 Preferred "A" Holders Preferred "A" conversion price Section 4(2)
adjustment
750,000 Common Aug 11, 1999 175,815 7 Individual Investors Price adjustments on previously issued Section 4(2)
stock
500,000 Common Aug 11, 1999 109,400 Tri-Emp Enterprises Loan Payment Section 4(2)
25,000 Common Sep 10, 1999 5,000 Robert Weiner Consulting Services Section 4(2)
195,127 Common Sep 20, 1999 44,793 Preferred "D" Holders Conversion of 25 shares of Preferred Section 4(2)
"D"
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options and Warrants
Since January, 1997 the Company has issued options and warrants to purchase its
common stock. The following table describes selected data with respect to
unexercised options and warrants at September30, 1999:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Date Expiration Number of Exercise
of Grant Date Name Shares Price Business Purpose
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sept 15, 1997 Sept 15, 2000 Corporate Relations Group 100,000 $ 3.93 Advertising and Marketing Services
Dec 17, 1997 Dec 17, 2002 Business Advisors 375,000 1.92 Business Expansion Consulting Services
Dec 17, 1997 Dec 17, 2002 Business Advisors 375,000 2.56 Business Expansion Consulting Services
Dec 17, 1997 Dec 17, 2002 Business Advisors 375,000 3.20 Business Expansion Consulting Services
Dec 17, 1997 Dec 17, 2002 Business Advisors 125,000 0.84 Business Expansion Consulting Services
Dec 29, 1997 Dec 29, 2000 Christopher M. Swartz* 1,000,000 0.29 Employee Compensation
Aug 3, 1998 Aug 3, 2001 Christopher M. Swartz* 1,000,000 0.29 Employee Compensation
Jan 6, 1997 Jan 6, 2000 Tri-Emp Enterprises, Inc. 225,000 0.75 Assignment of Other Rights
May 23, 1997 April 1, 2002 Thomas Larcomb 60,000 0.50 Loan Inducement
May 23, 1997 April 1, 2002 Richard Deegan 60,000 0.50 Loan Inducement
Sept 30, 1997 Feb 1, 2001 AB Laffer &Cantoo Assoc. 13,500 3.08 Acquisition of Mtn. Mike's
Sept 30, 1998 Sept 30, 2003 Wall St. Group 114,285 0.875 Investment Banking Services
Sept 30, 1998 Sept 30, 2003 Dr. Sol Lizerbram 114,285 0.875 Investment Banking Services
Feb 10, 1999 Feb 10, 2002 Employees/nonemployee Director 845,000 .20 Employee Stock Option Plan
------------
TOTAL 4,782,070
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Original options at $2.75 and $1.55 were repriced on October 1, 1999 at $0.29
per share.
The weighted average exercise price of these outstanding options is $1.02 and
the weighted average life until expiration is 29.9 months. Options representing
350,000 shares expired in 1999 and options representing 37,500 shares were
exercised in 1999 while the Company granted additional options on 895,000 shares
during the year.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Transition Period Due to Change in Fiscal Year
During 1999, the Company changed its fiscal period from December 31 to September
30. Accordingly, the audited financial statements included in item 7 of this
Form 10-KSB reflect operating results and cash flows for a twelve month period
and a nine month period ended December 31, 1998 and September 30, 1999,
respectively. Management has elected to present this discussion and analysis on
a nine month comparative basis with the unaudited results as disclosed on the
third quarter Form 10-QSB filed with the S.E.C. on November 15, 1998 and Form
10-QSB/A filed in January 2000. Readers
10
<PAGE>
are suggested to supplement a reading of this discussion and analysis with a
review of those financial statements as well as review the following comparative
table of results of operations and cash flows:
<TABLE>
<CAPTION>
Account Description Nine Months Ended Nine Months Ended
Sept. 30, 1999 Sept 30, 1998
-------------- -------------
<S> <C> <C>
Total Franchising Revenue $ 2,724,534 $ 2,652,781
Franchising Costs 1,296,506 1,484,583
----------- -----------
Net Franchising Income 1,428,028 1,168,198
Bakery Sales 571,844 736,171
Bakery Cost of Sales and Expenses 541,014 680,363
----------- -----------
Net Bakery Income 30,830 55,808
Retail Sales of Company Owned Stores 0 1,353,366
Cost of sales and Expenses 0 1,460,087
----------- -----------
Net Income From Company Owned Stores 0 (106,721)
Net Operating Line Profit 1,458,858 1,117,285
Other Expenses:
Business Expansion and Investor Relations 722,541 852,486
Central Corporate Expenses 1,177,276 1,257,656
Interest Expense 356,192 248,830
Write Off of Uncollectible Accounts 254,507 0
Amortization and Depreciation 670,442 865,678
Penalty Charge on Preferred "D" 0 718,272
Other 45,999 (46,522)
----------- -----------
Net Loss $(1,768,099) $(2,779,115)
=========== ===========
Net Loss Per Share $ (0.08) $ (0.17)
Weighted Average Shares Outstanding 22,796,417 16,378,836
Cash Consumed by Operating activities $ (429,270) $(1,256,394)
Cash Provided by Financing Activities 103,137 1,613,908
Cash Consumed by Investing Activities 136,847 (531,748)
----------- -----------
Net Change in Cash $ (189,286) $ (174,234)
=========== ===========
</TABLE>
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; the potential effect on business
from year 2000 issues; 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
The Company derives its revenue from several sources: royalties, franchise fees,
developer fees, company owned restaurants sales and other franchise related
activities as well as a bakery acquired to supply sandwich rolls to certain
franchisees. All Company owned stores were disposed of in 1998.
Royalties
Royalties are based on a percentage of franchisees' net sales and are recognized
by the Company in the same period that the franchise store sales occur.
Generally royalties are earned at the rate of 4%-7% of sales. Royalties earned
under newer franchise agreements are paid by means of weekly automatic drafts by
the Company drawn on franchisee bank accounts. Royalties earned under older
agreements are generally paid by the remittance of a check payable to the
Company on a weekly, bi-weekly or monthly basis. A portion of the royalties
received by the Company are paid to its area developers as royalty service costs
for providing on-going services to franchisees in their respective territories
(see Item 1. Business-Franchising-Area Developers). Royalties have increased
most dramatically as the result of the acquisition of the chains that now
constitute the Company. These acquisitions occurred in the last half on 1997 and
first quarter of 1998.
Franchise Fees
Franchise Fees are payments received by the Company from franchisees and are
recognized as revenue in the period in which the store opens. The franchise fee
for a franchisee's initial store is currently $10,000-$12,500 for
11
<PAGE>
submarine sandwich restaurants and $20,000 for pizza restaurants. Expenses
associated with the sale of franchises also include area developer fees and are
included in franchise servicing costs. Generally, area developers are paid one
half of the franchise fees received or collected in their territory.
Area Developer Fees
The Company charges area developers a non refundable fee for the exclusive right
to develop and market a defined territory for a specified period of time.
Typically, a portion of the developer fee is paid in cash and the balance is
paid with a promissory note (see Item 1. Business-Franchising-Area Developers).
When the Company has fulfilled substantially all of its contractual obligations
such as training, providing manuals, and reasonable efforts to obtain and retain
trademark registrations, the Company recognizes, as revenue, the cash portion of
the fee and the value of the promissory note. Certain performance obligations
are ongoing. On these the income has been deferred to future periods in which
the services will be substantially performed.
Restaurant Sales
Restaurant sales are reported from Company owned stores. These sales are
expected to decline as the Company completes its strategic shift to become
strictly a franchisor. The Company owned 11 stores at the end of 1997 and had
completely divested itself of all such stores by the end of 1998 by selling or
transferring them to new or existing franchisees. From time to time the Company
will take over the operations of a store from a franchisee before the contract
term has expired. Management's intent is to resell these stores to prospective
franchisees as soon as practicable. Management does not believe that the
operating costs of its Company owned stores are indicative of costs for
franchised stores on a systemwide basis. As such, store sales are not considered
to be a primary source of income. Store sales are expected to vary widely from
year to year and reflect the uncertainty of when, where and how long a store may
be operated by the Company before being returned to the franchising system.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenue: Total Revenue decreased $1,445,940 in 1999 over 1998 from $4,742,318
to $3,296,378.
Royalties increased $49,835, or about 2.5%, from $1,996,445 in 1998 to
$2,046,280 in 1999. An increase of $84,857 was the result of the acquisition of
the Li'l Dino chain in March of 1998 and reporting only six months of revenues
in 1998 compared to a full nine months of operations in 1999. This increase was
offset by overall lower royalty revenues in the other concepts of $35,022.
Franchise fees decreased $48,750 from $127,000 in 1998 to $78,250 in 1999.
$47,500 of the decrease was recognized through the Mt. Mikes pizza chain and was
the result of scheduled openings being pushed into the next reporting period.
The Company began 1999 with 273 franchised restaurants. During the current nine
month period the Company added an additional 6 new stores and closed or
terminated franchise agreements on 42 stores. These closings were the result of
voluntary terminations due to competitive conditions in the Company's market
segment and to the cancellation or rescission of franchise agreements of certain
franchisees that were not fulfilling their contract obligations. The company
ended the year with 209 franchised units after the sale of 28 Little King
restaurants, or a pro-forma decrease of 13.2%. The six new stores were primarily
opened by existing franchisees. This reflects the Company's policy of growth
through existing franchisees with the belief that this will contribute to a high
rate of new store successes.
Developer fees were $24,896 in 1998 compared to none in 1999. This was due to
the recognition of the deferred performance amounts on existing contracts. The
Company has not sold development rights in any territories in 1999 or 1998. The
Company anticipates that developer fees received in the future will primarily be
the result of re-marketing existing agreements.
Retail restaurant sales in Company owned stores decreased from $1,353,366 in
1998 to $0 in 1999. The decrease was the result of operating 10-11 stores in
the Little King chain for most of 1998. All Company owned stores were sold in
1998 and no new stores were acquired or operated by the Company in 1999.
Comparative average store sales volume for these stores remained substantially
unchanged from the previous year. The Company also discontinued its Hymie's
retail bagel sales efforts in Tampa in early 1998.
Bakery sales for the bakery owned and operated in 1999 remained about the same
as 1998's sales at $566,329 and $571,844, respectively. The Company also closed
the Tampa bakery in 1998. This operation generated $159,843 in '98 sales before
it was closed.
12
<PAGE>
Costs and Expenses
The Company segregates its operating expenses into six general categories as
follows:
Ongoing Franchise Servicing
Retail Company Owned Store Cost of Sales and Expenses
Bakery Cost of Sales and Expenses
Central Corporate Operating Expenses
Non-Cash
Other
Franchise servicing costs, including ongoing area developer fees, decreased
$188,077 to $1,296,506 in 1999. The addition of L'il Dino operations in late
March of 1998 accounted for an increase in current period expenses of $49,125
over 1998 while all the other chains, combined, experienced a decrease of
$237,202. These reductions are the result of management's ongoing efforts to
assimilate and combine functions previously performed at each division level.
Many of the purchasing, administrative, accounting and regulatory tasks
previously performed by the divisional employees are now being handled at the
corporate level. The effect of this was to reduce the staff necessary to perform
these functions at the divisional level. The Company continues to focus its
efforts on franchise royalty management with the result that the operating
profit from this activity increased $259,830 from 1998 to 1999 or from
$1,168,198 in '98 to $1,428,028 in 1999.
Retail cost of sales and operating expenses from company owned stores was
eliminated in 1999 as the Company neither owned or operated any stores during
that period.
Bakery cost of sales and expenses decreased $139,349 in 1999 from 1998's level
of $680,363. The decrease is primarily due the closing of the Tampa bakery in
1998 which amounted to a $127,393 cost elimination.
The following graph illustrates the net cash flow derived from the Company's
three main operating activities:
[GRAPH OMITTED]
Central corporate operating expenses generally include: officers and office
support staff payroll and payroll costs; legal, audit and other professional
fees; office occupancy costs and other general administrative costs. These
administrative costs decreased 6.4% in 1999 to $1,177,276 from $1,257,656 in
'98. This decrease was the result of non-recurring charges of $160,843 in 1998
for additional legal and accounting fees in connection with the audit of its
1997 financial statements and the filing of its S.E.C. registration statements
on forms 10-SB and SB-2.
Routine or recurring non-cash charges such as depreciation, amortization (of
goodwill and non-compete covenants), write off of uncollectable receivables, and
the amortization of certain prepaid expenses (interest and consulting) over
their contractual terms was $1,544,695 in 1999 compared to $865,678 in 1998. The
increase of $679,017 in '99 was principally the result of an increase of
$254,507 in bad debts expense due to write downs of certain notes receivable;
increased amortization of $185,715 in prepaid consulting agreements; and an
increase of $117,088 in goodwill and non compete covenant amortization.
13
<PAGE>
Non-routine or non-recurring non-cash charges such as stock and options issued
for services, asset valuation charges, losses on the sale of assets, deferred
taxes and a preferred stock conversion penalty totaled $337,797 in 1999 and was
$786,055 less than the $1,123,852 aggregate charge for those items in 1998. The
net decrease was due to a combined mix of several factors. A portion of the
decrease was due to a $105,635 reduction in stock and stock options issued for
services while the balance of the decrease was the elimination of a one time
charge of $718,272 due to a penalty feature imposed on the Company by the
preferred "D" class of stock issued January 5, 1998.
Total non cash expenses decreased $107,038 in 1999 to $1,882,492 from 1998's
level of $1,989,530.
Interest expense of $356,192 and $248,830 for 1999 and 1998 respectively,
increase by $107,362 over 1998. The increase in interest expense reflects a full
nine months of interest charges in 1999 of the $400,000 note assumed in late
March upon the acquisition of Li'l Dino and new borrowings of $300,000 in August
of 1998.
Liquidity and Capital Resources
Net cash used in operating activities was $429,270 in 1999. Accounts payable and
accrued liabilities decreased $561,174. Net cash of $136,847 was generated by
investing activities, primarily through $149,370 generated by the sale of
assets. Net cash of $103,137 was generated by financing activities. This was
primarily the result of $250,000 in additional capital raised through the sale
of the Company's common stock and Series F preferred stock. Debt payments of
$90,546 and dividend payments of $56,317 on the preferred stock offset cash
generated by financing activities.
Net cash used in operating activities was $1,256,394 in 1998. Accounts payable
and accrued liabilities decreased $760,506. Net cash of $531,748 was used in
investing activities. The substantial portion being $402,636 paid out in
connection with notes receivable. Net cash of $1,613,908 was generated by
financing activities. This was primarily the result of $1,817,490 raised through
the successful offering of the Company's preferred stock. New borrowings of
$550,000 matched against debt payments of $740,350 also contributed to an
application of $190,350 to the net change in cash generated by financing
activities.
At September 30, 1999 the Company had $5,084,235 in debt and redeemable
preferred stock outstanding. No new debt was incurred during the period. The
Company did, however, convert all holders of the preferred D stock to preferred
F stock. The preferred F carries a mandatory redemption feature in 2001 and is
therefore carried as a $2,468,750 liability.
During 1998, the Company borrowed $550,000 to finance its operations and
assumed $400,000 in connection with its acquisition of L'il Dino.
The Company believes that cash flow from operations and collections from notes
receivable will continue to fund its operations as well as generate most of the
capital necessary to meet the Company's obligations of $1,606,041 in current
portion of its long term debt. The Company intends to seek other sources of
financing, restructure and/or pay off all its current obligations in 2000. Of
the total amount of $1,606,041 due in 1999, the Company has taken steps to
restructure, or eliminate approximately $1,200,000. The Company's capital
requirements are anticipated to be funded through current operations
supplemented by additional debt or equity financing, as expansion plans require.
There is no assurance that additional funding will be available, or if
available, it can be obtained on terms favorable to the company. Failure to
obtain such funding could adversely affect the Company's financial condition.
Working capital at September 30, 1999 was a deficit of $1,879,446 compared with
a deficit of $2,157,280 on December 31, 1998 a decrease of $277,834. The
decrease in deficit is reflected in a $397,157 reduction in the current portion
of long term debt and a $661,434 reduction in accounts payable and accrued
expenses which were offset by a $189,286 reduction in cash.
Impact of Year 2000
The Company's business and relationships with it business partners and customers
depend significantly on a number of computer software programs, internal
operating systems and connections to other networks. The failure of any of these
programs, systems or networks to successfully address the Year 2000 rollover
problem could have a material adverse effect on the Company's business,
financial condition or results of operations. Many installed computer software
and network processing systems currently accept only two digit entries in the
date code field and may need to be upgraded or replaced in order to accurately
record and process information and transactions on or after January 1, 2000.
14
<PAGE>
The Company utilizes personal computers (PC's) at all its employee workstations,
some of which are connected to a network while others are stand-alone units.
These personal computers all utilize Microsoft Windows or Microsoft Windows NT
as their operating system. The Company believes that the Windows version found
on all its computers is Year 2000 compliant. Additionally, the Company recently
acquired and updated software to operate all its accounting functions. The
Company believes this new software, the system in which it runs and its computer
hardware to be Year 2000 compliant. Management anticipates that all accounting
functions will be performed using Year 2000 compliant. The costs of acquiring
and implementing the software are expected to be minimal. Management believes
that any additional expenditures required to implement this software will be
funded from the cash flow generated by operations.
The Company primarily does business with its subfranchisors and its franchisees
who in turn deal with retail customers and food distribution companies. The
Company has considered the transactions it conducts with its subfranchisors and
its franchisees in its analysis of the Year 2000 issue, and believes that it has
completed substantially all modifications to the computer systems used in these
transactions to ensure the systems are Year 2000 compliant. The Company is not
certain as whether the computer software and business systems of its
franchisees' suppliers are Year 2000 compliant. The failure or delay of these
distributors to successfully address the Year 2000 issue may result in delays in
placing or receiving orders for goods and services at the restaurant level. Such
delays may result in lost revenues for the franchisees and, in turn, lower
continuing royalties to the Company. The Company anticipates that such delays
and lost revenues, if any, would be minimal.
An inventory and assessment of all non-information technology systems (such as
telephone systems, fax machines and copiers) has not been completed. The Company
does not believe that the failure of such systems will have a significant impact
on its ability to conduct business. If a year 2000 failure should occur in any
of these systems, management intends to resort to traditional hand methods until
such failure can be cured.
The Company intends to continue to monitor its Year 2000 compliance and to
correct any noncompliance as it is discovered. Management will fund such efforts
out of operating cash flow. The Company believes that the effects on any
noncompliance on its part, or by its customers and suppliers, will not have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows.
Item 7. Financial Statements
Attached hereto and filed as part of this Form 10-KSB are the consolidated
financial statements listed in the index to the Consolidated Financial
Statements at page F-1.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
(a) Effective October 26, 1999 the Company appointed Pender, Newkirk and Company
as independent accountants for the fiscal year to end on September 30, 1999. The
decision to dismiss BDO Seidman, LLP was approved by the audit committee acting
pursuant to the authority delegated by the Company's Board of Directors.
BDO Seidman, LLP's reports on the consolidated financial of JRECK Subs Group,
Inc. for each of the two most recent fiscal years contained no adverse opinion
or disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During the last two fiscal years and in the subsequent interim period to the
date hereof, there were no disagreements between JRECK Subs Group, Inc. and BDO
Seidman, LLP on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of BDO Seidman, LLP would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports.
The Company has provided BDO Seidman, prior to the filing of Form 8-K with the
Commission, a copy of the disclosures made in Item 4(a) on Form 8K.
(b) Effective October 26, the Company engaged Pender, Newkirk and Company as its
new independent accountants to audit the Company's financial statements. During
the period that BDO Seidman served as independent auditor, including all interim
periods, the Company (or someone on its behalf) never consulted Pender, Newkirk
and Company regarding any matter.
15
<PAGE>
PART III
Item 9. Directors, Executive Officers and Control Persons
The following table sets forth certain information with respect to the
executive officers and directors of the Company. Each director holds such
position until the next annual meeting of the Company's shareholders and until
his successor has been duly qualified and elected. Any of the Company's officers
may be removed, with or without cause, by the company's board of directors.
- --------------------------------------------------------------------------------
Name Age Director/Date Office or Position
Elected
- --------------------------------------------------------------------------------
Christopher M. Swartz 29 Yes/10/23/98 Chairman, President and Chief
Executive Officer
Bradley L. Gordon 46 Yes/10/23/98 Chief Operating Officer
Eric T. Swartz 33 Yes/10/23/98 Secretary
Michael F. Cronin 43 No Chief Financial Officer/Treasurer
Gary E. Rowe 45 No Controller
- --------------------------------------------------------------------------------
Christopher M. Swartz has been Chairman, President and Chief Executive Officer
of the Company since April, 1996 and Chairman, President and Chief Executive
Officer of JRECK Subs, Inc. since September, 1995. From 1992 to 1995, he was
Director of Operations of Lox, Stox & Bagels of Liverpool, Inc. Mr. Swartz is a
graduate of Syracuse University. He is the second generation of his family to be
involved with JRECK. Mr. Swartz is also the President of Tri-Emp Enterprises,
Inc. and the brother of Eric Swartz.
Bradley L. Gordon has been Chief Operating Officer and Director of the Company
since September, 1997. From September 1993 up to joining the company in 1997, he
was president of Quality Franchise Systems, Inc. (the franchisor of Mountain
Mike's Pizza), Quality Franchise Systems, Inc.'s Chief Executive Officer since
1992 and one of its directors since January, 1993. Before joining Quality
Franchise Systems, Inc., he held various positions at Pace Membership Warehouse,
Inc. in Denver, Co. from 1983 forward as an Executive Vice President-Sales;
Senior Vice President-Operations and Vice President-Human Resources.
Eric T. Swartz has been a Director and Secretary of the Company since April,
1996. He was awarded his J.D. degree and undergraduate degree from Syracuse
University College of Law and Syracuse University respectively. From October,
1993 to the present he has been a partner in the Swartz Law Firm, P.C. and was
associated with the law firm of Pease and Willer after graduating from law
school in 1992. Mr. Swartz is the brother of Christopher M. Swartz.
Michael F. Cronin has been Chief Financial Officer of the Company since March 8,
1998 and Treasurer since January 1, 1999. He is a Certified Public Accountant
who has managed his own practice, specializing in S.E.C audits and business and
tax planning, since February, 1985. He has been licensed in New York State for
17 years. Mr. Cronin is a graduate of St. John Fisher College. From 1979 to 1985
Mr. Cronin was employed as a staff accountant and partner in a regional public
accounting firm in Rochester, NY. Mr. Cronin served in the United States Marine
Corps for three years and was honorably discharged in 1976.
Gary Rowe has been the Corporate Controller since September, 1993. Prior to
joining the Company, Mr. Rowe was the Controller of the Development Authority of
the North Country, a quasi-independent New York State government agency. Mr.
Rowe graduated from the State University of New York at Albany in 1974 where he
received a bachelor's degree in Accounting. Mr. Rowe is a Certified Public
Accountant.
Item 10. Executive Compensation
The following table sets forth the cash compensation of the Company's executive
officers and directors during each of the last three fiscal years. The
remuneration described in the table does not include the cost to the company of
benefits such as health insurance premiums, and other benefits, furnished to the
named executive officers, that are extended in connection with the ordinary
conduct of the Company's business. The value of such benefits cannot be
precisely determined, however no executive officer named below received any such
benefits in excess of the lesser of $25,000 or 10% of such officer's cash
compensation.
16
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
- -----------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- -----------------------------------------------------------------------------------------------------------------------
Name & Principal Other Annual Awards Awards Payouts All Other
Position Year Salary Bonus Compensation ----------------------------------------------
Restricted Options LTIP
Stock in $ SARS (#) Payouts
($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999(C) $ 96,154 $ 0 $ 0 $ 0 0(d) $ 0 $ 0
-----------------------------------------------------------------------------------------------
Christopher M. Swartz 1998 $ 175,000 $ 0 $ 0 $ 0 1,000,000 $ 0 $ 0
President & CEO -----------------------------------------------------------------------------------------------
1997 $ 115,393 $ 0 $ 0 $ 0 1,000,000 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------------
1999(C) $ 39,000 $ 0 $ 0 $ 0 0 $ 0 $ 0
-----------------------------------------------------------------------------------------------
Gary E. Rowe 1998 $51,000 $ 0 $ 0 $ 0 0 $ 0 $ 0
Controller -----------------------------------------------------------------------------------------------
1997 $52,600 $ 0 $ 0 $ 0 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------------
1999(C) $ 102,500 $ 0 $ 0 $ 0 0 $ 0 $ 0
-----------------------------------------------------------------------------------------------
Bradley L. Gordon 1998 $ 150,000 $ 0 $ 60,000(b) $ 0 0 $ 0 $ 0
Chief Operating Officer -----------------------------------------------------------------------------------------------
1997(a) $ 37,500 $ 0 $ 0 $ 0 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------------
1999(C) $ 84,615 $ 0 $ 0 $ 0 0 $ 0 $ 0
-----------------------------------------------------------------------------------------------
Michael F. Cronin 1998 $ 93,750 $ 0 $ 0 $ 0 0 $ 0 $ 0
Chief Financial Officer -----------------------------------------------------------------------------------------------
1997 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Does not include compensation earned at Mountain Mike's prior to acquisition
by the company in Oct., 1997.
(b) Relocation expense reimbursement.
(c) Due to a change in fiscal years, 1999 compensation covers only a nine month
period.
(d) Options on 2,000,000 shares granted to Mr. Swartz in 1997 and 1998 were
modified and regranted in 1999.
Employment Contracts:
<TABLE>
<CAPTION>
Only Mr. Gordon and Mr. Cronin have employment contracts with the Company. The following table
summarizes the significant terms of these agreements:
- -----------------------------------------------------------------------------------------------------------------
Termination
Clause
Initial Salary Change in
Commencement Annual Continuation Control
Name Position Date Term Compensation Period Arrangement
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bradley L. Gordon Chief Operating Sept 22, 1997 3 Years $ 150,000 12 Months No
Michael F. Cronin Officer/Director July 31, 1998 3 Years $ 125,000 12 Months No
Chief Financial Officer
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Options and Rights Granted to Purchase Common Stock:
The following table summarizes options and rights to purchase common stock that
were granted or issued to executive officers and directors over each of the last
two fiscal years:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Number Percent of
of Number of Total Promissory
Options Shares of Date of Exercise Options Note
Granted Common Grant Price of Granted to Payable to
(in Stock or Expiration Purchase Employees the
Name Position Shares) Purchased Purchase Date Price During Year Company(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Christopher M. Swartz President & 1,000,000 Aug 29, 1999 Dec 29, 2000 $ 0.29
CEO/Director 1,000,000 Aug 29, 1999 Aug 3, 2001 $ 0.29 1999-95%
Bradley L. Gordon Chief Operating 500,000 Sept 22, 1997 Not $ 3.00 $1,500,000
Officer/Director 500,000 July 30, 1998 Applicable $ 1.38 $ 687,500
Michael F. Cronin Chief Financial 500,000 July 30, 1998 Not $ 1.38 $ 687,500
Officer Applicable
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
(1) Mr. Gordon and Mr. Cronin each purchased common shares of the Company and
paid for such purchases by a promissory note(s). The notes call for annual
interest at 9.5% with principal and interest due three years from purchase
date. Both Mr. Gordon and Mr. Cronin have the right to require the Company
to repurchase their shares as consideration for the cancellation of the
note. All accrued interest under these notes through September 30, 1999 has
been waived by the Board of Directors..
The following table sets forth information regarding the value of Options and
Stock Appreciation Rights granted to officers of the Company during 1999:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of In-The-Money
Unexercised Options and SAR's Options and SAR's
at September 30, 1999 at September 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Shares Acquired
Name and Position on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Christopher M. None None 2,225,000 None None None
Swartz
President & CEO
Bradley L. Gordon 500,000 None None None None None
Chief Operating
Officer
Michael F. Cronin 500,000 None None None None None
Chief Financial
Officer
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other:
The Company does not carry officers & directors liability insurance or
disability benefits in excess of statutorially mandated amounts. Directors
receive no compensation for their duties.
The Company maintains, and is the beneficiary of, a $3,000,000 key man term
life insurance policy and a $1,000,000 whole life insurance policy on Mr.
Christopher Swartz.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information relating to the beneficial ownership
of the Company's Common Stock by those persons beneficially holding more than 5%
of the Company's common stock or held by the company's executive officers and
directors, and by all the Company's executive officers and directors as a group
as of September 30, 1999. The address of each person is in care of the Company
unless noted.
As used in the table, The term "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e. the power to dispose of, or to
direct the disposition of, a security). In addition, for purposes of this table,
a person is deemed to have "beneficial ownership" of any security if such person
has the right to acquire such security within sixty days.
- --------------------------------------------------------------------------------
Name and Amount and
Address of Officer Nature of
Title of Beneficial or Beneficial Percent of
Class Owner Director Owner Class
- --------------------------------------------------------------------------------
Common Stock Christopher M. Swartz Yes (a) 5,569,300 18.18 %
Common Stock Bradley L. Gordon Yes 1,114,956 3.64 %
Common Stock Michael F. Cronin Yes 500,000 1.63 %
Common Stock Eric Swartz Yes 0 0.00 %
All Officers and Directors as a Group 7,184,256 23.46 %
(a) Includes 3,344,300 shares of the common stock owned by Tri-Emp
Enterprises, Inc. Mr. Swartz is President and sole shareholder of Tri-Emp
Enterprises, Inc. and as such, is deemed to have beneficial ownership of the
shares of the Company owned by Tri-Emp Enterprises, Inc. It also includes
2,000,000 shares subject to options currently exercisable by Mr. Christopher
Swartz and 225,000 shares subject to options exercisable by Tri-Emp Enterprises,
Inc.
18
<PAGE>
Item 12. Certain Relationships and Related Transactions
Kalin Enterprises, Inc. is a franchisee of JRECK Subs in Watertown, NY. Mr.
Christopher M. Swartz is a 25% shareholder and officer of Kalin Enterprises,
Inc.
In April, 1997 Tri-Emp Enterprises, Inc. borrowed $445,000 from 20 investors
secured by 445,000 shares of the Company's common stock owned by Tri-Emp
Enterprises, Inc. Tri-Emp Enterprises, Inc. in turn, loaned the entire proceeds
to the Company. On October 8, 1997 the Company issued 495,000 shares of Common
Stock to the 20 note holders in full satisfaction of the amounts owed by Tri-Emp
Enterprises, Inc.
The Company issued options to purchase 375,000 shares of Common Stock to Gulf
Atlantic Publishing, Inc. on January 6, 1997, exercisable at $0.75 per share. On
November 17, 1997 Gulf Atlantic assigned 225,000 of those options to Tri-Emp
Enterprises, Inc. in exchange for purchasing 225,000 shares of the Company's
common stock directly from Tri-Emp Enterprises, Inc.
In 1997 the Company adjusted the $104,141 carrying value of a note receivable
from Mr. H. Thomas Swartz to $0. Mr. Thomas Swartz is the father of Christopher
Swartz and Eric Swartz.
In February, 1998 the Company issued 112,793 shares of common stock to Sidney
Wertheim and or his designees in satisfaction of $277,404 in debt owed to him
by the Company's Little King, Inc. subsidiary.
Mr. Jeremiah Haley, a former director, received 175,000 shares of JRECK Subs
Group, Inc. Series A Preferred stock in exchange of his JRECK Subs, Inc. Series
A Preferred Stock on May 6, 1996. Mr. Haley was elected to the board of
directors pursuant to the rights of the holders of the series A. Mr. Haley
received $15,750 in cash dividends on his Preferred Stock in 1997. Mr. Haley
has converted all 175,000 shares of Preferred A into 190,000 shares of common
stock during 1998. The shares received upon conversion include 15,000 shares in
consideration of accrued dividends.
Mr. Christopher M. Swartz, Chairman of the Company and its President and Chief
Executive Officer, received (through his control of Tri-Emp Enterprises, Inc.)
5,000,000 shares of the Company in exchange for all the outstanding common
shares of Jreck Subs, Inc. on May 6, 1996. Mr. Swartz also received 350,000
shares of the Company's Series B Preferred Stock for his 50% interest in Pastry
Product Producers Inc. In June, 1998 Mr. Swartz converted all 350,000 shares of
Series B Preferred into 350,000 shares of the Company's Common Stock.
Mr. Bradley Gordon, the Company's Chief Operating Office and a Director,
purchased 500,000 shares of the Company's Common Stock in each of two separate
transactions to obtain an aggregate of 1,000,000 shares. One transaction
occurred in September, 1997 and the other transaction occurred on July 30, 1998.
The Company received a promissory note from Mr. Gordon on each agreement for the
full amount of each purchase price of $1,500,000 and $687,500 respectively. The
notes each bear interest at 9.5% per annum and are due three years from the date
of issuance. Mr. Gordon has the right to require the Company to repurchase the
shares as consideration for the cancellation of the underlying promissory note.
Mr. Gordon received options to acquire an additional 1,000,000 shares at $0.29
per share on October 15, 1999. These options expire on October 15, 2004. Mr.
Gordon has not exercised his rights to acquire any shares under this agreement.
All accrued interest under these notes through September 30, 1999 has been
waived by the Board of Directors.
Mr. Richard Silberman, a shareholder of the Company, purchased 300,000 shares of
the Company's Common Stock in each of two separate transactions to obtain an
aggregate of 600,000 shares. One transaction occurred in September, 1997 and the
other transaction occurred on July 30, 1998. The Company received a promissory
note from Mr. Silberman on each agreement for the full amount of each purchase
price of $900,000 and $412,500 respectively. The notes each bear interest at
9.5% per annum and are due three years from the date of issuance. Mr. Silberman
has the right to require the Company to repurchase the shares as consideration
for the cancellation of the underlying promissory note. Mr. Silberman received
options to acquire an additional 600,000 shares at $0.29 per share on October
15, 1999. These options expire on October 15, 2004. Mr. Silberman has not
exercised his rights to acquire any shares under this agreement. All accrued
interest under these notes through September 30, 1999 has been waived by the
Board of Directors.
Mr. Michael F. Cronin, Chief Financial Officer and Treasurer of the Company,
purchased 500,000 shares of the Company's Common Stock. The transaction occurred
on July 30, 1998. The Company received a promissory note from Mr. Cronin on the
agreement for the full amount of the purchase price of $687,500. The note bears
interest at 9.5% per annum and is due three years from the date of issuance. Mr.
Cronin has the right to require the Company to repurchase the shares as
consideration for the cancellation of the underlying promissory note. Mr. Cronin
received options to acquire an additional 1,000,000 shares at $0.29 per share on
October 15, 1999. These options expire on October 15, 2004. Mr. Cronin has not
exercised his rights to acquire any shares under this agreement. All accrued
interest under these notes through September 30, 1999 has been waived by the
Board of Directors.
Mr. Christopher M. Swartz, Chairman of the Company and its President and Chief
Executive Officer, was granted options to purchase 2,000,000 shares of the
Company's Common Stock. The options were granted in the amount of
19
<PAGE>
1,000,000 shares each on December 29, 1997 and August 3, 1998. The exercise
prices were $2.75 and $1.55, respectively, and expire three years from the date
of grant.. These options to acquire were repriced at $0.29 per share on October
1, 1999. Mr. Swartz has not exercised his rights to acquire any shares under
these agreements.
On January 5, 1998 the Company concluded its Preferred "D" stock offering. The
Company raised $2,500,000 through the offering. Eighteen investors purchased
2,500 shares for $1,000 each. The holders of the Series "D" Preferred Stock have
no voting rights and are entitled to cumulative dividends of $80 per share, per
year, payable in cash or common stock. Holders of the Series "D" may convert a
portion or all of their holdings into common stock based upon a conversion rate
formula of 65% of the average five day closing bid price five trading days
before conversion. The conversion rate was further adjusted by two five percent
penalty increments for the Company's failure to file and make effective a Form
SB-2 within certain time parameters. As of June 10, 1999 the Company has issued
5,303,574 common shares as conversion shares under this agreement.
On June 10, 1999, the holders of the Preferred "D" converted their entire
holding to the Company's newly created Preferred "F" series. The Series D was
canceled and 197.5 shares of the Series F were issued in its place. The holders
of Series F are each entitled to receive an annual dividend of $1,000. The
dividend is payable quarterly beginning August 1, 1999. The holders may require
the Company to repurchase the outstanding shares at a 25% premium over the face
value of $10,000 no sooner than June 1, 2000 and no later than August 1, 2000.
The Company may also redeem the shares at any time prior to February 1, 2000 at
$12,500 per share. In the event of liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, the Series F holders are
entitled to receive $13,000 per share. Tri-Emp Enterprises, Inc. received
500,000 shares of the Company's common stock on August 11, 1999 in a partial
payment of $109,400 toward an outstanding debt obligation of the Company to
Tri-Emp of $343,000.
Item 13. Exhibits and Reports on Form 8-K
Schedule of Exhibits:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Reserved
for Incorporated
Exhibit Future by Date of
Item No. Description of Exhibit Use Reference in: Filing
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2.0 Plans of purchase, sale, reorganization, arrangement, liquidation or
succession:
2.1 Repurchase Agreement between Paul Truax and Robin Longley and JRECK Subs, Form 10-SB 02/17/99
Inc., a New York corporation and JRECK Subs Group, Inc. a Colorado
corporation dated October 28, 1997 (Pastry Products)
2.2 Agreement and Plan of Reorganization and Merger among JRECK Subs Group, Inc. Form 10-SB 02/17/99
and Admiral's Fleet, Inc. and Quality Franchise Systems, Inc. Quality
Agreement)
2.3 Amendment to Quality Agreement Form 10-SB 02/17/99
2.4 Agreement between JRECK Subs Group, Inc. and CHAI Enterprises, Inc. ("Hymie's") Form 10-SB 02/17/99
2.5 Agreement and Plan of Reorganization among JRECK Subs Group, Inc., Li'l Dino Form 10-SB 02/17/99
Management Corporation and Li'l Dino Corporation dated December 18, 1997
2.6 Purchase agreement among JRECK Subs Group, Inc., Interfoods of America, Inc. Form 10-SB 02/17/99
and SBK Franchise Systems, Inc. dated December 4, 1997
2.7 Agreement between JRECK Subs Group, Inc. and Little King, Inc. dated July Form 10-SB 02/17/99
23, 1997
2.8 Agreement between JRECK Subs Group, Inc. and Mitchell R. Day and Julie A. Form 10-SB 02/17/99
Day to purchase Seawest Sub Shops, Inc.
2.9 Stock Option Grants to acquire Seawest Sub Shops, Inc. Form 10-SB 02/17/99
2.10 Representation and Warranty Agreement among Mitchell R. Day and Julie A. Day Form 10-SB 02/17/99
and Admiral Subs of Washington, Inc. dated May 19, 1997.
2.11 Purchase and Sale Agreement between Admiral's Fleet, Inc, JRECK Form 10-SB 02/17/99
Subs Group, Inc., and Richey Enterprises, Inc.
2.12 Repurchase Agreement by Paul Truax and Robin Longley Form 10-SB 02/17/99
20
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------
Reserved
for Incorporated
Exhibit Future by Date of
Item No. Description of Exhibit Use Reference in: Filing
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3.0 Articles of Incorporation and Bylaws:
3.1 Articles of Incorporation-Circa Media, Inc. Form 10-SB 02/17/99
3.2 Articles of Amendment of Circa Media dated May 2, 1996 and filed May 7, 1996 Form 10-SB 02/17/99
3.3 Articles of Amendment of Jreck Subs, Inc. filed May 7, 1997 Form 10-SB 02/17/99
3.4 Certificate of Correction to Articles of Amendment filed July 24, 1996 Form 10-SB 02/17/99
3.5 Articles of Amendment to Articles of Incorporation regarding Certificate of Form 10-SB 02/17/99
Description of JRECK Subs Group, Inc. Series C Preferred Stock dated Sept. 27, 1997
3.6 Articles of Amendment to Articles of Incorporation regarding Certificate of Form 10-SB 02/17/99
Description of JRECK Subs Group, Inc. Series D Preferred Stock dated
January 5, 1998
3.7 Bylaws of JRECK Subs Group, Inc. dated August 23, 1998 Form 10-SB 02/17/99
10.0 Material Contracts:
10.1 Form of Franchise Agreement Form 10-SB 02/17/99
10.2 Facility Lease agreement between Springs Equity, Ltd. and JRECK Subs Group, Form 10-SB 02/17/99
Inc. dated December 16, 1997
10.3 Quality Franchise Systems, Inc. Area development Agreements: Form 10-SB 02/17/99
(a) MKJ Holdings, Inc.
(b) Master Franchising and Development Systems, Inc.
(c) John E. and Ann M. Maddox
(d) Alex Golshanara
10.4 Promissory Note from Bradley L. Gordon to JRECK Subs Group, Inc. dated Form 10-SB 02/17/99
September 24, 1997
10.5 Promissory Note from Richard T. Silberman to JRECK Subs Group, Inc. dated Form 10-SB 02/17/99
September 24, 1997
10.6 Promissory Note from Michael F. Cronin to JRECK Subs Group, Inc. dated July Form 10-SB 02/17/99
31, 1998
10.7 Promissory Note from Richard T. Silberman to JRECK Subs Group, Inc. dated Form 10-SB 02/17/99
July 31, 1998
10.8 Promissory Note from Bradley L. Gordon to JRECK Subs Group, Inc. dated July Form 10-SB 02/17/99
31, 1998
10.9 Employment Agreement between Bradley L. Gordon and JRECK Subs, Group, Inc. Form 10-SB 02/17/99
effective September 24, 1997
10.10 Employment Agreement between Michael F. Cronin and JRECK Subs, Group, Inc. Form 10-SB 02/17/99
effective July 31, 1998
10.11 Stock Option Grant between JRECK Subs Group, Inc. and Christopher M. Swartz Form 10-SB 02/17/99
dated August 3, 1998
10.12 Stock Option Grant between JRECK Subs Group, Inc. and Christopher M. Swartz Form 10-SB 02/17/99
dated December 29, 1997
10.13 Resale agreement of Little King, Inc. back to its previous owners dated Form 8-K 10/08/99
September 29, 1999
16.0 Letter of change in certifying accountants Form 8-K 11/08/99
16.1 Former accountants letter to Commission Form 10-SB 02/17/99
16.2 Former accountants letter to Commission Form 8-K 11/08/99
21 Subsidiaries of Registrant Form 10-SB 02/17/99
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Reports filed on form 8-K:
21
<PAGE>
Financial
Date of Filing Items Reported Statements
-------------- -------------- ----------
October 8, 1999 Rescission of Little King, Inc. No
November 8, 1999 Change in Certifying Accountants No
Change in Fiscal Year
SIGNATURES
In accordance with all the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Jreck Subs Group, Inc.
- ------------------------
(Registrant)
President & Duly Authorized
Officer Member of
01/05/00 Christopher M. Swartz Board of Directors /s/ Christopher M. Swartz
- -------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
Chief Financial
Officer & Principal
01/05/00 Michael F. Cronin Accounting Officer /s/ Michael F. Cronin
- -------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
Chief Operating
Officer & Member of
01/05/00 Bradley L. Gordon Board of Directors /s/ Bradley L. Gordon
- -------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
22
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
Contents
Independent Auditors' Reports on Consolidated Financial Statements.... F-1 - F-2
Consolidated Financial Statements:
Consolidated Balance Sheets...................................... F-3 - F-4
Consolidated Statements of Operations............................ F-5
Consolidated Statements of Cash Flows............................ F-6 - F-7
Consolidated Statements of Stockholders' Equity.................. F-8 - F-9
Consolidated Notes to Financial Statements..................... F-10 - F-46
23
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
JRECK Subs Group, Inc.
Longwood, Florida
We have audited the accompanying consolidated balance sheet of JRECK Subs Group,
Inc. and subsidiaries as of September 30, 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the nine
months ended then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of JRECK Subs Group,
Inc. and subsidiaries as of September 30, 1999, and the results of its
operations and its cash flows for the nine months then ended in conformity with
generally accepted accounting principles.
Pender Newkirk & Company, CPAs
Tampa, Florida
November 12, 1999
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
JRECK Subs Group, Inc.
Longwood, Florida
We have audited the accompanying consolidated balance sheet of JRECK Subs Group,
Inc. as of December 31, 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of JRECK Subs Group,
Inc. at December 31, 1998, and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Orlando, Florida
April 1, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents, including restricted cash of $35,086
and $34,315 for 1999 and 1998, respectively $ 121,292 $ 310,578
Accounts receivable - trade, net of allowance for doubtful
accounts of $152,886 and $157,000 for 1999 and 1998,
respectively 365,618 398,755
Prepaid expenses 456,883 650,215
Current portion of notes receivable 80,000 398,778
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 1,023,793 1,758,326
- ---------------------------------------------------------------------------------------------------------------------
Property and equipment, net 726,667 820,722
- ---------------------------------------------------------------------------------------------------------------------
Other assets:
Goodwill, net of accumulated amortization of $984,817 and $767,385
for 1999 and 1998, respectively 8,987,076 11,102,937
Covenants not to compete, net of accumulated amortization of
$388,458 and $283,039 for 1999 and 1998, respectively 113,542 318,961
Deferred loan costs, net 376,403 433,155
Notes receivable, net of allowance for doubtful accounts of
$180,000 and $0 for 1999 and 1998, respectively - 159,182
Other 106,750 114,571
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 11,334,231 $ 14,707,854
=====================================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Balance Sheets, Continued
September 30, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity Current liabilities:
<S> <C> <C>
Current portion of long-term debt $ 1,606,041 $ 2,003,198
Accounts payable 496,553 1,002,109
Accrued liabilities 552,881 708,759
Accrued preferred stock dividends 247,764 201,540
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,903,239 3,915,606
Long-term debt, less current portion 763,505 1,511,642
Note payable to related party 245,939 363,339
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 3,912,683 5,790,587
- ---------------------------------------------------------------------------------------------------------------------
Redeemable common stock 293,000 593,000
- ---------------------------------------------------------------------------------------------------------------------
Redeemable Series F Preferred Stock, no par value,
250 shares authorized, 197.5 and 0 shares
issued and outstanding for 1999 and 1998,
respectively 2,468,750 -
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Series C Convertible Preferred Stock, no par value, 120 shares
authorized, issued and outstanding 120,000 120,000
Series D Convertible Preferred Stock, no par value, 2,500 shares
authorized, 0 and 2,350 shares issued and outstanding for 1999
and 1998, respectively - 3,918,271
Common stock, no par value, 50,000,000 shares authorized,
28,403,440 and 19,503,596 shares issued and outstanding for
1999 and 1998, respectively 28,394,179 26,225,338
Accumulated deficit (19,666,881) (17,751,842)
Less: Stock subscriptions receivable (4,187,500) (4,187,500)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,659,798
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 11,334,231 $ 14,707,854
=====================================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Nine Months
Ended Year Ended
September 30, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C>
Continuing royalty revenues $ 2,046,280 $ 2,867,145
Initial royalty revenues 78,250 160,666
Retail sales - company-owned stores - 1,534,086
Retail sales - bakery and other products 571,844 829,803
Other revenues 600,004 598,844
- ---------------------------------------------------------------------------------------------------------------------
3,296,378
Operating costs and expenses:
Franchise servicing costs 1,296,506 2,037,631
Cost of retail sales and operating costs - stores - 1,446,876
Cost of retail sales and operating costs - bakery 541,014 1,032,806
General and administrative 1,177,276 1,404,131
Consulting and investor relations 722,541 998,287
Bad debt expense 254,507 125,417
Long-lived asset writedown - 1,902,290
Series D preferred stock conversion penalty - 718,272
Amortization and depreciation 670,442 1,040,260
- ---------------------------------------------------------------------------------------------------------------------
4,662,286 10,705,970
- ---------------------------------------------------------------------------------------------------------------------
Loss from operations (1,365,908) (4,715,426)
Other income (expense):
Interest, net (356,192) (435,584)
Loss on disposal of property, plant and equipment - (525,382)
Loss on sale of other assets (98,202) -
Other, net 52,203 -
- ---------------------------------------------------------------------------------------------------------------------
Net loss (1,768,099) (5,676,392)
Preferred stock dividends (146,940) (1,724,092)
- ---------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (1,915,039) $ (7,400,484)
=====================================================================================================================
Weighted average of common shares outstanding 22,796,417 16,333,684
=====================================================================================================================
Net loss per common share - basic and diluted $ (.08) $ (.45)
=====================================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months
Ended Year Ended
September 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C>
Net loss $ (1,768,099) $ (5,676,392)
Adjustments to reconcile net loss to net cash used by operating
activities:
Amortization and depreciation 670,442 1,040,260
Write down of long-lived assets - 1,902,290
Bad debts 254,507 125,418
Loss on disposal of property, plant and equipment - 525,382
Loss on sale of marketable security 58,596 -
Loss on sale of other assets 39,606 -
Stock and stock options issued for services 239,595 188,232
Conversion penalty on Series D preferred stock - 718,272
Prepaid interest and loan fees amortized to interest expense 75,502 83,055
Amortization of deferred loan costs 56,889 55,111
Prepaid consulting fees amortized to consulting and investor 487,356 450,643
relations expense
Other - 14,630
(Increase) decrease in:
Accounts receivable 32,184 (84,018)
Prepaid expenses (14,674) 72,341
Increase (decrease) in:
Accounts payable (362,255) (109,335)
Accrued liabilities (198,919) (337,046)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (429,270) (1,031,157)
- ----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from sale of marketable security 115,967 -
Purchase of property and equipment (2,059) (214,934)
Proceeds from disposal of property, plant and equipment and sale of assets 33,403 149,982
Advances made on notes receivable (12,185) (200,373)
Payments from notes receivable - 145,241
(Increase) decrease in other assets 1,721 (75,474)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 136,847 (195,558)
- ----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from the sale of common stock 150,000 -
Proceeds from the sale of Series E preferred stock 200,000 -
Proceeds from the sale of Series D preferred stock - 1,817,500
Payments to repurchase Series E preferred stock (100,000) -
Payments on redeemable common stock - (232,000)
Proceeds from long-term debt - 350,000
Payments on long-term debt (90,546) (832,102)
Proceeds from related party notes payable - 40,307
Payment of preferred stock dividends (56,317) (33,832)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 103,137 1,109,873
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (189,286) (116,842)
Cash and cash equivalents, beginning of year 310,578 427,420
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 121,292 $ 310,578
============================================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
Certain supplemental disclosure of cash flow information and non-cash investing
and financing activities is as follows:
Nine Months
Ended Year Ended
September 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for interest $ 223,801 $ 266,904
============================================================================================================================
Issuance of common stock in exchange for subscriptions receivable $ - $ 1,787,500
Stock and stock options issued in exchange for prepaid expenses 298,100 456,304
Stock and stock options issued in exchange for prepaid interest and deferred - 92,125
loan costs
Conversion of Series A preferred to common stock - 1,200,000
Conversion of Series B preferred to common stock - 700,000
Conversion of Series D preferred to common stock 791,983 250,102
Conversion of Series D and E preferred to redeemable Series F preferred 3,226,288 -
Common shares issued to satisfy dispute with prior owners of SBK 664,294 -
Common shares issued for price adjustments 197,695 -
Common shares received from sale of Little King and Richey Enterprises 1,111,031 -
Common shares issued to satisfy liability to issue common stock to prior
owner of Little King - 918,750
Renegotiation of liability to issue common stock to prior owner of Little King - 875,000
Common shares issued to satisfy Mountain Mike's acquisition contingency - 250,000
Conversion of long-term debt into Series D preferred stock - 250,000
Dividend on assumed conversion of Series D preferred stock into common stock - 1,382,601
Redeemable common stock obligation incurred upon exercise of stock options - 325,000
Conversion of long-term debt into common stock 159,400 277,404
Decrease in goodwill resulting from the disposals of assets - 499,080
Preferred stock dividends paid in common stock 44,399 130,651
Preferred stock dividends accrued 114,023 201,540
Other increases in notes receivable - 43,369
============================================================================================================================
<CAPTION>
In addition to the above non-cash items, the following is a summary of non-cash
transactions entered into for the acquisitions listed in Note 3 for the nine
months ended September 30, 1999 and the year ended December 31, 1998:
Nine Months
Ended Year Ended
September 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock and stock options issued $ - $ (2,100,000)
- ----------------------------------------------------------------------------------------------------------------------------
Total non-cash consideration paid - (2,100,000)
- ----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment acquired - 15,000
Goodwill acquired - 2,485,000
- ----------------------------------------------------------------------------------------------------------------------------
Total non-cash acquisition of assets - 2,500,000
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt assumed - (400,000)
- ----------------------------------------------------------------------------------------------------------------------------
Total non-cash assumption of liabilities - (400,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash paid $ - $ -
============================================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements
F-7
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Preferred Series A Preferred Series B
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 14,328,337 $18,170,103 600,000 $ 1,200,000 350,000 $ 700,000
Exercise of options for redeemable common 100,000 (325,000) - - - -
stock
Stock issued to settle liability to issue 300,000 918,750 - - - -
common stock
Common stock issued for acquisition 778,584 2,100,000 - - - -
Conversion of debt to equity 112,793 277,404 - - - -
Stock issued for current and prepaid 248,581 537,295 - - - -
services
Conversion of preferred Series A to common 600,000 1,200,000 (600,000) (1,200,000) - -
stock
Conversion of preferred Series B to common 350,000 700,000 - - (350,000) (700,000)
stock
Stock sold for subscription notes receivable 1,300,000 1,787,500 - - - -
Preferred stock dividends 99,727 130,651 - - - -
Stock issued in connection with debt 70,000 70,000 - - - -
Stock issued to satisfy acquisition 500,000 250,000 - - - -
contingencies
Issuance of options for services - 85,366 - - - -
Issuance of preferred Series D shares - - - - - -
Conversion of preferred Series D to common 615,384 250,102 - - - -
stock
Preferred Series D stock dividend - - - - - -
Other 100,190 73,167 - - - -
Net loss - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 19,503,596 26,225,338 - - - -
Conversion of debt to equity 692,308 159,400 - - - -
Stock issued for current and prepaid 1,291,667 340,000 - - - -
services
Exercise of options for common stock 37,500 - - - - -
Stock issued for marketable security 769,230 174,563 - - - -
Conversion of preferred Series D to common 4,250,499 791,983 - - - -
stock
Conversion of preferred Series D stock 397,966 44,399 - - - -
dividend
Acquisition and retirement of common stock (776,779) (1,111,031) - - - -
Other stock sales 500,000 150,000 - - - -
Stock issued for price adjustments 850,000 197,695 - - - -
Stock issued on acquisition restructuring 887,453 664,294 - - - -
Issuance of preferred E shares - - - - - -
Repurchase of preferred E shares - - - - - -
Conversion of preferred Series D and Series
E to Series F redeemable preferred stock - 757,538 - - - -
Preferred dividends - - - - - -
Net loss - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 28,403,440 $28,394,179 - $ - - $ -
==================================================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements
F-8
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
Preferred Series C Preferred Series D Preferred Series E Accumulated Subscription Total
Shares Amount Shares Amount Shares Amount Deficit Notes Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120 $120,000 - $ - - $ - $(10,351,358) $ (2,400,000) $ 7,438,745
- - - - - - - - (325,000)
- - - - - - - - 918,750
- - - - - - - - 2,100,000
- - - - - - - - 277,404
- - - - - - - - 537,295
- - - - - - - - -
- - - - - - - - -
- - - - - - - (1,787,500) -
- - - - - - (341,491) - (210,840)
- - - - - - - - 70,000
- - - - - - - - 250,000
- - - - - - - - 85,366
- - 2,500 2,785,772 - - - - 2,785,772
- - (150) (250,102) - - - - -
- - - 1,382,601 - - (1,382,601) - -
- - - - - - - - 73,167
- - - - - - (5,676,392) - (5,676,392)
- ------------------------------------------------------------------------------------------------------------------------------------
120 120,000 2,350 3,918,271 - - (17,751,842) (4,187,500) 8,324,267
- - - - - - - - 159,400
- - - - - - - - 340,000
- - - - - - - - -
- - - - - - - - 174,563
- - (475) (791,983) - - - - -
- - - - - - (44,399) - -
- - - - - - - - (1,111,031)
- - - - - - - - 150,000
- - - - - - - - 197,695
- - - - - - - - 664,294
- - - - 20 200,000 - - 200,000
- - - - (10) (100,000) - - (100,000)
- - (1,875) (3,126,288) (10) (100,000) - - (2,468,750)
- - - - - - (102,541) - (102,541)
- - - - - - (1,768,099) - (1,768,099)
- ------------------------------------------------------------------------------------------------------------------------------------
120 $120,000 - $ - - $ - $(19,666,881) $ (4,187,500) $ 4,659,798
====================================================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements
F-9
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
1. Background Information
JRECK Subs Group, Inc. (the "Company"), a Colorado corporation, was
formerly known as Circa Media, Inc. which was organized on July 19,
1995. On May 7, 1996, Circa Media, Inc. acquired 100% of JRECK Subs,
Inc. For financial reporting purposes, the acquisition was accounted
for as a reverse merger, whereby JRECK Subs, Inc. was deemed to be the
acquiring entity.
The wholly-owned subsidiaries of the Company include Jreck Subs Inc., a
New York corporation, SBK Franchise Systems, Inc., a Florida
corporation, Li'l Dino Corporation, a North Carolina corporation,
Admiral Subs of Washington, Inc., a Washington corporation, Admiral's
Fleet, Inc., a Washington corporation and Pastry Products Producers,
LLC, a New York limited liability company. Also, prior to the Company's
disposition or sale, the Company included Leovera, Inc., a Washington
corporation, Little King, Inc., a Delaware corporation and through its
Admiral's Fleet, Inc. subsidiary, Richey Enterprises, Inc., a
Washington corporation.
The Company is a multi-concept franchisor of sandwich shops and pizza
restaurants located throughout the United States. Its headquarters are
located in Longwood, Florida. Currently, the Company serves as the
franchisor to approximately 209 stores operating under various trade
names. Franchise arrangements include a license to operate under the
applicable trade name and generally provide for the receipt of initial
royalty revenues, as well as continuing royalty revenues based upon a
percentage of sales. In addition, the Company offers guidance and
assistance to the franchisees in areas such as product preparation,
equipment purchasing, marketing, administrative support and employee
training.
The Company also operates a bakery and previously had operated
company-owned stores. The bakery is the supplier of bread products to
certain franchisees of the Company. For the nine months ended September
30, 1999, all bakery sales were to franchisees (17.3% of total
revenues). During the year ended December 31, 1998, sales of bakery
products to the franchisees of the Company amounted to $767,378 (12.8%
of total revenues). As of December 31, 1998, all company-owned
restaurants had been disposed of.
As indicated in the accompanying consolidated financial statements, the
Company has reduced its loss from approximately $5.7 million for the
year ended December 31, 1998 to approximately $1.8 million for the nine
months ended September 30, 1999. Cash used by operations for the nine
months ended September 30, 1999 was approximately $400,000 compared to
approximately $1.0 million used for the year ended December 31, 1998.
Working capital deficit decreased from approximately $2.2 million at
December 31, 1998 to approximately $1.9 million at September 30, 1999.
Read independent auditors' report. F-10
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
1. Background Information (continued)
Management believes the following steps are important to the Company's
future:
1. the conversion and/or the extension of approximately
$1.2 million of debt due in the next twelve months;
and
2. the continuation of the positive financial trends
indicated above, including the continuation of the
decline in franchise expenses, reduction of payroll
costs and reduction of corporate general and
administrative expenses.
Management believes based on these major steps outlined above, the
Company's operating losses before amortization and negative working
capital could be reduced and to the extent that the Company's business
strategies could be realized, the Company's operating losses before
amortization and negative working capital could be eliminated, although
no assurances can be given.
2. Significant Accounting Policies
The significant accounting policies of the Company are as follows:
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of JRECK
Subs Group, Inc. and its wholly-owned subsidiaries. All significant
accounts and transactions have been eliminated in consolidation.
Read independent auditors' report. F-11
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
2. Significant Accounting Policies (continued)
Change in Accounting Year
Beginning January 1, 1999, the Company changed its accounting reporting
period from a calendar year ending December 31st to a fiscal year
ending September 30th. Thus the consolidated financial statements
present results of operations, changes in stockholders' equity and cash
flows for the nine months ended September 30, 1999 and the year ended
December 31, 1998, respectively.
Cash and Cash Equivalents
For financial presentation purposes, the Company considers those
short-term, highly liquid investments with original maturities of three
months or less to be cash and cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs
are charged to operations as incurred. Betterments and renewals are
capitalized. When property and equipment are sold or otherwise disposed
of, the asset account and the related accumulated depreciation accounts
are relieved, and any gain or loss is included in operations.
Depreciation is calculated by the straight-line method over the
estimated useful lives of the assets, generally ranging from 5 to 40
years. For income tax purposes, the Company uses accelerated methods of
depreciation for certain assets. For the nine months ended September
30, 1999 and the year ended December 31, 1998, depreciation expense
amounted to $96,114 and $256,349, respectively.
Asset Impairment
When the Company has long-lived assets which have a possible impairment
indicator, the Company estimates the future cash flows from the
operation of these assets. If the estimated cash flows recoup the
recorded value of the assets, they remain on the books at that value.
If the net recorded value cannot be recouped, the assets are written
down to their fair market value if lower than the recorded value.
Deferred Loan Costs
Deferred loan costs are amortized ratably over the terms of the related
loans.
Read independent auditors' report. F-12
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
2. Significant Accounting Policies (continued)
Goodwill
Goodwill represents the excess of cost over the fair value of net
assets acquired and is being amortized on a straight-line method over
20 years. The realization of goodwill is evaluated periodically for
impairment events or if changes in circumstances indicate a possible
inability to recover the carrying amount. When any such impairment
exists, the related assets are written down to fair value.
Covenants Not to Compete
Covenants not to compete are amortized using the straight-line method
over the estimated useful lives of the underlying agreements, ranging
from three to six years.
Revenue Recognition
Continuing franchise royalty revenue is recognized monthly as earned.
Initial franchise royalty revenue is recognized when all services or
conditions relating to the sale of the individual franchise has been
substantially performed. Revenues from company-owned stores and bakery
products are recognized upon the sale of products.
Accounting for Stock-Based Compensation
The Financial Accounting Standards Board issued Statement 123 ("FAS
123"), "Accounting for Stock-Based Compensation, which provides that
expense equal to the fair value of all stock-based awards on the date
of the grant be recognized over the vesting period.
Alternatively, this statement allows entities to continue to apply the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees", whereby compensation
expense is recorded on the date the options are granted equal to the
excess of the market price of the underlying stock over the exercise
period. The Company applies APB 25 and related interpretations in
accounting for employee stock options.
Read independent auditors' report. F-13
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
2. Significant Accounting Policies (continued)
Fair Value of Financial Instruments
Financial Accounting Standards Board Statement No. 107 ("FAS 107"),
"Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments. Fair
value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as of
September 30, 1999.
The respective carrying value of certain on-balance-sheet financial
instruments approximates their fair values. These financial instruments
include cash and equivalents, trade receivables, prepaid expenses,
accounts payable, accrued liabilities and accrued preferred stock
dividends. Fair values were assumed to approximate carrying values for
these financial instruments since they are short term in nature and
their carrying amounts approximate fair values or they are receivable
or payable on demand. The fair values of the Company's notes receivable
and long-term debt are estimated based upon the quoted market prices
for the same or similar issues or on the current rates offered for
instruments of the same remaining maturities. The carrying value of the
Company's notes receivable and long-term debt approximates their fair
market value.
Net Loss Per Common Share
The Company adopted the provisions of Financial Accounting Standards
Board Statement No. 128 ("FAS 128"), "Earnings per Share". FAS 128
replaces the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Diluted
earnings per share are computed similarly to fully diluted earnings per
share.
Contingently issuable shares are included in basic earnings (loss) per
share as of the date all necessary conditions have been satisfied.
Contingently issued shares are included in diluted earnings (loss) per
share based on the number of shares, if any, that would be issuable
under the terms of the acquisition agreements if the end of the
reporting period were the end of the contingency period.
Read independent auditors' report. F-14
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
2. Significant Accounting Policies (continued)
The Company's basic and diluted earnings per share are the same since
the Company has a loss for both years presented, and the impact of
potential common shares is antidilutive. Potential common shares at
September 30, 1999 and December 31, 1998 include 4,782,070 and
4,274,570 stock options and warrants, 15,986 and 1,398,071 shares
underlying the convertible preferred stock and 48,803 shares from the
convertible notes payable, respectively. The maximum number of
contingent shares to be issued is 0 and 333,846 as of September 30,
1999 and December 31, 1998, respectively.
Income Taxes
The Company accounts for income taxes on the liability method. Under
this method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities. Measurement of deferred income tax is based on enacted tax
rates and laws that will be in effect when the differences are expected
to reverse, with the measurement of deferred income tax assets being
reduced by available tax benefits not expected to be realized.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Board Statement No. 133 ("FAS 133"),
"Accounting for Derivative Instruments and Hedging Activities". FAS 133
requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk or (ii) the earnings effect of
the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the
period of change. FAS 133 is effective for all fiscal quarters or
fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts to
hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on October 1, 2000
to affect its financial statements.
Read independent auditors' report. F-15
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
2. Significant Accounting Policies (continued)
Risk and Uncertainties
The primary uncertainty which the Company faces is its ability to
locate knowledgeable franchisees who also have the financial resources
to successfully operate the stores. In addition, the Company needs to
be able to identify appropriate locations for its newly franchised
stores. The Company believes that it has taken the steps necessary to
minimize these risks.
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified
to conform to the 1999 presentation.
3. Acquisition of Subsidiaries
Changes in goodwill and accumulated amortization for the year ended
December 31, 1998 and the nine months ended September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Accumulated Net
Goodwill Amortization Goodwill
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1997 $ 11,717,891 $ (196,365) $ 11,521,526
Goodwill from Li'l Dino acquisition 2,485,000 - 2,485,000
Issuance of 500,000 contingent shares to QFS
shareholders 250,000 - 250,000
Adjustment on liability to issue common stock to
Little King shareholders (875,000) - (875,000)
Impairment in value (1,177,212) - (1,177,212)
Goodwill attributable to sold restaurants (457,804) - (457,804)
Other (72,553) - (72,553)
Amortization expense for the year ended December
31, 1998 - (571,020) (571,020)
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 11,870,322 (767,385) 11,102,957
Disposition of Richey Enterprises, Inc. (150,322) 25,858 (124,464)
Disposition of Little King, Inc. (1,897,401) 188,322 (1,709,079)
Settlement related to SBK Franchise Systems, Inc. 149,294 - 149,294
Amortization expense for the nine months ended
September 30, 1999 - (431,612) (431,612)
- ---------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $ 9,971,893 $ (984,817) $ 8,987,076
=========================================================================================================
</TABLE>
Read independent auditors' report. F-16
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
Changes in covenants not to compete and accumulated amortization for
the year ended December 31, 1998 and the nine months ended September
30, 1999 are as follows:
<TABLE>
<CAPTION>
Non-compete Accumulated Net
Convenants Amortization Goodwill
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1997 $ 602,000 $ (89,223) $ 512,777
Amortization expense for the year ended December
31, 1998 - (193,816) (193,816)
---------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 602,000 (283,039) 318,961
Disposition of Little King (100,000) 31,197 (68,803)
Amortization expense for the nine months ended
September 30, 1999 - (136,616) (136,616)
---------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $ 502,000 $ (388,458) $ 113,542
=========================================================================================================
</TABLE>
During 1998 and 1997, the Company acquired eight entities through the
purchase of assets or stock. The acquisitions have been accounted for
using the purchase method of accounting, and the results of the
acquired businesses have been included in the consolidated financial
statements since the date of acquisition.
Li'l Dino Corporation
On March 22, 1998, the Company acquired all of the outstanding
common stock of Li'l Dino Corporation ("Li'l Dino"). Li'l Dino
is a franchisor of sandwich shops in North Carolina.
The purchase price of Li'l Dino consisted of 778,584 shares of
the Company's common stock, valued at $2.72 per share, plus
debt assumed. The transaction was recorded as follows:
Total consideration paid $ 2,100,000
Less fair value of assets acquired (15,000)
Debt assumed 400,000
----------------------------------------------------------
Excess of cost over net assets acquired $ 2,485,000
==========================================================
Read independent auditors' report. F-17
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
Chai Enterprises, Inc.
On June 19, 1997, the Company, through its wholly-owned
subsidiary, Leovera, Inc., acquired all of the bakery
equipment of Chai Enterprises, Inc. ("Chai"). Chai is the
franchisor of the Hymie's bagel restaurant chain located in
Tampa, Florida. The purchase price of the Chai assets
consisted of 289,500 shares of the Company's common stock,
valued at $4.598 per share ($1,331,156) and $200,000 cash. The
transaction was recorded as follows:
Total consideration paid $ 1,531,156
Less fair value of assets acquired (537,336)
---------------------------------------------------------
Excess of cost over net assets acquired $ 993,820
==========================================================
At December 31, 1997, the Company recognized a goodwill
impairment charge of $993,820 related to the acquisition of
Chai Enterprises. In determining the amount of the impairment
charge, the Company developed its best estimate of the future
operating cash flows attributable to the assets purchased. In
the fourth quarter, the Company concluded that based on
current market conditions, including the reduction in the
number of franchises, the anticipated future cash flows
indicated the recoverability of the goodwill was not
reasonably assured.
During 1998, the Company ceased all operations of the Leovera
subsidiary, and as further discussed in Note 5, recorded an
impairment in the value of certain of the subsidiary's
property, plant and equipment.
Seawest Sub Shops, Inc.
On June 30, 1997, the Company, through its wholly-owned
subsidiary, Admiral Subs of Washington, Inc., acquired all of
the outstanding shares of Seawest Sub Shops, Inc. ("Seawest").
Seawest is a franchisor of sandwich restaurants in Seattle,
Washington. The purchase price of Seawest was $150,000 cash.
In addition, the Company entered into a noncompete agreement
with the former shareholder valued at $502,000. Consideration
for the agreement consisted of a $96,000 note payable and
stock options valued at $4.06 per share ($406,000).
Read independent auditors' report. F-18
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
The transaction was recorded as follows:
Total consideration paid $ 150,000
Less fair value of assets acquired (231,281)
Liabilities assumed 976,106
----------------------------------------------------------
Excess of cost over net assets acquired $ 894,825
==========================================================
As noted above, options were granted to purchase up to 100,000
shares of Company common stock to the prior owner of Seawest
at an exercise price of $.001 per share.
During 1998, all of these options were exercised.
Upon request of the prior owner of Seawest, the Company is
obligated to repurchase these exercised shares at the greater
of fair market value or $3.25 over a mutually agreeable period
of time which has not been determined. During 1998, $32,000
was paid pursuant to the guarantee and the remaining
obligation to repurchase these shares has been recorded as
redeemable common stock.
Richey Enterprises, Inc.
On August 15, 1997, the Company, through its wholly-owned
subsidiary, Admiral's Fleet, Inc., acquired all of the
outstanding common stock of Richey Enterprises, Inc.
("Richey"). Richey was the franchisor of the Georgio's
sandwich restaurants located in Seattle, Washington. The
purchase price of Richey consisted of 93,794 shares of the
Company's common stock, valued at $3.625 per share.
The transaction was recorded as follows:
Common stock issued in connection
with acquisition $ 340,000
Less fair value of assets acquired (95,174)
Liabilities assumed 143,057
----------------------------------------------------------
Excess of cost over net assets acquired $ 387,883
==========================================================
Read independent auditors' report. F-19
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
The Company was obligated to reimburse the prior owners of
Richey if the fair market value of the Company's common stock
falls below 80% of its value on the original closing date.
This contingency was to take effect August 15, 1999 and only
if the prior owners of Richey transfer their shares to a third
party during the first 30 days following the second
anniversary date of the closing.
In February 1999, the Company executed an agreement to sell
Richey Enterprises, Inc. back to the prior owners. Per the
agreement, the prior owners surrendered 89,986 of their
Company shares, paid $35,000 cash and assumed certain
liabilities. As a result of this transaction, an impairment to
the Richey Enterprises, Inc. acquisition goodwill was recorded
at December 31, 1998 in the amount of $177,000. For the nine
months ended September 30, 1999, the Company recorded a loss
on the sale of assets of $39,606 relating to the disposition
of Richey Enterprises, Inc.
Little King, Inc.
On August 31, 1997, the Company purchased the outstanding
shares of Little King, Inc., a franchisor of sandwich
restaurants in Omaha, Nebraska. In addition to the purchase of
the Little King shares, the Company purchased certain assets
and assumed certain liabilities from a separate entity related
by common ownership to the previous Little King owners. These
assets and liabilities represent company-owned stores. In
addition, the Company entered into a noncompete agreement with
the former shareholder valued at $100,000.
Included in the original purchase price was an obligation to
issue 700,000 additional shares of common stock within one
year of the acquisition. This obligation was accrued for in
the balance of "Liability to issue common stock" at December
31, 1997. In 1998, the Company and the former owners of Little
King renegotiated the purchase price and agreed to reduce the
number of shares to be issued to 300,000. As a result of this
renegotiation, the goodwill and the liability to issue common
stock was reduced by $875,000.
The Company must provide the prior owners of Little King the
opportunity to repurchase Little King, based on a fair market
value, as defined, if the quoted closing market price of
Company common stock is less than $1.50 per share on the
second anniversary of the closing of the acquisition.
Read independent auditors' report. F-20
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
The final purchase price of Little King and the company-owned
stores was $2,600,000 as follows:
500,000 shares of Company common stock $ 1,531,250
300,000 shares of Company common stock 918,750
Cash paid 50,000
Note payable 100,000
----------------------------------------------------------
Total acquisition price $ 2,600,000
==========================================================
The 800,000 shares of Company common stock were valued at
$3.0625 per share.
The transaction was recorded as follows:
Total consideration paid $ 2,600,000
Less fair value of assets acquired (475,470)
Liabilities assumed 1,230,675
----------------------------------------------------------
Excess of cost over net assets acquired $ 3,355,205
==========================================================
During 1998, the Company sold all of its Little King
company-owned stores for notes receivable totaling
approximately $185,000, resulting in a loss on disposal of
approximately $490,000, including $438,729 of net acquisition
goodwill allocated to the stores.
During the fourth quarter of 1998, the Company completed an
evaluation of the economic value of this acquisition's
goodwill through an updated analysis of the expected cash
flows. It was determined during the evaluation that the cash
flow to be generated from the Little King acquisition would be
less than the recorded cost of the investment and the
unamortized goodwill balances at December 31, 1998.
Accordingly, the Company recorded a provision for impairment
of goodwill for $1,000,000 to reduce the carrying value of the
goodwill to its current fair value based on the discounted
cash flows expected.
Effective August 31, 1999, the Company executed an agreement
to sell Little King, Inc. back to the prior owners. Per the
agreement, the prior owners surrendered 686,793 of their
Company shares and assumed all assets and liabilities. As a
result of this transaction, the Company recorded a reduction
in common stock of $1,088,534 relating to the disposition of
Little King, Inc.
Read independent auditors' report. F-21
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
Quality Franchise Systems, Inc.
On September 30, 1997, the Company, through its wholly-owned
subsidiary, Admiral's Fleet, Inc., purchased all of the
outstanding shares of Quality Franchise Systems, Inc. ("QFS").
QFS is the franchisor of Mountain Mike's Pizza restaurants
located in Northern California through a newly created
wholly-owned subsidiary. The purchase price of QFS was
summarized as follows:
Company common stock $ 3,084,278
Company Series "C" Preferred stock,
120 shares 120,000
Options for 32,204 shares of Company
common stock 23,000
----------------------------------------------------------
Total acquisition price $ 3,227,278
==========================================================
Included in the acquisition price were 899,967 shares of
common stock issued at date of acquisition and an additional
150,000 shares that were issued during 1998. The additional
150,000 shares were issued upon the resolution of a
contingency relating to market price performance of the
Company's common stock.
The Company's common stock was valued at $2.9375 per share.
The Series "C" Preferred Stock is valued at its par value of
$1,000 per share. The value of the stock options was computed
using the market value at the date of grant.
The transaction was recorded as follows:
Total consideration paid $ 3,227,278
Less fair value of assets acquired (325,406)
Liabilities assumed 1,047,261
----------------------------------------------------------
Excess of cost over net assets acquired $ 3,949,133
==========================================================
The Company was contingently liable to the previous owners of
QFS for the payment of up to an additional 500,000 shares of
common stock based on the 1998 earnings of the Mountain Mike's
division, as defined. These shares, with a fair market value
of $250,000 on the date of issuance, were issued during 1998,
resulting in a corresponding increase to goodwill.
Read independent auditors' report. F-22
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
Pastry Product Producers, LLC
On October 28, 1997, the Company acquired the remaining 50%
interest of Pastry Product Producers, LLC ("Pastry"). Pastry
is a bakery operation which primarily serves the JRECK
restaurant franchisees. In 1996, the Company purchased a 50%
investment in Pastry and accounted for it under the equity
method. The balance sheet of Pastry as of December 31, 1997
and its results of operations for the period between the
acquisition date of the remaining 50% ownership and year end
have been consolidated in the accompanying financial
statements. The Company's share of operations prior to the
acquisition have been treated as a loss on equity investment
and classified as such in the statement of operations.
The carrying value of the original 50% of Pastry was $743,984,
consisting of 350,000 shares of $2 par Series "B" preferred
stock, plus $43,984 in subsidiary equity earnings. The
purchase price of the remaining 50% of Pastry is comprised of
the following:
Company common stock, 262,500 shares $ 658,594
Options for 37,500 shares of Company
common stock 79,000
Other 48,000
----------------------------------------------------------
Total acquisition price of remaining
50% share $ 785,594
==========================================================
The Company's common stock was valued at $2.509 per share. The
value of the stock options was computed based upon the market
value at the date of grant. The transaction was recorded as
follows:
Total consideration paid $ 785,594
Carrying value of initial 50% investment 743,984
Less fair value of assets acquired (669,738)
Liabilities assumed 269,697
----------------------------------------------------------
Excess of cost over net assets acquired $ 1,129,537
==========================================================
Read independent auditors' report. F-23
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
SBK Franchise Systems, Inc.
On December 4, 1997, the Company purchased the outstanding
shares of SBK Franchise Systems, Inc. ("SBK"). SBK is the
franchisor of the Sobik's sandwich restaurant chain in Central
Florida.
The purchase price of SBK consisted of a note payable for
$500,000, cash of $100,000 and 187,266 shares of the Company's
common stock valued at $2.8125 per share ($526,686). The
transaction was recorded as follows:
Total consideration paid $ 1,126,686
Less fair value of assets acquired (90,342)
Liabilities assumed 89,963
----------------------------------------------------------
Excess of cost over net assets acquired $ 1,126,307
==========================================================
The prior owners of SBK had the right to require the Company
to repurchase 187,266 shares at a purchase price of $2.67 per
share. The Company was only required to repurchase a maximum
of 37,453 shares in any six-month period commencing six months
from the date of closing. The redeemable common stock purchase
obligation was noncumulative and was to expire in June 2000.
During 1998, the Company repurchased 74,906 shares of the
redeemable common stock and 112,360 shares remained subject to
redemption at December 31, 1998. In June 1999, the Company
entered into a settlement with the prior owners of SBK whereby
the Company issued 187,266 shares of its common stock for the
remaining 112,360 outstanding shares of redeemable common
stock owned by the prior owners of SBK. Also, the Company
issued 700,187 shares of its common stock to the prior owners
of SBK to settle disputes on the amount of liabilities in
existence at the date of acquisition of SBK by the Company and
for a principal reduction of $300,000 of a note due to the
former owners of SBK which reduced the principal balance from
$500,000 to $200,000. This transaction resulted in $149,294 of
additional excess of cost over net assets acquired.
Read independent auditors' report. F-24
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
3. Acquisition of Subsidiaries (continued)
Pro Forma Financial Information (Unaudited)
The following summarized unaudited pro forma consolidated
results of operations for the year ended December 31, 1998
have been prepared as if the preceding acquisitions occurred
at the beginning of the applicable year presented and includes
pro forma adjustments for interest, depreciation and
amortization:
1998
--------------------------------------------------------------
Revenue $ 6,114,936
Net loss $ (5,684,118)
--------------------------------------------------------------
Net loss per share - basic and diluted $ (.34)
--------------------------------------------------------------
Weighted average number of common shares
outstanding 16,631,492
==============================================================
The pro forma consolidated results do not purport to be
indicative of results that would have occurred had the
acquisitions been in effect for the periods presented, nor do
they purport to be indicative of the results that will be
obtained in the future.
Read independent auditors' report. F-25
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
4. Notes Receivable
Notes receivable are comprised of the following at September 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
$321,342 note receivable from a franchisee; payable in equal monthly
installments of principal and interest at 15% through September
2013; this note is secured by the underlying franchise rights,
currently past-due. $ 180,000 $ 180,000
$130,000 note receivable from an area developer; payable in annual
installments of $50,000 plus interest at 8-1/4%; final payment
was due November 1998; this note is unsecured and is now due upon
demand. 80,000 80,000
$50,000 note receivable from a franchisee; payable in monthly
installments of $1,185 including principal and interest at 12%
through November 2001; this note is secured by the underlying
franchise rights. - 38,229
Eight notes receivable from franchisees; payable in monthly
installments of $879 including principal and interest at an
average rate of 9%; the notes mature at various dates beginning
April 1999 through September 2004; collateralized by the
underlying franchise rights. These notes were assumed in
connection with the sale of Little King, Inc. in August 1999. - 235,582
Three notes receivable from franchisees; entire amount of principal
and interest at an average rate of 9%; collateralized by the
underlying franchise rights. - 24,149
---------------------------------------------------------------------------------------------------------
260,000 557,960
Less current portion (80,000) (398,778)
Less allowance for doubtful accounts (180,000) -
---------------------------------------------------------------------------------------------------------
$ - $ 159,182
=========================================================================================================
</TABLE>
Read independent auditors' report. F-26
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
5. Property and Equipment
Property and equipment are comprised of the following at September 30,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and building $ 371,771 $ 371,771
Machinery and equipment 372,201 378,730
Office and computer equipment 147,034 110,948
Vehicles 92,636 92,636
Leasehold improvements 83,291 110,787
---------------------------------------------------------------------------------------------------------
1,066,933 1,064,872
Less accumulated depreciation (340,266) (244,150)
---------------------------------------------------------------------------------------------------------
Net property and equipment $ 726,667 $ 820,722
=========================================================================================================
</TABLE>
During 1998, the Company ceased operations of the Leovera subsidiary
and evaluated the future undiscounted cash flows of its bakery
operations. In the fourth quarter of 1998, pursuant to FAS 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company adjusted those assets to their
estimated net realizable value of approximately $80,000. This resulted
in a writedown of property, plant and equipment of $725,078.
6. Accrued Liabilities
Accrued liabilities are comprised of the following at September 30,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued payroll and payroll-related items $ 106,442 $ 256,590
Deferred revenue 166,195 162,500
Accrued interest 161,730 118,888
Accrued insurance and taxes 118,514 51,452
Other - 119,329
---------------------------------------------------------------------------------------------------------
$ 552,881 $ 708,759
=========================================================================================================
</TABLE>
Read independent auditors' report. F-27
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
7. Note Payable to Related Party
Note payable to related party consists of a working capital borrowing
facility with the Company's largest stockholder. The related party note
agreement calls for payments of interest-only at 9% payable monthly
through January 1999, monthly principal and interest payments of $3,121
through December 2008, at which time any remaining unpaid balances are
due. During the nine months ended September 30, 1999, the Company
issued 500,000 shares of its common stock to this largest stockholder
in satisfaction of $109,400 of principal. The note had an outstanding
balance of $245,939 and $363,339 at September 30, 1999 and December 31,
1998, respectively, and is unsecured.
Interest expense on the related party debt totaled $24,525 and $22,172
during the nine months ended September 30, 1999 and the year ended
December 31, 1998, respectively.
Read independent auditors' report. F-28
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
8. Long-Term Debt
Long-term debt consists of the following at September 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Seventeen convertible notes payable with an aggregate face amount of
$530,000; quarterly interest-only payments at 12.75% due through
December 1999; all unpaid principal and interest due March 2000;
collateralized by royalty revenues generated by the Mountain
Mike's franchises; convertible into Company common stock at
$10.86 per share. $ 530,000 $ 530,000
Notepayable to former owner of acquired subsidiary; monthly
interest-only payments at 7% through July 2000; thereafter
monthly principal and interest payments of $3,019 are due through
July 2007; collateralized by royalty revenues generated by the
Sobik's franchises. 200,000 500,000
Notepayable to bank assumed upon the Li'l Dino's acquisition;
payable in monthly installments of $4,762 principal and interest
at the bank's prime lending rate plus 1% (9.5% at September 30,
1999) through February 2000; final payment of $290,474 due March
2000; collateralized by personal assets and a personal guarantee
of the prior owners of Li'l Dino's. 314,284 357,142
Note payable to FDIC; principal and interest at 10% payable upon
demand; note is uncollateralized. 257,583 257,583
Fournotes payable to individuals with an aggregate face amount of
$350,000 net of unamortized loan costs of $0 and $38,889,
respectively; all unpaid principal and interest at 8% currently
past-due; collateralized by a personal guarantee of the Company's
chief executive officer. 285,000 311,111
Two notes payable to former owners of Seawest with an aggregate face
amount of $700,000, non-interest bearing; monthly principal
payments of $4,000 are due through April 2004, at which time any
remaining unpaid principal is due; these notes are
uncollateralized. 259,900 301,400
Notepayable to franchisee; monthly interest-only payments at 9% due
through December 1999; thereafter monthly principal and interest
payments of $2,236 are due through December 2009; this note is
uncollaterlized. 176,476 176,476
Three notes payable to individuals; monthly interest-only payments at
15% due through November 2004, at which time any remaining unpaid
principal and interest is due; these notes are uncollateralized
and are net of unamortized loan costs of $138,000 and $156,000,
respectively. 42,000 24,000
</TABLE>
Read independent auditors' report. F-29
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
8. Long-Term Debt (continued)
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage note payable to former owner of Pastry Products Producers,
Inc.; monthly payments of $2,494 including principal and interest
at 10% due through November 2004, at which time any remaining
unpaid principal and interest is due; collateralized by real
property. 120,369 140,234
Various notes payable to banks, supplier and individual related to
the Company's former Little King subsidiary. These notes were
assumed in connection with the sale of this subsidiary in August
1999. - 573,428
Various uncollateralized notes payable; due in average monthly
principal payments of $825 including interest at an average rate
of 9.25%; maturing at various dates beginning through November
2000. 183,934 343,466
---------------------------------------------------------------------------------------------------------
2,369,546 3,514,840
Less current portion (1,606,041) (2,003,198)
---------------------------------------------------------------------------------------------------------
Total long-term debt $ 763,505 $ 1,511,642
=========================================================================================================
</TABLE>
Interest expense on long-term debt during the nine months ended
September 30, 1999 and the year ended December 31, 1998 amounted to
$205,596 and $291,580, respectively.
The annual maturities of long-term debt and related party debt for the
five years subsequent to September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Long-Term Related
Debt Party Debt Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 1,606,041 $ 15,965 $ 1,622,006
2001 406,475 17,463 423,938
2002 32,250 19,101 51,351
2003 31,778 20,893 52,671
2004 212,525 22,853 235,378
Thereafter 80,477 149,664 230,141
---------------------------------------------------------------------------------------------------------
$ 2,369,546 $ 245,939 $ 2,615,485
---------------------------------------------------------------------------------------------------------
</TABLE>
Read independent auditors' report. F-30
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity
The following is a synopsis of significant transactions involving the
Company's stockholders' equity accounts:
Preferred Series A
In 1996, the Company designated and issued 700,000 shares of no par
value Series A voting nonredeemable cumulative convertible preferred
stock ("Preferred Series A"). The Preferred Series A stock was entitled
to cumulative, preferential dividends at a rate of $.09 per share and
was convertible into common stock at a conversion rate of one share of
common stock for each preferred share. The Preferred Series A stock was
redeemable in liquidation at $2.00 per share. During 1998, the
remaining 600,000 shares of Preferred Series A stock was converted into
600,000 shares of the Company's common stock and there is currently no
Preferred Series A stock outstanding.
Preferred Series B
In 1996, the Company designated and issued 350,000 shares of $2 par
value Series B voting nonredeemable cumulative convertible preferred
stock ("Preferred Series B"). The Preferred Series B stock was entitled
to receive non-cumulative preferential dividends only when declared by
the Board of Directors and was convertible into common stock at a
conversion rate of one share of common stock for each preferred share.
The Preferred Series B stock was redeemable in liquidation at $2.00 per
share. During 1998, all of the 350,000 shares of Preferred Series B
stock was converted into 350,000 shares of the Company's common stock
and there is currently no Preferred Series B stock outstanding.
Preferred Series C
In September 1997, the Company designated and issued 120 shares of no
par value Series C convertible preferred stock ("Preferred Series C")
in connection with the acquisition of QFS (see Note 3). The Preferred
Series C stock is entitled to cumulative dividends at a rate of $32.50
per share per quarter and is convertible into common stock at a rate of
133.22 shares of common stock for each preferred share with a face
amount of $1,000. The stock is redeemable at the option of the Company
or in liquidation at a rate of $1,000 per share.
Read independent auditors' report. F-31
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
Preferred Series D
In January 1998, the Company sold 2,500 shares of no par value Series D
convertible preferred stock ("Preferred Series D") under a private
placement offering at a stated face value of $1,000 per share. The net
proceeds to the Company were $1,817,500 after deducting the placement
agent commission and expenses. In addition, $250,000 of long-term debt
was extinguished through the issuance of 250 shares of the Preferred
Series D stock. Each share of the Preferred Series D stock was
convertible, at the option of the shareholder at any time, into a
number of shares of common stock of the Company at a conversion rate
which shall be a number of shares of common stock equal to $1,000
divided by the lower of 55% of the average market price of the common
stock for the five trading days immediately prior to the conversion
date or $1.96875. The conversion price was based on 55% of the fair
market value of the Company's common stock at the date of conversion.
The holders of the Preferred Series D stock were entitled to receive
cumulative yearly dividends at a rate of 8% of the face value in cash
or, at the option of the Company, in shares of common stock. The
Preferred Series D shares were entitled to a liquidation preference of
$1,300 per share.
Since the Preferred Series D stock was convertible at a discount, a
Preferred Series D stock dividend of $1,382,601 was recorded for the
year ended December 31, 1998 for the difference between the discounted
conversion price of the Preferred Series D stock and the fair market
value of the Company's common stock at the time of issuance.
Pursuant to the terms of the private placement agreement, the Company
was required to register with the Securities and Exchange Commission
the shares of common stock underlying the Preferred Series D stock
within 30 days of the final closing of the private placement. In
addition, the registration was required to be declared effective within
120 days of the closing date. Since those events did not occur, the
Company was required to increase the discount rate by 10% from 35% to
45% to the purchasers of the private placement during 1998. This
additional discount was valued at $718,272 (the difference between the
original discounted conversion price and the fair market value of the
common stock) and was recorded for the year ended December 31, 1998. As
of December 31, 1998, there were 2,350 shares of Preferred Series D
stock outstanding after holders of 150 shares of Preferred Series D
stock converted their shares into 615,384 shares of the Company's
common stock.
Read independent auditors' report. F-32
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
During the nine months ended September 30, 1999, holders of 475 shares
of Preferred Series D stock converted their shares into 4,250,499
shares of the Company's common stock and holders of 1,875 shares of
Preferred Series D stock converted their shares into 187.5 shares of
the Company's Redeemable Preferred Series F stock. As of September 30,
1999 there were no Preferred Series D stock outstanding.
Preferred Series E
In February 1999, the Company designated 135 shares of no par value
Series E voting nonredeemable cumulative convertible preferred stock
("Preferred Series E") and issued 20 shares of its Preferred Series E
stock at $10,000 per share for a total consideration of $200,000. Each
share of the Preferred Series E stock was convertible, at the option of
the shareholder at any time, into a number of shares of common stock of
the Company at a conversion rate which shall be a number of shares of
common stock equal to $10,000 divided by the lower of 65% of the
average market price of the common stock for the five trading days
immediately prior to the conversion date or $1.96875. The Preferred
Series E stock was entitled to cumulative, preferential dividends at a
rate of $800 per share. The Preferred Series E stock was redeemable in
liquidation at $12,000 per share. In June 1999, the Company reacquired
10 shares of Preferred Series E stock for $100,000. Also in June 1999,
the holder of the remaining 10 shares of Preferred Series E stock
converted into 10 shares of the Company's Redeemable Preferred Series F
stock and there is currently no Preferred Series E stock outstanding.
Read independent auditors' report. F-33
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
Redeemable Preferred Series F
In June 1999, the Company designated 250 shares of no par value Series
F non-voting redeemable cumulative preferred stock ("Redeemable
Preferred Series F"). The Redeemable Preferred Series F stock is
entitled to cumulative, preferential dividends at a rate of $1,000 per
share. The holders of the Redeemable Preferred Series F stock may
require the Company to repurchase the stock at $12,500 per share
anytime between June 1, 2001 and August 1, 2001. In June 1999, holders
of 1,875 shares of the Company's Preferred Series D stock converted
their shares into 187.5 shares of Redeemable Preferred Series F stock.
Also in June 1999, holders of 10 shares of the Company's Preferred
Series E stock converted their shares into 10 shares of Redeemable
Preferred Series F stock. The carrying value of the 1,875 shares of
Preferred Series D stock was $3,126,288 and the carrying value of the
10 shares of Preferred Series E stock was $100,000 for a total
conversion carrying value of $3,226,288. The redemption value of the
197.5 shares of Redeemable Preferred Series F stock is $2,468,750. The
difference of $757,538 between the total carrying value (of the
Preferred Series D and Preferred Series E stocks) and the redemption
value of the Redeemable Preferred Series F stock was credited to common
stock.
Redeemable Common Stock
In connection with the Company's acquisition of SBK, the prior owners
of SBK had the right to require the Company to repurchase 187,266
shares at a purchase price of $2.67 per share for a total repurchase
value of $500,000. The Company was only required to repurchase a
maximum of 37,453 shares in any six-month period commencing six months
from the date of closing. The redeemable common stock purchase
obligation was noncumulative and was to expire in June 2000.
During 1998, the Company repurchased 74,906 shares of the redeemable
common stock for $200,000 and 112,360 shares with a value of $300,000
remained subject to redemption at December 31, 1998. In June 1999, the
Company entered into a settlement with the prior owners of SBK whereby
the Company issued 187,266 shares of its common stock for the remaining
112,360 outstanding shares of redeemable common stock owned by the
prior owners of SBK.
Read independent auditors' report. F-34
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
In connection with the Company's acquisition of Seawest, options were
granted to the prior owner of Seawest to purchase up to 100,000 shares
of Company common stock at an exercise price of $.001 per share. During
1998, all of these options were exercised. The Company is obligated to
repurchase these 100,000 shares at the greater of fair market value or
$3.25 over a mutually agreeable period of time. The value of these
100,000 redeemable shares was recorded at $325,000. During 1998, the
Company repurchased 10,000 shares for $32,000. At September 30, 1999
and December 31, 1998, there were 90,000 shares with a value of
$293,000 subject to redemption.
Stock Subscriptions Receivable
During 1998, the Company sold the following common shares in exchange
for subscription notes receivable: (1) 500,000 shares valued at
$687,500 to the Company's Chief Operating Officer, (2) 500,000 shares
valued at $687,500 to the Company's Chief Financial Officer, and (3)
300,000 shares valued at $412,500 to a consultant. Each of the
underlying stock subscription agreements bear interest at 9.5% per
annum and are due on or before July 2001. The shareholders also retain
the right to require the Company to repurchase the shares within three
years of their issuance in exchange for the cancellation of the notes.
During 1997, the Company sold the following common shares in exchange
for subscription notes receivable: (1) 500,000 shares valued at
$1,500,000 to the Company's Chief Operating Officer and (2) 300,000
shares valued at $900,000 to a consultant of the Company. Each of the
underlying stock subscription agreements bear interest at 9.5% per
annum and are due on or before September 2000. The officer and the
consultant also retain the right to require the Company to repurchase
the shares within three years of their issuance in exchange for
cancellation of the notes.
The fair value of each subscription was based on the quoted market
price of the Company's common stock on the date of issuance. Stock
subscriptions receivables were $4,187,500 at September 30, 1999 and
December 31, 1998. All accrued interest through September 30, 1999 has
been waived by the Board of Directors.
Read independent auditors' report. F-35
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
Common Stock Issued in Connection with Debt
During the year ended December 31, 1998, the Company borrowed $350,000
from four individuals. The Company issued 70,000 shares of common stock
to these investors. The market price of the shares on the date of the
issuance was $1.00 per share, and accordingly, $70,000 was recorded as
original issue discount and is being amortized as interest expense over
the life of the loan. The Company is obligated to issue additional
shares to these investors if the underlying per share value of the
stock is less than $1.50 upon the occurrence of certain defined future
events. The number of shares to be issued will be based upon the fair
market value of the Company's common stock at the date the contingency
is met.
Stock Issued for Services
For the nine months ended September 30, 1999 and the year ended
December 31, 1998, the Company issued 1,291,667 and 248,581 shares of
its common stock, respectively, in exchange for consulting and legal
services. The aggregate fair value of these shares was calculated to be
$340,000 and $537,295, respectively, based on the market value of the
stock on the date of issuance. Of these amounts, $298,100 and $434,429
were classified as prepaid consulting fees, respectively, and are being
amortized over the lives of the agreements.
Conversion of Debt to Equity
During the nine months ended September 30, 1999, the Company issued
192,308 shares of its common stock with a fair value of $50,000 in
exchange for extinguishment of long-term debt. Also, as described in
note 8, the Company issued 500,000 shares of its common stock to its
largest stockholder as satisfaction of $109,400 in principal.
During the year ended December 31, 1998, the Company issued 112,793
shares of its common stock with a fair market value of $277,404 in
exchange for extinguishment of long-term debt.
Read independent auditors' report. F-36
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
Private Placement of Common Stock
For the nine months ended September 30, 1999, the Company sold to
accredited investors a total of 769,230 shares of the Company's
freely-traded common stock at a purchase price if $0.23 per share in a
private transaction exempt from registration under applicable Federal
securities laws. The Company collected proceeds of $174,563 in
connection with this transaction. No offering costs were incurred as
part of the transaction.
The Company also sold 500,000 shares of its common stock at a purchase
price of $0.30 per share. The Company collected proceeds of $150,000
with no offering costs incurred.
Common Stock Issued in Conjunction with Prior Year Subsidiary
Acquisitions
In June 1999, the Company entered into a settlement with the prior
owners of SBK whereby the Company issued 187,266 shares of its common
stock for the remaining 112,360 outstanding shares of redeemable common
stock owned by the prior owners of SBK. Also, the Company issued
700,187 shares of its common stock to the prior owners of SBK to settle
disputes on the amount of liabilities in existence at the date of
acquisition of SBK by the Company and for a principal reduction of
$300,000 of a note due to the former owners of SBK which reduced the
principal balance from $500,000 to $200,000.
In November 1998, the Company issued 50,000 shares of its common stock
to the former owners of Sobik's. These shares were issued as
consideration for the granting of an extension on the due date of
long-term debt of $500,000 (see Note 9) incurred on the acquisition.
The fair value of these shares, $21,875, has been classified as prepaid
loan fees and is included in other assets as December 31, 1998. The
loan fees are being amortized over the remaining contractual life of
the loan.
Read independent auditors' report. F-37
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
Common Stock Options and Warrants
In February 1999, the Company approved the 1998 Incentive Plan
("Incentive Plan") to enable the Company to offer employees and its
consultants equity interests in the Company. There are 1,500,000 shares
designated under the Incentive Plan and are fully vested upon grant. In
February 1999, the Company granted options to purchase a total of
745,000 shares of common stock to non-officer employees and an option
to purchase a total of 150,000 shares of common stock to one of the
Company's non-employee director under the Incentive Plan. The options
were issued at an exercise price of $0.20 per share, the quoted market
price of the underlying shares on the date of grant and expire in
February 2002.
For the year ended December 31, 1998, the Company granted two
consultants options to purchase a total of 228,570 shares of common
stock at an exercise price of $0.875 per share, the quoted market price
of the underlying shares on the date of the grant. The fair value of
these options, $85,366, was recorded as prepaid consulting fees and is
being amortized over one year, the life of the underlying consulting
agreements. In September 1999, the Company adjusted the exercise price
on options granted to these two consultants from $0.875 per share to
$0.50 per share.
During the nine months ended September 30, 1999, options to purchase
37,500 shares of the Company's common stock were exercised by grantees
in connection with the Company's acquisition of Pastry. The Company
waived the exercise price of the exercise price which was based on 50%
of the fair market value on the date of exercise. In addition, options
to purchase 100,000 shares of the Company's common stock were exercised
by the prior owners of Seawest during the year ended December 31, 1998.
The Company waived the exercise price of $0.001 per share.
In August 1998 and December 1997, the Company granted options to
purchase 1,000,000 shares each of its common stock to the President and
Chief Executive Officer. The options were issued with an exercisable
price of $1.55 per share and $2.75 per share, respectively, with
expiration dates of August 2001 and December 2000, respectively. The
President has yet to exercise any portion of these options. In
September 1999, the Company adjusted the exercise price of both option
grants to $0.29 per share.
The Financial Accounting Standards Board issued Statement No. 123 ("FAS
123"), "Accounting for Stock-Based Compensation", which provides that
expense equaled to the fair value of all stock based awards on the date
of the grant over the testing period be recognized.
Read independent auditors' report. F-38
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
No compensation cost has been recognized for options granted to
employees at exercise prices which equal or exceed the market price of
the Company's common stock at the date of grant. Options granted at
exercise prices below market prices are recognized as compensation cost
measured as the difference between market price and exercise price at
the date of grant.
FAS 123 requires the Company to provide pro forma information regarding
net income and earnings per share as if compensation cost for the
Company's employee stock options had been determined in accordance with
the fair value based method prescribed in FAS 123. The Company
estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the nine months ended
September 30, 1999 and the year ended December 31, 1998: no dividend
yield; an expected life of five years; expected volatility of 64%, and
risk-free interest rate of 5.5%.
Under the accounting provisions of FAS 123, the Company's net loss and
loss per share would have increased to the pro forma amounts indicated
below for the nine months ended September 30, 1999 and the year ended
December 31, 1998:
1999 1998
---------------------------------------------------------------------
Net loss applicable to common stock
As reported $(1,915,039) $(7,400,484)
Proforma $(1,968,285) $(7,650,484)
Loss per share - basic and diluted
As reported $ (.08) $ (.45)
Proforma $ (.09) $ (.47)
---------------------------------------------------------------------
Read independent auditors' report. F-39
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
9. Stockholders' Equity (continued)
Changes in options outstanding for the nine months ended September 30,
1999 and the year ended December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Fair Value
Exercise of Options
Shares Price Granted
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1997 3,246,000 $2.48 $ -
Granted 1,228,750 1.42 .27
Less options exercised (100,000) - -
Less options expired (100,000) 2.81 -
---------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,274,570 2.22 -
Granted 895,000 .20 .20
Less options exercised (37,500) - -
Less options expired (350,000) 2.77 -
---------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 4,782,070 $1.02 -
=========================================================================================================
</TABLE>
The following table summarizes information about options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
---------------------------------------------------------
Weighted- Weighted-
Average Average
Range of Remaining Exercise
Exercise Prices Shares Contractual Life Price
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.20 to $0.75 3,418,570 29.7 months $0.32
$1.92 to $3.93 1,363,500 30.3 months $2.78
---------------------------------------------------------------------------------------------------------
4,782,070 29.9 months $1.02
=========================================================================================================
</TABLE>
Read independent auditors' report. F-40
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
10. Commitments and Contingencies
Operating Leases
The Company leases office space under certain operating leases which
expire through 2003. Total rent expense for the nine months ended
September 30, 1999 and the year ended December 31, 1998 was $88,848 and
$323,473, respectively.
Future annual minimum lease payments due under these operating leases
at September 30, 1999 are as follows:
2000 $ 88,917
2001 27,286
2003 7,425
--------------------------------------------
$ 123,628
============================================
Legal Issues
On August 2, 1999, shareholders of Li'l Dino Management Corporation
filed a complaint against the Company and some of its officers in Civil
Action Number 1:99-CV631 in the United States District Court for the
Middle District of North Carolina, Greensboro Division. The Company was
served with this complaint on August 5, 1999. This complaint alleges
damages of $4.5 million for securities fraud, misappropriation of
corporate opportunities and negligent misrepresentation, and seeks
treble damages, interest and attorney's fees. The allegations in the
complaint relate to the Company's acquisition of substantially all of
the assets of Li'l Dino Management. The Company believes that the
claims made in the complaint are without merit. The Company intends to
defend itself vigorously in this matter.
The Company is involved in various other lawsuits and litigation
matters on an ongoing basis as a result of its day-to-day operations.
However, the Company does not believe that any of these other or any
threatened lawsuits and litigation matters will have a material adverse
effect on the Company's financial position or results of operations.
Read independent auditors' report. F-41
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
10. Commitments and Contingencies (continued)
Franchise Agreements
Under the terms of the various franchise agreements, which are for
terms ranging from 10 to 15 years and contain various renewal options,
the franchisees are obligated for the payment of the following fees to
the Company:
o Franchise Fees - In accordance with the terms of the
franchise agreements, the Company receives an initial
franchise fee of $10,000 to $20,000.
o Royalties - The Company receives royalties ranging from
4% to 7% of gross sales from the franchisees' operations
of the restaurants.
o Advertising Fund - The franchise agreements require the
franchisees to contribute to an advertising fund based
upon 2% to 4% of gross sales. The funds are maintained in
separate bank accounts, and their use is restricted solely
for advertising, marketing and public relations programs
and materials to develop the goodwill and public image of
each of the respective franchises.
Employment Agreements
The Company is a party to employment agreements with its Chief
Operating Officer and Chief Financial Officer. Pursuant to the
agreements, these officers are to receive an annual salary of
approximately $150,000 and $125,000 through September 2000 and July
2001, respectively.
Consulting Fees
In October 1998, the Company entered into an agreement with a
consultant to receive advisory services. Pursuant to this agreement,
the Company is obligated to pay consulting fees ranging from 3% to 10%
based upon performance results, as defined.
During 1997, the Company entered into an agreement with a consultant to
receive advisory services. The Company is contingently obligated to the
consultant to provide for options of up to 500,000 shares of Company
common stock in the event the Company either raises $10,000,000 or
achieves a total store level of 630 units by December 2000. Since
management believes the 630-store level will be achieved, options with
a fair market value of $681,000 were recorded as prepaid consulting,
which is being amortized over the life of the agreement.
Read independent auditors' report. F-42
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
11. Income Taxes
The components of income tax expense for the nine months ended
September 30, 1999 and the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C>
Federal $ - $ -
State 650 12,610
---------------------------------------------------------------------------------------------------------
650 12,610
---------------------------------------------------------------------------------------------------------
Deferred:
Federal - -
State - -
---------------------------------------------------------------------------------------------------------
- -
---------------------------------------------------------------------------------------------------------
Total income taxes $ 650 $ 12,610
---------------------------------------------------------------------------------------------------------
<CAPTION>
The components of deferred tax assets and liabilities are comprised of
the following at September 30, 1999 and December 31, 1998:
1999 1998
---------------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 2,092,000 $ 1,796,000
Stock and stock options issued for services 874,000 1,066,000
Allowance for doubtful accounts 125,000 128,000
Goodwill and covenants not to compete 69,000 69,000
Property, plant and equipment 51,000 51,000
Accrued expenses 20,000 36,000
---------------------------------------------------------------------------------------------------------
Gross deferred income tax assets 3,231,000 3,146,000
Valuation allowance (3,231,000) (3,146,000)
---------------------------------------------------------------------------------------------------------
Total deferred tax assets $ - $ -
---------------------------------------------------------------------------------------------------------
</TABLE>
Read independent auditors' report. F-43
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
11. Income Taxes (continued)
The following summary reconciles differences from taxes at the federal
statutory rate with the effective rate:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income taxes at federal statutory rates (34.0)% (34.0)%
State income taxes, net of federal benefit 5.2 .3
Operating loss with no tax benefit 28.9 34.0
---------------------------------------------------------------------------------------------------------
Income tax at effective rates .1% .3%
---------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, the Company has net operating loss carryforwards
of approximately $5,500,000 for federal income tax purposes that expire
as follows:
2012 $ 2,900,000
2018 1,800,000
2019 800,000
-----------------------------------------
$ 5,500,000
=========================================
12. Operating Segments
The Company defines segments as each separate franchising concept it
operates. It clearly views each business as a separate segment and
makes decisions based on the activity and profitability of that
particular segment.
The reportable segments are defined as follows:
o The franchise operations segment is engaged in the
franchising of various quick-service restaurants located
throughout the United States. These restaurants feature
submarine sandwiches, pizza, soups and hot and cold side
order items. The Company assists the franchisees with
selecting suitable locations, advises on the negotiation
of lease terms and store design, assists with securing of
food product supply and purchase of furniture and
fixtures. The Company also operates company-owned stores
on a limited basis.
o The bakery operations segment is comprised of a bakery
that primarily serves the JRECK restaurant franchises.
Read independent auditors' report. F-44
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
12. Operating Segments (continued)
The table below shows certain financial information by business segment
for the nine months ended September 30, 1999 and the year ended
December 31, 1998:
<TABLE>
<CAPTION>
Segment Reporting Franchise Bakery Consolidated
September 30, 1999 Operations Operations Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue from external customers $ 2,724,534 $ 571,844 $ 3,296,378
Interest expense - net 356,192 - 356,192
Depreciation and amortization 565,642 104,800 670,442
Segment loss (1,674,185) (93,914) (1,768,099)
Segment assets 9,777,453 1,556,778 11,334,231
Expenditures for segment assets 2,059 - 2,059
---------------------------------------------------------------------------------------------------------
Segment Reporting Franchise Bakery Consolidated
December 31, 1998 Operations Operations Total
---------------------------------------------------------------------------------------------------------
Revenue from external customers $ 5,160,741 $ 829,803 $ 5,990,544
Interest expense - net 408,836 26,748 435,584
Depreciation and amortization 873,981 166,279 1,040,260
Segment loss (5,457,918) (218,474) (5,676,392)
Segment assets 13,068,764 1,639,090 14,707,854
Expenditures for segment assets 208,685 21,249 229,934
---------------------------------------------------------------------------------------------------------
</TABLE>
13. Subsequent Events
In October 1999, the Company granted options to officers, employees and
consultants to purchase an aggregate of 3,995,000 shares of its common
stock with exercise prices ranging from $0.29 to $0.50 per share. All
of the granted options have an expiration date of September 2004.
Read independent auditors' report. F-45
<PAGE>
JRECK Subs Group, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
14. Transition Period Due to Change in Fiscal Year
During 1999, the Company changed its fiscal period from December 31 to
September 30. Accordingly, the consolidated financial statements
presented reflect operating results and cash flows for a nine month
period and twelve month period ended September 30, 1999 and December
31, 1998, respectively. For comparative purposes, the unaudited
operating results and cash flows for the nine months ended September
30, 1998 are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1998
(Unaudited)
-----------------------------------------------------------------------------------
Revenues:
<S> <C>
Franchising related revenues $ 2,652,781
Retail sales - company-owned stores 1,353,366
Retail sales - bakery and other products 736,171
Other revenues 46,522
-----------------------------------------------------------------------------------
4,788,840
Operating costs and expenses:
Franchise servicing costs 1,484,583
Cost of retail sales and operating costs - stores 1,460,087
Cost of retail sales and operating costs - bakery 680,363
General and administrative 1,257,656
Consulting and investor relations 852,486
Series D preferred stock conversion penalty 718,272
Amortization and depreciation 865,678
-----------------------------------------------------------------------------------
7,319,125
-----------------------------------------------------------------------------------
Loss from operations (2,530,285)
Other expense - interest (248,830)
-----------------------------------------------------------------------------------
Net loss (2,779,115)
Preferred stock dividends (1,724,092)
-----------------------------------------------------------------------------------
Net loss applicable to common stock (4,503,207)
===================================================================================
Weighted average of common shares outstanding 16,378,836
===================================================================================
Net loss per common share - basic and diluted $ (.27)
===================================================================================
Net cash used by operating activities $ (1,256,394)
Net cash used by investing activities (531,748)
Net cash provided by financing activities 1,613,908
-----------------------------------------------------------------------------------
Net decrease in cash and cash equivalents $ (174,234)
===================================================================================
</TABLE>
Read independent auditors' report. F-46
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 121,292 310,578
<SECURITIES> 0 0
<RECEIVABLES> 518,504 555,755
<ALLOWANCES> 152,886 157,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,023,793 1,758,326
<PP&E> 1,054,970 1,064,872
<DEPRECIATION> 328,303 244,150
<TOTAL-ASSETS> 11,334,231 14,707,854
<CURRENT-LIABILITIES> 2,903,239 3,915,606
<BONDS> 2,369,546 3,514,840
2,468,750 0
120,000 4,038,271
<COMMON> 24,206,679 22,037,838
<OTHER-SE> (19,666,881) (17,751,842)
<TOTAL-LIABILITY-AND-EQUITY> 11,334,231 14,707,854
<SALES> 571,844 2,363,889
<TOTAL-REVENUES> 3,296,378 5,990,544
<CGS> 261,718 858,608
<TOTAL-COSTS> 261,718 858,608
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 254,507 125,418
<INTEREST-EXPENSE> 356,192 435,584
<INCOME-PRETAX> (1,365,908) (4,786,893)
<INCOME-TAX> 0 12,610
<INCOME-CONTINUING> (1,768,099) (5,676,392)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,915,039) (7,400,484)
<EPS-BASIC> (0.08) (0.45)
<EPS-DILUTED> (0.08) (0.45)
</TABLE>
