U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) or THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to _________.
Commission file number 0-21996
JAKE'S PIZZA INTERNATIONAL, INC.
[Name of small business issuer in its charter]
Delaware 36-3882273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 Official Road, Addison, IL 60101
(Address of principal executive offices) (Zip Code)
Issuer telephone number, including area code 630-543-0022
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value NASDAQ
Securities registered under Section 12(g) of the Act:
None
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
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]
State issuer's revenues for its most recent fiscal year: $2,903,906
The aggregate market value of the registrant's Common Stock, $.01
par value, held by non-affiliates of the registrant as of December 26,
1996, was $588,270 based on the closing price of $.50 on that date on
the National Association of Securities Dealers Automated Quotation
System. As of December 26, 1996, 1,176,540 shares of the registrant's
Common Stock, $.01 par value, were outstanding.
<PAGE>
PART I
Item 1. Description of Business.
General
Jake's Pizza International, Inc. ("Company") was incorporated in
Delaware on April 26, 1993 and is a successor by merger, effective on
May 27, 1993, of an Illinois corporation known as "Jake's International,
Inc." incorporated on April 25, 1974. As used in this Annual Report,
unless the context otherwise requires, the term "Company" includes
Jake's Pizza International, Inc., a Delaware corporation, and its
predecessor.
The Company operates and franchises pizza restaurants known as
"Jake's Pizza" restaurants which specialize in the sale of pizza,
utilizing what the Company believes are distinctive recipes, ingredients
and methods of food preparation. Certain Jake's Pizza restaurants may
also offer other food selections. Most of the ingredients utilized at
Jake's Pizza restaurants are privately-labeled. The majority of the
Jake's Pizza restaurants are carry-out and delivery facilities, with
limited seating. Certain Jake's Pizza restaurants, however, are full-
service, sit-down restaurants, with dining facilities, which also may
offer carry-out and delivery services.
The Company believes an indicator of its potential is that for over
30 years it has competed effectively in the extremely competitive
Chicago area market. The first Jake's Pizza restaurant was opened in
1961. The first Jake's Pizza restaurant franchise was opened in 1965.
By 1973, there were 15 Jake's Pizza franchise restaurant units operating
in the Chicago metropolitan area. In 1988 there were 17 Jake's Pizza
franchise restaurants in operation. Since then, the Company
successfully implemented a complete restructuring of its franchise
program and system. The number of Jake's Pizza restaurants has tripled
in those eight years. As of September 30, 1996, there were 54 Jake's
Pizza restaurants in operation, of which two were Company-owned and
operated and 52 were franchises.
Developments During Fiscal Year 1996
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on January 24, 1996 regarding the resignations of
James J. Banks, its then President, Chief Executive Officer and
director, Samuel V.P. Banks, its then Vice-Chairman of the Board of
Directors, Secretary, Treasurer and director, and two other directors.
After such resignations, John S. "Jake" Flowers, the Chairman of the
Board of Directors, assumed the additional positions of President and
Chief Executive Officer.
As part of the Severance, Consulting, Non-Compete Agreement and
Release in Full Mr. James J. Banks will continue to receive biweekly
payments (in accordance with his employment agreement) through June 30,
1997 at the rate of his then current annual salary of $50,000. Any
increases, bonuses and stock options have been cancelled under his
employment agreement. Additionally, the consulting agreement with
Samuel V.P. Banks, a prior officer and director, will continue to be in
effect. Samuel V.P. Banks five year consulting agreement continues
through June, 1998, and provides initial compensation of $40,000 with
annual increases of $2,000.
<PAGE>
During the fiscal year ended September 30, 1996, the Company opened
six new franchised Jake's Pizza restaurants. The Company also acquired
three existing Jake's Pizza restaurants from franchisees and sold them
to new franchisees. The Company sold its one Company-owned and operated
Jake's Pizza restaurant to a franchisee during the year. Ten franchised
Jake's Pizza restaurants were closed during the year. Additionally, two
Company-owned stores were opened. The master franchise agreement in
Fort Lauderdale, Florida was terminated. Of the 52 Jake's Pizza
restaurants franchised, 41 are located in Illinois (a majority of which
are in the Chicago metropolitan area), six are in the Phoenix, Arizona
metropolitan area, one is in the Charlotte, North Carolina metropolitan
area, one is in the Las Vegas, Nevada metropolitan area, one is in Fort
Lauderdale, Florida and another is in Pembroke Pines, Florida, and one
is in Merrillville, Indiana. The Company-owned Jake's Pizza restaurants
are located in Chicago, Illinois and Elk Grove, Illinois.
Since September 30, 1996, one Jake's Pizza franchise was closed,
one was sold to new ownership who elected not to remain part of the
Jake's Pizza chain, and a two franchises transfered ownership. As of
December 27, 1996, there were a total of 48 franchised Jake's Pizza
restaurants in operation.
The Company currently has agreements with three additional
franchisees which will result in the opening of three Jake's Pizza
franchised restaurants in the second quarter of fiscal 1997. Of these,
two are in the Chicago metropolitan area and one is in the St. Louis,
Missouri metropolitan area.
The Company offered certain food products, beverages, supplies and
promotional materials for sale to the franchisees until June 16, 1996
when it discontinued its distribution business. The Company signed an
agreement in late May, 1996 with a local distributor to supply the
Company's franchisees with these products beginning June 17, 1996. The
franchisees are not, however, required to purchase product from the
local distributor. The Company receives a rebate from the local
distributor for all products sold to the Company's franchisees.
On December 27, 1993, the Company reached a series of agreements
with Vanna White, a nationally recognized television personality, and
her related company. Under the terms of the agreements, Ms. White
became the Company's spokesperson and makes appearances on the Company's
behalf. Additionally, a wholly-owned subsidiary of the Company entered
into a joint-venture agreement with affiliates of Ms. White to open a
minimum of eight Jake's Pizza restaurants over the initial four year
term of the agreements. The restaurants will be funded 50% by the
Company's subsidiary and 50% by affiliates of Ms. White. Profits and
losses will be divided equally. The Company opened one joint venture
store in March, 1996 and closed the same store six months later.
As of September 30, 1996, the Company and Ms. White's affiliate
have verbally agreed to terminate their joint venture agreement and
modify the spokesperson agreement. The tentative terms of the new
agreement would require Ms. White to continue to serve as the Company's
national spokesperson through December 31, 1997 and Ms. White and her
affiliate will receive the remaining 55,000 shares that were to be
issued under the old agreement.
<PAGE>
The Company's goal is to develop a national presence in the pizza
restaurant market by building on the Company's experience and
reputation. During the upcoming fiscal year ending September 30, 1997,
the Company anticipates opening approximately twelve to sixteen
franchised restaurants. The timing of these planned openings is subject
to various factors, including locating satisfactory sites, negotiating
leases and franchise agreements.
Following is a listing of the 48 Jake's Pizza restaurants and the
markets they serve as of December 27, 1996:
Company-Owned
CHICAGO
METROPOLITAN AREA
Elk Grove
Chicago (Lincoln Park)
Franchised Restaurants
CHICAGO METROPOLITAN AREA
Algonquin Lake Zurich MERRILLVILLE, IN
(2 locations) Libertyville Merrillville
Arlington Heights Lisle
Bartlett Mt. Prospect PHOENIX
Bensenville Naperville METROPOLITAN AREA
Bolingbrook (2 locations) Chandler
Buffalo Grove North Aurora Gilbert
Carol Stream Northbrook Phoenix
Chicago (Evergreen Oswego (2 locations)
Park) Palatine Scottsdale
Crystal Lake Rolling Meadows Tempe
Des Plaines Schaumburg
East Dundee (2 locations) FLORIDA
Elgin St. Charles Pembroke Pines
Evanston Waukegan
Glendale Heights Westchester CHARLOTTE, NC
Glenview Wheaton METROPOLITAN AREA
Grayslake Winfield Matthews
Hoffman Estates Woodstock
LAS VEGAS
NORMAL, IL METROPOLITAN AREA
Normal Henderson
<PAGE>
Business Expansion
The Company plans to develop, through a combination of franchised
restaurants, joint ventures and other business arrangements, Jake's
Pizza restaurants throughout the United States, Canada and, possibly,
Europe. The Company's revised business plan contemplates developing
approximately sixteen franchises in the next nine to twelve months and
ten to thirteen franchised franchised restaurants per year. However,
the specific rate at which the Company is able to open new restaurants
will be determined by its success in locating satisfactory sites and
attracting qualified franchisees.
With existing hubs of operation in Chicago, Illinois and Phoenix,
Arizona, the immediate goal of the Company is to garner increased market
share by expanding from these two hubs. The Company believes its
development plan can best be met by establishing area development
through master franchise agreements. These agreements will facilitate
the Company's growth in new geographical areas. There is currently a
master franchise agreement in place in Charlotte, North Carolina. As
new geographic areas are developed, management believes additional
franchisees will be attracted to further expand the Company's
operations.
The Company considers the location of a restaurant to be critical
to its long-term success and devotes significant efforts to the
investigation and evaluation of potential sites. The site selection
process involves an evaluation of a variety of factors, including
demographics such as target population density and household income
levels; specific site characteristics such as visibility, accessibility
and traffic volume; proximity to activity centers such as prime urban
office or retail shopping districts, suburban shopping areas and office
complexes; parking availability; and potential competition in the area.
The Company's personnel and prospective franchisee inspect the sight and
then the Company approves the site for each franchised restaurant prior
to the execution of a lease. The opening of new restaurants is
contingent upon, among other things, locating satisfactory sites,
negotiating favorable leases, completing construction and securing
appropriate government permits and approvals. Once space has been
leased and made available to the Company, approximately 45 to 75 days
are typically required to complete construction, obtain necessary
licenses and approvals and open the new restaurant.
Franchise Operations
As of September 30, 1996, the Company had 52 franchised Jake's
Pizza restaurants located in Illinois, Arizona, Florida, Indiana, and
Nevada. Franchises are generally granted on a unit-by-unit basis,
rather than by territory. The Company is in continual discussions with
existing and prospective franchisees and expects to grant additional
franchises to qualified applicants with restaurant-related operating
experience and requisite financial resources.
The Company currently charges a uniform, non-recurring and non-
refundable initial franchise fee of $15,000, payable upon execution of a
franchise agreement. The Company applies the initial franchise fee to
defray its costs of obtaining and screening prospective franchisees, the
costs of providing training and supervision, both initially and
subsequently, and to increase the working capital funds of the Company.
<PAGE>
The Company may waive or reduce the initial franchise fee if it is
fully satisfied that all of the following conditions are met: (1) the
Company does not participate in the site selection; (2) the restaurant
requires no construction supervision; (3) the Company does not directly
participate in the development of the restaurant; (4) the franchisee
does not require any pre-opening training or assistance; and (5) the
franchisee has had previous experience in a managerial capacity of a
Jake's Pizza restaurant and is familiar with the approved operating
procedures as set forth by the Company.
Franchisees located in Illinois must pay to the Company a royalty
and service fee of 4% of gross sales payable by the tenth day of each
month based on gross sales of the previous month. Four Illinois-based
franchisees unrelated to the Company have franchise agreements which do
not conform to the Company's standard franchise agreement. Certain
nonconforming terms of these franchise agreements include an indefinite
duration, lower royalty and service fees and a waiver of the advertising
and promotion contribution. Representatives of the Company are
attempting to conform the terms of these franchise agreements as they
come up for renewal.
The royalty and service fee has been waived for one Illinois
franchise pursuant to an amendment to that franchise agreement. In
consideration for such waiver, the franchisee of that franchise, which
is a corporate affiliate of Mr. John S. "Jake" Flowers, the Company's
President, Chief Executive Officer and Chairman of the Board, has agreed
to assist the Company, subject to the Company's oversight and
supervision, in providing training to certain franchisees as designated
by the Company. Such training will be conducted at no expense to the
Company. This arrangement is not available to any other franchisees.
The royalty and service fee for franchises sold in states other
than Illinois may be different than the royalty and service fee for
franchises sold in the State of Illinois, however, the Company intends
to enter into franchise agreements on substantially similar terms as
those terms contained in franchise agreements used in the State of
Illinois.
The Company estimates the total initial investment required for the
establishment of a franchised carry-out and delivery Jake's Pizza
restaurant to be in the range of $115,300 to $172,500, including the
$15,000 initial franchise fee. The Company does not normally directly
offer financing to franchisees. During fiscal 1996, the Company did
finance a few selected franchisees, however, this was due to some
extenuating circumstances. The Company no longer provides financing to
any new franchisees. There are no other direct or indirect payments in
conjunction with the purchase of the franchise. The Company does not
require that franchisees purchase or lease from the Company or its
designee any goods, services, supplies, fixtures, equipment, inventory
or real estate relating to the establishment or operation of their
businesses under the franchise agreement. Each of the Company's current
franchisees, however, acquires the goods, services, supplies and other
items relating to the establishment and operation of a Jake's Pizza
franchise restaurant from the Company's approved distributors, and
management anticipates that each franchisee will continue this policy.
<PAGE>
The Company will furnish to franchisees prototype or protostyle
plans and specifications for a Jake's Pizza restaurant, reflecting the
Company's requirements for dimensions, exterior design, interior design
and layout, image, building materials, fixtures, equipment, furniture,
signs and decor. The franchisee is responsible for developing the
restaurant; however, the Company will provide such consultation in
connection with the development of the restaurant as the Company deems
appropriate.
Each franchisee must construct all required improvements necessary
to develop a Jake's Pizza restaurant in compliance with the plans and
specifications approved by the Company and all applicable ordinances and
building codes. Additionally, each franchisee must obtain all necessary
construction and business permits and licenses to operate a Jake's Pizza
restaurant, as well as establish accounting and inventory controls in
conformance with the requirements prescribed by the Company.
The Company's management believes that the reputation and goodwill
of Jake's Pizza restaurants is based upon, and can be maintained only
by, the sale of distinctive, high quality products and services.
Therefore, a Jake's Pizza restaurant must use only such products,
materials and supplies of any kind, including, but not limited to,
ingredients for the preparation of food products and beverages, plates,
cups, utensils, uniforms, menus, forms, packaging materials and labels,
and will offer for sale at the restaurant only such food products and
beverages that conform to the Company's specifications and quality
standards and/or are purchased from suppliers approved by the Company.
The Company may from time to time modify the list of approved brands
and/or suppliers, and a franchisee may not, after receipt in writing of
such modification, reorder any brand or reorder from any supplier which
is no longer approved. The Company has an approved distributor in the
Phoenix, Arizona area, and has arranged with its suppliers to make the
same goods available to the approved distributor that are available to
the Company.
A Jake's Pizza franchise is granted for a specific location which
must be acceptable to the Company. Although in some instances the
Company may locate an acceptable site for franchisees, the Company is
not obligated to do so. The Company's personnel will inspect and
approve the proposed site of each Jake's Pizza restaurant prior to the
execution of a lease by a franchisee. The Company's franchise
agreement does not grant a franchisee any territorial rights. The
franchise is granted for the location and premises specified in the
franchise agreement and the relocation of the restaurant is subject to
the prior written approval of the Company. The granting of additional
franchises for Jake's Pizza restaurants and the location of those
franchises is at the Company's sole discretion. Certain states'
franchise laws presently, or may in the future, impose restrictions on
the Company's ability to grant additional franchises within a certain
distance from an existing franchise.
<PAGE>
Prior to the opening of the restaurant, the Company will furnish,
and the franchisee and proposed manager of the restaurant must attend,
an initial training program on the operation of a Jake's Pizza
restaurant. The training program consists of consultations at the
Company's headquarters and on-the-job training at an operating Jake's
Pizza restaurant. The training program is generally conducted two to
four weeks prior to the scheduled opening of the restaurant and lasts
approximately two weeks. The Company advises franchisees from time to
time of operating problems which the Company discovers during the
Company's periodic inspections of the franchises.
Purchasing
The Company offered certain food products, beverages, supplies and
promotional materials for sale to the franchisees until June 16, 1996
when it discontinued its distribution business. The Company signed an
agreement in late May, 1996 with a local distributor to supply the
Company's franchisees with these products beginning June 17, 1996. The
Company receives a rebate from the local distributor for all products
sold to the Company's franchisees.
The Company still negotiates directly with suppliers for all food
ingredients unique to the Company's which are utilized in the
restaurants in order to ensure uniform quality and adequate supplies to
comply with Company quality standards and to obtain prices more
competitive than those available to individual restaurants. These
products are stored with the distributor located in Carol Stream,
Illinois and are sold to franchisees on an as-needed basis. The
products are also made available to the Company's approved distributors
in other geographical locations. Certain of the ingredients used in the
preparation of a Jake's pizza are manufactured for and supplied to the
Company by certain suppliers, although no exclusive supply arrangements
have been entered into by the Company. The Company believes that should
relations with these various suppliers be terminated, the Company will
be able to enter into arrangements with similar companies to provide the
necessary ingredients used in the preparation of a Jake's pizza without
impacting operations. In addition, franchisees are free to obtain food
ingredients and beverage products from any source whose products meet
the Company's specifications.
Advertising and Promotion
The Company has established and administers an advertising fund for
those advertising and marketing programs as the Company, in its sole
discretion, deems appropriate. Franchisees must contribute to the
Company's advertising fund non-refundable amounts of 2% of sales payable
by the tenth day of each month based on gross sales of the previous
month.
The Company relies principally on local print and direct mail
advertising to attract its target market. Additionally, the Company
prepares the advertising materials and also produces menus and
promotional programs for both franchised and Company-owned restaurants.
<PAGE>
The Company has currently suspended, for a period of six months,
the monthly advertising fee that most of the franchisees are to
contribute to the advertising fund. This suspension of advertising
payments is expected to end in February, 1997 at which time management
will reevaluate the suspension of advertising fees. At the present
time, management believes that franchisees are currently in a better
position to use these advertising funds locally to promote and grow
their businesses. The management of the Company, however, still
monitors the types and frequency of the franchisees advertising. The
suspension of advertising fees does not impact the cash flows of the
Company's operations since any amounts collected for the advertising
fund would be used only to finance additional advertising.
In December 1993, the Company entered into a series of agreements
with entertainer Vanna White and her affiliates. Included in these
agreements is a spokesperson agreement. Under the terms of this
agreement, Ms. White will be a national spokesperson for the Company,
and will make personal appearances at such events as conventions,
national and regional meetings and other events as mutually agreed upon.
As of September 30, 1996, the Company and Ms. White's affiliate have
verbally agreed to modify the spokesperson agreement whereby Ms. White
will continue to serve as the Company's national spokesperson through
December 31, 1997. Under the tentative terms of the new agreement Ms.
White and her affiliate will receive the remaining 55,000 shares that
were to be issued under the old agreement.
Competition
The Jake's Pizza restaurants face intense competition for both
potential locations and customers from numerous existing and potential
future restaurants in their respective areas. Many competitors have
similar or more diverse menus, and many have substantially greater
financial resources, personnel, operating experience and, in some
instances, better facilities than those of the Jake's Pizza restaurants.
These restaurants include, among many others, Pizza Hut, Little Caesars
International and Domino's.
Trademarks
The Company has obtained 11 trademark registrations with the State
of Illinois for seven different trademarks. The Company has obtained
three registrations on the Principal Register of the United States
Patent and Trademark Office for marks which are licensed to the
franchisees pursuant to the franchise agreements. The Company has
applied on the Principal Register of certain of the other marks.
Government Regulation
Jake's Pizza restaurants are subject to the jurisdiction of a
variety of regulatory authorities, including, without limitation,
federal, state, county and city agencies administering laws and
regulations relating to health, labor, taxation and the sale of
alcoholic beverages. There can be no assurance that the licenses and
permits for the operation of the Jake's Pizza restaurants can be
obtained or maintained. The Jake's Pizza restaurants are also subject
to periodic inspection by their respective municipal Departments of
Health.
<PAGE>
The Company is required to file its franchise offering document in
certain states in which it presently offers or intends to offer
franchises to prospective franchisees. The Company will be required to
update its franchise offering disclosure document to reflect the
occurrence of material events. The occurrence of any such events may
from time to time require the Company to stop offering and selling
franchises until the document is so updated. There can be no assurance
that the Company will be able to update its disclosure document or
become registered in certain states consistent with its expansion plans,
that it will not be required to stop offering and selling franchises or
that the Company will be able to comply with existing or future
franchise regulations in any particular state, any of which could have
an adverse effect on the Company. The Company will, however, make every
effort to timely update its documents to minimize any potential stoppage
of offering or selling franchises.
The Company is also subject to a number of state laws that regulate
certain substantive aspects of the franchisor-franchisee relationship,
such as termination, cancellation or non-renewal of a franchise (e.g.,
requirements that "good cause" exist as a basis for such termination and
that a franchisee be given advance notice of and a right to cure a
default prior to termination) and may require the franchisor to deal
with its franchisees in good faith and prohibit interference with the
right of free association among franchisees. Franchise relationships
are also subject to the Federal Trade Commission regulations relating to
disclosure requirements in the offer and sale of franchises.
Legislation has been introduced in Congress which, if enacted into law,
would require national registration of franchise offerings. This will
increase the cost of franchise operations and will affect the
franchisor-franchisee relationship.
The Company is also subject to federal and a substantial number of
state laws regulating the offer and sale of franchises. Such laws
impose registration and disclosure requirements on franchisors in the
offer and sale of franchises. These laws often also apply substantive
standards to the relationship between franchisor and franchisee and
limit the ability of a franchisor to terminate or refuse to renew a
franchise.
Employees
As of September 30, 1996, the Company had 21 employees, of which
one was an executive, three were corporate personnel and three were
field personnel or restaurant managers. The remaining employees are
restaurant personnel, many of whom are part-time. None of these
employees is covered by a collective bargaining agreement. The Company
believes that its labor relations are adequate. In addition, there are
approximately 1,200 individuals employed within the Jake's Pizza
franchise system. Each franchisee, and not the Company is responsible
for the payment of salaries and benefits to those individuals employed
by the franchisee.
<PAGE>
Item 2. Description of Property.
Prior to its initial public offering, the Company leased its
principal corporate offices from an Illinois land trust controlled by
Messrs. John S. "Jake" Flowers and James J. Banks. Concurrent with the
closing of the Company's initial public offering on July 1, 1993, the
Company purchased its corporate headquarters for approximately $900,000,
which was equal to its then current appraised value, and terminated the
lease. The corporate headquarters is located at 16 Official Road,
Addison, Illinois, and is a 14,000 square foot building consisting of
3,600 square feet of office space and 10,400 square feet of warehouse
space. At the time of its acquisition by the Company, the property was
encumbered by three liens, one of which is a trust deed and the other
two are mortgages. One lien secures payment of a promissory note in the
original amount of $677,600, which was obtained from an unaffiliated
lender, which bears interest at a rate of 8% per annum and matures on
January 1, 2000. The Company is responsible for making monthly payments
of principal and interest equal to $5,667.72. The property is also
encumbered by a second mortgage securing payment of a promissory note
held by Mrs. Dorothy A. Banks, the wife of Samuel V.P. Banks and the
mother of James J. Banks. This note is in the amount of $116,000, bears
interest at a rate of 8% per annum, requires quarterly payments
representing partial payments of interest only of $2,320, with a final
payment of all accrued and unpaid interest and all unpaid principal on
December 28, 1997. The property was also security for a mortgage held
by Messrs. Flowers and James J. Banks. This mortgage secured payment of
a promissory note which was in the amount of $106,400, bore interest at
the rate of 7% per annum, required monthly payments of interest only of
approximately $620 and matured on January 2, 1994. The Company paid
that obligation and is current on the other obligations secured by the
Company's headquarters building. It is estimated that real estate taxes
for 1996 for the building will be approximately $19,000. The property
and casualty insurance for the property is approximately $3,700. The
building was completed in December 1992 and, therefore, the maintenance
to date has been low.
As of December 27, 1996, the Company has a signed offer
for the cash sale of its current office and warehouse facility in
Addison, Illinois. The Company sold the building for $775,000. Any
excess proceeds from the sale of the building, after paying the
mortgages, will be used to relocate to new leased office space. The
Company has signed a one year lease for a 2,480 square foot office, with
monthly lease payments of approximately $2,790, located at 5999 New
Wilke Road, Suite 205-206 Rolling Meadows, Illinois, 60008. The closing
date for the sale of the building is tentatively scheduled for January
3, 1997. The Company plans to begin operating out of its new offices by
January 4, 1997.
<PAGE>
All Company-owned restaurants are located in leased spaces. The
leases for Company-owned restaurants typically have initial terms of
five years with certain renewal options and provide for a base rent plus
real estate taxes, insurance and other expenses, plus additional
percentage rents based on revenues of the restaurants. The Company
entered into a total of 17 leases for real estate; 14 of the leases are
accompanied by subleases to franchisees, two are for Company-owned
restaurants, and one is for the closed Placentia, California operation.
The Company is in the process of negotiating out of the Placentia,
California lease. The restaurant leases sub-leased to the franchisees
are under the same terms as the original lease. Should a franchisee
default on its payment obligation to the Company, the Company would be
responsible for the lease obligation. The remaining terms of these
leases range up to five years, with the last lease expiring in 2000.
Item 3. Legal Proceedings.
As of December 23, 1996, the Company is not involved in any
material litigation or proceeding, other than that described herein, and
is not aware of any such proceedings threatened against it.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of its stockholders was held on April
30, 1996. There were two proposals to be voted upon. The first was the
election of directors for the year, and the second was the approval of
Arthur Andersen LLP as the Company's auditors.
There were 726,680 shares represented at the meeting representing
62% of the outstanding shares of the Company. Approximately 98% of the
shares represented voted to elect the Company's slate of directors, and
approve Arthur Andersen LLP as the Company's auditors.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Company's Common Stock, $.01 par value, is listed on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") under the symbol "JAKE". The table sets forth the range of
high and low sales prices on the NASDAQ for the year ended September
30, 1996:
Common Stock
Price
High Low
Fiscal Year Ended September 30, 1996
First Quarter 2 1/2 1 1/2
Second Quarter 2 1/2 1
Third Quarter 2 1/4 5/8
Fourth Quarter 2 1/4 1/2
Number of Stockholders
As of September 30, 1996, there were approximately 400 beneficial
owners of record of the Company's Common Stock.
Dividends
The Company has not paid any cash dividends on its Common Stock and
does not anticipate paying cash dividends on the Common Stock in the
foreseeable future. The Company's policy is to retain earnings to
finance the development and growth of the Company. The Board of
Directors may reconsider this policy from time to time in light of
conditions then existing, including the Company's earnings performance,
financial condition and capital requirements.
Common Stock
The Company is authorized to issue 9,000,000 shares of Common
Stock, par value $0.01 per share, of which 1,176,540 shares are issued
and outstanding. The outstanding shares are fully paid and
nonassessable. Each common stockholder of record is entitled to one
vote per share on all matters voted upon by the Company's stockholders.
Common stockholders have no preemptive, redemption or cumulative voting
rights. In the event of liquidation, the common stockholders are
entitled to share ratably in any assets of the Company remaining after
payment in full of creditors and preferred stockholders to the extent of
any liquidation preference. Although the Company does not currently
anticipate paying dividends in the foreseeable future, holders of shares
of Common Stock will be entitled to share ratably in dividends, if any,
declared on the Common Stock by the Board of Directors of the Company
out of funds legally available for such purpose.
<PAGE>
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred
stock, par value $0.01 per share. The Board of Directors is authorized
to issue Preferred Stock in one or more series and to fix the number of
shares included in such series, and the designations, relative powers,
preferences, rights, qualifications, limitations or rights and terms of
redemptions, liquidation preferences and other terms. Issuance of such
Preferred Stock could adversely affect the voting and other rights of
the holders of Common Stock and could, in certain circumstances, be
viewed as an anti-takeover measure. There is no Preferred Stock
currently outstanding.
<PAGE>
<TABLE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
Selected Financial Data
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income statement data:
REVENUES:
Distribution sales $ 1,993,497 $3,086,018 $2,593,032 $2,364,464 $2,173,035
Franchise royalties 351,410 385,223 346,474 326,687 219,377
Advertising royalties 102,767 135,400 144,960 110,411 46,472
Franchise fees 215,500 161,000 105,000 68,500 184,500
Rebate income 40,172
Store sales 200,560 532,083 825,515 106,782 0
Other 25 2,796 67 6,779
Total $ 2,903,906 $4,299,749 $4,017,777 $2,976,911 $2,630,163
COSTS AND EXPENSES:
Costs of distribution sales $ 1,717,333 $2,593,627 $2,190,546 $1,950,485 $1,829,048
Costs of store sales 202,360 382,928 625,160 72,664
Store operations 139,287 234,840 202,464 17,960
Distribution and franchise
operations 75,976 89,153 94,413 64,961 59,611
Selling, general and
administrative 1,623,205 1,553,894 1,664,397 843,352 650,527
Loss on impairment of assets 696,085
Total $ 4,454,246 $4,854,442 $4,776,980 $2,949,422 $2,539,186
OPERATING INCOME (LOSS) $(1,550,340)$ (554,693)$ (759,203)$ 27,489 $ 90,977
NET INCOME (LOSS) $(1,953,136)$ (743,017)$ (567,221)$ 9,125 $ 56,340
Earnings (loss) per share ($1.69) ($0.70) ($0.54) $0.02 $0.15
Weighted average shares
outstanding 1,153,623 1,066,540 1,058,072 532,931 371,540
Earnings (loss) per share -
assuming full dilution ($1.59) ($0.60) ($0.48) $0.02 $0.15
Weighted average shares
outstanding - assuming
full dilution 1,231,540 1,231,540 1,181,822 532,931 371,540
Balance Sheet Data:
Working Capital $ (325,188)$ 16,878 $ 935,579 $2,132,969 $ 83,652
Total assets 1,944,703 4,081,991 4,552,331 4,023,487 493,431
Total liabilities 1,498,292 2,328,090 2,330,413 1,489,951 368,020
Long-term obligations 749,184 1,080,211 1,316,378 968,042 67,453
Shareholders' equity 350,765 1,753,901 2,221,918 2,533,536 125,411
</TABLE>
<PAGE>
Fiscal Year 1996 Compared to Fiscal Year 1995
Total revenues for the fiscal year ending September 30, 1996
decreased $1.4 million or 32.5% from the prior year. The decrease in
revenues was primarily attributable to the discontinuance of the
distribution business on June 16, 1996 (Note 12) as part of the
reorganization of the Company. Distribution sales, which primarily
consisted of ingredients for the preparation of food products and
supplies necessary to operate a Jake's Pizza restaurant, also decreased
due to price reductions in certain products to remain competitive with
much higher volume distributors. The Company currently has an agreement
with a local distributor to provide these products to the franchisees
(Note 1). The Company receives a rebate on the sales to the franchisees
from the distributor which is reflected as rebate income in the
Consolidated Statements of Operations
Revenues also decreased due to lower store sales, $200,560 in
fiscal 1996 versus $532,083 in fiscal 1995, from fewer Company-owned
restaurants operating during fiscal 1996 compared to the prior year.
The Company only operated one restaurant until May 31, 1996, until it
was sold to a new franchisee, and began operating two Company-owned
restaurants in late July, 1996.
Service revenues were also lower in fiscal 1996. The decrease in
royalty revenues was due to fewer operating franchises in fiscal 1996
compared to fiscal 1995. Royalty revenue is also affected, to a lesser
extent, by the timing of the opening and closing of franchises during
the year. Additionally, franchise and advertising royalties were also
negatively impacted due to a significant number of franchises which are
unable to meet their current obligations due to cash flow constraints
from a weak operation. The decrease in royalties were offset in part by
the increase in franchise fees which was primarily due to the
recognition of two master franchise agreements in Florida and North
Carolina. The Florida agreement was subsequently terminated.
Management has suspended, for a period of six months, the current
monthly advertising fee that most of the franchisees are to contribute
to an advertising fund beginning with September, 1996 advertising fee
(Note 12). The suspension of advertising fees does not impact the cash
flows of the Company's operations since any amounts collected for the
advertising fund would be used only to finance additional advertising.
The Company's total cost of sales decreased 35.5% or $(1.06)
million, to $1.92 million in fiscal 1996 compared to $2.98 million in
fiscal 1995. This decrease was also primarily attributable to the
discontinued distribution business in June, 1996. The cost of
distribution sales as a percentage of distribution sales increased to
86.1% in fiscal 1996 compared to 84.0% in fiscal 1995. The increase, as
a percentage of distribution sales, reflected the rising prices for
cheese, pork and paper products while the Company tried to remain
competitive in its distribution business with the higher volume
distributors.
<PAGE>
Operating and administrative expenses, before the loss on
impairment of assets, decreased slightly but increased as a percentage
of total revenues to 63.3% in fiscal 1996 compared to 43.7% in fiscal
1995. This increase as a percentage of revenue is primarily due to a
charge for uncollectible accounts and notes receivable of approximately
$262,000 in fiscal 1996 and to a lesser extent increases in professional
and legal fees related to the reorganization of the Company and the
related severance, consulting and non-compete agreement with the
Company's prior President, James J. Banks. These increased expenses
were offset by payroll reductions in management and in the distribution
business as well as the elimination of additional expenses associated
with the support of the distribution business.
The loss on impairment of assets in fiscal 1996 reflects the verbal
agreement by the Company, Ms. Vanna White and her affiliate to terminate
their joint venture agreement and modify the spokesperson agreement, as
more fully explained in Note 3, Deferred Contract Costs and Contractual
Obligations, in the Notes to the Consolidated Financial Statements.
The increase in other income and expense in fiscal 1996 is
primarily due to the settlement of a lawsuit with a former franchisee in
Arizona, the loss on the sale of two Company-owned stores to
franchisees, one of which is a director of the Company's current Board
of Directors, and the loss on the sale of the current office/warehouse
(Note 12).
The net loss for fiscal 1996 was $1,953,136, or a loss of $1.69 per
share compared to a loss a year earlier of $743,017, or a loss of $.70
per share. This loss for fiscal 1996 reflects charges to income of
$696,085 for the loss on impairment of assets, $261,621 in uncollectible
accounts and notes receivable reserves, $207,452 for losses on the sale
of assets and $131,992 for settlement expenses. These charges to income
are primarily one time charges relating to the reorganization and
downsizing of the Company. Management believes that it has positioned
the Company with plans that will grow the Company while significantly
reducing the losses of the Company.
Fiscal Year 1995 Compared to Fiscal Year 1994
Distribution sales, which consist of the ingredients involved in
the preparation of the food products and other supplies necessary to
operate a Jake's Pizza restaurant, increased $492,986, or 19.0%, from
$2,593,032 for the year ended September 30, 1994 to $3,086,018 for the
year ended September 30, 1995. The increase in distribution sales was
due primarily to the addition of seven new franchises during the year
ended September 30, 1995. Distribution sales increased for the eighth
consecutive year.
Sales for the Company-owned Jake's Pizza restaurants decreased
$293,432, or 35.6%, from $825,515 in fiscal 1994 to $532,083 in fiscal
1995. This was due to the existence of fewer Company owned Jake's
Pizza restaurants for most of the fiscal year.
<PAGE>
The Company's service revenues (which includes franchise royalties,
franchise fees, and advertising royalties) increased $85,189, or 14.3%,
from $596,434 for fiscal 1994 to $681,623 for fiscal 1995. This was due
to the opening of fourteen new franchises during fiscal 1995 and from
the full year's contributions of the seven new franchises opened in
fiscal 1994. Franchise fees increased $56,000, or 53.3%, from $105,000
in fiscal 1994 to $161,000 in fiscal 1995. This resulted from
franchise fees for the fourteen franchises opened in fiscal 1995 as
compared to seven franchises opened in fiscal 1994.
The Company's cost of sales rose $160,849, or 5.7%, from $2,815,706
in fiscal 1994 to $2,976,555 in fiscal 1995. This was due to the
additional Jake's Pizza restaurant locations opened during the fiscal
year. The increase was not as great as the increase in the number of
locations due to better controls over costs, except for paper goods,
relatively consistent food and supplies costs.
Operating and administrative expenses decreased $83,387, or 4.3%,
from $1,961,274 in fiscal 1994 to $1,877,887 in fiscal 1995. These
decreases were primarily due to cost controls instituted during the
year.
The Company's experienced a net loss for the fiscal year ended
September 30, 1995 amounting to $743,017, or $0.70 per share. Fiscal
1994 showed a net loss of $567,221, or $0.54 per share. The losses are
primarily the result of the Company's expansion program, and include a
number of one-time charges. Among these are losses on sales of property
and equipment of approximately $66,000, settlement expense of $60,000
and a one-time charge of $100,000 related to the Company's agreements
with entertainer Vanna White and her affiliates. Since the Company
completed its initial public offering of stock in July 1993, the Company
has aggressively pursued its expansion plans and will continue to do so.
Management believes that the current plans will result in the
realization of substantial increases in revenues in the short term, with
corresponding increases in net income over the longer term.
<PAGE>
Liquidity and Capital Resources
In July 1993, the Company completed an initial public offering of
640,000 shares of its common stock. Gross proceeds of the offering were
$3,200,000. After deducting underwriting discounts, commissions and
expenses of $428,000 and other expenses of the offering of approximately
$373,000, the net proceeds to the Company were approximately $2,399,000.
The Company does not have any remaining funds from the offering and will
fund its business and expansion efforts through the continuing
operations of the company.
The Company's management has determined, as previously addressed in
its press release dated June 28, 1996 and 10-QSB for the period ending
June 30, 1996, that it will need additional financing and/or investors
to help the Company's liquidity problem and enable the Company to
operate in the future. Management is in the process of taking every
action to reduce spending, improve its operations and increase its cash
position.
In an effort to streamline the Company's operations and try to
improve its franchisees operations, the Company contracted a local
distributor, in late May, 1996, who specializes in the pizza and
restaurant business, to supply its franchisees. The decision was made
to contract an outside local distributor since the company could not
compete with the prices or quantity of products of a large volume
distributor. Under the contract with the distributor, Jake's Pizza
International will receive a rebate on all products sold to Jake's Pizza
restaurants. On June 17, 1996 the distributor began deliveries to the
franchisees.
The company was be able to eliminate certain costs associated with
the support of the distribution business. These costs included
personnel reductions, facility operating expenses and other indirect
operating costs. The sale of its 14,000 square foot warehouse and
office facility, expected to be completed in early January, 1997, and
relocation to leased office space are estimated to reduce facility
expenses by approximately 50%.
The Company has made a proposal to 17 of its largest unsecured
creditors to settle an outstanding debt of $470,965 for $117,742 as
payment in full. As of December 27, 1996 two creditors have refused the
proposal and one creditor has not made a decision. The balance related
to these creditors amounts to $104,084. The Company anticipates
disbursing the funds to the creditors by January 31, 1997. The majority
of the funds to be used to pay the creditors will be provided from the
sale of the Company's current office/warehouse to be completed in early
January, 1997, through the postponement of a $100,000 payment on the
second mortgage note to a related party.
Additionally, the Company is selling its two Company-owned stores,
the assets of its closed joint venture restaurant in Placentia,
California and equipment the Company currently holds in inventory to
help fund the Company's short-term cash flow needs.
<PAGE>
The Company has made some management changes since John Flowers
assumed the additional role as President and Chief Executive Officer in
January, 1996. The Company engaged Michael Marczuk in March, 1996 to
consult the Company with respect to financial and operational issues and
evaluate various courses of action. John Veremis was promoted to Vice
President of Franchise Operations from Director of Franchise Operations
effective June 1, 1996. Mr. Veremis will replace Robert N. Wallen who
resigned. Four Board members have resigned since they were elected at
the shareholders meeting in April, 1996. They are Messrs. Jerome Rich,
Theodore Govedarcia and Tod Curtis and Jack Fischer. Mr. Ruben Melesio
was nominted on December 27, 1996 to serve on the Board of Directors.
The Board is now comprised of John "Jake" Flowers, Robert Leeper, Ruben
Melesio and Michael Sykes.
The President, Chief Executive Officer and Chairman of the Board of
Directors, with the direction and authorization of the Board of
Directors, engaged the law firm of Jenner & Block as special counsel to
advise Jake's Pizza International with respect to certain alternatives
of financing and reorganization.
The Company currently believes that it will need 65 to 70 healthy
operating franchised restaurants to bring the Company to a breakeven
cash flow. As of December 27, 1996, there were 50 Jake's Pizza
restaurants operating nationally, including two Company-owned
restaurants. However, a significant portion of the current franchisees
are not meeting their obligations for various reasons, including cash
flow constraints due to a weak franchise operation.
Management believes that all of these actions will substantially
reduce operating costs and help position the Company for growth and move
the Company toward profitability in the long-term.
The decrease in accounts receivable is primarily due to the
increase in the reserve for uncollectible accounts and improved
collection efforts. A comprehensive review of the outstanding accounts
receivable balance resulted in an additional reserve for uncollectible
accounts during fiscal 1996. The Company has written off a substantial
portion of its oldest accounts receivable, which were primarily related
to closed franchises. The Company has turned over approximately $190,000
of accounts receivable from discontinued franchise operations to
attorneys for collection. Management will continue to evaluate its
outstanding receivable balances and make the necessary provisions for
uncollectible accounts as needed.
The decrease in inventories is due to the discontinuance of the
distribution business and a write down of obsolete inventory offset by
an increase in equipment inventory seized from two closed franchises who
are in debt to the company. The Company plans to sell the equipment to
settle part of the debt.
Capital expenditures were $152,904 for fiscal 1996 compared to
$266,464 during fiscal 1995. Expenditures for fiscal 1996 were
primarily due to equipment purchases and property improvements for two
Company-owned stores and the closed joint venture store in Placentia,
California. Expenditures totaling approximately $231,000 during fiscal
1995 were primarily for the purchase of two Company-owned Jake's Pizza
restaurants which were then sold to a new Jake's Pizza franchisee.
<PAGE>
The decrease in property, plant and equipment primarily reflect the
sale of the Company's office and warehouse facility, which is classified
in the Company's Consolidated Balance Sheets as asset held for sale, and
the sale of equipment and improvements of two Company-owned stores
offset by the expenditures to open two additional Company-owned stores.
The decrease in total notes receivable is primarily due to the
settlement of a lawsuit from a prior franchisee who held two notes
receivable payable to the Company. Under the settlement agreement, the
franchisees returned the two stores to the Company and the Company wrote
off the notes receivable. Notes receivable also decreased due to a the
reserve for uncollectible notes receivable of which approximately
$20,000 has been turned over to attorneys for collection.
The decrease in deferred contract costs and contractual obligations
in fiscal 1996 reflects the verbal agreement by the Company, Ms. Vanna
White and her affiliate to terminate their joint venture agreement and
modify the spokesperson agreement, which is more fully explained in Note
3, Deferred Contract Costs and Contractual Obligations, in the Notes to
the Consolidated Financial Statements.
In November, 1995, the Company renewed its $300,000 line-of-credit.
The line-of-credit called for monthly payments of interest at the rate
of 1/2 per cent above the bank's prime rate and which would have matured
in November, 1996. In March, 1996, the Company paid the outstanding
balance of $193,943 under the line of credit. Management does not
expect to renew the line-of-credit. The Company is current on all its
loan obligations.
The Company is currently obligated under several leases, including
three leases for two Company-owned Jake's Pizza restaurants and one for
the joint venture store in Placentia, California, as well as leases for
space utilized by franchisees of Jake's Pizza restaurants. The terms of
the leases range up to six years, with the last lease expiring in 2000.
The leases utilized by the franchisees are sub-leased to those
franchisees under the same terms as the original lease. The Company is
current under all lease obligations.
Item 7. Financial Statements.
The financial statements are listed under Part III, Item 13 in
this Annual Report.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There were no changes in or disagreements with accountants on
accounting and financial disclosure as required by Item 304 of
Regulation S-B.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company, their ages and
their positions and offices are set forth in the following table:
Officer or
Director
Name Age Position Since
John S. "Jake" Flowers 59 Director, President, Chief
Executive Officer and
Chairman of the Board
of Directors 1993
Robert B. Leeper 59 Vice Chairman of the Board
of Directors, Vice President,
Secretary and Treasurer 1996
Jack L. Fischer 43 Director 1993
Ruben Melesio 59 Director 1996
Michael A. Sykes 33 Director 1996
The following is certain additional information concerning each
director and executive officer of the Company. When used below, unless
otherwise noted, positions held with the Company include positions held
with the Company's predecessor.
John S. "Jake" Flowers - Mr. Flowers, the President, Chief
Executive Officer and Chairman of the Board, also served as President of
the Company between 1979 and March 1993. Mr. Flowers has been a member
of the Board of Directors of the Company since 1974. Mr. Flowers
assumed the additional position of as President and Chief Executive
officer effective January 24, 1996. Mr. Flowers has also been the
principal stockholder, member of the Board of Directors and President of
Prospect Pizza, Inc., an Illinois corporation, which has owned and
operated a Jake's Pizza restaurant in Mt. Prospect, Illinois since 1961.
Robert B. Leeper - Mr. Leeper, the Vice Chairman of the Board, Vice
President, Secretary and Treasurer, has been a member of the Board of
Directors of the Company since January, 1996. From January, 1987 to the
present Mr. Leeper has been in a partnership owning nine Nevada Bob's
Discount Golf stores, seven in Illinois and two in southern California.
Since 1992, Mr. Leeper has also been a partner in Aotea Lodge, located
in New Zealand, a vacation/resort complex partnership.
Jack L. Fischer - Mr. Fischer has been a Director since 1993. Mr.
Fischer is the sole owner of Amsterdam Financial Group, a financial
services company, which he founded in 1977. Mr. Fischer resigned his
position on the Board of Directors on December 27, 1996.
<PAGE>
Ruben Melesio - Mr. Melesio was nominated to the Board of Directors
on December 27, 1996. His nomination was unanimously accepted by the
Board of Directors. Mr. Melesio is the owner of three corporations.
Highway Safety Corporation, established in 1979, and Highway Safety
Contracting Corporation which are suppliers of traffic control and
protection equipment in Illinois and Wisconsin. Hi-Gate Erectors
Incorporated is an installer of structural steel, re-bar and guardrails.
Mr. Melesio is a member of the Hispanic American Construction Industry
Association and was honored as their businessman of the year in 1981.
He is also an Illinois and national member of American Traffic Safety
Services organization.
Michael A. Sykes - Mr. Sykes has been a Director since January,
1996. From September, 1996 until present, Mr. Sykes has been Vice
President, Commercial Real Estate at Banco Poplar, in Chicago, Illinois.
From May, 1993 to the September, 1996, Mr. Sykes was Vice President,
Commercial Real Estate of LaSalle Bank Westmont in Westmont, Illinois.
From October, 1987 to May, 1993 Mr. Sykes was the Vice
President/Assistant Manager of Commercial Real Estate of Colonial Bank
in Chicago, Illinois.
The directors hold office until the next annual meeting of
stockholders and until their respective successors have been elected and
qualified. Officers are elected by and serve at the discretion of the
Board of Directors.
Directors of the Company are not compensated for attendance at
Board of Directors or committee meetings, but are reimbursed for their
travel and lodging expenses in connection with their activities on
behalf of the Company.
For the three years following the completion of the initial public
offering of the Company's common stock, the Company's underwriter from
its initial public offering (the "Underwriter") has the right to require
the Board of Directors of the Company to nominate for election, as a
director, a person designated by the Underwriter. As of December 27,
1996, the Underwriter has not designated anyone as a director.
<PAGE>
Item 10. Executive Compensation.
Compensation paid to executive officers for the year ended
September 30, 1996 was as follows:
Name of Individual
or Number of Persons Capacities in Annual Compensation
in Group which served Salary Bonus Other
John S. Flowers President, Chief
Executive Officer
and Chairman of the
Board of Directors $41,538 $ - $5,376
James J. Banks (1) President and Chief
Executive Officer $50,641 $ - $1,000
Robert N. Wallen Vice President $32,885 $ - $4,000
Glen Hjort Chief Financial
Officer $23,269 $ - $4,000
All executive officers
as a group (4 persons) $148,333 $ - $14,376
(1) Includes accrued compensation under James J. Banks Severance,
Consulting, and Non-compete agreement of $33,333.
Indemnification Agreements
The Company's Restated Certificate of Incorporation and By-laws
provide for indemnification of its officers and directors to the fullest
extent permitted by the Delaware General Corporation Law and that such
indemnification shall not be deemed exclusive of any other rights to
which any person indemnified may be entitled by law or otherwise. The
Company's Restated Certificate of Incorporation limits the liability of
a director to the Company or its stockholders for monetary damages for
breaches of fiduciary duties, subject to certain exceptions, all as
permitted by Delaware law. In addition, a director is not relieved of
his responsibilities under any other law, including the federal
securities laws.
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has ben informed that in the opinion
of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
Employee Stock Option Plan
Under the Company's 1993 Amended and Restated Non-qualified Stock
Option Plan (the "Option Plan"), 100,000 shares of Common Stock are
reserved for issuance upon the exercise of options which currently may
be granted only to James J. Banks, the Company's President. Options
will be granted on such terms and at such prices as determined pursuant
to the Option Plan and options granted at different times need not
contain similar provisions. The exercise price for these options
granted under the Option Plan will be $5.00 per share. Under the
current form of option agreement, options generally become exercisable
in installments of one-third as follows: one-third one year after the
date of grant, an additional one-third after two years and the final
one-third after three years. Such options may be exercised for periods
of up to ten years from the date of grant. No options have yet been
exercised under the Option Plan.
As part of the Severance, Consulting and Non-compete agreement
dated January 24, 1996, with James J. Banks, the prior President and
Chief Executive Officer of the Company, the options were forfeited under
the terms of the agreement as filed as an exhibit with Form 8-K dated
January 24, 1996.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth certain information as of November
30, 1996 with respect to the beneficial ownership of the Company's
Common Stock of each director, all officers and directors as a group,
and each person known by the Company to be the beneficial owner of five
percent or more of the Company's Common Stock. This information is
based upon information received from or on behalf of the named
individuals. In general, a person is deemed to be a "beneficial owner"
of a security if that person has or shares the power to vote or direct
the voting of such security, or the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which the person has the right to
acquire beneficial ownership within 60 days.
Shares of Common Stock
Name Beneficially Owned Percent of Class
John S. "Jake" Flowers 190,070 16.2
Samuel V.P. Banks 185,770 15.6
Robert B. Leeper 7,000 .6
Jack L. Fischer 1,000 .1
All officers and directors as a
group (4 persons) 383,840 32.6
<PAGE>
Item 12. Certain Relationships and Related Transactions.
Corporate Headquarters
See "Item 2. Description of Property," for information regarding
the purchase of the Company's corporate headquarters.
Other Matters
Mr. John S. Flowers, the President, Chief Executive Officer and
Chairman of the Board of the Company, is a principal stockholder and
president of an Illinois corporation which owns and operates a Jake's
Pizza restaurant in Mount Prospect, Illinois pursuant to a franchise
agreement dated June 5, 1984. As this restaurant has been utilized as a
training facility for new franchisees, the Company has waived the
requirements of Mr. Flowers' corporation to pay the Company the royalty
and service fees of 4% of gross sales and the advertising royalty of 2%
of gross sales. This franchise agreement terminates on June 5, 2004.
The amounts of royalty and service fees and advertising royalty are not
considered material to the Company's financial condition or results of
operations. Mr. Flowers previously was a principal stockholder and
president of another Illinois corporation which owned and operated a
Jake's Pizza restaurant in Westmont, Illinois under the same terms and
conditions as his other restaurant. This restaurant was sold at its
fair market value to an unrelated franchisee on September 27, 1993, and
is now subject to the standard Jake's franchise agreement.
In 1987 and 1989, Messrs. Flowers and Samuel V.P. Banks made the
Company loans totalling, in the aggregate, $32,000 bearing interest at
10% per annum and which matured in September 1994. In October 1993, the
Company, under an agreement with Mr. Flowers, prepaid his portion of the
loans in the amount of $16,000. The Company renewed its loan with Mr.
Banks under the same terms and conditions, and this loan now matures in
February, 1996. Currently, the loan has not been paid to Samuel V.P.
Banks.
The Company has entered into leases for space utilized by 14
franchisees of Jake's Pizza restaurants for such restaurants. The terms
of the leases range up to six years, with the last lease expiring in
2000. These restaurant leases are sub-leased to the franchisees under
the same terms as the original lease. Should a franchisee default in
its payment obligation to the Company, the Company could be responsible
for the lease obligation.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) 1. Index to Financial Statements
Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets -- September 30, 1996
and 1995 F-2
Consolidated Statements of Shareholders' Equity --
For the years ended September 30, 1996,
1995 and 1994 F-3
Consolidated Statements of Operations --
For the years ended September 30, 1996,
1995 and 1994 F-4
Consolidated Statements of Cash Flows --
For the years ended September 30, 1996,
1995 and 1994 F-5
Notes to Consolidated Financial Statements F-7
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and,
therefore, have been omitted.
3. Exhibits
(3) Articles of Incorporation and By-Laws.
(a) Restated Certificate of Incorporation filed as
Exhibit 3.3 to Registration Statement on Form SB-2
(Registration No. 33-61938C) (the "1993 Registration
Statement").*
(b) By-laws filed as Exhibit 3.2 to the 1993
Registration Statement.*
(10) Material contracts.
(a) Spokesperson agreement between Jake's Pizza
International, Inc. and Vanna White Productions,
Inc.*
(11) Statement Re: Computation of Per Share Earnings.
(21) Subsidiaries of the registrant.*
______________________
* In accordance with Rule 12b-23 and Rule 12b-32 under the Securities
Exchange Act of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission, which
documents are hereby incorporated by reference.
<PAGE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on January 24, 1996
regarding the resignations of James J. Banks, its then President,
Chief Executive Officer and director, Samuel V.P. Banks, its then
Vice-Chairman of the Board of Directors, Secretary, Treasurer and
director, and two other directors. After such resignations, John
S. "Jake" Flowers, the Chairman of the Board of Directors, assumed
the additional positions of President and Chief Executive Officer.
The exhibit filed with Form 8-K was the Severance, Consulting, Non-
Compete Agreement and Release in Full between Jake's Pizza
International, Inc. and James J. Banks.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) JAKE'S PIZZA INTERNATIONAL, INC.
By: /s/ John S. Flowers Date: December 27, 1996
John S. Flowers,
President and Chairman of the Board
By: /s/ Robert B. Leeper Date: December 27, 1996
Robert B. Leeper,
Treasurer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
By: /s/ John S. Flowers Date: December 27, 1996
John S. Flowers,
Director
By: /s/ Robert B. Leeper Date: December 27, 1996
Robert B. Leeper,
Director
By: /s/ Jack L. Fischer Date: December 27, 1996
Jack L. Fischer,
Director
By: /s/ Michael A. Sykes Date: December 27, 1996
Michael A. Sykes,
Director
<PAGE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996, 1995 AND 1994
TOGETHER WITH AUDITORS REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Jake's Pizza International, Inc.:
We have audited the accompanying consolidated balance sheets of JAKE'S
PIZZA INTERNATIONAL, INC. (a Delaware corporation) AND SUBSIDIARIES as
of September 30, 1996 and 1995, and the related consolidated statements
of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements base on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our 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 Jake's Pizza
International, Inc. and Subsidiaries as of September 30, 1996 and 1995,
and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 12
to the financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 12. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 27, 1996
<PAGE>
<TABLE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,090 $ 497,436
Accounts receivable, net of allowance for doubtful
accounts of $89,359 and $75,000, respectively 294,489 552,827
Inventories 32,945 145,389
Notes receivable - current portion net of allowance
for uncollectable notes of $43,078 - 1996 76,863 59,720
Other current assets 17,833 9,385
Total current assets 424,220 1,264,757
PROPERTY AND EQUIPMENT (at cost):
Land - 160,000
Buildings and improvements 192,440 967,215
Equipment 421,151 462,091
Furniture and fixtures 67,747 67,182
681,338 1,656,488
Less - Accumulated depreciation 250,915 259,926
Net property and equipment 430,423 1,396,562
ASSET HELD FOR SALE (Note 13) 732,148 -
OTHER ASSETS:
Deferred contract costs net of accumulated
amortization of $1,025,000 and $224,219, respectively - 800,781
Intangible assets, net of accumulated
amortization of $32,500 and $12,500, respectively 47,500 67,500
Security deposits 47,587 62,133
Notes receivable - net of current portion 167,479 490,258
Total other assets 262,566 1,420,672
Total assets $ 1,849,357 $ 4,081,991
</TABLE>
<PAGE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Bank line-of-credit $ - $ 193,943
Notes payable, current portion -
Related party 16,000 16,000
Mortgage 21,120 17,662
Other 57,235 28,612
Contract obligation - current portion - 275,000
Capital lease obligation - current portion 8,346 4,722
Accounts payable 426,246 432,446
Franchise deposits - 139,500
Accrued professional fees 188,877 88,399
Accrued - other 31,584 51,595
Total current liabilites 749,408 1,247,879
LONG-TERM DEBT:
Notes payable, net of current portion -
Related party 116,000 116,000
Mortgage 565,879 594,055
Other 34,684 58,740
CONTRACTUAL OBLIGATION, net of current portion - 275,000
CAPITAL LEASE OBLIGATION, net of current portion - 8,346
LEASE DEPOSITS 32,621 28,070
Total long-term debt and other long-term obligations 749,184 1,080,211
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, authorized
9,000,000 shares, issued and outstanding
1,176,540 and 1,121,540 shares, respectively 12,315 11,215
Paid-in capital 3,532,947 2,984,047
Deficit (3,194,497) (1,241,361)
Total stockholders' equity 350,765 1,753,901
Total liabilities and stockholders' equity $ 1,849,357 $ 4,081,991
</TABLE>
<PAGE>
<TABLE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Retained
Paid-in Earnings
Shares Dollars Capital Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, September 30, 1993 1,011,540 $10,115 $2,454,544 $ 68,877 $ 2,533,536
Additional offering costs - - (19,397) - (19,397)
Issuance of common stock 55,000 550 274,450 - 275,000
Net loss for the year - - - (567,221) (567,221)
BALANCE, September 30, 1994 1,066,540 10,665 2,709,597 (498,344) 2,221,918
Issuance of common stock 55,000 550 274,450 - 275,000
Net loss for the year - - - (743,017) (743,017)
BALANCE, September 30, 1995 1,121,540 11,215 2,984,047 (1,241,361) 1,753,901
Issuance of common stock 55,000 550 274,450 - 275,000
Vanna White Spokesperson
agreement modification - 550 274,450 - 275,000
Net loss for the year - - - (1,953,136) (1,953,136)
BALANCE, September 30, 1996 1,176,540 $12,315 $3,532,947 $(3,194,497)$ 350,765
</TABLE>
<PAGE>
<TABLE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Distribution sales $ 1,993,497 $3,086,018 $2,593,032
Franchise royalties 351,410 385,223 346,474
Advertising royalties 102,767 135,400 144,960
Franchise fees 215,500 161,000 105,000
Rebate income 40,172 - -
Store sales 200,560 532,083 825,515
Other - 25 2,796
Total revenues 2,903,906 4,299,749 4,017,777
COST OF SALES:
Cost of distribution sales 1,717,333 2,593,627 2,190,546
Cost of store sales 202,360 382,928 625,160
Total cost of sales 1,919,693 2,976,555 2,815,706
Gross profit and service revenues 984,213 1,323,194 1,202,071
OPERATING AND ADMINISTRATIVE EXPENSES:
Store operations 139,287 234,840 202,464
Distribution and franchise operations 75,976 89,153 94,413
Selling, general and
administrative expenses 1,623,205 1,553,894 1,664,397
Loss on impairment of assets 696,085 - -
Total operating and
administrative expenses 2,534,553 1,877,887 1,961,274
Loss from operations (1,550,340) (554,693) (759,203)
OTHER INCOME (EXPENSE):
Gain on securities transactions - - 244,129
Interest income 13,691 26,405 45,822
Interest expense--
Related party (10,880) (10,880) (13,413)
Other (66,163) (77,244) (74,127)
Minority interest - - -
Loss on sale of assets (207,452) (66,605) (10,429)
Settlement expense (131,992) (60,000) -
(402,796) (188,324) 191,982
NET LOSS $(1,953,136)$ (743,017)$ (567,221)
NET LOSS PER COMMON SHARE ($1.69) ($0.70) ($0.54)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 1,153,623 1,066,540 1,058,072
NET LOSS PER COMMON SHARE,
assuming full dilution ($1.59) ($0.60) ($0.48)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, assuming full dilution 1,231,540 1,231,540 1,181,822
</TABLE>
<PAGE>
<TABLE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) $(1,953,136)$ (743,017)$ (567,221)
Adjustments to reconcile net (loss)
income to net cash provided by (used for)
operating activities
Loss on impairment of assets 696,085 - -
Provision for losses on accounts and
notes receivable 261,621 59,000 -
Depreciation and Amortization 228,184 227,172 189,589
Non-cash settlement expense 151,581 22,500 -
(Gain)/Loss on sale of property plant
and equipment 207,452 66,605 8,911
Noncash franchise fees received - (76,000) -
Deferred interest income recognized - - (671)
Gain on securities transactions - - (244,129)
Consideration under deferred contract - - 100,000
Changes in assets and liabilities:
Accounts receivable, net 8,544 (418,572) (120,746)
Inventories 147,444 32,713 (35,425)
Other assets (8,448) 31,548 (11,033)
Security deposits 14,546 (6,490) (16,189)
Accounts payable 7,041 65,577 149,182
Franchise and lease deposits (139,949) 142,034 (15,000)
Accrued professional fees 88,896 (10,843) 42,898
Accrued other (20,011) 5,663 9,769
Net cash used for operating activities (310,150) (602,110) (510,065)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (152,904) (266,464) (537,208)
Gain on securities transactions - - 244,129
Decrease in CSV of officers' life insurance - - 43,497
Equipment rentals received - - 10,588
Proceeds from sale of property and equipment 128,000 93,477 98,000
Net cash used for investing activities (24,904) (172,987) (140,994)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank line-of-credit (193,943) - -
Repayments of related-party long-term debt - - (132,317)
Repayments of other long-term debt (51,628) (41,506) (35,104)
Repayments of capital lease obligations (4,722) (4,220) (3,966)
Payments received from Minority Interest
holders 40,365 - -
Payments received on notes receivable 49,636 7,148 -
Additional costs of initial public offering - - (19,397)
Net cash used for financing activities (160,292) (38,578) (190,784)
NET DECREASE IN CASH $ (495,346)$ (813,675)$ (841,843)
CASH, beginning of period $ 497,436 $1,311,111 $2,152,954
CASH, end of period $ 2,090 $ 497,436 $1,311,111
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 84,003 $ 62,697 $ 84,016
</TABLE>
<PAGE>
<TABLE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARY
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
FOR THE YEARS ENDED SEPTEMBER 30,
1996 1995 1994
<S> <C> <C> <C>
Notes receivable issued for franchise fees $ 23,500 $ 76,000 $ -
Notes receivable issued for franchise
acquisitions 129,000 415,228 -
Notes receivable isued for sale of property 3,428 - 32,000
Conversion of accounts receivable to
notes receivable 17,827 21,970 -
Noncash consideration issued to purchase
property and equipment
Accounts receivable - 199,247 -
Accounts payable - 13,472 -
Notes payable issed in litigation settlement - 22,500 -
Notes payable issued for noncompete agreement - 80,000 -
</TABLE>
<PAGE>
JAKE'S PIZZA INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS:
Jake's Pizza International, Inc, and Subsidiaries (the "Company') is an
operator and franchisor of restaurants located in Arizona, Florida,
Illinois, Indiana, Nevada and North Carolina. As of September 30, 1996,
the Company operated two Company-owned Jake's Pizza restaurant and had
an additional 52 franchised units. When a franchise is sold, the Company
agrees to provide certain services to the franchisee including training,
opening and operating assistance and certain information including
ingredients, method of preparation and recipes. Royalty fees are
charged to franchisees at rates of 4% to 5% of the franchisees' gross
sales per month. Advertising royalty fees are also charged to
franchisees at a rate of 2% of the franchisees' gross sales per month.
Certain franchisees are exempt from advertising fees as their original
agreements did not provide for advertising to be performed by the
Company.
The Company offered certain food products, beverages, supplies and
promotional materials for sale to the franchisees until June 16, 1996
when it discontinued its distribution business. The Company signed an
agreement in late May 1996 with a local distributor to supply the
Company's franchisees with these products beginning June 17, 1996. The
franchisees are not, however, required to purchase product from the
local distributor. The Company receives a rebate from the local
distributor for all products sold to the Company's franchisees.
The Company formed two subsidiaries in connection with its agreements
with entertainer Vanna White and her affiliates. These are Jakan, Inc.,
a company formed to be the joint venture participant in a series of
Jake's Pizza restaurants with an affiliate of Ms. White, and Jake's
Management, Inc., a company formed to manage the operations of the joint
venture restaurants. Both companies are currently inactive due to the
termination of the joint venture agreement as more fully described in
note 3.
2. SIGNIFICANT ACCOUNTING POLICIES:
Inventories
Inventory held prior to the discontinued distribution business was
valued at the lower of cost or market using a standard cost method which
approximates the first-in, first-out (FIFO) method. As of September 30,
1996, the inventory consisted primarily of restaurant equipment for
resale.
<PAGE>
Revenue Recognition
Continuing service fees from franchisees are recognized as royalty
income when earned. Franchise fees from the sale of individual
franchises and related expenses are recognized when the franchise
agreement is executed and the franchise opens for business. Fees
reserved for franchises which have not opened are recorded as franchise
deposits in the accompanying consolidated balance sheets. Area
franchise fees are deferred and recognized as income ratably upon store
openings. Advertising royalties are recognized as royalty income when
earned. Related advertising is recognized as expense when incurred.
Property and Equipment
Property and equipment are recorded at cost. Major additions are
capitalized while replacements, maintenance and repairs which do not
improve or extend the lives of the respective assets are expensed
currently. Depreciation is computed using both straight-line and
accelerated methods. Estimated useful lives are as follows:
A s s e t Life
Buildings and Improvements (Note 12) 31.5 years
Equipment 5-10 years
Furniture and fixtures 5-10 years
Taxes
Deferred income taxes, when recognized, result from timing differences
in the recognition of revenue and expense for tax and financial
reporting purposes and result primarily from depreciation and the
existence of net operating loss carryforwards. Management has provided
a 100% valuation allowance against the Company's net deferred tax asset
position.
As of September 30, 1996, the Company had approximately $3.68 million of
net operating loss carryforwards available to offset future taxable
income. These carryforwards begin to expire in fiscal 2008.
Reclassifications
Certain items in the 1995 financial statements have been reclassified to
conform to the 1996
presentation.
<PAGE>
3. DEFERRED CONTRACT COSTS AND CONTRACTUAL OBLIGATIONS:
In December 1993, the Company entered into a series of agreements with
entertainer Vanna White and her affiliates. Under the terms of the
agreements, the Company formed a joint venture with an affiliate of Ms.
White to cooperatively open and operate a minimum of eight new Jake's
Pizza restaurants, mainly in the western United States. The Company
opened one joint venture store in March 1996 and closed the same store
six months later. As part of these agreements, Ms. White would serve as
the Company's national spokesperson.
Consideration for these services was in the form of restricted stock to
be issued annually at 55,000 shares per year for the initial four-year
term of the agreements. The aggregate of 220,000 shares had been valued
at $1,100,000. Of this amount, $100,000 was consideration paid when
the Company entered into the agreements and was charged to earnings in
the accompanying 1994 consolidated statement of operations. The balance
was being amortized on a straight-line basis over the entire eight-year
term (four year agreement plus a four year non-compete) of the
agreements. For the first three years of the agreements 165,000 shares
have been issued.
As of September 30, 1996, the Company and Ms. White's affiliate have
verbally agreed to terminate their joint venture agreement and modify
the spokesperson agreement whereby Ms. White will continue to serve as
the Company's national spokesperson through December 31, 1997. Under
the tentative terms of the new agreement Ms. White and her affiliate
will receive the remaining 55,000 shares that were to be issued under
the old agreement.
In connection with the tentative terms of the new agreement, the Company
has written off the remaining unamortized portion of the deferred
contract costs ($800,781 at September 30, 1995), and has written down
the value of the assets at its closed joint-venture location in
Placentia, California to their net realizable value. This charge to
income is classified in the Company's Consolidated Statement of
Operations as a loss on the impairment assets. The remaining 55,000
shares (to be issued in 1997) have already been reflected in the
Company's Statement of Shareholders' Equity.
<PAGE>
4. NOTES RECEIVABLE:
As an accommodation to certain of its franchisees, the Company
occasionally financed portions of the franchisees' purchase price,
franchise fee or equipment. In some cases, the financing may be in the
form of a "bridge" amount until the franchisee can obtain outside
financing. The notes receivable, however, are set up without regard to
the likelihood of the outside financing. The Company no longer provides
financing for new franchisees, but will provide assistance in obtaining
outside financing for new franchisees. Notes receivable consisted of
the following as of September 30, 1996 and 1995:
1996 1995
Franchise purchase note receivable, unsecured, in
monthly installments of $1,322, including interest
at 7.5%, through August, 2010 $ --- $ 140,000
Franchise purchase note receivable, unsecured, in
monthly installments of $1,687, including interest
at 7.5% through August, 2002 --- 110,000
Franchise purchase note receivable, unsecured, in
monthly installments of $760, including interest
at 7.5% through November, 2001 --- 47,905
Franchise purchase note receivable, unsecured,
$21,000 due upon receipt of financing by franchisee,
balance due in monthly installments of $526,
including interest at 8.5%, beginning January, 1996,
through December, 2000 3,155 46,000
Franchise purchase note receivable, secured, in
monthly installments of $825, including interest
at 9%, through July, 2000 39,728 39,728
Franchise purchase note receivable, unsecured, in
monthly installments of $497, including interest
at 8%, through July, 2002 29,805 30,990
Franchise purchase note receivable, secured, in
monthly installments of $1,297, including interest
at 9.25%, through October, 2003 80,000 ---
Installment note receivable, unsecured, in weekly
installments of $125, including interest at 9%,
through March, 2001 25,741 27,776
Other franchise purchase notes receivable, unsecured,
in monthly installments of $250 to $750, including
interest at 9%, through October 1997 and 1999 16,020 22,000
Franchise fee notes receivable, unsecured, in
monthly installments ranging from $100 to $311,
including interest from 8.75% to 9%, with
various maturities through August, 2000 83,850 75,158
<PAGE>
4. NOTES RECEIVABLE (Continued):
1996 1995
Equipment notes receivable, unsecured, in monthly
installments ranging from $121 to $200, including
interest from 8% to 9%, through June, 1996 9,121 10,421
Reserve for uncollectible notes receivable (43,078) ---
Total Notes Receivable 244,342 549,978
Less - Current portion 76,863 59,720
Long-term portion $ 167,479 $ 490,258
5. BANK LINE OF CREDIT:
The Company had a $300,000 line of credit at 1/2% above the bank's prime
lending rate. The line of credit was to expire in November, 1996, and
was collateralized by a certificate of deposit. At September 30, 1995
there was $193,943 outstanding under the line. In February 1996, the
Company paid the line of credit and redeemed its certificate of deposit.
<PAGE>
6. DEBT:
Long-term debt consisted of the following as of September 30, 1996 and
1995:
1996 1995
Mortgage note payable to bank in monthly
installments of $5,668, including interest at
8%, through January, 2000 $ 586,999 $ 611,717
Mortgage note payable - related party, due
December 28, 1998 with interest at 8%,
due quarterly 116,000 116,000
Notes payable in connection with noncompete
agreements, due in monthly installments
aggregating $1,916, including interest at 7%,
through March, 1999 52,583 69,678
Note payable to officer, due in September, 1996,
interest at 10% 16,000 16,000
Other notes payable to monthly installments from
$60 to $776, including interest at 7% to 13.65%,
March, 1999 39,336 17,674
Total Long-term Debt 810,918 831,069
Less - Current portion 94,355 62,274
Long-term portion $ 716,563 $ 768,795
At September 30, 1996, principal payments of long-term debt mature as
follows:
Fiscal Year
1997 $ 94,355
1998 162,530
1999 37,755
2000 516,278
Total Debt Maturities $ 810,918
The mortgage loans are secured by the land and building which comprise
the Company's offices and warehouse facilities.
<PAGE>
7. LEASE COMMITMENTS:
The Company leases space for its two Company-owned Jake's Pizza
restaurants. Additionally, the Company has entered into leases for
space used by 14 franchisees for their Jake's Pizza restaurants. The
terms of the leases range from three to six years, with the last lease
expiring in 2000. These leases are subleased to the franchisees under
the same terms as the original lease. The Company also has leases for
various office equipment and vehicles which expire at various dates
through 2000. As of September 30, 1996, approximate future minimum
annual rental lease payments under operating leases, net of sublease
payments, are as follows:
Fiscal Year
1997 $ 89,595
1998 59,772
1999 25,932
2000 25,932
Total Lease Commitments $ 201,231
The Company also has a lease for a truck which is classified as a
capital lease. The lease runs through August, 1997, and the Company can
purchase the truck at the end of the lease term for $3,500. The future
minimum lease are payments under the capital lease are $9,608 and the
present value of the net minimum lease payments as of September 30, 1996
are $8,346.
8. RELATED-PARTY TRANSACTIONS:
The Company filed a report on Form 8-K with the Securities and Exchange
Commission on January 24, 1996 regarding the resignations of James J.
Banks, its then President, Chief Executive Officer and director, Samuel
V.P. Banks, its then Vice-Chairman of the Board of Directors, Secretary,
Treasurer and director, and two other directors. After such
resignations, John S. "Jake" Flowers, the Chairman of the Board of
Directors, assumed the additional positions of President and Chief
Executive Officer. The exhibit filed with Form 8-K was the Severance,
Consulting, Non-Compete Agreement and Release in Full between Jake's
Pizza International, Inc. and James J. Banks.
As part of the Severance, Consulting, Non-Compete Agreement and Release
in Full Mr. James J. Banks will continue to receive biweekly payments
(in accordance with his employment agreement) through June 30, 1997 at
the rate of his then current annual salary of $50,000. Any increases,
bonuses and stock options have been cancelled under his employment
agreement. Additionally, the consulting agreement with Samuel V.P.
Banks, a prior officer and director, will continue to be in effect.
Samuel V.P. Banks five year consulting agreement continues through June
1998, and provides initial compensation of $40,000 with annual increases
of $2,000. This liability has been reflected in the Company's
Consolidated Balance Sheets in accounts payable.
<PAGE>
9. BENEFIT PLANS:
The Company has a noncontributory defined contribution profit-sharing
plan which covers substantially all employees. Amount contributed to
the profit-sharing plan are determined annually by management, up to the
maximum amount allowed by law. The Company has not provide any
contribution to the Plan for the years ended September 30, 1996, 1995
and 1994.
The Company does not provide any additional retirement or postretirement
benefits to its employees.
10. EARNINGS PER COMMON SHARE:
Warrants to acquire 64,000 shares of the Company's stock at $6 per
share, which were issued in conjunction with the initial public offering
of the Company's common stock, were outstanding at the end of fiscal
1996. These warrants expire on July 1, 1998.
Earnings per common share and common equivalent share are computed by
dividing net income by the weighted average number of shares of common
stock and common stock equivalents outstanding during the year. The
number of common shares was increased by the number of shares issuable
on the exercise of the options and warrants when the market price of the
common stock exceeded the exercise price of the options and warrants.
This increase in the number of common shares was reduced by the number
of common shares that are assumed to have been purchased with the
proceeds from the exercise of the options and warrants; those purchases
were assumed to have been made at the average price of the common stock
during that part of the year when the market price of the common stock
exceeded the exercise price of the warrants. Earnings per common share,
assuming full dilution, were determined on the assumption that all stock
to be issued under the agreements with entertainer Vanna White and her
affiliates had been issued in January, 1994.
11. SETTLEMENT AND NONCOMPETE AGREEMENTS:
During 1995, the Company reached agreements with certain of its former
franchisees in connection with the Company's purchase of two Jake's
Pizza restaurants. Under the terms of the agreements, the Company
issued notes payable aggregating $80,000 in exchange for two four-year
noncompete agreements. The Company also paid $27,500 in cash and issued
notes payable aggregating $22,500 in connection with the settlement
agreements.
<PAGE>
12. MANAGEMENT PLANS:
In February, 1996 the Company began to implement several measures
intended to improve the Company's operating results. These included
personnel reductions, outsourcing of Company's warehouse distribution
function in June, 1996, and the sale of the office/warehouse which is
expected to be completed in early January, 1997. The sale of the
office/warehouse resulted in a net loss of approximately $95,000. This
charge to income was classified in the Company's Consolidated Statements
of Income as a loss on sale of assets. Management believes reductions
in certain selling, general and administrative expenses, the relocation
to affordable office space, and careful review of the collectability of
the Company's receivables should favorably impact the Company's
operating results for fiscal 1997.
The Company expects to generate approximately $320,000 in cash during
January, 1997 from the sale various Company assets, including its two
Company-owned stores, and from an agreement to postpone the payment of
$100,000 of its $116,000 second mortgage note held by a related party
(Footnote 6). Much of this cash would be used to pay a proposed
settlement to its unsecured creditors as a settlement in full of their
debts and to pay other current company debts. The remaining funds will
be used to fund the working capital needs of the Company until the
Company can sustain itself through continuing operations.
Management has also suspended, for a period of six months, the monthly
advertising fee that most of the franchisees are to contribute to an
advertising fund. This suspension of advertising payments is expected
to end in March, 1997 at which time management will reevaluate the
suspension of advertising fees. At the present time, management
believes that franchisees are currently in a better position to use
these advertising funds locally to promote and grow their businesses.
The management of the Company, however, still monitors the types and
frequency of the franchisees advertising. The suspension of advertising
fees does not impact the operations of the company since any amounts
collected for the advertising fund would be used only to finance
additional advertising.
Management believes that it will take approximately 65 to 70 strong
operating franchisees to bring the Company to a cash flow break-even
point. Currently the Company has 52 franchises of which a significant
number cannot meet their current obligations due to cash flow
constraints from a weak operation. Management is working with these
franchisees to improve their operations to enable them to meet their
obligations to the Company. It is expected that at least 50% of these
non-performing franchisees will close their operations and that it will
take six to twelve months to improve the operations of the remaining
non-performing franchisees.
Plans for fiscal 1997 call for the opening of approximately 16
franchises. The Company expects that the total number of franchises at
September 30, 1997 will be approximately 62. As of December 15, 1996,
the Company has a deposit for one new franchise and commitments for two
other potential franchises.
<TABLE>
Jake's Pizza International, Inc.
EXHIBIT 11
COMPUTATION OF EARNINS PER SHARE
SEPTEMBER 30, 1996
The computation of per share earnings was done by obtaining the weighted
average number of shares outstanding using the "Treasury Stock Method" as
follows:
Net loss for the year $1,953,136
Weighted average
shares outstanding 1,153,623
Net loss per share $1.69
Weighted average shares outstanding:
Period
Outstanding
<S> <C> <C> <C>
Shares outstanding: (A) (B) (AxB)
10/1/95 - 9/30/96 1,121,540 12 mos. 13,458,480
3/1/96 - 9/30/96 55,000 7 mos. 385,000
Warrants outstanding:
10/1/95 - 9/30/96 64,000 12 mos. 768,000
Remove warrants since
stock price did not
exceed exercise price.
(see computation bel (64,000) 12 mos. (768,000)
TOTAL 13,843,480
DIVIDED BY 12 TO GET WEIGHTED
AVERAGE SHARES OUTSTANDING 1,153,623
Warrant calculation:
Strike price: $6 per share
Proceeds on exercise $6 x 64,000) 384,000
Market price of stock did not exceed the strike price at any time during
the year. Accordingly, the effect would be antidilutive and is not considered.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 2090
<SECURITIES> 0
<RECEIVABLES> 294489
<ALLOWANCES> 89359
<INVENTORY> 32945
<CURRENT-ASSETS> 424220
<PP&E> 681338
<DEPRECIATION> 250915
<TOTAL-ASSETS> 1849357
<CURRENT-LIABILITIES> 749408
<BONDS> 716563
0
0
<COMMON> 12315
<OTHER-SE> 338450
<TOTAL-LIABILITY-AND-EQUITY> 1849357
<SALES> 2194057
<TOTAL-REVENUES> 2903906
<CGS> 1919693
<TOTAL-COSTS> 4454246
<OTHER-EXPENSES> 1838468
<LOSS-PROVISION> 903537
<INTEREST-EXPENSE> 77143
<INCOME-PRETAX> (1953136)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1953136)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1953136)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.59)
</TABLE>
