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: March 29, 1998
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 May 15, 1998
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-QSB FIRST QUARTER 1998
INDEX
Part I Page No.
- ------ -------
Financial Information:
Condensed Consolidated Balance Sheets-
March 29, 1998 and December 28, 1997 2
Condensed Consolidated Statements of Operations-
for the Three Months Ended March 29, 1998
and March 30, 1997 3
Condensed Consolidated Statements of Cash Flows-
for the Three Months Ended March 29, 1998
and March 30, 1997 4
Notes to Condensed Consolidated Financial
Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-8
Part II
- -------
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults upon Senior Securities 9
Item 4. Submission of Matters to a Vote
of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
1
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 29, December 28,
1998 1997
---------- ------------
(Unaudited) *
Assets
------
Current assets:
Cash $ 268,173 $ 276,956
Inventory 24,157 28,202
Prepaid expenses and other
current assets 61,777 87,332
---------- ----------
Total current assets 354,107 392,490
Property, plant and equipment, net 318,795 320,294
Other assets:
Security deposits 8,500 8,500
Franchise fees, net - 684
---------- ----------
Total assets $ 681,402 $ 721,968
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current maturities of note
payable, bank $ - $ 62,500
Accounts payable, accrued expenses
and other current liabilities 261,882 259,241
Taxes, other than income taxes 53,441 49,159
Due to Integrated Food
Systems, Inc. 11,284 13,222
---------- ----------
Total current liabilities: 326,607 384,122
Note payable bank, less current
maturities - 26,042
Security deposits payable 6,000 12,274
---------- ----------
Total liabilities: 332,607 422,438
---------- ----------
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) (1,883,210) (1,932,475)
---------- ----------
348,795 299,530
---------- ----------
Total liabilities and
shareholders' equity $ 681,402 $ 721,968
========== ==========
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
-------------------------
March 29, March 30,
1998 1997
---------- ----------
Sales $1,202,456 $1,322,026
Cost of sales 362,116 441,538
---------- ----------
Gross profit 840,340 880,488
---------- ----------
Store labor expenses 317,003 385,392
Store operating and occupancy expenses 299,234 345,402
Advertising and royalty expenses 96,062 105,674
General and administrative expenses 91,549 66,852
Interest expense 211 -
Rental income ( 2,700) ( 2,700)
Income and expense reimbursement arising
from management sub-contract ( 10,284) ( 15,977)
---------- ----------
791,075 884,643
---------- ----------
Net income (loss) $ 49,265 $( 4,155)
========== ==========
Weighted average number of shares
outstanding 8,914,300 8,914,300
========== ==========
Net income (loss) per share $ .01 $ ( - )
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
-------------------------
March 29, March 30,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 49,265 $( 4,155)
--------- ---------
Adjustments to reconcile to net
cash provided (required) by
operating activities
Depreciation and amortization 16,763 26,302
Change in assets and liabilities:
Inventory 4,045 1,228
Prepaid expenses and other
current assets 25,555 ( 5,315)
Due from/to Integrated Food
Systems, Inc. ( 1,938) ( 3,258)
Accounts payable, accrued
expenses and other current
liabilities 2,641 ( 75,821)
Taxes, other than income
taxes 4,282 7,065
--------- ---------
Total adjustments 51,348 ( 49,799)
--------- ---------
Net cash provided (required)
by operating activities 100,613 ( 53,954)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ( 14,580) ( 43,858)
Other ( 6,274) ( 7,758)
--------- ---------
Net cash used by investing
activities ( 20,854) ( 51,616)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note principal payments ( 88,542) -
--------- ---------
Net decrease in cash ( 8,783) (105,570)
CASH, beginning of period 276,956 230,604
--------- ---------
CASH, end of period $ 268,173 $ 125,034
========= ==========
SUPPLEMENTAL DISCLOSURES:
Interest expense paid $ 211 $ -
========= ==========
See accompanying notes to condensed consolidated financial statements.
4
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 at March 29, 1998, and the results of operations and
cash flows for the three-month periods ended March 29, 1998 and March
30, 1997.
2. The condensed consolidated results of operations for the three-month
period ended March 29, 1998, are not necessarily indicative of the
results to be expected for the full year.
3. 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 for the
three-month periods ended March 29, 1998 and March 30, 1997 was $9,684
and $15,377, respectively. The net fee for such periods was accordingly
$10,284 in 1998 and $15,977 in 1997.
The manager has offered to purchase this restaurant from the Company for
$70,000 plus the usual closing adjustments for the store's cash bank,
inventory and prepaid/accrued items. Management anticipates accepting
such offer subject to the execution of a definitive asset purchase
agreement.
4. On April 16, 1998, the Company received a verbal offer to purchase four
of its restaurants (excluding only the managed Empire Boulevard
restaurant) for $900,000. The offer was made by Gary Monie, formerly
the Company's Vice President of Operations. Since resigning this
position in the Fall of 1995, Mr. Monie has continued to provide
restaurant operation supervisory services for the Company, as a
consultant. The offer contemplates that if ultimately consummated, the
purchase will be made by a limited liability company in which Mr. Monie
will be a managing member.
Management is negotiating a definitive contract for the sale of these
four restaurants, which in the aggregate constitute substantially all of
the Company's assets. In addition to the execution of a definitive
agreement, consummation of such sale requires the formal approval of the
board of directors as well as the shareholders of the Company. Such
approval by the shareholders will require the Company to prepare and
file a proxy statement with the Securities and Exchange Commission.
5. Due to available net operating tax loss carryforwards, a provision for
income taxes was not required for the three months ended March 29, 1998.
6. Earnings (loss) per share is based upon the earnings or loss 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 was
not affected by adoption 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. For the three-month periods ended March 29, 1998 and March 30, 1997, the
Company had no components of comprehensive income (loss) other than net
income (loss). Accordingly, comprehensive income (loss) for such
periods equaled net income of $49,265 in 1998 and net loss of $4,155 in
1997.
5
Item 2
- ------
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
- ---------------------
Net sales in the first quarter of 1998 decreased by $119,570 to $1,202,456
from $1,322,026 in the first quarter of 1997, a decrease of 9.0%. All of such
decrease is due to the sale on April 15, 1997 of the Company's Hillside
Avenue, Queens restaurant. For the five restaurants operated throughout both
quarterly periods, sales increased by 2.1% in the aggregate, although
individually three restaurants had sales gains while the other two reported
sales decreases. All of the restaurants benefitted from a price increase of
approximately 7%, implemented in January. Such price increase was the first
by the Company in over three years. The Company's Manhattan location posted a
4.9% gain. When considered in conjunction with the price increase, this
result reflects a minor reduction in customer counts of approximately 2%. The
other restaurants with sales increases were the managed Empire Boulevard
location and the Pennsylvania Avenue, Brooklyn store which had gains of 10.7%
and 5.9%, respectively. Such gain at the managed location reflects increased
customer counts in addition to the price increase, attributable to improved
operations during the winter quarter which is traditionally the poorest in
terms of sales performance for the Company. Operating cash flow at this
managed location, though still a deficit for the quarter, improved by 37%.
(See Note 3 to the Condensed Consolidated Financial Statements). The sales
gain of 5.9% at the Pennsylvania Avenue restaurant, when viewed in conjunction
with the 7% sales increase, indicates this store maintained approximately 99%
of its customer counts. The sub-leased Brooklyn location, the Company's
smallest in terms of sales, had a sales decrease of 18.5%, despite the price
increase. The decrease in customer counts at this store was due to two
related factors: the first being the effect of this restaurant's declining
physical condition and the second being the temporary disruption occasioned by
its remodelling, undertaken in response thereto and completed at the end of
the March 1998 quarter. Management expects significant improvement in this
location's future sales. In the aggregate the three Brooklyn restaurants
posted a net sales increase of 2.4%. The remaining Queens location had a
sales decline of 3.4%. A needed remodelling for this store is scheduled for
the second quarter of fiscal 1998.
Cost of sales declined by $79,422 or 18.0% to $362,116 in 1998 from $441,538
in 1997, consistent with the overall sales decline and the reduction in
operating restaurants from six to five. However as such decline was twice the
decrease in total sales, the effect of the 7% sales price increase in menu
items is evident. As a percentage of sales, cost of sales decreased by 3.3%
to 30.1% from 33.4% one year ago.
Store labor expenses decreased by $68,389 or 17.7% to $317,003 from $385,392
one year ago, again a decrease which almost doubled the sales decrease. As a
percentage of sales, labor decreased by 2.8% to 26.4% in 1998 from 29.2% in
1997. Three-eighths of such percentage improvement was again effected by a
shift in labor mix from managers and assistant managers to crew, some of which
was due to the illness of one manager and the relocation out of the area of
another. The trend in this line item may reverse somewhat in the future with
the return to work of the former and the replacement of the latter. The
improvement in labor costs was also due to reductions in group health and
workers' compensation expenses attributable to recent marked decreases in
claims.
6
Item 2
- ------
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations - (continued)
- ---------------------
Store operating and occupancy expenses decreased by $46,168, or 13.4%, to
$299,234 in 1998 from $345,402 in 1997, outpacing the percentage decline in
sales by approximately fifty percent. As a percentage of sales, these
expenses declined by 1.2% to 24.9% this year from 26.1% one year ago.
Approximately one-half of this improvement occurred in utilities due to an
extremely mild winter. Reduced depreciation charges accounted for the rest of
the cost savings in this category, entirely due to the write-down at the end
of fiscal 1997 of the physical assets of the managed Brooklyn location in
recognition of the impairment loss attributable thereto. After such write-
down, no further depreciation charges are recorded, in accordance with
generally accepted accounting principles.
Advertising and royalty expenses decreased by $9,612 to $96,062 in 1998 from
$105,674 in 1997. As a percentage of sales, these expenses were constant at
8.0%, the contractual minimum required by the franchise agreements.
General and administrative expenses increased by $24,697 or 36.9% to $91,549
in 1998 from $66,852 in 1997. As a percentage of sales, these expenses
increased by 2.5% to 7.6% this year from 5.1% one year ago. Virtually all of
such increase occurred in professional fees reflecting increased audit and
legal fees. Management fees to Integrated Food Systems, Inc. decreased by
$1,000 due to a reduction in the minimum fee effective in February 1997.
Since such date the minimum fee is $24,000 per quarter.
Interest expense of $211 was incurred on the Company's bank debt in 1998,
which was extinguished in January at par. No interest expense was incurred in
1997.
Sub-lease income was constant at $2,700 in each year. The Company has one
continuing sub-lease at the managed Brooklyn location. If that location is
sold, the sub-lease arrangement would be sold with it.
The managed location referred to above had negative cash flow in both the 1998
and 1997 quarters resulting in income and expense reimbursement aggregating
$10,284 and $15,977, respectively. (See Note 3 to the Condensed Consolidated
Financial Statements).
Due to available net operating tax loss carryforwards, a provision for income
taxes was not required for the three months ended March 29, 1998.
Comprehensive income (loss) equaled net income (loss) in each quarterly
period.
7
Liquidity and Capital Resources
- -------------------------------
During the first quarter of 1997, the Company's working capital increased by
$19,132 to $27,500. The improvement arose from operations, which provided
$66,028, less capital expenditures of $14,580, retirement of long-term debt of
$26,042 and reduction in security deposits payable of $6,274.
The Company's intercompany balance with IFS decreased by $1,938 from $13,222
to $11,284. Significant fluctuations in this balance are not expected in the
future.
The Company's cash balance decreased by $8,783 to $268,173. Operating
activities provided $100,613, inclusive of changes in current assets and
liabilities which provided $34,585.
Investing activities required $20,854 of which $14,580 was used for fixed
asset purchases. Financing activities required $88,542, all of which was for
the retirement, at par, of the Company's bank debt.
It is not currently anticipated that any additional proceeds will be realized
from the sale, consummated in April 1997, of the Company's Hillside Avenue,
Queens restaurant. Additional proceeds of between $50,000 and $100,000 are
payable if the purchaser obtains an extension of the restaurant's lease, which
expires on July 31, 1998. However, negotiations to extend the lease have been
unsuccessful to date and any lease extension is presently deemed unlikely.
The Company has received two separate offers to purchase in the aggregate all
five of its restaurants. Such offers, one for the managed location and the
other for the other four, are in the amounts of $70,000 and $900,000,
respectively, plus the usual closing adjustments for the cash banks, inventory
and prepaid/accrued items. (See Notes 3 and 4 to the Condensed Consolidated
Financial Statements). Management is favorably disposed to both offers and is
negotiating purchase and sale contracts with each of the offerors.
If consummated, these sales will leave the Company with no restaurant
operations; accordingly the Company would then, in all likelihood, retire all
of its liabilities and distribute its remaining cash to shareholders in a
return of capital and liquidating dividend. The sale of the four restaurants
requires shareholder approval in addition to board of directors approval.
While the board is expected to approve the sale, shareholder approval requires
a definitive proxy. The Company is presently preparing a preliminary proxy
statement for filing with the Securities and Exchange Commission.
8
PART II. OTHER INFORMATION
- -------- -----------------
Item 1-5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
No reports on Form 8-K were filed during the quarter ended March
29, 1998; however on April 29, 1998, the Company filed a Form 8-K
dated April 16, 1998 reporting the verbal offer it received to
purchase substantially all of its assets.
FAST FOOD OPERATORS, INC.
Date: May 15, 1998 By /s/ Lewis E. Topper
-------------------
Lewis E. Topper
Chairman of the Board,
President, Chief
Executive Officer,
Treasurer and Director,
Principal Financial and
Accounting Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> MAR-29-1998
<CASH> 268,173
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 24,157
<CURRENT-ASSETS> 354,107
<PP&E> 318,795
<DEPRECIATION> 0
<TOTAL-ASSETS> 681,402
<CURRENT-LIABILITIES> 326,607
<BONDS> 0
0
0
<COMMON> 2,232,005
<OTHER-SE> (1,883,210)
<TOTAL-LIABILITY-AND-EQUITY> 681,402
<SALES> 1,202,456
<TOTAL-REVENUES> 1,202,456
<CGS> 362,116
<TOTAL-COSTS> 362,116
<OTHER-EXPENSES> 790,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211
<INCOME-PRETAX> 49,265
<INCOME-TAX> 0
<INCOME-CONTINUING> 49,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,265
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
