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,
1998, 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 Identification
incorporation or organization) number)
556 East 2100 South, Salt Lake 84106
City, Utah
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (801) 486-8133
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which
registered
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: $
1,315,709
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 $152,723
As of March 31, 1998, the Issuer had outstanding 1,248,525
shares of its common stock, par value $0.001.
<PAGE>
TABLE OF CONTENTS
PAGE
ITEM NUMBER AND CAPTION NUMBER
PART I
1. DESCRIPTION OF BUSINESS 1
2. DESCRIPTION OF PROPERTY 4
3. LEGAL PROCEEDINGS 5
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
PART II
5. MARKET FOR COMMON EQUITY AND 6
RELATED STOCKHOLDER MATTERS
6. MANAGEMENT'S DISCUSSION AND ANALYSIS 6
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
7. FINANCIAL STATEMENTS 8
8. CHANGES IN AND DISAGREEMENTS ON 8
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH 9
SECTION 16(a) OF THE EXCHANGE ACT
10. EXECUTIVE COMPENSATION 10
11. SECURITY OWNERSHIP OF CERTAIN 12
BENEFICIAL 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 25 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 then 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 25
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 25 Tunex centers open, 23 are owned and
operated by franchisees, one is owned by a franchisee and
operated by the Company and 2 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, generates works
orders, monitors inventory, costs, along with accounting
information, and provides the customer with an invoice and 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 employs fourteen full-time employees
consisting of six technical personnel, two service center
managers and six headquarters employees who are responsible for
executive, accounting, administrative, development, training and
franchise support functions. All employees are leased through a
professional employer organization to achieve maximum benefits at
reduced costs.
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.
In order to build on the position of being the most prominent
automotive engine performance specialty service business in the
state of Utah, it now intends to establish the same position in
the surrounding states, and ultimately in the country.
Recent Developments
Over the period from March 1997 to March 1998 the Company has
added, through franchise licensing and its own development, four
new service centers to its franchise system of 21 centers,
representing a 19% growth rate over that thirteen months time
period.
Same-store sales for the 21 established Tunex Service Centers
continued to increase, with 1997 sales of $7.7 million versus
sales of $7.3 million in the prior year, for an annual increase
of 5.5%. System-wide sales, with the addition of the four new
centers, were 8 million for an increase of 9.6% over the prior
year..
The company has sold to its franchisee in the Denver area,
and converted to a franchise, another of its established centers
in that area for a price of $160,000. Terms were $25,000 down
and a long-term note of $135,000.
So far, in the year of 1998, there have been two new
franchised Tunex centers added to the system. One of which, was
combined with a Fast-Lube center, for the first co-branded
operation in the Tunex system.
The now well tested and proven proprietary Point-of-Service
software program, named REVS*UP, 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.
The company had contracted and developed a ten page Website,
which has been published on the internet under the name of
www.tunex.com. The website contains the promotion and addresses
of all Tunex centers, franchising opportunities, employment
opportunities, plus others.
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 is subleasing part of the property for $1,450 per month.
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:
Monthly Expiration
Location Rental Date Premises
7061 Sheridan Boulevard $1,677 February 2003 Subleased
Westminster, Colorado
535 North Murray $2,352 July 2000 Company
Boulevard Operated
Colorado Springs,
Colorado
2664 East 17th Street $2,994 January 2001 Subleased
Idaho Falls, Idaho
4909 South Highland $1,471 April 2001 Subleased
Drive
Salt Lake City, Utah
5970 Dixie Highway $2,404 January 2003 Subleased
Fairfield, Ohio
2494 South Highway 91 $3,300 May 2016 Subleased
Bountiful, Utah
1141 W. Antelope Dr. $3,416 February 2006 Subleased
Layton, Utah
501 Malley Drive $2,608 May 2006 Subleased
Northglenn, CO
5762 So. Harrison Blvd. $3,375 February 2012 Company
South Ogden, Utah Operated
3549 So, 5600 West $3,600 April 2012 Subleased
West Valley, Utah
7850 So. 3300 West $3,450 February 2012 Subleased
West Jordan, Utah
Other than these leased properties the Company has no interest
in any other property.
ITEM 3. 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, 1998, 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: High Bid Low Bid
(Common Stock) (Common
Stock)
June 30, 1996 $0.625 $0.625
September 30, 1996 $0.5 $0.5
December 31, 1996 $0.375 $0.3125
March 31, 1997 $0.25 $0.25
June 30, 1997 $0.25 $0.25
September 30, 1997 $0.25 $0.25
December 31, 1997 $0.25 $0.15625
March 31, 1998 $0.25 $0.25
As of May 31, 1998, the Company has approximately 690
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operation
Total revenues have decreased to $1,315,709 in 1998 from
$1,721,599 in 1997. This decrease is primarily the result of
service and parts sales coming from three instead of five and,
for a few months, six company service centers during the first
six months of the fiscal year 1998, plus the effects of lower
sales from a reacquired and then newly opened company owned
center. Royalty income from franchised service centers increased
to $242,760 in 1998 from $207,082 in 1997, the result of two to
three more franchised service centers contributing in 1998.
Income from operations before income tax is $ 75,120 in 1998
as compared to $ 87,885 in 1997. This represents an decrease of
14.5% over the previous year. This decline in operating income is
the result of lower sales in the reduced number of company owned
centers and operating losses in a reacquired and reopened center,
which losses could not be offset with the gain in royalty income.
Taking into account the other income or expenses in 1997,
income before income taxes and extraordinary item is $75,458 in
1998 as compared to $69,134 in 1997.
In fiscal year 1994 the Company benefited from a considerable
increase in deferred tax benefits recognized on the books,
resulting from prior period operating losses. In 1998 additional
income tax benefits have been recognized in the statement of
income in the amount of $20,831 resulting in income, before the
extraordinary item, of $96,289 in 1998 as compared to $53,486 in
1997. 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 $2.1
million, as of March 31, 1998.
After giving effect to income tax expense and the changes in
the deferred tax benefits, the Company recognized the net income
of $108,895 in 1998 as compared to $82,700 in fiscal year 1997.
Consequently, the Company had net income per common share after
taxes on a fully diluted basis of $.05 in 1998 as compared to
$.04 in 1997.
The two new centers that were developed and placed in
operation during fiscal year 1997 had both been sold and
franchised, however, during this fiscal year, one of these
centers had to be taken back due to mismanagement of the
franchise. This center is now being resold. The Company's
present cash reserve does not allow new center development for
conversions to franchises. The Company plans to obtain a line a
credit through a bank, using its substantial receivables as
collateral. Such a line of credit will allow the Company to make
new commitments to additional center developments. In addition
to these efforts, the Company expects to sell at least six
additional franchises in fiscal year 1999, preferably in present,
underdeveloped areas and in states within the Company's head-
quarter vicinity. New franchise licenses sell for $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
has a master franchise covering Puerto Rico and the Caribbean
basin. This master franchise is developing three service centers
in its initial stages, with the first service center now in full
operation. The Company will continue to offer these master
franchises in parts of this country that are a greater distance
from the Company's headquarters and in some foreign countries.
Liquidity
The Company's cash has increased from $61,262 in 1997 to
$66,263 in 1998. The Company's working capital increased from
$134,965 in 1997 to $185,327 in 1998. This increase is primarily
the result of the reduction in current liabilities and an
increase in deferred income tax benefits.
Net income from current operations and a decrease in pre-
petition liabilities, have resulted in an increase to the
Company's stockholders' equity from $498,187 in 1997 to $607,082
at the end of fiscal year 1998.
Management believes that the working capital of the Company
is adequate for its current and present ongoing operations.
ITEM 7. FINANCIAL STATEMENTS
The balance sheets of the Company as of March 31, 1998 and
1997 and the related statements of operations, stockholders'
equity, and cash flows for the two years ending March 31, 1998
and March 31, 1997, 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 16.)
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 Position Held Since
Edward Dallin Bagley 59 Chairman of the Board 1990
Bagley
Rudolf Zitzmann 63 President, Chief 1985
Executive Officer
and Director
George V. South 49 Secretary, Controller 1993
Larry R. Hendricks 55 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.
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 $48,000 None None
C.E.O. 1996 $50,000 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, 1998.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year - End Option Values
Value of
Number of Unexercisable
Shares Value Unexercised in-the money
Acquired
Name on Exercise Realized Options @ FY Options @ FY
- End - End
Rudolf None $00.00 35,000 shares $17,500.00
Zitzmann (exercisable)
Each of the Company's directors receive $250 for each
directors' meeting attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of May 31, 1998, 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 Name & Address of Nature of Percent
of Beneficial Owner Beneficial of
Class Owner Class
Common Carolyn C. Bagley (1) 166,666 13.4
2350 Oakhill Dr.
Salt Lake City, UT 84121
Common Edward Dallin Bagley (2) 110,500 8.9
2350 Oakhill Dr.
Salt Lake City, UT 84121
Class-A Edward Dallin Bagley 200,000 (3) 33.3
Preferred 2350 Oakhill Dr.
Salt Lake City, UT 84121
Common Larry R. Hendricks (2) 108,000 8.7
2373 South Bountiful Blvd.
Bountiful, UT 84010
Class-A Larry R. Hendricks (2) 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 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 370,858 29.7
Officers (as a group)
Class-A All Directors and 600,000 100.0
Preferred Officers (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.
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.
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, 1998.
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: Jume 29, 1998
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 Date: June 29, 1998
Rudolf Zitzmann, Director
By: /s/ Edward Dallin Bagley Date: June 29, 1998
Edward Dallin Bagley, Director
By: /s/ Larry R. Hendricks Date: June 29, 1998
Larry R. Hendricks, Director
<PAGE>
TUNEX INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITOR'S REPORT F-1
BALANCE SHEETS, March 31, 1998, 1997 F-2
STATEMENT OF OPERATIONS F-3
Year Ended March 31, 1998, 1997
STATEMENTS OF STOCKHOLDERS' EQUITY F-4
Years Ended March 31, 1998, 1997
CASH FLOW STATEMENTS F-5,6
Year Ended March 31, 1998, 1997
NOTES TO FINANCIAL STATEMENTS F-7
thru
F-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors
Tunex International, Inc.
We have audited the accompanying balance sheets of Tunex
International Inc. as of March 31, 1998 and 1997 and the related
statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Tunex International, Inc. as of March 31, 1998 and 1997, and
the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting
principles.
Sorensen, Vance & Company, Inc.
Salt Lake City, Utah
June 11, 1998
<PAGE>
TUNEX INTERNATIONAL, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 66,263 $ 61,262
Receivables 123,001 133,588
Inventories 50,489 62,863
Deferred income tax benefit 62,000 18,900
Investment in franchise available for sale 11,117 --
Other current assets 8,018 10,230
Total current assets 320,888 286,843
Property and equipment, at cost, less
accumulated depreciation and
amortization of $305,509 and $321,503
for 1998 and 1997, respectively 194,527 214,757
Other assets:
Receivables, long-term 133,488 117,991
Idle equipment 13,350 9,210
Trademarks, net of accumulated
amortization of $815 and $136 for 1998
and 1997, respectively 3,489 1,229
Deposits 12,946 6,386
Deferred income tax benefit, net of
current portion 128,900 151,200
Total other assets 292,173 286,016
Total Assets $ 807,588 $ 787,616
Continued - next page
The accompanying notes are an integral part of the financial
statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
Continued -
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under capital leases -
current portion $ 11,031 $ 18,153
Current portion of prepetition liabilities 51,323 52,196
Accounts payable 22,398 21,738
Accrued payroll and related liabilities 43,735 52,665
Accrued expenses 7,074 7,126
Total current liabilities 135,561 151,878
Obligations under capital leases, net
of current portion 17,972 22,964
Prepetition liabilities, net of current
portion 46,973 114,587
Total liabilities 200,506 289,429
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 shares issued and outstanding 497,262 497,262
Common stock, par value $.001 per share;
50,000,000 shares authorized; 1,248,525
shares issued and outstanding 1,249 1,249
Additional paid-in capital 3,748,640 3,748,640
Accumulated (deficit) (3,940,069) (4,048,964)
Total stockholders' equity 607,082 498,187
Total Liabilities and
Stockholders' Equity $ 807,588 $ 787,616
The accompanying notes are an integral part of the financial
statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
Sales and other revenues:
Service and parts $1,001,503 $1,403,026
Royalty income 242,760 207,082
Franchise licensing income 52,500 69,750
Gain on sale of franchise 18,946 41,741
Total revenue 1,315,709 1,721,599
Cost of goods sold 470,181 676,387
Gross profit 845,528 1,045,212
Selling, general and administrative
Expenses 770,408 957,327
Operating income 75,120 87,885
Other income (expense):
Interest income 14,113 11,068
Interest (expense) (14,375) (26,519)
(Gain) loss on disposition of equipment 600 (3,300)
Total other income (expense) 338 (18,751)
Income before income taxes and 75,458 69,134
extraordinary item
Income tax benefit (provision) 20,831 (15,648)
Income before extraordinary item 96,289 53,486
Extraordinary item - reduction in
prepetition liabilities and related
interest expense (net of tax of $3,685
and $8,547 for 1998 and 1997,respectively) 12,606 29,214
Net income $ 108,895 $ 82,700
Continued - next page
The accompanying notes are an integral part of the financial
statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
Continued -
1998 1997
Earnings per common share and common
share equivalent (primary and fully
diluted):
Net income before extraordinary item $ .04 $ .03
Extraordinary item .01 .01
Net income $ .05 $ .04
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, 1998 AND 1997
Class A Class B
Preferred Stock Preferred Stock
Shares Amount Shares Amount
Balances, March 31, 600,000 $300,000 501,917 $501,917
1996
Cancellation of common
shares issued in
conjunction with
asset sale -- -- -- --
Class B, preferred
shares converted to
common shares -- -- (4,655) (4,655)
Net income for the year
ended March 31, 1997 -- -- -- --
Balances, March 31,
1997 600,000 300,000 497,262 497,262
Net income for the year
ended March 31, 1998 -- -- -- --
Balances, March 31,
1998 600,000 $300,000 497,262 $497,262
Continued - next page
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, 1998 AND 1997
Continued -
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
1,326,005 $1,326 $3,783,908 $(4,131,664) $455,487
(80,000) (80) (39,920) -- (40,000)
2,520 3 4,652 -- --
-- -- -- 82,700 82,700
1,248,525 1,249 3,748,640 (4,048,964) 498,187
-- -- -- 108,895 108,895
1,248,525 $1,249 $3,748,640 $(3,940,069) $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, 1998 AND 1997
1998 1997
Cash Flows From Operating Activities:
Net income $108,895 $ 82,700
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 27,676 33,831
Reduction of prepetition liabilities and
related interest expense (16,291) (37,761)
Loss on inventory due to obsolescence -- 14,333
(Gain) loss on disposition of equipment (600) 3,300
Provision for bad debts 9,335 27,084
(Increase) decrease in receivables 18,099 (46,004)
(Increase) decrease in other current assets 2,212 (3,402)
(Increase) decrease in inventories 657 (28,491)
Decrease in goodwill on franchises sold -- 19,017
(Increase) in deposits (6,560) (2,000)
(Increase) decrease in deferred income
tax benefit (20,800) 18,900
Increase (decrease) in accounts payable 660 (8,214)
(Decrease) in accured payroll and related
liabilities (8,930) (28,410)
(Decrease) in accrued expenses (52) (3,215)
Total adjustments 5,406 (41,032)
Net cash provided by operating activities 41,668 114,301
Cash Flows From Investing Activities:
Proceeds from investments, held to maturity -- 156,410
Payment for franchise available for sale (11,117) --
Collections on notes receivable 15,656 8,333
Purchase of equipment (39,076) (68,406)
Proceeds from sale of equipment 556 --
Expenditures for trademarks (2,939) --
Net cash provided by (used in) investing
activities (36,920) 96,337
Continued - next page
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, 1998 AND 1997
Continued -
1998 1997
Cash Flows From Financial Activities:
Net (payments) on line of credit -- (35,000)
Principal payments on capital lease
obligations (20,184) (23,136)
Principal payments on notes payable, related
party -- (11,024)
Court authorized payments on prepetition debt (52,196) (57,453)
Net cash (used in) financing activities (72,380) (126,613)
Net increase in cash and cash equivalents 5,001 11,392
Cash and cash equivalents, beginning of year 49,870 61,262
Cash and cash equivalents, end of year $ 66,263 $ 61,262
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Schedule of Noncash Investing and Financing Transactions:
Equipment acquired under capital lease
obligations $ 23,669 $ 55,271
Deposits reclassified to equipment -- 36,700
Equipment reclassified to idle equipment
net of accumulated depreciation of $400
for 1997 4,150 3,600
Conversion of royalty receivable to note
receivable 15,044 --
Continued - next page
The accompanying notes are an integral part of financial
statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
Continued -
1998 1997
Franchise sales consisted of the following
noncash components:
- Distribution of property and
equipment, net of accumulated
depreciation of $6,621 and $73,330,
respectively (57,604) (71,670)
- Distribution of inventory (7,567) (36,672)
- Elimination of goodwill associated with
the sold franchises, net of accumulated
amortization of $37,872 for 1997 -- (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 15,599 16,488
- Issuance of promissory note receivable 48,000 78,646
Cash Paid During the Year for:
Interest expense $ 14,375 $ 26,519
Income taxes $ 4,054 $ 3,495
The accompanying notes are an integral part of financial
statements.
<PAGE>
TUNEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
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 9) 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, 1998, the Company was
operating two automobile service centers in Colorado and
one in Utah, 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
<PAGE>
Notes to the financial statements - continued
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
2,192,156 and 2,232,005 at March 31, 1998 and 1997,
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 $679 and $8,647
for the years ended March 31, 1998 and 1997,
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.
<PAGE>
Notes to the financial statements - continued
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 and disclosures. Accordingly,
actual results could differ from those estimates.
Reclassifications
Certain 1997 amounts have been reclassified to conform
with the 1998 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.
Of the 200,000 shares of common stock, 40,000 shares
were issued each year ended March 31, 1996 and 1995 and
the remaining 120,000 restricted shares ,were to be
issued over the succeeding three years. The former
owner of the franchises became an employee and officer
of the Company as part of the transaction.
The acquisition was 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 was 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 canceling 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. INVESTMENT IN FRANCHISE AVAILABLE FOR SALE
As of March 31, 1998, investment in franchise available
for sale consisted of the reacquisition costs of a
franchise plus receivables due the Company from the
franchise. The Company expects to recover these costs
upon the sale of the franchise. The Company is currently
negotiating the sale and has received $10,000 in earnest
money.
<PAGE>
Notes to the financial statements - continued
4. RECEIVABLES
Receivables currently due are comprised of the following
at March 31, 1998 and 1997:
1998 1997
Trade accounts receivable $32,194 $ 63,6
14
Accounts receivable for royalties 35,182 31,723
Receivable from related party 28,810 26,170
Current portion of note receivable
from related party 4,748 --
Current portion of notes receivable
from individuals with annual
interest rates ranging from 6 - 10% 27,123 17,137
128,057 138,644
Allowance for doubtful accounts (5,056) (5,056)
Net current receivables $ 123,001 $133,588
Long-term receivables are amounts due in excess of one
year and consist of the following:
1998 1997
Notes receivable from individuals $ 103,617 $ 66,450
Accounts receivable for royalties -- 16,922
Note receivable from related party 29,871 34,619
Total long-term receivables $ 133,488 $117,991
5. PROPERTY AND EQUIPMENT
The major classifications of property and equipment
(including capitalized leases - note 7), at cost, are
summarized as follows:
1998 1997
Equipment $ 352,300 $ 352,724
Office furniture and equipment 53,690 79,548
Signs 23,115 29,387
Leasehold improvements 70,931 74,601
Total property and equipment 500,036 117,991
Less: accumulated depreciation
and amortization (305,509) (321,503)
Property and equipment - net $ 194,527 $ 214,757
Depreciation expense was $22,427 and $20,926 for the
years ended March 31, 1998 and 1997, respectively.
Amortization expense related to capitalized leases was
$4,570 and $4,258 for the years ended March 31, 1998 and
1997, respectively.
<PAGE>
Notes to the financial statements - continued
6. INCOME TAXES
As of March 31, 1998, the Company has a net operating
loss carryforward of approximately $2,119,000 which is
available to offset future taxable income. The net
operating loss expires in the years 2003 through 2006.
A deferred tax benefit associated with the loss of
$190,900 and $170,100, has been reflected in the
financial statements for the years ended March 31, 1998
and 1997, respectively. The tax benefit is net of a
valuation allowance which has been established for the
estimated portion of the loss which will not be
utilized. There are no net operating loss carryforwards
available for state income tax purposes. The deferred
tax benefit has been computed for 1998 and 1997 using an
expected tax rate of 23% and 21% respectively. The
valuation allowance was $296,383 and $292,466 for 1998
and 1997, respectively.
The tax expense reflected in the financial statements is
comprised of the following:
1998 1997
Computed tax expense, using
applicable federal rates $ 19,511 $ 23,355
Increase (decrease) in income tax
resulting from:
Timing differences (2,411) (4,648)
Permanent differences -- 467
Total federal tax 17,100 19,174
Tax benefit of net operating loss (17,100) (19,174)
Current federal tax -- --
State tax expense 3,654 5,295
(Increase) decrease in net deferred
tax benefit 20,800 18,900
Total income tax expense (benefit) (17,146) 24,195
Income tax related to extraordinary
item (3,685) (8,547)
Income tax provision (benefit) $(20,831) $15,648
7. LEASE ARRANGEMENTS
A. Capital Leases
The Company leases equipment under the terms of several
long-term capital lease arrangements. The monthly
payments total $1,699 including interest at 5.3% to
20.2% and are due at various dates from April 1998
through September 2001.
<PAGE>
Notes to the financial statements - continued
The following is a schedule of future minimum lease
payments:
Years Ending March 31,
1999 $ 15,436
2000 10,877
2001 7,306
2002 4,262
Total minimum lease payments 37,881
Less: amount representing interest (8,878)
Present value of net minimum lease
payments 29,003
Less: current portion (11,031)
Capital lease obligations, net of
current portion $ 17,972
B. Operating Leases
The Company also leases space under long-term operating
leases which expire in various years through 2011.
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 $105,272 and
$136,377 for the years ended March 31, 1998 and 1997.
Future minimum rental payments, excluding subleases, are
as follows:
Years Ending March 31,
1999 $ 75,308
2000 75,608
2001 67,594
2002 51,144
2003 49,194
2004 and thereafter 434,061
Total lease payments $ 752,909
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.
<PAGE>
Notes to the financial statements - continued
8. PREPETITION LIABILITIES
The prepetition liabilities consisting of priority tax claims
related to the 1990 bankruptcy reorganization were unpaid as
follows:
Current Long-Term Total
March 31, 1998 $ 51,323 $ 46,973 $ 98,296
March 31, 1997 $ 52,196 $ 114,587 $ 166,783
Annual maturities of prepetition debt are as follows:
1999 $ 51,323
2000 46,973
$ 98,296
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 9), 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% 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 written off 25% of the outstanding liability
and 50% of the accrued interest in each of the years ended
March 31, 1997 and 1996. An additional 25% of the outstanding
liability was written off in the year ended March 31, 1998.
The remaining liability will be written off in the next year
when the statute of limitations expires.
<PAGE>
Notes to the financial statements - continued
9. 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 a 25:1 reverse stock
split.
b.Six-hundred thousand Class A convertible preferred shares
were issued to a secured creditor who subsequently took out
bankruptcy. In 1992, the shares were purchased from the
bankruptcy 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,
1998. 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,
1998. The Preferred B shares are convertible into one
share of common stock for two shares of Preferred B stock.
No Preferred B shares were converted to common shares
during the year ended March 31, 1998 and 4,655 Preferred B
shares were converted to common shares during the year
ended March 31, 1997.
<PAGE>
Notes to the financial statements - continued
10. STOCK OPTIONS
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, 1998. No options were exercised during the
year ended March 31, 1998.
11.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 $11,305 and $17,685 for the years
ended March 31, 1998 and 1997, 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 $28,810 and $26,170 as
of March 31, 1998 and 1997, respectively.
In addition, in June 1996, the Company entered into a note
receivable from this franchise for $34,619. The note calls
for interest only payments for two years and then monthly
payments of $719, including interest at 9%, through April
2003. The balance due on the note was $34,619 at March 31,
1998 and 1997 (see note 4).
12. ADVERTISING
Advertising costs, included in selling, general and
administrative expenses, are expensed when incurred and
amounted to $47,865 and $57,919 for the years ended March 31,
1998 and 1997, respectively.
13. RETIREMENT PLAN
Effective April 1, 1997, the Company adopted a 401(k) profit
sharing retirement plan. All full-time employees who meet
certain age and length of service requirements are eligible
to participate. The plan is an employee salary reduction
plan that defers taxes on contributions until the date of
withdrawal. Participants may elect to contribute up to 15%
of their compensation, not to exceed $9,500
<PAGE>
Notes to the financial statements - continued
for 1998. The Company provides a matching contribution equal
to 50% of the elected salary reduction (up to 5%) of the
respective employee's compensation. The Company may also
make a discretionary contribution to the plan. The Company's
contributions vest to the employees at a rate of 20% per
year, being fully vested after six years of employment. The
Company contributed $3,122 to the plan for the year ended
March 31, 1998.
14. 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 7, 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.
15.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.
16.SUBSEQUENT EVENT
In May 1998, the Company sold one of its Colorado franchises
for $160,000. The Company received $25,000 in cash and a
note for $135,000 as payment. The note bears interest at 10%
and matures in April 2008. As part of the sale, the buyer
assumed the ongoing payments of capital leases for certain
equipment and entered into a sub-lease for the building in
which the franchise is located.
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<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 66,263
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<RECEIVABLES> 261,545
<ALLOWANCES> 5,056
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0
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<CGS> 470,181
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