U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[As last amended in Release No. 34-38850, July 18, 1997,
effective September 2, 1997, 62 F.R. 39755]
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to _________
0-23545
-------
Commission File Number
Ultimate Franchise Systems, Inc.
(formerly 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 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: June 30, 2000 -
32,052,182 Shares
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
Ultimate Franchise Systems, Inc. and Subsidiaries
(formerly Jreck Subs Group, Inc.)
Consolidated Balance Sheets
as of June 30, 2000 (Unaudited) and September 30, 1999
June 30, September 30,
2000 1999
---------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents, including restricted cash of $0 and
$35,086, respectively $ 1,345,221 $ 121,292
Accounts receivable - trade, net of allowance for doubtful accounts 181,260 365,618
Prepaid expenses 399,512 456,883
Notes receivable 80,000 80,000
---------------------------------------------------------------------------------------------------------------------
Total current assets 2,005,993 1,023,793
---------------------------------------------------------------------------------------------------------------------
Property and equipment, net 643,388 726,667
---------------------------------------------------------------------------------------------------------------------
Other assets:
Goodwill, net of accumulated amortization of $779,248 and
$984,817, respectively 4,993,511 8,987,076
Covenants not to compete, net of accumulated amortization of
$502,000 and $388,458, respectively - 113,542
Note receivable 200,000 -
Investment in company 468,829 -
Deferred loan costs, net 327,308 376,403
Other 100,650 106,750
---------------------------------------------------------------------------------------------------------------------
Total assets $ 8,739,679 $ 11,334,231
=====================================================================================================================
The interim financial statements include all adjustments which, in the opinion of
management, are necessary in order to make the financial statements not misleading. 2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ultimate Franchise Systems, Inc. and Subsidiaries
(formerly Jreck Subs Group, Inc.)
Consolidated Balance Sheets
As of June 30, 2000 (Unaudited) and September 30, 1999, Continued
June 30, September 30,
2000 1999
---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
<S> <C> <C>
Current portion of long-term debt $ 684,192 $ 1,606,041
Accounts payable 329,799 496,553
Accrued liabilities 584,412 552,881
Accrued preferred stock dividends 253,542 247,764
---------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,851,945 2,903,239
Long-term debt, less current portion 718,784 763,505
Note payable to related party - 245,939
---------------------------------------------------------------------------------------------------------------------
Total liabilities 2,570,729 3,912,683
---------------------------------------------------------------------------------------------------------------------
Redeemable common stock 293,000 293,000
---------------------------------------------------------------------------------------------------------------------
Redeemable Series F Preferred Stock, no par value, 250
shares authorized, 197.5 shares issued and outstanding 2,468,750 2,468,750
---------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Series C Convertible Preferred Stock, no par value, 120 shares
authorized, issued and outstanding 120,000 120,000
Common stock, no par value, 50,000,000 shares authorized,
32,052,182 and 28,403,440 shares issued and outstanding,
respectively 29,468,713 28,394,179
Accumulated deficit (21,994,013) (19,666,881)
Less: Stock subscriptions receivable (4,187,500) (4,187,500)
---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,407,200 4,659,798
---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,739,679 $ 11,334,231
=====================================================================================================================
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ultimate Franchise Systems, Inc. and Subsidiaries
(formerly Jreck Subs Group, Inc.)
Consolidated Statements of Operations
For the Nine and Three Months Ended June 30, 2000 and 1999 (Unaudited)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Continuing royalty revenues $ 1,666,049 $ 1,970,920 $ 417,498 $ 688,924
Initial royalty revenues 60,000 97,375 10,000 46,250
Retail sales - company-owned stores - 110,878 - -
Retail sales - bakery and other products 599,823 520,638 223,820 197,535
Other revenues 737,667 589,777 168,531 265,468
------------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Franchise servicing costs 994,719 1,328,104 250,051 426,580
Cost of retail sales and operating costs - stores - 117,561 - -
Cost of retail sales and operating costs - bakery 584,790 517,287 204,765 185,878
General and administrative 1,197,179 1,012,202 287,074 334,367
Consulting and investor relations 1,145,684 465,337 530,866 226,748
Bad debt expense 25,442 125,417 - -
Long-lived asset write down - 1,902,290 - -
Amortization and depreciation 546,343 720,710 150,067 213,236
------------------------------------------------------------------------------------------------------------------------------------
4,494,157 6,188,908 1,422,823 1,386,809
------------------------------------------------------------------------------------------------------------------------------------
Loss from operations (1,430,618) (2,899,320) (602,974) (188,632)
Other income (expense):
Interest, net (257,486) (449,467) (64,321) (126,766)
Loss on disposal of assets (409,856) (504,638) - -
Other, net (67,469) - (5,469) -
------------------------------------------------------------------------------------------------------------------------------------
Net loss (2,165,429) (3,853,425) (672,764) (315,398)
Preferred stock dividends (161,703) (138,765) (53,901) (42,225)
------------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (2,327,132) $ (3,992,190) $ (726,665) $ (357,623)
====================================================================================================================================
Weighted average of common shares outstanding 29,997,967 20,994,405 31,911,962 23,535,636
====================================================================================================================================
Net loss per common share - basic and diluted $ (.08) $ (.19) $ (.02) $ (.02)
====================================================================================================================================
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ultimate Franchise Systems, Inc. and Subsidiaries
(formerly Jreck Subs Group, Inc.)
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended June 30, 2000 (Unaudited) and the Nine Months Ended September 30, 1999
Preferred Preferred
Common Series C Series D Accumulated Subscription Total
Shares Amount Shares Amount Shares Amount Deficit Notes Equity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 19,503,596 $26,225,338 120 $120,000 2,350 $3,918,271 $(17,751,842) $(4,187,500) $8,324,267
Conversion of
debt to equity 692,308 159,400 - - - - - - 159,400
Stock issued for
current and prepaid
services 1,291,667 340,000 - - - - - - 340,000
Exercise of
options for common
stock 37,500 - - - - - - - -
Stock issued for
marketable security 769,230 174,563 - - - - - - 174,563
Conversion of
preferred Series D
to common stock 4,250,499 791,983 - - (475) (791,983) - - -
Conversion of
preferred Series
D stock dividend 397,966 44,399 - - - - (44,399) - -
Acquisition and
retirement of common
stock (776,779) (1,111,031) - - - - - - (1,111,031)
Other stock sales 500,000 150,000 - - - - - - 150,000
Stock issued for
price adjustments 850,000 197,695 - - - - - - 197,695
Stock issued
on acquisition
restructuring 887,453 664,294 - - - - - - 664,294
Conversion of preferred
Series D to Series
F redeemable preferred
stock - 757,538 - - (1,875) (3,126,288) - - (2,368,750)
Preferred dividends - - - - - - (102,541) - (102,541)
Net loss - - - - - - (1,768,099) - (1,768,099)
------------------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1999 28,403,440 28,394,179 120 120,000 - (19,666,881) (4,187,500) 4,659,798
Stock issued for
current and prepaid
services 1,905,000 465,899 - - - - - - 465,899
Options issued for
current and prepaid
services - 172,699 - - - - - - 172,699
Conversion of debt
to equity 1,743,742 435,936 - - - - - - 435,936
Preferred dividends - - - - - - (161,703) - (161,703)
Net loss - - - - - - (2,165,429) - (2,165,429)
------------------------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 2000 32,052,182 $29,468,713 120 $120,000 - $ - $(21,994,013) $(4,187,500) $3,407,200
====================================================================================================================================
The interim financial statements include all adjustments which, in the opinion of
management, are necessary in order to make the financial statements not misleading. 5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ultimate Franchise Systems, Inc. and Subsidiaries
(formerly Jreck Subs Group, Inc.)
Consolidated Statements of Cash Flows
For the Nine and Three Months Ended June 30, 2000 and 1999 (Unaudited)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C> <C>
Net loss $(2,165,429) $(3,853,425) $ (672,764) $ (315,398)
Adjustments to reconcile net loss to
net cash provided by used in operating activities:
Amortization and depreciation 546,343 720,710 150,067 213,236
Write down of long-lived assets - 1,902,290 - -
Bad debts 25,442 125,417 - -
Loss on disposal of assets 409,856 504,638 - -
Stock and stock options issued for services 190,668 68,426 59,200 16,900
Prepaid interest and loan fees amortized to
interest expense 67,095 168,569 22,365 47,296
Prepaid consulting fees amortized to consulting
and investor relations expense 606,000 474,323 220,296 216,747
Other 45,876 (112,076) - -
(Increase) decrease in:
Accounts receivable 14,186 (23,218) (13,367) 21,240
Prepaid expenses 49,751 (173,341) 27,144 6,296
Increase (decrease) in:
Accounts payable (118,127) 523,569 (159,653) 74,089
Accrued liabilities (28,775) (353,059) (130,923) (269,746)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (357,114) (27,177) (497,635) 10,660
------------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Collection on notes receivable - 65,678 - 10,413
Purchase of property and equipment (15,627) - (10,469) -
Cash received from sale of assets 2,685,688 518,904 2,210,688 -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,670,061 583,904 2,200,219 10,413
------------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from preferred stock - 100,000 - (100,000)
Proceeds from common stock - 150,000 - 150,000
Payments on redeemable common stock - (243,750) - -
Payments on long-term debt (933,093) (542,117) (643,434) (54,863)
Payment of preferred stock dividends (155,925) (9,300) (49,375) -
------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (1,089,018) (545,167) (692,809) (4,863)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,223,929 11,560 1,009,775 16,210
Cash and cash equivalents, beginning of period 121,292 253,184 335,446 248,534
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,345,221 $ 264,744 $ 1,345,221 $ 264,744
====================================================================================================================================
Certain supplemental disclosure of cash flow information and non-cash investing
and financing activities is as follows:
Cash paid for interest $ 190,391 $ 280,898 $ 41,956 $ 79,470
Common stock was issued for the following non-cash consideration:
Prepaid expenses $ 638,598 $ 298,100 $ - $ 298,100
Long-term debt $ 435,936 $ 50,000 $ - $ 50,000
The interim financial statements include all adjustments which, in the opinion of
management, are necessary in order to make the financial statements not misleading. 6
</TABLE>
<PAGE>
Ultimate Franchise Systems, Inc.
(formerly Jreck Subs Group, Inc.)
Notes to Interim Financial Statements
Form 10-QSB
June 30, 2000
Note 1. The unaudited financial statements and notes are presented as permitted
by Form 10-QSB. Accordingly, certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The accompanying financial statements
and notes should be read in conjunction with the audited financial statements
and notes of the Company for the fiscal year ended September 30, 1999. The
results of operations for the nine and three months ended June 30, 2000 are not
necessarily indicative of those to be expected for the entire year.
Note 2. Effective May 16, 2000, the Company changed its legal corporate name
from Jreck Subs Group, Inc. to Ultimate Franchise Systems, Inc.
Note 3. Effective April 28, 2000, the Company completed its sale of the Mountain
Mike's Pizza franchising assets to Concept Acquisitions, LLC ("COAC") for
$3,668,829. COAC is a company controlled by Bradley L. Gordon, who concurrent
with this transaction resigned as Chief Operating Officer and as a Director of
the Company. Mr. Gordon is President and Chief Executive Officer of COAC. The
consideration consisted of $3,000,000 cash, a $200,000 note and COAC units with
a discounted value of $468,829 representing an 18% participation in the Mountain
Mike's Pizza franchising division. The Company recorded a loss of $409,856 for
the nine months ended June 30, 2000 from the sale of the Mountain Mike's Pizza
franchising assets.
Note 4. Included in accrued liabilities of $584,412 at June 30, 2000 is $152,950
relating to the value of 665,000 shares of the Company's common stock to be
issued in connection with consulting services.
Note 5. Effective July 20, 2000, the Company acquired through its Central Park
of America ("Central Park") subsidiary the net assets of Central Park, USA and
Central Park Development including the franchising assets and certain
corporately-owned restaurants. Central Park consists of approximately 60
drive-through hamburger restaurants of which 7 are corporately-owned. The
restaurants are primarily located in the southeastern United States with other
restaurants located in Utah, Idaho and Illinois. The consideration for the
acquisition was $2,689,200 consisting of $800,000 cash, $1,150,000 notes, a
non-compete agreement with a value of $600,000 and 435,000 shares of the
Company's common stock valued at $139,200.
7
<PAGE>
Item 2. Management's Discussion and Analysis.
Forward Looking Statements
The following discussion contains certain forward-looking statements
subject to the safe harbor created by the "Private Securities Litigation Reform
Act of 1995". These statements use such words as "may," "will," "expect,"
"believe," "plan," "anticipate" and other similar terminology. These statements
reflect management's current expectations and involve a number of risks and
uncertainties. Actual results could differ materially due to changes in global
and local business and economic conditions; 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 and other franchise related activities as well as a bakery
acquired to supply sandwich rolls to certain franchisees. All company owned
restaurants were disposed by the end of 1998 by selling or transferring them to
new or existing franchisees. The Company has approximately 200 franchised units
and 8 corporately-owned units at July 31, 2000.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999.
Results of Operations
The Company had a net loss before preferred dividends of ($672,764) for
the three months ended June 30, 2000 compared to a net loss of ($315,398) for
the same period in 1999. The loss per share was $0.02 for the three months ended
June 30, 2000 compared to a loss per share of $0.02 for the same period in 1999.
Total revenues decreased $378,328 or 31.6% to $819,849 for the three
months ended June 30, 2000 compared to $1,198,177 for the same period in 1999.
Revenues from bakery sales were $223,820 for the three months ended June 30,
2000 compared to $197,535 for the same period in 1999, an increase of $26,285.
Royalties decreased $271,426 or 39.4% to $417,498 for the three months ended
June 30, 2000 compared to $688,924 for the same period in 1999. The decrease is
primarily due to only one month's of royalties from the Company's Mountain
Mike's Pizza chain for the three months ended June 30, 2000 before it was sold
on April 28, 2000 and from the sale of the Company's Little King's and Georgio's
submarine sandwich chains which were sold prior to the end of the Company's
fiscal year of September 30, 1999.
Total expenses increased $36,014 or 2.6% to $1,422,823 for the three
months ended June 30, 2000 compared to $1,386,809 for the same period in 1999.
The increase is primarily due to an increase in consulting and investor
relations expense which increased $304,118 to $530,866 for the three months
ended June 30, 2000 compared to $226,748 for the same period in 1999. The
increase in consulting and investor relations expense is consistent with the
Company's effort to seek potential acquisition candidates. General and
administrative expenses decreased $47,293 or 14.1% to $287,074 for the three
months ended June 30, 2000 compared to $334,367 for the same period in 1999 due
to a decrease in corporate staff and professional expenses. Franchise servicing
costs decreased $176,529 or 41.4% to $250,051 for the three months ended June
30, 2000 compared to $426,580 for the same period in 1999 as the Company sold
its Mountain Mike's Pizza chain in April 2000 and two of the Company's submarine
sandwich chains of Little King and Georgio's were sold prior to the end of the
Company's fiscal year of September 30, 1999.
8
<PAGE>
Liquidity and Capital Resources
Net cash used in operating activities was $(497,635) for the three
months ended June 30, 2000 compared to net cash provided by operating activities
of $10,660 for the comparable period in 1999. The decrease in cash provided by
operating activities is primarily attributable to a net decrease in accounts
receivable, prepaid expenses, accounts payable and accrued expenses of
$(276,799) for the three months ended June 30, 2000 compared to a net decrease
of $(168,121) for the same period in 1999. Other uses of cash in operating
activities were the increased consulting and investor relations expense expended
in conjunction with the Company's effort to seek potential acquisition
candidates.
Net cash provided by investing activities was $2,200,219 for the three
months ended June 30, 2000 compared to net cash provided by investing activities
of $10,413 for the comparable period in 1999. The Company received the balance
of the $3,000,000 cash portion of the purchase price in connection with its sale
of the Mountain Mike's Pizza chain and after transaction costs and the initial
deposit of $475,000 received in the quarter ended March 31, 2000.
Net cash of $(692,809) was used in financing activities for the three
months ended June 30, 2000 as payments on long-term debt (including the
retirement of $530,000 of convertible notes) and preferred stock dividends
compared to net cash used of $(4,863) for the comparable period in 1999.
Working capital at June 30, 2000 was $154,048 compared with a deficit
of $(1,971,062) at March 31, 2000, an increase in working capital of $2,125,110
primarily from the sale of the Company's Mountain Mike's Pizza chain.
The Company believes that cash flow from operations and from the sale
of the Mountain Mike's Pizza franchising assets in April 2000 will continue to
fund its operations as well as generate a portion of the capital necessary to
meet the Company's obligations on its long-term debt. The Company intends to
seek other sources of financing, restructure and/or pay off some of its
long-term debt. There is no assurance that additional funding will be available,
or that 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 June 30, 2000 Compared to Nine Months Ended June 30, 1999.
Results of Operations
The results of operations for the nine months ended June 30, 2000
reflect no retail sales as all company owned restaurants were disposed by
December 31, 1998.
The Company had a net loss before preferred dividends of ($2,165,429)
for the nine months ended June 30, 2000 compared to a net loss of ($3,853,425)
for the same period in 1999. The decrease in the net loss is primarily from the
result of a one time charge of $1,902,290 incurred during the nine months ended
June 30, 1999 due to a goodwill adjustment from the write-down of long-lived
assets and a loss of $504,638 from the disposition of the Company's corporately
owned restaurants and other assets. These items were reflected in a loss per
share of $0.08 for the nine months ended June 30, 2000 compared to a loss per
share of $0.19 for the same period in 1999.
9
<PAGE>
Total revenues decreased $226,049 or 6.9% to $3,063,539 for the nine
months ended June 30, 2000 compared to $3,289,588 for the same period in 1999.
This decrease consisted of a decrease of $110,878 resulting from the sale of all
corporately owned restaurants by the end of 1998 and from the decrease in
royalties from the sale of the Mountain Mike's Pizza chain in April 2000.
Revenues from bakery sales were $599,823 for the nine months ended June 30, 2000
compared to $520,638 for the same period in 1999, an increase of $79,185.
Royalties decreased $304,871 or 15.5% to $1,666,049 for the nine months ended
June 30, 2000 compared to $1,970,920 for the same period in 1999. The decrease
is primarily from the sale of the Company's Mountain Mike's Pizza chain in April
2000 and from the sale of the Company's Little King's and Georgio's submarine
sandwich chains which were sold prior to the end of the Company's fiscal year of
September 30, 1999.
Total expenses decreased $1,694,751 or 27.4% to $4,494,157 for the nine
months ended June 30, 2000 compared to $6,188,908 for the same period in 1999.
The decrease is primarily due to the result of a one-time charge of $1,902,290
incurred during the nine months ended June 30, 1999 due to a goodwill adjustment
from the write-down of long-lived assets. General and administrative expenses
increased $184,977 or 18.3% to $1,197,179 for the nine months ended June 30,
2000 compared to $1,012,202 for the same period in 1999 due to a net increase in
corporate staff and professional expenses from the Company changing its fiscal
year. Cost of retail sales for the Company's corporately owned restaurants were
$117,561 for the nine months ended June 30, 1999 compared to $0 for the same
period in 2000 as the Company disposed of all of its corporately owned
restaurants prior to the end of 1998. Franchise servicing costs decreased
$333,385 or 25.1% to $994,719 for the nine months ended June 30, 2000 compared
to $1,328,104 for the same period in 1999 as the Mountain Mike's Pizza chain was
sold in April 2000 as well as two of the Company's submarine sandwich chains of
Little King and Georgio's which were sold prior to the end of the Company's
fiscal year of September 30, 1999.
Liquidity and Capital Resources
Net cash used in operating activities was $(357,114) for the nine
months ended June 30, 2000 compared to net cash used in operating activities of
$(27,177) for the comparable period in 1999. The increase in cash used in
operating activities is primarily attributable to a net decrease in accounts
receivable, prepaid expenses, accounts payable and accrued expenses of $(82,965)
for the nine months ended June 30, 2000 compared to $(26,049) for the same
period in 1999. Other uses of cash in operating activities were the increased
consulting and investor relations expense expended in conjunction with the
Company's effort to seek potential acquisition candidates.
Net cash provided by investing activities was $2,670,061 for the nine
months ended June 30, 2000 primarily due from the Company receiving $2,685,688
($3,000,000 less transaction costs of $314,312) in connection with the sale of
its Mountain Mike's Pizza franchise division which was completed on April 28,
2000 compared to net cash provided by investing activities of $583,904 for the
comparable period in 1999 as the Company sold all of its corporately owned
restaurants.
Net cash of $1,089,018 was used in financing activities for the nine
months ended June 30, 2000 as payments on long-term debt and preferred stock
dividends compared to net cash used of $545,167 for the comparable period in
1999. The 2000 amount includes $933,093 of payments on long-term debt including
the retirement of $530,000 of convertible notes payable. The 1999 amount
principally reflects the redemption of $243,750 in redeemable common stock, the
proceeds of $250,000 from the issuance of preferred stock and common stock and
payments on long-term debt of $542,117.
10
<PAGE>
Working capital at June 30, 2000 was $154,048 compared with a deficit
of $(1,879,446) at September 30, 1999, an increase in working capital of
$2,033,494 primarily from the sale of the Company's Mountain Mike's Pizza chain.
The Company believes that cash flow from operations and from the sale of the
Mountain Mike's Pizza franchising assets in April 2000 will continue to fund its
operations as well as generate a portion of the capital necessary to meet the
Company's obligations on its long-term debt. The Company intends to seek other
sources of financing, restructure and/or pay off some of its long-term debt.
There is no assurance that additional funding will be available, or that 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.
11
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
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.
Item 2. Changes in Securities and Use of Proceeds.
The following table sets forth information with respect to the sale or
issuance of unregistered securities by the Company between April 1, 2000 to June
30, 2000:
Exempt From
1933 Act
Shares Type of Value of Business Registration In
Issued Security Consideration To Whom Issued Purpose Reliance of:
------ -------- ------------- -------------- ------------- ------------
40,000 Common $9,200 Compass Point Consulting Section 4(2)
Group Services
260,000 Common $57,200 Stockbroker Consulting Section 4(2)
Relations Services
150,000 Common $48,000 Olympus Capital Consulting Section 4(2)
Services
40,000 Common $11,200 Dan Patterson Consulting Section 4(2)
Services
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Effective April 28, 2000, Bradley L. Gordon, Chief Operating Officer and
a Director of the Company, terminated his employment and board of directors'
seat with the Company.
Item 6. Exhibits and Reports on Form 8-K.
Waiver and Consent to Actions in Lieu of Special Meeting of Directors.
Resignation Letter from Bradley L. Gordon.
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<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.
Ultimate Franchise Systems, Inc.
---------------------------------
(Registrant)
President & Duly
08/18/00 Christopher M. Swartz Authorized Officer /s/ Christopher M. Swartz
-------- --------------------- ------------------ -------------------------
Date Print Name Title Signature
Chief Financial
Officer & Principal
08/18/00 Michael E. Cronin Accounting Officer /s/ Michael E. Cronin
-------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
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