SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/2A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended September 30, 1997
Commission File Number 000-21093
INTERFOODS OF AMERICA, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 59-3356-011
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
9400 South Dadeland Boulevard, Suite 720, Miami, Florida 33156
(Address and Zip Code of Principal Executive Offices)
Issuer's Telephone Number: (305) 670-0746
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
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 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. [ ]
State issuer's revenues for its most recent fiscal year: $14,092,182
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 31, 1997 was approximately
$1,625,000. Solely for purposes of the foregoing calculation, all of the
registrant's directors and officers are deemed to be affiliates.
There were 5,560,482 shares of the registrant's common stock outstanding as
of December 31, 1997.
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Interfoods of America, Inc., a Nevada corporation (the "Company"), is,
through its wholly-owned subsidiary, Sailormen, Inc., a Florida corporation
("Sailormen"), a franchisee and operator of Popeyes/registered trademark/
Chicken and Biscuits ("Popeyes") restaurants. The Company currently operates,
pursuant to franchise agreements with AFC Enterprises, Inc. (the "Franchisor"),
25 Popeyes restaurants located in Florida, Alabama and Louisiana
The Company's headquarters is located at 9400 South Dadeland Boulevard,
Suite 720, Miami, Florida 33156. Its telephone number is (305) 670-0746.
HISTORY
Until September 1996, the Company was known as Sobik's Subs, Inc. In
May 1996, the Company acquired Sailormen from the Company's current Chief
Executive Officer, Robert S. Berg, and President, Steven M. Wemple, for a total
of 2,500,000 shares of the Company's common stock. At the time of the
acquisition, Sailormen operated 11 Popeyes restaurants.
Until December 1997, the Company operated two wholly-owned
subsidiaries, in addition to Sailormen: (1) SBK Franchise Systems, Inc., which,
through an exclusive master license with Sobik's Sandwich Shops, Inc., the
franchisor of Sobik's Subs restaurants, developed, franchised and serviced
Sobik's Subs franchises; and (2) Sobik's Restaurant Corp., which established,
owned and operated Sobik's Subs Shops. Sobik's Sub Shops offers a menu of
submarine (sub) style sandwiches (also referred to as hoagies or heroes).
On October 1 , 1997, the Company sold all the assets of Sobik's
Restaurant Corp. for approximately $100,000. On December 4, 1997, the Company
sold SBK Franchise Systems, Inc. for total consideration valued at $1,100,000.
Such consideration consisted of cash, a note and stock of the purchaser, JRECK
Subs Group, Inc. These divestitures were made by the Management of the Company
to streamline the Company's business operations and to focus its efforts on the
expansion and development of its Popeyes franchises.
Consistent with its decision to concentrate on the ownership and
operation of its Popeyes restaurants, the Company consummated several
acquisitions during fiscal 1997 and the first quarter of fiscal 1998. In October
1996, the Company acquired four existing Popeyes restaurants in the Birmingham,
Alabama market for consideration valued at $450,000, of which $50,000 was paid
in cash and 228,640 shares of the Company's mandatorily redeemable restricted
Class A Preferred Stock, valued at $400,000. In September 1997, the Company
acquired an existing Popeyes restaurant in Ft. Pierce, Florida for 338,983
shares of the Company's common stock valued at $400,000. Additionally, in
September 1997 the Company opened a new Popeye's Restaurant in Homestead,
Florida. In December 1997, the Company acquired eight Popeyes restaurants in the
Baton Rouge, Louisiana market, for approximately $3.7 million.
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OPERATIONS
The Popeyes menu features unique spicy fried chicken, which each
restaurant prepares daily on premises along with biscuits which are served with
the chicken entrees. In addition to its spicy fried chicken, the Popeyes menu
contains up to 20-25 other items, including seasonal entrees, such as seafood
dishes, and side items, such as red beans and rice, french fries, mashed
potatoes with gravy, cole slaw, and Cajun rice. Similar to the chicken entrees,
virtually all of these items are prepared fresh daily on the premises of each
restaurant. The Popeyes menu is designed to appeal to a large cross-section of
the population with particular concentration on the 18-49 age group. The
Company's restaurants are generally open seven days a week, from 10:00 am to
midnight, and serve lunch and dinner.
A typical Popeyes restaurant operated by the Company employs a full
time manager and at least one additional supervisory employee. Typically, all
restaurant managers (and other representatives of the Company) are required to
attend, at the Company's expense, training courses conducted by the Franchisor.
This training program involves on-the-job training and an instructional class.
Other restaurant employees are trained by the restaurant manager in accordance
with the Company's and the Franchisor's guidelines.
In 1997, there were 1,160 Popeyes units in operation worldwide, of
which 964 were located in the United States. Popeyes ranks third world wide in
the number of fast food fried chicken restaurants behind only KFC/registered
trademark/ and Church's. Average sales per unit for Popeyes/registered
trademark/ located in the United States are estimated to be $763,000 annually.
BUSINESS STRATEGY
The Company's business strategy is (1) to increase the level of sales
at its currently owned Popeyes restaurants; and (2) expand by (a) locating and
acquiring, at advantageous prices, existing Popeyes restaurants which management
believes are underperforming and (b) developing new Popeyes restaurants in the
Southeastern United States, and further exploring the possibility of expansion
to the Caribbean Basin and Mexico. There can be no assurance that the Company
will be able to achieve all or any part of its business strategy (see "Risk
Factors").
FRANCHISE AGREEMENT
The Company franchises its Popeyes restaurants from the Franchisor. The
Franchisor maintains its principal place of business at Six Concourse Parkway,
Atlanta, Georgia 30328 and does business under its corporate name and under the
trade names and service marks "Popeyes" and "Popeyes Chicken and Biscuits".
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Each of the Company's Popeyes restaurants is operated under a separate
franchise agreement from the Franchisor. Retention of these franchise agreements
is important to the success of the Company. The Company believes that its
relationship with the Franchisor is satisfactory. The franchise agreements are
for an initial term of 20 years and are renewable for additional ten-year terms
upon the payment of one-half of the then-applicable franchise fee, which is
currently $25,000, and the execution of a renewal franchise agreement. The
renewal franchise agreement may provide for increased royalties and advertising
contributions, and may require the Company to remodel or re-equip its
restaurants to meet the then current standards of the Franchisor. The Company is
required to pay the Franchisor a royalty fee equal to 5% of the gross sales of
each franchise restaurant. The franchise agreements require the Company to
construct and operate its Popeyes restaurants in accordance with the detailed
requirements of the Popeyes system.
The flours, batters, seasonings, mixes, sauces, dressings, and meats,
used to prepare Popeyes spicy chicken and other Popeyes menu items (the
"Proprietary Products") are acquired from vendors approved by the Franchisor.
The Company has an agreement with a distribution company approved by the
Franchisor for the supply of food products, dry goods and related supplies. The
Distribution Agreement commenced on March 8, 1996 and has a term of 10 years. It
is renewable annually thereafter unless terminated with 60 days notice by either
party.
The Company's ability to maintain consistent quality depends in part
upon its ability to acquire food products from reliable sources in accordance
with the Franchisor's specifications. While the Company has not experienced any
problems to date in acquiring such food products, there can be no assurance that
such food products will be available in the future on terms acceptable to the
Company.
MARKETING AND ADVERTISING
All Popeyes restaurants are required to contribute 3% of their weekly
gross sales to the Popeyes Chicken & Biscuit Advertising Fund (the "Popeyes
Advertising Fund") for regional and local advertising conducted by the
Franchisor. The terms of the Popeyes Advertising Fund require that all
contributions to the fund and earnings of the fund be utilized by the Franchisor
exclusively for advertising and promotional activities for Popeyes restaurants.
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GOVERNMENT REGULATION
Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which may include health,
sanitation, safety, fire, building and other agencies in the state and/or
municipality in which the restaurant is located.
Difficulties in obtaining or failure to obtain the required licenses or
approvals could delay or prevent the development of a new restaurant in a
particular area. The Company also is subject to federal and state environmental
regulations. Requirements of local governmental bodies with respect to zoning,
land use, and environmental factors could delay or prevent the development of a
new restaurant in a particular area.
The Company is also subject to state and federal labor laws that govern
its relationship with its employees, including with respect to minimum wage
requirements, overtime, working conditions and citizenship requirements.
COMPETITION
The restaurant industry is highly competitive with respect to price,
service, food quality and location. There are numerous well-established
competitors possessing substantially greater financial, marketing, personnel and
other resources than the Company. There is also active competition for
restaurant managers and hourly restaurant employees, as well as intense
competition for commercial real estate suitable as sites for quick-service
restaurants, such as those operated by the Company.
The Company is required to respond to various factors affecting the
restaurant industry, including changes in consumer preferences, tastes, eating
habits, demographic trends and traffic patterns, increases in food and labor
costs and national, regional and local economic conditions. A number of fast
food restaurant companies have recently been experiencing flattening growth
rates and declines in average sales per restaurant, in response to which certain
of such companies have
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adopted discount pricing strategies such as "value meals" and other marketing
strategies. Such strategies could have an adverse effect upon the Company and
could also negatively impact the Company's operating margins, should the Company
elect to match competitors' price reductions. The principal bases of competition
in the industry are food quality, speed of service, and price; but advertising,
location, and attractiveness of facilities are also important. Popeyes competes
with other national fried chicken chains such as KFC and Church's, as well as
with all other national and regional quick-service restaurant chains. Some of
these competitors have greater financial resources, larger advertising budgets
and more national recognition than those of Popeyes.
As a result of a national trend in increased chicken consumption, many
quick-service restaurant chains that are not identified with chicken, have added
a variety of chicken items to their menus. While the Company believes that its
spicy fried chicken is distinguished from the chicken offered by its competitors
by unique seasonings and tastes, product quality, and freshness, there can be no
assurances that consumers will not choose its competitors' chicken products over
those sold in the Company's restaurants.
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EMPLOYEES
As of December 31, 1997, the Company employed approximately 495
persons, on a full-time and part-time basis. Of these employees, 80 are employed
as field management personnel and 10 are in corporate management and
administration. None of the Company's employees belong to a union and the
Company has not experienced any work stoppages. The Company believes that its
labor relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 2600 square feet of office space at 9400 South
Dadeland Boulevard, Miami, Florida 33156. The monthly lease expense for the
offices is $3,250.00. The lease expires on December 31, 1999. These offices are
used to administer all Company operations.
The Company currently does not make any investments in real estate or
interests in real estate, including real estate mortgages or securities issued
by persons primarily engaged in real estate activities, and the Company does not
intend to make such investments in the future. The Company anticipates that
Company-owned restaurants will be established primarily in leased premises, but
the Company may elect as an alternate to leasing, to periodically purchase land
and buildings for new locations. To the extent that the purchase of a restaurant
property or real estate is a requirement in connection with the acquisition of a
particular franchise, the Company intends whenever possible, to subsequently
enter into a sale and leaseback type transaction with respect to such restaurant
properties or real estate.
As of December 31, 1997, all of the 25 Popeyes restaurants operated by
the Company were leased. The Company usually tailors the lease term according to
the term of the franchise agreement. The monthly lease expense on leased
properties ranges between $1,800 and $7,045. A total of two of the lower base
rent leases may also contain additional payments to the lessor based upon a
percentage of sales. As of December 31, 1997 the Company leased 13 restaurants
in Florida, 4 in Alabama and 8 in Louisiana.
ITEM 3. LEGAL PROCEEDINGS
On November 20, 1997, James Byrd, the former Chairman of the Board and
Director of the Company, filed suit against the Company and Mr. Berg for an
injunction and damages resulting from an alleged breach of contract by the
Company. Mr. Byrd alleges that the Company breached an agreement to repurchase
150,000 shares of common stock at a price of approximately $130,000. On November
26, 1997, Mr. Byrd's Emergency Motion for Temporary Injunction in that action
was denied. The Company believes that the suit is without merit and the Company
will vigorously defend this action.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
In the fourth quarter, no matter was submitted to a vote of securities
holders of the Company.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades in the over-the-counter market under
symbol IFDA on the OTC electronic bulletin board. There was no trading in the
Company's Common Stock prior to October 1995. The following table shows the
quarterly high and low bid prices for calendar years 1995, 1996 and 1997
as reported by the National Quotations Bureau Incorporated. These prices reflect
inter-dealer quotations without adjustments for retail markup, markdown or
commission and do not necessarily represent actual transactions.
YEAR PERIOD HIGH LOW
1995 First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter $6.75 $6.00
1996 First Quarter $7.00 $4.75
Second Quarter $6.00 $1.88
Third Quarter $3.25 $1.38
Fourth Quarter $1.25 $0.88
1997 First Quarter $1.38 $0.56
Second Quarter $1.44 $0.69
Third Quarter $1.75 $0.81
Fourth Quarter $0.87 $0.56
At December 31, 1997 there were approximately 1200 holders of record of
the Company's Common Stock.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto, appearing elsewhere in this
report.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
For the year ended September 30, 1997 ("Fiscal 1997"), the Company had
total revenues of $14,092,182 compared to total revenues of $6,298,074 for the
year ended September 30, 1996 ("Fiscal 1996"). The increase in revenues was
attributable to the inclusion of the revenues of Sailormen for a full fiscal
year, combined with the revenues attributable to the five additional Popeyes
restaurants which were acquired and the opening of a new Popeyes restaurant,
during Fiscal 1997.
Operating profit of the Company was $145,448 for Fiscal 1997, compared
to an operating loss of ($351,791) for Fiscal 1996. Net income for Fiscal 1997
was $318,878, compared to a net loss of ($409,353) for Fiscal 1996, an increase
of 178%. This increase in operating and net income resulted from the increases
in revenues, combined with a reduction in general and administrative expenses
related to the consolidation of the Company's corporate offices to one location.
Also contributing to the increase in net income was the realization of a
deferred tax asset in the amount of $164,900 related to prior year net operating
losses.
Cost of sales for Fiscal 1997 were $12,184,518, compared to $4,210,732
for Fiscal 1996. The increase was attributable to the inclusion of costs for
Sailormen for a full fiscal year, combined with the inclusion of costs relating
to the Popeyes restaurants acquired during Fiscal 1997, as well as the costs
associated with the new restaurant opened during the fiscal year. Also
contributing to the increase in costs of sales was an increase in the minimum
wage to $5.15 per hour during Fiscal 1997.
General and administrative costs for Fiscal 1997 were $1,574,526,
compared to $2,230,751 for Fiscal 1996. The decrease in general and
administrative expenses was primarily attributable to the cost savings
resulting from the consolidation of the Company's corporate offices.
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YEAR ENDED SEPTEMBER 30, 1996, COMPARED TO YEAR ENDED SEPTEMBER 30,
1995
For Fiscal 1996, the Company had total revenues of $6,298,074, compared
to total revenues of approximately $280,000 for the fiscal year ended September
30, 1995 ("Fiscal 1995"). This increase in revenues was primarily attributable
to the Company's acquisition of Sailormen in May 1996.
The Company had a loss from operations of ($351,791) for Fiscal 1996,
compared to a gain from operations of $14,449 for Fiscal 1995. Net loss for
Fiscal 1996 was ($409,353) compared to net income of 10,457 for Fiscal 1995. The
operating and net losses in Fiscal 1996 were primarily due to expenses
associated with the acquisition of Sailormen. Compounding the increased level of
expenses was the fact that the Company's results of operations reflected only
six months of revenues from Sailormen to offset these expenses.
Costs of sales for Fiscal 1996 were $4,210,732 and primarily reflect
the cost of sales related to the operation of the Sailormen stores which were
acquired in May, 1996. Costs of sales were negligible for Fiscal 1995, as the
Company had total restaurant sales of $3,374 for Fiscal 1995.
The Company's general and administrative expenses increased to
approximately $2,230,751 for Fiscal 1996 from a level of $265,000 for Fiscal
1995. The increase in general and administrative expenses was attributable to
the increase in overhead related to the Sailormen acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for Fiscal 1997 was $135,566 compared
to net cash used by operations of ($740,044) for Fiscal 1996. The increase in
operating cash flow was primarily attributable to the generation of net income
of $318,878 for Fiscal 1997 compared to a net loss of ($409,353) for Fiscal
1996, as well as an increase in the level of accounts payable of $170,774
compared to Fiscal 1996.
At September 30, 1997, the Company had current assets of $458,904 and
total assets of $7,138,673 compared to current assets of approximately $162,763
and total assets of approximately $5,277,993 at September 30, 1996. The increase
in total assets resulted from the Company's acquisition of four Popeyes
restaurants in Birmingham, Alabama and one Popeyes restaurant in Fort Pierce .
Net cash provided by financing activities was $483,886 for Fiscal 1997
compared to net cash used by financing activities for Fiscal 1996 of ($655,607).
The increase resulted from the proceeds from new debt of $1,343,594, which was
offset by the reduction of existing debt of $433,958, redemption of shares of
the Company's Series A and B Preferred Stock for $175,000, the repurchase of
treasury stock of $233,000 and dividends on the Series A Preferred Stock of
$17,750.
The Company believes that cash generated from operations will be
sufficient to fund its current operations for at least the next 12 months. The
Company believes it will be able to obtain, through equity or debt financing,
the necessary capital to fund its expansion during fiscal 1998. However, there
can be no assurance that the Company will be able to obtain such capital on
terms acceptable to the Company.
SALE LEASE-BACK
On September 30, 1996, the Company received proceeds of $2.23 million
in a transaction pursuant to which the Company sold land, building and
improvements for five of its locations to a subsidiary of Franchise Finance
Corporation of America and simultaneously agreed to lease back these locations.
The funds from this transaction were used to pay off a portion of the Company's
long term debt.
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Cautionary Statement Regarding Forward-looking Statements
From time to time, including herein, the Company may publish
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," or variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward looking
statements. The Company undertakes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise.
In addition to factors discussed in this Form 10-K, among the other
factors that could cause the Company's results to differ materially are: general
economic and business conditions; the impact of competitive products and
pricing; success of operating initiatives; development and operating costs;
advertising and promotional efforts; adverse publicity; acceptance of new
product offerings; consumer trial and frequency; changes in business strategy or
development plans; quality of management; availability, terms, and deployment of
capital; the results of financing efforts; business abilities and judgment of
personnel; availability of qualified personnel; food, labor, and employee
benefit costs; changes in, or the failure to comply with, government
regulations; weather conditions and construction schedules and risks that sales
growth resulting from the Company's current and future remodeling can be
sustained at the current levels experienced.
For a further description of some of these factors that could cause
actual results to differ materially from such forward-looking
statements, see "Risk Factors" below.
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RISK FACTORS
DEPENDENCE ON EXECUTIVE OFFICERS. The Company is dependent upon the
efforts and abilities of Robert Berg, its Chief Executive Officer, Chief
Financial Officer and Chairman of the Board, and Steven Wemple, its President
and Chief Operating Officer. The loss of the services of either Messrs. Berg or
Wemple would have a material adverse effect upon the Company's business and
future prospects. In addition, in order to successfully implement its proposed
expansion and manage anticipated growth, the Company will be dependent upon its
ability to retain existing and hire additional qualified management and other
personnel, including certain executive officers. The competition for qualified
management and other personnel in the restaurant industry is intense and,
accordingly, there can be no assurance that the Company will be able to retain
or hire the necessary personnel. The Company will also be dependent on its
ability to hire and train hourly employees. In recent years, the restaurant
industry has experienced a shortage in the availability of qualified restaurant
personnel, which could have an adverse effect on the Company.
COMPETITION IN THE RESTAURANT INDUSTRY. The Company's restaurants face
intense competition from quick- and full-service restaurants and, in particular,
from chains with operating concepts similar to those of the Company. Management
believes that its primary competitors are other national fried chicken chains,
including KFC/registered trademark/, Church's Fried Chicken/registered
trademark/ and others, as well as non-fried chicken chains, including Kenny
Rogers Roasters/registered trademark/, Boston Market/registered trademark/ and
Pollo Tropical/registered trademark/. In general, the restaurant industry is
highly competitive and can be significantly affected by many factors, including
changes in local, regional or national economic conditions, changes in consumer
tastes, consumer concerns about the nutritional quality of food and increases in
the number of, and particular locations of, competing restaurants. Factors such
as inflation, increases in food, labor and energy costs and the availability of
an adequate number of hourly-paid employees also affect the restaurant industry.
Major chains, which have substantial financial resources and longer operating
histories, dominate the restaurant industry. There can be no assurance that
consumers will regard the Company's menu items as significantly distinguishable
from competitive products, that substantially equivalent products will not be
introduced by the Company's competitors or that the Company will be able to
compete successfully in any given market.
INCREASES IN OPERATING AND FOOD COSTS; AVAILABILITY OF SUPPLIES. An
increase in operating costs could adversely affect the profitability of the
Company. Factors such as inflation, increased utility, labor and employee
benefit costs are beyond the Company's control and may adversely affect the
restaurant industry in general and the Company's restaurants in particular. In
connection with any further expansion of the Company, of which there can be no
assurance, the Company's general and administrative costs likely would increase
as a percentage of revenues as the Company adds administrative staff, systems,
and other infrastructure to support these costs. A majority of the Company's
revenues and food costs are derived from the sale and purchase of
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chicken. The cost of fresh chicken fluctuates from time to time depending on a
variety of factors beyond the control of the Company, such as weather conditions
and seasonal demand. There can be no assurance that fluctuations in the cost of
chicken or the price of other supplies will not adversely affect the Company's
results of operations. In addition, the Company is dependent on daily deliveries
of food supplies, such as chicken, produce, baked goods and other products and
any delays or stoppages in such deliveries, as a result of, among other
things, labor unrest or adverse weather conditions, could subject the Company's
restaurants to shortages or interruptions which could materially adversely
affect the Company.
LIMITED MENU; UNCERTAINTY OF MARKET ACCEPTANCE. The Company's Popeyes
restaurants menu is comprised primarily of fried chicken and accompanying side
dishes. Achieving consumer awareness and market acceptance of the Company's
concepts, particularly as the Company seeks to open and expand into new markets,
will require substantial effort and expenditures by the Company. A general
decline in the sale of chicken products due to industry trends, change in
consumer preferences, increased prices or other reasons would adversely impact
the Company.
The Company's future expansion plans are based upon Management's
belief that the Popeyes concept will have significant market appeal in the
markets in which the Company expects to enter. In the event the anticipated
consumer acceptance of the Popeyes concept in these markets is not realized, the
Company would be subject to a material adverse effect.
CERTAIN FACTORS AFFECTING THE QUICK-SERVICE RESTAURANT INDUSTRY. The
Company is required to respond to various consumer preferences, tastes and
eating habits; demographic trends and traffic patterns; increases in food and
labor costs; and national, regional and local economic conditions. In the past,
several quick-service restaurant companies have experienced flat growth rates
and declines in average sales per restaurant, in response to which certain of
such companies have adopted "discount-pricing" strategies. Such strategies could
have the effect of drawing customers away from companies that do not engage in
discount pricing and could also negatively impact the operating margins of
competitors that do attempt to match competitors' price reductions. Continuing
or sustained price discounting in the fast food industry could have an adverse
effect on the Company.
The Company's profits are dependent on discretionary spending by
consumers, particularly by consumers living in the communities in which the
Company's restaurants are located. Currently, the Company has locations in
Florida, Alabama and Louisiana. A significant weakening in any of the local
economies in which the Company operates may cause the residents of such
communities to curtail discretionary spending which, in turn, could materially
affect the profitability of the entire Company.
IMPORTANCE OF TRADEMARKS. The Company believes that its use of various
trademarks and service marks obtained pursuant to its franchisee agreements with
the Franchisor are valuable to
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the marketing of its restaurants. There can be no assurance that the Company's
use of such marks do not or will not violate the proprietary rights of others,
that the Company's rights to utilize such marks will be upheld if challenged, or
that the Company will not be prevented from using the marks, any of which could
have a materially adverse effect on the Company.
GOVERNMENT REGULATION. The restaurant business is subject to extensive
federal, state and local regulation relating to the development and operation of
restaurants, including regulations relating to building and zoning requirements,
franchising, preparation and sale of food, and laws governing the Company's
relationship with its employees, including minimum wage requirements,
unemployment taxes and sales taxes, overtime and working conditions and
citizenship requirements. The failure to obtain or retain required licenses, or
a substantial increase in the minimum wage rate, (which increases have been
proposed and are currently pending) could adversely affect the quick service
operations of the Company. The Company intends to explore the development of the
Popeyes fast-food concept in certain international markets. The restaurant
business in these markets is subject to extensive regulation relating to the
development and operation of restaurants, including regulations relating to
building requirements, preparation and sale of quick service, and laws
governing the Company's relationship with its employees. Compliance with such
regulations may result in the Company incurring significant expenses. Failure to
obtain required licenses or to comply with applicable laws and regulations in
such jurisdictions could adversely affect the operations of the Company's
franchised restaurants in such jurisdictions.
EXPANSION PLANS; CAPITAL RESOURCE REQUIREMENTS. There can be no
assurance that the Company will achieve its growth objectives or that new
restaurants will be profitable. The success of the Company's planned expansion
will be dependent upon numerous factors, many of which are beyond the Company's
control, including the identification of suitable markets, the availability and
leasing or purchase of suitable sites on acceptable terms, the hiring, training
and retention of qualified management and other restaurant personnel, the
ability to obtain necessary governmental permits and approvals, the availability
of appropriate financing and general economic conditions.
DEPENDENCE ON CONCEPTS. Because the Company develops Popeyes
restaurants, a failure of the Popeyes concept to compete successfully in the
quick
service restaurant industry in the areas in which the Company operates
Popeyes restaurants or in which the Company intends to develop new restaurants
or acquire existing restaurants would have a material adverse effect on the
Company.
RECENT LOSSES. Although the Company experienced net income for fiscal
1997, the Company experienced a net loss of ($409,353) in Fiscal 1996. The net
loss was primarily due to expenses associated with the acquisition of Sailormen.
There can be no assurance that the Company will not experience net losses for
any future fiscal years.
ITEM 7. FINANCIAL STATEMENTS
See the Financial Statements of the Company which are attached hereto.
14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective August 27, 1997, the Company's Board of Directors dismissed
James, Parks, Tschopp & Whitcomb, P.A. as the Company's independent auditors and
appointed Arthur Andersen LLP as independent auditors for the Company. The
former auditor's opinion for the past two years did not contain an adverse
opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit
scope, or accounting principles. There were no disagreements with the former
auditor on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedures.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The current executive officers and directors of the Company are, as
follows:
NAME AGE POSITION
Robert S. Berg 39 Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer
Steven M. Wemple 46 President and Chief Operating
Officer, Director
Andrew J. Nichols 67 Director
J. Russell Jones 59 Director
Each director is elected to hold office until the next annual meeting
of stockholders and until his successor is elected and qualified. The following
sets forth certain biographical information with respect to the directors and
executive officers of the Company:
Robert S. Berg has served as Chairman of the Board and Chief Executive
Officer of the Company since April 1996. Since 1987, Mr. Berg has served as
President of Sailormen.
15
<PAGE>
Steven M. Wemple has served as the President and Chief Operating
Officer of the Company and as a director since April 1996. Mr. Wemple is in
charge of all operational matters relating to the Company's business. Since
1985, Mr. Wemple has served as Vice-President of Sailormen.
Andrew J. Nichols has been a director of the Company since December
1997. Mr. Nichols was a Market Director for Waste Management, Inc. for in excess
of five years until his retirement in 1988.
J. Russell Jones has been a director of the Company since December
1997, at which time he sold eight Popeyes restaurants to the Company. Prior to
becoming a director, Mr. Jones operated a total of nine Popeyes franchises in
the greater Baton Rouge, Louisiana region for in excess of ten years.
There are no family relationships among any of the executive officers
or directors of the Company. With the exception of Mr. Berg, none of the
executive officers or directors of the Company is subject to any legal
proceedings.
ITEM 10. EXECUTIVE COMPENSATION
Below is the aggregate annual remuneration of each of the executive
officers of the Company. The Company's outside directors Messrs. Nichols and
Jones are compensated for their services and receive shares of the Company's
common stock valued at $1,000 per meeting.
CASH COMPENSATION
The following table shows, for the two year period ended September 30,
1997, the cash and other compensation paid to each of the executive officers of
the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Option Grants In Last Fiscal Year
NAME AND OTHER ANNUAL RESTRICTED OPTIONS/ ALL OTHER
PRINCIPAL POSITION PERIOD SALARY BONUS COMPENSATION STOCK AWARDS SAR'S(#) LTIP COMPENSATION
- ------------------ ------ ------ ----- ------------ ------------ -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert S. Berg 1997 $226,018 $0 $4,896 (1) $0 $0 $0 $0
Chairman of the Board 1996 $226,018 $2,000 $4,896 (1) $0 $0 $0 $0
Chief Executive Officer
Chief Financial Officer
Steve M. Wemple 1997 $196,326 $0 $6,528 (2) $0 $0 $0 $0
President and Chief 1996 $196,326 $2,000 $6,528 (2) $0 $0 $0 $0
Operating Officer,
Director
</TABLE>
- -------------------------------------------------------------------------------
(1) Represents premiums for health insurance.
(2) Represents premiums for health insurance.
16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1997 (a) by each
person known to the Company to own beneficially more than 5% of any class of the
Company's securities and (b) by each of the Company's officers and directors and
by all officers and directors of the Company as a group. As of December 31,
1997, there were 5,560,482 shares of Common Stock of the Company issued and
outstanding. The address of each of the individuals described below is 9400 S.
Dadeland Boulevard, Suite 720, Miami, Florida 33156.
NAME AND ADDRESS SHARES OF RECORD AND PERCENT
OF OWNER BENEFICIALLY OWNED OF CLASS
- ---------------- ------------------- --------
Robert S. Berg 1,674,583 30.1%
Chairman of the Board,
Chief Executive Officer,
Chief Financial Officer
Steven M. Wemple 919,584 16.5%
President and Chief Operating
Officer, Director
Andrew J. Nichols 542,500 9.8%
Director
Kenneth Cramer 388,000 7.0%
All Officers and Directors
as a Group (3 persons) 3,136,667 56.4%
========= =====
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Berg and Wemple jointly own all of Elk River Aviation Inc.
("Elk River"), a charter aircraft company whose sole business is the leasing of
the airplane described in this section. In Fiscal Years 1996 and 1997, the
Company paid $43,000 and $63,000 respectively, to Elk River for its services. In
September 1997, the Company signed a twelve-month lease agreement providing for
the Company's exclusive use of Elk River's sole aircraft at a monthly rental of
approximately $33,000 plus operating costs including insurance, repairs,
maintenance and pilot costs. Upon signing the lease the Company gave Elk River a
refundable security deposit of approximately $160,000. The Company believes that
the lease of the aircraft is important to the Company in order to permit
Management to effectively supervise the operations of its restaurants which are
located in several states, as well as in connection with the efforts of the
Company to analyze potential future restaurant locations.
During April 1997, in connection with Messrs Byrd and Kaufman retiring
from the Board of Directors the Company purchased the majority of their common
shares held. Mr. Byrd sold to the Company 1,030,000 shares of the Company's
common stock for 430,000 shares of the Company's mandatorily redeemable
preferred Class B stock, redeemable monthly for $5,000 per month. The Company
has the right of first refusal to purchase the 200,000 common shares that Mr.
Byrd retained. Mr. Kaufman sold all the Company's common shares he held,
1,150,000, to the Company for $208,000 cash.
The Company leases equipment from First Southern Financial Corp., a
Florida corporation controlled by Messrs. Berg and Wemple. Currently, the
Company is paying First Southern Financial Corp. the sum of approximately $900
per month for the equipment. The Company has the option to purchase the
equipment at any time during the lease which expires in September 2002.
On December 11, 1997, the Company entered into a lease agreement
controlled by J. Russell Jones, a Director of the Company, for a Popeyes
restaurant located in Baton Rouge, Louisiana. The lease is a long term lease
with a purchase option. The current rent is $5,000 per month. The Company
intends to purchase the real estate upon which the restaurant is located from R.
Jones Enterprises and is currently finalizing the terms for that purchase. In
the event the Company purchases such real estate the Company intends to enter
into a sale leaseback transaction.
17
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following list describes the exhibits filed as part of this Form
10-KSB:
EXHIBIT NUMBER
3.1 Articles of Incorporation of Sobik's Subs, Inc. dated May 13, 1994 (1)
3.2 By-Laws of Sobik's Subs, Inc. dated May 13, 1994 (1)
4.1 Specimen of Common Stock Certificate(2)
9.1 Shareholders Voting Agreement dated April 17, 1996(1)
10.1 Form of Company Franchise Agreement, including the Addendum to Franchise
Agreement.(1)
10.2 Trademark Licensing Agreement dated March 1, 1993.(1)
10.3 Franchise Agreement between SBK Franchise Systems, Inc. and Sailormen,
Inc. dated March 2, 1995.(1)
10.4 Exclusive Trademark Licensing Agreements between Sobik's Sandwich Shops,
Inc. and SBK Franchise Systems, Inc. dated March 1, 1993.(1)
10.5 Agreement and Plan of Reorganization between Sobik's Subs, Inc. and
Sailormen, Inc. dated January 22, 1996.(1)
10.6 List of Sobik's Subs franchisees.(1)
10.7 Exchange Agreement between FD Chemicals, Inc. and SBK Franchise Systems,
Inc. dated June 19, 1995.(1)
10.8 Agreement between Robert S. Berg, Steven M. Wemple, James S, Byrd, Norman
Kaufman and Sobik's Subs, Inc. dated June 25, 1996.(1)
21.1 Subsidiaries of Sobik's Subs, Inc.(1)
- -------------------
(1) Incorporated herein by reference to Form 10-KSB under the Securities
Exchange Act of 1934 filed with the Commission in July 1996, file number
000-21093
18
<PAGE>
INTERFOODS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(TOGETHER WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
F-1
<PAGE>
INTERFOODS OF AMERICA, INC. AND SUBSIDIARIES
Table of Contents
Reports of Independent Certified Public Accountants................F-3 - F-4
Consolidated Financial Statements:
Consolidated Balance Sheets...............................F-5
Consolidated Statements of Operations.....................F-6
Consolidated Statements of Stockholders' Equity...........F-7
Consolidated Statements of Cash Flows.....................F-8 - F-9
Notes to the Consolidated Financial Statements.....................F-10 - F-17
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Interfoods of America, Inc. and Subsidiaries.:
We have audited the accompanying consolidated balance sheet of Interfoods of
America, Inc. (a Nevada corporation) and subsidiaries as of September 30, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of Interfoods of America, Inc. as of September 30, 1996,
were audited by other auditors whose report, dated December 11, 1996, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Interfoods of
America, Inc. and subsidiaries, as of September 30, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
December 5, 1997 (except with respect to the
matters discussed in Footnote 10, as to which
the date is December 11, 1997).
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Interfoods of America, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Interfoods of
America, Inc. and Subsidiaries as of September 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Interfoods of
America, Inc. and Subsidiaries, as of September 30, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
James, Parks, Tschopp & Whitcomb, PA
December 11, 1996,
Maitland, Florida.
F-4
<PAGE>
INTERFOODS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable $115,742 $93,110
Inventories 66,271 38,946
Prepaid expenses 111,991 30,707
Deferred tax asset 164,900 0
--------- ---------
Total current assets 458,904 162,763
--------- ---------
Furniture, equipment and construction
in progress, net 3,698,995 2,573,737
--------- ---------
Other assets:
Deposits 331,122 85,487
Goodwill, less accumulated amortization
of $88,809 and $28,769 2,475,701 2,301,582
Other intangible assets, less accumulated
amortization of $181,200 and $169,929 147,677 99,646
Due from affiliates 26,274 54,778
--------- ---------
Total other assets 2,980,774 2,541,493
--------- ---------
Total assets $7,138,673 $5,277,993
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $1,182,117 $1,011,343
Current portion of long-term debt 204,122 376,270
Current portion of deferred income
on sale and leaseback transactions 19,844 15,487
Notes payable to stockholders 0 13,150
--------- ---------
Total current liabilities 1,406,083 1,416,250
Deferred income on sale and leaseback
transactions, net of current portion 377,039 294,254
Long-term debt, net of current portion 1,299,109 204,175
--------- ---------
Total liabilities 3,082,231 1,914,679
--------- ---------
Mandatorily redeemable preferred stock:
Restricted Class A stock, nonvoting,
228,640 shares authorized, 142,900
shares issued and outstanding, 6%
annual dividend 253,750 0
--------- ---------
Restricted Class B stock, nonvoting,
430,000 shares authorized, 405,000
shares issued and outstanding 405,000 0
--------- ---------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, 25,000,000 shares authorized
at $.001 par value; 8,079,979 and 7,740,996
shares issued and 5,526,646 and 7,392,663
shares outstanding 8,080 7,741
Additional paid-in capital 4,197,189 3,797,528
Accumulated deficit (79,309) (376,687)
Treasury stock, at cost, 2,553,333 and
348,333 shares (728,268) (65,268)
--------- ---------
Total stockholders' equity 3,397,692 3,363,314
--------- ---------
Total liabilities and
stockholders' equity $7,138,673 $5,277,993
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these balance sheets.
F-5
<PAGE>
<TABLE>
<CAPTION>
INTERFOODS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended September 30, 1997 and 1996
1997 1996
---- ----
<S> <C> <C>
Revenues:
Restaurant sales $13,830,499 $5,974,242
Royalties and fees 261,683 323,832
---------- ----------
Total revenues 14,092,182 6,298,074
---------- ----------
Cost and expenses:
Cost of sales 12,184,518 4,210,732
General and administrative expenses 1,574,526 2,230,751
Depreciation and amortization 187,690 208,382
---------- ----------
Total cost and expenses 13,946,734 6,649,865
---------- ----------
Operating profit (loss) 145,448 (351,791)
---------- ----------
Other income (expense):
Other income 62,821 52,262
Interest expense (54,291) (109,824)
---------- ----------
Total other income (expense) 8,530 (57,562)
---------- ----------
Net income (loss) attributable
to common stockholders 153,978 (409,353)
Deferred tax benefit 164,900 0
---------- ----------
Net income (loss) $318,878 $(409,353)
========== ==========
Net income (loss) per share, less
preferred stock dividends of $21,500 $0.05 $(0.09)
========== ==========
Weighted average shares outstanding 6,585,953 4,696,361
========== ==========
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part of these statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
INTERFOODS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended September 30, 1997 and 1996.
ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED TREASURY
STOCK SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------------ ------ ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 2,333,403 $2,333 $64,827 $32,666 $(50,268) $49,558
Net loss 0 0 0 (409,353) 0 (409,353)
Purchase of treasury stock 0 0 0 0 (15,000) (15,000)
Common stock issued 5,407,593 5,408 3,732,701 0 0 3,738,109
--------- ------ --------- ------- -------- ---------
BALANCE, SEPTEMBER 30, 1996 7,740,996 7,741 3,797,528 (376,687) (65,268) 3,363,314
Net income 0 0 0 318,878 0 318,878
Preferred stock- class A dividend 0 0 0 (21,500) 0 (21,500)
Purchase of treasury stock 0 0 0 0 (663,000) (663,000)
Common stock issued 338,983 339 399,661 0 0 400,000
--------- ------ --------- ------- -------- ---------
BALANCE, SEPTEMBER 30, 1997 8,079,979 $8,080 $4,197,189 $(79,309) $(728,268) $3,397,692
========= ====== ========= ======= ======== =========
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
INTERFOODS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended September 30, 1997 and 1996
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $318,878 $(409,353)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 187,690 208,382
Deferred income tax benefit (164,900) 0
Changes in assets and liabilities:
Accounts receivable (22,632) (57,488)
Deposits (245,635) (6,275)
Inventories (27,325) 637
Accounts payable and accrued expenses 170,774 (485,310)
Prepaid expenses (81,284) 9,363
--------- ---------
Net cash provided by (used in) operating activities 135,566 (740,044)
--------- ---------
Cash flows from investing activities:
Capital expenditures (963,654) (1,098,202)
Acquisition of restaurants (50,000) 0
Proceeds from sale of land and buildings 425,000 2,230,000
Collection of note receivable 0 200,000
Acquisition of intangible assets (59,302) 0
Due from affiliates 28,504 58,280
--------- ---------
Net cash provided by (used in) investing activities (619,452) 1,390,078
--------- ---------
Cash flows from financing activities:
Proceeds from long term debt 1,343,594 0
Repayment of long-term debt (420,808) (1,244,277)
Repayment of notes payable to stockholders (13,150) (42,350)
Purchase of treasury stock (233,000) (15,000)
Redemption of Restricted Class A Preferred stock (150,000) 0
Redemption of Restricted Class B Preferred stock (25,000) 0
Preferred stock- Class A dividend (17,750) 0
Proceeds from common stock issued 0 646,020
--------- ---------
Net cash provided by (used in) financing activities 483,886 (655,607)
--------- ---------
Net decrease in cash and cash equivalents 0 (5,573)
Cash and cash equivalents:
Beginning of period 0 5,573
--------- ---------
End of period $ 0 $ 0
========= =========
</TABLE>
Continued
F-8
<PAGE>
INTERFOODS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended September 30, 1997 and 1996
(Continued)
Supplemental disclosure of noncash financing and investing activities:
During the year ended September 30, 1996, the Company exchanged 2,500,000 shares
of common stock for 100% of the outstanding common stock of an entity known as
Sailormen, Inc. which was valued at $3,000,000.
In October 1996, the Company purchased four Popeyes/registered trademark/'s
restaurants for $450,000 of which $50,000 was paid in cash and 228,640 shares of
mandatorily redeemable Restricted Class A preferred stock were issued, valued at
$400,000.
In April 1997, 1,030,000 common shares were purchased and exchanged for 430,000
shares of mandatorily redeemable Restricted Class B preferred stock valued at
$430,000.
On September 22, 1997, the Company purchased a Popeyes/registered trademark/'s
restaurant in Fort Pierce, Florida for 338,983 shares of common stock, valued at
$400,000.
Supplemental disclosures of cash flow information: 1997 1996
---- ----
Cash paid during the year:
Income taxes $ 0 $ 0
======== =======
Interest $122,572 $41,543
======== =======
The accompanying notes to the consolidated financial statements
are an integral part of these financial statements.
F-9
<PAGE>
INTERFOODS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Interfoods of America, Inc. ("Interfoods" or the "Company" formerly known as
Sobik's Subs, Inc.) and its wholly owned subsidiaries, SBK Franchise Systems,
Inc. ("SBK"), Sobik's Restaurant Corp. ("Restaurant") and Sailormen, Inc.
("Sailormen"). In September 1996, the Company changed its name from Sobik's
Subs, Inc. to Interfoods of America, Inc.
SBK was incorporated under the laws of the State of Florida on March 8, 1993.
SBK, which was sold by the Company on December 4, 1997, was engaged in franchise
sales of a system of business of producing and merchandising distinctive
specialty sandwiches, related food items and other products, under the name
"Sobik's Subs."
Restaurant was incorporated in 1995 for the purpose of operating Sobik's Subs
Inc. stores in Central Florida. The first company-owned store was opened on
September 20, 1995.
At September 30, 1997, there were 52 existing franchises and company-owned
Sobik's Subs stores. The stores are located primarily in the Central Florida
Area.
In May 1996, the Company purchased all of the outstanding stock of Sailormen, an
operator of eleven "Popeye's Chicken and Biscuits" restaurants in South Florida.
The purchase price consisted of 2,500,000 shares of the Company's common stock
valued at $1.20 per share.
The acquisition of Sailormen was accounted for by the purchase method of
accounting, and the net assets acquired are included in the Company's
consolidated balance sheets based on their estimated fair values. In July 1996,
a Form 10SB was filed with the Securities and Exchange Commission, which
reflected the acquisition of Sailormen on a pro forma basis. Subsequent to this
date, the Company reevaluated the fair market value ascribed to the business
acquired, and decreased the amount recorded as goodwill to $2,330,351. The
excess of the purchase price over the estimated fair value of the net assets
acquired ("goodwill") is being amortized on a straight-line basis over 40 years.
In October 1996, Interfoods acquired the assets of a company which operated four
"Popeye's/registered trademark/'s Chicken and Biscuits" restaurants in
Birmingham, Alabama. The purchase price consisted of $50,000 cash and 228,640
shares of the Company's mandatorily redeemable Restricted Class A preferred
stock. The preferred shares are convertible into common shares, at the
shareholder's election, in equal amounts over a period of eight quarters
beginning three months from date of acquisition; or are required to be redeemed
at a rate of $50,000 per quarter. The preferred shares have no voting rights
until converted to common stock, and are entitled to an annual dividend of 6%.
As of
F-10
<PAGE>
September 30, 1997, 85,740 shares of mandatorily redeemable Restricted Class A
preferred stock has been redeemed for $150,000.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an original
maturity of three months or less. There were no cash and cash equivalents at
September 30, 1997 and 1996.
REVENUE RECOGNITION
In connection with its franchising operations, SBK received initial franchise
fees, transfer fees and royalties. Initial franchise fees and transfer fees are
recognized as income when substantially all services and conditions relating to
the sale of the franchise have been performed or satisfied, which occurs when
the franchised restaurant commences operations. Royalties, which were based upon
a percentage of the franchise's gross sales, were recognized as income when the
fees are earned and become receivable and collectible.
FURNITURE AND EQUIPMENT
Property and equipment acquired in exchange for restricted common stock is
recorded at the fair market value of the assets acquired.
All other property and equipment is recorded at cost. Depreciation is provided
using the straight-line method over the following estimated useful lives:
Leasehold improvements Lesser of 20 years or life of lease
Furniture and equipment 5-20 years
START UP COSTS
The Company capitalizes costs relating to new restaurant start-up cost
activities, such costs include training and labor costs prior to opening the new
restaurant. On April 22, 1997, the Accounting Standards Executive Committee
issued Exposure Draft Proposed Statement of Position, "Reporting on Costs of
Start-up Activities." This Exposure Draft when issued would require the write
off of start-up costs capitalized by the Company. The write off will be reported
as a cummulative change in accounting principle. The proposed effective date for
the exposure draft would be for fiscal years beginning after December 15, 1997.
As of September 30, 1997 the Company has capitalized start-up costs of
approximately $120,000.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
INTANGIBLE ASSETS
Intangible assets are recorded at cost and consist of organizational costs,
trade marks and franchise rights which are being amortized using the
straight-line method over 5 years, 10 years and 20 years, respectively. The
franchise agreements are for an initial term of 20 years may be extended for
additional ten-year terms upon the payment of one-half of the then-applicable
franchise fee (currently $25,000) and the execution of a renewal franchise
agreement. The franchise terms require the Company to pay royalties of 5% and
advertising of 3% of gross sales on a weekly basis. Goodwill is amortized on a
straight-line basis over 40 years.
F-11
<PAGE>
Statement of Financial Accounting Standard No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
is effective for fiscal years beginning after December 15,
1995. SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Under such circumstances,
SFAS 121 requires that long-lived assets and certain identifiable intangibles to
be held and used or disposed of be reported at the lower of their carrying
amount or fair value less cost to sell. Accordingly, when events or
circumstances indicate that long-lived assets may be impaired, the Company
estimates the asset's future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized based on the excess of the carrying amount over
the fair value of the asset. The Company determined that no impairment loss need
be recognized for applicable assets at September 30, 1997.
USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined based on
available information and appropriate valuation methodologies. The carrying
amounts of accounts receivable and accounts payable approximate fair value due
to the short-term nature of the accounts. The fair value of due from affiliates,
notes payable to stockholders, long-term notes payable and mandatorily
redeemable restricted preferred stock approximate the carrying value of such
assets and liabilities as of September 30, 1997 and 1996.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the number of weighted average shares
outstanding. For the purpose of computing primary earnings per share, preferred
stock dividends paid or accrued of $21,500 during the year has been excluded
from net income to determine earnings available for common shareholders.
Fully diluted earnings per share for the year ended September 30, 1997
contemplates the conversion of preferred stock to 142,900 shares of common
stock. Primary and fully diluted earnings per share are the same.
If the Company were required to calculate earnings per share under Statement of
Financial Accounting Standards No. 128, which is effective for periods after
December 15, 1997, basic and diluted earnings per share for the years ended
September 30, 1997 and 1996 would not have been materially different than the
earnings per share reported in the accompanying consolidated statements of
income.
RECLASSIFICATION
Certain 1996 accounts have been reclassified to be consistent with current year
presentation.
2. FURNITURE, EQUIPMENT AND CONSTRUCTION IN PROGRESS
Furniture, equipment and construction in progress consist of the following at
September 30:
F-12
<PAGE>
1997 1996
---- ----
Leasehold improvements $ 959,022 $ 942,537
Furniture and equipment 2,534,273 1,776,697
Construction in progress 494,787 0
----------- -----------
3,988,082 2,719,234
Less-accumulated depreciation
and amortization (289,087) (145,497)
----------- -----------
$ 3,698,995 $ 2,573,737
=========== ===========
3. PREPAID EXPENSES
Prepaid expenses consisted of the following at September 30:
1997 1996
---- ----
Insurance $ 18,086 $ 4,465
Marketing 35,841 0
Other 58,064 26,242
------------ -------------
Total prepaid expenses $ 111,991 $ 30,707
============ =============
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at September
30:
1997 1996
---- ----
Accounts payable $ 754,020 $ 474,988
Bank overdraft 179,985 129,323
Payroll 117,531 71,698
Interest 0 68,281
Other 130,581 267,053
----------- -------------
Total accounts payable and
accrued expenses $ 1,182,117 $ 1,011,343
=========== =============
5. LONG-TERM DEBT
Long-term debt consists of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note payable to a financial institution, payable in monthly installments of
$17,996 including fixed interest at 10.75%. The note matures in July 2007. $1,308,047 $0
Annual line of credit with financial institution. Interest is payable monthly at
6.9% with principal balance due December 31, 1997, subject to
annual renewal approval by the financial institution. Secured by
certificate of deposit held by an affiliate of the Company. The principal
balance was paid in full during August 1997. 0 235,268
Note payable to a financial institution, due in monthly installments of
$6,295, including interest at 7.5% through July 1998. Unsecured. 53,455 128,989
<PAGE>
Note payable to a company, due in monthly installments of $4,000,
including imputed interest at 8% through October 1998. Unsecured. 47,000 90,000
Note payable to a financial institution, due on demand, including interest
at 10%. Unsecured. 0 17,959
F-13
<PAGE>
Note payable to a financial institution, due in monthly installments of
$2,000, including interest at 12% through March 2001. Unsecured. 94,729 108,229
------------- -----------
1,503,231 580,445
Less - Current portion (204,122) (376,270)
------------- -----------
Long-term debt $ 1,299,109 $ 204,175
============= ===========
</TABLE>
Annual maturities of long-term debt as of September 30, 1997 are as follows:
1998 $ 204,122
1999 112,169
2000 122,128
2001 131,941
2002 121,550
Thereafter 811,321
----------
$1,503,231
==========
6. COMMON AND PREFERRED STOCK
On June 2, 1994, the Company purchased 333,333 shares of its common stock from a
stockholder at a total cost of $50,268. As of September 30, 1997, the shares are
being held as treasury stock.
During June, August and September of 1996, a total of 15,000 shares of the
Company's common stock were redeemed for $15,000 and are being held as treasury
stock.
On April 22, 1997, the Company purchased 1,030,000 shares of its common stock
from a former director in exchange for 430,000 shares of mandatorily redeemable
Restricted Class B preferred stock, which are redeemable monthly at a rate of
5000 shares for $5,000 per month for 86 months. During the year ended September
30, 1997, the Company redeemed 25,000 of these preferred shares for $25,000.
During the year ended September 30, 1997, the Company repurchased an additional
25,000 shares of its common stock from the same former director for $25,000. As
of September 30, 1997, those shares are being held as treasury stock.
During the year ended September 30, 1997, the Company purchased 1,150,000 shares
of its common stock from a former director for $208,000 which are being held as
treasury stock. See Note 1 for the terms and conditions of the Company's
mandatorily redeemable Restricted Class A preferred stock.
7. COMMITMENTS AND CONTINGENCIES
a. Acquisition of Trademark
F-14
<PAGE>
In March 1993, the Company entered into an agreement for the acquisition and use
of franchise and trademarks of Sobik's Subs rights from an unaffiliated party
for $15,000 plus 25% and 24% of gross receipts in 1997 and 1996, respectively,
from franchisees for the following five years, payable monthly. During the years
ended September 30, 1997 and 1996, the Company incurred $61,272 and $40,000 in
royalty expense, respectively, which is included in general and administrative
expenses in the accompanying consolidated statements of operations.
b. Office and Store Leases
During September 1996, under a sale and leaseback agreement, the Company sold
five owned stores (land and buildings) for $2,230,000 and leased them back under
twenty-year operating lease agreements. The transactions resulted in a total
gain of $309,741 which has been deferred and is being amortized over the
twenty-year lease terms. Proceeds from the sale were used to pay off existing
notes payable and other current liabilities. During December 1996, the Company
sold an owned store for $425,000 and leased the store back under a twenty-year
operating lease. The transaction has resulted in a gain of $100,000, which has
been deferred and is being amortized over the twenty-year lease term.
Future minimal rental commitments for operating leases over the next five years
with noncancellable terms in excess of one year as of September 30, 1997, are as
follows:
1998 $ 843,513
1999 774,785
2000 682,453
2001 648,771
2002 648,771
Thereafter 5,593,324
------------
$ 9,191,617
============
Rent expense for the years ended September 30, 1997 and 1996 was $878,662 and
$220,158, respectively.
8. RELATED PARTY TRANSACTIONS
Amounts due from affiliates represent non-interest bearing advances made
primarily to certain entities controlled by the principal stockholders of the
Company. The amounts relate to bookeeping services provided for the apartment
building owned by the CEO and President.
On September 8, 1997, the Company entered into an aircraft lease agreement with
Elk River Aviation, Inc., an affiliate controlled by the Company's CEO and
President. The lease term is for a 12 month period beginning October 1, 1997.
Monthly rental is $33,066, plus 6.5% tax. Under the terms of the lease, the
Company is required to pay all operating costs and maintain certain minimum
insurance coverages on the aircraft. The lease required a deposit of $160,438
which is included in deposits in the accompanying consolidated balance sheet as
of September 30, 1997. Prior to September 8, 1997, the Company leased an
aircraft on a periodic basis and incurred rent expense of approximately $63,000
and $43,000 in 1997 and 1996, respectively.
9. INCOME TAXES
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at September 30, 1997 and 1996 are presented below:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforward $ 164,900 $ 210,000
Less - Valuation allowance 0 (210,000)
--------- ----------
F-15
<PAGE>
Net deferred tax assets $ 164,900 $ 0
========= ==========
At September 30, 1997 and 1996, the Company had net operating loss carryforwards
available to offset taxable income and tax liabilities of approximately $485,000
and $620,000, respectively. The losses expire between the years 2002 and 2007.
As of September 30, 1996, such operating loss carryforwards were fully reserved
as their realization was not more likely than not. As a result of the sale of
SBK on December 4, 1997 (See Note 10), the realizability of such carryforwards
is assured and accordingly, the valuation allowance was reversed.
The effective income tax provision (benefit) on pre-tax income (loss) differed
from the provision (benefit) computed at the U.S. Federal statutory rate for the
following reasons:
1997 1996
---- -----
Provision (benefit) computed at
Federal statutory rate of 34% $ 52,370 $(139,180)
Other (7,270) 0
Change in valuation allowance (210,000) 139,180
--------- ---------
Deferred income tax benefit $(164,900) $ 0
========= =========
10. SUBSEQUENT EVENTS
On October 1, 1997, SBK Restaurant Corporation sold substantially all of its
assets for a $100,000 promissory note.
On October 1, 1997, the Company leased equipment from First Southern Financial
Corp., a Florida corporation controlled by the CEO and President. Under the
terms of lease the Company is to pay First Southern Financial Corp.
approximately $900 per month for the equipment. The Company has the option to
purchase the equipment at any time during the lease which expires in September
2002.
On November 14, 1997, the Company entered into a $300,000 sale-leaseback
transaction on equipment and leasehold improvements of one of the
Popeyes/registered trademark/s store locations.
On November 20, 1997, James Byrd, the former Chairman and Director of the
Company filed suit against the Company and Mr. Berg for an injunction and
damages resulting from an alleged breach of contract by the Company. The
allegation made by Mr. Byrd are that the Company breached an agreement to
repurchase 150,000 shares of common stock at a price of approximately $130,000.
The Company believes that the suit is without merit and the Company will
vigorously defend this action.
On December 4, 1997, the Company sold SBK, for $1.1 million. The purchase price
consisted of $500,000 worth of the acquirer's common stock, a $500,000
promissory note and $100,000 in cash. The sale resulted in a pretax gain of
approximately $1.0 million.
On December 11, 1997, the Company entered into a lease agreement with controlled
by J. Russell Jones, for one Popeyes restaurant located in Baton Rouge,
Louisiana. The lease is a long term lease with a purchase option. The rent is
$5,000 per month. The Company intends to purchase the real estate upon which the
restaurant is located and is currently finalizing the terms for that purchase.
In the event the Company purchases such real estate, the Company intends to
enter into a sale leaseback transaction.
On December 11, 1997, the Company acquired eight Popeye's locations in Baton
Rouge, Louisiana for approximately $3.7 million. The transaction was accounted
for as a purchase.
F-16
<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, on this 17
day of February, 1998, thereunto duly authorized.
INTERFOODS OF AMERICA, INC.
(Registrant)
STEVEN WEMPLE
-------------------------------------------
By: /S/STEVEN WEMPLE
Steven Wemple, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and the capacities on the dates
indicated:
SIGNATURE TITLE DATE
/S/ROBERT S. BERG Director, Chairman of the Board 2/17/98
- ---------------------- Chief Executive Officer
Robert S. Berg
/S/STEVEN M. WEMPLE Director, President, Chief Operating 2/17/98
- ---------------------- Officer, Secretary and Treasurer
Steven M. Wemple
F-17
