UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/ X / SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/ / SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 33-39759
CRESCENT CAPITAL, INC.
(Exact name of Small Business Issuer in its charter)
DELAWARE 13-3645694
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
6701 Democracy Boulevard
Suite 300
Bethesda, MD 20817
(Address of principal executive offices) (Zip Code)
(301) 530-1708
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the issuer 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 disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of issuer'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.
Yes X No
State issuer's revenues for its most recent fiscal year.
$28,360,981
As of April 1, 1998, the aggregate market value of the Issuer's
Common Stock held by non-affiliates of the Issuer was $246,960.
As of April 1, 1998, there were 545,800 shares outstanding of the
Issuer's Common Stock.
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TABLE OF CONTENTS
ITEM
PAGE
PART I
1. Description of Business............................................. 4
2. Description of Properties...........................................13
3. Legal Proceedings...................................................13
4. Submission of Matters to a Vote of
Security Holders....................................................14
PART II
5. Market for the Issuer's Common
Equity and Related Stockholder
Matters.............................................................15
6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................................................17
7. Financial Statements and Supplementary
Data................................................................21
8. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure..........................................................21
PART III
9. Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16a of the Exchange Act.....................23
10. Executive Compensation..............................................24
11. Security Ownership of Certain Beneficial
Owners and Management...............................................26
12. Certain Relationships and Related
Transactions........................................................27
13. Exhibits and Reports on Form 8-K....................................28
Signatures..........................................................30
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PART I
Item 1. Description of Business
Introduction
Crescent Capital, Inc. (the "Company") was incorporated under the laws of the
State of Delaware on January 15, 1991. The Company was formed for the purpose of
seeking business ventures, either through the acquisition of existing businesses
or the acquisition of assets to establish subsidiary businesses for the Company.
From incorporation through December 29, 1993, the Company's only business
activity has been the acquisition of funds from the sale of common stock to its
sole officer and director and from the public offering of its securities in
January 1992 and the entry into a non-binding Letter of Intent to acquire a
majority interest in Dansmith Corporation, a North Carolina company.
The transaction was later abandoned.
On December 29, 1993, the Company entered into a Loan and Exchange of Stock
Agreement with International Franchise Systems, Inc. ("Domino's UK") and its
parent, Woodland Limited Partnership ("Woodland") and on June 30, 1994, Domino's
UK became a wholly owned subsidiary of the Company. In January, 1995, Domino's
UK completed an initial public offering of its securities and as a result of the
offering, 18.6% of the common stock of Domino's UK is owned by the public and
81.4% by the Company. Since its acquisition of Domino's UK, the operations of
the Company have consisted substantially of the operations of Domino's UK.
The Loan and Exchange of Stock Agreement
Pursuant to the terms of the Loan and Exchange of Stock Agreement (the
"Agreement") dated December 29, 1993, by and among the Company, Domino's UK and
Woodland, the Company loaned $400,000 to Domino's UK repayable on or before the
later of (I) ninety (90) days from December 29, 1993, or (ii) in the event of
the Exchange (defined below) did not occur, ninety (90) days after the Exchange
was last scheduled to occur. Interest is payable at an annual rate of 8%. The
loan was secured by a pledge by Domino's UK of all of the issued and outstanding
stock of Domino's Pizza Group Limited, Domino's UK's wholly owned subsidiary,
and a pledge by Woodland of all of the issued and outstanding stock of Domino's
UK, its wholly owned subsidiary.
The Agreement obligated the Company and Domino's UK to enter into an exchange of
stock (the "Exchange") whereby Woodland would exchange all of the issued and
outstanding stock of Domino's'UK, consisting of 315,000 shares of common stock
and 2,000,000 shares of Class B common stock ("Class B stock"), a class of
voting stock convertible on a one-for-one basis into common stock, for 315,000
shares of the Company's common stock and 2,000,000 shares of the Company's Class
B convertible common stock.
The Exchange was completed on June 30, 1994 and as a result, Woodland owned
315,000 shares of the outstanding common stock and 2,000,000 shares of the Class
B stock of the Company. The Class B stock is convertible on a one-for-one basis
for common stock and otherwise has the same rights, including voting rights, as
the common stock. Woodland subsequently purchased 9,990 Units. As a result,
Woodland controls approximately 92% of the voting shares of Crescent. In
September 1995, the Company completed an exchange offer pursuant to which it
issued 874,000 shares of Class A Common Stock in exchange for warrants
exercisable for the purchase of 1,748,040 shares of Class A Common Stock.
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Business of the Company and International Franchise Systems, Inc.
International Franchise Systems, Inc. and its subsidiaries (collectively,
"Domino's UK") have the exclusive right to own, operate and franchise Domino's
Pizza stores ("Domino's Stores") in the United Kingdom, and the Republic of
Ireland ("the Territory") pursuant to a master franchise agreement (the "Master
Agreement") with Domino's Pizza International, Inc. ("DPII), a wholly owned
subsidiary of Domino's Pizza, Inc. ("Domino's). The Company also has the right
to operate a fresh pizza dough production facility and wholesale supply business
(the "Commissary") for all Domino's Stores in the Territory pursuant to an
agreement with Domino's (the "Commissary Agreement").
In December 1993, Domino's UK acquired the United Kingdom subsidiary of the
U.S.-based parent company of Domino's Pizza, Inc., which included existing
operations, the rights as subfranchisor to 77 franchise agreements for Domino's
Stores, assets relating to the Commissary, and assets relating to the existing
franchise operation. As of December 28, 1997, Domino's UK had 154 Domino's
Stores opened as well as two distribution centers and a commissary. At year end
1997, it was the largest Domino's franchisee in Europe and the fourth largest
Domino's franchisee outside the United States. Domino's UK is a Delaware
corporation, incorporated on October 22, 1993.
Business Objectives and Strategy
Domino's UK's mission is to maintain its status as the leading pizza delivery
brand in the marketplace and to continue to build stockholder value. To
accomplish this, Domino's UK has developed a strategy designed to achieve high
levels of customer satisfaction and repeat business, as well as to enhance
recognition of the Domino's name and concept in the Territory.
The key elements of Domino's UK's strategy include:
New Store Locations
Domino's UK believes that the location of a Domino's Store is an essential
element of success. Domino's UK's development of the Territory is based on store
locations that are strategically located in areas that satisfy Domino's UK's
demographic criteria. The stores are positioned in high visibility areas with
prominent signage and brightly lit interiors to attract attention.
Franchise System
Domino's UK is committed to developing a strong franchise system by attracting
experienced operators and business people who adhere to Domino's UK's high
standards. Domino's UK devotes significant resources to providing its
franchisees with assistance in marketing, site selection, store design and
employee training.
High Quality Menu
Domino's Stores offer a menu of high quality pizzas. Pizzas are prepared using
fresh dough, real mozzarella cheese, a propriety mix of tomato sauce and spices
and other high quality ingredients and toppings. Other menu items include garlic
bread, cole slaw, chicken wings, ice cream and soft drinks. IFS has expanded its
menu in limited ways to increase market penetration and average spend per order.
Efficient Operating System
Domino's UK believes that its operating systems, store layout and designated
delivery areas result in lower in-store cost, improved food quality and higher
customer service. Domino's UK's Commissary and distribution system provide
consistency and efficiencies of scale in dough production. This eliminates the
need for each store to order food from third party vendors and commit
substantial labor and other resources
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to dough production. To ensure consistent food quality, each franchisee must
purchase all food and supplies from Domino's UK or its approved suppliers.
Training and Development
Domino's UK operates a training program for store personnel and new franchisees
to improve store operations and the management of each franchisee's business.
Domino's UK has revised the standard Domino's training program to make it more
appropriate and relevant to operations in the Territory.
Targeted Marketing
Domino's UK's marketing programs target the delivery area of each store, making
extensive use of coupons, leaflets and direct mail promotions. Domino's UK also
uses radio to advertise its product and name. The local marketing efforts
include more effective involvement with community oriented activities with
sports teams, schools and other organizations. Domino's UK is implementing an
in-store computer system that enables better tracking of customer preferences
and targets its marketing based on these preferences. Domino's UK works closely
with franchisees on local marketing efforts. Domino's UK promoted both the brand
and selected new pizza products on television in 1997.
The Domino's Store System
Domino's opened its first store in 1960 and today is the world's leader in pizza
delivery, with over 5,952 company-owned and franchised stores as of December 31,
1997. It had system-wide revenues of approximately $3.2 billion for fiscal year
1997.
Domino's has developed a pizza store format and operating system which includes
a recognized design, decor and color scheme for store buildings; uniforms for
store personnel; signage; service format; quality and uniformity of products and
services offered; procedures for inventory and management control; a delivery
system; and Domino's trademarks (collectively, the "Domino's System"). All
Domino's Stores are required to be operated in accordance with the Domino's
System.
Domino's Stores feature carryout services and delivery services to customers
located within a prescribed service area. The service area for each Domino's
Store is established to enable the store to deliver a pizza within 30 minutes of
the customer's order. Domino's Stores offer a substantially similar core menu
including various types of pizza and soft drinks. In the Territory, other menu
items include cole slaw, garlic bread and ice cream. Pizza accounts for the most
significant amount of system-wide sales. Prices for Domino's menu items are
determined by the various operators of Domino's Stores and, accordingly, may
vary throughout the Territory.
Relationship With Domino's Pizza, Inc.
Master Franchise Agreement
Domino's UK acquired the rights to the Territory from DPII in December 1993.
Since that time, the relationship between Domino's UK and Domino's has been
governed principally by the Master Agreement. The initial term of the agreement
runs from December 31, 1995 through December 31, 2006. According to the terms of
the initial agreement, Domino's UK shall have opened and operating a minimum
number of Domino's Stores in accordance with the following yearly schedule:
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Year Minimum(1)
Ended Total
December 31 Stores
1998 168
1999 192
2000 217
2001 227
2002 252
2003 277
2004 297
2005 317
2006 337
(1) Does not include non-traditional Domino's Pizza stores.
If Domino's UK does not meet the development schedule, within one hundred-eighty
(180) days after written notice of such failure is provided by DPII, DPII may
terminate Domino's UK's exclusive right to operate and franchise additional
Domino's Stores in the Territory. To date, the Company has exceeded the required
schedule.
If Domino's UK is in compliance with the Master Agreement at the expiration of
the Initial Term, Domino's UK will have the option to extend its exclusive
development rights for an additional 10-year period, provided Domino's UK and
DPII agree to a minimum development schedule for the renewal term. If after
expiration of the Initial Term (or any renewal term), Domino's UK fails to
exercise its option to renew its exclusive development rights, or the parties
are unable to agree to a minimum development schedule for the renewal term, then
Domino's UK would continue to have the right to operate its then-existing
Company-owned Domino's Stores and to maintain and continue its rights and
obligations, and act as subfranchisor, with respect to all then existing
franchised Domino's Stores. In such event, Domino's UK would generally have no
further right to operate or grant franchises for additional Domino's Stores and
DPII would have the right to proceed (or the right to grant a third party the
right to proceed) with further development of the Territory, subject to
territorial rights granted under then- existing franchise agreements.
Domino's UK is required to pay DPII a one-time store opening fee for each new
Domino's Store, whether Company-owned or franchised. Domino's UK has passed and
will continue to pass the cost through to the franchisees in the case of
franchised stores. In addition, Domino's UK must pay to DPII a monthly royalty
fee equal to a certain percentage of each Domino's Store's gross sales. This
royalty fee is payable to DPII irrespective of the profitability of Domino's UK
or the Domino's Store, and irrespective of Domino's UK's ability to collect
royalties from franchisees. This royalty fee as reduced in accordance with the
Stock Purchase Agreement discussed below, escalates each year until it reaches a
maximum of 3% in 2003. Domino's UK's payments to DPII are to be made in U.S.
dollars.
DPII and Domino's UK entered into a Stock Purchase Agreement as of May 26, 1997,
("SPA") whereby Domino's UK agreed to sell to DPII 300,000 shares of its common
stock in consideration for royalty concessions under the Master Agreement. The
SPA provides that DPII may not sell, transfer or otherwise dispose of its shares
before May 26, 2001 and any transferee receiving stock in violation of this
prohibition will have no rights with respect to the shares. The SPA further
provides for put and call options on the common shares at an agreed upon base
purchase price of $1,200,000 adjusted to reflect changes in the common stock,
such as, stock splits and dividends.
The Master Agreement cannot be assigned by Domino's UK without DPII's consent.
In addition, the agreement prohibits Domino's Pizza Group Limited, a
majority-owned subsidiary of Domino's UK, ("DP Group") and Colin and Gail
Halpern (as indirect controlling shareholders of DP Group) from transferring
control of Domino's UK without DPII's prior written consent. For the term of the
Master Franchise
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Agreement, DP Group and Colin and Gail Halpern are restricted from having an
interest in, being employed by, advising or assisting another business in the
pizza or pizza store business in the Territory.
Under certain circumstances of default by Domino's UK under the Master
Agreement, DPII has the right to terminate the Master Agreement. If the Master
Agreement is terminated, Domino's UK would be subject to a one-year
non-competition covenant in the delivery or carryout pizza business. Should this
occur, DPII would have the right (but not the obligation) to purchase, at the
then-current fair market value, all of Domino's UK's rights and interests as the
subfranchisor of Domino's Stores and all of the assets of each Domino's Store
owned by Domino's UK. The fair market value would be determined by mutual
agreement of Domino's UK and DPII, or in the absence of such agreement, by an
appraiser. Under certain circumstances of default by Domino's under the Master
Agreement, Domino's UK has the right to terminate the agreement and continue as
an independent pizza operation, including the operation of the Commissary.
Commissary Agreement
Pursuant to the agreement with DPII relating to the Commissary ("Commissary
Agreement"), DPII has agreed to provide Domino's UK, on an ongoing basis, all
information and materials necessary to make Domino's UK familiar with the
methods used to operate and manage a Domino's Commissary. Domino's UK must
maintain the confidentiality of such information and, subject to limited
exceptions, cannot use it in any other business. The Commissary Agreement has a
term co-extensive with the Master Agreement, with termination and default
provisions and restrictions on transfers substantially similar to those
contained in the Master Agreement.
Geographic Concentration/Expansion
As of December 31, 1997, Domino's UK had 154 Domino's Stores in the Territory.
Thirty-five were located in greater London, two were in Northern Ireland, two
were in the Republic of Ireland, three were in Scotland, and one was in Wales,
with the remainder of the stores located throughout England.
The Company currently has two distribution centers. The original center, opened
in 1985, is located in the Company's Milton Keynes headquarters. In November
1996, the Company opened a second distribution center in the north of England to
service the franchisees in Ireland, Scotland and Wales. As of December 1997 this
second distribution center was servicing 25 stores.
In February 1998, the Company began construction on a new facility to replace
the Company's current administrative offices and Commissary in Milton Keynes.
The new facility, also in Milton Keynes, is scheduled for completion in August
1998. National Westminster Bank has agreed to finance 65% of the construction
costs with a loan of (pound)1.9 million bearing a base plus 1 3/4% rate and a
15-year term. The Company has a commitment to finance an additional
(pound)500,000 for a five year period as a capital lease and corresponds to the
cost of the equipment for the Commissary. The Company expects to finance the
remainder of the building costs out of cash flow from operations and from the
proceeds from the sale of 15% of the UK subsidiary, DP Group, to Nigel Wray in
June 1997.
In 1995, the Company signed an exclusive agreement with Total Oil Great Britain,
a subsidiary of the multinational Total Oil, to open non-traditional stores with
the opening of the first Domino's franchise within a gas station convenience
store. Currently there are six Domino's franchises operating in these service
stations. The Company has also entered into an arrangement with Alldays, a
British convenience store company, to establish Domino's delivery stores on the
premises of Alldays Stores. The Company currently has nine Domino's franchises
operating in Allday's Stores. The Company believes that these non-traditional
stores have generated additional product awareness by providing a
phone-in/pick-up service to customers in areas where delivery is not available.
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Expansion
Domino's UK believes that the location of a Domino's Store is an essential
element of success. The site selection process involves an evaluation of a
variety of factors, including demographics (such as population density);
specific site characteristics (such as visibility, accessibility and traffic
volume); proximity to activity centers (such as office or retail shopping
districts and apartment, hotel and office complexes); competition in the area;
construction or renovation costs, and lease terms and conditions. Domino's UK
will inspect and approve proposed sites for each Domino's Store prior to the
execution of a franchise agreement or lease. All sites are subject to the
approval of Domino's and the store must generally be approved by the local
planning board. Planning board approval can take approximately six months.
To promote restaurant growth and increase the presence of Domino's in the
Territory, the Company has established a very successful Dealer Development
Program whereby experienced and talented restaurant managers in the Domino's UK
system who lack start-up capital can enter into the Domino's system with
financial support from the Company. Those who qualify make a good faith payment
of $7,500 while the Company invests the remaining capital to build and equip the
restaurant. The individual then operates the restaurant with full responsibility
for operations, marketing and financial management. There are currently five
Dealer Development units in the system.
Store Operations
Menu
Domino's Stores offer a substantially similar core menu including high-quality
pizza, garlic bread and soft drinks. Other menu items include cole slaw and ice
cream. Domino's UK also continuously test-markets pizzas with specialty toppings
and adds those items to the regular menu if they prove popular. Pizza accounts
for approximately 85% of Domino's Stores' sales in the Territory. Prices for
Domino's menu items are determined by franchisees and, accordingly, may vary
throughout the Territory.
Store Design
A typical Domino's Store in the Territory ranges from 800 to 1,200 square feet
and is designed to facilitate a smooth flow of food orders through the store.
The layout includes specific areas for order taking and pizza preparation. This
results in simplified operations, increased efficiency, and improved consistency
and quality of food products. The interior of each store has a red and blue
color scheme and includes a bright menu board and carryout customer area. The
exterior typically includes a Domino's sign with the Domino's logo. The design
for a Domino's Store must comply with specified Domino's standards and
specifications. However, these requirements are flexible enough to allow a store
to be configured to fit a wide variety of building shapes and sizes, thereby
increasing the number of suitable locations.
Domino's UK currently estimates that once the site has the appropriate council
planning approval, approximately 30-60 days is required to open a Domino's
Store. Domino's UK currently estimates the cost of opening a Domino's Store to
be between (pound)90,000 ($148,000) and (pound)120,000 ($198,000), including
leasehold improvements, furniture, fixtures, equipment and opening inventories,
but excluding lease payments and the franchise fee. Such estimates vary
depending on the size of the proposed store and the extent of required leasehold
improvements.
Delivery Service
Approximately 85% of the sales made by stores in the Territory are delivered. A
delivery area is designed for each store to deliver a pizza within approximately
30 minutes of the time an order is placed. In defining a delivery area, Domino's
UK takes into consideration the least favorable driving conditions, strict
compliance with all laws, regulations and rules of the road, and due care and
caution in the operation
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of delivery vehicles. Deliveries throughout the Territory are generally made on
mopeds owned by the franchisee and driven by store employees. Domino's UK
provides training to franchisees on safe driving and moped safety.
Store Personnel
A typical Domino's Store employs a store manager, an assistant manager and
approximately 14 hourly employees, most of whom work part-time. The manager is
responsible for the day-to-day operation of the store and for the maintenance of
operating standards. Domino's UK and franchisees seek to hire experienced store
managers and staff and motivate and retain them by providing opportunities for
advancement and performance-based financial incentives.
Reporting and Oversight
Franchisees provide Domino's UK with weekly reports containing certain
information including the amount of royalty sales, the number of pizzas of
various sizes sold and the number of pizzas that were late. Pizzas are
considered to be late if they are removed from the oven more than 21 minutes
after an order is taken.
Domino's UK maintains financial, accounting and management controls for its
company owned Domino's Stores through the use of centralized accounting systems,
detailed budgets and computerized management information systems. This includes
an accounting system that provides each Domino's Store's daily sales, expenses
and cash position.
Domino's UK has selected and continues to install computer systems in Domino's
Stores. The system begins with the taking of orders and follows through to the
management of deliveries. The system generates all of the daily, weekly and
monthly reports and maintains a customer database that aids in the achievement
of significant sales through target marketing. The systems are installed,
maintained, and supported by Domino's Pizza Group Ltd. ("DP Group"). To date,
the Company has installed the system in 130 stores. The Company has a computer
staff that trains franchisees in the use of these in-store computers. The
Company has also formed a user group of franchisees to facilitate feedback and
to discuss new developments.
Franchise Program
General
Domino's UK believes that the success of the Domino's System, together with the
relatively low initial capital investment per Domino's Store, allows Domino's UK
to attract franchisees with significant business experience. Domino's UK
considers its franchisees to be a vital part of its continued growth. There can
be no assurance that Domino's UK will be able to attract a sufficient number of
qualified franchisees to meet the development schedule in the Master Agreement.
Approval
Franchisees are approved on the basis of the applicant's business background,
restaurant operating experience and financial resources.
Franchise Agreements
Each franchisee must comply strictly with the Domino's System and its standards,
specifications and procedures. The franchise agreement sets forth various
requirements regarding signage, equipment, menu, service, hygiene, hours of
operation and communications.
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Under Domino's UK's current standard franchise agreement, the franchisee is
required to pay, at the time of signing the franchise agreement, a
non-refundable fee of either (pound)8,000 ($13,163) or (pound)18,000 ($29,172),
depending upon whether the franchisee is an existing franchisee or a new
franchisee of Domino's Stores. Generally, a franchise agreement is executed when
a franchisee secures a location. Domino's UK's current standard franchise
agreement provides for a term of 10 years (with one ten-year renewal option) and
payment to Domino's UK of a royalty fee of 5.5% of sales. The franchise
agreement gives Domino's UK the right to terminate a franchisee for a variety of
reasons, including a franchisee's failure to make payments when due or failure
to adhere to Domino's UK's policies and standards.
Franchise Store Development
Domino's UK furnishes each franchisee with assistance in selecting sites and
developing stores. Domino's UK provides its franchisees with the physical
specifications for typical stores. Domino's UK will generally present store
locations to franchisees for their approval and franchisees must obtain Company
approval of their store design. Each location is selected on the basis of
accessibility and visibility of the site and targeted demographic factors,
including population, density, income, age and traffic pattern. While Domino's
UK assists in the design and planning of each store and assists the franchisee
in acquiring the equipment needed for each location at competitive prices, the
franchisee is responsible for all costs associated with the purchase of
equipment.
Franchise Training and Support
Every franchisee is required to have a principal operator approved by Domino's
UK who satisfactorily completes Domino's UK's training program. Each manager of
a franchised store is required to complete Domino's UK's training program.
Multi-unit franchisees are encouraged to hire a full-time training coordinator
to train new employees for their stores. Domino's UK maintains constant
communication with its franchisees, relaying operating and marketing information
through quarterly newsletters and posters for products and recruitment. Domino's
UK also conducts a quarterly operations advisory meeting. Every eight weeks,
Company representatives visit all stores and prepare a standards report
detailing each store's operations.
Franchise Operations
All franchisees are required to operate their Domino's Stores in compliance with
Domino's UK's policies, standards and specifications, including matters such as
menu, ingredients, materials, supplies, services, fixtures, furnishings, decor
and signs. Each franchisee has full discretion to determine the prices to be
charged to its customers.
Franchisee Advisory Group
Domino's UK has instituted a Franchisee Advisory Group for the purpose of
assisting Domino's UK with the development of new ideas. The Franchisee Advisory
Group is composed of up to eight members, all of whom are franchisees of
Domino's UK. The members serve at the discretion of Domino's UK and advise
Domino's UK on matters such as store design and menu, operation, marketing,
safety and competition in local markets.
Purchasing; Commissary and Distribution Operations
Domino's and Domino's UK set quality standards for all products used in Domino's
Stores in the Territory. Domino's UK provides fresh dough and substantially all
of the other food products and supplies to franchisees through its Commissary
and distribution facilities. In order to ensure product quality and consistency,
all stores are required to make all purchases through the Commissary or from
suppliers approved by Domino's and Domino's UK.
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Domino's UK has begun construction on a new Commissary and distribution center
in Milton Keynes which is scheduled for completion in August 1998. This facility
will replace Domino's UK's existing Commissary. Domino's UK believes that the
new facility will provide adequate room for expansion. Domino's UK operates the
Commissary as a separate profit center. The Commissary negotiates purchase
contracts for virtually all of the ingredients and supplies used in Domino's
Stores. When possible, Domino's UK enters into one-year, fixed-price contracts
for products purchased for the Commissary. Certain products, such as mushrooms,
are purchased at market prices due to the volatile nature of the prices of those
products. The Commissary produces pizza dough that it delivers fresh to the
stores.
Virtually every store orders products through the Commissary on a regular basis
and is billed by Domino's UK for the purchases. The Commissary employs an
individual who is responsible for quality control and quality assurance and an
employee who is responsible for distribution. Products are delivered to stores
on a daily basis in refrigerated trucks that are owned or leased by Domino's UK.
All of the equipment, counters and smallwares needed to open and operate a
Domino's Store can be purchased from Domino's UK. Domino's UK also provides
layout and design services and recommends contractors, signage installers and
telephone systems to its franchisees. Although not required to do so,
substantially all of Domino's UK's franchisees purchase most of their equipment
from Domino's UK or specified suppliers.
Advertising and Promotion
The franchise agreement provides that each franchisee must contribute a monthly
advertising and promotion fee of 4% of its royalty sales to a fund administered
by Domino's UK to be used for advertising, sales promotion and public relations.
Domino's UK is responsible for using the proceeds of the advertising fund to
develop and implement advertising and promotional plans, materials and
activities on behalf of the Domino's Stores in the Territory. All advertising,
promotional plans, materials and activities are subject to Domino's approval.
Domino's UK's principal method of promotion is through leaflets which are
distributed to the homes and places of business within each store's service
area. These leaflets generally announce promotional prices, new menu items or
include special coupons. The leaflets are generally designed by Domino's UK and
can be customized by each store. The customizing is facilitated through the use
of a single print shop that provides printing services to Domino's UK and the
franchisees. Domino's UK also uses local radio advertising and cable television
for advertising. During 1997, the Company began advertising on national
television throughout Great Britain to further develop brand recognition. In
1998, Domino's UK intends to expand its marketing to include not only television
advertising, but also promotions with Hollywood video rentals and new movie
releases.
Domino's UK is installing an in-store computer system in many franchisee stores.
This system provides data that enables franchisees to better track information
such as location of customers, the frequency with which each customer orders and
the response to a particular coupon or other promotion. Domino's UK believes the
system will enable Domino's UK to do better target marketing, improve the
effectiveness of its marketing and reduce the cost of its marketing effort.
Trademarks
Domino's UK is authorized to use such trademarks, service marks and such other
marks as Domino's may authorize from time to time for use in connection with
Domino's Stores (collectively, the "Domino's Trademarks"). Domino's has
represented to Domino's UK that, to the best of its knowledge, Domino's owns all
of the rights, title and interests to the Domino's Trademarks used by Domino's
UK. Any events or conditions that negatively affect the Domino's Trademarks
could have a material adverse effect on Domino's UK.
12
<PAGE>
Foreign Currency and Exchange
Domino's UK converts United States dollars, as needed, into British pounds
sterling for use in the Territory. Revenues from operations in the Territory
will be maintained in pound-denominated accounts, although they may be freely
converted into foreign currencies, at then-current official exchange rates, for
purposes of paying for foreign goods, payment of royalties and for repatriation
of profits. Domino's UK anticipates that it will continue to leave a substantial
portion of the profits of its operation, if any, in the Territory for use in its
business. There are presently no limitations on Domino's UK's ability to
repatriate profits. The exact amount of profits, if any, that Domino's UK
repatriates at a given time will depend on, among other factors, Domino's UK's
financial condition, results of operations and capital requirements. Domino's UK
will be subject to risks from exchange rate fluctuations. Domino's UK may seek
to limit its exposure to the risk of currency fluctuations by engaging in
hedging or other transactions.
United States and United Kingdom Income Taxes
Pursuant to United States tax laws, if Domino's UK's subsidiaries organized
under the laws of the United Kingdom are not engaged in business in the United
States, such subsidiaries will not be subject to United States taxation. Any
earnings of these United Kingdom subsidiaries, when paid to Domino's UK (or, in
certain cases, deemed paid, even though not distributed, under certain technical
provisions of the Internal Revenue Code), would be included by Domino's UK for
United States Federal income tax purposes. However, Domino's UK would receive a
credit against Federal income tax liability that otherwise would result from any
deemed or actual distributions from its United Kingdom subsidiaries, for any
United Kingdom corporate taxes paid by such United Kingdom subsidiaries on these
distributions, as well as for any United Kingdom dividend and royalty
withholding taxes imposed directly on Domino's UK. Because the United Kingdom
corporation tax rate (presently 31 percent of taxable income) is lower than the
United States corporate tax rate, Domino's UK does not anticipate being subject
to significant United States Federal income tax on either distributed or
undistributed earnings of its United Kingdom subsidiaries.
Under United Kingdom tax law, when a United Kingdom corporation pays a dividend
to a shareholder, it must also pay Advance Corporate Tax (referred to herein as
"ACT") with respect to that dividend. The ACT is presently set at 25% of the net
amount of the dividends paid (which is equivalent to 20% of the sum of the
dividend plus the ACT). The paying corporation can normally apply the ACT it
pays with respect to dividends paid by it in any accounting period as a credit
against its corporation tax liability for the accounting period. To the extent
that the ACT cannot be fully applied as such a credit, any unapplied amount may
be carried back six years or carried forward indefinitely.
Under the combined effect of current United Kingdom tax law and the current
United States-United Kingdom Tax Treaty relating to income and capital gains
taxes, if Domino's UK's United Kingdom subsidiary pays it a dividend, Domino's
UK will receive in addition to the dividend a tax credit equal to one-half of
the ACT paid by the subsidiary with respect to that dividend. Subject to a
United Kingdom withholding tax calculated as a percentage of the aggregate of
the dividend received and such tax credit, which the treaty limits, in the case
of a dividend paid to a United States corporation holding not less than 10% of
the subsidiary's voting stock, to no more than 5%. On November 25, 1997, the
United Kingdom government pronounced proposals which abolish the requirement to
account for ACT in respect of dividends paid on or after April 6, 1999.
Competition in the U.K. Pizza Business
Pizza has proven to be a particular success in the United Kingdom. Although
there are several large pizza operators in the U.K., the market is fragmented
with well over 2,000 small units. The Company believes that the two largest
operators in the Territory are Pizza Hut with approximately 104 stores and
Perfect Pizza with approximately 148 stores dedicated to home delivery.
13
<PAGE>
Domino's UK also competes for qualified franchisees with many other business
concepts, including international, national and regional restaurant chains such
as McDonalds, Kentucky Fried Chicken and Burger King. There can be no assurance
that Domino's UK will be able to attract a sufficient number of qualified
franchisees to satisfy its obligations under the Master Agreement.
Employees
As of December 31, 1997, Domino's UK employed 212 persons of whom 117 were store
employees, 51 were corporate personnel and 44 were employed in Domino's UK's
Commissary and distribution center. Most store employees work part-time and are
paid on an hourly basis. None of Domino's UK's employees are covered by a
collective bargaining agreement.
Government Regulation
Domino's UK is subject to various British, European and local laws affecting its
business. Each of Domino's UK's stores is subject to licensing and regulation by
a number of governmental authorities, which include health, safety, sanitation,
building and fire agencies in the municipality in which the store is located.
Difficulties in obtaining or failure to obtain required licenses or approvals
could delay or prevent the opening of a new store in a particular area. The
Commissary and distribution facility are licensed and subject to regulation by
national and local health and fire codes, and the operation of its trucks is
subject to certain regulations. Domino's UK is also subject to environmental
regulations, though these have not had a material effect on Domino's UK's
operations.
Domino's UK is subject to British and European Union regulations over the
franchiser-franchisee relationship. These regulations limit, among other things,
the duration and scope of non-competition provisions, exclusive territories and
restrictions on sources of supply.
Domino's UK's store operations are also subject to British, European Union and
local laws governing such matters as wages, working conditions, citizenship
requirements and overtime. Domino's UK's hourly personnel are paid at rates
ranging from (pound)3 to (pound)8 and, accordingly, further increases could
increase Domino's UK's labor costs. New European Community regulations could
materially increase Domino's UK's and franchisees' cost of operations.
Item 2. Description of Properties
In the Territory, DP Group maintains its place of business at Unit 10, Maryland
Road, Tongwell, Milton Keynes, England. There are three leased spaces associated
with DP Group's administrative offices and the Commissary. The leases (for a
total of approximately 20,000 square feet) cover a period of two to five years,
with options that allow for early release from the commitments, at a rate of
$194,889 per year.
Domino's UK is constructing a new site on which it is building a larger
Commissary and distribution center. The Company anticipates completion of the
project in August 1998. DP Realty Limited, a wholly owned subsidiary of DP
Group, has a total of 115 leases. DP Realty Limited enters the lease on new
properties as a service to franchisees, enabling them to secure longer rent
obligations. The Company then subleases the store space to each franchisee. This
practice allows the Company to ensure the franchisee maintains the image of the
brand. DP Realty Limited obtains a markup on the sublease to cover the
administrative costs. The Company currently subleases 108 of the 115 properties
to franchisees. In 1997, the margin generated from the subleases less the cost
of the leased properties was approximately $83,000.
The Company has a one year lease for its U.S. office that is renewable. The
total rent payable by the Company is approximately $1,000 per month.
14
<PAGE>
Item 3. Legal Proceedings
The Company is not a party to any litigation or governmental proceedings that
management believes would result in judgments or fines that would have a
material adverse effect on Domino's UK.
Item 4. Submissions of Matters to a Vote of Security Holders
No matters were submitted to a vote of the holders of the Company's Common Stock
during the fourth quarter of the Company's fiscal year ended December 28, 1997.
15
<PAGE>
PART II
Item 5. Market for the Issuer's Common Equity and Related Stockholder Matters
Market Information
The Company's Class A Common Stock has never been listed and no trading market
has ever developed.
Dividends
The Company has not paid any cash dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock for the foreseeable future. The
Company intends to retain future earnings to finance future developments.
Number of Stockholders
As of April 1, 1998, there were 20 record holders of the Company's Common Stock.
The Company believes that there are in excess of 20 beneficial owners of the
Company's Common Stock.
16
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company, through its subsidiary International Franchise Systems, Inc.
("Domino's UK") has the exclusive right to own, operate and franchise Domino's
Stores in the United Kingdom and Northern Ireland. Domino's UK's principal
business consists of franchise and royalty fees, the sale and support of Company
owned Domino's Pizza stores, the sale of food, non-food products and in-store
computer systems to franchisees, and rental income from the sublease of delivery
stores. These sources of revenue represent the total revenue earned by the
Company.
The Company had 154 Domino's stores opened by December 28, 1997. New unit
openings of traditional delivery stores increased from 21 in 1996 to 27 in 1997.
The increase in store openings is the result of: (i) enhanced awareness of the
Domino's brand through trade exhibitions and industry publications; (ii)
additional store openings by existing franchisees; and (iii) partnership with
Allday's (a British convenience store chain). The Company continues to select
"high street" locations that provide enhanced visibility, adequate parking and
late night operating hours.
In June, 1997 the Company agreed to sell up to a 20% interest in its Domino's UK
operation for approximately $4.5 million to British businessman Nigel Wray. Mr.
Wray paid Domino's UK approximately $3 million for 15% of its shares in the UK
subsidiary and holds an option to invest in DP Group for an additional 5% of new
shares for a price of $1.5 million. The Company plans to use the proceeds from
the sale to fund expansion of Domino's UK and Domino's UK.
The Company purchased three Haagen Dazs ice cream parlors in 1995. The Company
decided in June 1996 that operating and accumulating more parlors was not
consistent with its primary mission. As a result, one store was sold back to the
master franchiser in September 1996. The Company disposed of the other two
stores in December 1997. The revenue and costs from these stores are reported in
discontinued operations.
The Company opened a sit down restaurant, Pizzazz, in December 1995 to increase
further awareness of the Domino's brand. The restaurant was closed in June 1996
after the Company determined that it wished to discontinue this line of business
as the success of the concept would require too much management attention to be
redirected from the Company's primary business. The Company subleased the
property commencing April 1997 and terminating at the expiration of the lease,
in December 2010.
Results of Operations
The Company realized net income of $1,632,782 for the year ended December 31,
1997 primarily due to the nonrecurring income from the sale of DP Group shares
to Nigel Wray ($2,163,038), increased systemwide sales of 35% which resulted in
higher royalty and commissary income, and the opening of 27 new units. Minority
interest share of the income was $735,538. This compared to a net loss of
$123,222 for the same period last year. Gross margins increased from the prior
year by $2,123,616. Income from continuing operations, excluding the
non-recurring income and the adjustment for minority interest, was $549,881 in
1997 as compared to $488,672 in 1996 or an increase of 13%.
17
<PAGE>
The following tables set forth the percentage relationships to total revenue,
unless otherwise indicated, of certain income statement data and certain
restaurant data for the years 1997 and 1996.
December 28, 1997 December 29, 1996
INCOME STATEMENT DATA
Revenues:
Company Owned Stores 11.6% 15.6%
Franchise Royalties 14.0% 13.9%
Franchise Fees 1.8% 2.4%
Commissary Sales 59.7% 57.6%
Property Rentals 7.9% 6.4%
Other Income 5.0% 4.1%
----- -----
Total Revenues 100.0% 100.0%
Costs and Expenses:
Company Owned Stores(1) 94.6% 92.1%
Commissary Expenses(1) 86.5% 90.0%
Franchise Support, G&A(2) 18.5% 15.5%
Depreciation/Amortization(2) 2.7% 3.3%
----- -----
Total Costs and Expenses 97.4% 97.9%
Operating Income 2.6% 2.1%
Other Income(2) 8.6% 0.3%
----- -----
Income from Continuing Operations 11.2% 2.4%
===== =====
Notes:
(1) As a percentage of respective revenues
(2) As a percentage of total revenues
RESTAURANT DATA
Percentage Increase in Comparable
Restaurant Sales 11% 14%
Average Annual Sales for Company Owned
Stores Open for Full Year $820,000 $655,000
Number of Company Owned Stores:
Beginning of Year 11 10
Opened -- 2
Acquired 2 2
Sold (2) (3)
-------- --------
End of Year 11 11
-------- --------
Number of Franchised Stores:
Beginning of Year 116 93
Opened 27 22
Acquired from Company 2 3
Sold to Company (2) (2)
-------- --------
End of Year 143 116
-------- --------
Total Stores End of Year 154 127
======== ========
18
<PAGE>
Comparison of Fiscal 1997 to Fiscal 1996
Revenues
Total revenue for the fiscal year ended December 28, 1997 was $28.4 million
versus $22.8 million for the fiscal year 1996. This represents a 25% increase in
total revenue. System-wide sales increased from $55.0 million in 1996 to $72.1
million in 1997 or an increase of 31%.
Sales by company owned stores remained constant at $3.3 million. The consistency
in revenues was primarily the result of the timing of the acquisition and
disposal of units and different trading levels of the stores acquired/disposed.
Royalty fees increased 37.9% to $4.0 million in 1997 from $2.9 million in 1996.
The increase was primarily due to a same store comparable sales increase of 11%
versus 1996 and the opening of 27 new delivery stores.
Franchise and other fees decreased to $507,000 in 1997 or a decrease of 2% over
1996 when fee revenues were $517,000. The Company increased fees attributed to
new stores openings but experienced a decrease in fees because more new stores
were opened by existing franchisees which reduced franchise training fees and
support.
Commissary sales increased 38.5% net of intercompany sales to $16.9 million from
$12.2 million in 1996. This increase of 38.5% is primarily due to new stores in
the system and the increase in comparable store sales.
The increase in other sales to $1.4 million from $831,000 is related to the
Company's expansion of computer sales to franchisees.
Cost and Expense
For the fifty-two week period ended December 28, 1997, gross margins increased
from $6.0 million in 1996 to $7.6 million in 1997, or an increase from 26.5% to
26.8% of total revenues. This increase was principally related to consistent
margins throughout the year on the sale of commissary products and better gross
margins on computer sales and franchise and other fees.
The Company-operated pizza delivery stores are either staffed with Company
personnel or are operated under a Dealer Development Program. Under the Dealer
Development Program, the store is operated under a third party management
contract where the Company receives a fixed percentage of sales. In those cases,
the Company records revenue but does not record cost of food, labor, and
delivery expense associated with the store. In the Company operated stores, the
Company was able to maintain food costs as a percentage of sales at 25.5% for
both 1997 and 1996. In total, cost and expense at the Company-operated pizza
delivery stores increased as a percentage of revenue from 92.1% in 1996 to 94.6%
in 1997. The increase is attributed to new corporate owned store openings and
acquiring two under performing stores from franchisees.
The Commissary expenses include the cost of sales, warehousing and packaging,
and distribution expenses associated with food sales, non-food sales, and
equipment sales. These expenses decreased as a percentage of revenue from 90.0%
in 1996 to 86.5% in 1997. This decrease is primarily due to improved controls to
ensure that Commissary pricing was adjusted for raw material price fluctuations.
Franchise support, general and administrative expenses increased as a percentage
of revenues from 15.5% to 18.2% as the Company increased franchise support staff
to serve existing stores and to prepare for continuing new store growth and
expanding market share. The Company's market share has increased from 5% to 12%
in the last four years.
19
<PAGE>
Depreciation and amortization decreased as a percentage of revenues to 2.7% in
1997 from 3.3% in 1996. The expense decreased primarily as a result of increased
revenues and lower capital expenditures in 1997 versus 1996.
Net Other Income increased to $2,444,421 from $183,577 in 1996. This increase is
primarily related to the interest earned on the lending of funds to related
parties ($247,925) and the gain (2,163,038) on sale of a portion of the
investment in subsidiaries.
Liquidity and Capital Resource
The Company's net working capital at December 28, 1997 was $3.1 million, an
increase from $1.4 million on December 29, 1996. Total current assets were $9.1
million at December 28, 1997 versus $7.2 million on December 28, 1996. Current
liabilities increased by $0.1 million in 1997 to $6.0 on December 28, 1997 from
$5.9 million in 1996.
The primary increases in current assets related to cash which increased as a
result of the expanding business and the sale of shares to Nigel Wray. The
increase in current liabilities relates to decreases in accounts payable offset
by increases in value-added taxes payable, and accrued expenses.
The following table represents the net funds provided and/or used in operating,
financing, and investment activities for both periods:
<TABLE>
<CAPTION>
(Thousands)
December 30 - December 28, January 1 - December 29,
1997 1996
Net Cash Provided/(used) from
<S> <C> <C>
Continuing Operations $2,239 $1,193
Net Cash (used) for Discontinued Operations (223) (653)
Net Cash (used) from Investing (755) (464)
Net Cash provided/(used) by Financing 820 (307)
</TABLE>
The Company generated approximately $2.2million in cash from continuing
operations and utilized cash of $23,000 in discontinued operations. The Company
had a net profit of approximately $1.6 million for the year ended December 28,
1997. Trade accounts receivable and franchisee loans and other receivables
increased from the prior year by $532,000, prepaid and accrued income decreased
by $599,745, and inventories increased $150,000. Accounts payables and accrued
and other payables decreased by $78,000, and value added taxes and income taxes
payable increased by $627,000. The Company anticipates that it will continue to
generate positive cash flow from operations in 1998 as a result of improving
profits of the Company, the opening of additional stores, and reduction of
administrative expenses as a percentage of sales.
The Company utilized $759,000 and $464,000 in investing activities for fiscal
years 1997 and 1996, respectively. The Company requires capital to open or
acquire stores, the acquisition of new commissary equipment and delivery trucks,
or the enhancement of corporate systems and facilities. The Company spent $3.2
million in 1997 versus $1.3 million in 1996 in property and equipment and land
for the new Commissary. The Company anticipates that it will need $6.2 million
to open three new corporate stores and invest in Commissary equipment and the
new facility in 1998. The Company also believes it will collect approximately
$1.7 million of the receivable from its parent, Woodland Limited Partnership, in
1998. Cash utilized for financing activities during the year ended December 28,
1997 was $0.8 million. Proceeds of a loan to DP Group from National Westminster
Bank totaled $1.5 million. Repayments of debt totaled $550,860 and capital lease
payments totaled $97,000.
20
<PAGE>
The Company has a commitment on office space at its Corporate office until June,
1998. The Company's UK subsidiary has its principle office in Milton Keynes,
England, and leases 115 Domino's store properties. Estimated annual operating
lease payments for the next five years range each year between $2.52 million and
$2.86 million and approximately $21 million for all of the years combined
subsequent to 2002 for a total of $34.8 million. The Company collects rental
income from the sublease of the Domino store properties that total approximately
$32.1 million. The Company does not believe that the net exposure is $2.6
million because the total minimum future rental income as calculated assumes the
subleases are for the initial ten year period of the franchise agreement only.
The Company believes that the franchisees will exercise the renewal option of
the franchise agreement.
The Company has lease obligations under capital leases for commissary equipment
and motor vehicles. As of December 28, 1997, and the next two years, the Company
has decreasing annual obligations which range from $108,000 down to $25,000 per
year. The net present value of these obligations total approximately $188,000.
The Company's anticipated debt payment through December 27, 1998 will be
approximately $200,000. In the following three years, annual principal payments
are expected to be approximately $218,000, $200,000, and $138,000.
The Company believes it can meet its short-term liquidity needs from the
projected cash to be generated from operations and collection of its receivable
from the parent company of approximately $2.4 million. The Company's long-term
liquidity needs will also be met by cash generated from operations, and if
necessary, supplemented by debt financing or additional equity funding. The
Company currently has a commitment from National Westminster Bank to finance the
commissary. The loan commitment is approximately $4.0 million. The Company
anticipates it will spend $6.2 million to open additional corporate stores and
acquire commissary equipment in 1998. The Company is not obligated to open any
additional Company owned stores by December 1998 under the Master Franchise
Agreement. If the company's plans change, or its assumptions or estimates prove
to be inaccurate, the Company may require additional funds to achieve increased
sales. If such funds are unavailable, the Company will have to reduce its
operations to a level more consistent with its available funding.
Inflation
The primary inflationary factor affecting the Company's operations
is the cost of food. As the cost of food has increased, the Company has
historically been able to offset these increases through economies of scale and
improved operating procedures, although there is no assurance that such offsets
will continue. To date, inflation has not had a material effect on the Company's
operations.
Item 7. Financial Statements and Supplementary Data
See the Financial Statements and Supplementary Data listed in the
accompanying Index to Financial Statements and Schedules on Page F-1 herein.
Information required by other schedules called for under Regulation S-X is
either not applicable or is included in the financial statements or notes
thereto.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Moore Stephens, P.C. was previously the principal accountants for
International Franchise Systems, Inc. On May 19, 1998, that firms appointment as
principal accountants was terminated. The decision to terminate was approved by
the board of directors. In connection with the audits of the two fiscal years
ended December 29, 1996, and the subsequent interim period, there were no
disagreements with Moore Stephens, P.C. on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not
21
<PAGE>
resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject of the disagreement.
The audit reports of Moore Stephens, P.C. on the consolidated financial
statements of Domino's UK and subsidiaries as of and for the years ended
December 29, 1996 and December 31, 1995, did not contain any adverse opinion or
disclaimer of opinion, not were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
In March 1998, Crescent appointed Wayne Hickey to replace Moore Stephens, P.C.
as their independent auditors of Crescent for the fiscal year ended December 28,
1997.
The Company has agreed to provide indemnification to Moore Stephens, P.C.,
subject to certain conditions, for legal and other costs that might be incurred
in defending itself in the event of threatened or actual litigation in
connection with the issuance of its auditors report on the financial statement
of the Company.
Moore Stephens, P.C. was the previously the principal accountants for Crescent
Capital, Inc. In December 1997, that firms appointment as principal accountants
was terminated. In connection with the audits of the two fiscal years ended
December 31, 1996, and the subsequent interim period through December 10, 1997,
there were no disagreements with Moore Stephens, P.C. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject of the disagreement.
The audit reports of Moore Stephens, P.C. on the consolidated financial
statements of Crescent Capital and subsidiaries as of and for the years ended
December 31, 1996 and December 31, 1995, did not contain any adverse opinion or
disclaimer of opinion, not were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
22
<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, their ages, their principal occupations
during the past five years or more, and directorships of each in public
companies in addition to the Company, are as follows:
Colin Halpern, age 60, has served as President, Secretary, Treasurer and
Director of the Company since January 1991. He also currently serves as Chairman
of the Board of International Franchise Systems, Inc, Director of Celebrated
Group Plc., and President, Chief Executive Officer and Chairman of the Board of
Directors of NPS Technologies Group, Inc., all of which are public companies. He
has held these positions since July 1994, January 1998 and August 1983,
respectively. Mr. Halpern serves as President and Chairman of the Board for Red
Hot Concepts, a public company that operates Chili's restaurants in the United
Kingdom, from June 1994 to present. He also served as President from June 1994
to August 1996, and is serving again as President since May 1997. Mr. Halpern
also served as Executive Vice President of Lafayette Industries from January
1992 to December 1996. From 1985 to the present, Mr. Colin Halpern has also
served as the Chairman of Universal Services Group, Inc. Mr. Colin Halpern was
formerly the Chairman and Chief Executive Officer of DRC Industries, Inc., a
company which, from November 1975 through October 1985, had a Budget Rent-A-Car
master license agreement for the New York metropolitan area, including LaGuardia
and John F. Kennedy Airports.
In June 1991, the SEC sought and received, and NPS Technologies Group, Inc.
("NPS") consented to the entering of, an order against NPS and its officers and
employees that required NPS to file certain periodic reports with the SEC that
had not been timely filed and permanently restrained and enjoined NPS and such
officers and employees from failing to file in proper form with the SEC accurate
and complete reports required to be filed by NPS pursuant to the rules and
regulations of the SEC. Mr. Colin Halpern is the President and Director of NPS,
which is currently inactive. Since June 1991, certain of NPS' reports have not
been timely filed by NPS and other reports have not been filed in proper form.
The SEC has taken no further action against NPS or any of its officers and
employees.
Item 10. Executive Compensation
The information required by this item will be in the Company's definitive proxy
materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-KSB by this reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be in the Company's definitive proxy
materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-KSB by this reference.
Item 12. Certain Relationships and Related Transactions
The information required by this item will be in the Company's definitive proxy
materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-KSB by this reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
23
<PAGE>
* Incorporated by reference from the Company's Registration Statement on Form
S-1 declared effective on November 25, 1991; File No. 33-39759.
** Incorporated by reference from the Company's current Report on Form 8-K
dated December 29, 1993.
(b) Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the issuer has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CRESCENT CAPITAL, INC.
By:/s/Colin Halpern
Colin Halpern, President
Date: May 13, 1998
In accordance with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the issuer
and in the capacities and on the dates indicated.
/s/Colin Halpern President, May 13, 1998
Colin Halpern Chairman of the Board
25
<PAGE>
CRESCENT CAPITAL, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Independent Auditor's Report..................................................................... F-2.....F-3
Consolidated Balance Sheet as of December 31, 1997............................................... F-4.....F-5
Consolidated Statements of Operations for the years ended December 31,
1997 and 1996.................................................................................... F-6.....
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1996 ...................................................................... F-7.....
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1996 ................................................................................... F-8.....F-9
Notes to Consolidated Financial Statements....................................................... F-10....F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Crescent Capital, Inc.
I have audited the consolidated balance sheet of Crescent
Capital, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, retained earnings, and cash flows for each of
the year then ended. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted
auditing standards. Those standards require that I 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. I believe that my audit and the report of other auditors provide a
reasonable basis for our opinion.
In my opinion, based on my audit, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Crescent Capital, Inc. and its subsidiaries as of December
31, 1997, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
WAYNE P. HICKEY
Certified Public Accountant
Bohemia, New York
May 19, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITOR'S
To the Stockholders and Board of Directors of
Crescent Capital, Inc.
We have audited the accompanying consolidated balance sheet of
Crescent Capital, Inc. and its subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the fifty-two week period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 consolidated financial
position of Crescent Capital, Inc. and its subsidiaries as of December 31, 1996,
and the consolidated results of their operations and their consolidated cash
flows for the fifty-two week period ended December 31, 1996, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
March 6, 1997
F-3
<PAGE>
CRESCENT CAPITAL, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
<TABLE>
<CAPTION>
December 31, December 31,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 2,575,876 $ 657,880
Trade Accounts Receivable [Net of Allowance of $166,939] 2,050,094 2,278,638
Franchise Loans 707,009 1,008,990
Inventories 1,015,651 865,131
Prepaid Expenses and Other Current Assets 306,716 778,834
Due from a Related Party 1,687,762 1,471,997
Due from Officer 148,573 125,016
Other Receivables 611,690 51,475
--------------- ---------------
Total Current Assets 9,103,371 7,237,961
--------------- ---------------
Property and Equipment - At Cost 7,132,961 4,443,747
Less: Accumulated Depreciation: 1,697,143 1,020,205
--------------- ---------------
Property and Equipment - Net 5,435,818 3,423,542
--------------- ---------------
Other Assets:
Deposits 308,318 637,562
Deferred Offering Costs 100,000 100,000
Intangible Assets - Net 1,079,741 1,107,953
Net Assets of Discontinued Operations -- --
--------------- ---------------
Total Other Assets 1,488,059 1,845,515
--------------- ---------------
Total Assets $ 16,027,248 $ 12,507,018
=============== ===============
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-4
<PAGE>
CRESCENT CAPITAL, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
<TABLE>
<CAPTION>
December 31, December 31,
1 9 9 7 1 9 9 6
Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C> <C>
Trade Accounts Payable $ 2,691,247 $ 3,704,523
Accrued Expenses and Other Payables 1,920,684 1,186,168
Taxes Payable 1,042,354 415,771
Obligations Under Capital Leases 111,604 217,691
Current Portion of Long Term Debt 200,629 321,621
Related Party Payable -- 29,785
--------------- ---------------
Total Current Liabilities 5,966,518 5,875,559
--------------- ---------------
Long-Term Liabilities:
Long-Term Debt 1,438,409 392,262
Obligations Under Capital Leases 76,843 67,877
--------------- ---------------
Total Long-Term Liabilities 1,515,252 460,240
--------------- ---------------
Commitments and Contingencies -- --
--------------- ---------------
Minority Interest 3,415,973 2,015,233
--------------- ---------------
Stockholders' Equity:
$.01 Par Value, Preferred Stock, 1,000,000 Shares Authorized,
No Shares Issued and Outstanding -- --
$.001 Par Value, Class A Common Stock - 5,000,000 Shares
Authorized, 545,800 Shares Issued 494,057 Shares Outstanding 546 546
$.001 Par Value, Convertible Class B Common Stock -
2,000,000 Shares Authorized, Issued and Outstanding 2,000 2,000
Additional Paid-in Capital 6,209,214 6,209,214
Retained Earnings 1,177,971 322,246
Cumulative Foreign Currency Translation Adjustment 288,194 250,400
Note Receivable for Stock, Including Accrued Interest (1,972,275) (1,852,275)
Treasury Stock (776,145) (776,145)
---------------- ----------------
Total Stockholders' Equity 5,129,505 4,155,986
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 16,027,268 $ 12,507,018
=============== ===============
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-5
<PAGE>
CRESCENT CAPITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AS OF DECEMBER 31, 1997 and DECEMBER 31,
1996.
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Revenues:
<S> <C> <C>
Sales by Company-Owned Stores $ 3,297,210 $ 3,319,001
Commissary Sales 16,943,678 12,241,320
Royalty Sales 3,960,780 2,941,971
Rental Income 2,227,129 1,364,434
Franchise Fees 506,974 516,780
Computer Sales 1,375,494 828,828
Management Fees from Related Party/Other Income 49,716 25,000
--------------- ---------------
Total Revenues 28,360,981 21,237,334
--------------- ---------------
Cost of Revenues:
Company-Owned Stores 2,116,317 2,067,747
Food, Packaging and Distribution 14,649,036 10,796,422
Other Operating Expenses 4,000,654 2,901,077
--------------- ---------------
Total Cost of Revenues 20,766,007 15,764,976
--------------- ---------------
Gross Margin 7,594,974 5,472,358
General and Administrative Expenses 6,029,120 4,474,062
Loss on Sale of Fixed Assets 67,078 --
Depreciation and Amortization 755,916 693,201
--------------- ---------------
Operating Income 742,860 305,095
--------------- ---------------
Other Income [Expense]:
Interest Income from Related Party 247,925 233,014
Interest Income 142,435 69,017
Interest Expense (108,977) (118,454)
Sale of Investment in Subsidiary 2,163,038 --
--------------- ---------------
Total Other Income 2,444,421 183,577
--------------- ---------------
Minority Interest in Income from Continuing Operations
of Subsidiary (735,538) 41,943
--------------- ---------------
Income Before Tax 3,187,281 530,615
Income Taxes 656,362 --
--------------- ---------------
Income from Continuing Operations 1,795,381 530,615
--------------- ---------------
Discontinued Operations:
[Loss] from Discontinued Operations after Taxes (Note 8) (162,599) (653,837)
Net [Loss] Income $ 1,632,782 $ (123,222)
=============== ================
Earnings [Loss] Per Share:
Income from Continuing Operations $ .71 $ .21
Loss from Discontinued Operations (.08) (.26)
--------------- ---------------
Net [Loss] Income Per Share .64 (.05)
=============== ================
Weighted Average Number of Shares Outstanding 2,545,800 2,528,269
=============== ================
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-6
<PAGE>
CRESCENT CAPITAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Foreign Common
Common Stock Additional Currency Stock of the Note Total
Number of Paid-in Retained Translation Parent Held by Receivable Stockholders'
Shares Amount Capital Earnings Adjustments a Subsidiary For Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 2,545,200 2,545 6,230,593 445,468 31,622 -- (1,500,000) 5,210,228
Accrued Interest on Note (352,275) (352,275)
Additional Offering Costs from 2nd Phase
Sale of Stock of Subsidiary -- -- (21,379) -- -- -- -- (21,379)
Issuance of Common Stock on
Exercise of Warrants 600 1 -- -- -- -- -- 1
Common Stock Issued to Subsidiary -- -- -- -- -- (776,145) -- (776,145)
Foreign Currency Translation Adjustment -- -- -- -- 218,778 -- -- 218,778
Net [Loss] for the year ended
December 31, 1996 -- -- -- (123,222) -- -- -- (123,222)
--------- ------- ---------- ---------- -------- -------- ----------- ----------
Balance - December 31, 1996 2,545,800 $ 2,546 $6,209,214 $322,246 $250,400 (776,145) $(1,852,275) $4,155,986
========= ======= ========== ========== ======== ======== =========== ==========
Minority Interest Adjustment -- -- -- (577,057) -- -- -- (577,057)
Net Profit for the Year Ended
December 31, 1997 -- -- -- 1,632,782 -- -- -- 1,632,782
Accrued Interest on Note -- -- -- -- -- -- (120,000) (120,000)
Foreign Currency Translation Adjustment -- -- -- -- 37,794 -- -- 37,794
Balance - December 31, 1997 2,545,800 $ 2,546 $6,209,214 $1,377,971 $288,194 (776,145) $(1,972,275) $5,129,505
========= ======= ========== ========== ======== ======== =========== ==========
</TABLE>
Foreign Currency Translation:
The functional currency for the Company's foreign operations is the British
pound sterling. The translation from British pound sterling into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. The gains or losses resulting from such
translation are included in stockholders' equity. Equity transactions
denominated in British pound sterling have been translated into U.S. dollars
using the effective rate of exchange at date of issuance.
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-7
<PAGE>
CRESCENT CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fifty-two weeks ended
December 31, December 31,
1 9 9 7 1 9 9 6
Operating Activities:
<S> <C> <C>
Net Income (Loss) Before Minority Interest After Tax $ 2,592,285 $ (530,615)
--------------- ----------------
Adjustments to Reconcile Net Income (Loss) to Net Cash (Used for) Provided by
Operating Activities:
Depreciation and Amortization 921,342 917,546
Loss from Discontinued Operations -- 631,341
Gain on Sale of Subsidiary Stock (2,163,038) --
Recovery of Bad Debts -- (46,230)
(Loss) on Disposal of Property and Equipment 67,078 (306,057)
Changes in Assets and Liabilities:
(Increase)/Decrease in:
Trade Accounts and Other Receivables 530,525 (61,787)
Inventories (150,520) (174,788)
Prepaid Expenses and Accrued Income 352,120 (653,488)
Other Assets (230,971) (206,176)
Increase (Decrease) in:
Trade Accounts Payable (1,040,025) 320,797
Accrued Expenses 734,525 334,994
Other Payables and Accrued Interest -- 300,802
Taxes Payable 626,583 79,244
--------------- ----------------
Net Cash Provided by Continuing Operations 2,239,903 1,035,472
--------------- ----------------
Net Cash (Used) by Discontinued Operations (223,965) (653,837)
--------------- ----------------
Net Cash - Operating Activities - Forward 2,015,939 381,635
--------------- ----------------
Investing Activities:
Proceeds from Sale of Subsidiary Stock 3,125,063 --
Purchase of Property and Equipment and Capitalized Costs (3,253,569) (1,294,141)
Cost of Disposal of Subsidiary Stock (664,873) --
Proceeds on Disposal of Property and Equipment 390,542 700,855
Advances to Officer (125,557) --
Payments by Officer 102,000 43,135
Advances to Parent Company (981,203) (440,000)
Payments by Parent Company 765,439 609,532
Payments/Advances to Related Parties (29,785) --
Payments by Related Parties -- --
(Increase) Decrease in Restricted Cash -- 200,000
Purchase of Intangible Assets (82,708) (64,223)
--------------- ----------------
Net Cash - Investing Activities - Forward (754,651) (244,842)
--------------- ----------------
Financing Activities:
Deferred Offering Costs -- (100,000)
Proceeds from Sale of Common Stock 6,500 --
Purchase Shares for Treasury Stock (14,000) --
New Bank Loans 1,475,914 187,920
Repayment of Debt (550,860) (281,504)
Capital Lease Payments (97,121) (213,178)
--------------- ----------------
Net Cash - Financing Activities - Forward $ 820,433 $ (406,762)
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-8
<PAGE>
CRESCENT CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fifty-two weeks ended
December 28, December 29,
1 9 9 7 1 9 9 6
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $ 2,015,939 $ 381,635
Net Cash - Investing Activities - Forwarded (754,651) (244,842)
Net Cash - Financing Activities - Forwarded 820,433 (406,762)
Effect of Exchange Rate Changes on Cash (163,726) 55,486
---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,917,995 (214,483)
Cash and Cash Equivalents - Beginning of Periods 657,880 872,363
--------------- ---------------
Cash and Cash Equivalents - End of Periods $ 2,575,875 $ 657,880
=============== ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 108,977 $ 50,904
Income Taxes $ -- $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Acquisition of Equipment Under Capital Lease $ 84,696 $ 81,719
Receipt of Parent Company Stock in Payment of Related Party
Note for Assignment of Consulting Agreements $ -- $ 776,145
Write Down of Parent Company Stock to Market $ 388,073 $ --
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-9
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
Corporate Structure - Crescent Capital, Inc. ("Crescent"), a Delaware
corporation, was incorporated in January 1991 for the purpose of seeking
business ventures, either through the acquisition of existing businesses or the
acquisition of assets to establish subsidiary businesses.
In December 1993, International Franchise Systems, Inc. ("IFS") became a
subsidiary of Crescent. At December 28, 1997, Crescent owned 67% of the
Company's common stock while the remaining 33% is publicly traded.
IFS was incorporated in Delaware on October 22, 1993. IFS owns 85% of the stock
of Domino's Pizza Group Limited ("DP Group"), a United Kingdom ("UK")
corporation headquartered in Milton Keynes, England. DP Group owns 100% of the
stock of DP Realty Limited ("DP Realty"), DPGS Limited ("DPGS"), Livebait
Limited ("Livebait"), and DP Group Developments Ltd., each a UK corporation with
headquarters at Milton Keynes, England.
Since its acquisition of IFS, Crescent's operations have consisted substantially
of IFS's operations. Crescent and IFS (including its wholly owned subsidiaries)
are referred to as the "Company".
Description and Nature of Business - The principal purpose of the Company is to
be a holding company for the exclusive right to own, operate and franchise
Domino's Pizza Stores in the U.K., and the Republic of Ireland (the "Territory")
pursuant to a Master Franchise Agreement ("MFA") (See Note 17A). The Company's
multi-national operations include the ownership and operation of Domino's Pizza
Stores, the sale of commissary food products, supplies and equipment to
franchisees and the development of new franchises. As of December 28, 1997,
there were 154 stores operating, 143 of which were franchised and 11 were
Company-owned. As of December 29, 1996, there were 127 stores operating, 116 of
which were franchised and 11 were Company-owned.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Accounts Receivable - Substantially all accounts receivable are due from
franchisees for commissary and small wares equipment purchases and royalties.
Credit is extended based on an evaluation of the franchisee's financial
condition. The Company has a security interest in the franchise stores and their
assets as collateral. The Company considers its accounts receivable to be fully
secured.
Franchisee Loans - Franchisee loans consist of loans issued for in store
computer purchases, new loans for equipment purchases, or loans acquired from
Dominos Pizza International, Inc. which were issued to the original franchisees.
The Company has a security interest in the franchise stores and their assets as
collateral. The Company considers their franchisee loans to be fully secured.
Inventories - Inventories, which consist primarily of food products and
equipment for resale to franchises, are stated at the lower of cost, determined
by the first-in, first-out basis or market value.
Property and Equipment and Depreciation - Property and equipment are stated at
cost. Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 7 years. Leasehold
improvements are amortized using the straight-line method over the lesser of the
term of the related lease or the estimated useful lives of the improvements.
Master Franchise Agreement - The MFA is stated at cost that includes associated
professional costs. One-third of the cost of the MFA has been allocated to the
exclusive development rights under the MFA
F-10
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
(2) Summary of Significant Accounting Policies (Continued)
and is being amortized over a ten-year period and the expiring date of the
agreement is the year 2003. The remaining two-thirds of the cost of the MFA has
been allocated to the right to operate as sub-franchisor in the Territory and is
being amortized over a twenty-year period. Amortization expense for the
fifty-two weeks ended December 28, 1997 and December 29, 1996 was $79,559 and
$72,000, respectively (See Note 17A).
Consulting Agreements - The Company had entered into various consulting
agreements which were being amortized over the life of the agreements. The
Company assigned these assets to Woodland Limited Partnership ("Woodland"), a
related party, at their net book value on April 1, 1996 (See Note 17C).
Amortization expense for the fifty-two weeks ended December 28, 1997 and
December 29, 1996 was $-0- and $51,563, respectively.
Rights to Store Leases - The rights to store leases are stated at cost and are
being amortized over a ten-year period (the average length of the remaining term
under the leases) under the straight-line method. Amortization expense for the
fifty-two weeks ended December 28, 1997 and December 29, 1996 is $14,419 and
$13,439, respectively.
Store Franchise Agreement - The Store Franchise Agreement represents the cost of
the franchise fees paid for corporate-owned stores. The cost of the franchise
fees range from $4,650 to $12,400 per store. These costs are amortized over the
term of the franchise agreements, which is ten years. Amortization expense for
the fifty-two weeks ended December 28, 1997 and December 29, 1996 is $8,306 and
$7,210, respectively.
Store Development Costs - Store development costs, which represent expenses
incurred before a new store opens, including design and construction costs, are
amortized on a straight-line basis over three years. Amortization expense for
the fifty-two weeks ended December 28, 1997 and December 29, 1996 is $7,345 and
$30,075, respectively.
Goodwill - Goodwill represents the excess of the price paid for a corporate
store over the fair value attributed to the assets acquired, and is being
amortized using the straight-line method over ten years. Amortization expense
for the fifty-two weeks ended December 28, 1997 and December 29, 1996 is $1,293
and $1,253, respectively.
Revenue Recognition - Revenue from commissary sales is recognized upon shipment
of products and company-owned store sales are recognized at point of sale.
Franchise fees consist of initial franchise fees which are recognized in income
when the Company has substantially completed its obligations under the franchise
agreement. This generally occurs upon the opening of a franchise location at
which time the Company has completed its obligation to assist with the location
and design of the new store and the training of staff. Royalty fees are earned
on sales by franchisees and is recognized as revenue when the related sales are
made. Rental income, which consists of rent paid under subleases (See Note 7) is
recognized ratably over the lease period. Other operating income consists
primarily of computer system sales which is recognized at point of installation.
Advertising Costs - Advertising costs are expensed as incurred and are offset by
a fee of 4% of royalty sales by franchisees, which amount must be spent on the
franchise's behalf for various advertising programs. If advertising costs exceed
the fees received at a given point, a receivable to the franchisor is recorded
from the franchisee on the Company books for the amounts still due. Similarly if
at a given point, more fees are received than have been expended, a payable to
the franchisee is recorded. This amount is included in other receivables or
other payables.
F-11
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
(2) Summary of Significant Accounting Policies (Continued)
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Earnings (Loss) Per Share - Earnings (loss) per share of common stock is based
on the weighted average number of common shares outstanding for the period
presented. Common stock equivalents are included in the computation when their
effect is considered dilutive. Fully diluted earnings/(loss) per share is
calculated in accordance with FAS128, taking into account the impact of any
additional common stock that would have been outstanding if the dilutive
potential common stock had been issued.
Foreign Currency Translation - The functional currency for the Company's foreign
operations is the British pound sterling. The translation from British pound
sterling into U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains or
losses resulting from such translation are included in stockholders' equity.
Equity transactions denominated in British pound sterling have been translated
into U.S. dollars using the effective rate of exchange at date of issuance.
Impairment - Certain long-term assets of the Company are reviewed at least
annually as to whether their carrying value has become impaired, pursuant to
guidance established in SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets." Management considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related operations
(undiscounted and without interest charges). If impairment is deemed to exist,
the assets will be written down to fair value or projected discounted cash flows
from related operations. Management also re-evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of December 28, 1997, management expects
these assets to be fully recoverable.
Stock Options Issued to Employees - The Company adopted SFAS No. 123 on January
1, 1996 for financial note disclosure purposes and will continue to apply the
intrinsic value method of Accounting Principles Board ("APB") Opinion No. 25 for
financial reporting purposes.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification - Certain items in the prior year's financial statements have
been reclassified to conform with the current year's presentation.
(3) Significant Risks and Uncertainties
(A) Concentrations of Credit Risk - Cash - The Company had approximately $1.9
million on deposit at National Westminster Bank, Plc, a U.K. bank at December
28, 1997. Neither the bank nor the UK government insures the deposits under a
program similar to the Federal Deposit Insurance Corporation. Thus, the $1.9
million is subject to loss due to credit risk.
The Company does not require collateral in relation to cash credit risk.
(B) Concentrations of Credit Risk - Receivables - The Company routinely assesses
the financial strength of its franchisees and, based upon factors surrounding
the credit risk of its franchisees, establishes an allowance for uncollectable
accounts and, as a consequence, believes that its accounts
F-12
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
receivable credit risk exposure beyond such allowances is limited. The Company
has a security interest in franchised stores and their assets are collateral for
the receivable.
(C) DPII Relationship - Due to the nature of franchising and the Company's
agreements with DPII, the success of the Company is in part dependent upon the
overall success of DPII, including DPII's financial condition, management and
marketing success, and the successful operation of stores opened by other
franchisees.
(D) Potential Loss of Exclusive Development Rights - The Company's business plan
is dependent on its exclusive development rights under the MFA. The MFA requires
that the Company have opened and operating a minimum number of Domino's stores
in accordance with a specified yearly schedule. The Company was obligated for
the year ended December 28, 1997 to have a total of 146 delivery stores opened.
As of that date, the Company had 154 stores opened, of which 148 were delivery
stores, including 11 of which were Company owned. There can be no assurance that
the Company will be successful in opening the number of Domino's Stores
required, or that new Domino's stores opened by the Company or its franchisees
will be operated profitably. Furthermore, there can be no assurance that the
Company will be able to renew the MFA beyond December 31, 2006. If the MFA is
not renewed, the Company would lose its exclusive development rights.
(E) Operations in a Foreign Country - The Company is subject to numerous factors
relating to conducting business in a foreign country (including, without
limitation, economic, political and currency risks), any of which could have a
significant impact on the Company's operation.
The Company's U.K. operating subsidiary, DP Group, is subject to U.K.
corporation tax on its profits. The Company has used and expects DP Group to be
able to continue to use the tax loss carryforwards previously held by its
predecessor and carried over to DP Group to offset some of its future tax
payments. However, there can be no guarantee that DP Group will be profitable to
be able to continue to use the carryforward tax losses.
Currently, DP Group's operations are subject to the laws and regulations of the
Territory and the European Union, including such laws and regulations relating
to antitrust and trade regulation. The failure by DP Group to comply with these
laws may cause the Company to be unable to enforce its franchise agreements with
franchisees. The Company and its franchisees are also subject to U.K. government
and local laws and regulations generally. Store operations are subject to
health, sanitation, employment and safety standards imposed by the European,
national and local authorities. These regulations and any new laws and
regulations could have a significant financial impact on the operation of the
Company owned and franchised stores.
(4) Property and Equipment
The following details the composition of property and equipment:
<TABLE>
<CAPTION>
Cost Depreciation Net
<S> <C> <C> <C>
Land and Buildings $ 2,079,183 $ 1,522 $ 2,077,661
Equipment, Fixtures and Furnishings 2,473,404 1,074,573 1,398,831
Capital Leases 710,479 298,520 411,959
Leasehold Improvements 1,745,603 265,793 1,479,810
Motor Vehicles 124,292 56,735 67,557
-------------- --------------- --------------
Totals $ 7,132,961 $ 1,697,143 $ 5,435,818
------ ============== =============== ==============
</TABLE>
F-13
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
(4) Property and Equipment (Continued)
Depreciation expense for the fifty-two weeks ended December 28, 1997 and
December 29, 1996 was $810,422 and $533,195, respectively.
(5) Intangible Assets
Intangible assets, at December 28, 1997, consists of the following:
<TABLE>
<CAPTION>
Write-offs
Accumulated and
Cost Amortization Assignments Net
<S> <C> <C> <C> <C>
Master Franchise Agreement $ 1,200,698 $ 320,183 $ -- $ 880,515
Rights to Store Leases 144,188 41,509 -- 102,679
Store Franchise Agreement 49,362 6,754 -- 42,608
Store Development 79,675 31,871 3,535 44,269
Goodwill 13,163 3,493 -- 9,670
-------------- -------------- --------------- --------------
Totals $ 1,487,086 $ 403,810 $ 3,535 $ 1,079,741
------ ============== ============== =============== ==============
</TABLE>
(6) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 28,
1 9 9 7
<S> <C>
Note Payable to Domino's Pizza International, Inc. for the
Master Franchise Agreement $ --
Loans Payable to National Westminster Bank 1,639,038
---------------
Total 1,639,038
Less: Current Portion 200,629
Long-Term $ 1,438,409
--------- ===============
</TABLE>
The note payable to Domino's Pizza International, Inc. for the MFA was
originally for $650,000 of which $300,000 was paid on January 17, 1995 and
$350,000 is payable in installments of approximately $29,000 for twelve
consecutive quarters beginning on January 1, 1995, with interest at the rate of
8% per annum payable on the installment dates. Total installment payments of
$116,667 were made as of December 28, 1997. The note has been completely paid
off.
The Company has various loans payable to National Westminster Bank ("NatWest")
of $1,639,038 at December 28, 1997. The loans are payable over terms of 3 to 15
years in aggregate monthly installments of approximately $25,950. Interest on
one loan is 9.75% per annum and the second loan carries interest at 9.875% per
annum while the other loans bear interest at the bank's base rate plus 3%. The
Company has secured a 15-year mortgage on the purchase of land for the new
commissary. This loan carries an interest rate of 8.75%. The bank's base rate at
December 28, 1997 was 5.5%. The obligations to NatWest are secured by all of the
assets of DP Group, DP Realty, DPGS, and DP Group Developments Ltd.
Additionally, the Chairman of the Company has personally guaranteed these
obligations to a maximum of approximately $42,000.
F-14
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
(6) Long-Term Debt (Continued)
The following are maturities of long-term debt for the next fourteen years:
December
1998 $ 200,629
1999 218,183
2000 200,087
2001 138,214
2002 85,540
Over 2002 796,385
----------
Total $1,639,038
==========
(7) Leases
The Company is the lessee of motor vehicles and equipment under capital leases
expiring in various years through 1999. The assets and liabilities under capital
leases are recorded at the present value of the minimum lease payments. The
assets are depreciated over the shorter of their related lease terms or their
estimated productive lives. Depreciation of assets held under capital leases is
included in depreciation expense.
Following is a summary of property held under capital leases at December 28,
1997:
Equipment and Motor Vehicles $ 710,479
Less: Accumulated Depreciation 298,520
----------------
Net $ 411,959
--- ================
Minimum future lease payments under capital leases as of December 28, 1997 for
each of the next five years and in the aggregate are:
Year Ended
December Amount
1998 111,604
1999 79,692
2000 21,460
2001 --
2002 --
Subsequent to 2002 --
---------------
Total Minimum Lease Payments $ 212,756
Less: Amount Representing Interest 24,308
---------------
Present Value of Net Minimum Lease Payment $ 188,448
------------------------------------------ ===============
F-15
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
(7) Leases (Continued)
Interest rates on capitalized leases vary from 3% to 8% and are imputed based on
the lower of the Company's incremental borrowing rate at the inception of each
lease or the lessor's implicit rate of return.
The Company has a one-year operating lease for its U.S. office that expires on
June 30, 1998 and is renewable year-to-year.
The Company leases land and buildings, office equipment and motor vehicles under
operating leases expiring in various years through 2022.
The Company leases store properties directly, through a subsidiary, DP Realty,
and then subleases the properties to franchisees. At December 28, 1997, the
Company had operating leases for approximately 115 stores with periods ranging
from 10 to 25 years, of which 108 were also subject to subleases to the
franchisees and the balance are used for Company-owned stores. The subleases are
for an initial ten year period, consistent with the franchisee period, with a
subsequent ten year renewal period. Total minimum future rental income, as shown
below, from subleases to be received in the future under non-cancelable
subleases assumes the subleases are for the initial ten year period only,
although the Company believes that the franchisees will exercise the renewal
option on substantially all subleases. Also included below is the minimum future
rental payments and sublease rental income for the building where the Pizzazz
restaurant was located (See Notes 8 and 17D).
Minimum future rental payments and sublease rental income under non-cancelable
operating leases and subleases, respectively, having remaining terms in excess
of one year as of December 28, 1997 for each of the next five years and in the
aggregate are as follows:
<TABLE>
<CAPTION>
Operating
Year ending Leases Subleases
December
<S> <C> <C>
1998 2,857,008 2,518,138
1999 2,823,414 2,510,323
2000 2,781,389 2,481,186
2001 2,682,864 2,467,131
2002 2,654,706 2,467,131
Subsequent to 2002 21,056,121 19,657,529
--------------- ----------------
Total Minimum Future Rentals $ 34,855,502 $ 32,101,438
---------------------------- =============== ================
</TABLE>
Rent expense for the fifty-two weeks ended December 28, 1997 and December 29,
1996 was $2,354,765 and $1,889,624, respectively. The rental income received on
subleases for the fifty-two weeks ended December 28, 1997 and December 29, 1996
was $2,227,129 and $1,639,953, respectively.
F-16
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
(8) (A) Discontinued Operations - Pizzazz Concept
On May 31, 1996, the Company's Board of Directors approved the Company's
recommendation to discontinue the development of the Pizzazz concept and the
operation of the Pizzazz restaurant. The primary purpose for the closure of the
restaurant and the cessation of the concept development was to ensure that
management's time was not redirected from the primary focus of developing the
Domino's brand and delivery store franchise network. On June 3, 1996, the
Company closed the restaurant. The Company continues to have an obligation for
the property under the lease that expires in fifteen years. The Company has been
able to secure a subtenant for the property beginning in April 1997. The
sublease runs concurrent with the Company's lease. The income from the sublease
is approximately $130,000. The annual cost of the lease is approximately
$87,000.
The results of operations of Pizzazz were treated as discontinued operations in
the accompanying financial statements and are presented net of any related
income tax expense. The prior year results of operations and statement of cash
flows have been reclassified to conform to this method of presentation. The
discontinued Pizzazz concept had net property and equipment of $575,671 as of
December 28, 1997. These assets have been reclassified as rental assets from the
start of the sublease agreement. The loss from discontinued operations consists
of:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------
<S> <C> <C>
Revenues $ 96,250 $ 103,874
Cost of Sales 80 170,583
Operating Expenses 248,919 429,362
Estimated Closing Costs -- 135,270
--------------- ----------------
Net Before Taxation Effects $ (152,749) $ (631,341)
The taxation benefit from the losses was: 41,853 --
--------------- ----------------
Total (110,896) (631,341)
================ =================
</TABLE>
The Company is obligated under a 15-year lease on the building where the
restaurant was located. However it is anticipated that a sublease will offset
these expenses (See Note 17D).
(8) (B) Discontinued Operations -Haagen Dazs
In August 1995, the Company entered into an agreement with an unrelated entity
to purchase all of the assets and operating rights of three Haagen Dazs ice
cream parlors for approximately $140,000. The Company, however, sold one Haagen
Dazs parlor back to the master franchisor in the UK because the Company feels,
at this time, that management's attention and resources must be focused on the
core business of delivery pizza stores. The Company sold the other two Haagen
Dazs units in December 1997. The results of operations for the Haagen Dazs units
have been treated as discontinued operations for the fifty-two weeks ended
December 28, 1997:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenues $ 816,158 $ 1,532,361
Cost of Sales 551,732 967,653
Operating Expenses 335,642 587,204
--------------- ----------------
Net Before Taxation Effects $ (71,216) $ (22,496)
- ---------------------------
The taxation benefit from the losses was: 19,513 --
--------------- ----------------
Total (51,703) (22,496)
================ =================
</TABLE>
F-17
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
(8) (B) Discontinued Operations -Haagen Dazs (Continued)
The Statements of Operations and Cash Flows for the year ended December 29, 1996
has been reclassified to reflect the treatment of the Haagen Dazs income as
discontinued operations.
(9) Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of these financial instruments, the Company used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, trade receivables and trade payables and officer
advances, it was estimated that the carrying amount approximated fair value for
the majority of these instruments because of their short maturities. For
long-term investment in marketable securities, fair value is estimated based on
current quoted market price.
Management estimates that the carrying value of its long-term debt, related
party debt and amounts due from parent approximate its fair value because the
applicable interest rates approximates the current market rates.
(10) Related Party Transactions
Woodland Limited Partnership ("Woodland") is a partnership controlled by members
of Mr. Colin Halpern's family. Mr. Halpern is the President of Crescent and
Chairman of the Board of IFS.
As of December 28, 1997, Woodland owns 92% of the shares of Crescent.
In connection with the issuance to Woodland of shares of IFS stock, IFS accepted
a note receivable for $1,500,000 from Woodland at 8% per annum. This note
receivable was transferred to Crescent pursuant to a Loan and Exchange of Stock
Agreement between Crescent, IFS and Woodland. Accrued interest on this note
receivable at December 31, 1997 was $472,275.
As of December 28, 1997, Crescent owns 4,700,000 restricted shares, or
approximately 67%, of IFS's outstanding stock. As a result of the capital
structures of the Company and Crescent, Woodland has indirect voting control of
the Company and, consequently, can elect the Company's entire Board of
Directors, determine the vote on any matter submitted for shareholder approval
(including increasing the Company's authorized capital stock and authorizing any
merger, sale of assets or dissolution of the Company), and, generally, direct
the affairs of the Company.
At December 31, 1997, $1,943,700 was due from Woodland for funds transferred
between companies. These funds are to be repaid on a short-term basis and bear
interest at 8% per annum. Included in prepaid and other assets this bears
accrued interest receivable of $240,939.
Mr. Halpern is the President and Chairman of the Board of Red Hot Concepts, Inc.
("Red Hot"). The Chief Financial Officer of International Franchise Systems is
also the Chief Financial Officer of Red Hot. The charge for his services is
allocated between the two companies.
F-18
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
(10) Related Party Transactions (Continued)
The Company has advanced funds to Mr. Halpern. At December 28, 1997, the total
amount due to the Company is approximately $148,573. This amount is being offset
through reimbursements due to Mr. Halpern.
Mr. Halpern's son is an attorney with a law firm that provides legal services to
the Company. Legal expense incurred with this firm for the fifty-two weeks ended
December 28, 1997 was $135,108.
(11) Investment in Marketable Securities of Parent Company
In September 1996, IFS received from Woodland, 51,743 shares of Crescent Class A
Common Stock in payment of Woodland's interest bearing note for the assignment
of the three consulting agreements (See Note 17C). IFS classifies its investment
in Crescent as available for sale securities pursuant to SFAS No. 115. The
number of shares to be received in payment of the Woodland loan of $776,145, was
estimated using the market value of Crescent's shares on the open market. IFS's
intention is to hold these securities for a least a twelve month period. In the
consolidated financial statements, these shares are presented as Treasury Stock.
(12) Income Taxes and Provision for Income Taxes
<TABLE>
<CAPTION>
1997 1996
$ $
The current year taxation charge consists of the following:
Continuing Operations
<S> <C> <C>
- - United States 182,000 0
- - United Kingdom 474,362 0
--------------- ----------------
$656,362 $0
Discontinued Operations
- - United States 0 0
- - United Kingdom (61,366) 0
---------------- ----------------
$(61,366) $0
Total Income Tax Charge $594,996 $0
=============== ================
</TABLE>
Rate Reconciliation:
The following is an analysis of the differences between United States statutory
income tax rate and the Company's effective tax rates on continuing operations.
<TABLE>
<CAPTION>
%
<S> <C>
United States statutory income tax rate 35.0
Permanent differences 5.1
Utilization of net operating losses carried forward
of UK operations (4.3)
Net US operating losses utilized against extraordinary income 11.8
Other operating unprovided timing differences (1.9)
Difference in effective tax rate of UK operations 1.9
-----------------
Effective tax rate on continuing activities 20.2
=================
</TABLE>
F-19
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
(12) Income Taxes and Provision for Income Taxes (Continued)
Pursuant to United States tax laws, if the Company's subsidiaries organized
under the laws of the UK are not engaged in business in the United States,
profits of such subsidiaries will not be subject to United States taxation,
until distributed as dividends. The Company however, would receive a credit
against its UK federal income tax liability that would otherwise result from any
distributions from its subsidiaries for any UK corporate taxes paid by its UK
subsidiaries on these distributions, as well as for any UK dividend and royalty
withholding taxes imposed directly on the Company.
The Company through its UK subsidiary is a tax payer in the United Kingdom. The
Company's estimated tax liability for the 1997 tax year is $413,000. There are
tax losses available to carryforward indefinitely against future UK profits
amounting to $210,980.
(13) Gain on Sale of Portion of Investment in Subsidiary
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Profit on Sale of 15% of the
investment in Domino's Pizza Group (UK) 2,163,038 0
Taxation Thereof (182,000) 0
---------------- ----------------
Gain After Taxation 1,981,038 0
=============== ================
</TABLE>
$1.1 million of net operating losses brought forward in the US were utilized
against this income for taxation purposes.
(14) Stock Transactions
In connection with units sold in prior years, the underwriter received options
originally exercisable through November 25, 1996 to purchase 8,000 units at
$9.00 per unit. Each unit consists of one share of common stock, twelve Class A
warrants, and twelve Class B warrants. Each redeemable Class A warrant entitled
the holder to purchase one share of common stock at a price of $5.00 per share
exercisable through August 25, 1995. Each redeemable Class B warrant entitled
the holder to purchase one share of common stock at the price of $6.00 per share
exercisable through August 25, 1995. On September 19, 1995, Crescent completed
its tender offer for its Class A Warrants and Class B Warrants by exchanging
86,800 shares of Class A common stock in exchange for a total of 868,000 Class A
Warrants and 868,000 Class B Warrants. In addition, 38,400 Warrants were
exercised in exchange for 38,400 shares of stock. The gross proceeds in
connection with the exercise of the Warrants was $192,000. In February 1996, the
6,000 Class A Warrants and 6,000 Class B Warrants were exchanged for 600 shares
of Class A common stock valued at $.001 par value. At December 31, 1996,
Crescent had no outstanding Class A Warrants or Class B Warrants.
F-20
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
(15) Stock Transactions of Subsidiary
On December 30, 1994, the Company completed the first phase of an initial public
offering (the "Offering") of its common stock. The Company sold 1,017,681 units,
each unit consisting of one share of common stock and two common stock purchase
warrants, at an initial public offering price of $5 per unit. Net proceeds from
the first phase of the Offering (after deducting the underwriting discounts of
$585,167 and expenses of $883,673) were $3,619,565. On January 17, 1995, the
Company completed the second phase of its initial public offering and sold an
additional 59,643 units. Net proceeds from these additional units (after
deducting the underwriting discounts of $76,210 and expenses of $44,855) were
$177,150. Additional costs for both the first and second phase relating to the
offering of $244,831 were paid during 1995 reducing paid-in capital.
On May 12, 1995, the Company issued 237,500 shares of common stock valued at
$350,000 in connection with entering into a four year consulting agreement.
On June 5, 1995, the Company issued 237,500 shares of common stock valued at
$475,000 in connection with entering into a five year consulting agreement.
During October 1995, the Company issued 475,000 shares of common stock valued at
$1,900,000 and received cash of $1,781,250 in connection with entering into a
five year consulting agreement (See Notes 11 and 17C).
During July 1997, the Company issued 300,000 shares of common stock valued at a
market price of $300,000 to DPII with put/call provisions that can be exercised
in May 2001 at a cost of $1.2 million. This was in connection to a modification
of the franchise agreement that altered the royalty rate, store opening costs
and development schedule. This was recorded on the Company's books and records
at a par value of $3,000 (See Note 17A).
In December 1997, three employees of the Company who were issued share options
under the 1997 Stock Plan, exercised their options. The Company purchased these
shares (7,000) as Treasury Stock.
(16) Stock Options and Warrants
(A) Stock Options - In order to attract, retain and motivate employees
(including officers), directors and consultants who perform substantial services
for or on behalf of the Company, the Company adopted the 1995 and 1996
Non-Employee Directors Stock Option Plans, the 1994 Stock Incentive Plan and the
1995 Consultants and Advisors Stock Incentive Plan (the "Director Plan", the
"Stock Plan" and the "Consultants Plan", respectively).
The 1994 Stock Plan was terminated effective December 31, 1996 and replaced by
the 1997 Stock Plan. Pursuant to the 1997 Stock Plan, officers and key employees
of the Company are eligible to receive awards of stock options (with or without
limited stock appreciation rights). Options granted under the Stock Plan may be
"incentive stock options" ("ISO"), or non-qualified stock options ("NQSO").
Limited Stock Appreciation Rights ("LSARs") may be granted simultaneously with
the grant of an option or (in the case of NQSOs) at any time during its term.
The Company's acting president and chief financial officer was granted an ISO
for 15,000 shares at $1.25 per share on March 8, 1996 and for 75,000 shares at
$.50 per share on January 28, 1997, which approximated the market value of the
shares on that date. Both option grants become exercisable at the rate of 33%
per year and are generally exercisable over a ten-year period.
The 1995 Director Plan was terminated effective December 31, 1996. At the same
time, the 1996 Director Plan was declared void and replaced by the 1997 Director
Plan (See Note 15A). Under the
F-21
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
(16) Stock Options and Warrants (Continued)
1997 Directors Plan, only NQSOs can be granted. The 1995 Consultants Plan was
amended, effective April 29, 1997 to make additional shares available for grant
under that plan. Under this Plan, either stock or NQSOs can be granted to
eligible consultants and advisors.
The Company has reserved 800,000 shares of the Common Stock for issuance of
awards under the 1997 Stock Plan, 300,000 shares of Common Stock under the
Director Plan and 250,000 shares of Common Stock under the Consultants Plan
(subject to anti-dilution and similar adjustments).
The 1997 Stock Plan, 1997 Director Plan and the 1995 Consultants Plan (as
amended) are administered by a committee (the "Committee"), established by the
Company's Board of Directors. Subject to the provisions of the 1997 Stock Plan
and the 1995 Consultants Plan (as amended), the Committee determines the type of
award, when and to whom awards will be granted, and the number of shares covered
by each award, the terms, provisions and kind of consideration payable (if any),
with respect to awards. The Committee has sole discretionary authority to
interpret each of the Plans and to adopt rules and regulations related thereto.
Under the 1997 Director Plan, any nonemployee member of the the Board of
Directors is automatically granted a NQSO for 5,000 shares on the first business
day of January, April, July and October of each year.
An option may be granted under the 1997 Stock Plan and the 1995 Consultants Plan
(as amended) on such terms and conditions as the Committee may approve, and
generally may be exercised for a period of up to 10 years from the date of
grant. Generally, options will be granted under the Stock Plan with an exercise
price equal to the "Fair Market Value" (as defined in the Plan) on the date of
grant. The exercise price for options granted under the Consultants Plan may not
be less than 60% "Fair Market Value" (as defined in the Plan) on the date of
grant. In the case of ISOs granted under the Stock Plan, certain limitations
will apply with respect to the aggregate value of option shares which can become
exercisable for the first time during any one calendar year, and certain
additional limitations will apply to "Ten Percent Stockholders" (as defined in
the Stock Plan). The Committee may provide for the payment resulting from the
exercise of the option in cash, by delivery of other common stock having fair
market value equal to such option price or by a combination thereof.
An option granted under the 1997 Stock Plan or the 1995 Consultants Plan (as
amended) shall be exercisable at such time or times as the Committee, in its
discretion, shall determine, except that no stock option shall be exercisable
after the expiration of ten years (five years in the case of an incentive stock
option granted to a "Ten Percent Employee", as defined in the Stock Plan) from
the date of the grant. The Stock Plan contains special rules governing the time
of exercise in the case of death, disability or other termination of employment
and also provides for acceleration of the exercisability of options upon certain
events involving a change in control of the Company. Options granted under the
1997 Director Plan are exercisable one year after the grant is made for a period
of nine years. The Director Plan also contains special exercise rules in the
event of death or other termination.
The Company's Board of Directors may at any time and from time to time suspend,
amend, modify or terminate the Plans. However, to the extent required by the
Securities Exchange Act of 1934 or other applicable law, no such amendment shall
be effective unless approved by the holders of a majority of the issued and
outstanding securities of the Company entitled to vote. In addition, no such
change may adversely affect any option previously granted, except with the
written consent of the optionee or be made to extent inconsistent with the
Securities laws or other applicable law.
F-22
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
(16) Stock Options and Warrants (Continued)
Information pertaining to options as of December 28, 1997 and for the year then
ended is as follows:
<TABLE>
<CAPTION>
Remaining
Contractual
Exercisable Life
Common Exercise Prices Stock of Options
Shares Per Share Options Outstanding
<S> <C> <C> <C> <C>
Options Outstanding - January 1, 1996 40,000 $5.94 40,000 8.5 years
Options Granted 65,000 0.63-1.25 -- 9.25-9.5 years
----------- --------- ------------- ---------------
Options Outstanding - January 1, 1997 105,000 0.63-5.94 40,000 8.25-8.5 years
Options Granted 514,000 .50-2.25 96,333 9.5 years
Options Exercised (7,000) .50 -- --
Options Canceled (135,000) -- -- --
----------- --------- ------------- ----------------
Options Outstanding - December 31, 1997 477,000 $.50-5.94 141,333 8.25 - 9.5 years
=========== ========= ============= ================
</TABLE>
At the 1997 grant dates, the weighted average fair value of the above options
was $.80. No compensation cost was recognized in income. The weighted average
exercise price for options outstanding at December 28, 1997 was $0.893 per
share.
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
For the Fifty-Two Weeks Ended
December 28, December 29,
1 9 9 7 1 9 9 6
------- -------
Net (Loss) Income:
<S> <C> <C>
As Reported $ 2,346,084 $ (139,808)
============== ================
Pro Forma $ 2,326,001 $ (183,008)
============== ================
(Loss) Earnings Per Share:
As Reported $ .34 $ (.02)
============== ================
Pro Forma $ .34 $ (.03)
============== ================
</TABLE>
The fair value used in the pro forma data was estimated by using an option
pricing model which took into account as of the grant date, the exercise price
and the expected life of the option, the current price of the underlying stock
and its expected volatility, expected dividends on the stock and the risk-free
interest rate for the expected term of the option.
The following is the average of the data used for the following items.
<TABLE>
<CAPTION>
Risk-Free Expected Expected Expected
Interest Rate Life Volatility Dividends
<S> <C> <C> <C>
1997 6.63% 5 Years 139.4% --
1996 6.63% 10 Years 81.99% --
</TABLE>
(B) Common Stock Purchase Warrants - As of December 28, 1997, there were
1,077,324 Class B warrants outstanding, which were issued on December 30, 1994
as part of a public offering. Holders of each Class B warrant are entitled to
purchase one share of common stock at $10.00 per share until December 9, 1999.
No warrants were exercised during the fifty-two week periods ended December 28,
1997 or December 29, 1996.
F-23
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
(16) Stock Options and Warrants (Continued)
In connection with the public offering, the Company granted 107,732 unit options
to Patterson Travis, Inc., the Company's Underwriter, as part of the
Underwriting Agreement dated September 9, 1994. The exercisable price of these
options is $8.25 per unit.
(17) Operations by Geographic Area
The summary of financial information for the Company's operations by geographic
area is as follows:
For the fifty-two weeks ended December 28, 1997:
<TABLE>
<CAPTION>
United
United States Kingdom Eliminations Consolidated
<S> <C> <C> <C> <C>
Revenue $ 441,804 $ 28,360,981 $ (441,804) $ 28,360,981
Income Before Taxes $ 1,013,178 $ 1,732,299 $ 441,804 $ 3,187,281
Net Income $ 537,443 $ 1,095,339 $ -- $ 1,632,782
Assets $ 5,885,188 $ 11,179,130 $ (1,037,070) $ 16,027,248
Liabilities $ 437,863 $ 6,691,379 $ (1,132,724) $ 5,996,518
Company's Investment in
Foreign Subsidiaries $ 1,683,863 $ -- $ (1,683,863) $ --
</TABLE>
For the fifty-two weeks ended December 29, 1996:
<TABLE>
<CAPTION>
United
United States Kingdom Eliminations Consolidated
<S> <C> <C> <C> <C>
Revenue $ 500,534 $ 21,897,463 $ (527,064) $ 22,769,695
Operating Profit (Loss) $ (815,207) $ 1,097,806 $ -- $ 282,599
(Loss) from Discontinued
Operations $ -- $ (441,938) $ -- $ (441,938)
Net (Loss) Income $ (610,457) $ 445,292 $ -- $ (123,222)
Assets $ 12,233,157 $ 10,817,767 $ (9,807,906) $ 12,507,018
Liabilities $ 2,086,404 $ 6,815,156 $ (2,565,761) $ 6,335,799
Company's Investment in
Foreign Subsidiaries $ 1,981,016 $ -- $ (1,981,016) $ --
</TABLE>
(18) Commitments and Contingencies
(A) Master Franchise Agreement - The relationship between the Company and
Domino's Pizza International, Inc.("DPII") is governed principally by the MFA.
The MFA requires that during the 10-year period ending December 2006, the
Company shall open and operate a minimum number of Domino's pizza stores in
accordance with a yearly schedule. If the Company does not meet the development
schedule, Domino's may terminate the Company's exclusive right to operate and
franchise additional Domino's Stores in the Territory. The Company was obligated
for the year ended December 28, 1997 to have a total of 146 delivery stores
opened. As of that date, the Company had 154 stores opened of which 148 were
delivery stores, including 11 that were Company owned.
If the Company is in compliance with the MFA at the expiration of the initial
term, the Company will have the option to extend its exclusive development
rights for an additional 10-year period, provided the Company and DPII agree to
a minimum development schedule for the renewal term. There can be no assurance
that the Company will be successful in opening the number of Domino's Stores
required. If after expiration of the initial term (or any renewal term), the
Company fails to exercise its option to renew its exclusive development rights,
or the parties are unable to agree to a minimum development
F-24
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
(18) Commitments and Contingencies (Continued)
schedule for the renewal term, then the Company would continue to have the right
to operate its then existing Company-owned Domino's Stores and to maintain and
continue its rights and obligations, and act as subfranchisor, with respect to
all then existing franchised Domino's Stores. The Company would generally have
no further right to operate or grant franchises for additional Domino's Stores
and DPII would have the right to proceed (or the right to grant a third party
the right to proceed) with further development of the Territory, subject to
territorial rights granted under then-existing franchise agreements.
The Company is required to pay DPII a one-time store opening fee for each new
Domino's Store, whether Company-owned or franchised. The Company expects to pass
this cost through to the franchisees in the case of franchised stores. In
addition, the Company must pay to Domino's a monthly royalty fee equal to a
certain percentage of each Domino's Store's gross sales. This royalty fee is
payable to Domino's irrespective of the profitability of the Company or the
Domino's Store, and irrespective of the Company's ability to collect royalties
from franchisees. The Company's payments to DPII are to be made in United States
dollars.
Under certain circumstances of default by the Company under the MFA, DPII has
the right to terminate the MFA. If the MFA is terminated, the Company would be
subject to a one-year non- competition covenant in the delivery, carryout or
sit-down pizza business and DPII would have the right (but not the obligation)
to purchase, at the then-current fair market value, all of the Company's rights
and interests as the subfranchisor of Domino's Stores and all of the assets of
each Domino's Store owned by the Company. The fair market value would be
determined by mutual agreement of the Company and DPII,
or in the absence of such agreement by an appraiser. Under certain circumstances
of default by DPII under the MFA, the Company has the right to terminate the
agreement and continue as an independent pizza operation, including the
operation of the fresh pizza dough production facility and wholesale business
(the "Commissary").
DPII and IFS entered into a Stock Purchase Agreement as of May 26, 1997, ("SPA")
whereby IFS agreed to sell to DPII 300,000 shares of its common stock in
consideration for royalty concessions under the Master Agreement. The SPA
provides that DPII may not sell, transfer or otherwise dispose of its shares
before May 26, 2001 and any transferee receiving stock in violation of this
prohibition will have no rights with respect to the shares. The SPA further
provides for put and call options on the common shares at an agreed upon base
purchase price of $1,200,000 adjusted to reflect changes in the common stock,
such as, stock splits and dividends.
The Master Agreement cannot be assigned by IFS without DPII's consent. In
addition, the agreement prohibits Domino's Pizza Group Limited, a majority-owned
subsidiary of IFS, ("DP Group") and Colin and Gail Halpern (as indirect
controlling shareholders of DP Group) from transferring control of IFS without
DPII's prior written consent. For the term of the Master Franchise Agreement, DP
Group and Colin and Gail Halpern are restricted from having an interest in,
being employed by, advising or assisting another business in the pizza or pizza
store business in the Territory.
(B) Employment Agreement - In August 1994, the Company entered into an
employment agreement with its then President and now Chairman of the Board for a
salary of $96,000 per year. The initial term of the agreement expired on January
31, 1996. The salary was adjusted at the discretion of the Board of Director's
Compensation Committee to $180,000 per year.
(C) Consulting Agreements - In May, June and October 1995, the Company entered
into three consulting agreements with terms of 4, 5 and 5 years respectively,
issuing 950,000 shares of common stock as compensation for these agreements (See
Note 17C). Consulting expense of $943,750 was to
F-25
<PAGE>
CRESCENT CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
be amortized over the terms of these agreements. The Company was also
responsible for out-of-pocket expenses incurred and a monthly advisory fee.
During the years ended December 28, 1997 and December 29, 1996, the Company
recognized $0 and $51,563, respectively, of consulting expense related to these
agreements. These consulting agreements were assigned to Woodland in the form of
an interest bearing note at the net book value of $776,145 on April 1, 1996 (See
Note 11).
(D) Pizzazz Lease Commitment - In connection with the Pizzazz restaurant, the
Company had entered into a 15-year operating lease, expiring December 24, 2010
(See Note 7).
(19) New Authoritative Accounting Pronouncements
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1997. Earlier application is not
allowed.
The provisions of SFAS No. 125 must be applied prospectively; retroactive
application is prohibited. Adoption on January 1, 1998 is not expected to have a
material impact on the Company. The FASB deferred some provisions of SFAS No.
125, which are not expected to be relevant to the Company.
The FASB issued Statement of Financial Accounting Standards ("SFAS") No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosure About
Segments of an Enterprise and Related Information" both clarify existing
reporting requirements and in certain cases expand the disclosure. Neither is
expected to have a material impact on the Company.
(20) Subsequent Events
On March 11, 1998, the Company received an offer from IFS Acquisition
Corporation, an affiliate of Crescent Capital, Inc., the Company's largest
shareholder, to participate in a merger which would result in all of the
shareholders other than Crescent Capital, Inc. receiving $2.80 per share for
each share of the Company's stock. The Board of Directors named a Special
Committee of directors, comprised of Bernard Goldman and David Coffer, to
consider the offer. The Special Committee hired legal and financial advisors and
is considering the offer. On April 17, 1998, the Special Committee announced
that an agreement had been reached on the financial terms of the merger and that
the public shareholders would receive $3.60 per share if the transaction is
completed. The proposed merger is subject to, among other things (i) execution
of a definitive merger agreement containing customary representations,
warranties, covenants and conditions (including a financial condition), and (ii)
compliance with all applicable regulatory and governmental requirements.
Accordingly, there can be no assurance that the proposed merger will be
consummated.
.......................
F-26
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