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: June 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-10213
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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 August 14, 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-Q SECOND QUARTER 1998
INDEX
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PART I PAGE NO.
- ------ -------
Financial Information:
Condensed Consolidated Balance Sheets-
June 28, 1998 and December 28, 1997 2
Condensed Consolidated Statements of
Operations-for the Three and Six Month
Periods Ended June 28, 1998 and June 29, 1997 3-4
Condensed Consolidated Statements of
Cash Flows-for the Six Month Periods
Ended June 28, 1998 and June 29, 1997 5-6
Notes to Condensed Consolidated Financial
Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
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
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 28, December 28,
1998 1997
---------- ------------
(Unaudited) *
Assets
------
Current assets:
Cash $ 368,198 $ 276,956
Inventory 26,872 28,202
Prepaid expenses and other
current assets 47,573 87,332
---------- ----------
Total current assets 442,643 392,490
Property, plant and equipment, net 310,657 320,294
Other assets:
Franchise fees, net 67 684
Deferred costs - -
Security deposits 8,500 8,500
---------- ----------
Total assets $ 761,867 $ 721,968
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current maturities of note
payable, bank $ - $ 62,500
Due to Integrated Food
Systems, Inc. 12,275 13,222
Accounts payable, accrued expenses
and other current liabilities 241,512 259,241
Taxes payable 56,674 49,159
---------- ----------
Total current liabilities: 310,461 384,122
Note payable bank, less current
maturities - 26,042
Security deposits payable 6,000 12,274
---------- ----------
Total liabilities: 316,461 422,438
---------- ----------
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) (1,786,599) (1,932,475)
---------- ----------
445,406 299,530
---------- ----------
Total liabilities and
shareholders' equity $ 761,867 $ 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
June 28, June 29,
1998 1997
---------- ----------
Sales $1,382,718 $1,328,711
Cost of sales 414,490 427,922
---------- ----------
Gross profit 968,228 900,789
---------- ----------
Store labor expenses 359,112 353,060
Store operating and occupancy expenses 305,320 299,101
Advertising and royalty expenses 110,608 106,402
General and administrative expenses 98,053 89,137
Interest expense - 2,832
Rental income ( 2,700) ( 2,700)
Gain of sale of restaurant - (13,908)
Income and expense reimbursement
arising from management sub-contract ( 2,776) -
---------- ----------
867,617 833,924
---------- ----------
Income before income taxes 100,611 66,865
Provision for income taxes 4,000 3,000
---------- ----------
Net income $ 96,611 $ 63,865
========== ==========
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)
Six Months Ended
June 28, June 29,
1998 1997
---------- ----------
Sales $2,585,174 $2,650,737
Cost of sales 776,606 869,460
---------- ----------
Gross profit 1,808,568 1,781,277
---------- ----------
Store labor expenses 676,115 738,452
Store operating and occupancy expenses 604,554 644,503
Advertising and royalty expenses 206,670 212,076
General and administrative expenses 188,602 155,989
Interest expense 211 2,832
Rental income ( 5,400) ( 5,400)
Gain of sale of restaurant - ( 13,908)
Income and expense reimbursement
arising from management sub-contract ( 13,060) ( 15,977)
---------- ----------
1,657,692 1,718,567
---------- ----------
Income before income taxes 150,876 62,710
Provision for income taxes 5,000 3,000
---------- ----------
Net income $ 145,876 $ 59,710
========== ==========
Weighted average number of shares
outstanding 8,914,300 8,914,300
========== ==========
Net income per share $ .02 $ .01
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 28, June 29,
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 145,876 $ 59,710
--------- ---------
Adjustments to reconcile to net
cash provided (used) by operating
activities
Depreciation and amortization 33,033 49,647
Gain on sale of restaurant - ( 13,908)
Change in assets and liabilities:
Inventory 1,330 3,836
Prepaid expenses and other
current assets 39,759 17,361
Due from/to Integrated Food
Systems, Inc. ( 947) 5,530
Accounts payable, accrued
expenses and other current
liabilities ( 17,729) (116,582)
Taxes payable 7,515 ( 126)
Litigation settlement payable - (143,500)
Security deposits - ( 7,758)
--------- ---------
Total adjustments 62,961 (205,500)
--------- ---------
Net cash provided (used) by
operating activities 208,837 (145,790)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ( 22,779) ( 70,497)
Proceeds from sale of restaurant - 41,331
Other ( 6,274) ( 950)
--------- ---------
Net cash used by investing
activities ( 29,053) ( 30,116)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loan proceeds - 125,000
Bank loan repayments ( 88,542) ( 10,417)
--------- ---------
Net cash provided (used) by
financing activities ( 88,542) 114,583
--------- ---------
Net increase (decrease) in cash 91,242 ( 61,323)
CASH, beginning of period 276,956 230,604
--------- ---------
CASH, end of period $ 368,198 $ 169,281
========= =========
See accompanying notes to condensed consolidated financial statements.
5
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 28, June 29,
1998 1997
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 211 $ 2,120
========= =========
Income taxes $ - $ -
========= =========
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 at June 28, 1998, and the results of operations and
cash flows for the three and six month periods ended June 28, 1998 and
June 29, 1997.
2. The condensed consolidated results of operations for the three and six
month periods ended June 28, 1998, are not necessarily indicative of the
results to be expected for the full year.
3. 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 purchase offer was made by Mr. Monie on behalf of a
limited liability company to be formed.
The parties have signed a definitive contract for the sale of these four
restaurants, which in the aggregate constitute substantially all of the
Company's assets. Such sale requires the approval of the Company's
franchisor as well as the shareholders of the Company. In connection
therewith, the Company has filed a preliminary proxy statement with the
Securities and Exchange Commission.
4. 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
six month periods ended June 28, 1998 and June 29, 1997 was $11,860 and
$14,777, respectively. The net fee for such periods was accordingly
$13,060 in 1998 and $15,977 in 1997.
On July 8, 1998, the Company entered into an asset purchase agreement
for the sale of this restaurant to the Restaurant's Manager. Pursuant
thereto, the Company has agreed to sell the Restaurant for $70,000 in
cash, plus the usual closing adjustments for the cash bank, inventory
and prepaid/accrued items. The sale, which will result in neither
significant gain nor loss to the Company, is awaiting approval by the
Company's franchisor, expected by the latter part of August.
5. Due to available net operating tax loss carryforwards, only a minor
provision for income taxes has been provided for the three and six
months periods ended June 28, 1998 and June 29, 1997.
6. Earnings 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 has not been
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 and six month periods ended June 28, 1998 and June 29,
1997, the Company had no components of comprehensive income other than
net income. Accordingly, comprehensive income equaled net income for
such periods.
7
Item 2
- ------
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
- ---------------------
Net sales for the quarter ended June 28, 1998 increased by $54,007, or 4.1%,
to $1,382,718 from $1,328,711 for the quarter ended June 29, 1997. Excluding
the results of the Hillside Avenue, Queens store sold on April 15, 1997, the
increase for the five continuing locations was 6.1%. All stores except the
sub-leased Brooklyn location reported increased sales, ranging from 6.5% for
the Manhattan restaurant, the Company's largest, to 8.3% for the managed
Brooklyn location, which the Company now has agreed to sell subject to
franchisor approval. (See Note 4 to the Condensed Consolidated Financial
Statements and Liquidity). Despite a decrease in sales of 7.2% for the sub-
leased location, the three Brooklyn stores had an aggregate sales increase of
5.5%. The decrease at the sub-leased store reflects the lingering effects of
a deteriorated physical plant, the remodel for which was completed in March
1998. Improved sales are now expected at this store. The one remaining
Queens location reported a sales increase of 7.1%. All of the increases
resulted principally from a 7.0% increase in menu-item sales prices, effected
in the first quarter of 1998. Viewed in this context, the Queens location
maintained its customer counts while the two larger Brooklyn stores each had
increases in customer counts of approximately 1%. The Manhattan location lost
just one-half of one percent of customer counts, a satisfactory result given
the intense competition in the Times Square area.
Net sales for the six months ended June 28, 1998 decreased by $65,563 to
$2,585,174 from $2,650,737 for the six months ended June 29, 1997, a decrease
of 2.5%. 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 six-month periods, sales increased by 4.2% in the
aggregate, with all stores except the sub-leased location recording gains. The
sales gains are principally attributable to the 7% menu-price increase.
Cost of sales declined by $13,432 to $414,490 for the quarter and by $92,854
to $776,606 for the six months, decreases of 3.1% and 10.7%, respectively,
consistent with the overall sales results. As a percentage of sales, cost of
sales decreased by 2.2% to 30.0% for the quarter and by 2.8% to 30.0% for the
year-to-date period reflecting the 7% sales price increase in menu items.
Store labor expenses increased by $6,052, or 1.7%, to $359,112 for the quarter
while decreasing by $62,337, or 8.4%, to $676,115 for the six months,
consistent with the overall sales increase and decrease for the quarter and
year-to-date periods, respectively. As a percentage of sales, labor expenses
decreased by 0.6% to 26.0% for the quarter and by 1.7% to 26.2% for the six
months, reflecting principally the 7.0% increase in menu prices as well as
reductions in group health and workers' compensation expenses attributable to
recent marked decreases in claims.
8
Store operating and occupancy expenses decreased by $6,219, or 2.1%, to
$305,320 for the quarter while decreasing by $39,949, or 6.2% to $604,554 for
the six months, again in keeping with the change in net sales for such
periods. As a percentage of sales, these expenses declined by 0.4% to 22.1%
for the quarter and by 0.9% to 23.4% for the six months, reflecting the menu
price increase generally as well as specific cost savings in utilities, due to
an extremely mild winter and in depreciation charges, attributable to the
write-down at the end of fiscal 1997 of the physical assets of the managed
Brooklyn location in recognition of its impairment loss. After such write-
down, no further depreciation charges are recorded, in accordance with
generally accepted accounting principles. The sales price for this restaurant
approximates its carrying value after such write-down. (See Note 4 to the
Condensed Consolidated Financial Statements and Liquidity).
Advertising and royalty expenses were constant at 8.0% of sales for all
periods, reflecting the Company's contractual obligations as franchisee under
the franchise agreements.
General and administrative expenses, including management fees, increased by
$8,916, or 10.0%, to $98,053 for the quarter and by $32,613, or 20.9%, to
$188,602 for the six months. Management fees to IFS were constant at $8,000
for the quarter but decreased by $1,000 to $48,000 for the six months in
accordance with the contractual agreement therefor.
As a percentage of sales, general and administrative expenses increased by
0.4% to 7.1% for the quarter and 1.4% to 7.3% for the six months. Virtually
all of the increase as a percentage of sales for the six month period is
attributable to increased legal and professional fees incurred to prepare
agreements for the sale of substantially all of the Company's assets and a
related preliminary proxy statement.
The Company had no interest expense for the quarter ended June 28, 1998 having
prepaid its bank loan in January of 1998. Interest incurred on such loan,
which was borrowed to fund the Marriott litigation settlement was $2,832 for
the 1997 periods and $211 for the first quarter of the current year.
Rental income was unchanged at $2,700 for the quarter and $5,400 for the six
months in both years. The Company presently has one sub-lease, yielding $900
per month.
For the quarter ended June 28, 1998, the Company realized $2,776 of income and
related expense reimbursement arising from the Empire Boulevard management
sub-contract. For the year-to-date periods such income and expense
reimbursement amounts totalled $13,060 and $15,977 for 1998 and 1997,
respectively.
Pre-tax income increased $33,746 to $100,611 for the quarter and by $88,166 to
$150,876 for the six months. Due to available net operating loss
carryforwards, only minor provisions, $5,000 in 1998 and $3,000 in 1997, were
required for the six month periods.
Comprehensive income equalled net income for each quarterly and year-to-date
period presented.
9
Liquidity and Capital Resources
- -------------------------------
During the first six months of 1998, the Company's working capital increased
by $123,814 to $132,182. The improvement arose from operations, which
provided $178,909, less capital expenditures of $22,779, 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 $947 from $13,222 to
$12,275. Significant fluctuations in this balance are not expected in the
future.
The Company's cash balance increased by $91,242 from $276,956 to $368,198.
Operating activities provided $208,837, inclusive of changes in current assets
and liabilities which provided $29,928.
Investing activities required $29,053 of which $22,779 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.
The Company has agreed to 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 has negotiated purchase and sale contracts
with each of the offerors. Both sales require franchisor approval, which is
expected, and the latter requires shareholder approval as well. If
consummated, these sales will leave the Company with no restaurant operations.
The Company would then retire all of its liabilities and distribute its
remaining cash to shareholders in a return of capital and liquidating
dividend. The Company has prepared a preliminary proxy statement, which has
been filed with the Securities and Exchange Commission and anticipates that
the definitive proxy statement will be mailed to stockholders during the
latter part of the third quarter.
PART II. OTHER INFORMATION
- ------- -----------------
Item 1-5. Not Applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
On April 29, 1998, the Company filed a Current Report on Form 8-K dated April
16, 1998 reporting the offer received that day to purchase substantially all
of the Company's assets.
10
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: August 17, 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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> JUN-28-1998
<CASH> 368,198
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 26,872
<CURRENT-ASSETS> 442,643
<PP&E> 310,657
<DEPRECIATION> 0
<TOTAL-ASSETS> 761,867
<CURRENT-LIABILITIES> 310,461
<BONDS> 0
0
0
<COMMON> 2,232,005
<OTHER-SE> (1,786,599)
<TOTAL-LIABILITY-AND-EQUITY> 781,867
<SALES> 2,585,174
<TOTAL-REVENUES> 2,585,174
<CGS> 776,606
<TOTAL-COSTS> 776,606
<OTHER-EXPENSES> 1,657,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211
<INCOME-PRETAX> 150,876
<INCOME-TAX> 5,000
<INCOME-CONTINUING> 145,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,876
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
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