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 period ended March 30, 1997 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 April 30, 1997 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 December 30, 1996 to March 30, 1997
INDEX
Part I: FINANCIAL INFORMATION
Item 1 : Financial Statements
Condensed Consolidated Balance Sheet as of March 30, 1997
[Unaudited] 1-2
Condensed Consolidated Statements of Operations for the three
month period December 30, 1996 to March 30, 1997 and January
1, 1996 to March 31, 1996 [Unaudited] 3
Condensed Consolidated Statement of Stockholders' Equity for
the three month period December 30, 1996 to March 30, 1997
[Unaudited] 4
Condensed Consolidated Statements of Cash Flows for the three
month period December 30, 1996 to March 30, 1997 [Unaudited] 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II: OTHER INFORMATION 10
SIGNATURES 11
o o o o o o o o o o
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 30, 1997.
ASSETS:
Current Assets:
<TABLE>
<CAPTION>
March 30, 1997 December 29, 1996
<S> <C> <C>
Cash and Cash Equivalents $440,862 $664,123
Trade Accounts Receivable - Net 2,220,180 2,278,638
Franchisee Loans 1,035,803 1,008,990
Other Receivables 332,349 51,475
Inventories 860,508 865,131
Prepaid Expenses and Accrued Income 512,928 665,521
Officer Loan Receivable 124,701 125,016
Due from Related Parties [C] 1,744,481 1,839,325
----------- -----------
$7,271,812 $7,498,219
Total Current Assets
----------- -----------
----------- -----------
Property and Equipment - Net $2,853,692 $2,757,386
----------- -----------
Other Assets:
Master Franchise Agreement - Net $846,000 $864,000
Rights to Store Leases - Net 109,612 112,519
Goodwill - Net 10,611 11,260
Deposits 303,375 637,562
Store Franchise Agreement - Net 56,073 45,830
Store Development Costs - Net 66,825 74,344
Investment in Marketable Securities of Parent Company 776,145 776,145
Net Assets of Discontinued Operation 629,446 666,156
----------- -----------
Total Other Assets $2,798,087 $3,187,816
----------- -----------
----------- -----------
$12,923,591 $13,443,421
Total Assets
----------- -----------
</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 30, 1997
Liabilities and Stockholders' Equity:
Current Liability:
<TABLE>
<CAPTION>
March 30, 1997 December 29, 1996
<S> <C> <C>
Trade Accounts Payable $3,274,043 $3,704,523
Accrued Expenses 784,367 1,114,416
Other Payables and Accrued Interest 260,839 29,785
Obligations Under Capital Leases 204,409 217,691
Notes Payable - Short-Term 247,201 321,621
Other Taxes Payable 502,007 415,771
----------- -----------
$5,272,866 $5,803,807
----------- -----------
Total Current Liabilities
LongTerm Liabilities:
Notes Payable - Long Term 370,801 392,363
Obligations under Capital Lease 62,793 67,877
----------- -----------
Total Long Term Liabilities 433,594 460,240
----------- -----------
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 496,359 372,090
Cumulative Foreign Currency Translation Adjustment 163,888 250,400
----------- -----------
Total Stockholders' Equity 7,217,131 7,179,374
----------- -----------
----------- -----------
Total Liabilities and Stockholders' Equity $12,923,591 $13,443,421
----------- -----------
</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
December 30, 1996 to January 1, 1996 to March
March 30, 1997 31, 1996
Revenue:
<S> <C> <C>
Sales by Company Owned Stores $908,725 $1,063,214
Commissary Sales 3,919,040 2,423,766
Franchise Fees 133,277 42,848
Rental Income 491,351 328,119
Royalty Sales 886,774 635,186
Computer Sales 278,523 157,800
Other Operating Income 76,709 166,528
----------- -----------
Total Revenue $6,694,399 $4,817,461
----------- -----------
Cost of Sales
Company Owned Stores 562,357 762,856
Food, Packaging & Distribution 3,389,404 2,272,872
Other Cost of Sales 1,010,931 624,271
----------- -----------
Total Cost of Sales 4,962,692 3,659,999
----------- -----------
Gross Margin 1,731,707 1,157,462
----------- -----------
Administrative Expenses 1,382,441 1,281,016
Amortization and Depreciation 185,621 244,904
Gain on the Sale of Fixed Assets -- 275,933
----------- -----------
Operating Income (Loss) 163,645 (92,525)
Other Income (Expense)
Interest Income 59,052 20,370
Interest Expense (30,073) (25,696)
----------- -----------
Total Other Income 28,979 (5,326)
Income (Loss) From Continuing
Operations 192,624 (97,851)
Loss From Discontinued Operations (68,355) (400,986)
----------- -----------
Net Income (Loss) $124,269 ($498,837)
----------- -----------
Earnings (Loss) Per Share $0.02 ($0.07)
----------- -----------
Income From Continuing Operations $0.03 ($0.01)
Loss From Discontinued Operations (0.01) (0.06)
Net Income (Loss) Per Share 0.02 (0.07)
----------- -----------
Weighted Average Number of Shares Outstanding 6,727,324 6,727,324
----------- -----------
</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 29, 1996 6,727,324 $ 67,273 $ 6,489,611 $ 372,090 $ 250,400 $ 7,179,374
Foreign Currency Translation Adjustment -- -- -- -- (86,512) (86,512)
Net Income for the period
December 30, 1996 to March 30, 1997 -- -- -- $ 124,269 -- $ 124,269
--------- -------- ----------- --------- -------- ----------
Balance - March 30, 1997 6,727,324 $ 67,273 $ 6,489,611 $ 496,359 $163,888 $7,217,131
--------- -------- ----------- --------- -------- ----------
</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 Three Month Period
December 30, January 1,
1996 to 1996 to
March 30, 1997 March 31, 1996
<S> <C> <C>
Net Cash From Continuing Operations $155,287 $34,095
Net Cash From Discontinued Operations (68,355) (247,956)
----------- -----------
Net Cash - Operating Activities $86,932 ($213,861)
----------- -----------
Investing Activities:
Purchase of Property, Equipment and Capitalized Costs (344,927) (511,610)
Proceeds on Disposal of Property and Equipment 44,585 259,386
Repayment of Loan to Officer -- --
Loan to Related Party 128,099 --
----------- -----------
Net Cash - Investing Activities (172,243) (252,224)
----------- -----------
Financing Activities:
Proceeds from Loan -- --
Repayment of Debt (79,049) (123,839)
Repayment of Capital Leases (40,594)
----------- -----------
Net Cash - Financing Activities (119,643) (123,839)
----------- -----------
Effect of Exchange Rate Changes on Cash (18,307) (6,814)
Net [Decrease] in Cash and Cash Equivalents (223,261) (596,738)
Cash and Cash Equivalents - Beginning of Periods 664,123 1,039,915
----------- -----------
Cash and Cash Equivalents - End of Periods 440,862 443,177
----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid ($23,905) ($20,096)
Taxes Paid $ -- $ --
Supplemental Disclosures of Non-Cash Financing and Investing Activities:
Fixed Assets acquired under Capital leases $29,889 $248,620
</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 29, 1996, as filed with the Securities and Exchange
Commission.
[B] Basis of Reporting
The balance sheet as of March 30, 1997, the statements of operations
for the period December 30, 1996 to March 30, 1997, the statement of
stockholders' equity for the period December 30, 1996 to March 30, 1997
and the statement of cash flows for the period December 30, 1996 to
March 30, 1997 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 March 30,
1997, 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 29, 1996.
Certain reclassifications may have been made to the 1996 financial
statements to conform to classification used in 1997.
[C] 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 $1,744,481. These loans are
interest bearing and principal and interest are payable on or before
October 31, 1997.
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 higher than the same period of the previous year due
to more new store openings which increased by six in the first quarter of 1997
as compared to one in the first quarter of 1996, an increase in same store sales
year of 15%, its corresponding impact on royalties and commissary sales and
higher computer system sales. As of March 30, 1997, the Company has opened a
total of 133 Domino's units. This includes 127 delivery units (11 that are
Company owned) and 6 units that are "call and collect".
In September 1996, 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. The ice cream business is influenced by cold weather and the Company
experienced losses from these 2 units during the first quarter 1997. The Company
expects the margins to improve in the second quarter as the weather improves.
The Company opened a sit down restaurant, Pizzazz, in December 1995, to further
increase awareness of the Domino's brand. The Company did not receive assistance
from Domino's Pizza International, Inc. in the site selection, restaurant layout
and decor, menu design and pricing, or advertising and marketing. The restaurant
was closed in June 1996 after the Company determined that they to discontinue
this line of business as they believed the success of the concept would require
too much management attention to be redirected from the Company's primary
business. Accordingly, the Company reported the losses from Pizzazz discontinued
operations in the 1996 financial statements. The Company has subleased the
property commencing April 1997 and terminating December 2010.
Results of Operations
Comparison of the three month periods ended March 30, 1997, to March 31, 1996
<TABLE>
<CAPTION>
For the Three Months Ended
INCOME STATEMENT DATA March 30, 1997 March 31, 1996
Revenues: (%) (%)
<S> <C> <C>
Company owned stores 13.6 22.1
Commissary Sales 58.5 50.3
Royalty Sales 13.3 13.2
All Other Revenues 14.6 14.4
---- ----
Total Revenues 100.0 100.0
Cost of Sales
Company Owned Stores (1) 61.9 71.8
Commissary/Distribution (1) 86.5 93.8
All Other Cost of Sales (1) 54.2 46.9
---- ----
Total Cost of Sales 74.1 76.0
Gross Margin 25.9 24.0
Administrative (2) 20.6 26.6
Amoritzation/Depreciation (2) 2.8 5.1
Gain on Sale of Fixed Assets (2) -- 5.7
---- -----
Operating Income 2.5 (2.0)
Other Income (2) 0.4 (0.1)
---- -----
Continuing Operations (2) 2.9 (2.1)
Discontinued Operations (2) (1.0) (8.3)
----- -----
Net Income/(Loss) 1.9 (10.4)
</TABLE>
Notes:
(1) as a percentage of respective revenue
(2) as a percentage of total revenue
7
<PAGE>
Revenue
Total revenue for the period ended March 30, 1997 was $6,694,399, an increase of
$1,876,938 (39%) against the same period of 1996. The main constituents of this
increase arose from royalty income which increased by $251,588, commissary sales
which increased by $1,495,274, rental and other income which increased by
$73,413 and computer system sales which increased by $120,974. Sales at Company
owned stores decreased by $ 154,489.
For the period ended March 30, 1997, system wide sales totaled $16,125,000
versus $11,550,000 in the first quarter of 1996. This represents a 39%
improvement from the previous year.
The decrease in comparative sales at Company owned stores resulted primarily
from one less Haagen Dazs unit and the operating of more corporate stores under
the dealer development program than the previous year. The increase in royalty
income and commissary sales resulted almost entirely from the increase in system
wide sales.
Cost and Expenses
The Company experienced an increase in cost of sales against the same period in
1996 from approximately $3.6 million to $5.0 million, an increase of $1,302,693
(36%). The cost of sales as a percentage of commissary sales decreased by 8%
from the same period of the previous year because of better controls to ensure
that Commissary pricing was adjusted for raw material price fluctuations, and
lower distribution cost per delivery. The cost of sales as a percentage of
Company owned stores sales decreased by approximately 10% because of one less
Haagen Dazs unit and the operating of corporate stores under the dealer
development program. The royalty percentage payable to Domino's increased from
the prior year by one tenth of a percent.
Administrative and corporate expenses as a percentage of total revenue decreased
by 6% versus the same period of the previous year. The Company improved
eficiencies and controlled expenses as the franchise system grew.
Income
Income from continuing operations of $192,624 was achieved in the period against
operating loss of $97,851 in the comparable period in 1996. This increase in
profitability resulted from an increase in sales and lower expenses.
Liquidity and Capital Resources
At March 30, 1997, the Company's working capital of $2.0 million compared to
$1.7 million at December 30, 1996 and $2.1 million for the first quarter of
1996. The Company's trade receivable has increased by $232,173 from the same
period of the prior year, in addition loans to franchisees increased by $338,886
from the prior year. The Company's receivable from related parties increased by
$276,692 and inventories and other receivable have increased by $329,492. Total
current liabilities have increased by $724,431 from the same period of the
previous year. The Company believes that its working capital will be sufficient
to satisfy its obligations over the next twelve months.
The Company has started to negotiate on the purchase of land and the
construction of a new commissary and headquarters building. The existing
Commissary will adequately service the dough production needs of existing and
projected new franchisees for the next twelve months. The Company has a general
commitment from National Westminster Bank to provide financing for 70% of the
total estimated cost of $4 million. The Company does not believe that projected
cash flow will be able to support the development of new corporate stores and
the Company's portion of the land/construction costs. The Company is exploring
different ways to raise money for this project.
The Company anticipates it will spend $800,000 to open additional corporate
stores and acquire commissary equipment in 1997. The Company is not obligated to
open any additional Company owned stores by December 1997 under the Master
Franchise Agreement. If the Company's plans change or its assumptions or
estimates prove to be inaccurate, the Company may require additional funds to
achieve increased sales. If such funds are unavailalbe, the Company will have to
reduce its operations to a level consistent with its available funding.
The Company does not anticipate that the loan to Crescent Capital will be repaid
before October 1997.
Exchange Rates
The weighted exchange rate for the three months ended March 30, 1997 ($1.645 per
British pound sterling) was approximately 8% higher than the exchange rate
during the comparable period in 1996 ($1.526 per British pound sterling). This
difference has the effect of improving the Company's results by approximately 8%
when expressed in U.S. dollars.
8
<PAGE>
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.
9
<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.
10
<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 13, 1997 By: /s/ H Michael Bush
H. Michael Bush, President
(Principal Executive Officer and
Principal Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 440,862
<SECURITIES> 0
<RECEIVABLES> 2,220,180
<ALLOWANCES> 0
<INVENTORY> 332,349
<CURRENT-ASSETS> 7,271,812
<PP&E> 2,853,692
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,923,591
<CURRENT-LIABILITIES> 5,272,866
<BONDS> 0
<COMMON> 67,273
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,923,591
<SALES> 908,725
<TOTAL-REVENUES> 6,694,399
<CGS> 4,962,692
<TOTAL-COSTS> 4,962,692
<OTHER-EXPENSES> 1,382,441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (30,073)
<INCOME-PRETAX> 192,624
<INCOME-TAX> 0
<INCOME-CONTINUING> 192,624
<DISCONTINUED> (68,355)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,269
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
