<PAGE> 1
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 29, 1998.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
------------ ------------
Commission file number 0-25926
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WOODROAST SYSTEMS, INC.
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(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 11, 1998 there were 4,242,397
shares of common stock, $0.005 par value outstanding.
Page 1 of 14
<PAGE> 2
WOODROAST SYSTEMS, INC.
Form 10-QSB Index
March 29, 1998
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 29, 1998 and December 28, 1997...................... 3
Consolidated Condensed Statements of Operations -
for the thirteen week periods ended March 29, 1998 and
March 30, 1997............................................ 4
Consolidated Condensed Statements of Cash Flows -
for the thirteen week periods ended March 29, 1998 and
March 30, 1997............................................ 5
Notes to Consolidated Condensed
Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................ 9
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.......................................... 13
Item 2: Changes in Securities and Use of Proceeds ................. 13
Item 6: Exhibits and Reports on Form 8-K........................... 13
Signatures ........................................................... 14
Page 2 of 14
<PAGE> 3
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(Unaudited) *
March 29, December 28,
1998 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 130,915 $ 67,240
Inventories.......................................... 275,419 244,920
Prepaid expenses and other........................... 79,180 112,167
----------- ----------
Total current assets................................ 485,514 424,327
PROPERTY AND EQUIPMENT, NET............................ 5,978,683 6,044,911
DEPOSITS............................................... 82,802 80,609
PATENT AND TRADEMARKS, NET............................. 61,770 40,677
----------- ----------
$ 6,608,769 $6,590,524
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - stockholder........................... $ 300,000 $ 250,000
Current portion of senior secured promissory notes... 39,577 27,916
Current portion of long-term debt.................... 11,476 12,126
Current portion of capital lease obligations......... 49,270 64,215
Accounts payable..................................... 1,046,115 892,922
Accounts payable - construction ..................... 0 632,013
Accrued expenses..................................... 322,693 230,902
----------- ----------
Total current liabilities......................... 1,769,131 2,110,094
SENIOR SECURED PROMISSORY NOTES, NET OF CURRENT PORTION 960,423 972,084
LESS: UNAMORTIZED DISCOUNT............................. (240,264) (252,114)
LONG-TERM DEBT, NET OF CURRENT PORTION................. 9,671 11,879
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION...... 32,358 35,358
PREFERRED STOCK DIVIDENDS.............................. 10,044 0
----------- ----------
Total liabilities................................. 2,541,363 2,877,301
----------- ----------
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
Class A 8% preferred stock, $10.00 stated and par value,
117,500 shares authorized, issued and outstanding... 1,175,000 0
Additional paid-in capital........................... 10,823,765 10,033,229
Unearned compensation............................... (2,836) (4,861)
Accumulated deficit.................................. (7,949,735) (6,336,357)
----------- ----------
Total stockholders' equity........................ 4,067,406 3,713,223
----------- ----------
$ 6,608,769 $6,590,524
=========== ==========
</TABLE>
* From Audited Consolidated Financial Statements
See accompanying notes to consolidated condensed financial statements
Page 3 of 14
<PAGE> 4
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------
March 29, March 30,
1998 1997
----------- -----------
<S> <C> <C>
NET SALES...................................... $ 1,860,142 $ 1,592,280
----------- -----------
COSTS AND EXPENSES:
Food, beverage, supply & retail costs........ 603,774 502,405
Unit operating expenses...................... 1,124,344 933,288
Depreciation and amortization................ 186,896 113,898
Pre-opening expenses......................... 86,352 0
General, administrative and development...... 389,434 521,285
----------- -----------
Total costs and expenses................... 2,390,800 2,070,876
----------- -----------
Loss from operations....................... (530,658) (478,596)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income.............................. 232 34,245
Interest expense............................. (60,780) (55,334)
Other income................................. 0 14,408
----------- -----------
Total other income (expense)............... (60,548) (6,681)
----------- -----------
LOSS BEFORE INCOME TAXES....................... (591,206) (485,277)
Income taxes............................... 0 0
----------- -----------
NET LOSS....................................... (591,206) (485,277)
PREFERRED STOCK DIVIDENDS AND ACCRETION........ 1,022,172 0
----------- -----------
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS....... $(1,613,378) $ (485,277)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE.... $ (0.14) $ (0.11)
=========== ===========
BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS PER COMMON SHARE....... $ (0.38) $ (0.11)
=========== ===========
SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE..................... 4,242,397 4,242,397
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements
Page 4 of 14
<PAGE> 5
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------------
March 29, March 30,
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (591,206) $ (485,277)
Adjustments to reconcile net loss to
cash flows from operating activities -
Depreciation and amortization..................... 186,896 113,898
Amortization of senior secured promissory notes... 11,850 11,850
Changes in operating assets and liabilities....... (382,515) 253,462
---------- ----------
Cash flows from operating activities........... (774,975) (106,067)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale
securities....................................... 0 2,015,000
Purchases of property and equipment............... (119,902) (323,437)
Construction in progress.......................... 0 (644,543)
Purchases of patents and trademarks............... (21,860) 0
Deposits advanced................................. (2,193) (55,402)
---------- ----------
Cash flows from investing activities........... (143,955) 991,618
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholder notes................... 450,000 0
Proceeds from preferred stock sale, net........... 953,408 0
Payments on Stockholder notes..................... (400,000) 0
Payments on notes payable......................... (2,858) 0
Payments on capital leases........................ (17,945) (20,630)
---------- ----------
Cash flows from financing activities........... 982,605 (20,630)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS............... 63,675 864,921
CASH AND CASH EQUIVALENTS, BEGINNING................ 67,240 1,673,662
---------- ----------
CASH AND CASH EQUIVALENTS, ENDING................... $ 130,915 $2,538,583
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements
Page 5 of 14
<PAGE> 6
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 29, 1998
(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 28, 1997. 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 29, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 27, 1998.
(2) NET LOSS PER COMMON SHARE
Basic and diluted loss per common share are determined by dividing net loss by
the weighted average number of common shares outstanding during each period.
Basic and 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, $116,541 in fiscal
year 2002 and $594,127 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 29, 1998, the Company
had net operating loss carryforwards of approximately $5,900,000, 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.
Page 6 of 14
<PAGE> 7
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONT.)
MARCH 29, 1998
(UNAUDITED)
(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 29, 1998, 670,000 options had been
granted at exercise prices of $0.75 to $5.50 per share, none of which had been
exercised.
(7) CLASS A 8% PREFERRED STOCK
In February 1998, the Company completed a private placement of 117,500 shares of
Class A 8% convertible preferred stock with a par and stated value of $10.00 per
share (the preferred stock) and received net proceeds of approximately $953,000.
The Preferred Stock is convertible into shares of the Company's $.005 par value
common stock based on dividing the aggregate stated value of the Preferred Stock
and the accrued dividends by the lesser of $1.125 or 80% (the conversion rate)
of the average closing bid price for common stock five days prior to the
conversion. In addition, the conversion rate is subject to reduction to 70% upon
the passage of specific time periods and the nonoccurrence of certain events as
defined in the Certificate of Designation for the Preferred Stock. The Preferred
Stock is convertible from February 1998 to February 2001.
In connection with this transaction, the Company recorded a non-cash deemed
dividend of $1.0 million. The non-cash deemed dividend represents the
approximate discount to market calculated at the date the preferred stock was
issued. The deemed dividend was recorded as a discount to preferred stock with a
corresponding credit to additional paid-in-capital. The discount is recognized
during the periods in which the preferred shares are convertible in common
stock.. The accretion of the preferred stock is reflected in the statement of
operations as an adjustment to net loss during the first quarter ended March 29,
1998 as the preferred stock was immediately convertible into common stock of the
Company. The accretion of the discount had no effect on total stockholders'
equity.
The Company may redeem the preferred stock in whole upon 20 days notice at a
price of 120% of the total stated value of the preferred stock plus any accrued
dividends. Additionally, the Company issued a warrant to the agent to purchase
175,000 shares of the Company's common stock at $1.125 per share in connection
with the offering. The warrant is exercisable for four years.
(8) 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.
(9) RECENT ACCOUNTING PRONOUCEMENTS
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
98-5 ("SOP 98-5") entitled "Reporting on the Costs of Start-Up Activities." This
accounting standard requires entities to expense as incurred all start-up and
pre-opening costs that are not otherwise capitalizable as long-lived assets.
This new accounting standard is effective for fiscal years beginning after
December 15, 1998 with early adoption encouraged. The Company elected to adopt
SOP 98-5 in fiscal 1998. Since the Company's previous policy has been
consistent with SOP 98-5, the early adoption had no effect on the consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive
income and its components in a full set of general-purpose financial
statements. The Company adopted SFAS 130 in fiscal 1998. Such adoption had no
material effect on the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 for annual 1998 financial reporting
and has not yet evaluated the impact of such adoption on the notes to its
annual consolidated financial statements.
Page 7 of 14
<PAGE> 8
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Woodroast Systems, Inc. (the "Company") is a hospitality development company
which was incorporated in 1987 as a Minnesota corporation. The Company owns and
operates two free-standing full service restaurants (one with an attached
tavern) and two taverns built on the theme of the turn-of-the-century London
divans.
The Shelly's Woodroast restaurants are located in St. Louis Park, Minnesota, a
suburb of Minneapolis (the "St. Louis Park Restaurant"), and Rockville,
Maryland, a suburb of Washington D.C. (the "Rockville Restaurant") (together
with the St. Louis Park Restaurant, the "Restaurants"). The Company has operated
the St. Louis Park Restaurant since 1989 and the Rockville Restaurant since
November 1995. The Company announced earlier that its Restaurants were for sale.
As of May 11, 1998, no acceptable offers have been received.
With the Company's recruitment of senior management, its focus on building the
larger superstore restaurants has been replaced with a concept to develop units
named "Shelly's Back Room, The American Tavern", which is designed to capitalize
on the popular cigar smoking trend in an upscale tavern atmosphere featuring
exceptional food and drink. The original Shelly's Back Room prototype tavern is
attached to the Rockville Restaurant, and as such, is considered part of the
Restaurants. In June of 1997, the first single concept of Shelly's Back Room
(the "Back Room")(together with the Restaurants, the "Units"), opened in
Washington, D.C. (the DC Back Room"). On January 22, 1998, the second
stand-alone Back Room was opened in the Gold Coast Area of Chicago, Illinois
(the "Chicago Back Room"), adjacent to the Magnificent Mile and Oak Street
shopping areas. This concept brings a touch of the traditional divan to America.
Divans were turn-of-the-century gathering places in London, synonymous with
comfort and service, an exclusive place where the elite could meet, enjoy good
food and sip a little cognac. The Company hopes to redefine the American tavern
as a place much like the historic divan, yet accessible to all.
The Company 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 the Back Room concept. The successful operation of
the Restaurants and future expansion of the 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, obtaining additional capital resources 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 a net loss of
$591,206 for the thirteen week period ended March 29, 1998, 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 1998 will be a 52 week year.
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1998 AND MARCH 30,
1997
NET SALES
The St. Louis Park Restaurant had net sales for the thirteen weeks ended March
29, 1998 of $628,622 or a 5.5% decrease of $36,678 from $665,300 for the
thirteen weeks ended March 30, 1997. The St. Louis Park Restaurant continues to
have guest counts at or near seating capacity on a daily basis. Over the years,
the St. Louis Park Restaurant has become a favorite dining experience for many
Twin City patrons. The product mix sold is very repetitive, with all menu items
being good sellers. Due to seating limitations,
Page 8 of 14
<PAGE> 9
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
RESULTS OF OPERATIONS (cont.)
sales for this unit are not anticipated to increase, if at all, over its current
level. The Minneapolis/St. Paul Twin City region experienced an early spring and
much warmer weather than usual. The St. Louis Park Restaurant's strongest sales
months are in the cold weather seasons. The Rockville Restaurant had net sales
for the thirteen weeks ended March 29, 1998 of $792,129 or a 14.5% decrease of
$134,851 from $926,980 for the thirteen weeks ended March 30, 1997. The Company
believes that the menu items that are so well cherished in the Midwest may be
too heavy for the tastes of the seacoast patrons. The restaurant offerings along
Rockville Pike are vast and together with our menu selection, sales were less
than anticipated. The Company has implemented expense reductions and operating
efficiencies along with menu revisions and will develop a media campaign during
1998. However, no assurance can be given that these efforts will achieve desired
results by year end, if at all.
The first stand-alone Back Room which opened on June 10, 1997 in Washington
D.C. had net sales for the thirteen weeks ended March 29, 1998 of $274,843.
This unit is performing above expected sales levels. However, no assurance can
be given that this unit will continue to perform above managements'
expectations. The Company believes that at least a twelve month history will be
necessary, due to new concept and locations, before more meaningful information
can be acquired. The second stand-alone Back Room opened on January 22, 1998 in
Chicago, Illinois and had net sales for the nine weeks ended March 29, 1998 of
$164,548. The month of January represented only a four day sales period. This
unit did not receive its liquor license until January 30, 1998, one week after
opening.
COSTS AND EXPENSES
The food, beverage, supply, retail costs and other unit operating expenses
related to the operation of the St. Louis Park Restaurant for the thirteen weeks
ended March 29, 1998 were $543,665 or a 3.9% decrease of $22,139 from $565,804
for the thirteen weeks ended March 30, 1997. The food, beverage, supply, retail
costs and other unit operating expenses related to the operation of the
Rockville Restaurant for the thirteen weeks ended March 29, 1998 were $741,078
or a 14.8% decrease of $128,810 from $869,888 for the thirteen weeks ended March
30, 1997. The correlation that exists between the Restaurant's decreases in
costs and expenses matches the decrease in revenues. The Company continues to
address ongoing cost and expense issues at the Restaurants. The Company has
already began to address methods to increase cash flows at the Rockville
Restaurant. However, no assurance can be given that these efforts will achieve
desired results by year end, if at all.
The food, beverage, supply, retail costs and other unit operating expenses
related to the operation of the DC Back Room for the thirteen weeks ended March
29, 1998 were $234,631. This is slightly above anticipated levels. No trend is
yet predictable for this location. The food, beverage, supply, retail costs and
other unit operating expenses related to the operation of the Chicago Back Room
for the nine weeks ended March 29, 1998 were $208,744. During this start-up
period of nine weeks, labor expense and opening training expense were the
largest components in generating this loss. Due to the nature of the employees
in the hospitality industry, labor expenses usually run high during the initial
quarters after opening.
For the thirteen weeks ended March 29, 1998, the St. Louis Park Restaurant
generated net revenues of $628,622 and operating income of $84,957 or 13.5% of
net revenues as compared to the thirteen weeks ended March 30, 1997 of net
revenues of $665,300 and operating income of $99,496 or 15.0% of net revenues.
The Rockville Restaurant generated net revenues of $792,129 and operating income
of $51,051 or 6.4% of net revenues for the thirteen weeks ended March 29, 1998,
as compared to the thirteen weeks ended March 30, 1997 of net revenues of
$926,980 and operating income of $57,092 or 6.2% of net revenues. For the
thirteen weeks ended March 29, 1998, the DC Back Room generated net revenues of
$274,843 and operating income of $40,212 or 14.6% of net revenues. For the nine
weeks ended March 29, 1998, the Chicago Back Room generated net revenues of
$164,548 and had an operating loss of $44,196. These Unit operating incomes and
losses are exhibited as earnings before interest, taxes, depreciation and
amortization.
Page 9 of 14
<PAGE> 10
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
RESULTS OF OPERATIONS (cont.)
Pre-opening and start-up costs were $86,352 for the thirteen weeks ended March
29, 1998. These were for the opening of the Chicago Back Room only. It is the
Company's policy to expense all pre-opening and start-up costs associated with
new unit development that are not otherwise capitalized as property and
equipment when incurred. See "Recent Accounting Pronouncements."
The Company's executive and administrative office located in Eden
Prairie, Minnesota had general, administrative and development expenses which
were $389,434 for the thirteen weeks ended March 29, 1998, compared to $521,285
for the thirteen weeks ended March 30, 1997. This is a decrease of $131,851 or
25.3%. This decrease reflects the results of the Company's efforts to reduce
its general, administrative and development expense line items for the 1998
fiscal year. Interest expense was $60,780 for the thirteen weeks ended March
29, 1998, compared to $55,334 for the thirteen weeks ended March 30, 1997. With
the change in focus of the Company towards the Back Room concept, the Company
has to address the numerous executive and administrative staffing requirements,
the requirements needed to manage remote sites, shareowner relationships, etc.
and the development costs associated with the site location and franchising.
Until more Back Rooms are in operation, the general, administrative and
development expenses will continue to provide the greatest impact on the net
operating profit or loss of the Company for the foreseeable future. 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 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $1,283,617 at March 29, 1998,
compared to a working capital deficit of $1,685,767 at December 28, 1997. Cash
and cash equivalents were $130,915 at March 29, 1998, representing an increase
of $63,495 from $67,420 at December 28, 1997. This increase is attributable to
the proceeds received from the sale of 117,500 shares of Class A 8% preferred
stock and the promissory notes with the major stockholder (see discussion
below).
During the past three 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.
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")(including $700,000 to Company stockholders) and Warrants (the
"Warrants") to purchase an aggregate 200,016 shares of Common Stock. The private
placement of Units resulted in net proceeds of approximately $940,000 which were
used to fund construction expenses and other costs related to the opening of the
Rockville Restaurant. 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. The Warrants have an
exercise price of $.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 the Warrants is being amortized over the life of the Notes using the
interest method. Holders of Warrants or Warrant shares have certain piggyback
registration rights through May 31, 2002. The Notes bear interest of 15%,
payable monthly. The approximate effective annual interest rate, after
considering the value of the Warrants, is approximately 20%. The Notes require
repayment of principal over an eight-year period beginning in August 1998.
Current maturities of the Notes are $29,916 in fiscal year 1998, $74,518 in
fiscal year 1999, $86,497 in fiscal year 2000, $100,401 in fiscal year 2001,
$116,541 in fiscal year 2002 and $594,127 thereafter.
Page 10 of 14
<PAGE> 11
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
In March 1996, the Company sold 625,000 shares of its Common Stock in a private
placement for $2.25 per share, and received and used the net proceeds of
approximately $1,315,000. Holders of such shares have certain piggyback
registration rights.
In December 1997, the Company entered into a promissory note with the majority
stockholder for $250,000. The note was unsecured and bore interest at prime plus
2% annually. The note was repaid in full February 1998.
In January 1998, the Company entered into a promissory note with the majority
stockholder for $150,000. The note was unsecured and bore interest at prime plus
2% annually. The note was repaid in full February 1998.
In February 1998, the Company completed a private placement of 117,500 shares of
Class A 8% convertible preferred stock with a par and stated value of $10.00 per
share (the "Preferred Stock") and received net proceeds of approximately
$953,000. The Preferred Stock is convertible into shares of the Company's $.005
par value common stock based on dividing the aggregate stated value of the
Preferred Stock and the accrued dividends by the lesser of $1.125 or 80% (the
conversion rate) of the average closing bid price for common stock five days
prior to the conversion. In addition, the conversion rate is subject to
reduction to 70% upon the passage of specific time periods and the nonoccurrence
of certain events as defined in the Certificate of Designation for the Preferred
Stock. The Preferred Stock is convertible from February 1998 to February 2001.
The Preferred Stock not converted by February 2001 is automatically converted
into shares of the Company's $.005 par value common stock. The Company may
redeem the Preferred Stock in whole upon 20 days notice at a price of 120% of
the total stated value of the Preferred Stock plus any accrued dividends.
Additionally, the Company issued a warrant to the agent to purchase 175,000
shares of the Company's common stock at $1.125 per share in connection with the
offering. The warrant is exercisable for four years.
In March 1998, the Company entered into a promissory note with the majority
stockholder. The note is unsecured and bears interest at eight percent (8%)
annually. The note balance was $300,000 at March 29,1998.
In April 1998, the Company entered into a promissory note with the majority
stockholder for $200,000. The note is unsecured and bears interest at eight
percent (8%) annually.
The Company will require additional financing to implement its expansion plans.
The Company is in negotiations to complete a line of credit for working capital
purposes. Also, the Company is pursuing additional financing through one or more
additional offerings of equity securities or debt financing in order to finance
operations and develop and open additional Back Rooms. However, there can be no
assurance that additional financing will be available, or if available, will be
on terms acceptable to the Company or its shareholders.
RECENT ACCOUNTING PRONOUCEMENTS
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
985 ("SOP 98-5) entitled "Reporting on the Costs of Start-Up Activites." This
accounting standard is effective for fiscal years beginning after December 15,
1998 with early adoption encouraged. The Company elected to adopt SOP 98-5 in
fiscal 1998. Since the Company's previous policy has been consistent with SOP
98-5, the early adoption had no effect on the consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive
income and its components in a full set of general-purpose financial
statements. The Company adopted SFAS 130 in fiscal 1998. Such adoption had no
material effect on the consolidated financial statements.
In June 1997, the Fiancial Accounting Standards Boards issued Statement of
Financial Accounting Standards No.131, "Disclosures About Segments of An
Enterprise and Related Information "(SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards
for related disclosures about products and services, gepgraphic areas and major
customers. The Company will adopt SFAS 131 for annual 1998 financial reporting
and has not yet evaluated the impact of such adoption on the notes to its
annual consolidated financial statements.
Page 11 of 14
<PAGE> 12
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
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.
Page 12 of 14
<PAGE> 13
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 2. Changes in Securities and Use of Proceeds
In February 1998, the Company completed a private placement of 117,500
shares of Class A 8% Convertible Preferred Stock to ten "accredited
investors." The offering was underwritten by Perrin, Holden & Davenport
Capital Corp. The Company received gross proceeds of $1,175,000. The
underwriter received commissions of 10% of the gross proceeds, or
$117,500, and a four-year purchase option to purchase up to an
aggregate of 175,000 shares of Common Stock of the Company at an
exercise price of $1.125 per share. The Company also reimbursed the
underwriter for fees and disbursements of counsel, among other
expenses. The Preferred Stock and dividends accrued thereon are
convertible, at the election of the holder, into a number of shares of
Common Stock determined by dividing the aggregate stated value of the
Preferred Stock being converted ($10 per share) plus the amount of
accrued dividends by the lessor of (i) 80% (the "Conversion Rate") of
the average closing bid price for the Common Stock, as reported by The
Nasdaq Stock Market or the OTC Bulletin Board for the five consecutive
trading days ending on the trading day prior to the conversion date and
(ii) $1.125, subject to adjustment for stock splits, stock dividends
and other recapitalizations, mergers and other similar events. The
Conversion Rate is subject to reduction to 70% upon passage of
specified time periods and the nonoccurrence of certain events.
Preferred Stock not converted by February 19, 2001 is automatically
converted into Common Stock. Based upon the investors' representations
as to their "accredited investor" status, the Company believes that the
sales of Preferred Stock were exempt from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 under Regulation D of
the Securities Act.
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 29, 1998.
Exhibit 27 - Financial Data Schedule - which is only submitted
electronically to the Securities and Exchange Commission for EDGAR
information purposes.
Page 13 of 14
<PAGE> 14
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.
(Registrant)
/s/ SHELDON F. JACOBS
--------------------------------
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 13, 1998
Page 14 of 14
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<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
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