U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 March 30, 1997.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ________________ to__________________
Commission file number 0-25926
WOODROAST SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Minnesota 41-1563961
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10250 Valley View Road, Suite 145, Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices)
612-944-5113
(Issuer's Telephone Number, Including Area Code)
___________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X_ No___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At May 5, 1997 there were 4,242,397
shares of common stock, $0.005 par value outstanding.
WOODROAST SYSTEMS, INC.
Form 10-QSB Index
March 30, 1997
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 30, 1997 and December 29, 1996................... 3
Consolidated Condensed Statements of Operations -
for the thirteen week periods ended March 30, 1997 and
March 31, 1996......................................... 4
Consolidated Condensed Statements of Cash Flows -
for the thirteen week periods ended March 30, 1997 and
March 31, 1996......................................... 5
Notes to Consolidated Condensed
Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................. 8
PART II: OTHER INFORMATION
Item 1: Legal Proceedings....................................... 11
Item 6: Exhibits and Reports on Form 8-K........................ 11
Signatures ............................................................... 12
<TABLE>
<CAPTION>
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 30, December 29,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 2,538,583 $ 1,673,663
Available-for-sale securities .......................... 0 1,998,750
Inventories ............................................ 196,706 181,971
Prepaid expenses and other ............................ 159,974 89,183
------------ ------------
Total current assets ................................ 2,895,263 3,943,567
PROPERTY AND EQUIPMENT, NET .............................. 4,682,976 4,537,418
CONSTRUCTION IN PROGRESS ................................. 708,748 0
DEPOSITS ................................................. 194,287 138,884
PATENT AND TRADEMARKS, NET ............................... 10,445 9,834
------------ ------------
$ 8,491,719 $ 8,629,703
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital leases ...................... $ 75,264 $ 77,936
Accounts payable ....................................... 313,614 640,752
Construction in progress payable ....................... 510,305 0
Accrued expenses ....................................... 383,751 228,311
------------ ------------
Total current liabilities ........................... 1,282,934 946,999
LONG-TERM DEBT ........................................... 1,000,000 1,000,000
LESS: UNAMORTIZED DISCOUNT ............................... (287,664) (299,514)
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT PORTION . 89,856 107,813
------------ ------------
Total liabilities ................................... 2,085,126 1,755,298
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.005 par value, 33,333,333 shares
authorized, 4,242,397 shares issued and outstanding ... 21,212 21,212
Additional paid-in capital ............................. 10,033,229 10,033,229
Unrealized loss on securities available-for-sale ....... 0 (16,250)
Unearned compensation .................................. (8,508) (9,723)
Accumulated deficit .................................... (3,639,340) (3,154,063)
------------ ------------
Total stockholders' equity .......................... 6,406,593 6,874,405
------------ ------------
$ 8,491,719 $ 8,629,703
============ ============
</TABLE>
<TABLE>
<CAPTION>
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Thirteen Weeks Ended
March 30, March 31,
1997 1996
----------- -----------
<S> <C> <C>
NET SALES ................................ $ 1,592,280 $ 1,831,969
----------- -----------
COSTS AND EXPENSES:
Food and beverage costs ................ 502,405 628,984
Restaurant operating expenses .......... 933,288 1,097,651
Depreciation and amortization .......... 113,898 104,818
General, administrative and development 521,285 239,223
----------- -----------
Total costs and expenses ............. 2,070,876 2,070,676
----------- -----------
Loss from operations ................. (478,596) (238,707)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income ......................... 34,245 55
Interest expense ........................ (55,334) (82,668)
Other income ............................ 14,408 61,518
----------- -----------
Total other income (expense) ......... (6,681) (21,095)
----------- -----------
LOSS BEFORE INCOME TAXES ................. (485,277) (259,802)
Income taxes ......................... 0 0
----------- -----------
NET LOSS ................................. $ (485,277) $ (259,802)
=========== ===========
NET LOSS PER COMMON SHARE ................ $ (0.11) $ (0.11)
=========== ===========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING ............... 4,253,335 2,264,472
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Thirteen Weeks Ended
-----------------------------
March 30, March 31,
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $ (485,277) $ (259,802)
Adjustments to reconcile net loss to
cash flows from operating activities -
Depreciation and amortization .............. 113,898 104,818
Amortization of long-term debt discount .... 11,850 27,501
Changes in operating assets and liabilities. 253,462 (387,202)
----------- -----------
Cash flows from operating activities .... (106,067) (514,685)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of a-f-s securities ..... 2,015,000 11,945
Purchases of property and equipment ........ (323,437) (20,438)
Construction in progress ................... (644,543) 0
Deposits used (advanced) ................... (55,402) 8,222
----------- -----------
Cash flows from investing activities .... 991,618 (271)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on obligations under capital lease (20,630) (16,353)
Proceeds from stock sale net ............... 0 956,228
----------- -----------
Cash flows from financing activities .... (20,630) 939,875
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS ........ 864,921 424,919
CASH AND CASH EQUIVALENTS, BEGINNING ......... 1,673,662 27,843
----------- -----------
CASH AND CASH EQUIVALENTS, ENDING ............ $ 2,538,583 $ 452,762
=========== ===========
</TABLE>
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 30, 1997
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim consolidated condensed financial statements be read in conjunction with
the Company's most recent audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 29, 1996. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented have been made. Operating results for the periods
ended March 30, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 28, 1997.
(2) LOSS PER COMMON SHARE
Primary and fully diluted loss per common share are determined by dividing net
loss by the weighted average number of common shares outstanding during each
period. Primary and fully diluted loss per share are the same.
(3) CONSTRUCTION IN PROGRESS
The Company maintains separate Construction in Progress and Construction in
Progress Payable accounts to reconcile all contractual agreements relating to
new site development.
(4) LONG-TERM DEBT
In November 1995, the Company completed a private placement of $1,000,000 in
principal amount of Secured Promissory Notes (the Notes) (including $700,000 to
Company stockholders) and received net proceeds of $943,252. The Notes are
secured by substantially all Company assets and bear interest at 15%, payable
quarterly. In addition, the holders of the Notes received warrants to purchase
an aggregate of 200,016 shares of the Company's common stock at $.0033 per
share, of which 170,008 were exercised in 1996. The remaining warrants are
exercisable through May 31, 2000. On the date of issuance, the Warrants had a
total value of $299,333 based on the then market price of the Company's common
stock. The discount created by the issuance costs and warrants is being
amortized over the life of the Notes using the interest method. The approximate
effective annual interest rate of the Notes is 20%. The Notes require repayment
of principal over an eight-year period beginning August 1998. Current maturities
of the Notes are $27,916 in fiscal year 1998, $74,518 in fiscal year 1999,
$86,497 in fiscal year 2000, $100,401 in fiscal year 2001 and $710,668
thereafter.
(5) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", under which deferred income tax assets and
liabilities are recognized for the differences between financial and income tax
reporting basis of assets and liabilities based on currently enacted rates and
laws. The Company has incurred cumulative net operating losses for both
financial reporting and income tax purposes. As of March 30, 1997, the Company
had net operating loss carryforwards of approximately $3,600,000, which, if not
used, will begin to expire in 2010. Future changes in the ownership of the
Company may place limitations on the use of these net operating loss
carryforwards. The Company has recorded a full valuation allowance against the
net deferred tax asset due to the uncertainty of realizing the related benefits.
(6) STOCK OPTIONS
STOCK OPTION PLAN - The Company has a Stock Option Plan (the "Plan"), pursuant
to which options and other awards to acquire an aggregate of 750,000 shares of
the Company's common stock may be granted. Stock options, stock appreciation
rights, restricted stock, other stock and cash awards may be granted under the
Plan. The Plan is administered by a stock option committee which has the
discretion to determine the number and purchase price of the shares subject to
stock options, which may be below the fair market value of the common stock on
the date thereof, the term of each option, and time or times during its term
when the option becomes exercisable. At March 30, 1997, 417,000 options had been
granted at exercise prices of $0.81 to $5.50 per share, none of which had been
exercised.
(7) COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company is involved in legal actions in the ordinary course of
its business. While no reasonable estimates of potential liability can be
determined, management believes such legal actions will be resolved without a
material effect on the Company's financial position or results of operations.
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was organized in 1987 to develop Shelly's Original Woodroast
Restaurants. The Company has operated a restaurant in St. Louis Park, Minnesota,
since 1989, and a restaurant in Rockville, Maryland, since November 1995. As a
result of the Company's recent recruitment of senior management, its focus on
building these larger restaurants has changed. The Company now plans to pursue
development of the Shelly's Back Room "Civilized Cigar Parlor and Tavern"
concept, which is designed to capitalize on the popular cigar smoking trend in
an upscale atmosphere featuring exceptional food and drink. Management believes
this concept is not a departure from the main core of the Company's business,
which is to provide customers with a quality food and beverage experience in a
relaxed atmosphere. Instead, this shift of focus allows the Company to pursue
other avenues to generate revenue, primarily because of the simpler structure to
operate a Back Room and lower capital investment, which would allow franchising
of this concept. The Company has signed a lease for its first stand-alone Back
Room in Washington, D.C. with an anticipated opening in late May or early June
1997. The successful operation of the Rockville restaurant and future expansion
of the Shelly's Back Room by the Company will depend on various factors,
including market acceptance of the Shelly's Woodroast and the Shelly's Back Room
concepts and general economic conditions. The Company also faces all of the
risks, expenses and difficulties frequently encountered in connection with the
operation, development and franchising of a new and expanding business.
Furthermore, to the extent that the Company's expansion strategy is successful,
the Company must manage the transition to multiple site operations (both
Company-owned and franchise operations), higher volume operations, the control
of overhead expenses and the addition of necessary personnel. The Company had
losses of $485,277 for the thirteen week period ended March 30, 1997, and
expects losses to continue for the near future.
The Company uses a 52/53 week fiscal year ending on the last Sunday of December.
Fiscal year 1997 will be a 52 week year.
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED MARCH 30, 1997 AND MARCH 31,
1996
The restaurant located in St. Louis Park, Minnesota, had net sales for the
thirteen weeks ended March 30, 1997 of $665,300 or a 2.1% increase of $13,823
from $651,477 for the thirteen weeks ended March 31, 1996. The restaurant
located in Rockville, Maryland, that opened for business on November 20, 1995,
had net sales for the thirteen weeks ended March 30, 1997 of $926,980 or a 21.5%
decrease of $253,512 from $1,180,492 for the thirteen weeks ended March 31,
1996. The St. Louis Park restaurant continues to have guest counts at or near
seating capacity on a daily basis. The 21.5% decrease in net sales at the
Rockville restaurant reflects the impact of the grand opening months from early
1996. A major marketing program has been implemented to increase sales. However,
no assurance can be given that these efforts will achieve desired results by
year end, if at all.
The food, beverage and other direct costs related to the operation of the St.
Louis Park, Minnesota, restaurant for the thirteen weeks ended March 30, 1997
were $565,804 or a 0.2% increase of $1,438 from $564,366 for the thirteen weeks
ended March 31, 1996. The food, beverage and other direct costs related to the
operation of the Rockville, Maryland, restaurant for the thirteen weeks ended
March 30, 1997 were $869,888 or a 25.1% decrease of $292,381 from $1,162,269 for
the thirteen weeks ended March 31, 1996. The Company continues to address
ongoing cost and expense issues at both restaurant locations. However, no
assurance can be given that these efforts will achieve desired results by year
end, if at all.
For the thirteen weeks ended March 30, 1997, the St. Louis Park unit generated
net revenues of $665,300 and operating income of $99,496 or 15.0% of total
revenue as compared to the thirteen weeks ended March 31, 1996 of net revenues
of $651,477 and operating income of $87,136 or 13.4% of total revenue. The
Rockville unit generated net revenues of $926,980 and operating income of
$57,092 or 6.2% of total revenue for the thirteen weeks ended March 30, 1997, as
compared to the thirteen weeks ended March 31, 1996 of net revenues of
$1,180,492 and operating income of $18,223 or 1.5% of total revenue. These unit
operating incomes are exhibited as earnings before interest, taxes, depreciation
and amortization.
The Company's executive and administrative office located in Eden Prairie,
Minnesota had other expenses, consisting of general and administrative expenses,
interest income, interest expense, other income and development expenses which
were $527,966 for the thirteen weeks ended March 30, 1997, compared to $260,318
for the thirteen weeks ended March 31, 1996. This is an increase of $267,648 or
a 102.8% increase. This increase is attributable primarily to the Company's
ongoing building of a corporate management team and facility to lead the Company
into its new focus on the Back Room concept. The Company is seeking additional
senior management personnel as well as support staff, which will also have an
associated impact on future earnings. The Company expects to continue to incur
operating losses during 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the past two fiscal years, the Company's capital requirements have been
met principally through the public and private sale of debt and equity
securities. In June 1994, the Company completed an Initial Public Offering of
750,000 units consisting of 750,000 shares of Common Stock, and 750,000
Redeemable Class A Warrants at an offering price of $5.50 per unit and received
net proceeds of approximately $3,360,000 after approximately $765,000 in
offering costs and underwriting discounts. Such net proceeds had been fully
utilized by December 31, 1995, for the development and opening of the Rockville
restaurant, and for the reduction of debt and trade payables.
The Company had working capital of $1,612,329 at March 30, 1997, compared to
working capital of $2,996,568 at December 29, 1996. Cash, cash equivalents and
available-for-sale securities were $2,538,583 at March 30, 1997, representing a
decrease of $1,133,830 from $3,672,413 at December 29, 1996. This decrease is
attributable to the payments relating to the development and construction of the
Washington D.C. Shelly's Back Room and the Company's additions necessary to its
management team and corporate office facility.
In November 1995, the Company completed a private placement of Units consisting
of $1,000,000 in principal amount of 15% Secured Promissory Notes (the Notes)
and warrants (the Warrants) to purchase an aggregate 200,016 shares of Common
Stock. The Notes are secured by a senior interest in substantially all assets
owned by the Company and its subsidiary. Property leased by the Company and its
subsidiary, including real estate and certain equipment, is not included in the
security interest. A total of 170,008 of the Warrants were exercised in 1996.
In March and April 1996, the Company sold 625,000 shares of its Common Stock in
a private placement for $2.25 per share, and received net proceeds of
approximately $1,315,000. Holders of such shares have certain piggyback
registration rights. The net proceeds from the private placement of Common Stock
have been used to pay debt and trade payables and to provide working capital for
general corporate purposes.
The Company will require additional financing to implement its expansion plans.
There is no assurance that additional financing will be available, or if
available, will be on terms acceptable to the Company. The Company believes that
it can repay its existing indebtedness from cash flow from operations or will be
able to obtain new financing when such indebtedness is due. However, there can
be no assurance that cash flow from operations will be sufficient or that new
financing will be available.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Form 10-QSB and other materials filed or to be
filed by the Company with the Securities and Exchange Commission, as well as
other written materials or oral statements that the Company may make or publish
from time to time, contain forward-looking statements relating to such matters
as plans for future expansion, other business development activities,
anticipated financial performance, business prospects, and similar matters. Such
forward-looking statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially from the anticipated
results or other expectations expressed in the forward-looking statements. These
risks and uncertainties include, but are not limited to, those relating to the
operation and development of a new and expanding business, dependence on current
management and need for additional management personnel, and the risks and
uncertainties described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Form 10-QSB.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently involved in legal proceedings arising in the
ordinary course of its business. The Company does not believe any such
legal proceedings will have a material adverse impact on the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarterly period ended
March 30, 1997.
Exhibit 27 - Financial Data Schedule - which is only submitted
electronically to the Securities and Exchange Commission for EDGAR
information purposes.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Woodroast Systems, Inc.
/s/ SHELDON F. JACOBS
----------------------------------
(Registrant) by Sheldon F. Jacobs
Chairman of Board,
Chief Executive Officer
(Principal Executive Officer)
/s/ RALPH J. GUARINO
----------------------------------
by Ralph J. Guarino
President, Chief Operating Officer,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> MAR-30-1997
<CASH> 2,538,583
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 196,706
<CURRENT-ASSETS> 2,895,263
<PP&E> 5,957,355
<DEPRECIATION> 1,274,379
<TOTAL-ASSETS> 8,491,719
<CURRENT-LIABILITIES> 1,282,934
<BONDS> 802,192
0
0
<COMMON> 21,212
<OTHER-SE> 6,385,381
<TOTAL-LIABILITY-AND-EQUITY> 8,491,719
<SALES> 1,592,280
<TOTAL-REVENUES> 1,592,280
<CGS> 502,405
<TOTAL-COSTS> 2,070,876
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,334
<INCOME-PRETAX> (485,277)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (485,277)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
