SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 28, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission file number: 0-10213
-------
FAST FOOD OPERATORS, INC.
(Exact name of small business issuer as specified in its charter)
New York 13-2974867
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
42-40 Bell Boulevard, Bayside, New York 11361
(Address of principal executive offices) (zip code)
(718) 229-1113
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities 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 / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by court.
Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November
11, 1997
Common Stock, $.01 par value 8,914,300 Shares
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES / / NO /X/
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
FORM 10-Q THIRD QUARTER 1997
INDEX
-----
PART I PAGE NO.
- ------ -------
Financial Information:
Condensed Consolidated Balance Sheets-
September 28, 1997 and December 29, 1996 2
Condensed Consolidated Statements of
Operations-for the Three and Nine Month
Periods Ended September 28, 1997 and
September 29, 1996 3-4
Condensed Consolidated Statements of
Cash Flows-for the Nine Month Periods
Ended September 28, 1997 and
September 29, 1996 5-6
Notes to Condensed Consolidated Financial
Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II
- -------
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote
of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, December 29,
1997 1996
------------ ------------
(Unaudited) *
Assets
------
Current assets:
Cash $ 232,660 $ 230,604
Inventory 27,445 35,905
Prepaid expenses and other
current assets 31,628 60,183
---------- ----------
Total current assets 291,733 326,692
Property, plant and equipment, net 477,219 484,775
Other assets:
Franchise fees, net 1,042 2,917
Deferred costs 9,934 11,090
Security deposits 8,500 13,500
---------- ----------
Total assets $ 788,428 $ 838,974
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current maturities of note
payable, bank $ 62,500 -
Due to Integrated Food
Systems, Inc. 11,526 $ 16,683
Accounts payable, accrued expenses
and other current liabilities 202,187 338,887
Taxes payable 57,385 54,526
Litigation settlement payable - 143,500
---------- ----------
Total current liabilities: 333,598 553,596
Note payable bank, less current
maturities 36,458 -
Security deposits payable 9,318 18,758
---------- ----------
Total liabilities: 379,374 572,354
---------- ----------
Shareholders' equity -
Common stock - $.01 par value;
authorized 10,000,000 shares;
issued and outstanding
8,914,300 shares 89,143 89,143
Additional paid-in capital 2,142,862 2,142,862
Retained earnings (deficit) (1,822,951) (1,965,385)
---------- ----------
409,054 266,620
---------- ----------
Total liabilities and
shareholders' equity $ 788,428 $ 838,974
========== ==========
See accompanying notes to condensed consolidated financial statements.
*Condensed from audited financial statements.
2
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 28, September 29,
1997 1996
------------ ------------
Sales $1,349,196 $1,502,519
Cost of sales 432,934 519,286
---------- ----------
Gross profit 916,262 983,233
---------- ----------
Store labor expenses 349,801 381,884
Store operating and occupancy expenses 303,728 386,906
Advertising and royalty expenses 107,326 121,205
General and administrative expenses 70,690 51,442
Interest expense (income) 2,693 ( 161)
Rental income ( 2,700) ( 7,291)
---------- ----------
831,538 933,985
---------- ----------
Income before income taxes 84,724 49,248
Provision for income taxes 2,000 1,000
---------- ----------
Net income $ 82,724 $ 48,248
========== ==========
Weighted average number of shares
outstanding 8,914,300 8,914,300
========== ==========
Net income per share $ .01 $ .01
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
September 28, September 29,
1997 1996
------------ ------------
Sales $3,999,933 $3,993,976
Cost of sales 1,302,394 1,321,412
---------- ----------
Gross profit 2,697,539 2,672,564
---------- ----------
Store labor expenses 1,088,253 1,078,911
Store operating and occupancy expenses 948,231 1,070,130
Advertising and royalty expenses 319,402 321,177
General and administrative expenses 226,679 235,144
Interest expense (income) 5,525 ( 161)
Rental income ( 8,100) ( 41,137)
Gain of sale of restaurant ( 13,908) -
Income and expense reimbursement
arising from management sub-contract ( 15,977) -
---------- ----------
2,550,105 2,664,064
---------- ----------
Income before income taxes 147,434 8,500
Provision for income taxes 5,000 1,000
---------- ----------
Net income $ 142,434 $ 7,500
========== ==========
Weighted average number of shares
outstanding 8,914,300 8,914,300
========== ==========
Net income per share $ .02 $ -
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 28, September 29,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 142,434 $ 7,500
--------- ---------
Adjustments to reconcile to net
cash provided (used) by operating
activities
Depreciation and amortization 72,992 85,965
Gain on sale of restaurant ( 13,908) -
Change in assets and liabilities:
Inventory 4,729 2,837
Prepaid expenses and other
current assets 21,905 92,639
Due from/to Integrated Food
Systems, Inc. ( 5,157) 167,328
Accounts payable, accrued
expenses and other current
liabilities (136,700) ( 89,142)
Taxes payable 2,859 6,824
Litigation settlement payable (143,500) -
Security deposits ( 4,440) 16,884
--------- ---------
Total adjustments (201,220) 283,335
--------- ---------
Net cash provided (used) by
operating activities ( 58,786) 290,835
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ( 78,497) ( 86,280)
Proceeds from sale of restaurant 41,331 -
Other ( 950) -
--------- ---------
Net cash used by investing
activities ( 38,116) ( 86,280)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loan proceeds 125,000 -
Bank loan repayments ( 26,042) -
--------- ---------
Net cash provided by financing
activities 98,958 -
--------- ---------
Net increase in cash 2,056 204,555
CASH, beginning of period 230,604 106,569
--------- ---------
CASH, end of period $ 232,660 $ 311,124
========= =========
See accompanying notes to condensed consolidated financial statements.
5
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 28, September 29,
1997 1996
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 5,525 $ -
========= =========
Income taxes $ - $ 17,000
========= =========
Non-cash investing and financing
activities:
Net book value of property and
equipment sold $ 16,092 $ -
========= =========
Other restaurant assets sold:
Inventory $ 3,731 $ -
========= =========
Prepayments $ 6,650 $ -
========= =========
See accompanying notes to condensed consolidated financial statements.
6
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of
September 28, 1997, and the results of operations and cash
flows for the three and nine month periods ended September 28,
1997 and September 29, 1996.
2. The condensed consolidated results of operations for the three
and nine month periods ended September 28, 1997, are not
necessarily indicative of the results to be expected for the
full year.
3. On April 15, 1997 the sale of the Hillside Avenue restaurant
in Queens was consummated as of the close of business on the
previous day. Such sale reduced the Company's restaurants to
five. The Company received gross initial proceeds of $41,331,
including closing adjustments of $11,331. The Company may
receive further proceeds in the event the buyer obtains an
extension of the lease. For any extension of the lease, the
Company will receive an additional $50,000. For extensions of
the lease in excess of five years, the Company will receive an
additional $10,000 per year for a maximum of five additional
years. The Company realized a gain on the sale of $13,908.
4. On April 21, 1997, the Company paid the litigation settlement
to the Host Marriott Corporation in the amount of $143,500.
The Company funded such payment principally from the proceeds
of a $125,000 loan from BSB Bank and Trust Company. The loan
is repayable in 24 equal installments of $5,208 plus interest
at 10% per annum.
5. The Company's Empire Boulevard Restaurant in Brooklyn is
managed by an unrelated party pursuant to a management
agreement. The agreement provides for the manager to receive
the restaurant's net cash flow and for the Company to receive
a monthly fee equal to the greater of $200 per month or five
percent of such cash flow. If monthly cash flow is negative,
the manager must pay the Company the amount of negative cash
flow in addition to the monthly minimum fee. Negative cash
flow occurred for the first three months of fiscal 1997 in the
amount of $15,377. Such negative cash flow at this managed
restaurant gave rise to an income item totalling $15,977,
which included the Company's minimum fee for the first quarter
of $600. For the second three months of fiscal 1997, the
restaurant was cash flow positive, and the fee retained by the
manager, net of the $600 minimum fee to the Company for such
period, was $3,060. For the third three months of fiscal
1997, the restaurant was cash flow positive, and the fee
retained by the manager, net of the $600 minimum fee to the
Company for such period, was $3,477. The fee amounts for the
second and third quarters are reported in general and
administrative expenses as is the management fee paid to
Integrated Food Systems, Inc.
6. Per share data is based upon the income for the period divided
by the weighted average number of common shares outstanding
during the period. The Company has no potentially dilutive
securities outstanding. Accordingly, the Company's per share
data will not be affected by application of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share,"
issued in February 1997 and effective for annual and interim
periods ending after December 15, 1997.
7
Item 2
- ------
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
- ---------------------
Net sales for the quarter ended September 28, 1997 decreased by
$153,323 to $1,349,196 from $1,502,519 in 1996, a decrease of
10.2%, primarily attributable to the sale on April 15, 1997 of the
Hillside Avenue, Queens restaurant. Sales for the five restaurants
which were operated throughout both the 1997 and 1996 quarters
increased by $11,368, or 0.8%, to $1,349,196 in 1997 from
$1,337,828 in 1996. The increase in same-store sales was due
principally to a sales gain of 4.9% at the Pennsylvania Avenue
location, due largely to increased customer counts following its
recent remodelling. The three Brooklyn locations had an aggregate
sales gain of 2.2% Sales at the Company's Manhattan location, its
sales leader, had a very slight decrease of 0.3%, following several
quarters of significant sales gains. The continuing Queens
location had a slight sales decrease of 0.6% for the quarter. This
location should benefit from a remodelling scheduled for the first
quarter of 1998. For the nine-month, year-to-date period, total
sales increased by $5,957, or 0.1%, to $3,999,933 in 1997 from
$3,993,976 in 1996, while same-store sales increased by $287,529,
or 8.1%, to $3,829,879 in 1997 from $3,542,350 in 1996.
Cost of sales decreased by $86,352, or 16.6%, to $432,934 for the
quarter and by $19,018, or 1.4%, to $1,302,394 for the nine months.
Such decreases significantly exceeded the decreases in total sales.
As a percentage of sales, cost of sales decreased by 2.5% to 32.1%
for the quarter and by 0.5% to 32.6% for the nine months. These
improvements reflect better operational control over food costs
arising from recently-installed, new computerized register systems
as well as the effects of television advertising aimed at high-end
(higher gross profit) menu items this quarter, compared to low-end
(higher food cost) menu items last year.
Store labor expenses decreased by $32,083, or 8.4%, to $349,801 for
the quarter but increased by $9,342, or 0.9%, to $1,088,253 for the
nine months. As a percentage of sales, labor increased by 0.5% to
25.9% for the quarter and by 0.2% to 27.2% for the nine months.
Such increases were due to a $.40 increase in the minimum wage to
$5.15, effective September 1, 1997.
Store operating and occupancy expenses decreased by $83,178 to
$303,728 for the quarter and by $121,899 to $948,231 for the nine
months, decreases of 21.5% and 11.4%, respectively. As a
percentage of sales, they decreased by 3.3% to 22.5% for the
quarter, and by 3.1% to 23.7% for the nine month period. The
decrease is principally attributable to reduced insurance and
utility costs.
Advertising and royalty expenses were constant at approximately
8.0% of sales for all periods, reflecting the Company's contractual
obligations as franchisee.
General and administrative expenses, including management fees,
increased by $19,248, or 37.4%, to $70,690 for the quarter but
decreased by $8,465, or 3.6%, to $226,679 for the nine months.
Management fees for the managed Empire Boulevard location in
Brooklyn decreased by $251 for the quarter and by $3,530 for the
nine months. The agreement commenced on April 1, 1996. No
management fees were earned during the first quarter of 1997. For
the nine months, an income item arose as a result of a
reimbursement from the manager required under the agreement in the
amount of $15,377, credited during the first quarter. (See Note 5
to the Condensed Consolidated Financial Statements). Management
fees to IFS decreased by $3,000 for the quarter and by $5,000 for
the nine months, reflecting changes made to the minimum annual fee
over the last two years. As of January 26, 1997, such minimum
annual fee is $96,000.
8
Item 2
- ------
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations (continued)
- ---------------------
As a percentage of sales, general and administrative expenses
increased by 1.8% to 5.2% for the quarter, of which approximately
one-half is due to increased costs for certain corporate overhead
items and one-third is due to reduced miscellaneous income credited
to this account. The balance of the increase is due to
individually immaterial items. For the nine months, these costs
decreased by 0.2% to 5.7% of sales, comprised of the decrease in
management fees of 0.1% and a net decrease of 0.1% of sales in
other individually insignificant items.
The Company had interest expense of $2,693 for the third quarter
and $5,525 for the nine months, incurred on its new bank loan.
Such loan was used to fund most of the Marriott litigation
settlement. (See Liquidity and Note 4 to the Condensed
Consolidated Financial Statements). The Company had no interest
expense in 1996.
Rental income decreased substantially for both the quarterly and
year-to-date periods due to the termination of a sub-lease on
August 1, 1996. The Company presently has one sub-lease, yielding
$900 per month.
The Company gained $13,908 on the sale of the Hillside Avenue,
Queens restaurant, consummated on April 15, 1997. There were no
restaurants sold in 1996. (See Note 3 to the Condensed
Consolidated Financial Statements).
The Company had pre-tax income for all periods presented requiring
tax provisions of $2,000 and $5,000 for the current quarter and
year-to-date periods, respectively. A $1,000 provision was made
for the third quarter and nine-month periods of 1996.
LIQUIDITY
During the first nine months of 1997, the Company's working capital
deficit decreased by $185,039 to $41,865. The decrease in the
deficit arose from working capital provided by operations of
$201,518, net long-term bank proceeds of $36,458 and proceeds from
the sale of the Hillside Avenue, Queens restaurant of $30,000,
excluding closing adjustments, less property acquisition of $78,497
and security deposit repayments of $4,440.
The Company's intercompany balance with IFS decreased by $5,157
from $16,683 to $11,526. Significant fluctuations in this balance
are not expected in the future.
The Company's cash balance increased by $2,056 to $232,660.
Operations required $58,786 after changes in current assets and
liabilities required $260,304.
The Company received initial gross proceeds from the sale of the
Hillside Avenue, Queens Restaurant of $41,331 on April 15, 1997.
Conditioned upon the signing of a lease extension which is sought
by the purchaser, the Company will receive an additional $50,000 to
$100,000. (See Note 3 to the Condensed Consolidated Financial
Statements). After investing out-flows of $79,447, principally for
property acquisitions, investing activities required net out-flows
of $38,116.
The Company settled the Host Marriott litigation on April 21, 1997
by the payment of $143,500 in cash. The Company borrowed $125,000
from the BSB Bank and Trust Company to fund most of such payment.
The loan, which is repayable in monthly installments over two years
with interest at 10%, may be prepaid without penalty. Bank loan
repayments of $26,042 reduced net financing in-flows to $98,958.
In the event the Company receives additional proceeds from the
Hillside Restaurant sale, the Company may apply such proceeds to a
loan prepayment. As the Company's restaurant operations are now
cash flow positive, the Company anticipates being able to satisfy
its cash flow requirements. Future return of capital distributions
are also a possibility.
9
PART II. OTHER INFORMATION
- ------- -----------------
Item 1-5. Not Applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None
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.
FAST FOOD OPERATORS, INC.
Date: November 11, 1997 By \s\ Lewis E. Topper
-------------------
Lewis E. Topper
Chairman of the Board,
President, Chief
Executive Officer,
Treasurer and Director,
Principal Financial and
Accounting Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> SEP-28-1997
<CASH> 232,660
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 27,445
<CURRENT-ASSETS> 291,733
<PP&E> 477,219
<DEPRECIATION> 0
<TOTAL-ASSETS> 788,428
<CURRENT-LIABILITIES> 333,598
<BONDS> 0
0
0
<COMMON> 2,232,005
<OTHER-SE> (1,822,951)
<TOTAL-LIABILITY-AND-EQUITY> 788,428
<SALES> 3,999,933
<TOTAL-REVENUES> 3,999,933
<CGS> 1,302,394
<TOTAL-COSTS> 1,302,394
<OTHER-EXPENSES> 2,544,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,525
<INCOME-PRETAX> 147,434
<INCOME-TAX> 5,000
<INCOME-CONTINUING> 142,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,434
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
