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,
1999, 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 Number)
incorporation or organization)
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: $
1,226,709
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,
1999 was $152,723
As of March 31, 1999, the Issuer had outstanding 1,248,525
shares of its common stock, par value $0.001.
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TABLE OF CONTENTS
PAGE
ITEM NUMBER AND CAPTION NUMBER
PART I
1. DESCRIPTION OF BUSINESS 3
2. DESCRIPTION OF PROPERTY 5
3. LEGAL PROCEEDINGS 6
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
5. MARKET FOR COMMON EQUITY AND 6
RELATED STOCKHOLDER MATTERS
6. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
7. FINANCIAL STATEMENTS 9
8. CHANGES IN AND DISAGREEMENTS ON 9
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 10
BENEFICIAL OWNERS AND MANAGEMENT
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12
13. EXHIBITS AND REPORTS ON FORM 8-K 12
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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. Currently there are 25 company and franchisee-
owned Tunex Service Centers in operation. The Company continues
to offer, 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 franchise
headquarters along with training facilities and other support
services.
From that point forward the Company showed steady growth in
all areas, resulting in more than forty Tunex service centers
throughout the Intermountain region and beyond. A new President
and Chief Executive Officer, along with other management changes
in the later part of 1985, and a public stock offering in 1987,
expanded that growth to about sixty operating service centers,
with fifteen centers company-owned, and an additional twelve
under development.
This overly aggressive expansion along with failure to
properly capitalize the expansion created severe cash flow
problems, an inability to meet financial and contractual
obligations, resulting in the break-up of the Tunex franchise
system at the end of 1988.
A court-sanctioned reorganization of the Company and its
finances, and the re-signing of a core group of franchise owners
allowed the Company to slowly rebuild its system to a point where
since 1995 new franchised centers have again been, and continue
to be, developed and opened.
The Company and its franchisees continue to market the Tunex
services in the states of Arizona, Colorado, Idaho, Nevada, Ohio,
Utah and the Commonwealth of 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-
owned and franchised Tunex service centers, on a gradual basis.
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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 and two 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 also
available on a fleet basis to contractors and other businesses.
Employees
The Company currently employs fifteen full-time employees
consisting of eight technical personnel, two service center
managers and five headquarters employees who are responsible for
executive, accounting, administrative, development, training and
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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
and to build on the position of being the most prominent
automotive engine performance specialty service business in the
state of Utah, by establishing the same position in the
surrounding states, and ultimately in the country.
Recent Developments
Over the period from January 1998 to March 1999 the Company
has added, through franchise licensing, two new service centers
to its franchise system of 23 centers.
Same-store sales for the 23 established Tunex Service Centers
continued to increase, with 1998 sales of $8.5 million versus
sales of $7.9 million in the prior year, for an annual increase
of 7.3%. System-wide sales, with the addition of the two new
centers, were $9.2 million for an increase of 16.4% over the
prior year.
In May 1998, the Company sold to its franchisee in the Denver
area, and converted to a franchise, one 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. On July 1, 1998, the
Company sold and converted to a franchise a newly developed and
reacquired company-operated center for the price of $60,000 plus
assumption of an equipment lease. Also on July 1, 1998, the
Company repurchased one of the franchised centers in Utah, that
had been managed by the Company, for the approximate cost of
$84,000 plus the assumption of promissory notes in the amount of
$120,000
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, and in all of the 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 of services
and addresses of all Tunex centers, information on franchising
opportunities, employment opportunities, plus others, and has
recently been newly registered and linked to popular franchise
web sites.
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:
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Monthly Expiration
Location Rental Date Premises
7061 Sheridan Boulevard $1,677 February 2003 Subleased
Westminster, Colorado
535 North Murray Boulevard $2,352 July 2000 Company Operated
Colorado Springs, Colorado
2664 East 17th Street $3,060 January 2001 Subleased
Idaho Falls, Idaho
4909 South Highland Drive $1,471 April 2001 Subleased
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. $3.787 February 2006 Subleased
Layton, Utah
501 Malley Drive $2,608 May 2006 Subleased
Northglenn, CO
5762 So. Harrison Blvd. $3,375 February 2012 Subleased
South Ogden, Utah
3549 So. 5600 West $3,600 April 2012 Subleased
West Valley, Utah
7850 So. 3300 West $4,049 February 2013 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. A judgement has been
entered, in favor of the Company.
Other than this lawsuit 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).
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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, 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
June 30, 1998 $0.25 $0.25
September 30, 1998 $0.375 $0.25
December 31, 1998 $0.25 $0.25
March 31, 1999 $0.25 $0.25
As of May 31, 1999, the Company has approximately 685
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 revenue has decreased to $1,226,709 in 1999 from
$1,315,709 in 1998. This decrease is primarily the result of
service and parts sales, after July 1, 1998, coming from two
instead of four company service centers resulting in sales of
$790,004 in 1999 against sales of $1,001,503 in 1998. Royalty
income from franchised service centers increased to $306,527 in
1999 from $242,760 in 1998, the result of two and eventually four
more franchised service centers contributing in 1999.
Operating income for the year ended March 31, 1999 is
$145,306 as compared to $75,120 in 1998. This represents an
increase of 93% over the previous year. This increase in
operating income is the result of higher income from royalty
payments, some reductions in general and administrative expenses,
and primarily the gain on sale of an established service center
and the sale of a newly developed, re-acquired center.
When taking into account the other income or expenses in the
fiscal year ended March 31, 1999, income before income taxes and
extraordinary item is $160,192 in 1999 as compared to $75,458 in
1998.
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. These tax benefits
required the Company to make provisions for income taxes for the
fiscal year ended March 31, 1999, in the amount of $46,576 as
compared to a benefit of $20,831 in 1998, this resulted in income
before extraordinary item of $113,616 in 1999 as compared to
$96,289 in 1998. 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 $1.952 million, as of March 31, 1999.
After giving effect to income tax expense and the changes in
the deferred tax provision or benefit, the Company recognized net
income of $124,565 in 1999 as compared to $108,895 in fiscal year
1998. Consequently, the Company had net income per common share
after taxes on a fully diluted basis of $.06 in 1999 as compared
to $.05 in 1998.
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The Company has sold and converted to franchises two of the
Company-owned centers and has thereby increased its available
cash to allow the Company to develop and open for business at
least two more centers in previously identified market areas.
The Company has the ability to obtain a $200,000 line of credit,
using its receivables as collateral. Along with these efforts,
the Company expects to sell at least six additional franchises in
fiscal year 2000, preferably in present, sparsely developed areas
in states within the Company's headquarter 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 has the right to develop three service centers
in its initial stages along with sub-franchising to qualified
individuals, with the first service center in full operation.
The Company will continue to offer master franchises in parts of
this country that are a great distance from the Company's
headquarters and in some foreign countries.
Liquidity and Capital Resources
The Company's cash has increased from $66,263 in 1998 to
$111,110 in 1999. The Company's working capital increased from
$185,327 in 1998 to $202,559 in 1999. This increase is primarily
the result of the reduction in current liabilities.
An increase in net income from operations and a decrease in
current liabilities; have resulted in further increase to the
Company's stockholders' equity from $607,082 in 1998 to $731,667
at the end of fiscal year 1999.
Management believes that the working capital of the Company
is adequate for its current and ongoing operations.
Year 2000 (Y2K) Readiness.
The Company has conducted a review of its computer systems and
has identified the systems that could be affected by the "Year
2000" issue. The Year 2000 issue is principally the result of
computer programs that have time-sensitive software which may
recognize a date using "00" as the year 1900 rather than they
year 2000. The Year 2000 issue may also affect the systems and
applications of the Company's vendors or customers.
While the Company has not performed a detailed analysis of the
Y2K capabilities of its primary vendors, management believes that
sufficient alternative sources of supplies and services are
available to be called upon in the event one of the Company's
primary vendors suffers a Y2K related disruption of its
operations.
As part of management's review of internal telecommunications and
computer systems, a decision was reached to reprogram the
affected portion of the Company's current and system-wide Point-
of-Service (POS) Software program, which is not yet Y2K
compliant. All hardware and software is presently being tested
for compliance and for reprogramming of embedded chips. The
accounting software has been replaced with a Y2K compliant
version. The Company will also replace the POS software in all
its franchised locations with the Y2K compliant version. All
franchisees of the Company have been notified to have their
present computer hardware tested, reprogrammed or updated in
order to be compliant for Year 2000 operation. All these
procedures and operations will be completed by the end of the
third calendar quarter of the year 1999. Cost for new Y2K
compliant hardware and software were approximately $7,000 during
fiscal year 1998 and the cost for reprogramming, testing, and
additional Y2K compliant hardware and software are expected to be
another $5,000 during fiscal year 1999.
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The Company sees no potential risk from these reprogramming and
updating operations and there are adequate internal personnel
resources available to have all the Company's computer systems
Y2K compliant. In a worst case scenario, manual procedures are
available to continue the operations, should any computer system
fail.
ITEM 7. FINANCIAL STATEMENTS
The balance sheets of the Company as of March 31, 1999 and
1998 and the related statements of operations, stockholders'
equity, and cash flows for the three years ending March 31, 1999,
1998 and 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-
2. (See the index to financial statements on page F-1.)
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 60 Chairman of the Board 1990
Bagley
Rudolf Zitzmann 64 President, Chief Executive 1985
Officer and Director
George V. South 50 Secretary, Controller 1993
Larry R. Hendricks 56 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. For the past five years, Mr. Bagley has been
self-employed as an investment and financial consultant.
In addition, he is a director of ION Laser Technology,
Inc., and Gentner Electronics, Inc., both 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
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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 1997 $50,000 None None
C.E.O. 1998 $50,000 None None
1999 $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, 1999.
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, 1999, 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.
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Amount & Nature
Title Name & Address of Nature of Percent
of Class Beneficial Owner Beneficial Owner of 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 Officers 370,858 29.7
(as a group)
Class-A All Directors and Officers 600,000 100.0
Preferred (as a group)
(1) Carolyn C. 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.
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ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
On July 1, 1998, the Company re-purchased a franchised
service center from Ventures Funding Corporation, the franchisee.
E. Dallin Bagley, Larry R. Hendricks and Rudolf Zitzmann were
investors and stockholders of that company. As part of the re-
purchase by the Company, the Company assumed promissory notes
made out to Bagley, Hendricks and Zitzmann in the amounts of
$33,333.00, $58,334.00 and $9,191.70, respectively. These notes
are to pay interest only at an interest rate of 9% with a lump
sum payment due at the end of 5 years. These notes are
convertible, at the holders discretion, to Tunex Common stock at
a rate of $.50 per share. All notes are redeemable by the
Company in total or partially on a pro rata basis.
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, 1999.
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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 29, 1999
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, 1999
Rudolf Zitzmann, Director
By: /s/ Edward Dallin Bagley Date: June 29, 1999
Edward Dallin Bagley, Director
By: /s/ Larry R. Hendricks Date: June 29, 1999
Larry R. Hendricks, Director
13
<PAGE>
TUNEX INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITOR'S REPORT F-2
BALANCE SHEETS, March 31, 1999 and 1998 F-3
STATEMENT OF OPERATIONS F-4
Year Ended March 31, 1999, 1998, 1997
STATEMENTS OF STOCKHOLDERS' EQUITY F-5
Years Ended March 31, 1999, 1998, 1997
CASH FLOW STATEMENTS F-6,7
Year Ended March 31, 1999, 1998, 1997
NOTES TO FINANCIAL STATEMENTS F-8
thru
F-15
F-1
<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, 1999 and 1998 and the related statements of income,
stockholders' equity and cash flows for each of the three years ended March
31, 1999. 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, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years ended March 31, 1999 in
conformity with generally accepted accounting principles.
Sorensen, Vance & Company, P.C.
Salt Lake City, Utah
June 18, 1999
F-2
<PAGE>
TUNEX INTERNATIONAL, INC.
BALANCE SHEETS
MARCH 31, 1999 and 1998
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 111,110 $ 66,263
Receivables 112,645 123,001
Inventories 46,870 50,489
Deferred tax asset 32,500 62,000
Investment in franchise available for sale -- 11,117
Other current assets 6,352 8,018
Total current assets 309,477 320,888
Property and equipment, at cost, less accumulated
depreciation and amortization of $284,777 and
$305,509 for 1999 and 1998, respectively 176,445 194,527
Other assets:
Receivables, long-term 205,304 133,488
Idle equipment 8,750 13,350
Goodwill, net of accumulated amortization of $7,258
and $16,165 for 1999 and 1998, respectively 133,490 --
Trademarks, net of accumulated amortization of $1,560
and $815 for 1999 and 1998, respectively 3,534 3,489
Deposits 8,843 12,946
Deferred tax asset, net of valuation allowance of
$301,209 and $296,383 for 1999 and 1998, respectively 115,154 128,900
Total other assets 475,075 292,173
Total Assets $ 960,997 $807,588
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,268 $ 22,398
Accrued payroll and related liabilities 38,662 43,735
Accrued expenses 11,004 7,074
Current portion of prepetition liabilities 30,712 51,323
Obligations under capital leases - current portion 5,272 11,031
Total current liabilities 106,918 135,561
Notes payable - related party 120,670 --
Obligations under capital leases, net of current portion 1,742 17,972
Prepetition liabilities, net of current portion -- 46,973
Total liabilities 229,330 200,506
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) (3,815,484)(3,940,069)
Total stockholders' equity 731,667 607,082
Total Liabilities and Stockholders' Equity $ 960,997 $ 807,588
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Sales and other revenues:
Service and parts $ 790,004 $1,001,503 $1,403,026
Royalty income 306,527 242,760 207,082
Franchise sales and licensing income 130,178 71,446 111,491
Total revenue 1,226,709 1,315,709 1,721,599
Cost of goods sold 371,873 470,181 676,387
Gross profit 854,836 845,528 1,045,212
Selling, general and administrative expenses 709,530 770,408 957,327
Operating income 145,306 75,120 87,885
Other income (expense):
Interest income 28,194 14,113 11,068
Interest (expense) (13,308) (14,375) (26,519)
(Gain) loss on disposition of equipment -- 600 (3,300)
Total other income (expense) 14,886 338 (18,751)
Income before income taxes and extraordinary item 160,192 75,458 69,134
Income tax benefit (provision) (46,576) 20,831 (15,648)
Income before extraordinary item 113,616 96,289 53,486
Extraordinary item - reduction in prepetition
liabilities and related interest expense
(net of tax of $5,322, $3,685 and $8,547 for
1999, 1998 and 1997, respectively) 10,969 12,606 29,214
Net income $ 124,585 $ 108,895 $ 82,700
Earnings per common share and common share equivalent
(primary and fully diluted):
Net income before extraordinary item $ .05 $ .04 $ .03
Extraordinary item .01 .01 .01
Net income $ .06 $ .05 $ .04
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Class A Class B Additional Total
Preferred Stock Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1996 600,000 $ 300,000 501,917 $ 501,917 1,326,005 $ 1,326 $3,783,908 $ (4,131,664) $ 455,487
Cancellation of common
shares in conjunction
with asset sale -- -- -- -- (80,000) (80) (39,920) -- (40,000)
Class B, preferred shares
converted to common shares -- -- (4,655) (4,655) 2,520 3 4,652 -- --
Net income for the year
ended March 31, 1997 -- -- -- - -- -- -- 82,700 82,700
Balances, March 31, 1997 600,000 300,000 497,262 497,262 1,248,525 1,249 3,748,640 (4,048,964) 498,187
Net income for the year
ended March 31, 1998 -- -- -- -- -- -- -- 108,895 108,895
Balances, March 31, 1998 600,000 300,000 497,262 497,262 1,248,525 1,249 3,748,640 (3,940,069) 607,082
Net income for the year
ended March 31, 1999 -- -- -- -- -- -- -- 124,585 124,585
Balances, March 31, 1999 600,000 $ 300,000 497,262 $ 497,262 1,248,525 $ 1,249 $ 3,748,640 $(3,815,484) $ 731,667
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 124,585 $ 108,895 $ 82,700
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 34,960 27,676 33,831
Reduction of prepetition liabilities and related
interest expense (16,291) (16,291) (37,761)
Loss on inventory due to obsolescence -- -- 14,333
(Gain) on sale of franchises (112,073) (31,000) (38,391)
Franchise fee income related to sale of franchises (38,000) (19,000) (4,669)
(Gain) loss on disposition of equipment -- (600) 3,300
Contract labor provided in lieu of cash 2,217 -- --
Provision for bad debts 6,093 9,335 27,084
(Increase) decrease in receivables (17,854) 18,099 (46,004)
(Increase) decrease in other current assets 1,666 2,212 (3,402)
(Increase) decrease in inventories (1,088) 657 (28,491)
(Increase) decrease in deposits 4,103 (6,560) (2,000)
(Increase) decrease in deferred income tax benefit 43,246 (20,800) 18,900
Increase (decrease) in accounts payable (14,922) 660 (8,214)
(Decrease) in accrued payroll and related liabilities (5,992) (8,930) (28,410)
Increase (decrease) in accrued expenses 2,282 (52) (3,215)
Total adjustments (111,653) (44,594) (103,109)
Net cash provided by (used in) operating activities 12,932 64,301 (20,409)
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 25,929 15,656 8,333
Purchase of equipment (23,624) (39,076) (68,406)
Proceeds from sale of equipment -- 556 --
Proceeds from sale of franchises 89,776 50,000 62,077
Expenditures for trademarks (790) (2,939) --
Net cash provided by investing activities 91,291 13,080 158,414
Cash Flows From Financial Activities:
Net borrowings (payments) on line of credit -- -- (35,000)
Principal payments on capital lease obligations (8,083) (20,184) (23,136)
Principal payments on notes payable - related party -- -- (11,024)
Court authorized payments on prepetition debt (51,293) (52,196) (57,453)
Net cash (used in) financing activities (59,376) (72,380) (126,613)
Net increase in cash and cash equivalents 44,847 5,001 11,392
Cash and cash equivalents, beginning of year 66,263 61,262 49,870
Cash and cash equivalents, end of year $ 111,110 $ 66,263 $ 61,262
</TABLE>
Continued - next page
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
Continued - TUNEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Schedule of Noncash Investing and Financing Transactions:
Equipment acquired under capital lease obligations
(excluding amounts related to franchise
purchase below). $ -- $ 23,669 $ 55,271
Deposits reclassified to equipment. 7,600 -- 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 --
Franchise sales consisted of the following noncash
components:
- Distribution of property and equipment, net of
accumulated depreciation of $39,866, $6,621
and $73,330, respectively. (62,544) (57,604) (71,670)
- Distribution of inventory. (15,300) (7,567) (36,672)
- Elimination of goodwill associated with the
sold franchises, net of accumulated
amortization of $16,165 for 1998 and $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 associated
with the sold franchises. 19,043 15,599 16,488
- Issuance of promissory notes receivable. 135,000 48,000 78,464
Franchise purchase consisted of the following noncash
components:
- Acquisition of receivables. 4,868 -- --
- Acquisition of inventory. 10,593 -- --
- Acquisition of equipment and leasehold improvements. 43,204 -- --
- Goodwill acquired. 140,747 -- --
- Acquisition of accounts payable and other
accrued expenses. (16,358) -- --
- Assumption of capital leases associated
with the acquired franchises. (5,137) -- --
- Assumption of notes payable to related parties. (120,670) -- --
Cash Paid During the Year For:
Interest expense $ 13,308 $ 14,375 $ 26,519
Income taxes $ 4,352 $ 4,054 $ 3,495
</TABLE>
The accompanying notes are an integral part of financial statements.
F-7
<PAGE>
TUNEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999, 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.
Operations of the Company consist of Company-owned automobile service
centers, sales of new service center franchises, and royalty income
from franchised service centers. At March 31, 1999, the Company was
operating one automobile service center in Colorado and one in Utah,
and had franchise operations in Arizona, Colorado, 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 utilizes the asset and liability method to account for
income taxes. The objective of this method is to establish deferred
tax assets and liabilities for the temporary differences between net
income for financial reporting basis and tax basis of the Company's
assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized. Income tax expense is provided based
upon the financial statement earnings of the Company. In this
regard, the Company has established a deferred tax asset, subject to
a valuation allowance, for the anticipated benefit of certain tax
loss carryforwards allowable for Federal income tax purposes (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 in 1999 and 1998
and 2,232,005 in 1997.
Goodwill
Goodwill, which represents the excess of costs over fair value of
assets acquired, is being amortized on a straight-line basis over
periods of ten to 15 years. Amortization expense was $8,003, $679
and $8,647 for the years ended March 31, 1999, 1998 and 1997,
respectively.
F-8
<PAGE>
Notes to the financial statements - continued
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.
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 and
disclosures. Actual results could differ from those estimates.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform with
1999 classification. Such reclassifications had no effect on
reported net income.
2. RECEIVABLES
Receivables currently due are comprised of the following at March 31,
1999 and 1998:
1999 1998
Trade accounts receivable $ 22,687 $ 32,194
Accounts receivable for royalties 56,715 35,182
Receivable from related party -- 28,810
Current portion of notes receivable
from related party -- 4,748
Current portion of notes receivable from
individuals with annual interest rates
ranging from 6 - 10% 38,299 27,123
117,701 128,057
Allowance for doubtful accounts (5,056) (5,056)
Net current receivables $ 112,645 $ 123,001
Long-term receivables are amounts due in excess of one year and consist
of the following:
1999 1998
Notes receivable from individuals $ 199,413 $ 103,617
Trade accounts receivable 2,525 --
Accounts receivable for royalties 3,366 --
Note receivable from related party -- 29,871
Total long-term receivables $ 205,304 $ 133,488
3. INVESTMENT IN FRANCHISE AVAILABLE FOR SALE
As of March 31, 1998, the investment in franchise available for sale
consisted of the costs to reacquire the franchise and receivables due
the Company on that date. The Company recovered these costs upon the
sale of the franchise during the year ended March 31, 1999. (See note
7.b.)
F-9
<PAGE>
Notes to the financial statements - continued
4. PROPERTY AND EQUIPMENT
The major classifications of property and equipment (including
capitalized leases - note 10), at cost, are summarized as follows:
1999 1998
Equipment $ 310,262 $ 352,300
Office furniture and equipment 54,431 53,690
Signs 26,415 23,115
Leasehold improvements 70,114 70,931
Total property and equipment 461,222 500,036
Less: accumulated depreciation and amortization (284,777) (305,509)
Property and equipment - net $ 176,445 $ 194,527
Depreciation expense was $26,957, $22,427 and $20,926 for the years
ended March 31, 1999, 1998 and 1997, respectively. Amortization
expense related to capitalized leases was $4,537, $4,570 and $4,258
for the years ended March 31, 1999, 1998 and 1997, respectively.
5. NOTES PAYABLE - RELATED PARTY
In connection with the Company's acquisition of the Sugarhouse
franchise referred to in Note 7. c., the Company assumed $120,670 in
notes payable to the previous owners of the franchise. The previous
owners consist of certain officers and directors of the Company. The
terms of the notes call for interest only payments at 9% for five
years, after which the entire amount is due and payable. The principal
amount of the notes may be converted, within the five year period, to
restricted shares of common stock at the rate of $0.50 per share.
6. INCOME TAXES
As of March 31, 1999, the Company has a net operating loss carryforward
of approximately $1,952,000 which is available to offset future income
taxes. The net operating loss expires in the years 2003 through 2006.
A deferred tax asset associated with the loss of $147,654, $190,900 and
$170,100, has been reflected in the financial statements for the years
ended March 31, 1999, 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. The deferred
tax benefit has been computed using an expected tax rate of 23% for
1999 and 1998 and 21% for 1997. There are no net operating loss
carryforwards available for state income tax purposes.
Tax expense reflected in the financial statements is comprised of the
following:
1999 1998 1997
Computed tax expense, using applicable
federal rates $ 49,000 $ 19,511 $ 23,355
Increase (decrease) in income taxes
resulting from:
Timing differences -- (2,411) (4,648)
Permanent differences -- -- 467
Total federal tax 49,000 17,100 19,174
Tax benefit of net operating loss (49,000) (17,100) (19,174)
Current federal tax -- -- --
State tax expense 8,652 3,654 5,295
(Increase) decrease in net deferred tax
benefit 43,246 (20,800) 18,900
Total income tax expense (benefit) 51,898 (17,146) 24,195
Income tax related to extraordinary item (5,322) (3,685) (8,547)
Income tax provision (benefit) $ 46,576 $ (20,831) $ 15,648
F-10
<PAGE>
Notes to the financial statements - continued
7. BUSINESS COMBINATIONS AND SALE OF FRANCHISES
a.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 arrangement for the building in which the franchise is
located.
b.In July 1998, the Company sold one of its Utah franchises for
$60,000. The Company received full payment in cash. As part of the
sale, the buyer assumed the ongoing payments of capital leases for
certain equipment and entered into a sub-lease arrangement for the
building in which the franchise is located.
c.In July 1998, the Company reacquired the Sugarhouse franchise which
was owned by certain officers and directors of the Company. The
Company has accounted for the acquisition as a purchase transaction,
and beginning July 1, 1998, has included the results of operations of
the acquired franchise in the Company's Statement of Income. The
total consideration, as adjusted, was $204,118. Accordingly, acquired
assets and liabilities, including $20,237 in cash, accounts
receivable and inventory, $43,204 in equipment and leasehold
improvements, $62,023 in cancelled trade and note receivables,
$16,358 in accounts payable and accrued liabilities, and $125,807 in
debt obligations were recorded. The excess value of the acquisition
over and above the value of the net assets acquired, $140,748, has
been recorded as goodwill to be amortized on the straight-line basis
over 15 years.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had occurred on April
1, 1996:
Year Ended Year Ended Year Ended
March 31, 1999 March 31, 1998 March 31, 1997
Revenues $1,310,388 $1,648,639 $1,688,305
Net income $ 115,612 $ 90,066 $ 101,290
Earnings per share $ 0.05 $ 0.04 $ 0.05
Pro forma financial information is not necessarily indicative of
results of operations that would have occurred if the transaction had
occurred on April 1, 1996, or of future results of operations of the
combined companies.
d.On August 31, 1996, the Company sold two Tunex franchises, including
related goodwill, equipment, furnishings and inventory, back to its
former owner. The manner of payment consisted of returning 80,000
shares of common stock issued as part of the original acquisition and
cancelling a 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.
8. ADVERTISING
Advertising costs, included in selling, general and administrative
expenses, are expensed when incurred and amounted to $37,184, $47,865
and $57,919 for the years ended March 31, 1999, 1998 and 1997,
respectively.
9. 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 $10,000 for 1999 and $9,500
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 $1,752 and $3,122 to the plan for the years
ended March 31, 1999 and 1998, respectively.
F-11
<PAGE>
Notes to the financial statements - continued
10. LEASE ARRANGEMENTS
A. Capital Leases
The Company leases equipment with an original cost of $28,915,
$56,532 and $83,298 and accumulated amortization of $10,491, $9,687
and $26,012 as of March 31, 1999, 1998 and 1997, respectively, under
the terms of several long-term capital lease arrangements. The
monthly payments total $654 including interest at 17.6% to 20.2% and
are due at various dates from November 1999 through October 2000.
The following is a schedule of future minimum lease payments:
Years Ending March 31,
2000 $ 6,064
2001 1,870
Total minimum lease payments 7,934
Less: amount representing interest (920)
Present value of net minimum lease payments 7,014
Less: current portion (5,272)
Capital lease obligations, net of current portion $ 1,742
B. Operating Leases
The Company leases space under long-term operating leases which
expire in various years through 2002. One agreement provides 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 $71,627, $105,272 and $136,377 for the
years ended March 31, 1999, 1998 and 1997.
Future minimum rental payments, excluding subleases, are as follows:
Years Ending March 31,
2000 $ 60,312
2001 43,380
2002 30,000
2003 22,500
Total lease payments $ 156,192
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.
11. PREPETITION LIABILITIES
The prepetition liabilities consisting of priority tax claims related
to the Company's previous reorganization were unpaid as follows:
Current Long-Term Total
March 31, 1999 $30,712 $ -- $ 30,712
March 31, 1998 $51,323 $ 46,973 $ 98,296
March 31, 1997 $52,196 $ 114,587 $ 166,783
F-12
<PAGE>
Notes to the financial statements - continued
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,
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.
Prior to the reorganization, notification was sent to all priority tax
creditors. Despite the Company's attempts to notify various state and
local agencies of their priority tax claims, the creditors made no
contact or attempt to collect the priority tax claims during the entire
five year reorganization plan. These liabilities had an eight year
statute of limitations; therefore, these agencies have lost their
ability to pursue collection. Based on the fact that there had 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 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 was written off in the
year ended March 31, 1999 when the statute of limitations expired.
12. PREFERRED STOCK
a.Class A convertible preferred 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,
1999. The Preferred A shares are convertible to common stock on a
basis of one share for one share.
b.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. No dividends have
been declared as of March 31, 1999. 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 years ended March 31, 1999 and 1998 and 4,655
Preferred B shares were converted to common stock during the year
ended March 31, 1997.
13. 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. The option price is $.50 per share and the options are
exercisable through July 31, 2000. No options were exercised during
the years ended March 31, 1999, 1998 and 1997.
14.RELATED PARTY TRANSACTIONS
a.Until July 1, 1998, the Company had a one year management agreement
(terms negotiated annually) with the Sugarhouse franchise which was
owned by certain officers and directors of the Company. The
agreement called 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 $741,
$11,305 and $17,685 for the years ended March 31, 1999, 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 called 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, respectively (see note 2).
F-13
<PAGE>
Notes to the financial statements - continued
b.As discussed in notes 5 and 7.c, the Company reacquired a related
party Tunex franchise. As part of the acquisition, certain assets
and liabilities were cancelled and assumed. The excess value of the
net assets acquired was recorded as goodwill.
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 8, 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.
The Company maintains several bank accounts at two institutions.
Accounts at an institution are insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. Cash at one institution exceeded
the Federally insured limits by $7,403 as of March 31, 1999. Cash was
within insured limits as of March 31, 1998 and 1997.
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.
17. YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Date sensitive systems may recognize the year 2000 as 1900 or some
other date. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has assessed the effects of the Year 2000 issue and has
developed a plan for its information systems and business relationships
with its customers and suppliers.
While the Company has not performed a detailed analysis of the Year
2000 capabilities of its primary vendors, management believes that
sufficient alternative sources of supplies and services are available
in the event one of the Company's primary vendors suffers a Year 2000
related disruption of its operations.
Because of the Year 2000 issue, its effects and the success of related
remediation efforts will not be fully determinable until the year 2000
and thereafter. Management cannot assure that the Company is or will
be Year 2000 ready, that the Company's remediation efforts will be
successful in whole or in part, or that parties with whom the Company
does business will be Year 2000 ready.
F-14
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 111,110
<SECURITIES> 0
<RECEIVABLES> 112,645
<ALLOWANCES> 5,056
<INVENTORY> 50,489
<CURRENT-ASSETS> 309,447
<PP&E> 461,222
<DEPRECIATION> 284,777
<TOTAL-ASSETS> 960,997
<CURRENT-LIABILITIES> 106,918
<BONDS> 0
0
797,262
<COMMON> 1,249
<OTHER-SE> (66,844)
<TOTAL-LIABILITY-AND-EQUITY> 960,997
<SALES> 790,004
<TOTAL-REVENUES> 1,226,709
<CGS> 371,873
<TOTAL-COSTS> 709,530
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,308
<INCOME-PRETAX> 160,192
<INCOME-TAX> (46,576)
<INCOME-CONTINUING> 113,616
<DISCONTINUED> 0
<EXTRAORDINARY> 10,969
<CHANGES> 0
<NET-INCOME> 124,585
<EPS-BASIC> .06
<EPS-DILUTED> .06
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