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 29, 1998 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 1, 1998 7,034,324 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 29, 1997 to March 29, 1998
INDEX
Part I: FINANCIAL INFORMATION
Item 1 : Financial Statements
Condensed Consolidated Balance Sheet as of March 29, 1998 and December 29,
1997 [Unaudited] 3-4
Condensed Consolidated Statements of Operations for the three month periods
December 29, 1997 to March 29, 1998 and December 30, 1996 to March 30, 1997
[Unaudited] 5
Condensed Consolidated Statement of Stockholders' Equity for the three month
period December 29, 1997 to March 29, 1998 [Unaudited] 6
Condensed Consolidated Statements of Cash Flows for the three month periods
December 29, 1997 to March 29, 1998 and December 30, 1996 to March 30, 1997
[Unaudited] 7
Notes to Condensed Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-12
Part II: OTHER INFORMATION 13
SIGNATURES 14
o o o o o o o o o o
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 29, 1998 AND DECEMBER 29, 1997.
- -------------------------------------------------------------------------------
ASSETS:
Current Assets:
March 29, 1998 December 29, 1997
Cash and Cash Equivalents $1,402,720 $2,610,227
Trade Accounts Receivable - Net 2,003,817 2,050,094
Franchisee Loans 611,570 707,009
Other Receivables 1,295,965 611,690
Inventories 947,609 1,015,651
Prepaid Expenses and Accrued Income 85,176 65,776
Officer Loan Receivable 163,575 148,573
Due from Related Parties [D] 2,917,807 2,347,765
----------- -----------
Total Current Assets 9,428,239 9,556,785
----------- -----------
----------- -----------
Property and Equipment - Net 6,138,300 5,435,818
----------- -----------
Other Assets:
Deposits 328,461 308,318
Intangible Assets 1,063,546 1,079,741
Marketable Securities 388,072 388,072
----------- -----------
Total Other Assets 1,780,079 1,776,131
----------- -----------
----------- -----------
Total Assets $17,346,618 $16,768,734
----------- -----------
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
3
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 29, 1998 AND DECEMBER 29, 1997.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity:
<S> <C> <C>
March 29, 1998 December 29, 1997
Current Liability:
Trade Accounts Payable $3,558,575 $ 2,691,247
Accrued Expenses and Other Payables 1,599,416 1,858,441
Obligations Under Capital Leases 111,604 111,604
Current Portion of Long-Term Debt 181,405 200,629
Taxes Payable 1,004,954 1,042,354
------------ ------------
6,455,954 5,904,275
------------ ------------
Total Current Liabilities
LongTerm Liabilities:
Long Term Debt 1,344,247 1,438,409
Obligations Under Capital Leases 76,843 76,843
------------ ------------
------------ ------------
Total Long Term Liabilities 1,421,091 1,515,252
------------ ------------
Minority Interest 794,737 751,087
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 7,034,324 Shares Issued and
7,024,324 Outstanding at March 1998 70,343 70,343
Additional Paid-in-Capital 6,493,041 6,493,041
Unrealized (Loss) on For-Sale Securities (388,073) (388,073)
Retained Earnings 2,223,556 2,148,616
Shares Held in Company Treasury (7,000) (14,000) (14,000)
Cumulative Foreign Currency Translation Adjustment 289,969 288,193
------------ ------------
Total Stockholders' Equity 8,674,836 8,598,120
------------ ------------
------------ ------------
Total Liabilities and Stockholders' Equity $ 17,346,618 $ 16,768,734
------------ ------------
</TABLE>
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 OPERATIONS
[UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months
December 29, December 30,
1997 to March 1996 to
29, 1998 March 30, 1997
<S> <C> <C>
Revenue:
Sales by Company Owned Stores $ 981,027 $ 908,725
Commissary Sales 4,696,409 3,919,040
Franchise Fees 122,655 133,277
Rental Income 569,011 491,351
Royalty Sales 1,060,352 886,774
Computer Sales 206,338 278,523
Other Operating Income 83,603 76,709
----------- -----------
Total Revenue $ 7,719,397 $ 6,694,399
----------- -----------
Cost of Sales
Company Owned Stores 370,614 562,357
Food and Packaging 4,211,932 3,389,404
Other Operating Expenses 983,332 1,010,931
----------- -----------
Total Cost of Sales $ 5,565,878 $ 4,962,692
----------- -----------
Gross Margin $ 2,153,519 $ 1,731,707
----------- -----------
Administrative Expenses 1,776,463 1,382,441
Depreciation and Amortization
219,402 185,621
----------- -----------
Operating Income/(Loss) 157,654 163,645
Interest Income 85,650 59,052
Interest Expense -- (30,073)
----------- -----------
Income (Loss) Before Income Taxes and Minority Interest 243,304 192,624
Income Taxes 124,715 48,156
Minority Interest 43,650 --
Income from Continuing Operations 74,939 144,468
(Loss) from Discontinued Operations -- (68,355)
----------- -----------
Net Income/(Loss) $ 74,939 $ 76,113
----------- -----------
Earnings/(Loss) Per Share:
From Continuing Operations $ 0.01 $ 0.02
From Discontinued Operations -- (0.01)
----------- -----------
$ 0.01 $ 0.01
----------- -----------
Weighted Average Number of Shares Outstanding 7,034,324 6,727,324
----------- -----------
</TABLE>
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
5
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional (Loss) Currency Total
Number of Paid-in Retained on For Sale Translation Treasury Stockholders'
Shares Amount Capital Earnings Securities Adjustments Stock Equity
<S> <C> <C> <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 -- -- -- -- -- 218,778 -- 218,778
Net [Loss] for the fifty-two weeks
ended December 29, 1996 -- -- -- (139,808) -- -- -- (139,808)
--------- ------- ---------- ---------- --------- -------- ------- ----------
Balance - December 29, 1996 6,727,324 $67,273 6,489,611 $372,090 -- $250,400 -- $7,179,374
Issue of Shares to Domino's Pizza
International, Inc. 300,000 3,000 -- -- -- -- -- 3,000
Redeemed Employee Options 7,000 70 3,430 -- -- -- -- 3,500
Unrealized gain/(loss)
On Available-for-Sale Securities -- -- -- -- (388,073) -- -- (388,073)
Foreign Currency Translation
Adjustment -- -- -- -- -- 37,793 -- 37,793
Minority Share of Reserves -- -- -- (569,558) -- -- -- (569,558)
Purchase Shares for Treasury -- -- -- -- -- -- (14,000) (14,000)
Net Income for the fifty-two weeks
ended December 28, 1997 -- -- -- 2,346,084 -- -- -- 2,346,084
--------- ------- ---------- ---------- --------- -------- ------- ----------
Balance - December 28, 1997 7,034,324 $70,343 $6,493,041 $2,148,616 $(388,073) $288,193 (14,000) $8,598,120
========= ======= ========== ========== ========= ======== ======= ==========
Net Income for the period
December 29, 1997 to March 29, 1998 -- -- -- 74,939 -- -- -- 74,939
Foreign Currency Translation
Adjustment -- -- -- -- -- 1,776 -- 1,776
Balance - March 29, 1998 7,034,324 $70,343 $6,493,041 $2,223,556 $(388,073) $289,969 (14,000) $8,674,836
========= ======= ========== ========== ========= ======== ======= ==========
</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.
6
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months
December 29, December 28,
1997 to 1996 to
March 29, 1998 March 30, 1997
<S> <C> <C>
Net Cash From Continuing Operations $ 379,833 $ 155,287
Net Cash From Discontinued Operations -- (68,355)
----------- -----------
Net Cash - Operating Activities 379,833 86,932
Investing Activities:
Purchase of Property, Equipment and Capitalized Costs (1,091,485) (344,927)
Proceeds on Disposal of Property and Equipment 178,526 44,585
Advances to Officer -- --
Loan to Related Party (570,042) 128,099
----------- -----------
Net Cash - Investing Activities (1,474,324) (172,243)
----------- -----------
Financing Activities:
New Bank Loan 54,617 --
Payment of Debt (168,002) (79,049)
Proceeds from Sale of Common Stock -- --
Repayment of Capital Leases -- (40,594)
----------- -----------
Net Cash - Financing Activities (113,385) (119,643)
----------- -----------
Effect of Exchange Rate Changes on Cash 369 (18,307)
Net [Decrease] in Cash and Cash Equivalents (1,207,506) (223,261)
Cash and Cash Equivalents - Beginning of Periods 2,610,227 664,123
----------- -----------
Cash and Cash Equivalents - End of Periods 1,402,720 $ 440,862
----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid $ -- $ (23,905)
Taxes Paid $ -- $ --
Supplemental Disclosures of Non-Cash Financing
and Investing Activities:
Assignment of Consulting Agreements $ -- $ --
Fixed Assets acquired under Capital leases $ -- $ 29,889
$ -- $ --
</TABLE>
The Accompanying Notes are an Integral Part of these Condensed Consolidated
Financial Statements.
7
<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 28, 1997, as filed with the Securities and Exchange
Commission.
(B) Basis of Reporting
The balance sheet as of March 29, 1998, the statements of operations
for the period December 29, 1997 to March 29, 1998, and for the period
December 30, 1996 to March 30, 1997, the statement of stockholders'
equity for the period December 29, 1997 to March 29, 1998 and the
statements of cash flows for the period December 29, 1997 to March 29,
1998 and 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 29, 1998, 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 28, 1997.
Certain reclassifications may have been made to the 1997 financial
statements to conform to classification used in 1998.
(C) Due from Related Parties
Crescent Capital owns 4,700,000 share or approximately 67% of
International Franchise Systems, Inc. outstanding stock. The Company
has loaned funds to Crescent Capital of $2,917,807. These loans are
interest bearing and principal and interest are payable on or before
September 29, 1998.
(D) Related Party Transactions
On March 11, 1998, the Company received an offer from IFS Acquisition
Corporation, an affiliate of Crescent Capital, Inc., the Company's
largest shareholder, to participate in a merger which would result in
all of the shareholders other than Crescent Capital, Inc. receiving
$2.80 per share for each share of the Company's stock. The Board of
Directors named a Special Committee of directors, comprised of Bernard
Goldman and David Coffer, to consider the offer. The Special Committee
hired legal and financial advisors and is considering the offer. On
April 17, 1998, the Special Committee announced that an agreement had
been reached on the financial terms of the merger and that the public
shareholders would receive $3.60 per share if the transaction is
completed. The proposed merger is subject to, among other things (i)
execution of a definitive merger agreement containing customary
representations, warranties, covenants and conditions (including a
financial condition), and (ii) compliance with all applicable
regulatory and governmental requirements. Accordingly, there can be no
assurance that the proposed merger will be consummated.
o o o o o o o o o o
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations
Overview
Income before taxes and minority interest for the thirteen week period was
higher than the same period of the previous year due to more stores open, an
increase in average weekly sales, and improved commissary efficiencies ($243,304
in 1998 versus $192,624 in 1997). During the thirteen week period ended March
29, 1998, the Company opened 5 delivery units which brings the total to 159
units operating in the United Kingdom and Ireland. Domino units opened include
153 delivery units, (12 that are Company owned) and 6 units that are "call and
collect".
In a move to strengthen IFS's investment value and future growth potential, in
June 1997, the Company sold a 15% interest in its Domino's subsidiary for $3.125
million. After expenses and taxes, the Company realized a net profit of $2.0
million from the sale. The Company is using the proceeds from the sale to help
finance a new commissary and administrative center to support continuing rapid
growth of Domino's in the UK. In connection with the sale, the purchaser has an
option to acquire an additional 5% interest in the company's Domino's
subsidiary.
In December 1997, the Company sold the last two Haagen Dazs units. The first
quarter 1997 trading loss is shown as discontinued operations in the 1997 first
quarter financial statements.
The Company opened a sit down restaurant, Pizzazz, in December 1995, to further
increase awareness of the Domino's brand. The restaurant was closed in June 1996
after the Company determined that 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 as a loss from
discontinued operations in the 1997 first quarter financial statements. The
Company subleased the property commencing April 1997.
9
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended
Income Statement Data March 29, 1997 March 28, 1997
Revenues: (%) (%)
<S> <C> <C>
Sales by Company Owned Stores 12.7 13.6
Commissary Sales 60.8 58.5
Franchise Fees 1.6 2.0
Rental Income 7.4 7.3
Royalty Sales 13.7 13.3
Computer Sales 2.7 4.2
All Other Revenues 1.1 1.1
----- -----
Total Revenues 100.0 100.0
Cost of Sales:
Company Owned Stores and Delivery Expenses(1)
64.7 61.9
Commissary Sales (1) 89.7 86.5
Other Cost of Sales (1) 48.2 54.2
----- -----
Total Cost of Sales (2) 73.3 74.1
Gross Margin 24.5 25.9
Administrative (2) 19.6 20.6
Amortization/Depreciation (2) 2.8 2.8
Gain On Fixed Assets (2) -- --
----- -----
Operating Income (2) 2.1 2.5
Other Income (2) 1.1 0.4
----- -----
Continuing Operations (2) 3.2 2.9
Discontinued Operations - (Loss) (2) -- (1.0)
</TABLE>
Notes:
(1) as a percentage of respective revenue
(2) as a percentage of total revenue
Comparison of the Thirteen Week Periods December 29, 1997 to March 29, 1998 and
December 30, 1996 to March 30, 1997.
Revenue
Total revenue for the thirteen week period ended March 29, 1998 was $7.7
million, an increase of 15% against the same period of 1997. The main
constituents of this increase arose from royalty income which increased by
approximately $0.2 million, and commissary sales which increased by $0.8
million.
For the period ended March 29, 1998, system wide sales totalled $20.1 million
versus $16.1 million in the first quarter of 1997. This represents a 20%
improvement from the previous year. This increase in system-wide sales is the
primary reason for the increase in royalty income and commissary sales. Sales at
Company owned stores increased by approximately $70,000 for the period ended
March 29, 1998 as compared to the period ended March
10
<PAGE>
30, 1997. The increase was attributed to more open corporate units (12 versus
11) and better sales performance at its flagship store in Milton Keynes.
Cost and Expenses
The Company experienced an increase in cost of sales against the same thirteen
week period in 1997 from approximately $4.9 million to $5.6, an increase of 12%.
The cost of sales as a percentage of commissary sales was higher to the same
period of the previous year (89.7% vs 86.5%) primarily because of higher
distribution costs and lower margin on cheese. The cost of sales as a percentage
of Company owned store sales increased from 61.9% in the same period in 1997 to
64.7% in 1998. This is the result of new stores and under-performing stores
acquired in the first quarter of 1998.
Income
Operating income of $157,654 was achieved in the period against operating income
of $163,645 in the comparable period in 1997. This decrease in profitability
resulted from an increase in operating and administrative expense that offset
the improved gross margin results.
Liquidity and Capital Resources
At March 29, 1998, the Company's working capital of $3.0 million compared to
$2.0 million at March 30, 1997, and $3.7 million at December 29, 1997. The
Company's trade receivable has decreased by $216,000 from the same period of the
prior year as the Company improved its credit collection controls. The Company's
receivable from related parties increased by $1,174,000 and inventories and
other receivables have increased by $540,000. Total current liabilities have
increased by $1.2 million from the same period of the previous year. The
principle increase in current liabilities is related almost entirely to the
accrual for expenses and taxes related to the income earned in the UK.
The Company anticipates it will spend $500,000 to open additional corporate
stores and acquire additional commissary equipment in 1998. The Company is not
obligated to open any additional Company owned stores through the end of 1998
under the Master Franchise Agreement.
To support the Company's continuing growth, the Company is constructing a new
administrative office and new commissary. The Company estimates the cost of the
new facility to be approximately 3.4 million pound sterling ($5.5 million). The
Company has secured financing from National Westminster Bank for approximately
70% of the total cost. The building construction cost will be financed over 15
years at a fixed rate interest rate of 8.75%. The equipment will be financed
over a 5 year lease. The Company believes its existing commissary will
adequately service the dough production needs of existing and projected new
franchisees for the next twelve months. The Company believes it can finance its
obligations from existing cash balances and projected cash flows. The new
facility is forecasted to open in August 1998.
The Company does not anticipate that the loan to Crescent Capital will be repaid
before September 1998.
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 unavailable, the Company will have to reduce its operations to
a level consistent with its available funding.
11
<PAGE>
Exchange Rate
The weighted exchange rate for the thirteen weeks ended March 29, 1998 ($1.6354
per British pound sterling) was approximately 1% lower than the exchange rate
during the comparable period in 1997 ($1.645 per British pound sterling).
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.
12
<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. Exhibits
(a) Exhibits
None.
(b) Reports on Form 8-K
March 12, 1998 Appointment of Ernst & Young as Auditors
13
<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, 1998 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> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 1,402,720
<SECURITIES> 388,072
<RECEIVABLES> 2,003,817
<ALLOWANCES> 0
<INVENTORY> 947,609
<CURRENT-ASSETS> 9,428,239
<PP&E> 6,138,300
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,346,618
<CURRENT-LIABILITIES> 6,455,954
<BONDS> 0
<COMMON> 70,343
0
0
<OTHER-SE> 2,223,556
<TOTAL-LIABILITY-AND-EQUITY> 17,346,618
<SALES> 7,719,397
<TOTAL-REVENUES> 7,719,397
<CGS> 5,565,878
<TOTAL-COSTS> 5,565,878
<OTHER-EXPENSES> 1,776,463
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 243,304
<INCOME-TAX> 124,715
<INCOME-CONTINUING> 74,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,939
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
