SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission file number 0-21996
JAKE'S PIZZA INTERNATIONAL, INC.
(Exact name of small business issuer as
specified in its charter)
Delaware 36-3882273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 Official Road, Addison, Illinois 60601
(Address of principal executive offices)
(708) 543-0022
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 1,176,540 shares of
common stock, $.01 par, as of August 15, 1996.
Transitional Small Business Disclosure Format (check one): Yes No X
<PAGE>
<TABLE>
JAKE'S PIZZA INTERNATIONAL, INC.
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Distribution sales. . . . . . . . $ 596,194 $ 734,257 $ 1,976,427 $ 2,298,673
Franchise royalties . . . . . . . 70,889 94,801 211,717 291,849
Advertising royalties . . . . . . 25,172 32,202 71,571 103,092
Franchise fees. . . . . . . . . . 88,000 25,000 170,500 101,000
Rebate income . . . . . . . . . . 5,057 --- 5,057 ---
Store sales . . . . . . . . . . . 42,666 141,635 118,428 443,527
Other . . . . . . . . . . . . . . --- --- --- 25
Total Revenues. . . . . . . . . . 827,978 1,027,895 2,553,700 3,238,166
Cost of Sales:
Cost of distribution sales. . . . 545,534 632,027 1,682,286 1,924,468
Cost of store sales . . . . . . . 53,626 99,758 120,668 310,940
Total cost of sales . . . . . . . 599,160 731,785 1,802,954 2,235,408
Gross Profit and Service Revenues 228,818 296,110 750,746 1,002,758
Operating and Administrative Expenses:
Store operations. . . . . . . . . 37,036 65,004 89,972 192,602
Distribution and franchise
operations . . . . . . . . . 23,701 24,606 69,426 67,342
Selling, general and
administrative expenses. . . 490,787 343,304 1,263,865 1,161,477
Total operating and administrative
expenses . . 551,524 432,914 1,423,263 1,421,421
Loss from operations. . . . . . . (322,706) (136,804) (672,517) (418,663)
Other Income (Expense):
Interest income . . . . . . . . . 2,464 4,317 12,715 19,244
Interest expense -
Related Party. . . . . . . . . (2,720) (2,720) (8,160) (8,160)
Other. . . . . . . . . . . . . (10,349) (17,662) (57,392) (53,647)
Minority interest . . . . . . . . 31,299 --- 31,299 ---
Miscellaneous . . . . . . . . . . (220,798) (22,466) (314,357) (49,298)
Total other income (expense). . . (200,104) (38,531) (335,895) (91,861)
Net Loss. . . . . . . . . . . . . $(522,810)$ (175,335) $(1,008,412)$ (510,521)
Net Loss Per Share. . . . . . . . $ (.44) $ (.16) $ (.88) $ (.46)
Weighted Average Number of
Outstanding Shares . 1,176,540 1,121,540 1,145,984 1,103,207
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Financial Position
As of
June 30, September 30,
1996 1995
<S> <C> <C>
Assets
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . $ 32,274 $ 497,436
Accounts receivable, net of allowances for doubtful
accounts of $54,450 and $75,000, respectively. . 353,938 552,827
Inventories . . . . . . . . . . . . . . . . . . . . 43,135 145,389
Notes receivable. . . . . . . . . . . . . . . . . . 98,223 59,720
Other current assets. . . . . . . . . . . . . . . . 47,907 9,385
Total current assets . . . . . . . . . . . . . . 575,477 1,264,757
Property and Equipment (at cost):
Land . . . . . . . . . . . . . . . . . . . . . . 160,000 160,000
Buildings and improvements . . . . . . . . . . . 873,550 967,215
Equipment. . . . . . . . . . . . . . . . . . . . 394,593 462,091
Furniture and fixtures . . . . . . . . . . . . . 67,747 67,182
At Cost. . . . . . . . . . . . . . . . . . . . . 1,495,890 1,656,488
Less: accumulated depreciation . . . . . . . . . 284,703 259,926
Net property and equipment . . . . . . . . . . . 1,211,187 1,396,562
Other Assets:
Deferred contract costs, net of accumulated
amortization of $320,312 and $224,219, respectively 704,688 800,781
Intangible assets, net of accumulated
amortization of $27,500 and $12,500, respectively 52,500 67,500
Security deposits . . . . . . . . . . . . . . . . . 64,644 62,133
Notes receivable, net of allowance for uncollectible
notes of $38,241 at June 30, 1996. . . . . . . . 219,857 490,258
Total other assets . . . . . . . . . . . . . . . 1,041,689 1,420,672
Total assets . . . . . . . . . . . . . . . . . .$ 2,828,353 $ 4,081,991
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Liabilities And Shareholders' Equity
Current Liabilities:
Bank line-of-credit . . . . . . . . . . . . . . . .$ --- $ 193,943
Notes Payable -
Related party. . . . . . . . . . . . . . . . . . 132,000 16,000
Other. . . . . . . . . . . . . . . . . . . . . . 46,496 46,274
Contractual obligation, current portion . . . . . . 275,000 275,000
Capital lease obligation, current portion . . . . . 5,189 4,722
Accounts payable. . . . . . . . . . . . . . . . . . 401,931 432,446
Franchise deposits. . . . . . . . . . . . . . . . . 30,000 139,500
Accrued professional fees . . . . . . . . . . . . . 153,268 88,399
Accrued, other. . . . . . . . . . . . . . . . . . . 47,233 51,595
Total current liabilities. . . . . . . . . . . . 1,091,117 1,247,879
Long-term debt:
Related party. . . . . . . . . . . . . . . . . . --- 116,000
Other. . . . . . . . . . . . . . . . . . . . . . 619,875 652,795
Contractual obligation, net of current portion. . . 275,000 275,000
Capital lease obligation, net of current portion. . 4,394 8,346
Lease deposits. . . . . . . . . . . . . . . . . . . 32,621 28,070
Total long-term debt and other
long term obligations . . . . . . . . . . . . 931,890 1,080,211
Minority interest . . . . . . . . . . . . . . . . . 59,857 ---
Stockholders' Equity:
Common stock, $.01 par value, authorized 9,000,000
shares, issued and outstanding 1,176,540 and
1,121,540 shares, respectively . . . . . . . . . 11,765 11,215
Paid-in capital . . . . . . . . . . . . . . . . . . 2,983,497 2,984,047
Deficit . . . . . . . . . . . . . . . . . . . . . . (2,249,773) (1,241,361)
Total stockholders' equity . . . . . . . . . . . 745,489 1,753,901
Total liabilities and stockholders' equity . . .$ 2,828,353 $ 4,081,991
See Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended
June 30,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income/(Loss) . . . . . . . . . . . . . . . . .$(1,008,412) $ (510,524)
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Provision for losses on accounts
and notes receivable . . . . . . . . . . . 188,241 ---
Depreciation and amortization . . . . . . . . 171,682 171,577
Settlement expense. . . . . . . . . . . . . . 151,581 22,500
(Gain)/Loss on sale of property and equipment 142,127 (11,865)
Non-cash franchise fees received. . . . . . . (5,000) (58,000)
Changes in assets and liabilities:
Accounts receivable, net. . . . . . . . . . 68,382 (232,293)
Inventories . . . . . . . . . . . . . . . . 127,254 (158,300)
Other assets. . . . . . . . . . . . . . . . (38,522) 61,574
Security deposits . . . . . . . . . . . . . (2,511) (8,264)
Accounts payable. . . . . . . . . . . . . . (30,515) 96,909
Franchise and lease deposits. . . . . . . . (104,949) 101,000
Accrued professional fees . . . . . . . . . 53,288 (1,589)
Accrued, other. . . . . . . . . . . . . . . (4,362) 6,211
Net Cash Used For Operating Activities. . . . . . . (291,716) (521,064)
Cash Flows from Investing Activities:
Purchase of property and equipment . . . . . . . (104,341) (350,700)
Proceeds from sale of property and equipment . . 87,000 78,960
Net Cash Used for Investing Activities. . . . . . . (17,341) (271,740)
Cash Flows from Financing Activities:
Repayment of bank line-of-credit . . . . . . . . (193,943) ---
Repayments of long-term debt . . . . . . . . . . (32,698) (30,431)
Repayments of capital lease obligations. . . . . (3,485) (2,774)
Payments received from Minority Interest holders 40,364 ---
Payments received on notes receivable. . . . . . 33,657 2,052
Net Cash Used for Financing Activities. . . . . . . (156,105) (31,153)
Net Decrease in Cash. . . . . . . . . . . . . . . . (465,162) (823,957)
Cash, beginning of period . . . . . . . . . . . . .$ 497,436 $1,311,111
Cash, end of period . . . . . . . . . . . . . . . .$ 32,274 $ 487,154
Supplemental Disclosures. . . . . . . . . . . . . .$ 75,231 $ 45,750
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Notes payable aggregating $80,000 were issued for noncompete agreements
in connection with the purchase of two Jake's Pizza restaurants in 1995.
The Company holds a note receivable in the amount of $50,000 in connection
with the sale of property and equipment in 1994.
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
JAKE'S PIZZA INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
The interim condensed financial statements included herein
reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented, which adjustments are of a normal recurring nature, except as
noted above.
There are no other notes attached to these interim financial
statements since there have been no other material changes which would
require additional disclosures from those included in the Company's 1995
audited financial statements filed on Form 10-KSB.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
Liquidity and Capital Resources
In July 1993, the Company completed an initial public offering
of 640,000 shares of its common stock. Gross proceeds of the offering
were $3,200,000. After deducting underwriting discounts, commissions
and expenses of $428,000 and other expenses of the offering of
approximately $373,000, the net proceeds to the Company were
approximately $2,399,000. The company does not have any remaining funds
from the offering and will fund its business and expansion efforts
through the continuing operations of the company.
The Company's management has determined, as addressed in its
press release dated June 28, 1996, that it will need additional
financing and/or investors to help the Company's liquidity problem and
enable the Company to operate in the future. Management is in the
process of taking every action to reduce spending, improve its
operations and increase its cash position. The Company has reached an
informal agreement, with its largest creditors, for relief of payments
while the Company strives to improve its position and search for
additional financing. This agreement is through October 30, 1996 at
which time management will reevaluate the Company's position.
In an effort to streamline the Company's operations and try to
improve its franchisees operations, the Company contracted a local
distributor, in early June 1996, who specializes in the pizza and
restaurant business, to supply its franchisees. The decision was made
to contract an outside local distributor since the company could not
compete with the prices or quantity of products of a large volume
distributor. Under the contract with the distributor, Jake's Pizza
International will receive a rebate on all products sold to Jake's Pizza
restaurants. On June 17, 1996 the distributor began deliveries to the
franchisees.
The company will be able to eliminate certain costs associated
with the support of the distribution business. The company currently
has a contingent contract for the sale of its 14,000 square foot
warehouse and office facility, and is in the process of locating office
space in a office complex. The sale of the building and the move to an
office complex would reduce facility expenses by approximately 50%.
The Company currently believes that it will need 65 to 70
healthy operating franchised restaurants to bring the Company to a
breakeven cash flow. Currently, there are 54 Jake's Pizza restaurants
operating nationally. However, a significant portion of the current
franchisees are not meeting their obligations for various reasons,
including cash flow constraints due to a weak franchise operation.
<PAGE>
The decrease in accounts receivable is primarily due to the
increase in the reserve for uncollectible accounts and improved
collection efforts. This decrease was partially offset by an increase
in the receivable from the joint venture partner of approximately
$51,000. A review of the outstanding accounts receivable balance
resulted in an additional $75,000 reserve for uncollectible accounts
during the third quarter of fiscal 1996. The total reserve for
uncollectible accounts is $54,450 and the Company has written off
approximately $171,000 as of June 30, 1996. The Company has turned over
$157,000 of accounts and notes receivable from discontinued franchise
operations to attorneys for collection. Management will continue to
evaluate its outstanding receivable balances and make the necessary
provisions for uncollectible accounts as needed.
The decrease in inventories is due to the discontinuance of the
distribution business and a write down of obsolete inventory offset by
an increase in equipment inventory seized from two closed franchises who
are in debt to the company. The Company plans to sell the equipment to
settle part of the debt.
Capital expenditures were $104,341 for the nine month period
ended June 30, 1996 compared to $350,700 for the nine months ended June
30, 1995. Expenditures for the nine months ended June 30, 1996 were
equipment purchases and property improvements for two Company-owned
stores. Expenditures totaling approximately $231,000 during the nine
months ended June 30, 1995 were primarily for the purchase of two
Company-owned Jake's Pizza restaurants which were then sold to a new
Jake's Pizza franchisee.
The decrease in total notes receivable is primarily due to the
settlement of a lawsuit from a prior franchisee who held two notes
receivable payable to the Company. Under the settlement agreement, the
franchisees returned the two stores to the Company and the Company wrote
off the notes receivable.
In November 1995, the Company renewed its $300,000 line-of-
credit. The line-of-credit called for monthly payments of interest at
the rate of 1/2 per cent above the bank's prime rate and which would
have matured in November 1996. In March 1996, the Company paid the
outstanding balance of $193,943 under the line of credit. Management
does not expect to renew the line-of-credit. The Company is current on
all its loan obligations.
The Company is currently obligated under several leases,
including three leases for two Company-owned Jake's Pizza restaurants
and one for the joint venture store in Placentia, California, as well as
leases for space utilized by franchisees of Jake's Pizza restaurants.
The terms of the leases range up to six years, with the last lease
expiring in 2000. The leases utilized by the franchisees are sub-leased
to those franchisees under the same terms as the original lease. The
Company is current under all lease obligations.
<PAGE>
Results of Operations
Total revenues decreased $199,917, or 19.4%, to $827,978 for
the three months ended June 30, 1996 from $1,027,895 for the three
months ended June 31, 1995. For the nine months ended June 30, 1996,
total revenues decreased $684,466, or 21.1%, to $2,553,700 from
$3,238,166 for the nine months ended June 30, 1995. The decrease in
sales for the three months and nine months period is due to less company
stores in operation, the closing of the Phoenix, Arizona distribution
center in September 1995, reduced prices on product sold to franchisees
in order to remain competitive, and the discontinuance of the
distribution business on June 17, 1996. The lower royalty revenue in
both the three month period and nine month period ending June 30, 1996
is a result of nonaccrual of royalty and advertising fees due to a
significant portion of the franchisees unable to meet their current
obligations for several reasons, including cash flow constraints due to
a weak franchise operation. The company is working with the
nonperforming franchisee stores in an effort to improve their operations
to enable them to meet their royalty obligations.
The Company's cost of distribution sales decreased $86,493 or
13.7%, to 91.5% of distribution sales for the three month period ended
June 30, 1996 compared to 86.1% of distribution sales for three month
period ended June 31, 1995. This increase as a percentage of revenue is
primarily due to increased paper costs for the comparable periods and
reduced selling prices on certain food products. For the nine month
period ended June 30, 1996 and 1995, the cost of distribution sales
decreased $242,182 or 12.6%, and as a percentage of distribution sales
increased to 85.1% from 83.7%, respectively. This increase as a
percentage of revenue is due to increased paper costs and reduced prices
on certain food products in an effort to remain competitive.
The decrease in the cost of Company-owned store sales decreased
due to less Company-owned stores in operation. The cost of Company-
owned store sales as a percentage of store sales increased primarily due
to start up costs associated with the opening of the Placentia,
California store in March 1996.
Operating and administrative expenses increased $118,610 or
27.4%, to $551,524 for the quarter ended June 30, 1996 from $432,914 for
the quarter ended June 30, 1995. For the nine months ended June 30,
1996, operating and administrative expenses increased slightly to
$1,423,263 from $1,421,421 for the nine months ended June 30, 1995. The
increase for the three months ended June 30, 1996 is primarily due to
increased reserves for uncollectible notes and accounts receivables of
approximately $133,000 and additional advertising costs. These
increases were offset in part by lower store operating expenses due to
fewer Company-owned Jake's Pizza restaurants compared to the same period
in 1995 and reduce overhead spending at the Company's headquarters. The
slight increase in operating and administrative expenses for the nine
month period ended June 30, 1996 compared to the nine month period ended
June 30, 1995 is also due to less Company-owned stores in operation as
well as personnel reductions and increased cost controls offset by the
increased provision for uncollectible accounts and notes receivable of
approximately $188,000.
<PAGE>
Miscellaneous expense for the nine months ended June 30, 1996
is primarily due to the settlement of a lawsuit from a previous
franchisee for $151,581 in May 1996 and the loss on the sale two
Company-owned stores to franchisees, one in the third quarter of 1996
and one in the first quarter of 1996.
Decreases in revenues and increases in some of the Company's
costs and expenses resulted in a net loss for the quarter ended June 30,
1996 of $522,810 or a loss of $.44 per share compared to a net loss of
$175,335 or $.16 per share for the three months ended June 30, 1995.
For the nine months ended June 30, 1996, the net loss was $1.008
million, or $.88 per share compared to a net loss of $510,524, or $.46
per share for the nine months ended June 30, 1995.
As of June 30, 1996, the Company had 54 franchised Jake's Pizza
restaurants and one joint venture store which the Company will close and
list for sale in late August 1996. The company also opened two Company-
owned stores in July 1996. A new franchise is planned to open in
Arizona in late August 1996. This compares to 51 franchises and three
Company-owned stores at June 30, 1995.
On January 24, 1996, James J. Banks, the then President, Chief
Executive Officer and director resigned effective immediately. Samuel
V.P. Banks, the father of James J. Banks and the then Vice-Chairman of
the Board of Directors, Secretary, Treasurer and director also resigned
as did two other directors. The Company and James J. Banks entered into
a Severance, Consulting and Non-Compete Agreement and Release in Full
providing for, among other things, termination of the Employment
Agreement with Mr. Banks which would have expired June 30, 1996,
payments to Mr. Banks at the rate of his current salary of $50,000 per
year through the end of the Employment Agreement and one additional year
thereafter, waiver by Mr. Banks of any right to unpaid salary increases
scheduled under the Employment Agreement, waiver of certain unreimbursed
expenses, a non-compete covenant by Mr. Banks through the period in
which payments are made to him, and provision of certain consulting
services by Mr. Banks to the Company. Mr. Samuel V.P. Banks continues
to own approximately 18% of the outstanding shares of the Company, and
the consulting agreement between the Company and Mr. Samuel Banks will
continue in effect.
Following the resignations, John S. "Jake" Flowers, the
Chairman of the Board of Directors, assumed the additional positions of
President and Chief Executive Officer. Mr. Flowers owns approximately
18% of the Company's outstanding shares. Mr. Flowers had been President
of the Company's predecessor until 1993.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company is involved in litigation
relating to claims arising out of its normal business operations. The
Company is not now engaged in any legal proceedings that are expected to
have any material adverse effects on the Company.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
The Company has made some management changes since John Flowers
assumed the additional role as President and Chief Executive Officer in
January of this year. The Company engaged Michael Marczuk in March 1996
to consult the Company with respect to financial and operational issues
and evaluate various courses of action. John Veremis was promoted to
Vice-President of Franchise Operations from Director of Franchise
Operations effective June 1, 1996. Mr. Veremis will replace Robert N.
Wallen who resigned. Three Board members have resigned. They are
Messrs. Jerome Rich, Theodore Govedarcia and Tod Curtis. The Board is
now comprised of John "Jake" Flowers, Robert Leeper, Jack Fischer and
Michael Sykes.
The President, Chief Executive Officer and Chairman of the
Board of Directors, with the direction and authorization of the Board of
Directors, has recently engaged the law firm of Jenner & Block as
special counsel to advise Jake's Pizza International with respect to
certain alternatives of financing and reorganization.
Item 6. Exhibits and Reports on Form 8-K.
The Company filed a report on Form 8-K on January 24, 1996
regarding the resignations of James J. Banks, its then President, Chief
Executive Officer and director, Samuel V.P. Banks, its then Vice-
Chairman of the Board of Directors, Secretary, Treasurer and director,
and two other directors. After such resignations, John S. "Jake"
Flowers, the Chairman of the Board of Directors, assumed the additional
positions of President and Chief Executive Officer. The exhibit filed
with Form 8-K was the Severance, Consulting, Non-Compete Agreement and
Release in Full between Jake's Pizza International, Inc. and James J.
Banks.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JAKE'S PIZZA INTERNATIONAL, INC.
(Registrant)
By: /s/ John S. Flowers Date: August 14, 1996
John S. Flowers
President, Chief Executive Officer
and Chairman of the Board
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 32,274
<SECURITIES> 0
<RECEIVABLES> 353,938
<ALLOWANCES> 54,450
<INVENTORY> 43,135
<CURRENT-ASSETS> 575,477
<PP&E> 1,495,890
<DEPRECIATION> 284,703
<TOTAL-ASSETS> 2,828,353
<CURRENT-LIABILITIES> 1,091,117
<BONDS> 619,875
0
0
<COMMON> 11,765
<OTHER-SE> 733,724
<TOTAL-LIABILITY-AND-EQUITY> 2,828,353
<SALES> 1,987,855
<TOTAL-REVENUES> 2,553,700
<CGS> 1,802,594
<TOTAL-COSTS> 3,226,217
<OTHER-EXPENSES> 1,423,263
<LOSS-PROVISION> 188,241
<INTEREST-EXPENSE> 65,552
<INCOME-PRETAX> (1,008,412)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,008,412)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,008,412)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> .00
</TABLE>
