UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 1996 Commission File Number 33-78950
INTERNATIONAL FRANCHISE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1853204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6701 Democracy Boulevard
Suite 300
Bethesda, Maryland 20817
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (301) 897-4870
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 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_____
As of May 10, 1996 6,727,324 shares of common stock par value, $.01 per share
were outstanding.
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
FORM 10-QSB
QUARTERLY REPORT
For the Period January 1, 1996 to March 31, 1996
INDEX
Part I: FINANCIAL INFORMATION
Item 1 : Financial Statements
Condensed Consolidated Balance Sheet at
March 31, 1996 [Unaudited] 1 - 2
Condensed Consolidated Statements of Operations for
the three month periods January 1, 1996 to March 31, 1996
and January 2, 1995 to April 2, 1995 [Unaudited] 3
Condensed Consolidated Statement of Stockholders' Equity
for the three month period January 1, 1996 to March
31, 1996 [Unaudited] 4
Condensed Consolidated Statements of Cash Flows for the
three month periods January 1, 1996 to March 31, 1996
and January 2, 1995 to April 2, 1995 [Unaudited] 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 8
Part II: OTHER INFORMATION 9
SIGNATURES 10
o o o o o o o o o o
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INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996.
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 443,177
Trade Accounts Receivable - Net 1,988,007
Franchisee Loans 696,917
Other Receivables 328,112
Inventories 535,253
Prepaid Expenses and Accrued Income 495,713
Officer Loan Receivable 38,836
Due from Related Parties 1,467,789
Deposits 445,187
-----------
Total Current Assets 6,438,991
-----------
Property and Equipment - Net 3,176,935
-----------
Other Assets:
Master Franchise Agreement - Net 918,000
Rights to Store Leases - Net 93,312
Goodwill - Net 11,085
Consulting Agreements - Net 776,145
Store Franchise Agreement - Net 72,084
Store Development Costs - Net 100,884
Start-up Costs - Net 128,214
-----------
Total Other Assets 2,099,724
-----------
Total Assets $11,715,650
===========
</TABLE>
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
1
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996.
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Trade Accounts Payable $ 2,940,398
Accrued Expenses 642,806
Other Payables and Accrued Interest 129,723
Obligations Under Capital Leases 190,031
Notes Payable - Short-Term 265,134
Income Taxes Payable 380,343
------------
Total Current Liabilities 4,548,435
------------
Long Term Liabilities:
Notes Payable - Long Term 414,169
Obligations under Capital Lease 207,490
------------
Total Long Term Liabilities 621,659
------------
Commitments and Contingencies --
------------
Stockholders' Equity:
$.01 Par Value, Preferred Stock, 1,000,000 Shares Authorized,
No Shares Issued and Outstanding --
$.01 Par Value, Common Stock - 19,000,000 Shares
Authorized and 6,727,324 Shares Issued and Outstanding 67,273
Additional Paid-in-Capital 6,489,611
Retained Earnings 13,061
Cumulative Foreign Currency Translation Adjustment (24,389)
------------
Total Stockholders' Equity 6,545,556
============
Total Liabilities and Stockholders' Equity $ 11,715,650
============
</TABLE>
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
2
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INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS.
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three For the
Months Three Months
January 1, January 2,
1996 to 1995 to
March 31, April 2,
1996 1995
<S> <C> <C>
Revenue:
Sales by Company Owned Stores 1,063,214 $ 596,273
Commissary Sales 2,581,566 2,227,989
Franchise Fees 42,848 47,901
Rental Income 328,119 275,975
Royalty Sales 635,186 514,926
Other Operating Income 166,528 110,720
----------- -----------
Total Revenue 4,817,461 3,773,784
----------- -----------
Cost of Sales
Company Owned Stores 762,853 447,541
Food and Packaging 1,893,426 1,651,237
Other Operating Expenses 624,271 391,766
----------- -----------
Total Cost of Sales 3,280,550 2,490,544
----------- -----------
Gross Margin 1,536,911 1,283,240
----------- -----------
Distribution and Administrative Expenses 1,629,436 1,191,302
Operating and Closing Costs of Pizzazz Restaurant [C] 400,986 --
----------- -----------
Operating (Loss) Income (493,511) 91,938
Interest Income 20,370 29,788
Interest Expense (25,696) (9,204)
----------- -----------
(Loss) Income Before Income Taxes (498,837) 112,522
Income Taxes -- --
----------- -----------
Net (Loss) Income (498,837) $ 112,522
----------- -----------
(Loss) Income Earnings Per Share ($ 0.07) $ 0.02
----------- -----------
Weighted Average Number of Shares Outstanding
6,727,324 5,766,838
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
3
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Currency Total
Number of Paid-in Retained Translation Stockholders'
Shares Amount Capital Earnings Adjustments Equity
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 6,727,324 $ 67,273 $ 6,489,611 $ 511,898 $ 31,622 $ 7,100,404
Foreign Currency Translation
Adjustment -- -- -- -- (56,011) (56,011)
Net Income for the period
January 1, 1996 to March 31,
1996 -- -- -- (498,837) -- (498,837)
--------- -------- ----------- -------- ----------- -----------
Balance - March 31 , 1996
[Unaudited] 6,727,324 $ 67,273 $ 6,489,611 $ 13,061 $ (24,389) $ 6,545,556
========= ======== =========== ======== =========== ===========
</TABLE>
Foreign Currency Translation
The functional currency for the Company's foreign operations is the British
pound sterling. The translation from the British pound sterling into U.S.
dollars is performed for balance sheet accounts using the current exchange rate
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 translations are included in stockholders' equity.
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
4
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INTERNATIONAL FRANCHISE SYSTEMS INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months
January 1, January 2,
1996 1995
to March 31, to April 2,
1996 1995
<S> <C> <C>
Net Cash - Operating Activities (213,861) $(1,478,500)
----------- -----------
Investing Activities:
Purchase of Property, Equipment and Capitalized Costs (511,610) (378,221)
Proceeds on Disposal of Property and Equipment 259,386 4,950
Repayment of Loan to Officer (7,310)
Loan to Related Party (121,000)
----------- -----------
Net Cash - Investing Activities (252,224) (521,581)
----------- -----------
Financing Activities:
Proceeds from Loan -- --
Payment of Debt (123,839) (1,339,449)
Proceeds from Sale of Common Stock -- 253,360
----------- -----------
Net Cash - Financing Activities (123,839) (1,086,089)
----------- -----------
Effect of Exchange Rate Changes on Cash (6,814) 13,270
Net [Decrease] in Cash and Cash Equivalents (596,738) (3,052,900)
Cash and Cash Equivalents - Beginning of Periods 1,039,915 4,813,224
----------- -----------
Cash and Cash Equivalents - End of Periods 443,177 $ 1,760,324
----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid $ (20,096) $ 98,804
Taxes Paid $ -- $ --
Supplemental Disclosures of Non-Cash
Financing and Investing Activities:
Total offering costs during the period
January 2, 1995 to April 2, 1995 $ 76,210
Fixed Assets acquired under capital leases $ 248,620
</TABLE>
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
5
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- --------------------------------------------------------------------------------
[A] Significant Accounting Policies
Significant accounting policies of International Franchise Systems, Inc.
and Subsidiaries [the "Company"] are set forth in the Company's Form 10-KSB
for the year ended December 31, 1995, as filed with the Securities and
Exchange Commission.
[B] Basis of Reporting
The balance sheet as of March 31, 1996, the statements of operations for
the three months ended March 31, 1996 and April 2, 1995, the statement of
stockholders' equity for the three months ended March 31, 1996, and the
statements of cash flows for the three months ended March 31, 1996 and
April 2, 1995 have been prepared by the Company without audit. The
accompanying interim condensed consolidated unaudited financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the requirements of
Regulation SB and Form 10-QSB for condensed financial statements.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the management of the Company, such
statements include all adjustments [consisting only of normal recurring
items] which are considered necessary for a fair presentation of the
financial position of the Company at March 31, 1996, and the results of its
operations and cash flows for the three months then ended. It is suggested
that these unaudited financial statements be read in conjunction with the
financial statements and notes contained in the Company's Form 10-KSB for
the year ended December 31, 1995.
[C] Subsequent Event
In May, the Company decided to suspend Pizzazz Restaurant operations and
the development of the Pizzazz concept. The Company feels, at this time,
that management attention and resources must be focused on the core
business of delivery stores. In the Condensed Consolidated Statement of
Operations, the "Operating and Closing Costs of Pizzazz Restaurant"
consists of the following items:
Revenues $ 48,997
Cost of Sales (97,899)
Operating Expenses (199,054)
Estimated Closing Costs (153,030)
---------
Total ($400,986)
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Result of Operations
Overview
Income for the quarter was lower than the same quarter of the previous year
despite the increase in per store sales of 11%. At the end of the quarter,
management believes it experienced a significant boost in sales as a result of
the scare regarding English beef. The Company promotes their use of only Danish
beef and the "healthy" aspects of pizza as part of their advertising and
marketing strategies.
The Company's core business of franchise fees, commissary sales and the Company
owned stores lost approximately $10,000 for the quarter versus an income of
$112,522 in the same quarter of the previous year. The deterioration of income
was the result of lower margins on products sold from the commissary, higher
company overhead costs, and higher costs on the Company owned delivery stores.
The Company opened one new franchise store in the quarter.
The Company's Haagen Dazs stores lost approximately $88,000 for the quarter.
This business is seasonal and management believes that cold weather had a
significant adverse impact on the unit's activities.
The Company opened a sit down casual dining pizza restaurant ("Pizzazz") in late
December to compliment the delivery stores and further establish brand
recognition for Domino's pizza. Although the "Pizzazz" concept was developed by
Domino's in the United States, the Company did not receive assistance from
Domino's in the start up of this concept in the United Kingdom. During the
quarter ended March 31, 1996, the Company recorded losses of approximately
$248,000 and established a reserve for closing costs of approximately $153,000
related to the Pizzazz concept.
The Company has taken corrective actions where possible to return the Company to
a level of profitability.
Results of Operations
Comparison of the three month period January 1, to March 31, 1996 and January 2
to April 2, 1995
Total revenue for the period was $4,817,461, an increase of $1,043,677 (28%)
against the same period of 1995. The main constituents of this increase arose
from sales at Company owned stores which increased by $466,941, royalty income
which increased by $120,260 and commissary sales which increased by $353,577.
Increases were also evident in rental and other income streams of $107,952.
The increase in sales at Company owned stores resulted primarily from the
increased number of stores in operation during this period against 1995 (10
versus 9) and the addition of three Haagen Dazs stores which contributed
$269,899. The increase in royalty income and commissary sales resulted almost
entirely from the increase in system wide sales.
The Company also experienced an increase in cost of sales in excess of the
increase in sales. Cost of sales increase of $887,905 (36%). This is the result
of lower commissary margins, the inclusion of Haagen Dazs cost of sales and an
increase in the royalty percentage payable to Domino's.
An operating loss of ($493,511) was incurred in the period against operating
income of $91,938 in the comparable period in 1995. This decrease in
profitability resulted from higher gross margins offset by higher administrative
and corporate store costs ($96,345), the operating losses and closing costs of
the Pizzazz restaurant ($400,986), and operating loss offset by gross margins of
the Haagen Dazs stores ($88,118).
7
<PAGE>
The Company has taken the following actions to improve Company profitability:
Commissary In late February, the Company implemented a 5% price increase to
the franchisees which will cover most of the rising costs of the raw
materials of topping/cheese etc. The Company has also initiated an internal
study to ensure that fresh dough provided to the franchisees is priced to
cover the increased production costs and earn a fair profit.
Delivery Stores The Company has hired a person dedicated to new franchisee
development. This person has industry experience and is using his industry
contacts to develop new franchisee interests. In addition, the Company has
participated in two trade shows and is scheduled to participate in two more
later in the year. The Company has also successfully concluded their test
period arrangement with Total Oil Great Britain and have finalized an
agreement to open Domino's franchises in gas stations. This should result
in the rapid development of non-traditional stores in addition to the
traditional stores. The Company has also entered into another arrangement
with Alldays, a British convenience store company to install "cash and
carry" Domino's stores on the premises. The Company anticipates that a
minimum of twelve new non-traditional stores will open before the end of
the year.
Company Owned Stores The Company has installed computer systems in company
owned stores which will allow daily monitoring and control of food and
labor costs by headquarters personnel. It is anticipated that this new
system will allow the Company to control the costs and achieve better
profitability.
Haagen Dazs The Company continues to have discussions with the Master
Franchisor in the United Kingdom to discuss menu items and other ways to
reduce the seasonal impact of Haagen Dazs stores. The Company expects the
units to perform profitably for the next two quarters.
Pizzazz The Company believes these losses resulted from the lack of
Domino's support, the timing of the restaurant opening, product pricing,
menu items and promotion. The Company believes the concept is viable and
the knowledge gained over the last quarter is valuable. However, the
Company feels, at this time, management attention and resources must be
focused on the "core" business of delivery stores. Consequently, in May
1996, the Company decided to suspend operations and the development of the
Pizzazz restaurant concept.
Liquidity and Capital Resources
At March 31, 1996 the Company's working capital of $2,171,800 has been reduced
by $703,844 from the end of the Company's last fiscal year. The Company used a
portion of the net proceeds from its initial public offering to purchase fixed
assets and repay the outstanding short-term notes payable. Additionally, the
Company sold a non-performing company owned store to finance a new company owned
store opened in April 1996. The company believes that its working capital will
be sufficient to satisfy its obligations over the next twelve months.
Exchange Rates
The weighted exchange rate for the three months ended March 31, 1996 ($1.526 per
British pound sterling) was approximately 4% lower than the exchange rate during
the comparable period in 1995 ($1.597 per British pound sterling). This
difference has the effect of reducing the Company's results by approximately 4%
when expressed in U.S. dollars.
Inflation
To date, inflation has not had a material effect on the Company's operations.
8
<PAGE>
Part II OTHER INFORMATION
Item 1. 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 the Company.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Other Information
Not Applicable.
Item 5. Exhibits
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by
this report.
9
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL FRANCHISE SYSTEMS, INC.
Date: May 15, 1996 By: /s/ Colin Halpern
Colin Halpern, President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000923142
<NAME> INTERNATIONAL FRANCHISE SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 443,177
<SECURITIES> 0
<RECEIVABLES> 1,988,007
<ALLOWANCES> 0
<INVENTORY> 535,253
<CURRENT-ASSETS> 6,438,991
<PP&E> 3,176,935
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,715,650
<CURRENT-LIABILITIES> 4,548,435
<BONDS> 0
0
0
<COMMON> 67,273
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,715,650
<SALES> 2,581,566
<TOTAL-REVENUES> 4,817,461
<CGS> 1,893,426
<TOTAL-COSTS> 3,280,550
<OTHER-EXPENSES> 1,629,436
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (25,696)
<INCOME-PRETAX> (498,837)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (498,837)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
