Form 10-QSB/A
[As last amended In Release No. 34-38350, July 18, 1997, effective
September 2, 1997, 62 F.R. 39755]
U.S. Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to _________
0-23545
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Commission File Number
Jreck Subs Group, Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
Colorado 84-1317674
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(state or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
2101 West State Road 434, Suite 100, Longwood, Florida, 32779
-------------------------------------------------------------
(Address of principal executive offices)
(407) 682-6363
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the post 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the most recent practicable date: September 30,
1998-16,596,628 Shares
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Consolidated Balance Sheet
September 30, 1998 and December 31, 1997
ASSETS
Sep. 30, 1998 Dec. 31, 1997
------------- -------------
Current Assets:
<S> <C> <C>
Cash & Cash Equivalents $ 253,184 $ 427,420
Accounts Receivable-Trade, net of allowance of $60,000 333,152 391,567
Current Portion of Notes Receivable 100,000 168,560
Prepaid Expenses 495,530 730,811
------------ -----------
Total Current Assets 1,181,866 1,718,358
Property & Equipment-Net 1,818,588 1,930,990
Other Assets:
Notes Receivable 601,152 173,704
Excess of Cost Over Fair Value of Net Assets Acquired 14,357,392 11,521,526
Covenants Not To Compete & Other Intangible Assets 427,829 512,777
Deferred Loan Costs 610,960 597,760
Other 121,912 34,097
------------ -----------
Total Other Assets 16,119,245 12,839,864
Total Assets $ 19,119,699 $16,489,212
============ ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long Term Debt $ 1,448,625 $ 2,163,554
Current Portion of Notes Payable to Related Parties 60,000 434,765
Accounts Payable-Trade 727,874 1,020,101
Accrued Expenses 517,566 1,196,130
Accrued Preferred Stock Dividend 210,840 0
Liability to issue Common Stock 1,793,750 2,234,375
------------ -----------
Total Current Liabilities 4,758,655 7,048,945
Long Term Debt-Related Parties 476,059 323,032
Other 2,353,373 1,619,115
Redeemable Common Stock 801,000 500,000
Stockholders' Equity:
Preferred Stock-2,620 Shares Outstanding 4,288,373 2,020,000
Common Stock Authorized-50 Million Shares
Issued-16,597 Million Shares 23,694,423 17,729,478
Less Stock Subscription Receivable (2,400,000) (2,400,000)
Accumulated Deficit (14,852,184) (10,351,358)
------------ -----------
Total Stockholders' Equity 10,730,612 6,996,120
Total Liabilities & Stockholders' Equity $ 19,119,699 $16,489,212
============ ===========
</TABLE>
The interim financial statements include all adjustment which, in the opinion of
management, are necessary in order to make the financial statements not
misleading.
2
<PAGE>
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Statement of Operations
Nine Months & Quarters Ended
September 30, 1998 and 1997
Nine Months Nine Months Quarter Quarter
Ended Ended Ended Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
Revenues:
<S> <C> <C> <C> <C>
Continuing Royalties $ 1,996,445 $ 358,199 $ 731,882 $ 137,413
Initial Franchise & Franchise Transfer Fees 127,000 0 57,601 0
Retail Store Sales-net 1,353,366 61,551 390,507 61,551
Bakery Operation Sales-net 736,171 174,703 211,059 174,703
Other 636,528 0 184,244 0
------------- ------------- ------------- -------------
Total Revenue 4,849,510 594,453 1,575,293 373,667
Costs Applicable to Sales & Revenue 783,024 96,373 231,703 96,373
Selling, General & Administrative Expenses 3,824,934 652,903 1,461,766 459,869
Business Development Costs 1,127,537 2,528,493 46,093 1,088,493
Interest 248,830 79,875 68,997 40,158
Depreciation & Amortization 865,678 72,945 312,702 43,324
Series D Preferred Stock Conversion Penalty 718,272 0 0 0
Loss on Disposal of Property, Plant & Equipment 60,350 0 0 0
------------- ------------- ------------- -------------
Total Expenses 7,628,625 3,430,589 2,121,261 1,728,217
Net Loss (2,779,115) (2,836,136) (545,968) (1,354,550)
Preferred Stock Dividends (1,724,092) 0 (1,724,092) 0
------------- ------------- ------------- -------------
Net Loss $ (4,503,207) $ (2,836,136) $ (2,270,060) $ (1,354,550)
============= ============= ============= =============
Weighted Average Common Shares Outstanding 15,369,469 10,524,992 16,500,034 11,848,834
============= ============= ============= =============
Loss per Share $ (0.293) $ (0.299) $ (0.138) $ (0.114)
============= ============= ============= =============
</TABLE>
The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not
misleading.
3
<PAGE>
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Statement of Cash Flows
Nine Months & Quarters Ended
September 30, 1998 and 1997
Nine Months Nine Months Quarter Quarter
Ended Ended Ended Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
Operating Activities:
<S> <C> <C> <C> <C>
Net Loss $ (2,779,115) $ (2,836,136) $ (545,968) $ (1,354,550)
Non-Cash Expenses Included in Net Income:
Depreciation & Amortization 865,678 72,945 312,702 43,324
Consulting Fees paid in Common Stock
and Options 345,230 2,294,127 0 935,200
Conversion Penalty on Series D Preferred Stock 718,272 0 0 0
Loss on Disposal of Property, Plant & Equipment 60,350 0 0 0
Adjustments to Reconcile Net Loss to Cash
Provided (Consumed) by Operating Activities:
(Increase) in Accounts Receivable 58,416 0 (14,380) (1,009)
(Increase) in Prepaid Expenses 235,281 (942,997) 68,347 (942,997)
Increase in Accounts Payable & Accruals (760,506) 74,374 (129,189) (464,184)
------------- ------------- ------------- -------------
Cash Consumed by Operating Activities (1,256,394) (1,337,687) (308,488) (1,604,216)
Financing Activities:
Proceeds From the Issuance of
Preferred Stock (Common In '97) 1,817,490 715,000 0 495,000
Payments on Long Term Debt (740,350) 0 (100,000) 0
Proceeds of Long Term Debt 550,000 1,197,099 350,000 1,197,099
Dividends Paid (13,232) (44,571) 0 (18,171)
------------- ------------- ------------- -------------
Cash Generated by Financing Activities 1,613,908 1,867,528 250,000 1,673,928
Investing Activities:
Advances Made on Notes Receivable (402,636) 0 0 0
Payments Collected on Notes Receivable 43,747 0 11,188 150,311
Acquisition of Equipment (50,859) (18,673) 0 0
Cash Paid in Connection with Acquisitions (122,000) (331,964) (5,165) 0
------------- ------------- ------------- -------------
Cash Expended on Investing Activities (531,748) (350,657) 6,023 150,311
Net Increase (Decrease) in Cash (174,234) 179,184 (52,465) 20,023
Cash & Cash Equivalents-Beginning 427,420 47,368 305,651 206,529
------------- ------------- ------------- -------------
Cash & Cash Equivalents-Ending $ 253,184 $ 226,552 $ 253,184 $ 226,562
============= ============= ============= =============
</TABLE>
The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not
misleading.
4
<PAGE>
Jreck Subs Group, Inc.
Notes to Financial Statements
Form 10-QSB
September 30, 1998
Note 1. The interim financial statements include all adjustments which, in the
opinion of management, are necessary in order to make the financial statements
not misleading. The accompanying unaudited financial statements have been
prepared in accordance with the instructions to form 10-QSB and do not include
all of the information and footnotes required by Generally Accepted Accounting
Principles for complete financial statements.
Note 2. On March 22, 1998 the Company acquired the assets of Li'l Dino
Corporation, a 43 unit sandwich shop franchisor located in North Carolina. The
purchase price of $2,400,000 was paid by assuming $400,000 in debt and issuing
735,294 of the Company's common shares. The shares issued were valued at $2.72
per share. The acquisition has been recorded as follows:
Total Consideration Paid $ 2,000,000
Fair value of assets acquired (15,000)
Liabilities assumed 400,000
-----------
Excess of cost over net assets acquired $ 2,385,000
===========
Note 3. In June, 1998 the shareholders of Preferred Series A and B converted all
$1,900,000 of their preferred stock into 1,010, 000 shares of the Company's
common stock.
Item 2. Management's Discussion and Analysis.
Three months ended September 30, 1998 compared to three months ended September
30, 1997.
Results of Operations:
The Company had a net loss of $545,968 for the three months ended September 30,
1998 compared to a net loss of $1,354,550 for the same period in 1997. The
decrease in net loss is primarily the result significant business acquisitions
had in shifting the business structure, coupled with a decrease of $935,200 in
1998 in non-cash consulting and business development expenses that were
reflected in the 3rd quarter of 1997. The aggregate sales of $390,507 generated
by company owned restaurants acquired in 1997, offset by food costs and
operating costs of $188,685 and $232,824, respectively, resulted in contributing
$31,002 to the 1998 quarter loss. The bakery operations generated revenues of
$211,059 offset by product costs of $43,018 and operating expenses of $121,562,
thereby contributing $46,479 in income to offset the overall 1998 quarter loss
compared to a bakery operating loss of $93,525 in the same period of 1997. The
1998 quarter reflects the operations of the Company's Watertown bakery, whereas
1997 bakery operations reflect the Tampa operation which had been reorganized
and discontinued by 3rd quarter of 1998. Other changes for the quarter ended
September 30, 1998 were an increase over 1997 of $269,378 in amortization and
depreciation expense and interest expense increasing from $40,158 to $68,997,
primarily the result of debt assumed and originating from the Company's
acquisitions. Business expansion expenses were $1,088,493 in 1997 compared to
$46,094 in the same quarter of 1998.
The revenue of the Company increased $1,201,626 to $1,575,293 for the three
months ended September 30, 1998 from $373,667 for the same period in 1997. The
increase is primarily due to the impact of businesses acquired in the 3rd and
4th quarters of 1997 and 1st quarter of 1998 generating $836,314 of additional
franchising revenue and the sales contributions of $390,507 and $211,059 in 1998
from the Company stores and bakery, respectively, compared to $61,551 and
$174,703 for each of the activities in 1997.
5
<PAGE>
Costs and operating expenses applicable to sales and revenue increased
$1,137,227 to $1,693,469 for the three months ended September 30, 1998 from
$556,242 for the same period in 1997. This increase is also primarily due to the
effects of business acquisitions made in 1997 including restaurant and bakery
food costs and operating expenses of $585,089 in 1998 compared to $324,266 in
1997. Additional franchise servicing costs of $510,384 in 1998 were the result
of business acquisitions made in 3rd & 4th quarter of 1997.
Liquidity and Capital Resources:
Working capital deficit at September 30, 1998 was $3,576,789 compared with a
deficit of $5,330,587 on December 31, 1997 a decrease of $1,753,798. The
decrease in deficit is primarily due to the Company's issuance of $2,500,000 in
Series D Preferred Stock in January of 1998. The proceeds of this offering were
substantially used to pay down existing debt or to satisfy other obligations.
The Company's primary capital requirements are for repayments of current loans
payable, including those payable to related parties, of $1,508,625 and accounts
payable and accrued expenses of $1,245,430. 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.
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997.
Results of Operations:
The Company had a net loss of $2,779,115 for the nine months ended September 30,
1998 compared to a net loss of $2,836,136 for the same period in 1997. The
decrease in net loss is primarily the result significant business acquisitions
had in shifting the business structure, coupled with a decrease of $2,096,810 in
1998 in non-cash consulting and business development expenses that were
reflected in the first nine months of 1997. The aggregate sales of $1,353,366
generated by the company owned stores in 1998, offset by food costs and
operating costs of $568,474 and $891,612, respectively, resulted in contributing
$106,721 to the 1998 nine month loss. The bakery operations generated revenues
of $736,171 offset by product costs of $214,549 and operating expenses of
$546,380 thereby contributing $24,759 toward the 1998 net loss. Other changes
for the nine months ended September 30, 1998 were an increase over 1997 of
$630,549 in amortization and depreciation expense, and interest expense
increasing from $79,875 to $248,330, primarily the result of debt assumed and
originating from the Company's acquisitions. Business expansion expenses were
$2,528,493 in 1997 compared to $1,127,537 in the same period of 1998. The
revenue of the Company increased $4,255,057 to $4,849,510 for the nine months
ended September 30, 1998 from $594,453 for the same period in 1997. The increase
is primarily due to the impact of businesses acquired in the 3rd and 4th
quarters of 1997 generating $2,400,774 of additional franchising revenue and the
sales contributions of $1,353,366 and $736,171 in 1998 from the Company stores
and bakery, respectively, compared to $61,551 and $174,703 for each of the
activities in 1997.
Costs and operating expenses applicable to sales and revenue increased
$3,558,682 to $4,327,958 for the nine months ended September 30, 1998 from
$749,276 for the tame period in 1997. This increase is also primarily due to the
effects of business acquisitions made in 1997 including restaurant and bakery
food costs and operating expenses of $2,221,017 in 1998 compared to $324,266 in
1997. Additional franchise servicing costs of $1,358,298 in the first nine
months of 1998 over the same period in 1997 were the result of business
acquisitions made in 3rd & 4th quarter 1997.
6
<PAGE>
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.
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 software by June of 1999.
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.
7
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
Incorporated by reference to Registration Statement 10-SB Part II, Item
4. S.E.C. file Number 0-23545
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
8
<PAGE>
SIGNATURES
In accordance with all the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Jreck Subs Group, Inc.
- -------------------------
(Registrant)
President & Duly
01/27/00 Christopher M. Swartz Authorized Officer /s/ Christopher M. Swartz
- -------- --------------------- ------------------ -------------------------
Date Print Name Title Signature
Chief Financial
Officer & Principal
01/27/00 Michael E. Cronin Accounting Officer /s/ Michael E. Cronin
- -------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 253,184
<SECURITIES> 0
<RECEIVABLES> 333,152
<ALLOWANCES> 60,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,181,866
<PP&E> 1,181,866
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,119,699
<CURRENT-LIABILITIES> 4,758,655
<BONDS> 0
0
4,288,373
<COMMON> 23,694,423
<OTHER-SE> (2,400,000)
<TOTAL-LIABILITY-AND-EQUITY> 19,119,699
<SALES> 2,089,537
<TOTAL-REVENUES> 4,849,510
<CGS> 783,024
<TOTAL-COSTS> 6,601,173
<OTHER-EXPENSES> 778,622
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 248,830
<INCOME-PRETAX> (2,779,115)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,779,115)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,503,207)
<EPS-BASIC> (0.293)
<EPS-DILUTED> (0.293)
</TABLE>
