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,
2000, 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: $
1,080,477
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,
2000 was $523,875
As of March 31, 2000, the Issuer had outstanding 1,848,525
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 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
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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, opened and added to the system.
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.
BUSINESS OPERATIONS
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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, brakes, 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
standards. 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 condition and the condition of other engine related
systems with its trademark engine analysis and visual inspection.
This procedure, along with any other required analysis, performed
quickly while the customer waits or watches, accurately pinpoints
any and all problems in a car's engine, and related systems.
These in-depth analyses and inspection also reveals potential
problems that require correction or maintenance before a
breakdown occurs. The results of these completed analyses are
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 from the customer, 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 fourteen full-time employees
consisting of seven technical personnel, two service center
managers and five headquarters employees who are responsible for
executive, accounting, administrative,
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development, technical support, 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
and to build on the position of being recognized as the most
prominent automotive engine performance specialty service
business in the state of Utah, by aiming at establishing the same
position in the surrounding states, and ultimately in the
country.
Recent Developments
Same-store sales for the 25 established Tunex Service Centers
continued to increase, with 1999 sales of $9.7 million versus
sales of $9.2 million in the prior year, for an annual increase
of 4%.
On January 1, 2000, Rudolf Zitzmann, the Company's President
and Chief Executive Officer for the last eleven years, retired
from these positions. The Board of Directors appointed R. Steven
Love as the new President and CEO of the Company. Mr. Love is
the former Owner, President and CEO of Amware, Inc., a regional
automotive warehouse and distribution company; a company that he
had sold to another parts distribution company, more than a year
ago. Mr. Zitzmann stayed with the Company through the end of
March to help with transitional tasks and will remain as a
Director and a Consultant, on a part time basis, for the
foreseeable future.
In February and May of this year the Company sold licenses
for two new areas in the Utah region with new center construction
planned to start this fall season. The plans for one of these
centers has been increased from the present eight bay to a ten
bay format to accommodate anticipated sales increases and adjust
to the higher land costs.
The Company had contracted and developed an extensive
Website, which has been published on the Internet under the name
of www.tunex.com and has recently been updated to also provide an
Intranet. The website contains the promotion of Tunex services,
addresses and locations of all Tunex centers, information and
promotion of individual Tunex centers information on franchising
opportunities, employment opportunities, plus many other
features, including information to the consumer. The Intranet
portion of the Website is primarily for communication with and
between Tunex franchisees, for information to franchisees and
their managerial and technical personnel.
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 $2,500.00 per month under a
lease that has been extended to expire in December 2002.
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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 Boulevard $2,583 July 2005 Company
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
There are presently 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, 1999 and 2000, 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, 1999 $0.50 $0.25
September 30, 1999 $0.50 $0.50
December 31, 1999 $0.6250 $0.50
March 31, 2000 $0.75 $0.6250
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, 2000, the Company has approximately 682
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 $1,080,477 in 2000 from
$1,226,709 in 1999. This decrease is primarily the result of
service and parts sales, in two company owned service centers,
declining to $754,467 in 2000 from $790,004 in 1999, the result
of the Company granting just one license during that period and
that the Company sold and converted to a franchise a Company
owned center in 1999, for a gain in income by way of a note to
the Company for $135,000, against no gain in 2000.
Royalty income from franchised service centers increased to
$315,863 in 2000 from $306,527 in 1999, the result of a 4.5%
increase in system-wide sales by franchised service centers.
The Company shows an operating loss for the year 2000 of
$25,497 as compared to operating income of $145,306 in 1999.
This represents a decrease of 117% from the previous year
operating income. This decrease in operating income is the
result of higher general and administration expenses, the result
of fewer franchise sales, inventory adjustments, the costs
associated with personnel changes and the transition to a new
chief executive (see "Item 1. Description of Business, Business
Operations - Recent Developments"), and nonperformance on the
note received for the sale of the Company owned center in 1999,
resulting in "doubtful accounts" approximately of $27,000.
When taking into account the other income or expenses in the
fiscal year ended March 31, 2000, the loss before income taxes
and extraordinary items is $23,116 in 2000 as compared to an
income of $160,192 in 1999.
In fiscal year 1994 the Company benefited from a considerable
increase in deferred tax benefits recognized on the books,
resulting from prior period income taxes for the fiscal year
ended March 31, 2000, in the amount of $6054 as compared to a
provision of $46,576 in 1999, this resulted in a loss before
extraordinary item of $29,170 as compared to an income of
$113,616 in 1999. 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 1.95 million, as of March 31, 2000.
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After giving effect to income tax expense and the changes in
the deferred tax provision or benefit, the Company recognized the
net loss of $29,170 in 2000 as compared to income of $124,585 in
the fiscal year 1999. Consequently, the Company had a net loss
per common share after taxes on a diluted basis of $.01 in 2000
as compared to income of $.06 in 1999.
The Company has recently obtained a $50,000 line of credit
with its banking institution which it plans to use to supplement
its available cash to allow the Company to develop and open for
business possibly two more service centers in a present market
area for conversion to franchised centers. The Company has so
far this fiscal year sold one additional franchise to one of its
existing franchisees and expects to sell at least four more
franchises in fiscal year 2001, preferably in undeveloped 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 decreased from $111,110 in 1999 to
$71,205 in 2000. The Company's working capital decreased from
$202,559 in 1999 to $175,226 in 2000. This decrease is primarily
the result of the reduction in current liabilities and a decrease
in current receivables.
A Net loss from operations and a reduction on the amount of
long-term note receivable, have resulted in a decrease to the
Company's stockholders' equity from $731,667 in 1999 to $702,497
at the end of fiscal year 2000.
Management believes that the working capital of the Company
is adequate for its current and ongoing operations.
Year 2000 (Y2K) Compliance.
The Company has reprogrammed the affected portion of the
Company's system-wide Point-of-Service (POS) Software program, in
order to make it Y2K compliant. All hardware and software has
been tested for compliance. The accounting software has been
replaced with a Y2K compliant version. The Company has also
replaced the POS software in all its franchised locations with
the Y2K compliant version. All these procedures and operations
had been completed by the end of the third calendar quarter of
the year 1999. Cost for new Y2K compliant hardware and software
were approximately $7,000.00 and the cost for reprogramming,
testing, and additional Y2K compliance of software were another
$5,000.00 during fiscal year 2000.
ITEM 7. FINANCIAL STATEMENTS
The balance sheets of the Company as of March 31, 2000, and
1999 and the related statements of operations, stockholders'
equity, and cash flows for the three years ending March 31, 2000,
1999 and 1998, including the notes thereto along with the
auditor's report of Sorensen, Vance & Company, P.C., independent
certified public accountants, are set forth beginning at page F-
1. (See the index to financial statements on page 15.)
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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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 61 Chairman of the Board 1990
Bagley
R. Steven Love 50 President,Chief Executive 2000
Officer and Director
George V. South 51 Secretary, Controller 1993
Larry R. Hendricks 57 Director 1990
Rudolf Zitzmann 65 Director 1985
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.
R. Steven Love became President, Chief Executive Officer
and Director of the Company on January 1, 2000. Prior to
that Mr. Love was the owner, President and CEO of Amware,
Inc., a major parts warehouse distributor in Salt Lake
City and the surrounding areas. A year ago, Mr. Love
sold his company to the Frank Edwards Company, a regional
warehouse distributor and, until December 1999, assisted
that company in the transition.
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.
Rudolf Zitzmann became a Director of the Company in 1985
and was then its Vice President of Franchise Development.
From February
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1989 to December 1999 Mr. Zitzmann served as President
and CEO of the Company, after which time he retired from
these positions.
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 (1) 1997/98 $50,000 None None
C.E.O. 1998/99 $50,000 None None
1999/00 $50,000 None None
R. Steven Love (2) 2000/01 $75,000 None None
C.E.O.
(1) Mr. Zitzmann retired from the position of President and
Chief Executive Officer on December 31, 1999 and will continue to
serve as a Director
(2) Mr. Love became President and Chief Executive Officer on
January 1, 2000 and will also serve as a director.
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 two Directors at an exercise price of $.50 per
share. Options are exercisable immediately and are to expire
July 31, 2001.
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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)
R. Steven Love None $00.00 None None
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, 2000, the
number of shares of voting securities owned of record or
beneficially by each person who owned of record, or is known by
the Company to own beneficially, more than 5% of the Company's
voting securities, the number of shares of voting securities
owned by each director and executive officer and the number of
shares of voting securities owned by all directors and executive
officers as a group.
Amount &
Nature
Title of Name & Address of Nature of Percent
Class Beneficial Owner Beneficial of
Class
Common Carolyn C. Bagley (1) 166,666 9.0
2350 Oakhill Dr.
Salt Lake City, UT 84121
Common Edward Dallin Bagley (2) 421,000 22.8
2350 Oakhill Dr.
Salt Lake City, UT 84121
Common Larry R. Hendricks (2) 208,000 11.2
2373 South Bountiful Blvd.
Bountiful, UT 84010
Common Rudolf Zitzmann (2) 285,688 15.4
2111 Sahara Drive
Salt Lake City, UT 84124
Common R. Steven Love (2) 66,670 3.6
6742 Courtland Ave.
Salt Lake City, UT 84121
Common All Directors and Officers 981,358 53.0
(as a group)
(1) Carolyn C. Bagley is the spouse of Edward Dallin
Bagley, a Director of the Company.
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(2) These persons are all of the Directors and Executive
Officers of the Company.
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
called for interest only payments of 9% with a lump sum payment
due at the end of 5 years. These notes were convertible, at the
holders discretion.
During the year ended March 31, 2000, the Company paid the
related party: notes payable in full. The payments were
primarily funded by a loan obtained by the Company from its long-
time banking institution.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS:
See Table of Contents to financial statements appearing on
Page 15.
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, 2000.
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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/ R. Steven Love
R. Steven Love, President
(Principal Executive)
Date: June 29, 2000
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/ R. Steven Love Date: June 29, 2000
R. Steven Love, Director
By: /s/ Rudolf Zitzmann Date: June 29, 2000
Rudolf Zitzmann, Director
By: /s/ Edward Dallin Bagley Date: June 29, 2000
Edward Dallin Bagley, Director
By: /s/ Larry R. Hendricks Date: June 29, 2000
Larry R. Hendricks, Director
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TUNEX INTERNATIONAL, INC.
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
F-1
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TUNEX INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-3
Balance Sheets F-4
Statements of Income F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to the Financial Statements F-9
F-2
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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, 2000 and 1999 and the related statements of income,
stockholders' equity and cash flows for each of the three years ended March
31, 2000. 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, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years ended March 31, 2000 in
conformity with generally accepted accounting principles.
Sorensen Vance & Company PC
Salt Lake City, Utah
June 20, 2000
F-3
<PAGE>
TUNEX INTERNATIONAL, INC.
BALANCE SHEETS
MARCH 31, 2000 and 1999
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 71,205 $ 111,110
Receivables 95,573 112,645
Inventories 52,455 46,870
Deferred tax asset 30,481 32,500
Other current assets 6,380 6,352
Total current assets 256,094 309,477
Property and equipment, at cost, less accumulated
depreciation and amortization of $315,878 and
$284,777 for 2000 and 1999, respectively 185,381 176,445
Other assets:
Receivables, long-term 181,294 205,304
Idle equipment 8,750 8,750
Goodwill, net of accumulated amortization of $16,641
and $7,258 for 2000 and 1999, respectively 124,107 133,490
Trademarks, net of accumulated amortization of $2,397
and $1,560 for 2000 and 1999, respectively 2,697 3,534
Deposits 6,822 8,843
Work-in-process 5,270 --
Deferred loan fees 1,130 --
Deferred tax asset, net of valuation allowance of
$318,322 and $301,209 for 2000 and 1999, respectively 111,184 115,154
Total other assets 441,254 475,075
Total Assets $ 882,729 $ 960,997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,227 $ 21,268
Accrued payroll and related liabilities 36,756 38,662
Accrued expenses 1,822 11,004
Current portion of long-term debt 23,758 --
Current portion of prepetition liabilities -- 30,712
Obligations under capital leases - current portion 1,275 5,272
Total current liabilities 80,838 106,918
Long-term debt, net of current portion 99,394 --
Notes payable - related party -- 120,670
Obligations under capital leases, net of current portion -- 1,742
Total liabilities 180,232 229,330
Stockholders' equity:
Preferred stock, Class A, par value $.50 per share;
1,000,000 shares authorized; 600,000 shares
issued and outstanding for 1999 -- 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; 1,848,525 and 1,248,525 shares
issued and outstanding for 2000 and 1999, respectively 1,849 1,249
Additional paid-in capital 4,048,040 3,748,640
Accumulated (deficit) (3,844,654) (3,815,484)
Total stockholders' equity 702,497 731,667
Total Liabilities and Stockholders' Equity $ 882,729 $ 960,997
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
Sales and other revenues:
Service and parts $ 754,467 $ 790,004 $ 1,001,503
Royalty income 315,863 306,527 242,760
Franchise sales and licensing income 10,147 130,178 71,446
Total revenue 1,080,477 1,226,709 1,315,709
Cost of goods sold 337,406 371,873 470,181
Gross profit 743,071 854,836 845,528
Selling, general and administrative expenses 768,568 709,530 770,408
Operating income (loss) (25,497) 145,306 75,120
Other income (expense):
Interest income 15,754 28,194 14,113
Interest (expense) (13,373) (13,308) (14,375)
Loss on disposition of equipment -- -- 600
Total other income 2,381 14,886 338
Income (loss) before income taxes and
extraordinary item (23,116) 160,192 75,458
Income tax benefit (provision) (6,054) (46,576) 20,831
Income (loss) before extraordinary item (29,170) 113,616 96,289
Extraordinary item - reduction in prepetition
liabilities and related interest expense
(net of tax of $5,322 and $3,685 for 1999
and 1998, respectively) -- 10,969 12,606
Net income (loss) $ (29,170) $124,585 $ 108,895
Earnings (loss) per share:
Basic:
Net income (loss) before extraordinary item $ (.02) $ .09 $ .08
Extraordinary item -- .01 .01
Net income (loss) $ (.02) $ .10 $ .09
Diluted:
Net income (loss) before extraordinary item $ (.01) $ .05 $ .04
Extraordinary item -- .01 .01
Net income (loss) $ (.01) $ .06 $ .05
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Class A Class B
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1997 600,000 $ 300,000 497,262 $ 497,262 1,248,525 $ 1,249
Net income for the year
ended March 31, 1998 -- -- -- - -- --
Balances, March 31, 1998 600,000 300,000 497,262 497,262 1,248,525 1,249
Net income for the year
ended March 31, 1999 -- -- -- -- -- --
Balances, March 31, 1999 600,000 300,000 497,262 497,262 1,248,525 1,249
Class A, preferred shares
converted to common
shares (600,000) (300,000) -- -- 600,000 600
Net (loss) for the year
ended March 31, 2000 -- -- -- -- -- --
Balances, March 31, 2000 -- $ -- 497,262 $ 497,262 1,848,525 $ 1,849
</TABLE>
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
Additional Total
Paid-in Accululated Stockholders'
Capital Deficit Equity
Balances, March 31, 1997 $ 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 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 3,748,640 (3,815,484) 731,667
Class A, preferred shares
converted to common shares 299,400 -- --
Net (loss) for the year -- (29,170) (29,170)
ended March 31, 2000,
Balances, March 31, 2000 $ 4,048,040 $ (3,844,654) $ 702,497
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
TUNEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
Cash Flows From Operating Activities:
Net income (loss) $ (29,170) $ 124,585 $ 108,895
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 41,321 34,960 27,676
Reduction of prepetition liabilities and related
interest expense -- (16,291) (16,291)
(Gain) on sale of franchises -- (112,073) (31,000)
Franchise fee income related to sale of franchises -- (38,000) (19,000)
(Gain) on disposition of equipment -- -- (600)
Contract labor provided in lieu of cash -- 2,217 --
Provision for bad debts 31,430 6,093 9,335
(Increase) decrease in receivables (21,143) (17,854) 18,099
(Increase) decrease in inventories (5,585) (1,088) 657
(Increase) decrease in other current assets (28) 1,666 2,212
(Increase) decrease in deposits 2,021 4,103 (6,560)
(Increase) decrease in deferred income tax
benefit 5,989 43,246 (20,800)
Increase (decrease) in accounts payable (4,041) (14,922) 660
(Decrease) in accrued payroll and related
liabilities (1,906) (5,992) (8,930)
Increase (decrease) in accrued expenses (9,182) 2,282 (52)
Total adjustments 38,876 (111,653) (44,594)
Net cash provided by operating activities 9,706 12,932 64,301
Cash Flows From Investing Activities:
Payment for franchise available for sale -- -- (11,117)
Collections on notes receivable 30,795 25,929 15,656
Purchase of equipment (25,057) (23,624) (39,076)
Proceeds from sale of equipment -- -- 556
Proceeds from sale of franchises -- 89,776 50,000
Deposit on intangible asset (5,270) -- --
Payments for trademarks -- (790) (2,939)
Net cash provided by investing activities 468 91,291 13,080
Cash Flows From Financial Activities:
Proceeds from issuance of long-term debt 112,000 -- --
Principal payments on notes payable -
related party (120,670) -- --
Principal payments on long-term debt (4,958) -- --
Principal payments on capital lease obligations (5,739) (8,083) (20,184)
Court authorized payments on prepetition debt (30,712) (51,293) (52,196)
Net cash (used in) financing activities (50,079) (59,376) (72,380)
Net increase (decrease) in cash and cash
equivalents (39,905) 44,847 5,001
Cash and cash equivalents, beginning of year 111,110 66,263 61,262
Cash and cash equivalents, end of year $ 71,205 $ 111,110 $ 66,263
Continued - next page
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
Continued - TUNEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
2000 1999 1998
Schedule of Noncash Investing and Financing Transactions:
Equipment acquired under capital lease obligations
or promissory notes (excluding amounts related
to franchise purchase below). $ 14,980 $ -- $ 23,669
Deferred loan fees 1,130 -- --
Deposits reclassified to equipment. -- 7,600 --
Equipment reclassified to idle equipment, net of
accumulated depreciation of $400 for 1997. -- -- 4,150
Conversion of trade and royalty receivables to
notes receivable. 18,302 -- 15,044
Franchise sales consisted of the following noncash
components:
- Distribution of property and equipment, net of
accumulated depreciation of $39,866 and
$6,621, respectively. -- (62,544) (57,604)
- Distribution of inventory. -- (15,300) (7,567)
- Elimination of goodwill associated with the
sold franchises, net of accumulated
amortization of $16,165 for 1998. -- -- --
- Assignment of capital leases associated
with the sold franchises. -- 19,043 15,599
- Issuance of promissory notes receivable. -- 135,000 48,000
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 --
- Cancelled trade and note receivables -- (62,023) --
- 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 $ 13,373 $ 13,308 $ 14,375
Income taxes $ 11,740 $ 4,352 $ 4,054
The accompanying notes are an integral part of financial statements.
F-8
<PAGE>
TUNEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
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, 2000, 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 5).
Earnings Per Share
In 1997, Statement of Financial Accounting Standard (SFAS) No. 128,
Earnings per Share (EPS) was issued. SFAS No. 128 replaced the
previously reported primary and fully diluted EPS with basic and
diluted EPS, respectively. Unlike the previously reported primary
EPS, basic EPS excludes the dilutive effects of preferred stock and
stock options. Diluted EPS is similar to the previously reported
fully diluted EPS. EPS amounts for all periods presented have been
calculated in accordance with and, where appropriate, restated to
conform to the requirements of SFAS No. 128.
F-9
<PAGE>
Notes to the financial statements - continued
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 $9,383, $8,003
and $8,647 for the years ended March 31, 2000, 1999 and 1998,
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.
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.
2. RECEIVABLES
Receivables currently due are comprised of the following at March 31,
2000 and 1999:
2000 1999
Trade accounts receivable $ 21,077 $ 22,687
Accounts receivable for royalties 43,170 56,715
Income tax receivable 2,875 --
Current portion of notes receivable from
individuals with annual interest rates
ranging from 6 - 10% 30,772 38,299
97,894 117,701
Allowance for doubtful accounts (2,321) (5,056)
Net current receivables $ 95,573 $ 112,645
Long-term receivables are amounts due in excess of one year and consist
of the following:
2000 1999
Notes receivable from individuals $ 194,447 $ 199,413
Trade accounts receivable -- 2,525
Accounts receivable for royalties 13,566 3,366
208,013 205,304
Allowance for doubtful accounts (26,719) --
Net long-term receivables $ 181,294 $ 205,304
F-10
<PAGE>
Notes to the financial statements - continued
3. PROPERTY AND EQUIPMENT
The major classifications of property and equipment (including
capitalized leases - note 9), at cost, are summarized as follows:
2000 1999
Equipment $ 324,725 $ 310,262
Office furniture and equipment 54,431 54,431
Signs 26,415 26,415
Vehicle 14,980 --
Leasehold improvements 80,708 70,114
Total property and equipment 501,259 461,222
Less: accumulated depreciation and amortization (315,878) (284,777)
Property and equipment - net $ 185,381 $ 176,445
Depreciation expense was $31,101, $26,957 and $22,427 for the years
ended March 31, 2000, 1999 and 1998, respectively. Amortization
expense related to capitalized leases was $3,156, $4,537 and $4,570 for
the years ended March 31, 2000, 1999 and 1998, respectively.
4. NOTES PAYABLE - RELATED PARTY
In connection with the Company's acquisition of the Sugarhouse
franchise referred to in Note 8. 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 called for interest only payments at 9% for five
years, after which the entire amount was due and payable. The
principal amount of the notes was convertible, within the five year
period, to restricted shares of common stock at the rate of $0.50 per
share. During the year ended March 31, 2000, the Company paid the
related party notes in full. The payments were primarily funded by a
borrowing from a financial institution in March 2000 (see Note 6).
5. INCOME TAXES
As of March 31, 2000, the Company has a Federal net operating loss
carryforward of approximately $1,951,000 which is available to offset
future income taxes. The net operating loss expires in the years 2003
through 2006. A deferred tax asset of $141,665 and $147,654 has been
reflected in the financial statements as of March 31, 2000 and 1999.
The tax asset is being carried 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%. There are no net operating loss
carryforwards available for state income tax purposes.
The components of the Company's deferred tax assets at March 31, are as
follows:
2000 1999
Net operating loss carryforwards $ 448,726 $ 448,863
Temporary timing differences 11,261 3,906
Total deferred tax assets 459,987 452,769
Less: valuation allowance (318,322) (305,115)
Net deferred tax assets $ 141,665 $ 147,654
Notes to the financial statements - continued
F-11
<PAGE>
Tax expense reflected in the financial statements is comprised of the
following:
2000 1999 1998
Computed tax expense (benefit), using
applicable federal rates $ (3,569) $ 49,000 $ 19,511
Increase (decrease) in income taxes
resulting from:
Temporary timing differences 3,569 -- (2,411)
Total federal tax -- 49,000 17,100
Tax benefit of net operating loss -- (49,000) (17,100)
Current federal tax -- -- --
State tax expense 65 8,652 3,654
(Increase) decrease in net deferred
tax assets 5,989 43,246 (20,800)
Total income tax expense (benefit) 6,054 51,898 (17,146)
Income tax related to extraordinary item -- (5,322) (3,685)
Income tax provision (benefit) $ 6,054 $ 46,576 $ (20,831)
6. LONG-TERM DEBT
Long-term debt consists of the following:
2000 1999
Promissory note with a financial institution,
due in monthly installments of $2,490,
including interest at 11.36%, through
March 2005. The note is collateralized by
equipment and general intangible assets. $ 113,130 $ --
Promissory note, due in monthly installments of
$546, including interest at 9.95%, through
November 2001. The note is collateralized by
a vehicle. 10,022 --
Total long-term debt 123,152 --
Less: current maturities (23,758) --
Long-term debt, net of current portion $ 99,394 $ --
Annual maturities of long-term debt are as follows:
Years Ending March 31,
2001 $ 23,758
2002 24,298
2003 22,496
2004 25,189
2005 27,411
Total $ 123,152
7. LINE-OF-CREDIT
The Company has a $25,000 bank card line-of-credit with a financial
institution. The line is unsecured, bears interest at 9.99% and
requires minimum payments until paid in full. There was a balance due
of $1,003 at March 31, 2000 which has been included in accounts
payable.
Notes to the financial statements - continued
8. BUSINESS COMBINATIONS AND SALE OF FRANCHISES
F-12
<PAGE>
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. The note is collateralized by the franchise. 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.
During the year ended March 31, 2000, the buyer ceased making the
required monthly payments on the note. Accordingly, an allowance of
$26,719 has been recorded to reflect the estimated net realizable
value in the event the franchise is resold.
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 $204,188. 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, $140,747, 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, 1997:
Year Ended Year Ended
March 31, 1999 March 31, 1998
Revenues $1,310,388 $1,648,639
Net income $ 115,612 $ 90,066
Earnings per share $ 0.05 $ 0.04
Pro forma financial information is not necessarily indicative of
results of operations that would have occurred if the transaction had
occurred on April 1, 1997, or of future results of operations of the
combined companies.
9. LEASE ARRANGEMENTS
a. Capital Leases
The Company leases equipment with an original cost of $28,915 and
accumulated amortization of $14,097 and $10,491 as of March 31, 2000
and 1999, respectively, under the terms of several capital lease
arrangements. The remaining lease has monthly payments of $225
including interest at 20.2% through October 2000.
The following is a schedule of future minimum lease payments:
Years Ending March 31, 2000 1999
2000 $ -- $ 6,064
2001 1,351 1,870
Total minimum lease payments 1,351 7,934
Less: amount representing interest (76) (920)
Present value of net minimum lease payments 1,275 7,014
Less: current portion (1,275) (5,272)
Capital lease obligations,
net of current portion $ -- $ 1,742
F-13
<PAGE>
Notes to the financial statements - continued
b. Operating Leases
The Company leases space under long-term operating leases which
expire in various years through 2005. Two 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 $65,150, $71,627 and $105,272 for the
years ended March 31, 2000, 1999 and 1998.
Future minimum rental payments, excluding subleases, are as follows:
Years Ending March 31,
2001 $ 61,005
2002 61,005
2003 54,300
2004 32,198
2005 32,993
Thereafter 11,130
Total lease payments $ 252,631
The Company acts as sublessor with certain franchises on some
operating leases and as such is contingently liable in the event
that the sublessees do not fulfill their obligation.
10. PREPETITION LIABILITIES
The 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
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.
11. PREFERRED STOCK
a.The 600,000 Preferred A shares were converted to common shares during
the year ended March 31, 2000 on a basis of one share of preferred
for one share of common.
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, 2000. The Preferred B shares are
convertible into one share of common stock for two shares of
Preferred B stock.
F-14
<PAGE>
Notes to the financial statements - continued
12. 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, 2001. No options were exercised during
the years ended March 31, 2000, 1999 and 1998.
13. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available
to common shareholders (the numerator) by the weighted-average number
of common shares outstanding (the denominator). The computation of
diluted EPS is similar to basic EPS, except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the potentially dilutive common shares had
been issued.
The numerator in calculating both basic and diluted EPS for each year
is reported income before extraordinary item, extraordinary item, and
net income, respectively. The denominator is based on the following
weighted-average number of common shares:
Year Ended Year Ended Year Ended
March 31, 2000 March 31, 1999 March 31, 1998
Basic 1,548,525 1,248,525 1,248,525
Diluted 2,097,156 2,097,156 2,097,156
The difference between basic and diluted weighted-average common shares
results from the assumption that both Class A and Class B preferred
stock were converted into common stock.
The 95,000 exercisable stock options at March 31, 2000, 1999 and 1998
were excluded from the computation of diluted EPS because the options'
exercise price was greater that the average market price of the common
shares, and therefore, the effect would be antidilutive.
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
and $11,305 for the years ended March 31, 1999 and 1998,
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.
b.As discussed in notes 4 and 8.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. RETIREMENT PLAN
The Company has 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 $10,500 for 2000, $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 $1,575, $1,752, and $3,102 to the plan, net of
approximately $1,000 in fees, for the years ended March 31, 2000, 1999
and 1998, respectively.
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Notes to the financial statements - continued
16. ADVERTISING
Advertising costs, included in selling, general and administrative
expenses, are expensed when incurred and amounted to $43,797, $37,184
and $47,865 for the years ended March 31, 2000, 1999 and 1998
respectively.
17. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's sales are to customers residing in
the Rocky Mountain area. Sales can vary in relation to the economic
conditions of this area.
As disclosed in note 9, the Company acts as sublessor on some operating
leases and is contingently liable in the event that the sublessees do
not make payment. The Company has several options for recourse from
the sublessees if this were to occur.
The Company maintains several bank accounts at two financial
institutions. Accounts at an institution are insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000. Cash was within
insured limits as of March 31, 2000.
18.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.
19. SUBSEQUENT EVENTS
a.In May 2000, the Company obtained a $50,260 line of credit with a
financial institution. The line is secured with equipment, bears
interest at a base rate plus 3% and is due on demand.
b.In May 2000, the Company obtained a promissory note for $34,542 for
leasehold improvements. The terms of the note require monthly
installments of $772, including interest at 12.04%, through May 2005.
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