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 27, 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
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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 November 16, 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 THIRD QUARTER 1998
INDEX
-----
PART I PAGE NO.
- - ------ -------
Financial Information:
Condensed Consolidated Balance Sheets-
September 27, 1998 and December 28, 1997 2
Condensed Consolidated Statements of
Operations-for the Three and Nine Month
Periods Ended September 27, 1998 and
September 28, 1997 3-4
Condensed Consolidated Statements of
Cash Flows-for the Nine Month Periods
Ended September 27, 1998 and
September 28, 1997 5-6
Notes to Condensed Consolidated Financial
Statements 7-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II
- - -------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote
of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 27, December 28,
1998 1997
------------ ------------
(Unaudited) *
Assets
------
Current assets:
Cash $ 414,749 $ 276,956
Inventory 23,870 28,202
Prepaid expenses and other
current assets 26,597 87,332
---------- ----------
Total current assets 465,216 392,490
Property, plant and equipment, net 337,372 320,294
Other assets:
Franchise fees, net - 684
Deferred costs - -
Security deposits 8,500 8,500
---------- ----------
Total assets $ 811,088 $ 721,968
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current maturities of note
payable, bank $ - $ 62,500
Due to Integrated Food
Systems, Inc. 16,882 13,222
Accounts payable, accrued expenses
and other current liabilities 217,910 259,241
Taxes payable 60,913 49,159
---------- ----------
Total current liabilities: 295,705 384,122
Note payable bank, less current
maturities - 26,042
Security deposits payable 6,000 12,274
---------- ----------
Total liabilities: 301,705 422,438
---------- ----------
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) (1,722,622) (1,932,475)
---------- ----------
509,383 299,530
---------- ----------
Total liabilities and
shareholders' equity $ 811,088 $ 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
September 27, September 28,
1998 1997
------------ ------------
Sales $1,451,701 $1,349,196
Cost of sales 464,044 432,934
---------- ----------
Gross profit 987,657 916,262
---------- ----------
Store labor expenses 368,220 349,801
Store operating and occupancy expenses 329,735 303,728
Advertising and royalty expenses 116,711 107,326
General and administrative expenses 110,675 70,690
Interest expense - 2,693
Rental income ( 2,700) ( 2,700)
Income and expense reimbursement
arising from management sub-contract ( 1,961) -
---------- ----------
920,680 831,538
---------- ----------
Income before income taxes 66,977 84,724
Provision for income taxes 3,000 2,000
---------- ----------
Net income $ 63,977 $ 82,724
========== ==========
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 27, September 28,
1998 1997
------------ ------------
Sales $4,036,875 $3,999,933
Cost of sales 1,240,650 1,302,394
---------- ----------
Gross profit 2,796,225 2,697,539
---------- ----------
Store labor expenses 1,044,335 1,088,253
Store operating and occupancy expenses 934,289 948,231
Advertising and royalty expenses 323,381 319,402
General and administrative expenses 299,277 226,679
Interest expense 211 5,525
Rental income ( 8,100) ( 8,100)
Gain of sale of restaurant - ( 13,908)
Income and expense reimbursement
arising from management sub-contract ( 15,021) ( 15,977)
---------- ----------
2,578,372 2,550,105
---------- ----------
Income before income taxes 217,853 147,434
Provision for income taxes 8,000 5,000
---------- ----------
Net income $ 209,853 $ 142,434
========== ==========
Weighted average number of shares
outstanding 8,914,300 8,914,300
========== ==========
Net income per share $ .02 $ .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 27, September 28,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 209,853 $ 142,434
--------- ---------
Adjustments to reconcile to net
cash provided (used) by operating
activities
Depreciation and amortization 49,236 72,992
Gain on sale of restaurant - ( 13,908)
Change in assets and liabilities:
Inventory 4,332 4,729
Prepaid expenses and other
current assets 60,735 21,905
Due from/to Integrated Food
Systems, Inc. 3,660 ( 5,157)
Accounts payable, accrued
expenses and other current
liabilities ( 41,331) (136,700)
Taxes payable 11,754 2,859
Litigation settlement payable - (143,500)
Security deposits - ( 4,440)
--------- ---------
Total adjustments 88,386 (201,220)
--------- ---------
Net cash provided (used) by
operating activities 298,239 ( 58,786)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ( 65,630) ( 78,497)
Proceeds from sale of restaurant - 41,331
Other ( 6,274) ( 950)
--------- ---------
Net cash used by investing
activities ( 71,904) ( 38,116)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loan proceeds - 125,000
Bank loan repayments ( 88,542) ( 26,042)
--------- ---------
Net cash provided (used) by
financing activities ( 88,542) 98,958
--------- ---------
Net increase in cash 137,793 2,056
CASH, beginning of period 276,956 230,604
--------- ---------
CASH, end of period $ 414,749 $ 232,660
========= =========
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 27, September 28,
1998 1997
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 211 $ 5,525
========= =========
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
September 27, 1998, and the results of operations and cash
flows for the three and nine-month periods ended September
27, 1998 and September 28, 1997.
2. The condensed consolidated results of operations for the
three and nine-month periods ended September 27, 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 on behalf of
Popyork, LLC, a limited liability company that was
subsequently formed. The parties signed an Asset Purchase
Agreement dated as of July 10, 1998 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 filed both a preliminary and definitive proxy
statement with the Securities and Exchange Commission.
The definitive proxy statement was mailed on September 25,
1998 to holders of record on September 23, 1998. The
Company's Special Meeting of Stockholders was held October
26, 1998 at the Company's offices at No. 1 Commercial Drive,
Area E., Florida, New York. At such meeting, the Company's
stockholders voted in favor of management's combined
proposal to sell the four restaurants to Popyork, LLC for
$900,000 plus closing adjustments and to dissolve and
liquidate the Company. The sale is expected to receive
franchisor approval by November 30, 1998 and to close on
that date. The Company will then retire its outstanding
liabilities and distribute its cash to its stockholders in
liquidating distributions. As indicated in the Company's
definitive proxy statement, such distributions are expected
to aggregate $.11 per share.(See Part II, Item 4).
The Company also reached an agreement to sell its last
restaurant to that restaurant's manager. (See Note 4).
7
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. The Company's Empire Boulevard Restaurant in Brooklyn was
managed by an unrelated party pursuant to a management
agreement. The agreement provided 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 was negative, the manager was required to pay the
Company the amount of negative cash flow in addition to the
monthly minimum fee. Negative cash flow for the nine-month
periods ended September 27, 1998 and September 28, 1997 was
$13,221 and $14,177, respectively. The net fee for such
periods was accordingly $15,021 in 1998 and $15,977 in 1997.
On July 8, 1998, the Company and the manager entered into an
asset purchase agreement for the sale of this restaurant.
Pursuant thereto, on October 29, 1998 the restaurant was
sold for $70,000 in cash, plus the usual closing adjustments
for the cash bank, inventory and prepaid/accrued items,
which totaled $10,833 for an aggregate sales price of
$80,833. The sale resulted in a de-minimus gain to the
Company as the restaurant had previously been written down
to its net realizable value.
5. Due to available net operating tax loss carry-forwards, only
a minor provision for income taxes has been provided for the
three and nine-month periods ended September 27, 1998 and
September 28, 1997.
6. Earnings per share is based upon the earnings 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 nine-month periods ended September 27,
1998 and September 28,1997, the Company had no components of
comprehensive income other than net income. Accordingly,
comprehensive income equaled net income for such periods.
8
Item 2
- - ------
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
- - ---------------------
Net sales for the quarter ended September 27, 1998 increased by
$102,505, or 7.6%, to $1,451,701 from $1,349,196 for the quarter
ended September 28, 1997. The Company operated five stores
throughout both quarters. All stores reported increased sales
for the quarter, ranging from 10.4% for the Manhattan restaurant,
the Company's largest, to 3.7% for the sub-leased Brooklyn
location. The three Brooklyn stores had an aggregate sales
increase of 6.2%. The Queens location reported a sales increase
of 6.5%. 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, except for the sub-leased
location, the Company maintained substantially all of its
customer counts while actually increasing its customer counts by
approximately 3.4% at the Manhattan location, a remarkable result
given the intense competition in the Times Square area.
Net sales for the nine months ended September 27, 1998 increased
by $36,942, or 0.9% to $4,036,875 from $3,999,933 for the nine
months ended September 28, 1997. The Hillside Avenue, Queens
restaurant was sold on April 15, 1997. For the five restaurants
operated throughout both nine-month periods, sales increased by
5.4% 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 increased by $31,110, or 7.2%, to $464,044 for the
quarter, while decreasing by $61,744, or 4.7%, to $1,240,650 for
the nine months. As a percentage of sales, cost of sales
decreased by 0.1% to 32.0% for the quarter and by 1.9% to 30.7%
for the year-to-date period, the latter reflecting the 7% sales
price increase in menu items.
Store labor expenses increased by $18,419, or 5.3%, to $368,220
for the quarter while decreasing by $43,918, or 4.0%, to
$1,044,335 for the nine months. As a percentage of sales, labor
expenses decreased by 0.5% to 25.4% for the quarter and by 1.3%
to 25.9% for the nine 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.
Store operating and occupancy expenses increased by $26,007, or
8.6%, to $329,735 for the quarter while decreasing by $13,942, or
1.5% to $934,289 for the nine months. As a percentage of sales,
these expenses increased by 0.2% to 22.7% for the quarter but
decreased by 0.6% to 23.1% for the nine months.
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.
9
Item 2
- - --------
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations (continued)
- - ---------------------
General and administrative expenses, including management fees,
increased by $39,985, or 56.6%, to $110,675 for the quarter and
by $72,598, or 32.0%, to $299,277 for the nine months,
principally as a result of significantly greater legal and
professional fees incurred in connection with the preparation of
sale agreements for the Company's restaurants and the related
proxy statements filed with the Securities and Exchange
Commission. Management fees to IFS were constant at $8,000 for
the quarter but decreased by $1,000 to $72,000 for the nine
months in accordance with the contractual agreement therefor.
As a percentage of sales, general and administrative expenses
increased by 2.4% to 7.6% for the quarter and by 1.7% to 7.4% for
the nine months. Virtually all of the increase as a percentage of
sales for the nine-month period is attributable to the increased
professional fees.
The Company had no interest expense for the quarter ended
September 27, 1998 having prepaid its bank loan in January of
1998.
Rental income was unchanged at $2,700 for the quarter and $8,100
for the nine months in both years. The Company's one sub-lease,
yielding $900 per month, was sold together with the Empire
Boulevard Brooklyn location.
For the quarter ended September 28, 1998, the Company realized
$1,961 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 totaled $15,021 and $15,977 for 1998 and 1997,
respectively. This restaurant was sold to the manager for
$70,000 plus $10,833 in closing adjustments on October 29, 1998.
Pre-tax income decreased by $17,747, or 20.9%, to $66,977 for the
quarter but increased by $70,419, or 47.8%, to $217,853 for the
nine months. Due to available net operating loss carry-
forwards, only minor income tax provisions were required, $3,000
and $8,000 in the 1998 periods, and $2,000 and $5,000 in the 1997
periods.
Earnings per share were $.01 in each quarter and $.02 for each
year-to-date period.
Comprehensive income equaled net income for each quarterly and
year-to-date period presented.
10
Item 2
- - ------
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Liquidity and Capital Resources
- - -------------------------------
During the first nine months of 1998, the Company's working
capital increased by $161,143 to $169,511. The improvement arose
from operations, which provided $259,089, less capital
expenditures of $65,630, retirement of long-term debt of $26,042
and reduction in security deposits payable of $6,274.
The Company's inter-company balance with IFS decreased by $3,660
from $13,222 to $16,882. Significant fluctuations in this
balance are not expected in the future.
The Company's cash balance increased by $137,793 from $276,956 to
$414,749. Operating activities provided $298,239, inclusive of
changes in current assets and liabilities which provided $39,150.
Investing activities required $71,904 of which $65,630 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's stockholders have voted their approval of
management's plan to sell all of the operating assets of the
Company, followed by its liquidation and dissolution. The Empire
Boulevard Brooklyn store was sold on October 29, 1998. The sale
of the other four restaurants to Popyork, LLC is awaiting
approval by the franchisor and is expected to close on November
30, 1998. The Company will then retire its remaining liabilities
and distribute its cash to its stockholders. Such liquidating
distributions are expected to aggregate $.11 per share. (See
Notes 3 and 4 to the Condensed Consolidated Financial Statements
and Part II, Item 4).
11
PART II. OTHER INFORMATION
- - ------- -----------------
Item 1-3. Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On October 26, 1998, a Special Meeting of the Company's
stockholders was held at the Company's offices at No. 1
Commercial Drive, Area E., Florida, New York. A quorum being
present, in person or by proxy, the Company's stockholders voted
in favor of management's combined proposal to sell the four
restaurants to Popyork, LLC for $900,000 plus closing adjustments
and to dissolve and liquidate the Company. The sale is expected
to receive franchisor approval by November 30, 1998 and to close
on that date. The Company will then retire its outstanding
liabilities and distribute its cash to its stockholders in
liquidating distributions. As indicated in the Company's
definitive proxy statement, such distributions are expected to
aggregate $.11 per share.
Approval by two-thirds of all outstanding shares was required for
passage. The results of the voting were as follows:
Percentage of
Number ------------------
of Votes Votes Total
--------- -------- -------
Voted in favor 6,205,771 97.9% 69.6%
Voted against 120,636 1.9% 1.4%
Abstained 9,625 .2% .1%
--------- ------- ------
Total votes counted 6,336,032 100.0% 71.1%
=======
Non-votes 2,578,268 28.9%
--------- ------
Total shares outstanding 8,914,300 100.0%
========= ======
Item 5. Not Applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None
12
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 16, 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
13
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> SEP-27-1998
<CASH> 414,749
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 23,870
<CURRENT-ASSETS> 465,216
<PP&E> 337,372
<DEPRECIATION> 0
<TOTAL-ASSETS> 811,088
<CURRENT-LIABILITIES> 295,705
<BONDS> 0
0
0
<COMMON> 2,232,005
<OTHER-SE> (1,722,622)
<TOTAL-LIABILITY-AND-EQUITY> 811,088
<SALES> 4,036,875
<TOTAL-REVENUES> 4,036,875
<CGS> 1,240,650
<TOTAL-COSTS> 1,240,650
<OTHER-EXPENSES> 2,578,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211
<INCOME-PRETAX> 217,853
<INCOME-TAX> 8,000
<INCOME-CONTINUING> 209,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 209,853
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