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 June 30, 1996 Commission File Number 0-26270
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 August 1, 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 June 30, 1996
INDEX
Part I: FINANCIAL INFORMATION
Item 1 : Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1996 [Unaudited] 1-2
Condensed Consolidated Statements of Operations for the three month
periods April 1, 1996 to June 30, 1996 and April 3, 1995 to July 2,
1995 and for the six month periods January 1, 1996 to June 30, 1996
and January 2, 1995 to July 2, 1995 [Unaudited] 3
Condensed Consolidated Statement of Stockholders' Equity for the six
month period January 1, 1996 to June 30, 1996 [Unaudited] 4
Condensed Consolidated Statements of Cash Flows for the six month
periods January 1, 1996 to June 30, 1996 and January 2, 1995 to July
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
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996.
<TABLE>
<CAPTION>
ASSETS:
Current Assets:
June 30, 1996 July 2, 1995
<S> <C> <C>
Cash and Cash Equivalents $ 101,688 $ 1,295,956
Trade Accounts Receivable - Net 2,058,997 1,399,088
Franchisee Loans 797,033 742,053
Other Receivables 507,930 329,954
Inventories 504,772 447,091
Prepaid Expenses and Accrued Income 881,654 324,860
Officer Loan Receivable 100,050 39,781
Due from Related Parties [D] 2,437,574 734,138
Deposits 370,759 319,134
----------- -----------
Total Current Assets 7,760,457 5,632,055
----------- -----------
Property and Equipment - Net 3,332,718 1,490,211
----------- -----------
Other Assets:
Master Franchise Agreement - Net 900,000 972,000
Rights to Store Leases - Net 91,645 42,500
Goodwill - Net 10,987 12,508
Start-Up Costs - Net 112,992 --
Consulting Agreements - Net [C] -- 806,145
Store Franchise Agreement - Net 71,512 8,864
Store Development Costs - Net 22,969 45,902
----------- -----------
Total Other Assets 1,210,105 1,887,919
----------- -----------
Total Assets $12,303,280 $ 9,010,185
=========== ===========
</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 JUNE 30, 1996
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity:
Current Liability:
June 30, 1996 July 2, 1995
<S> <C> <C>
Trade Accounts Payable $ 3,048,245 $ 1,951,940
Accrued Expenses 950,070 410,951
Other Payables and Accrued Interest 189,156 102,394
Obligations Under Capital Leases 193,678 74,970
Notes Payable - Short-Term 267,984 233,665
Other Taxes Payable 472,714 277,908
----------- -----------
Total Current Liabilities 5,121,847 3,051,828
----------- -----------
LongTerm Liabilities:
Notes Payable - Long Term 349,402 465,670
Obligations under Capital Lease 167,634 152,146
----------- -----------
Total Long Term Liabilities 517,036 617,816
----------- -----------
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 62,523
Additional Paid-in-Capital 6,489,611 4,819,192
Retained Earnings 69,746 370,916
Cumulative Foreign Currency Translation Adjustment 37,767 87,910
----------- -----------
Total Stockholders' Equity 6,664,397 5,340,541
----------- -----------
Total Liabilities and Stockholders' Equity $12,303,280 $ 9,010,185
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
2
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
<TABLE>
<CAPTION>
For the Three Months For the Six Months
April 1, April 3, January 1, January 2,
1996 to 1995 to 1996 to 1995 to
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue:
Sales by Company Owned Stores $ 1,410,032 $ 641,048 $ 2,473,246 $ 1,237,321
Commissary Sales 2,899,511 2,353,447 5,481,077 4,581,436
Franchise Fees 137,491 53,072 180,339 100,973
Rental Income 326,253 332,790 623,358 608,765
Royalty Sales 691,157 525,394 1,326,343 1,040,320
Other Operating Income 198,602 86,574 365,130 197,294
------------ ------------ ------------ ------------
Total Revenue 5,663,046 3,992,325 10,449,493 7,766,109
------------ ------------ ------------ ------------
Cost of Sales
Company Owned Stores 881,819 430,105 1,644,672 877,646
Food and Packaging 2,564,852 1,999,787 4,912,687 4,076,024
Other Operating Expenses 649,182 431,020 1,242,439 822,786
------------ ------------ ------------ ------------
Total Cost of Sales 4,095,853 2,860,912 7,799,798 5,776,456
------------ ------------ ------------ ------------
Gross Margin 1,567,193 1,131,413 2,649,695 1,989,653
------------ ------------ ------------ ------------
Non Operating Income 37,992 -- 67,649 --
Administrative Expenses 1,590,632 1,049,777 2,795,316 1,816,079
Operating and Closing Costs of Pizzazz Restaurant -- -- 400,986 --
------------ ------------ ------------ ------------
Operating Income/(Loss) 14,553 81,636 (478,958) 173,574
Interest Income 66,294 40,407 86,664 70,195
Interest Expense (24,162) (22,168) (49,858) (31,372)
------------ ------------ ------------ ------------
(Loss) Income Before Income Taxes 56,685 99,875 (442,152) 212,397
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Income/(Loss) $ 56,685 99,875 $ (442,152) 212,397
------------ ------------ ------------ ------------
Earnings/(Loss) Per Share $ 0.01 $ 0.02 $ (0.07) $ 0.04
------------ ------------ ------------ ------------
Weighted Average Number of Shares Outstanding 6,727,324 5,983,505 6,727,324 5,875,171
------------ ------------ ------------ ------------
</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 -- -- -- -- 6,145 6,145
Net Loss for the period
January 1, 1996 to June 30, 1996 -- -- -- (442,152) -- (442,152)
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 1996 6,727,324 $ 67,273 $ 6,489,611 $ 69,746 $ 37,767 $ 6,664,397
=========== =========== =========== =========== =========== ===========
</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. Equity transactions
are denominated in British Pound sterling have been translated into U.S. dollars
using the effective rate of exchange at date of issuance.
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
4
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
<TABLE>
<CAPTION>
For the Six Months
January 1, January 2,
1996 to 1995 to
June 30, 1996 July 2, 1995
<S> <C> <C>
Net Cash - Operating Activities $182,738 $(1,334,304)
----------- -----------
Investing Activities:
Purchase of Property, Equipment and Capitalized Costs (1,151,811) (860,876)
Proceeds on Disposal of Property and Equipment 259,047 52,594
Repayment of Loan to Officer -- 630
Loan to Related Party -- (664,844)
----------- -----------
Net Cash - Investing Activities (892,764) (1,472,496)
----------- -----------
Financing Activities:
Proceeds from Loan -- 371,174
Payment of Debt (239,046) (1,352,462)
Proceeds from Sale of Common Stock 253,360
----------- -----------
Net Cash - Financing Activities (239,046) (727,928)
----------- -----------
Effect of Exchange Rate Changes on Cash 10,845 17,460
Net [Decrease] in Cash and Cash Equivalents (932,227) (3,517,268)
Cash and Cash Equivalents - Beginning of Periods 1,039,915 4,813,224
----------- -----------
Cash and Cash Equivalents - End of Periods 101,688 $ 1,295,956
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid $ 49,858 $ 28,031
Taxes Paid $ -- $ --
Supplemental Disclosures of Non-Cash Financing and Investing Activities:
Total offering costs during the period January 2, 1995 to July 2, 1995 $ -- $ 76,210
Assignment of Consulting Agreements $ 776,145 $
Fixed Assets acquired under Capital leases $ 248,295 $ --
</TABLE>
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
5
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[A] Significant Accounting Policies
Significant accounting policies of INTERNATIONAL FRANCHISE SYSTEMS, INC.
[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 June 30, 1996, the statements of operations for the
period January 1, 1996 to June 30, 1996, and for the period January 2, 1995
to July 2, 1995, the statement of stockholders' equity for the period
January 1, 1996 to June 30, 1996 and the statements of cash flows for the
period January 1, 1996 to June 30, 1996 and for the period January 2, 1995
to July 2, 1995 have been prepared by the Company without audit. The
accompanying interim condensed unaudited financials have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions of Form 10-QSB and
Regulation SB. 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 June 30, 1996, and the results of its
operations and cash flows for the six 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.
Certain reclassifications may have been made to the 1995 financial
statements to conform to classification used in 1996.
[C] Assignment Of Consulting Agreements
The three consulting agreements entered into by the Company were assigned
to Woodland Limited Partnership at their net book value on March 31, 1996.
The consideration for this assignment consisted of a short term interest
bearing loan which is convertible to securities on or before September 29,
1996.
[D] Due from Related Parties
Woodland Limited Partnership is a partnership controlled by members of the
Colin Halpern family. As stated in Note [C], Woodland has a short term loan
of $776,145 which will be replaced by marketable securities on or before
September 29, 1996.
Crescent Capital owns 4,700,000 share or approximately 70% of International
Franchise Systems, Inc. outstanding stock. The Company has loaned funds to
Crescent Capital of $1,661,429. These loans are interest bearing and
principal and interest are payable on or before September 29, 1996.
o o o o o o o o o o
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 year to year of 11%. The Company's core
business of franchising, commissary and Company owned stores earned $21,414 for
the quarter versus income of $99,875 in the same quarter of the previous year.
The principal reasons for the decline in income was higher Company overhead
costs and higher expenses on the Company-owned delivery stores. The Company
opened five new franchise stores in the quarter and two were closed. To date,
the Company has opened a net of four new stores.
The Company's Haagen Dazs stores earned $35,270 for the quarter. This business
is seasonal and management believes that cold weather in May and June had an
adverse impact on these stores profitability.
In May, the Company management decided to re-focus on the core business and
divest of non-core assets. In addition, the Company started to strengthen
elements of the core business to achieve sustained profitability. The benefits
of these decisions and actions are expected to be realized in the coming
quarters.
The Company has done the following to carry out its plans:
Haagen Dazs The Company has reached an agreement with the Master Franchisor
in the United Kingdom to (1) purchase one ice cream parlour back from the
Company at the end of August and (2) assist the Company in the sale of the
other two units. It is the Company's intention to divest of all the units
before the end of the year.
Pizzazz The Company suspended operations and the development of the Pizzazz
restaurant concept. The Company has an agreement with a third party to
lease the property and assets. The third party will not operate the
restaurant as a Pizzazz restaurant or offer similar type cuisine.
Commissary The Company has implemented controls to ensure that margins
remain constant when price movements occur in raw materials. Additionally,
the Company has conducted studies, in conjunction with Domino's parent
company commissary personnel, to improve commissary efficiencies, to
establish pan -European purchasing co-ops with other Domino's franchisors
and to set up a distribution centre in the north of England to reduce
distribution costs.
Delivery Stores The Company is re-working the franchisee recruitment
program to increase the number of new franchisees in the system. Changes
include more public relations coverage of Domino's successful franchisees,
improvements in promotional materials, better follow up with prospects and
the creation of incentive programs. In addition, the Company has
participated in three trade shows and is scheduled to participate in
another one later in the year. The Company has also entered into another
arrangement with Alldays, a British convenience store company, to establish
Domino's delivery stores on the premises of Alldays stores. The Company
anticipates that a minimum of five new delivery stores with Alldays will
open before the end of the year.
Company Owned Stores The Company has converted two Corporate delivery
stores to "Dealer Development" stores and intends to convert two more in
the third quarter. The Company has had success with this program because it
allows new franchisees to participate in the Domino's' system while the
Company initially finances the store construction costs. As the Company
achieves increased profitability under this arrangement, a reduction in
revenue can be expected.
Results of Operations
Comparison of the three month period April 1, to June 30, 1996 and April 3, to
July 2, 1995
Total revenue for the period was $5,663,046, an increase of $1,670,721 (42%)
against the same period of 1995. The main constituents of this increase arose
from sales at Company owned stores which increased by $768,984, royalty income,
which increased by $165,763 and commissary sales, which increased by $546,064.
Rental and other income also increased by $189,910.
The increase in sales at Company owned stores resulted primarily from the
increased number of stores in operation during this period against 1995 (11
versus 9) and the addition of three Haagen Dazs stores which contributed
$506,706. The increase in royalty income and commissary sales resulted almost
entirely from the increase in system wide sales.
7
<PAGE>
The Company also experienced an increase in cost of sales against the same
period of 1995. Cost of sales increased by $1,659,941 (68%). This is the result
of an increase in the cost of food, the inclusion of Haagen Dazs cost of sales
and an increase in the royalty percentage payable to Domino's.
An operating profit of $14,553 was attained in the period against operating
income of $81,636 in the comparable period in 1995. This decrease in
profitability resulted from higher gross margins offset by higher administrative
and corporate store costs of $540,855 which offset an increase in the gross
margin of $435,780.
Comparison of the six month period January 1, to June 30, 1996 and January 2 to
July 2, 1995
Total revenue for the period was $10,449,493, an increase of $2,683,384 (35%)
against the same period in 1995. The main constituents of this increase arose
from sales at Company owned stores, which increased by $1,235,925, royalty
income, which increased by $286,023 and commissary sales, which increased by
$899,641.
The increase in sales at Company owned stores resulted primarily from the
increased number of stores in operation during this period against 1995 and the
addition of three Haagen Dazs stores which contributed $770,375. 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 against the same
period of 1995. Cost of sales increased by $2,873,342 (58%). This is the result
of an increase in food costs, the inclusion of Haagen Dazs cost of sales and an
increase in the royalty percentage payable to Domino's.
An operating loss of $478,958 was incurred in the period against operating
income of $173,574 in the comparable period in 1995. This decrease in
profitability resulted from higher administrative and corporate store costs of
$979,237 offsetting higher gross margins, and the operating losses at and
closure of the Pizzazz Restaurant.
Liquidity and Capital Resources
At June, 1996 the Company's working capital of $2,638,610 has been reduced by
$237,034 from the end of the Company's last fiscal year. The Company assigned
the beneficial interest in its consulting agreements to Woodland Limited
Partnership which resulted in an increase in working capital of $776,145. 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 six months ended June 30, 1996 ($1.5283 per
British pound sterling) was approximately 3% lower than the exchange rate during
the comparable period in 1995 ($1.5777 per British pound sterling). This
difference has the effect of reducing the Company's results by approximately 3%
when expressed in U.S. dollars.
Inflation
The primary inflationary factor affecting the Company's operations is the cost
of food. As the cost of food has increased, the Company has historically been
able to offset these increases through economies of scale and improved operating
procedures, although there is no assurance that such offsets will continue. To
date, inflation has not had a material effect on the Company's operations.
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 judgements 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: August 5, 1996 By: /s/ H Michael Bush
-----------------------------------------
H Michael Bush, President
(Principal Executive Officer and Principal
Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 101,688
<SECURITIES> 0
<RECEIVABLES> 2,058,997
<ALLOWANCES> 0
<INVENTORY> 504,772
<CURRENT-ASSETS> 7,760,457
<PP&E> 3,332,718
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,303,280
<CURRENT-LIABILITIES> 5,121,847
<BONDS> 0
0
0
<COMMON> 67,273
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,303,280
<SALES> 5,663,046
<TOTAL-REVENUES> 5,663,046
<CGS> 4,095,853
<TOTAL-COSTS> 4,095,853
<OTHER-EXPENSES> 1,590,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,162
<INCOME-PRETAX> 14,553
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,685
<EPS-PRIMARY> $0.01
<EPS-DILUTED> $0.01
</TABLE>
