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 September 29, 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 November 8, 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 Ended to September 29, 1996
INDEX
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of September 29, 1996
[Unaudited] 1-2
Condensed Consolidated Statements of Operations for the three
month periods July 1, 1996 to September 29, 1996 and July 3, 1995
to October 1, 1995 and for the nine month periods January 1, 1996
to September 29, 1996 and January 2, 1995 to October 1, 1995
[Unaudited] 3
Condensed Consolidated Statement of Stockholders' Equity for the
nine month period January 1, 1996 to September 29, 1996
[Unaudited] 4
Condensed Consolidated Statements of Cash Flows for the nine
month periods January 1, 1996 to September 29, 1996 and January
2, 1995 to October 1, 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 SEPTEMBER 29, 1996.
<TABLE>
<CAPTION>
ASSETS:
Current Assets:
September 29, December 31,
1996 1995
<S> <C> <C>
Cash and Cash Equivalents $ 605,231 $ 1,039,915
Trade Accounts Receivable - Net 2,314,491 1,697,548
Franchisee Loans 813,288 696,917
Other Receivables 267,076 565,708
Inventories 459,012 621,408
Prepaid Expenses and Accrued Income 709,132 469,116
Officer Loan Receivable 123,726 134,151
Due from Related Parties [D] 1,109,697 1,666,896
Deposits 292,669 383,331
----------- -----------
Total Current Assets 6,694,322 7,274,990
----------- -----------
Property and Equipment - Net 3,432,261 2,733,667
----------- -----------
Other Assets:
Master Franchise Agreement - Net 882,000 936,000
Rights to Store Leases - Net 90,680 83,359
Goodwill - Net 10,732 11,570
Start-Up Costs - Net 109,095 146,916
Consulting Agreements - Net [C] -- 827,707
Store Franchise Agreement - Net 59,008 75,273
Store Development Costs - Net 14,139 104,419
Investment in Parent Company 776,145 --
----------- -----------
Total Other Assets 1,941,799 2,185,244
----------- -----------
Total Assets $12,068,382 $12,193,901
----------- -----------
</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 SEPTEMBER 29, 1996
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity:
Current Liability:
September 29, December 31,
1996 1995
<S> <C> <C>
Trade Accounts Payable $ 2,592,349 $ 3,109,445
Accrued Expenses 826,048 373,034
Other Payables and Accrued Interest 240,700 157,741
Obligations Under Capital Leases 194,699 188,077
Notes Payable - Short-Term 299,107 267,693
Other Taxes Payable 518,952 303,356
----------- -----------
4,671,855 4,399,346
----------- -----------
Total Current Liabilities
Long Term Liabilities:
Notes Payable - Long Term 434,474 491,464
Obligations under Capital Lease 89,212 202,687
Total Long Term Liabilities 523,686 694,151
----------- -----------
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 67,273
Additional Paid-in-Capital 6,489,611 6,489,611
Retained Earnings 267,416 511,898
Cumulative Foreign Currency
Translation Adjustment 48,541 31,622
----------- -----------
Total Stockholders' Equity 6,872,841 7,100,404
----------- -----------
Total Liabilities
and Stockholders' Equity $12,068,382 $12,193,901
----------- -----------
</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 Thirteen Weeks For the Thirty-Nine Weeks
July 1, July 3, January 1, 1996 January 2, 1995
1996 to 1995 to to to
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue:
Sales by Company Owned Stores $ 1,578,453 $ 754,747 $ 4,051,699 $ 1,992,068
Commissary Sales 3,039,451 2,546,101 8,520,528 7,127,537
Franchise Fees 151,934 38,789 332,273 139,762
Rental Income 341,987 298,501 965,345 907,266
Royalty Sales 749,824 687,002 2,076,167 1,727,322
Other Operating Income 156,618 251,322 589,397 448,616
------------ ------------ ------------ ------------
Total Revenue 6,018,267 4,576,462 16,535,409 12,342,571
------------ ------------ ------------ ------------
Cost of Sales
Company Owned Stores 1,007,948 463,608 2,652,620 1,341,254
Food and Packaging 2,730,664 2,390,428 7,643,351 6,466,452
Other Operating Expenses 613,451 553,582 1,855,890 1,376,368
------------ ------------ ------------ ------------
Total Cost of Sales 4,352,063 3,407,618 12,151,861 9,184,074
------------ ------------ ------------ ------------
Gross Margin 1,666,204 1,168,844 4,383,548 3,158,497
------------ ------------ ------------ ------------
Administrative Expenses 1,449,697 1,070,880 4,245,013 2,886,959
Operating and Closing Costs
of Pizzazz Restaurant
41,245 -- 442,231 --
------------ ------------ ------------ ------------
Operating Income/(Loss) 175,262 97,964 (303,696) 271,538
Interest Income 47,276 28,477 133,940 98,672
Interest Expense (24,868) (15,490) (74,726) (46,862)
------------ ------------ ------------ ------------
(Loss) Income Before Income Taxes 197,670 110,951 (244,482) 323,348
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Income/(Loss) $ 197,670 $ 110,951 $ (244,482) 323,348
------------ ------------ ------------ ------------
Earnings/(Loss) Per Share $ 0.03 $ 0.02 $ (0.04) $ 0.05
------------ ------------ ------------ ------------
Weighted Average Number
of Shares Outstanding
6,727,324 6,252,324 6,727,324 6,000,889
------------ ------------ ------------ ------------
</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 -- -- -- -- 16,919 16,919
Net Loss for the period
January 1, 1996 to September 29, 1996 -- -- -- (244,482) -- (244,482)
----------- ----------- ----------- ----------- ----------- -----------
Balance - September 29, 1996 6,727,324 $ 67,273 $ 6,489,611 $ 267,416 $ 48,541 $ 6,872,841
----------- ----------- ----------- ----------- ----------- -----------
</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 Thirty-Nine Weeks
January 1, January 2,
1996 to 1995 to
September 29, October 1,
1996 1995
<S> <C> <C>
Net Cash - Operating Activities $ 251,385 $(1,043,746)
----------- -----------
Investing Activities:
Purchase of Property, Equipment and Capitalized Costs (1,488,656) (1,464,412)
Proceeds on Disposal of Property and Equipment 445,338 52,944
Repayment of Loan to Officer -- 945
Loan to Related Party 554,687 (510,280)
----------- -----------
Net Cash - Investing Activities (488,631) (1,920,803)
----------- -----------
Financing Activities:
Proceeds from Loan 184,596 373,645
Payment of Debt (380,226) (1,439,231)
Proceeds from Sale of Common Stock -- 253,360
----------- -----------
Net Cash - Financing Activities (195,630) (812,226)
----------- -----------
Effect of Exchange Rate Changes on Cash (1,808) 11,133
Net [Decrease] in Cash and Cash Equivalents (434,684) (3,765,642)
Cash and Cash Equivalents - Beginning of Periods 1,039,915 4,813,224
----------- -----------
Cash and Cash Equivalents - End of Periods 605,231 $ 1,047,582
----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid $ 133,940 $ 46,862
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
Exchange of Marketable Securities and Assignment of Consulting Agreements $ 776,145 $ --
Issuance of 475,000 shares of Common Stock in connection with two consulting
agreements $ -- $ 825,000
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 September 29, 1996, the statements of operations
for the period January 1, 1996 to September 29, 1996, and for the period
January 2, 1995 to October 1, 1995, the statement of stockholders' equity
for the period January 1, 1996 to September 29, 1996 and the statements of
cash flows for the period January 1, 1996 to September 29, 1996 and for the
period January 2, 1995 to October 1, 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 September 29, 1996, and the
results of its operations and cash flows for the thirty-nine weeks 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 April 1, 1996.
[D] Due from Related Parties
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 $1,109,697. These loans are interest bearing and
principal and interest are now payable on or before December 29, 1996
(extended from 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 thirteen week period was higher than the same period of the
previous year due to the opening of new stores, the increase of existing store
sales year to year of 12%, and the Haagen Dazs ice cream line of business. The
Company opened six new franchise stores in the period. To date, the Company has
opened a net of eleven new stores for the year.
In September, the Company sold one Haagen Dazs parlour back to the Master
Franchisor in the UK. The Company is attempting to divest the two other Haagen
Dazs units before the end of the year. The ice cream business is influenced by
cold weather and the Company anticipates losses from these 2 units in the fourth
quarter.
During the second quarter, the Company closed their sit down restaurant
("Pizzazz"). The Company had an agreement with a third party to lease the
property and the assets. The Company was unsuccessful in obtaining the
landlord's consent to sub-lease the facilities to the third party. As a result,
the Company incurred rental and associated expenses on the unit during the third
quarter of $41,245. This loss has been included in the Company's income results.
The Company has entered into negotiations with another third party that it
believes will be acceptable to the landlord. The Company hopes to have the
transaction finalized by the end of the year although there are no assurances
that the sublease will be finalized or that the landlord will approve the
sublease.. Therefore, the Company expects to incur similar costs in the fourth
quarter on this property.
Results of Operations -
Comparison of the thirteen week period July 1, to September 29, 1996 and July 3,
to October 1, 1995
Revenue
Total revenue for the period was $6,018,267 an increase of $1,441,805 (32%)
against the same period of 1995. The main constituents of this increase arose
from sales at Company owned stores which increased by $823,706, royalty income,
which increased by $175,967 and commissary sales, which increased by $493,350.
Rental income also increased by $43,486 and other income decreased by $94,704.
The increase in comparative sales at Company owned stores resulted primarily
from the three Haagen Dazs units which were operated by the Company for only one
month in the same period last year. The increase in royalty income and
commissary sales resulted almost entirely from the increase in system wide
sales.
Cost and Expenses
The Company's cost of sales as a percentage of total revenue decreased by 2.1%
against the same period of the previous year. However, total cost of sales
expenditures increased by $944,445. The cost of sales as a percentage on
commissary sales declined by 4.1% from the same period of the previous year
because of improved pricing and better margins. The cost of sales as a
percentage on Company owned store sales increased by 2.5% because of higher food
costs and lower margins for the Haagen Dazs units as compared to the
Company-owned Domino's stores. The royalty percentage payable to Domino's
increased from the prior year by 6.7%.
Administrative and corporate expenses as a percentage of total revenue increased
by 1.6% ($378,817) versus the same period of the previous year. Expenses
increased as a result of Haagen Dazs ($189,075), headcount additions to support
the franchisees, and general costs for franchise development and shareholder
support.
Income
An operating profit of $175,262 was attained in the period against operating
income of $97,964 in the comparable period in 1995. This increase in
profitability resulted from higher gross margins of $497,360 which offset higher
administrative and corporate store costs of $420,062.
Comparison of the thirty-nine week period January 1, to September 29, 1996 and
January 2, to October 1, 1995
Revenue
Total revenue for the period was $16,416,512, an increase of $4,073,941 (33%)
against the same period in 1995. The main constituents of this increase arose
from sales at Company owned stores, which increased by $2,059,631, royalty
income, which increased by $541,356 and commissary sales, which increased by
$1,392,991.
7
<PAGE>
The increase in sales at Company owned stores resulted primarily from the
addition of three Haagen Dazs stores which contributed $1,401,568 and the
increased number of stores in operation during this period against 1995. The
increase in royalty income and commissary sales resulted almost entirely from
the increase in system wide sales.
Cost and Expenses
The Company's cost of sales as a percentage of total revenue decreased by .8%
against the same period of 1995. The cost of sales as a percentage of commissary
sales declined by 1% from the same period of the previous year. The cost of
sales as a percentage of Company owned store sales decreased by 1.8%. The
royalty percentage payable to Domino's increased from the prior year by 6.7%.
Administrative and corporate store expenses as a percentage of total revenue
increased by 2.3% against the same period of the previous year This increase is
reflective of the growth of the company to support the franchisees the increased
costs of corporate stores including Haagen Dazs ($978,544) and personnel and
shareholder support costs at the Corporate headquarters.
Income
An operating loss of $303,696 was incurred in the period against operating
income of $271,538 in the comparable period in 1995. This decrease in
profitability resulted primarily from the operating losses at and closure of the
Pizzazz Restaurant ($442,231) and higher administrative and corporate store
costs offsetting higher gross margins .
Liquidity and Capital Resources
At September 29, 1996 the Company's working capital of $2,022,467 has been
reduced by $853,177 from the end of the Company's last fiscal year. The
Company's trade receivable have increased by $611,943 from the end of the year
in addition to a increase in computer loans to franchisees for $116,371. The
Company's receivable from related parties has decreased by $557,199 and
inventories and other receivable have decreased by $461,028. The Company's
current liabilities have increased as a result of increased commissary purchases
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 thirty-nine week period ended September 29,
1996 ($1.5383 per British pound sterling) was approximately 3% lower than the
exchange rate during the comparable period in 1995 ($1.5882 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. Submission of Matters to a Vote of Security Holders
The annual general meeting of the Stockholders of the Company was held
on July 8, 1996 (the Annual Meeting" or "Meeting", with the following
results:
The total number of shares represented at the Annual Meeting in person
or by proxy was 1,133 of the 6,727,324 shares of common stock
outstanding and entitled to vote at the Meeting.
On the proposal to elect Franklen M. Abelman, Robert P. Flack, Kenneth
R. Franklin, Colin Halpern, Gerald Halpern and Melvin F. Lazar
Directors to serve until the 1997 Annual Meeting and until their
successors are duly elected and qualified, the nominees for Directors
received the number of votes set forth opposite their respective
names:
For Against Withheld
Franklen M. Abelman 6,601,133 650 33,925
Robert P. Flack 6,600,683 1,100 33,925
Kenneth R. Franklin 6,601,133 650 33,925
Colin Halpern 6,600,583 1,200 33,925
Gerald Halpern 6,599,883 1,900 33,925
Melvin F. Lazar 6,601,033 750 33,925
There were no broker non-votes recorded. On the basis of the above
vote, Franklen M. Abelman, Robert P. Flack, Kenneth R. Franklin, Colin
Halpern, Gerald Halpern and Melvin F. Lazar were elected as Directors
to serve until the 1997 Annual Meeting and until their respective
successors are duly elected and qualified.
In addition, the Company's stock incentive plan was approved by a vote
of 6,566,527 shares for the plan, 69,875 shares against, and 10,915
shares abstained.
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: November 8, 1996 By: /s/ H Michael Bush
H Michael Bush, President
(Principal Executive Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 605,231
<SECURITIES> 0
<RECEIVABLES> 2,314,491
<ALLOWANCES> 0
<INVENTORY> 459,012
<CURRENT-ASSETS> 6,694,322
<PP&E> 3,432,261
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,068,382
<CURRENT-LIABILITIES> 4,671,855
<BONDS> 0
0
0
<COMMON> 67,273
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,068,382
<SALES> 6,018,267
<TOTAL-REVENUES> 6,018,267
<CGS> 4,095,853
<TOTAL-COSTS> 4,095,853
<OTHER-EXPENSES> 1,449,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (24,868)
<INCOME-PRETAX> 175,262
<INCOME-TAX> 0
<INCOME-CONTINUING> 175,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197,670
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
