9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
to
Commission File No. 0-15369
TUNEX INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Utah 87-0416684
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
556 East 2100 South, Salt Lake City, Utah 84106
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (801) 486-8133
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $0.001 Par Value
(Title of class)
Check whether the Issuer (1) filed all reports required to
be filed by sections 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 is not contained in this
form, and no disclosure will be contained, to the best of
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. [X]
Issuer's revenues for its most recent fiscal year: $1,721,599
The aggregate market value of the voting stock held by non-
affiliates computed by reference to the average bid and asked
price of such stock in the over-the-counter market on March 31,
1997 was $150,097.
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court. Yes [X] No [ ]
As of March 31, 1997, the Issuer had outstanding 1,248,415
shares of its common stock, par value $0.001.
<PAGE>
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Number
Part I
1. Description of Business 1
2. Description of Properties 3
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for Common Equity and Related Stockholder 6
Matters
6. Management's Discussion and Analysis of Fiancial 6
Condition and Results of Operations
7. Financial Statements 8
8. Changes in and Disagreements 8
on Accounting and Financial Disclosure
Part III
9. Directors and Executive Officers; Compliance 9
with Section 16(a) of the Exchange Act
10. Executive Compensation 10
11. Security Ownership of Certain Beneficial 12
Owners and Management
12. Certain Relationships and Related Transactions 14
13. Exhibits and Reports on Form 8-K 14
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Tunex International, Inc. (the "Company") is engaged in the
business of providing to the general public, diagnostic tests and
evaluations of the performance of automotive engines and engine
related systems, and all related inspections, services and
repairs through "Tunex Service Centers" that are owned and
operated by the Company or are owned by licensed franchisees and
operated by them or this company. Currently there are 23 company
and franchisee-owned Tunex Service Centers in operation. The
Company also offers, through licensing individual Tunex Service
Center franchises and area master franchises to qualified
individuals or entities.
HISTORY AND ORGANIZATION
The Company was incorporated in the State of Utah on September 2,
1981, under the name of Leggett, Inc., and is publicly held. In
September of 1983, the Company entered into a business merger
with Tunex, Inc., a closely held Utah corporation, pursuant to
which Tunex, Inc., became a wholly owned subsidiary of the
Company. In September of 1985, the Company acquired all the
assets of Tunex, Inc. and changed its name to Tunex
International, Inc.
Tunex, Inc., the predecessor of Tunex International, Inc., was
founded in 1972 on the idea of providing an analysis of the
performance of an automobile's engine and engine related systems
as a service to the consumer and thereby inform the consumer of
existing conditions and problems, if any. This idea was later
expanded to also perform the recommended services and repairs,
with the customer's approval, and guarantee the parts and labor
associated with these services and repairs for 6 months or 6,000
miles.
The first service center began operating in June of 1974, in
Murray, Utah. Tunex, Inc., sold its first franchise license in
February of 1975 and at the same time established a franchise
headquarters along with training facilities and other support
services.
Uncontrolled expansion, under-capitalization, and a failed merger
attempt forced the company in February 1989, to seek protection
under Chapter-11 of the U.S. Bankruptcy Code. Under new
management, the Company reorganized by consolidating and reducing
company operations, and at the same time reduce lease
liabilities, and strengthen its franchising system by signing new
and equitable agreements with many of its existing franchise
owners. In May 1990, a plan of reorganization was confirmed by
the Bankruptcy Court whereby pre-petition debt, except for unpaid
taxes, was converted to preferred and common stock. Only unpaid
taxes are still being paid by an agreed to schedule until the
year 1999. The bankruptcy court issued a final decree on
September 19, 1995 and thereby closed this case.
The Company and its franchisees continue to market the Tunex
services in the states of Arizona, Colorado, Idaho, Nevada, Ohio,
Utah and Puerto Rico. The Company provides diagnostic engine
performance services and other engine related services and
repairs to the consumer in selected market areas in these states
and plans to continue and expand in these areas, and some
surrounding states, by developing and opening new company owed
and franchised Tunex service centers, on a gradual basis.
BUSINESS OPERATIONS
General
Tunex centers specialize in the service and repair of most engine-
related systems, by using a proven diagnostic approach and
analyzing systems, such as ignition, fuel injection,
carburetion, emission, computer controls, air conditioning,
heating & cooling, starting and charging, before any service or
repair is recommended. Tunex also provides services such as
lubrication, emissions testing and safety inspections. These
services are performed by schooled, Tunex-trained and certified
technicians. Each Tunex service center facility has at least six
and, in many cases, eight service bays equipped with modern
diagnostic/service equipment and instruments, meeting the
Company's specifications. At the present time, there are 23
Tunex centers in operation in 5 western states comprised of
Idaho, Colorado, Utah, Nevada, and Arizona and in the island of
Puerto Rico. Of the 23 Tunex centers open, 19 are owned and
operated by franchisees, one is owned by a franchisee and
operated by the Company and 3 are company owned and operated.
Tunex completely "tunes" an engine along with repairs and
services of all under-the-hood systems to new car performance in
contrast to general automotive repair facilities or "quick tune"
and maintenance service specialty shops which generally install
spark plugs, make a few adjustments (the so-called maintenance
tune-up) and considers the job done. It is the Tunex diagnostic
first method that separates this Company from others, together
with the approach of solving a need or problem first and then
pointing out potential problems rather than just performing tune-
ups or maintenance procedures. Tunex gives a written guarantee of
satisfaction; and the guarantee is good at all Tunex centers no
matter where the original work was performed.
To accomplish this, Tunex first makes a complete study of the
engine's performance with its trademark engine performance
analysis and visual inspection. This procedure, performed
quickly while the customer waits or watches, accurately pin-
points any and all problems in a car's engine, and related
systems. The in-depth analysis and inspection also reveals
potential problems that require correction or maintenance before
a breakdown occurs. The complete analysis is then reviewed with
the customer. Only needed repairs or maintenance, which the
customer authorizes, and are clearly specified on the customer's
report, are undertaken and performed at posted prices. Only high
quality parts are used.
After each repair, replacement, or adjustment, the work is
electronically quality-control tested. Performance is considered
satisfactory only when readings meet or exceed manufacturer's
"new car" specifications for the make and model of the car being
serviced. The vehicle is then test driven to assure top
performance.
Tunex has developed and owns a customized Point-of-Service
computer software program which aids in getting accurate problem
symptoms and vehicle information, maintains service records and
other data of the customer and his vehicles, monitors inventory,
costs, along with accounting information, and provides the
customer with a personalized guarantee on the work performed.
Most services at Tunex centers are scheduled by appointment. A
comfortable, clean, and professional looking waiting room is
provided for those customers who want to wait while the work is
being done. Shuttle services are made available for customers who
have to return home or to work. All these Tunex services are
available on a fleet basis to contractors and other businesses.
Employees
The Company currently has twenty-four full-time employees
consisting of fourteen technical personnel, four service center
managers and six headquarters employees who are responsible for
executive, accounting, administrative, development, training and
franchise support functions.
Competition
To the best of its knowledge and in the opinion of management,
Tunex is one of the most experienced franchise operations in this
particular specialized segment of the automotive aftermarket
business. Though there are larger "tune-up", preventative
maintenance and specialized car care chains and franchises
throughout the United States, management believes that none of
these are as specialized in their operating system and perform
the services as extensively and as expertly as Tunex.
The primary objective of the Company is to use its experience
from being the oldest and most experienced company in its field
to establish a position as the most prominent automotive engine
performance specialty service business in its region, and
ultimately in the country.
Recent Developments
Over the period from August 1995 to March 1997 the Company has
added, through franchise licensing and its own development, four
new service centers to its long established franchise system of
19 centers, representing a 21% growth rate over that eighteen
months time period.
Same-store sales for the 19 established Tunex Service Centers
continued to increase, with 1996 sales of $6.8 million versus
sales of $6.4 million in the prior year, for an annual increase
of 5.3%. System-wide sales, with the addition of the four new
centers, were 7.5 million for an increase of 18% over the prior
year..
Starting in September 1996, two company owned centers were
repurchased by the then Vice President and Director of
Operations and converted to Tunex franchises.
The Company has signed leases for the development of two new
Tunex centers in the Utah region. These developments have since
been subleased and franchised to individuals and will be open and
operational by August and October respectively.
The recently contracted and developed proprietary Point-of-
Service software program, named REVS*UP, is now completed. It
has been installed in most of the established Tunex Service
Centers, in all new centers and is ready for sale and
installation in future Tunex Service Center counters.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal offices, training center, warehouse, and
the company operated service center are located at 544-566 East
2100 South, Salt Lake City, Utah, consisting of approximately
11,000 square feet, are leased from an otherwise unrelated third
party at a rental of $2,300.00 per month under a lease that has
been extended to expire in December 2002.
The Company presently leases the following properties for the
Tunex Service Centers having principal terms as follows. Some
properties are subleased to franchisees where indicated:
Monthl Expiration Premises
Location y Date
Rental
7061 Sheridan Boulevard $1,450 March 1998 Company
Westminster, Colorado Operated
535 North Murray Boulevard $2,352 July 2000 Company
Colorado Springs, Colorado Operated
2664 East 17th Street $2,994 January 2001 Subleased
Idaho Falls, Idaho
2855 South Alma School Road $3,245 August 1997 Subleased
Mesa, Arizona
4909 South Highland Drive $1,387 September Subleased
Salt Lake City, Utah 1997
5970 Dixie Highway $2,185 January 1998 Subleased
Fairfield, Ohio
2494 South Highway 91 $3,300 May 2016 Subleased
Bountiful, Utah
1141 W. Antelope Dr. $3,416 February Subleased
Layton, Utah 2006
501 Malley Drive $2,000 May 2006 Company
Northglenn, CO Operated
5762 So. Harrison Blvd. $3,375 February Subleased
South Ogden, Utah 2012
3549 So, 5600 West $3,600 April 2012 Subleased
West Valley , Utah (Under
Construction)
7850 So. 3300 West $3,450 May 2012 Subleased
West Jordan, Utah (Under
Construction)
Other than these leased properties the Company has no interest in
any other property.
ITEM3. LEGAL PROCEEDINGS
The Company has filed suit through the District Court of Utah to
recover the balance of a defaulted promissory note in the amount
of $6,000.00 from a former employee. The defendant has made
counter claims, which are now in the discovery phase of the suit.
Other than this law suit there are no legal proceedings against
this Company or by this Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last fiscal quarter, the Company did not submit any
matter to a vote of its security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter
market. Set forth below are the high and low bid quotations for
the Company's common stock, for each quarter of the fiscal year
ended March 31, 1997, as reported based on inter-dealer bid
quotations, without markup, markdown, commissions, or adjustments
(which may not reflect actual transactions).
Quotations for the Company's common stock appear on the over-the-
counter bulletin board under the symbol: TNEX.
Quarter Ended Low Bid High Bid
(Common Stock) (Common Stock)
June 30, 1995 $0.75 $0.625
September 30, 1995 $0.625 $0.50
December 31, 1995 $0.625 $0.50
March 31, 1996 $0.50 $0.50
June 30, 1996 $0.625 $0.625
September 30, 1996 $0.50 $0.50
December 31, 1996 $0.375 $0.3125
March 31, 1997 $0.25 $0.25
As of May 31, 1997, the Company has approximately 695 holders of
record of its common stock.
The Company has declared no cash dividends on its shares of
common stock during the most recent fiscal year and does not
intend to do so in the foreseeable future.
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operation
Total revenue has decreased to $1,721,599 in 1997 from $2,074,890
in 1996. This decrease is primarily the result of service and
parts sales coming from three instead of five company owned
service centers for more than one-half of the fiscal year 1997,
plus the effects of lower sales from a newly opened company owned
center. Royalty income from franchised service centers increased
to $207,082 in 1997 from $160,391 in 1996, the result of more
franchised service centers contributing in 1997.
Income from operations before income tax is $ 87,885 in 1997 as
compared to $ 76,130 in 1996. This represents an increase of 15%
over the previous year. This growth in income is the result of
the sale of two new franchises and the sale/conversion of company
owned service centers to franchised centers.
In fiscal year 1994 the Company benefited from a considerable
increase in deferred tax benefits recognized on the books,
resulting from prior period (pre-petition) operating losses. As
a result of this increase in the deferred tax benefits the
Company now shows a total income tax expense of $24,195 in 1997
and $17,217 in 1996. The federal income tax portion of this
expense is offset by these tax benefits and no federal income
taxes are payable. Additionally the Company's remaining net
operating loss, which is available to offset federal income tax,
totals approximately $2,200,000, as of March 31, 1997.
After giving effect to income tax expense and the changes in the
deferred tax benefits, the Company recognized the net income of $
82,700 in 1997 as compared to $71,442 in fiscal year 1996.
Consequently, the Company had net income per common share after
taxes on a fully diluted basis of $.04 in 1997 as compared to
$.03 in 1996.
The company has developed and readied for operation two new
service centers with one of these centers having been franchised
during that process. The other center is now operated by the
Company with the intent to franchise that center on a conversion
basis. The Company plans to continue the development of new
centers on a schedule that is based on the frequency of the sales
and conversions to franchises of these company-developed centers.
In addition to these turn-key conversions, the Company expects to
sell additional franchises in fiscal year 1998. New franchise
licenses cost $19,000, with an optional development fee of
$6,000, or a total of $25,000. In addition, new franchisees pay
a royalty to the Company equal to 5% of gross sales by the
franchised service center. The Company sold a master franchise
covering Puerto Rico and the Caribbean basin in March of 1995.
The master franchise contemplates an initial development of three
service centers, with the first service center now in full
operation. The Company will continue to offer master franchises
in other parts of the country.
Liquidity
The Company's cash has increased from $49,870 in 1996 to $61,262
in 1997. Two interest-bearing certificates of deposit classified
as investment in the previous year in the amount of $156,410 were
primarily used in the development of two newly developed company
owned centers, including start-up expenses.
The Company's working capital decreased from $ 158,274 in 1996 to
$ 134,965 in 1997. This decrease is primarily the result of the
reduction of investments. Notes payable-related party have
decreased from $162,280 in 1996 to zero in 1997 and pre-petition
liabilities have decreased from $242,993 in 1996 to $166,783 in
1997.
Goodwill of $245,627, part of the assets in 1996, has decreased
to zero in 1997, the result of the sale and conversion to
franchises of two company owned service centers. This sale has
also increased receivables of $162,529 in 1996 to $251,579 in
1997.
Net income from current operations, have resulted in an increase
to the Company's stockholder's equity from $ 455,487 in 1996 to
$498,187 at the end of fiscal year 1997.
Management believes that the working capital of the Company is
adequate for its current and ongoing operations and the
implementations of its plan to continue the development of
service centers for sale to prospective franchisees, on a limited
basis.
ITEM 7. FINANCIAL STATEMENTS
The balance sheets of the Company as of March 31, 1997, and 1996
and the related statements of operations, stockholders' equity,
and cash flows for the two years ending March 31, 1997 and March
31, 1996, including the notes thereto along with the auditor's
report of Sorensen, Vance & Company, P.C., independent certified
public accountants, are set forth beginning at page F-1. (See
the index to financial statements on page 15.)
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Executive Officers
The following table sets forth certain information with
respect to the directors and executive officers of the Company:
Name Age Positions Held Since
Edward Dallin Bagley 58 Chairman of the Board 1990
Rudolf Zitzmann 62 President, Chief Executive 1985
Officer and Director
George V. South 48 Secretaty, Controller 1993
Larry R. Hendricks 54 Director 1990
Peter R. Genereaux 64 Director 1990
All directors and executive officers serve until the next annual
meeting of the shareholders and directors, respectively, and
until their successors are elected and qualified.
Edward Dallin Bagley became a director of the Company in May
1990. He has been actively involved in the securities
industry for the past twenty years. From 1986 to 1990, Mr.
Bagley has owned and operated Bagley Securities, Inc., a Salt
Lake City stock brokerage firm. Mr. Bagley is now an
investment and financial consultant and also an attorney and
member of the Utah State Bar. In addition, he is a director
of ION Laser Technology, Inc., Gentner Electronics, Inc., and
Mining Services International Corporation., all publicly-held
corporations.
Rudolf Zitzmann became President and CEO of the Company in
February 1989. Prior to May 1988, Mr. Zitzmann had served as
Vice President of Franchise Development and Secretary and has
been a director of the Company since 1985.
Larry R. Hendricks became a director of the Company in May
1990 and served as Secretary/Treasurer of the Company for a
period through April 1991 and again from August 1993 to
August 1996. Prior to that period, Mr. Hendricks served as
the President of Western Heritage Thrift and Loan. In
October 1990 Mr. Hendricks became President of A&R Meats.
A&R Meats sold the business to Daily Foods, Inc., effective
September 3, 1991, and Mr. Hendricks was appointed General
Manager and Secretary/Treasurer of Daily Foods, Inc., at that
time. Mr. Hendricks has been a certified public accountant
since 1971 and is a member of the AICPA and UACPA.
Peter R. Genereaux became a director of the Company in June
1990. Mr. Genereaux has been the President of the Executive
Resource Group and Turnaround Resources, Inc. for the last 7
years and has over 35 years of experience as a CEO, a
marketing and sales executive, and as a consultant in the
management of change, uncertainty and crises with various
small and large companies, including IBM, McGraw Hill,
Metropolitan Life, and Unisys. Mr. Genereaux is now the
President of the Utah Information Technologies Association.
George V. South became the controller of the Company in July
1993 and a Secretary of the company in August 1996. Prior to
his employment with this company, Mr. South served as
controller of A&R Meats and the Fernwood Candy Company.
Compliance with Section 16(a) of the Exchange Act
To the best of the Company's knowledge, all Forms-3 and 4
required to be furnished to this registrant under Rule 16(a)-3(d)
and Forms-5 have been furnished to the Company by all its
directors, officers, and beneficial owners of more than 10% of
all classes of the Company's equity securities; and each such
person has filed these Forms on a timely or amended basis.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the chief
executive officer of the Company during the last three years:
Annual Compensation Long-Term
Compensation
Name and Principal
Position Year Salary Bonus Options
Rudolf Zitzmann, 1995 $46,000 $2,000 38,000 Shares
CEO 1996 $48,000 None None
1997 $50,000 None None
No officer has received annual salaries and bonuses in excess of
$100,000.
Stock option agreements for a total of 95,000 shares have been
issued to a Director, and the Executive Officer, at an exercise
price of $.50 per share. Options are exercisable immediately and
are to expire July 31, 1997.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year - End Option Values
Value of
Shares Number of Unexercisable
Acquired Value Unexercised in-the-money
Name on Exercise Realized Options @ FY-End Options @ FY-End
Rudolf Zitzmann None $00.00 35,000 shares $17,500.00
(exerciseable)
Each of the Company's directors receive $200 for each directors'
meeting attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of May 31, 1997, the number of
shares of voting securities owned of record or beneficially by
each person who owned of record, or is known by the Company to
own beneficially, more than 5% of the Company's voting
securities, the number of shares of voting securities owned by
each director and executive officer and the number of shares of
voting securities owned by all directors and executive officers
as a group.
Amount & Nature
Title of Name & Address of Nature of Percent of
Class Beneficial Owner Beneficial Owner Class
Common Caroline C. Bagley (1) 166,666 13.4
8 Shadow Wood Lane
Sandy, UT 84092
Common Edward Dallin Bagley (2) 110,500 8.9
8 Shadow Wood Lane
Sandy, UT 84092
Class-A Edward Dallin Bagley 200,000 (3) 33.3
Preferred 8 Shadow Wood Lane
Sandy, UT 84092
Common Larry R. Hendricks (2) 108,000 8.7
2373 South Bountiful Blvd.
Bountiful, UT 84010
Class-A Larry R. Hendricks 200,000 (3) 33.3
Preferred 2373 South Bountiful Blvd.
Bountiful, UT 84010
Common Rudolf Zitzmann (2) 152,358 12.2
2111 Sahara Drive
Salt Lake City, UT 84124
Class-A Rudolf Zitzmann 200,000 (3) 33.3
Preferred 2111 Sahara Drive
Salt Lake City, UT 84124
Common Peter Genereaux (2) 10,500 00.8
1805 E. Severn Dr. Unit B
Salt Lake City, UT 84124
Common Edward N. Bagley & 100,000 8.0
Helen Y. Bagley,Trustees
Bagley Family Revocable Trust
8987 St. Ives Drive
Los Angeles, CA 90069
Common All Directors and Officers 381,358 30.6
(as a group)
Class-A All Directors and Officers 600,000 100.0
Preferred (as a group)
(1) Caroline L. Bagley is the spouse of Edward Dallin Bagley, a
Director of the Company.
(2) These persons are all of the Directors and Executive
Officers of the Company.
(3) The holders of the Class-A Preferred Stock are entitled,
voting as a class, to elect one of the five directors of the
Company, but are not entitled to vote on any other matter
submitted to the shareholders for approval. The Class-A
Preferred Stock is convertible to common stock of the Company at
the rate of one-share of common stock for each of Class-A
Preferred Stock. Assuming each of the persons indicated
converted his shares of Class-A Preferred Stock individually and
no other shares were converted, Mr. Zitzmann would hold 352,358
shares, Mr. Hendricks would hold 308,000 shares and Mr. Bagley
would hold 310,500 shares of Company's common stock, or
approximately 19.0%, 16.7% and 16.8% respectively of the then
issued and outstanding shares. If all shares of Class-A
Preferred Stock were converted, these persons would hold an
aggregate of 970,858 shares of common stock, or approximately
52.6% of the then outstanding shares.
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The Company's plan of reorganization provided for the issuance of
600,000 shares of Class A convertible preferred stock, par value
$0.50 ("Class A Stock"), to a secured creditor. The Class A
Stock has a preference in liquidation over all other classes of
stock in the amount of the par value. Dividends accrue on the
Class A Stock at the rate of 10% of the par value, are payable
out of assets of the Company legally available therefrom on the
90th day following the end of each one year period commencing
June 1, 1990, and are noncumulative. The Class A Stock is
subject to redemption by the Company at $1.00 per share, and may
be converted by the holder to common stock of the Company at the
rate of one share of common stock for one share of Class A Stock.
The secured creditor entitled to receive the Class A Stock under
the plan of reorganization filed its own petition in bankruptcy,
and during the course of that proceeding a dispute arose between
various parties regarding the proper issuance of the Class A
Stock. While this dispute was pending, Edward Dallin Bagley,
Larry R. Hendricks, and Rudolf Zitzmann, all officers and/or
directors of the Company, negotiated for the acquisition of the
Class A Stock for their own accounts. As a result of these
negotiations, they each purchased in October 1991, 200,000 shares
of the Class A Stock at a purchase price of $11,000.
On August 30, 1996 the Company re-sold and re-franchised it
service centers in West Valley City, Utah and Bountiful, Utah
back to Frank Larsen then Vice President and Director of
Operations of the Company. The transaction was the result of Mr.
Larsen's desire to return to the franchise ownership portions of
the Tunex system with the plan of acquiring additional Tunex
franchises.
Based on net earnings, equipment and inventory values, the sales
price for the two centers was $366,000, the same price that the
centers were purchased for in January 1995. Payment for both
centers was in the amount of 80,000 shares of the Company's
common stock, the cancellation of additional stock commitments
and promissory notes along with the issuance of a new and
secured promissory note.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS:
See Table of Contents to financial statements appearing on Page
16.
EXHIBITS:
None
REPORTS ON FORM 8-K:
No reports on Form 8-K were filled during the last fiscal quarter
of its fiscal year ended March 31, 1997.
SIGNATURES
Pursuant to the requirements of section 13(e) or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TUNEX INTERNATIONAL, INC.
Registrant
By: /s/ Rudolf Zitzmann
Rudolf Zitzmann, President
(Principal Executive)
Date: June 27, 1997
In accordance with the Exchange Act, as amended, this report has
been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
By: /s/ Rudolf Zitzmann, Director
Date: June 27, 1997
By: /s/ Edward Dallin Bagley, Director
Date: June 27, 1997
By: /s/ Larry R. Hendricks, Director
Date: June 27, 1997
<PAGE>
TUNEX INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITOR'S REPORT F-1
BALANCE SHEETS, March 31, 1997, 1996 F-2
STATEMENT OF OPERATIONS F-3
Year Ended March 31, 1997, 1996
STATEMENTS OF STOCKHOLDERS' EQUITY F-4
Years Ended March 31, 1997, 1996
CASH FLOW STATEMENTS F-5,6
Year Ended March 31, 1997, 1996
NOTES TO FINANCIAL STATEMENTS F-7 thru F-14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors
Tunex International, Inc.
We have audited the accompanying balance sheet of Tunex
International Inc. as of March 31, 1997 and the related
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 audit. The financial statements as of March 31, 1996, were
audited by Christensen, Gyllenskog & Company, P.C., who merged
with Sorensen, Vance & Company, P.C. as of November 1, 1996, and
whose report dated June 14, 1996, expressed an unqualified
opinion on those statements.
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 provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above
present fairly, in all material respects, the financial position
of Tunex International, Inc. as of March 31, 1997, and the
results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting
principles.
Salt Lake City, Utah
June 13, 1997
<PAGE>
TUNEX INTERNATIONAL, INC.
BALANCE SHEETS
MARCH 31, 1997 AND 1996
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 61,262 $ 49,870
Investments, held-to-maturity -- 156,410
Receivables 133,588 115,865
Inventories 62,863 85,377
Deferred income tax benefit 18,900 18,900
Other current assets 10,230 6,828
Total current assets 286,843 433,250
Property and equipment, at cost, less accumulated
depreciation and amortization of $321,503 and
$375,375 for 1997 and 1996, respectively 214,757 174,646
Other assets:
Receivables, long-term 117,991 46,664
Idle equipment 9,210 8,910
Goodwill, net of accumulated amortization of $16,165
and $45,480 for 1997 and 1996, respectively -- 245,627
Trademarks, net of accumulated amortization of $136
and $46 for 1997 and 1996, respectively 1,229 1,319
Deposits 6,386 41,086
Deferred income tax benefit, net of current portion 151,200 170,100
Total other assets 286,016 513,706
Total Assets $ 787,616 $1,121,602
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 35,000
Current portion of notes payable - related party -- 34,141
Obligations under capital leases - current portion 18,153 8,500
Current portion of prepetition liabilities 52,196 56,963
Accounts payable 21,738 29,952
Accrued payroll and related liabilities 52,665 81,075
Accrued expenses 7,126 29,345
Total current liabilities 151,878 274,976
Commitments -- 60,000
Notes payable - related party, net of current portion -- 128,139
Obligations under capital leases,
net of current portion 22,964 16,970
Prepetition liabilities, net of current portion 114,587 186,030
Total liabilities 289,429 666,115
Stockholders' equity:
Preferred stock, Class A, par value $.50 per share;
1,000,000 shares authorized; 600,000 shares
issued and outstanding 300,000 300,000
Preferred stock, Class B, par value $1.00 per share;
1,000,000 shares authorized; 497,262 and 501,917
shares issued and outstanding in 1997 and 1996,
respectively 497,262 501,917
Common stock, par value $.001 per share;
50,000,000 shares authorized; 1,248,415
and 1,326,005 shares issued and outstanding
in 1997 and 1996, respectively 1,248 1,326
Additional paid-in capital 3,748,641 3,783,908
Accumulated (deficit) (4,048,964) (4,131,664)
Total stockholders' equity 498,187 455,487
Total Liabilities and Stockholders' Equity $ 787,616 $1,121,602
The accompanying notes are an integral part of the financial statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
Sales and other revenues:
Service and parts $ 1,403,026 $ 1,886,999
Royalty income 207,082 160,391
Franchise licensing income 69,750 27,500
Gain on sale of franchises 41,741 --
Total revenue 1,721,599 2,074,890
Cost of goods sold 676,387 849,183
Gross profit 1,045,212 1,225,707
Selling, general and administrative expenses 957,327 1,149,577
Operating income 87,885 76,130
Other income (expense):
Interest income 11,068 15,031
Interest expense (26,519) (34,943)
Loss on disposition of equipment (3,300) --
Total other (expense) (18,751) (19,912)
Income before income taxes and
extraordinary item 69,134 56,218
Income taxes (15,648) (10,917)
Income before extraordinary item 53,486 45,301
Extraordinary item - reduction in
prepetition liabilities and related interest
expense (net of tax of $8,547 and $6,300
for 1997 and 1996, respectively) 29,214 26,141
Net income $ 82,700 $ 71,442
Earnings per common share and common share equivalent
(primary and fully diluted):
Net income before extraordinary item $ .03 $ .02
Extraordinary item .01 .01
Net income $ .04 $ .03
The accompanying notes are an integral part of the financial statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
Class A Class B
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
Balances,
March 31, 1995 600,000 $ 300,000 586,686 $ 586,686 1,193,410 $ 1,193
Restricted common
shares - sold
for cash -- -- -- -- 53,500 54
Restricted common
shares issued in
conjunction with
asset purchase -- -- -- -- 40,000 40
Class B, preferred
shares converted
to common shares -- -- (84,769) (84,769) 39,095 39
Net income for
the year ended
March 31, 1996 -- -- -- -- -- --
Balances,
March 31, 1996 600,000 300,000 501,917 501,917 1,326,005 1,326
Cancellation of
common shares in
conjunction with
asset sale -- -- -- -- (80,000) (80)
Class B, preferred
shares converted
to common stock -- -- (4,655) (4,655) 2,410 2
Net income for
the year ended
March 31, 1997 -- -- -- -- -- --
Balances,
March 31, 1997 600,000 $ 300,000 497,262 $497,262 1,248,415 $ 1,248
Continued - next page.
The accompanying notes are an integral part of the financial statements.
<PAGE>
Continued
TUNEX INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
Balances,
March 31, 1995 $3,665,897 (4,203,106) $ 350,670
Restricted common
shares - sold
for cash 13,321 -- 13,375
Restricted common
shares issued in
conjunction with
asset purchase 19,960 -- 20,000
Class B, preferred
shares converted
to common shares 84,730 -- --
Net income for
the year ended
March 31, 1996 -- 71,442 71,442
Balances,
March 31, 1996 3,783,908 (4,131,664) 455,487
Cancellation of
common shares in
conjunction with
with asset sale (39,920) -- (40,000)
Class B, preferred
shares converted
to common stock 4,653 -- --
Net income for
the year ended
March 31, 1997 -- 82,700 82,700
Balances,
March 31, 1997 $3,748,641 $(4,048,964) $ 498,187
The accompanying notes are an integral part of the financial statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
Cash Flows From Operating Activities:
Net Income $ 82,700 $ 71,442
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 33,831 43,621
Reduction of prepetition liabilities and related
interest expense (37,761) (32,441)
Loss on inventory due to obsolescence 14,333 --
Loss on disposition of idle equipment 3,300 950
Change in allowance for doubtful accounts (4,944) 5,000
(Increase) in receivables (13,976) (24,590)
(Increase) in other current assets (3,402) (3,471)
(Increase) in inventories (28,491) (16,276)
Decrease in goodwill on franchises sold 19,017 --
(Increase) in deposits (2,000) (2,021)
Decrease in deferred income tax benefit 18,900 14,064
(Decrease) increase in accounts payable (8,214) 1,328
(Decrease) increase in accrued payroll and related
liabilities (28,410) 8,858
(Decrease) increase in accrued expenses (3,215) 110
Total adjustments (41,032) (4,868)
Net cash provided by operating activities 41,668 66,574
Cash Flows From Investing Activities:
Proceeds from investments, held to maturity 156,410 39,578
Collections on notes receivable 8,333 5,728
Purchase of equipment (68,406) (19,069)
Deposits on equipment -- (27,600)
Expenditures for trademarks -- (1,365)
Net cash provided by (used in) investing activities 96,337 (2,728)
Cash Flows From Financial Activities:
Proceeds from issuance of common stock -- 13,375
Net borrowings (payments) on line of credit (35,000) --
Principal payments on capital lease obligations (23,136) (14,772)
Principal payments on notes payable - related party (11,024) (31,302)
Court authorized payments on prepetition debt (57,453) (56,028)
Net cash (used in) financing activities (126,613) (88,727)
Continued - next page
The accompanying notes are an integral part of the financial statements.
<PAGE>
Continued - TUNEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
Net increase (decrease) in cash and cash equivalents 11,392 (24,881)
Cash and cash equivalents, beginning of year 49,870 74,751
Cash and cash equivalents, end of year $ 61,262 $ 49,870
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Schedule of Noncash Investing and Financing Transactions:
Equipment acquired under capital lease obligations. $ 55,271 9,568
Deposits reclassified to equipment. 36,700 --
Equipment reclassified to idle equipment, net of
accumulated depreciation of $400 for 1997. 3,600 3,000
Franchise sales consisted of the following noncash
components:
- Distribution of property and equipment, net of
accumulated depreciation of $73,330. (71,670) --
- Distribution of inventory. (36,672) --
- Elimination of goodwill associated with the sold
franchises, net of accumulated amortization of
$37,872. (218,052) --
- Return and cancellation of 80,000 shares of common
stock. 40,000 --
- Cancellation of remaining obligation to issue common
stock. 60,000 --
- Settlement of notes payable associated with the sold
franchises. 151,255 --
- Assignment of capital leases payable associated with
the sold franchises. 16,488 --
- Issuance of promissory note receivable. 78,464 --
Satisfaction of commitment by issuance of common stock. -- 20,000
Cash Paid During the Year for:
Interest expense $ 26,519 $ 15,939
Income taxes $ 3,495 $ 183
The accompanying notes are an integral part of financial statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
1.SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
A. Organization
Tunex International, Inc. (the Company) was incorporated in Utah
on September 2, 1981, under the name of Leggett, Inc. In 1983,
the Company entered into a business merger with Tunex, Inc., (a
closely held Utah corporation) in which Tunex, Inc. became a
wholly owned subsidiary of the Company. In 1985, the Company
acquired the assets of Tunex, Inc. and changed its name to Tunex
International, Inc.
In February 1989, the Company was forced to seek protection under
Chapter 11 of the Federal Bankruptcy Code. In May 1990, a plan
of reorganization was confirmed (note 11) whereby the Company
would continue to market its services and maintain the majority
of its service centers located in the Rocky Mountain region. In
September, 1995, the final decree closing the Chapter 11
bankruptcy was ordered.
Operations of the Company consist of revenue from Company-owned
automobile service centers, sale or conversion of Company-owned
service centers, sales of new service center franchises, and
royalty income from franchised service centers. At March 31,
1997, the Company was operating three automobile service centers
in Colorado and had franchise operations in Arizona, Idaho,
Nevada, Ohio, Puerto Rico and Utah.
B. Significant Accounting Policies
The following significant accounting policies are used by the
Company in preparing and presenting its financial statements:
Inventories
Inventories consist of automobile parts and supplies to be sold
to the Company's franchises which are carried at the lower of
cost or market using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
calculated using straight line and accelerated methods over
estimated useful lives of the assets as follows:
Equipment 5 - 10 years
Office furniture 5 - 10 years
Leasehold improvements 5 - 39 years
Signs 5 - 10 years
The cost of maintenance and repairs are charged to operating
expense when incurred. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation and
amortization are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
Income Taxes
The Company has adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". This statement
allows for the recognition of a deferred tax asset related to the
anticipated benefit of tax net operating loss carryforwards,
subject to a valuation allowance (see note 6).
Earnings Per Share
Net income per share was calculated based on the weighted average
number of shares of common stock outstanding during the year.
Preferred A shares, Preferred B shares, stock options and
contingent shares to be issued based on the passage of time have
all been treated as common stock equivalents in the computation.
Total common stock and common stock equivalents were 2,232,005
and 2,271,834 at March 31, 1997 and 1996, respectively.
Revenue Recognition for Franchises
When new service center franchises are sold, a portion of the
initial franchise fee and related costs are deferred until all
significant commitments and obligations of the Company have been
performed. Commitments and obligations of the Company in
connection with the sale of franchised service centers generally
consist of assisting in location selection; providing
construction plans and typical site layouts; providing
information regarding possible sources of financing; providing an
initial training program for managers and technicians; and
providing operations manuals. Additionally, initial franchise
fees are deferred when they are collectible over an extended
period of time and are recognized by the installment accounting
method.
Goodwill and Trademarks
Goodwill and trademarks acquired in previous years were being
amortized on a straight-line basis over ten and 15 year lives.
Amortization expense was $8,647 and $20,269 for the years ended
March 31, 1997 and 1996, respectively.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
are defined as cash on hand, checking and savings accounts and
highly liquid investments with original maturities of three
months or less.
Management Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts of assets and liabilities at March 31, 1997 and 1996 and
revenues and expenses during the years then ended. The actual
outcome of the estimates could differ from the estimates made in
the preparation of the financial statements.
Reclassifications
Certain 1996 amounts have been reclassified to conform with 1997
classifications. Such reclassifications had no effect on
reported net income.
2. BUSINESS COMBINATION AND SALE OF FRANCHISES
A. On January 3, 1995, the Company acquired two Tunex
franchises, including goodwill, all items of equipment,
furnishings and inventory. The total consideration paid, as
adjusted, was $316,000, which included the issuance of 200,000
restricted common shares of stock. Contractually, the restricted
shares were valued at $.75 per share, but for financial statement
purposes, were valued at $.50 per share. The goodwill reflected
in the purchase transaction was accordingly reduced by $50,000.
40,000 shares of common stock were issued each year ended March
31, 1996 and 1995. The liability for commitments at March 31,
1996 represents the remaining 120,000 restricted shares
anticipated to be issued over the next three years. The former
owner of the franchises became an employee and officer of the
Company as part of the transaction.
The acquisition has been accounted for as a purchase transaction
and, accordingly, the fair value of the Company's stock that was
issued was allocated to assets based on their estimated fair
value as of the acquisition date. The excess value of the
Company's stock over and above the value of the net assets
acquired has been recorded as goodwill to be amortized on the
straight-line basis over 15 years.
B. On August 31, 1996, the Company sold the two franchises,
including goodwill, equipment, furnishings and inventory, back to
the former owner. The manner of payment consisted of returning
the 80,000 shares of common stock that was issued and cancelling
the remaining obligation to issue an additional 120,000 common
shares; settlement in full of notes payable in the amount of
$151,255; and the issuance of a promissory note receivable to the
Company in the amount of $78,464. The former owner was
terminated as an officer and employee.
3. INVESTMENTS-HELD-TO-MATURITY
As of March 31, 1996, investments consisted of two interest-
bearing certificates of deposit which matured June, 1996. The
certificates of deposit were used to secure the line of credit
(see note 7).
4. RECEIVABLES
Receivables currently due are comprised of the following at March
31, 1997 and 1996:
1997 1996
Trade accounts receivable $ 61,861 $ 55,204
Accounts receivable for royalties 31,723 23,834
Receivable - related party 26,170 37,240
Current portion of notes receivable from
individuals with annual interest rates
ranging from 6 - 10% 17,137 9,242
Interest receivable 1,753 345
138,644 125,865
Allowance for doubtful accounts (5,056) (10,000)
Net current receivables $ 133,588 $ 115,865
Long-term receivables are amounts due in excess of one year and
consist of the following:
1997 1996
Notes receivable from individuals $ 66,450 $ 3,158
Accounts receivable for royalties 16,922 14,415
Note receivable from related party 34,619 29,091
Total long-term receivables $ 117,991 $ 46,664
5. PROPERTY AND EQUIPMENT
The major classifications of property and equipment (including
capitalized leases - note 9), at cost, are summarized as follows:
1997 1996
Equipment $ 352,724 $ 369,870
Office furniture and equipment 79,548 71,498
Signs 29,387 31,538
Leasehold improvements 74,601 77,115
Total property and equipment 536,260 550,021
Less: accumulated depreciation
and amortization (321,503) (375,375)
Property and equipment - net $ 214,757 $ 174,646
Depreciation expense was $20,926 and $18,588 for the years ended
March 31, 1997 and 1996, respectively. Amortization expense
related to capitalized leases was $4,258 and $1,753 for the years
ended March 31, 1997 and 1996, respectively.
6. INCOME TAXES
As of March 31, 1997, the Company has a net operating loss
carryforward of approximately $2,203,000 which is available to
offset future taxable income. The net operating loss expires in
the years 2003 through 2006. A deferred tax benefit of $170,100
and $189,000, has been reflected in the financial statements for
the years ended March 31, 1997 and 1996, respectively. The tax
benefit is net of a valuation allowance of approximately
$293,000. The net deferred tax benefit has been computed based
upon estimated taxable
income of $90,000 per year during the loss carryover period and
an effective income tax rate of 21%. There are no net operating
loss carryforwards available for state income tax purposes.
The tax expense reflected in the financial statements is
comprised of the following:
1997 1996
Computed tax expense, using applicable
federal rates $ 23,355 $ 18,148
Increase (decrease) in income taxes
resulting from:
Timing differences (4,648) 2,897
Permanent differences 467 955
Total federal tax 19,174 22,000
Tax benefit of net operating loss (19,174) (22,000)
Current federal tax -- --
State tax expense 5,295 3,153
Decrease in net deferred tax benefit 18,900 14,064
Total income tax expense 24,195 17,217
Income tax related to extraordinary item (8,547) (6,300)
$ 15,648 $ 10,917
7. LINE OF CREDIT
At March 31, 1996, the Company had a $35,000 note payable to a
bank. The note was paid in June, 1996, including interest at
7.85% and was secured by a certificate of deposit which also
matured in June, 1996 (see note 3).
8. NOTES PAYABLE - RELATED PARTY
In connection with the Company's acquisition of the two Tunex
franchises referred to in Note 2, the Company issued the
following notes payable to the previous owner of the two
franchises who then became an officer and shareholder of the
Company as part of the transaction:
1997 1996
Note payable in monthly installments of $1,058,
including interest at prime + 1% $ -- 60,281
Note payable in monthly installments of $1,267,
including interest at 8% -- 41,420
Note payable in monthly installments of $1,141,
including interest at 9%. An annual lump sum
payment of $8,000 was due each January. -- 60,579
Total notes payable - related party -- 162,280
Less current installments -- (34,141)
Notes payable - related party $ -- $ 128,139
As discussed in note 2, the two franchises were sold back to the
previous owner on August 31, 1996. The manner of payment
included the settlement in full of notes payable to the buyer.
9. LEASE ARRANGEMENTS
A. Capital Leases
The Company leases equipment with an original cost of $83,298 and
$36,654 and accumulated amortization of $26,012 and $21,753 as of
March 31, 1997 and 1996, respectively, under seven long-term
capital lease arrangements. The monthly payments total $2,347
including interest at 5.9% to 18.2% and are due at various dates
from June 1997 through August 2000.
The following is a schedule of future minimum lease payments
under the capital leases together with the present value of the
net minimum lease payments:
Years Ending March 31,
1998 $ 23,638
1999 13,809
2000 10,530
2001 2,958
Total minimum lease payments 50,935
Less: amount representing interest (9,818)
Present value of net minimum lease
payments 41,117
Less: current portion (18,153)
Capita lease obligations,
net of current portion $22,964
B. Operating Leases
The Company also leases space under long-term operating leases
which expire in various years through 2008. Several agreements
provide for two five-year renewal options. Generally, the
Company is required to pay related costs such as property taxes,
maintenance and insurance. Rental expenses for operating leases,
less amounts paid by sublessees, amounted to $136,377 and
$180,139 for the years ended March 31, 1997 and 1996.
Future minimum rental payments, excluding subleases, are as
follows:
Years Ending March 31,
1998 $ 81,660
1999 64,260
2000 64,560
2001 53,710
2002 37,260
2003 and thereafter 126,145
Total lease payments $ 427,595
The Company acts as sublessor with certain franchises on some
operating leases and as such is contingently liable in the event
that the sublessees do not fulfill their obligation.
10. PREPETITION LIABILITIES
The following prepetition liabilities related to the 1990
bankruptcy reorganization were unpaid as of March 31, 1997 and
1996:
Current Long-Term Total
1997:
Priority tax claims $52,196 114,587 166,783
1996:
Priority tax claims $56,963 186,030 242,993
Annual maturities of prepetition debt are as follows:
1998 $ 52,196
1999 51,323
2000 63,264
$166,783
The priority tax claims were scheduled to be paid with interest
at 11% over 60 months from June 1, 1990. Under terms of the
reorganization (Note 11), interest only payments were due for one
year, and then amounts sufficient to amortize principal and
interest were due over the remaining 48 months. In March 1993,
the Company entered into a modification agreement with the
Internal Revenue Service which is the majority priority tax claim
creditor. Under the terms of the modification agreement, the
interest rate was reduced from 11% to 7% and the monthly
principal payment amount was reduced from twelve payments per
year to eight payments per year. The effect of this agreement
was to extend the payment schedule and enhance the working
capital and cash flow situation of the Company.
As part of the closing of the bankruptcy in September, 1995,
notification was sent to all the priority tax creditors in an
attempt to confirm and finalize the remaining liability prior to
bankruptcy closing.
At March 31, 1996, various state and local agencies with amounts
currently due totaling $69,105 plus interest have made no contact
or attempt to collect their priority tax claim during the entire
five year period of the reorganization plan despite the Company's
attempts to notify the creditors. Interest at 11% has continued
to be accrued on these balances through the five years of the
reorganization. These liabilities have an eight year statute of
limitations, after which the agencies will lose their ability to
pursue collection. Based on the fact that there has been no
contact by the various taxing authorities in over five years,
management has opted to write off 25% of the outstanding
liability and 50% of the accrued interest in the year ended March
31, 1996. The remaining interest accrual and an additional 25% of
the outstanding liability were written off in the year ended
March 31, 1997. The remaining liability will be written off
ratably over the next two years. The remaining balance of
$32,583 and $51,829 has been classified as a non-current
liability at March 31, 1997 and 1996, respectively.
11. STOCK ISSUED RELATIVE TO REORGANIZATION
In 1990, a plan of reorganization was confirmed whereby certain
prepetition secured and unsecured creditor claims were exchanged
for common and preferred stock. The basic elements of the plan
included:
a. Certain officers and directors of the Company invested
$50,000 in the company and loaned an additional $100,000 to the
Company through a separate corporation. The loan included
interest at 9% and was unsecured. This note was subsequently
used by the related party to acquire the Sugarhouse franchise.
In return for the investment, the new voting corporation received
500,000 restricted shares of common stock which gave the new
corporation voting control of the Company following the 25:1
reverse stock split.
b. 600,000 shares of Class A convertible preferred stock were
issued to a secured creditor who subsequently took out
bankruptcy. In 1992, the shares were purchased from the bankrupt
creditor's trustee by certain officers and directors of the
Company. The shares are senior to all other classes of preferred
and common stock. The preferred stock has a liquidation
preference of $.50 per share. Non-cumulative dividends can be
paid, as declared, at the rate of 10% per annum on a par value of
$.50 per share, commencing with the year following the effective
date of the reorganization plan. No dividends have been declared
as of March 31, 1997. The Preferred A shares are convertible to
common stock on a basis of one share for one share.
c. Unsecured creditor claims were reduced by 65% of the
allowed claim. One hundred thousand shares of restricted common
stock were issued to unsecured creditors along with one share of
Class B preferred stock, at a par value of $1.00 for each full
dollar of its reduced claim amount. The Class B preferred shares
have a preference over common stock in the event of liquidation,
but have no priority over ordinary debt. They are nonassessable
and have no voting rights. Dividends on Class B preferred stock
can be paid, as declared, at the rate of 10% per annum on the par
value of the preferred stock commencing on the one year
anniversary of the effective date of the reorganization plan. No
dividends have been declared as of March 31, 1997. The Preferred
B shares are convertible into one share of common stock for two
shares of Preferred B stock. Preferred B shares of 4,655 and
84,769 were converted to common stock during the years ended
March 31, 1997 and March 31, 1996, respectively.
12. STOCK OPTIONS
In 1992, the Board of Directors approved a non-qualified stock
option plan providing for the issuance of stock options to
purchase an aggregate of 75,000 shares of the Company's common
stock, with 63,000 shares to be issued to key management
personnel and members of the board at an option price of $.25 per
share. The options became effective January 1, 1991; vested one-
third each year; were cumulative; and expired on December 31,
1995. Options for 53,500 shares were exercised during the year
ended March 31, 1996.
During the year ended March 31, 1995, the Board of Directors
granted stock options to the Chairman of the Board and the Chief
Executive Officer. The Chairman was granted options for 60,000
shares of common stock and the Chief Executive Officer was
granted options for 35,000 shares of common stock. The options
price was $.50 per share and the options expire July 31, 1997.
No options were exercised during the year ended March 31, 1997.
13. RELATED PARTY TRANSACTIONS
The Company has a one year management agreement (terms negotiated
annually) with the Sugarhouse franchise which is owned by certain
officers and directors of the Company. The agreement calls for
such services as accounting and financial management, personnel
management and supervision of day-to-day operations. The amount
paid for services rendered to the franchise during the term of
the current agreement was 2% of gross receipts plus 15% of net
pre-tax earnings which resulted in a total of $17,685 and $17,992
for the years ended March 31, 1997 and 1996, respectively. The
franchise also reimbursed the Company for any other expenses
necessarily and reasonably incurred by the Company in the
performance of its duties under the agreement.
The receivable due from this franchise was $26,170 and $28,221 as
of March 31, 1997 and 1996, respectively.
14. ADVERTISING
Advertising costs, included in selling, general and
administrative expenses, are expensed when incurred and amounted
to $57,919 and $83,386 for the years ended March 31, 1997 and
1996, respectively.
15. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's sales are to customers
residing in the Rocky Mountain area. Sales can vary in relation
to the economic conditions of this area.
As disclosed in note 9, the Company acts as sublessor on some
operating leases and is contingently liable in the event that the
sublessees do not make payment. The Company has several options
for recourse from the sublessees if this were to occur.
16. GOVERNMENTAL REGULATION
Substantially all of the Company's facilities are subject to
federal, state and local regulations regarding the discharge of
materials into the environment. Compliance with these provisions
has not had, nor does the Company expect such compliance to have,
any material adverse effect upon the capital expenditures, net
income, financial condition or competitive position of the
Company. Management believes that its current practices and
procedures for the control and disposition of such wastes comply
with applicable federal and state requirements.
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