SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 28, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ------------ to ------------
Commission file number 0-10213
FAST FOOD OPERATORS, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-2974867
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42-40 Bell Boulevard, Bayside, New York 11361
(Address of principal executive offices) (zip code)
718-229-1113
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by (X) whether the Registrant (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 / /
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form and will not
be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / X /
State issuer's revenues for its most recent fiscal year:
$5,247,779.
Aggregate market value of voting stock held by non-affiliates of
the Registrant as at April 6, 1998: $279,816*
Shares of Common Stock outstanding as at April 6, 1998: 8,914,300
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* For purposes of this Report, shares held by non-affiliates
were determined by aggregating the number of shares held by
officers and directors of Registrant, as reflected on Form
3's and Form 4's filed with the Commission with respect to
Registrant's Common Stock and by others who, to Registrant's
knowledge, own 5% or more of Registrant's Common Stock, and
subtracting those shares from the total number of shares
outstanding. The resulting number of shares was multiplied
by $1/16, the bid price for shares of Registrant's Common
Stock on December 9, 1991, the last day on which any trading
activity in the Common Stock was reported by the National
Association of Securities Dealers Automated Quotation
System.
PART I
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Item 1. BUSINESS
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Background
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Fast Food Operators, Inc. (the "Company") was incorporated
on December 18, 1978, pursuant to the laws of the State of New
York. The Company conducts substantially all of its business
under the trade name "Popeyes Famous Fried Chicken of New York."
On April 9, 1981, the Company's Registration Statement on
Form S-18 was declared effective by the United States Securities
and Exchange Commission. Pursuant to such Registration
Statement, the Company offered and sold to the public 2,200,000
Units (each Unit consisting of one share of Common Stock and one
Common Stock Purchase Warrant to purchase a one-quarter
fractional share of Common Stock) and received net proceeds
therefrom of approximately $1,728,000.
On December 27, 1978, the Company entered into an option
agreement with Popeyes Famous Fried Chicken, Inc., a Louisiana
corporation ("PFFC"), pursuant to which the Company paid a total
of $170,000 for options to establish and operate 17 Popeyes
Famous Fried Chicken and Biscuits restaurants in specified
geographical areas within the Counties of New York and Queens, in
the City of New York.
As of December 27, 1984, the date of the expiration of the
option agreement, the Company had exercised ten of its 17
options. On January 22, 1985, the Company entered into a
development agreement with PFFC pursuant to which the Company
purchased the option to open up to 12 additional stores in
specified geographical areas within the Counties of Kings
(Brooklyn) and Queens in the City of New York and the right to
open additional stores in Manhattan on a case-by-case basis. The
Company paid PFFC $50,000 for the five additional options and
PFFC gave the Company credit for $70,000 previously paid under
the option agreement for the seven options which the Company did
not exercise thereunder. The Company entered into a separate
development agreement, dated July 6, 1987, with respect to its
Popeyes Famous Fried Chicken and Biscuits restaurant on 40 Empire
Boulevard in Brooklyn, New York. Subsequently, in 1990, the
Company sold two of its options under the development agreement
to third party purchasers for $10,000 per option.
On January 26, 1988, the Company entered into a series of
transactions with Integrated Food Systems, Inc., a New Jersey
corporation ("IFS"), pursuant to which, among other things, the
Company agreed to be managed by IFS and borrowed $420,000 from
IFS. See "Transactions with IFS."
In 1992, PFFC, whose parent company had been in bankruptcy,
was acquired by America's Favorite Chicken Company, a Minnesota
corporation ("Franchisor"). See "The Franchisor."
The development agreement provided that each time the
Company exercised an option it was required to pay a $15,000 fee
and to enter into a franchise agreement calling for the payments
of certain royalties on sales, as more fully described under the
heading "The Franchise" below. Under the development agreement,
the Company had, until 60 days after the last store was opened
thereunder, the nonexclusive right to open Popeyes Famous Fried
Chicken and Biscuits restaurants in its specified areas in
Brooklyn, Queens and Manhattan.
The development agreement provided that the options must be
exercised and restaurants opened no later than specified. On
March 9, 1992, the development agreement was amended to reinstate
two options which expired unexercised in 1986 and to extend the
date by which each of the remaining eight stores under option was
required to be opened. In October 1992, the Company sold the
option due to expire on March 1, 1993 to a third party for
$10,000.
The Company permitted its September 1, 1993 and March 1,
1994 options to expire unexercised; however, management requested
the Franchisor to restore such options with revised expiration
dates of March 1, 1997 and September 1, 1997, respectively.
Management had received verbal assurance that reinstatement of
the expired options with the requested expiration dates would be
granted; however, in 1994, the Company and the Franchisor were
unable to agree upon terms for the reinstatement of such expired
options. The Company's option which was exercisable by September
1, 1994 also expired unexercised. The Company recognized a loss
of $30,000 in fiscal 1994 as a result of the three expired
options. The Company was accordingly in default of the
development agreement.
As a result of the defaults described above, the Franchisor
had the right, among others, to terminate the development
agreement, or to reduce the number of options. On January 30,
1995, the Franchisor notified the Company that pursuant to its
rights thereunder, it was terminating the development agreement
as a result of the Company's noncompliance with the amended
development schedule. As of the date of such termination, the
Company had four unexpired options remaining under the
development agreement. The Company recognized the related
$40,000 loss in the first quarter of fiscal 1995. The
termination of the Development Agreement had no effect on the
existing franchise agreements.
As of March 31, 1998, the Company was operating five Popeyes
restaurants. Six restaurants were sold and/or closed during the
fourteen-month period from October 1994 to November 1995. On
April 15, 1997, the Company sold the Hillside, Queens Restaurant.
The Company is presently seeking to sell the Empire Boulevard,
Brooklyn Restaurant, which is being managed for the Company
pursuant to a management agreement. See Item 1. "Recent
Restaurant Sales," "Present Operations," "Future Locations," "The
Franchise" and "The Franchisor," and Item 6. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Transactions with IFS
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IFS is a wholly-owned subsidiary of Fast Food Systems, Inc.,
a publicly-held company. Such entities presently manage two
Wendy's franchises in New Jersey, having disposed of 19 Wendy's
restaurants in the New York Metropolitan area during the
fourteen-month period from February 1995 to March 1996.
On December 28, 1990, the Company and IFS entered into a
series of transactions (the "1990 Transactions"), which by their
terms, were subject to ratification by the affirmative vote of
the holders of a majority of the Company's outstanding voting
common stock at the Company's next occurring annual meeting of
shareholders. In exchange for the cancellation of $210,000 of
the Company's secured debt to IFS representing one-half of its
note payable thereto and $240,000 owing to IFS by the Company for
unpaid management fees and interest charges, the Company agreed
to issue 3,000,000 common shares to IFS. Absent the 1990
Transactions, the $420,000 note payable to IFS was convertible
into 1,400,000 common shares, representing upon such conversion,
19.1% of the issued and outstanding Common Stock of the Company.
The 3,000,000 common shares issued to IFS upon shareholder
approval of the 1990 Transactions represent a 33.65% interest in
the Company.
As part of the 1990 Transactions, a new $210,000 secured
promissory note due January 26, 1992 was issued by the Company.
The new note was identical to the prior note except that it was
not convertible into Common Stock. The new note bore interest,
payable monthly, at a rate equal to two points above the prime
interest rate. As of January 26, 1992, the new note was amended
as to its principal repayment terms, in contemplation of the 1990
Transactions being approved by the stockholders. The revised
repayment terms were: (i) $30,000 on January 26, 1992, and (ii)
$10,000 per month for eighteen months commencing February 26,
1992. The Company initially failed to meet its payment
obligations to IFS under the new note as they became due;
however, IFS did not declare a default thereon. When the Company
reached its peak season, during the summer of 1992, it was able
to satisfy its past due obligations under the new note. The new
note was paid in full, according to its amended repayment
schedule, on July 26, 1993.
Also in connection with the 1990 Transactions, the Company
and IFS further amended a Management Agreement (the "Management
Agreement") under which IFS provides, among other things,
consultative, supervisory and advisory services to the Company.
Under the terms of the amendment, IFS was to receive $16,000 per
annum for each restaurant managed for the Company and
income-related incentive fees, previously provided for, were
eliminated. By its terms, the December 28, 1990 amendment to the
Management Agreement required (and received) shareholder
ratification at the Company's next occurring annual meeting.
Under the terms of the previous agreement, IFS received $16,000
per month without regard to the number of restaurants under
management, in addition to other income-related incentives
(which, historically were not met). As amended in connection
with the 1990 Transactions, the Management Agreement would have
remained in effect until January 25, 1992; however, by an
amendment dated January 26, 1992, the term of the Management
Agreement was extended until January 25, 1993. By its terms, the
January 26, 1992 amendment to the Management Agreement was also
subject to (and also received) ratification by the Company's
shareholders at the Company's 1992 Annual Meeting. Effective as
of January 26, 1993, the Management Agreement was further amended
to extend its term until January 25, 1994. As of January 26,
1994, the Management Agreement was extended until January 25,
1995 except that the management fee was reduced to $12,000 per
restaurant per year. As of January 26, 1995, the Management
Agreement was extended until January 25, 1996. Effective as of
January 26, 1996, the Management Agreement was extended until
January 25, 1997. Per restaurant fees remained at $12,000 per
annum; however annual aggregate fees could not be less than
$108,000. Effective as of January 26, 1997, the Management
Agreement was extended until January 25, 1998. Per restaurant
fees remained at $12,000 per annum; however, the annual aggregate
minimum fee was reduced to $96,000. Effective as of January 26,
1998, the Management Agreement was extended until January 25,
1999 at the same per restaurant and minimum fees. Management
fees were $97,000 and $105,000 in fiscal 1997 and 1996,
respectively. See Item 6. Management's Discussion and Analysis
of Financial Conditions and Results of Operations.
The Company's 1992 Annual Meeting took place on June 25,
1992, at which time the Company's stockholders ratified and
approved the 1990 Transactions. In accordance therewith,
$450,000 of aggregate indebtedness to IFS, including $210,000 of
note principal, was converted to equity and IFS was issued
3,000,000 shares of the Company's Common Stock. The amended
Management Agreement similarly went into effect, and as both the
stock subscription and amended Management Agreement provided for
their approval to be retroactive to December 28, 1990, an
additional $67,306, representing the difference in management
fees (attributable to the Company operating fewer than twelve
restaurants for portions of the intervening eighteen-month
period) and interest charges on the $210,000 of note principal
retroactively extinguished, was contributed to the paid-in
capital of the Company.
At December 31, 1995, IFS owed the Company $153,010 pursuant
to an interest-free, short-term advance, repayment of which was
made during the first quarter of fiscal 1996. At December 29,
1996 and December 28, 1997, the Company owed IFS $16,683 and
$13,222, respectively for the management fee for the month then
ended and other miscellaneous items. See Note 6 to the
Consolidated Financial Statements.
Recent Restaurant Sales
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On April 15, 1997, the Company and an unaffiliated party,
who had previously purchased two of the Company's restaurants and
is also managing one Brooklyn restaurant for the Company,
consummated the sale of the Company's Hillside Avenue, Queens
Restaurant. The purchase price for this restaurant, the lease
for which expires on July 31, 1998, was $30,000 plus closing
adjustments of $11,331 for inventory and prepaid/accrued items.
The price is subject to increase by a minimum of $50,000 if the
purchaser obtains any extension of the lease. For extensions of
the lease term in excess of five years, the price is increased by
an additional $10,000 per year to a maximum of $50,000.
Accordingly, if the lease is extended for ten or more years, the
adjusted purchase price will be $130,000. The Company recorded a
gain on the sale of $13,908. See Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Present Operations
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Since June 1979, the Company exercised 12 of the options
purchased by it pursuant to the option agreement and the
development agreement, and acquired three existing Popeyes
restaurants in New Jersey and opened three Popeyes restaurants in
New York, pursuant to a separate development agreement. During
the same period, the Company closed seven restaurants, one at 172
West 72nd Street in New York, New York, upon the expiration of
the lease; one at 46-05 Northern Boulevard in Queens, New York
and one at 125 West 42nd Street, New York, New York, both of
which were unprofitable restaurants at the time of closure; one
in Raritan, New Jersey, due to condemnation-related construction
activity at the site; one at 168-30 Hillside Avenue, Queens and
one at 1126 Eastern Parkway, Brooklyn, New York (which had opened
in August 1993 and to which the Raritan franchise rights had been
transferred) both of which were unprofitable at the time of
closure; and one at 46-48 161st Street, Bronx, New York, another
location which was unprofitable at the time of closure, and whose
lease was terminated by IFS, the sub-lessor. In 1995, the
Company also sold at a gain three profitable restaurants, located
at 1318 Liberty Avenue, Hillside, New Jersey; 372 Central Avenue
in East Orange, New Jersey; and 1307 Teaneck Road in Teaneck, New
Jersey. In April 1997, the Company sold at a gain the restaurant
located at 144-20 Hillside Avenue in Queens, Nw York. The
Company has entered into agreements ("Franchise Agreements") with
PFFC and its successor in interest with respect to its five
continuing Popeyes restaurant franchises in New York. The
Company has one continuing subleased location. The Popeyes
restaurants are located at 722 Seventh Avenue in the Times Square
area of the Borough of Manhattan, City of New York; 850
Pennsylvania Avenue, 40 Empire Boulevard and 2137 Nostrand Avenue
(sub-lease) in the Borough of Brooklyn, City of New York; and
122-10 Guy Brewer Boulevard in the Borough of Queens, City of New
York. See Item 2. Properties.
Effective April 1, 1996 the Company entered into a
management agreement with an individual (The "Manager") to manage
the operations of its Popeye's Restaurant on Empire Boulevard in
Brooklyn. The agreement, the initial term of which expired
December 31, 1996 is automatically renewable unless cancelled by
the Company or the Manager, in each case, upon written notice of
30 or 90 days, respectively. If the agreement is terminated by
reason of the Manager's breach or is otherwise terminated by the
Manager for any reason other than a breach by the Company, the
Manager must pay a $10,000 termination fee. The Manager paid a
$15,000 security deposit upon the commencement of the agreement.
The agreement provides for a monthly management fee to the
Manager equal to the restaurant's cash flow including sub-lease
income less the greater of $200 or five percent of such monthly
cash flow total, calculated monthly and not cumulatively. Stated
conversely, the Company receives the greater of $200 per month or
5% of the restaurant's total monthly cash flow. Any negative
cash flow in any month is borne by the Manager and the Company
still receives the $200 minimum amount for such month. The
Company earned the minimum $1,800 amount for the nine months the
agreement was in effect in fiscal 1996. The amount retained by
the Manager during this period was $10,686. In fiscal 1997 the
Company earned the minimum fee of $2,400 but was also reimbursed
by the Manager for $4,084 of net cash flow shortfall for the
year. At the end of fiscal 1997, cognizant of the poor results
and future prospects for this restaurant, management of the
Company determined that this location's carrying value was
unlikely to be recovered through its future cash inflows and
decided to seek the sale of this restaurant. The Company has
held preliminary discussions with the Manager of this location,
who has expressed an interest in purchasing it. In accordance
with generally accepted accounting principles, the Company wrote
down the tangible and intangible assets of this restaurant to
$60,000, representing their estimated fair value less estimated
costs to sell and recorded an impairment loss of $159,772. See
Item 6. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 1D, 2, 3, 7C and
9A to the Consolidated Financial Statements.
At the time of its acquisition, the now-closed Raritan, New
Jersey location was subject to a condemnation proceeding. Such
proceeding was concluded in December 1993 at a significant gain
to the Company. In September 1994, the Raritan landlord
commenced a lawsuit against the Company. In March 1997, the
lawsuit was adjudicated with the substantial and unexpected award
for the plaintiff. In April 1997, the parties agreed to a
settlement of the judgement amount pursuant to which the Company
paid the plaintiff a total of $143,500. See Item 3. Legal
Proceedings, Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 7D to the
Consolidated Financial Statements.
For the five fiscal years ended December 28, 1997, December
29, 1996, December 31, 1995, December 25, 1994 and December 26,
1993, the Company recorded sales of $5,247,779, 5,349,978,
$6,588,338, $8,062,632 and $8,240,781, respectively. The Company
had net income of $32,910 in 1997, a net loss of $137,412 in
1996, net income of $518,705 in 1995 and net losses of $228,720
and $57,465 in 1994 and 1993, respectively. See Item 6.
Management's Discussion and Analysis of Financial Condition and
Results of Operations and Item 7. Financial Statements.
The Company's present restaurants range in size from
approximately 1,000 to 2,500 square feet of space and seat from
approximately 38 to 66 persons. Restaurant hours of operation
vary, depending upon location.
The Company obtains its equipment, supplies, and food
products from sources recommended and approved by the Franchisor.
In order to serve its featured "New Orleans Style" spicy and mild
fried chicken, the Company must purchase its batter mix and
special spices from Franchisor approved distributors.
The Franchisor maintains quality control over the operations
of its franchised restaurants by means of periodic, on-site
inspections and evaluations. All aspects of business operations
are inspected and evaluated, including cleanliness, service, food
recipes and taste, and management. The failure by the Company to
achieve satisfactory inspections and evaluations may be deemed to
be a default under those provisions of the Franchise Agreements
which require the Company to operate in accordance with the
Franchisor's franchising "system," which default, if not cured
within 30 days of written notice of default sent by the
Franchisor to the Company, may result in termination of the
Franchise Agreement.
The Company has sought to find and establish restaurants in
high traffic areas, and advertises in each restaurant's local
area by means of discount coupons which are distributed
throughout the marketing area, electric and electronic sign
advertising and local community promotions. The Company also
uses the nationally known and copyrighted figure of Popeye the
Sailorman and its related family of characters in the Company's
advertising and promotions, as well as throughout the decor of
its restaurants. The Company has in the past undertaken limited
local television and radio advertising promotions. Pursuant to
the Company's Franchise Agreements, 3% of the Company's gross
sales, exclusive of sales taxes, is to be contributed to the
Franchisor for advertising, as more fully described under the
heading "The Franchise."
Food Menu
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Each of the Company's operating restaurants is a "limited
menu" restaurant which utilizes the Popeyes Famous Fried Chicken
and Biscuits fast food system and which specializes in the
preparation and sale of uniquely flavored "New Orleans Style"
spicy and mild fried chicken. The Company depends upon the
distinctive taste of the batter used in the preparation of fried
chicken and other items in order to attract and retain customers.
The recipe for the batter mix is the property and trade secret of
the Franchisor and the precise spices and ingredients and proper
proportions of such spices and ingredients are unknown to the
Company. As a result, the Company is required to purchase the
batter mix and spices from distributors approved by the
Franchisor.
In addition to featuring its "New Orleans Style" fried
chicken, the Company's restaurants offer for sale such
accompanying food items as barbecue chicken sandwiches, onion
rings, cole slaw, french fried potatoes, corn on the cob, cajun
rice, cajun nuggets, cajun popcorn bite-sized shrimp and red
beans, egg fried cajun style french fries and rice. Certain of
these items are also prepared utilizing the Franchisor's
proprietary spice blends. Although the Company possesses the
recipe for preparing the above items, the blend of spices used
therefor are the property of the Franchisor, and the Company must
purchase such spices directly from the Franchisor's authorized
distributors.
Future Locations
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Under the development agreement, the Company had options to
open a specified number of additional Popeyes restaurants within
the territories and time periods set forth in the development
agreement and the right to submit additional locations in
Manhattan to the Franchisor on a case-by-case basis. During the
sixteen-month period ended December 25, 1994, three of such
options expired unexercised. As a result, the Company was in
default of the development agreement. On January 30, 1995,
pursuant to its rights thereunder, the Franchisor terminated the
development agreement. Such action did not affect the continuing
franchise agreements nor the Company's right to submit additional
locations as franchise sites to the Franchisor on a case-by-case
basis. See "Background," and "The Franchise."
Provided that the Company obtains the additional financing
which would be required, and further provided that the Company
successfully negotiates additional franchise rights, which may or
may not include partial or full credit against new franchise fees
for lapsed options and/or closed locations, the Company may in
the future seek to acquire additional Popeyes Famous Fried
Chicken and Biscuits restaurants in the New York Metropolitan
area. The Company has recently initiated discussions regarding a
new potential leased site but has not reached any agreement
therefor.
The Franchisor
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The Company originally purchased the right to establish and
operate Popeyes Famous Fried Chicken and Biscuits restaurant
franchises from PFFC, a privately-held company founded in 1972.
In 1992, PFFC, whose parent had been in bankruptcy, was acquired
by the Franchisor who continues to operate a national fast food
system consisting of company-owned and franchised restaurants.
The Franchisor's executive offices are located in Atlanta,
Georgia.
There are approximately 700 Popeyes Famous Fried Chicken and
Biscuits restaurants currently operating in 40 states, the
District of Columbia, and five countries. Approximately 13% of
all restaurants are owned by the Franchisor, and the balance are
owned by franchisees. To the Company's knowledge, the nearest
Popeyes Famous Fried Chicken and Biscuits restaurant not operated
by the Company is located in Manhattan on 34th Street.
The Franchise
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Historically, when the Company decided upon a site for a
Popeyes restaurant, it submitted such site to the Franchisor for
approval. Under the development agreement, the Franchisor had 30
days to approve or disapprove any proposed site. Within 90 days
after site approval, the Company was to submit to the Franchisor
proof that it owned the site or had a lease for such site
containing certain required provisions, including that the term
of the lease, together with renewal options was for at least 20
years (although such requirement had been waived in certain
instances). In addition, the Company was required to submit
plans and specifications for such site to the Franchisor for
approval, which plans and specifications were to be in accordance
with the Franchisor's standards and specifications for franchised
locations. After such approvals were given by the Franchisor,
the Company and the Franchisor entered into a Franchise Agreement
covering the establishment and operation of a Popeyes Famous
Fried Chicken restaurant franchise to be operated at the chosen
location.
Although the Franchisor terminated the development agreement
as of January 30, 1995, such action did not irrevocably preclude
the Company from acquiring additional franchises. While the
Company has no definitive expansion plans, should the Company
seek to develop new locations or acquire existing restaurants, it
expects it would follow previously applicable procedures to be
approved as the unit franchisee and would also likely seek to
negotiate credits against the franchise fee from lapsed options
and/or closed locations. See "Future Locations".
PFFC, and as its successor in interest, the Franchisor, and
the Company have entered into Franchise Agreements for each of
the Company's restaurants of which five continue in effect. Such
Franchise Agreements generally provided for the Company to pay a
franchise fee of $25,000 per franchise of which $10,000 was
credited from the applicable option being exercised. The term of
each Franchise Agreement and the franchise granted thereunder is
20 years from the date the Franchise Agreement is executed, and
is thereafter renewable at the Company's option for one
additional ten-year period. In order to renew, the Company must
satisfy certain conditions, including the payment of one-half of
the then current franchise fee; the execution of the then current
Franchise Agreement, which may include a higher royalty rate or
advertising fund contribution than currently; the execution of a
general release in favor of the Franchisor; satisfaction of all
monetary obligations to the Franchisor; and the reasonable
remodeling and/or modernization of the franchised location, in
accordance with the specifications contained in the Franchisor's
then current Franchise Agreement or Operating Manual.
Each Franchise Agreement requires, the Company to pay a
continuing royalty fee, payable on a weekly basis equal to 5% of
gross sales. The Company also is currently required to pay an
additional sum equal to 3% of gross sales, exclusive of sales
tax, payable on a weekly basis, as and for its advertising
contribution. Three-fourths of such amount is required to be
contributed to a regional advertising cooperative which purchases
regional media advertising.
The occurrence of certain events constitutes a default under
the Franchise Agreement. Such events include the failure to make
timely payments to the Franchisor; the failure to abide by the
Franchise Agreement; the filing of a petition in bankruptcy by
the Company, or the Company's consent to the filing of such a
petition by another; the adjudication of the Company as bankrupt;
the unauthorized transfer by the Company of any rights or
obligations under the Franchise Agreement; the Company's repeated
violation of the Franchise Agreement, whether or not cured; or
the cessation by the Company of business activities at the
franchised location. In the event of default, the Franchisor, at
its option, may terminate the Franchise Agreement.
Upon payment of the franchise fee and continuing royalty and
advertising fees, the Franchisor provides and will continue to
provide the Company with the following services: (a) standard
basic plans and specifications for equipment, furnishings, decor,
layouts and signs, together with advice and consultation
concerning the architectural layout of Company stores; (b) lease
review and approval; (c) a pre-opening and continuing training
program; (d) pre-opening and continuing management training at
the school operated by the Franchisor; (e) a Confidential
Operations Manual; (f) special recipe techniques; (g) food
preparation instructions; (h) standardized accounting methods;
(i) cost control methods; (j) portion control systems; and (k)
grand opening advertising and promotion supervision.
The Franchise Agreements, among other things, require the
Company to maintain a high degree of cleanliness and repair, to
operate in conformity with procedures established by the
Franchisor, to use supplies conforming to the Franchisor's
standards purchased from suppliers approved by the Franchisor,
and to sell only items meeting the Franchisor's standards and
which have been expressly approved by the Franchisor.
The Franchise Agreements also provide that during their
term, and for a period of one year thereafter, no officer,
director or 5% shareholder of the Company will divert or attempt
to divert any business of the Company to any competitor, to
employ or seek to employ any employee of the Franchisor or any
other franchisee, or own, operate, or have more than a 5%
beneficial interest in any restaurant which is similar to a
Popeyes restaurant. In addition, no officer, director or 5%
shareholder of the Company may own, maintain, engage in, or have
a controlling interest in any business which is similar to or the
same as the franchised business (except other Popeyes
restaurants), within a five or ten mile radius of the Popeyes
restaurant subject to such Franchise Agreement.
Trademarks and Service Marks
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In much of its advertising, promotions and interior and
exterior decor, the Company utilizes Popeye the Sailorman and its
related family of characters pursuant to the rights conferred by
the Franchise Agreement with PFFC and the Franchisor, as
successor. PFFC obtained its license from King Features
Syndicate, Inc. and the Company is not a party to such license
and has no control over its perpetuation. The Company uses the
licensed characters in order to promote the public's awareness of
the Company's identity, but does not believe that it would be
materially adversely affected by the loss of the use of such
characters.
Competition
- -----------
The fast food, limited menu restaurant business is highly
competitive. Competition is provided by an increasing number of
franchised units of national and regional fast food chains, as
well as by company-owned and locally-owned restaurants, drive-ins,
and diners. The Company also competes with retail stores
and other restaurants for desirable locations. The Company does
not consider itself to be a significant factor in the fast food
industry and many of the Company's competitors have far greater
financial resources, management expertise, and physical
operations than the Company. Competitive factors in the industry
include price, taste, location, advertising and trademarks.
Employees
- ---------
The Company has approximately 107 employees. Of such
number, approximately 33 are full-time and approximately 74 are
employed on a part-time basis. All of the Company's employees
are trained to serve as food handlers and preparers, cooks,
cashiers, servers and maintenance personnel and are trained in
every phase of the Company's operations. The Franchisor requires
that certain of such employees be trained by the Franchisor. In
addition, all employees rotate between positions, thus providing
each employee with a thorough knowledge of restaurant operations.
Of the 33 full-time employees, 14 are employed in supervisory or
managerial positions. None of the Company's employees are
covered by a collective bargaining agreement.
Item 2. PROPERTIES
- ------ ----------
The Company operates five Popeyes Famous Fried Chicken and
Biscuits restaurants at the locations set forth below:
1. 722 Seventh Avenue, New York, New York
2. 40 Empire Boulevard, Brooklyn, New York
3. 122-10 Guy Brewer Boulevard, Queens, New York
4. 850 Pennsylvania Avenue, Brooklyn, New York
5. 2137 Nostrand Avenue, Brooklyn, New York
The leases for these locations provide expiration dates
(including options to extend) ranging from July 31, 1998 to June
30, 2013.
The lease for the fifth restaurant, a sub-lease at which the
Company had been in holdover status subsequent to February 28,
1997 has been renewed through February 28, 2007 at a percentage
rental of 11% of sales for the first five years and 12% of sales
for the second five years. Rent on such sub-lease had previously
been 15% of sales.
In July 1996 the Manhattan lease, due to expire December 31,
1996, was amended to extend the term to December 31, 2002 and
effective August 1, 1996 to increase the annual rent from
$180,000 to $265,000 through July 31, 1999. The rent for the
remainder of the extended term will be $270,000 annually.
In addition to the foregoing, the Company has subleased to
an unrelated party a portion of the greater premises leased at
its Empire Boulevard, Brooklyn location. Such sub-leased
premises front on the cross-street to Empire Boulevard at 1074
Washington Avenue. These premises had originally been used by
the Company for a pizza restaurant which did not operate
profitably. If the Empire Boulevard location is sold, the
related sub-lease will be sold as well. See Item 6.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
A sublease for certain premises formerly used as a Popeyes
Restaurant at 87-26 Roosevelt Avenue in Queens, New York was
terminated August 1, 1996 when the Company, with the lessor's
consent, assigned its lease to the sub-lessee.
For further information concerning lease commitments, see
Note 7B to the Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS
- ------ -----------------
At the time of its acquisition by the Company in August,
1991, the Raritan, New Jersey restaurant was subject to a
condemnation suit brought by the New Jersey Department of
Transportation. The Company was one of three tenants at the
site. Work on the related three-year construction project
commenced in October, 1991 and necessitated the closing of the
restaurant in July 1993. A commission hearing was held on August
26, 1992 at which time, the commissioners determined an aggregate
award for all defendants, including the landlord. The State
appealed the award. In December 1993, the Superior Court of New
Jersey awarded the Company an aggregate of $399,302 which was
received in January, 1994. The Company's attorney fees and
expenses totalled $105,909 and from the proceeds the Company also
paid the outstanding balance of the Raritan mortgage debt in the
amount of $131,972 together with accrued interest thereon of
$1,184. The Company realized a net gain on the condemnation of
$143,061.
The Company considered the lease terminated and as of
February 1,1994 ceased paying rent. On September 30, 1994, Host
Marriott Corporation, as sublandlord, instituted litigation
against the Company seeking lost rent from February 1, 1994,
payment for alleged removal of equipment, alleged loss of
percentage rent, recovery of the amount allocated to the Company
as a result of the condemnation proceeding and punitive damages.
On November 23, 1994, the Company filed an answer denying all
liability and asserting various affirmative defenses, among which
was the failure of Marriott to mitigate damages based on
Marriott's refusal to assign the sublease to another tenant.
In March 1996, the Company, as defendant, and Host Marriott
Corporation, as plaintiff, filed cross motions for summary
judgment. The matter proceeded to trial in U.S. District Court in
February 1997. On March 7, 1997, the Court decided in favor of the
plaintiff and awarded $229,893 plus reasonable legal fees. The result
at trial was completely unexpected by the Company and its counsel.
On March 19, 1997 the Company filed a notice of appeal with the U.S.
Circuit Court of Appeals for the Third Circuit. The Company also
sought to negotiate a settlement of the judgement with the
plaintiff. On April 9, 1997, the settlement negotiations
resulted in the plaintiff agreeing to accept the Company's offer
of $143,500 in full satisfaction of the judgement amount. Payment
thereof was made April 10, 1997. See Item 6. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Note 7D to the Consolidated Financial Statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders
during the fiscal year ended December 28, 1997.
PART II
-------
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ------- -----------------------------------------------------
The Company's Common Stock was previously traded in the
over-the-counter market. However, there has been no reported
trading activity in the Company's Common Stock since December 9,
1991. The Company presently has no market maker and no NASDAQ
symbol. The Company is unable to predict whether a trading
market for its Common Stock will resume in the future.
As of April 6, 1998, there were approximately 1,952 holders
of record of the Company's Common Stock.
On November 28, 1995, the Company's Board of Directors
declared a dividend in the nature of a return of capital of $.025
per share on its Common Stock. The dividend, aggregating
$222,858, was paid on December 21, 1995 to holders of record as
of December 11, 1995. On November 15, 1996, the Company declared
a second return of capital distribution of $.01 per share of
common stock. This distribution, aggregating $89,143 was paid on
December 16, 1996 to holders of record as of December 2, 1996.
Prior to these return of capital distributions, the Company had
never paid a cash dividend of any kind. See Item 6."Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ------- -------------------------------------------------
Results of Operations
- ---------------------
The Company's net sales of $5,247,779 in fiscal 1997
decreased by $102,199, or 1.9% from $5,349,978 in 1996. All of
such decrease is attributable to the sale of the Hillside Avenue,
Queens Restaurant on April 15, 1997. Sales for the five
restaurants operated throughout both years increased by 6.9%.
All five restaurants recorded individual sales gains led by the
Manhattan location which had a 12.5% increase, due principally to
the continued improvements being made to the Times Square area
and the related increase in traffic. The three Brooklyn
locations had an aggregate sales gain of 5.6% led by the
Pennsylvania Avenue store which increased by 8.5%, benefitting
noticeably from its recent remodelling. The continuing Queens
restaurant gained 1.2%. Both it and the sub-leased Brooklyn
location, which recorded a 1.1% sales gain will be remodelled
during the first half of fiscal 1998. The managed Brooklyn
location had a sales gain of 2.8%. The Company has determined it
will seek to sell this restaurant in 1998. (See Notes 7C and 9A
to the Consolidated Financial Statements). Management also
attributes a portion of the system-wide sales gains to its
continued focus on improving operations as well as much more
temperate weather throughout much of the year.
Cost of sales decreased by $83,820, or 4.7% to $1,697,245 in
1997 from $1,781,065 in 1996, due to the following reasons: (i)
the decline in total sales; (ii) an average decrease in the price
of chicken of approximately 3% from 1996, and (iii) the effect of
new cash register systems, installed early in fiscal 1997, which
facilitate the tracking a food usage on a weekly basis and
thereby help to reduce inventory, waste, spoilage and shrinkage.
As a percentage of sales, cost of sales decreased by 1.0% to
32.3% in 1997 from 33.3% in 1996, of which decline approximately
three-fourths is attributable to food cost and approximately one-fourth
is attributable to paper cost. The improvement in the
latter category arose from reduced paper prices due to better
contract purchasing arrangements negotiated on behalf of
franchisees by the Franchisor.
Selling, general and administrative expenses decreased by
$261,486, or 7.2%, to $3,390,737 in 1997 from $3,652,223 in 1996,
in part due to the sale of one restaurant and the overall sales
reduction and in part due to various cost-cutting and monitoring
measures. As a percentage of sales, these expenses decreased by
3.7% to 64.6% in 1997 from 68.3% in 1996. Within this category,
labor costs were virtually unchanged at approximately 27.2% of
sales. Such constancy of labor cost is a notable achievement
given the increase in the statutory minimum wage rate effective
October 1, 1996. The Company effected such labor cost savings
generally by utilizing fewer managers and more crew staff.
Advertising and royalty expenses were constant at their franchise
agreement specified levels of 3.0% and 5.0%, respectively.
Costs classified as manager controllable declined by 0.8% of
sales, almost entirely attributable to reduced utility charges,
due to much more moderate temperatures throughout the year.
Occupancy expenses declined by 1.0% of sales. Although rent and
percentage rent charges increased by 0.2%, savings of 0.5%, 0.4%
and 0.3%, respectively, were realized in insurance, real estate
tax and related charges and depreciation and amortization
expenses, all attributable to the higher store volumes of the
continuing restaurants. Other operating expenses declined by 0.8%
of sales reflecting savings of 0.6% in repair, maintenance and
security services and 0.2% in theft losses. The former arose
from fewer required repairs as well as the volume gains, while
the latter reflect significantly fewer incidences.
General and administrative expenses decreased by 1.1% of
sales, reflecting savings of 0.2% in each of administrative
accounting services and franchise taxes while stock transfer fees
and certain other miscellaneous expenses declined by 0.1% and
0.2% of sales, respectively. The balance of the savings in this
category, 0.4% of sales, occurred in management fees. Management
fees to IFS declined by $8,000 to $97,000 in fiscal 1997. The
management agreement with IFS has been renewed through January
25, 1999 at its existing terms, $12,000 per restaurant subject to
a $96,000 annual minimum. Management fees for the Empire
Boulevard Restaurant reflected a savings of $15,370 as the fee
arrangement in 1997 resulted in a net payment to the Company of
$6,484, including a net cash flow shortfall reimbursement of
$4,084 from the Manager, compared to a net payment to the Manager
of $8,886 in 1996. The Company recorded an impairment loss on
this location's assets in 1997 and is seeking to sell the
restaurant; the Manager has expressed an interest in purchasing
it. (See the discussion below, "Liquidity" and Notes 1D, 2, 3, 7C
and 9A to the Consolidated Financial Statements).
Interest expense of $8,100 was incurred on the Company's
bank borrowing in fiscal 1997; none was incurred in fiscal 1996.
The $125,000 installment loan, which was used to pay the Marriott
litigation settlement, was prepaid in January 1998.
Sub-lease income decreased by $35,737, or 76.8%, to $10,800
in 1997 from $46,537 in 1996. One of two sub-leases was
terminated on August 1, 1996. The remaining sub-leased location
produces sub-rental income of $900 per month. Such sub-leased
premises constitute a portion of the entire property leased by a
subsidiary of the Company which also encompasses the Empire
Boulevard location. Should this location be sold as the Company
seeks to do, the sub-lease agreement would be sold as well. (See
Notes 2, 3, 7B, 7C and 9A to the Consolidated Financial
Statements).
Miscellaneous income decreased by $12,676, or 29.6%, to
$30,185 in 1997 from $46,537 in 1996. Included in the amount for
1997 is a gain of $13,908 on the sale of the Hillside Avenue,
Queens Restaurant. The Company may realize additional proceeds
on such sale of from $50,000 to $100,000 if the purchaser obtains
an extension of the lease which is due to expire on July 31,
1998. As of March 31, 1998, the Company has been informed that
negotiations to obtain such an extension have been unsuccessful.
(See Note 9B to the Consolidated Financial Statements).
As of December 28, 1997, the Company has recorded an
impairment loss of $159,772 attributable to the tangible and
intangible assets of the Empire Boulevard, Brooklyn location and
related sub-leased premises. Such loss recognition was a
consequence of the Company determination that the carrying value
of the restaurant's and the related sub-leased property's assets
would likely not be recovered from the future cash inflows of
restaurant operations and the sub-lease agreement. Since April
1, 1996 all of such operations have been conducted under the
auspices of a management agreement. The fee arrangements
applicable to such agreement effectively result in the Company
receiving a minimum monthly payment of $200 plus reimbursement
for any cash flow shortfall. As such operations have sustained
net divisional losses of $28,809 and $42,641 over the last two
fiscal years, future annual operating cash flows to the Company
from such location would appear to be limited to the $2,400
annual total of such minimum monthly payments. The Company has
accordingly written down the applicable assets to a carrying
value of $60,000 representing their estimated fair value less
estimated costs to sell. Although the restaurant's Manager has
expressed an interest in purchasing this location, no formal
offer has been made. Nevertheless the Company anticipates
selling this store and the related sub-lease by the end of 1998.
(See "Liquidity" and Notes 1D, 2, 3, 7B, 7C and 9A to the
Consolidated Financial Statements).
At December 29, 1996 the Company had accrued the $143,500
litigation settlement amount in satisfaction of the judgement
awarded to the plaintiff landlord for the closed Raritan
location. (See Item 3. "Legal Proceedings" and Note 7D to the
Consolidated Financial Statements).
Due to available net operating tax loss carryforwards in
excess of taxable income for fiscal 1997 and 1996, the Company
did not incur any income taxes in either year. At December 28,
1997, the Company has net operating loss and jobs tax credit
carryforwards of approximately $1,489,000 and $91,000, which
expire in 2009 and 2002, respectively. (See Note 10 to the
Consolidated Financial Statements).
Liquidity
- ---------
The Company's working capital improved by $235,272 from a
deficiency of $226,904 at December 29, 1996 to a surplus of
$8,368 at December 28, 1997. Operations provided $279,298. Net
capital expenditures and security deposits required $68,584 and
$1,484, respectively, while long-term borrowings provided
$26,042.
From a cash flow standpoint, operating activities provided
$11,013, investing required $53,203 and financing provided
$88,542 resulting in a $46,352 net increase in cash, which
brought the year-end cash balance to $276,956.
In January 1998, the Company retired its outstanding bank
indebtedness of $88,542. (See Note 11A to the Consolidated
Financial Statements).
The Company believes its existing cash resources and
expected net cash inflows will be adequate for its scope of
operations over the next twelve months. In addition should the
Company consummate a sale of the managed Brooklyn restaurant, net
cash proceeds therefrom are estimated at $60,000. The Company
has recently initiated discussions regarding a new potential
leased site but has not reached any agreement therefor. If a new
site is leased, the development of such location would be funded
from a combination of available cash, current operating cash
flow, and/or the sale proceeds of the Brooklyn restaurant, if
applicable, and/or third party lender financing depending upon
the amounts required.
If the Company's plans to develop a new location do not come
to fruition, the Company may consider a further return-of-capital
distribution by the end of 1998.
Inflation
- ---------
In the Company's recent fiscal years, inflation has not been
an overly significant factor. While certain raw food costs have
fluctuated, such fluctuations have been cyclical rather than
representative of steady inflationary pressure. Also, while unit
labor costs have gone up, such increases have generally been
offset by productivity improvements.
Item 7. FINANCIAL STATEMENTS
- ------- --------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Independent Auditor's Report F-1
Consolidated Balance Sheet at December 28, 1997 F-2
Consolidated Statement of Operations for the Years
Ended December 28, 1997 and December 29, 1996 F-3
Consolidated Statement of Stockholders' Equity for the
Years Ended December 28, 1997 and December 29, 1996 F-4
Consolidated Statement of Cash Flows for the Years
Ended December 28, 1997 and December 29, 1996 F-5
Notes to Consolidated Financial Statements F-6 to F-13
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Fast Food Operators, Inc.
Bayside, New York
I have audited the accompanying consolidated balance sheet of
Fast Food Operators, Inc. and Subsidiaries as of December 28,
1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the
two-year period ended December 28, 1997. These financial
statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted
auditing standards. Those standards require that I plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. I
believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Fast Food Operators, Inc. and Subsidiaries as of
December 28, 1997, and the consolidated results of their
operations and cash flows for each of the years in the two-year
period ended December 28, 1997, in conformity with generally
accepted accounting principles.
/S/ ERIC L. WESTON
Certified Public Accountant
Westbury, New York
January 15, 1998, except for Note 11 as
to which the date is January 26, 1998
F-1
Fast Food Operators, Inc. and Subsidiaries
Consolidated Balance Sheet
December 28, 1997
ASSETS
Current assets:
Cash $ 276,956
Inventory (Note 1B) 28,202
Prepaid expenses and other current assets 87,332
-----------
Total current assets 392,490
-----------
Property and equipment, net of accumulated
depreciation (Notes 1C, 1D, 2, and 9) 320,294
-----------
Other assets:
Security deposits 8,500
Intangible assets, net of accumulated
amortization (Notes 1E and 3) 684
-----------
Total other assets 9,184
-----------
TOTAL ASSETS $ 721,968
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable bank
(Notes 4 and 11A) $ 62,500
Accounts payable and accrued expenses 259,241
Taxes, other than income taxes 49,159
Due to Integrated Food Systems, Inc. (Note 6) 13,222
-----------
Total current liabilities 384,122
Note payable bank, less current maturities
(Notes 4 and 11A) 26,042
Security deposits payable 12,274
-----------
Total liabilities 422,438
-----------
Commitments and contingencies -
(Notes 6, 7, 9, 10 and 11)
Stockholders' equity - (Notes 5 and 6):
Common stock, $.01 par value;
authorized: 10,000,000 shares;
issued and outstanding: 8,914,300 shares 89,143
Additional paid-in capital 2,142,862
Accumulated deficit (1,932,475)
-----------
Total stockholders' equity 299,530
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 721,968
===========
See notes to consolidated financial statements.
F-2
Fast Food Operators, Inc. And Subsidiaries
Consolidated Statement of Operations
Years Ended December 28, 1997 and December 29, 1996
1997 1996
----------- -----------
Sales $ 5,247,779 $ 5,349,978
Cost of sales 1,697,245 1,781,065
----------- -----------
Gross profit 3,550,534 3,568,913
----------- -----------
Selling, general and
administrative expenses
(Notes 6, 7A, 7B, 7C and 11B) 3,390,737 3,652,223
Interest expense -
(Notes 4 and 11A) 8,100 -
Sublease income (Note 7B) ( 10,800) ( 46,537)
Miscellaneous income, including gain
of $13,908 on sale of restaurant
in 1997 (Note 9B) ( 30,185) ( 42,861)
Loss on asset impairment in 1997 and
litigation settlement in 1996
(Notes 9A and 7D) 159,772 143,500
----------- -----------
3,517,624 3,706,325
----------- -----------
Net income (loss) (Note 10) $ 32,910 $ (137,412)
=========== ===========
Earnings (loss) per common share
(Note 1H) $ - $ (.02)
=========== ===========
Weighted average number of
shares outstanding 8,914,300 8,914,300
=========== ===========
See notes to consolidated financial statements.
F-3
Fast Food Operators, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Two Years Ended December 28, 1997
Total
Additional Accumu- Stock-
Common Stock Paid-In lated holders'
Shares Amount Capital Deficit Equity
------ ------ ---------- ------- -------
Balances,
January
1, 1996 8,914,300 $89,143 $ 2,232,005 $(1,827,973) $ 493,175
Return of
capital
distri-
bution
(Note 5) - - ( 89,143) - ( 89,143)
Net loss
for 1996 - - - ( 137,412) ( 137,412)
--------- ------- ----------- ----------- ---------
BALANCES,
DECEMBER
29, 1996 8,914,300 89,143 2,142,862 (1,965,385) 266,620
Net income
for 1997 - - - 32,910 32,910
--------- ------- ----------- ------------ ----------
BALANCES,
DECEMBER
28, 1997 8,914,300 $89,143 $ 2,142,862 $(1,932,475) $ 299,530
========= ======= =========== =========== ==========
See notes to consolidated financial statements.
F-4
Fast Food Operators, Inc. And Subsidiaries
Consolidated Statement of Cash Flows
Years Ended December 28, 1997 and December 29, 1996
1997 1996
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 32,910 $( 137,412)
----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 100,524 117,679
Loss on asset impairment (1997)
and litigation settlement
(1996) 159,772 143,500
Gain on sale of restaurant ( 13,908) -
Decrease (increase) in inventory 3,972 ( 229)
Decrease (increase) in prepaid
expenses and other current
assets ( 33,799) 78,393
Decrease in accounts payable
and accrued expenses ( 222,221) ( 57,634)
Increase (decrease) in security
deposits ( 6,484) 8,128
Increase (decrease) in taxes, other
than income taxes ( 6,292) 5,484
Increase (decrease) in due to
Integrated Food Systems, Inc. ( 3,461) 169,693
----------- -----------
Total adjustments ( 21,897) 465,014
----------- -----------
Net cash provided by operating
activities 11,013 327,602
----------- -----------
Cash flows from investing activities:
Purchase of fixed and other assets ( 98,584) ( 120,938)
Proceeds from sale of restaurant
assets 41,331 -
Security deposits refunded 5,000 6,514
Other ( 950) -
----------- -----------
Net cash required by investing
activities ( 53,203) ( 114,424)
----------- -----------
Cash flows from financing activities:
Proceeds of note payable 125,000 -
Return of capital distribution - ( 89,143)
Payments of long-term debt ( 36,458 -
----------- -----------
Net cash provided (required) by
financing activities 88,542 ( 89,143)
----------- -----------
Net increase in cash 46,352 124,035
Cash, beginning of year 230,604 106,569
----------- -----------
Cash, end of year $ 276,956 $ 230,604
=========== ===========
Supplemental cash flow information:
Cash paid during the year for
interest $ 6,341 $ -
=========== ===========
Non-cash investing and financing
activities:
Reclassification of deferred
lease costs $ 9,283 $ -
=========== ===========
Net book value of property and
equipment sold $ 16,092 $ -
=========== ===========
Other restaurant assets sold:
Inventory $ 3,731 $ -
=========== ===========
Prepayments $ 6,650 $ -
=========== ===========
See notes to consolidated financial statements.
F-5
Fast Food Operators, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization and Principles of Consolidation:
The Company is engaged in the business of operating
retail fast food restaurants under its trade name,
Popeye's Famous Fried Chicken and Biscuits of New York,
in accordance with franchise agreements. The Company is
managed by Integrated Food Systems, Inc. ("IFS") who has
made loans with as well as an investment in the Company.
(See Notes 1E, 3, 6 and 7A). At December 1997 the
Company was operating five restaurants, having sold one
restaurant at a gain in April 1997. (See Note 9).
The consolidated financial statements include the
accounts of the Company's wholly owned subsidiaries, New
Jersey Pop Corp., Royal Foods, Inc., Empire Boulevard,
Inc. and 1074 Washington Avenue, Inc. All intercompany
accounts and transactions have been eliminated.
(B) Inventory:
Inventory consists of food and paper supplies and is
valued at the lower of cost or market on a first-in,
first-out basis.
(C) Depreciation and Amortization:
The cost of property and equipment is depreciated using
the straight-line method at rates adequate to allocate
the cost of applicable assets over their expected useful
lives.
Leasehold improvements are amortized over the lesser of
the terms of the related leases or the estimated useful
lives of the assets.
(D) Asset Impairments:
The Company records impairment losses when events and/or
changes in circumstances indicate that the carrying value
of an asset will not be recovered through future cash
inflows. Assets deemed to be impaired are written down
to their fair values. For impaired assets to be sold or
otherwise disposed of, reported asset values are reduced
for estimated costs of sale of disposal, as applicable.
Impaired assets to be sold or disposed of are neither
depreciated nor amortized; though they may still be
utilized in revenue-producing capacities. (See Notes 2,
3 and 9A).
(E) Intangible Assets:
The Company operates its Popeye's franchises pursuant to
franchise agreements. Initial franchise fees incurred in
connection with the acquisition of franchises are
amortized on a straight-line basis over 10 years. The
agreements pertaining to each existing franchise are for
a 20-year term. The Company may, at its option, renew
each expiring franchise for one additional 10-year period
for a fee equal to 50% of the then current franchise fee.
Such renewal fee is presently $12,500.
The franchise agreements also obligate the Company to pay
the franchisor fees for royalties and advertising. (See
Note 7A).
Deferred lease costs are amortized over the life of the
lease.
F-6
Fast Food Operators, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
(F) Income Taxes:
The Company's consolidated federal income tax return
includes all of its subsidiaries. The Company accounts
for income taxes pursuant to Financial Accounting
Standard No. 109, ("FAS 109"), adopted in 1993. The
adoption of this standard has had no impact on the
Company's reportable income tax expense or benefit. (See
Note 10).
The Company is also subject to various state and local
corporate franchise taxes. Such taxes, not constituting
a tax on income, are included in general and
administrative expenses.
(G) Use of Estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date thereof and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
(H) Earnings (Loss) per Common Share:
Income (loss) per common share is computed by dividing
such amount by the weighted average number of common
shares outstanding during each year. The Company has no
outstanding stock options, purchase warrants or other
potentially dilutive securities. Accordingly, adoption
of Financial Accounting Standard No. 128, "Earnings Per
Share," effective for periods ended after December 15,
1997, had no effect on such per share data.
(I) Fiscal Year:
Th Company's fiscal year ends on the last Sunday in
December. Fiscal 1997 and 1996 each comprised 52 weeks.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment at December 28, 1997 consist of
the following:
Leasehold improvements $ 798,498
Kitchen equipment 626,032
Furniture and fixtures 197,129
Register systems 54,495
Automobiles 13,023
Impaired restaurant assets to be sold,
including deferred leasehold costs
of $9,283 (See Notes 3, 7C and 9A) 60,000
----------
1,749,177
Less: Accumulated depreciation and
amortization 1,428,883
----------
Net property and equipment $ 320,294
==========
F-7
Fast Food Operators, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 3 - INTANGIBLE ASSETS:
Intangible assets at December 28, 1997 consist of the
following:
Franchise fees, net of accumulated
amortization of $99,583 $ 417
Deferred lease costs, net of accumulated
amortization of $3,733 267
----------
Total: $ 684
==========
At December 28, 1997, unamortized deferred lease costs of
$9,283 were reclassified to "Impaired Assets to be Sold."
(See Notes 2, 7C and 9A).
NOTE 4 - NOTE PAYABLE, BANK
On April 10, 1997 the Company borrowed $125,000 from the
BSB Bank & Trust Company in order to fund the payment of
the litigation settlement with the Host Marriott
Corporation. (See Note 7D). The note, secured by the
Company's inventory, equipment and intangibles, was due
in 24 monthly principal payments of $5,208 plus interest
at 10%. Subsequent to December 28, 1997, the balance of
the note was prepaid. (See Note 11A).
NOTE 5 - RETURN OF CAPITAL DISTRIBUTION
On November 15, 1996, the Company declared a return of
capital distribution of $.01 per share of common stock.
The distribution, aggregating $89,143, was paid on
December 16, 1996 to shareholders of record as of
December 2, 1996.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company is managed by IFS pursuant to a management
and other related agreements originally entered into in
January 1988. In December 1990, the Company and IFS
conditionally amended the various agreements between
them. Adoption of the amended agreements, including a
restructuring of the Company's debt and a conversion of a
part thereof to 3,000,000 shares of common stock, all on
a retroactive basis, required the ratification of the
Company's shareholders, which was obtained on June 25,
1992. The management agreement was further amended
effective January 26, 1994 to reduce the annual
management fee by $4,000 per restaurant to $12,000.
The management agreement has been renewed annually for
additional one-year terms through January 25, 1998; each
renewal provided for a per restaurant fee of $12,000.
However, the renewal effective January 26, 1996 required
a minimum annual fee of $108,000; the renewal effective
January 26, 1997 required a minimum annual fee of
$96,000. Subsequent to December 28, 1997 the agreement
was again renewed. (See Note 11B).
Management fees were $97,000 in fiscal 1997 and $105,000
in 1996.
At January 1, 1996, IFS owed the Company $153,010, which
was repaid during the first quarter of 1996. At December
28, 1997 and December 29, 1996 the Company owed IFS
$13,222 and $16,683, respectively, representing the
management fee for the respective month then ended and
miscellaneous items.
F-8
Fast Food Operators, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 7 - COMMITMENTS AND CONTINGENCIES
(A) Franchise Arrangements:
The Company is obligated to pay the franchisor fees for
royalties and advertising, equal to 5% and 3% of gross
sales, respectively. Royalty and advertising fees
charged to operations were $262,289 and $156,997 for
fiscal 1997 and $267,375 and $162,486 for 1996.
(B) Operating Lease Commitments:
The Company has lease agreements for all five of its
store premises expiring at various dates through June
2007. Of these, one expires in September 1998, one in
2002, one in 2003 and two in 2007. Only the lease
expiring in 2003 may be extended - for one ten-year term.
Three of the leases provide for percentage rent at rates
averaging 5% on annual sales in excess of stated
minimums. One lease requires base rent equal to 11% of
sales through February 28, 2002 and 12% of sales through
February 28, 2007. In addition to monthly rental charges
on all the leases, the Company must pay certain property
taxes, insurance and other expenses.
Effective August 1, 1996 the Company's lease for its
Manhattan restaurant was amended to extend the lease term
by six years until December 31, 2002 and increase the
annual rental from $180,000 to $265,000 for the three-year
period ending July 31, 1999 and to $270,000
thereafter.
During 1997 the Company sold one Queens restaurant. (See
Note 9B). At December 28, 1997 the Company earns rental
income from one sublease. (See Note 9A). Another sub-lease
was terminated on August 1, 1996.
Minimum future annual rental and sublease payments under
the remaining operating leases are as follows:
Year Amount Sublease Net
----------- ---------- -------- ----------
1998 $ 384,445 $ 10,800 $ 373,645
1999 359,903 10,800 349,103
2000 362,820 10,800 352,020
2001 362,820 10,800 352,020
2002 365,361 10,800 354,561
2003-2007 272,559 47,700 224,859
---------- -------- ----------
Totals $2,107,908 $101,700 $2,006,208
========== ======== ==========
The components of rent expense for the last two fiscal
years are as follows:
1997 1996
--------- ---------
Minimum rentals $ 424,122 $ 431,238
Contingent rentals 102,532 94,683
--------- ---------
526,654 525,921
Less: Sublease rentals 10,800 46,537
--------- ---------
$ 515,854 $ 479,384
========= =========
F-9
Fast Food Operators, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 7 - COMMITMENTS AND CONTINGENCIES - (continued)
(C) Management Agreement:
Effective April 1, 1996 the Company entered into a
management agreement with an individual (The "Manager") to
manage the operations of its Popeye's Restaurant on
Empire Boulevard in Brooklyn. The agreement, which had
an initial term of nine months, continues in effect
indefinitely unless cancelled by the Company or the
Manager, in each case, upon written notice of 30 or 90
days, respectively. If the agreement is terminated by
reason of the Manager's breach or is otherwise terminated
by the Manager for any reason other than a breach by the
Company, the Manager must pay a $10,000 termination fee.
The Manager paid a $15,000 security deposit upon the
commencement of the agreement.
The agreement provides for a monthly management fee to
the Manager equal to the restaurant's cash flow including
sub-lease income less the greater of $200 or five percent
of such monthly cash flow total, calculated monthly and
not cumulatively. Stated conversely, the Company
receives the greater of $200 per month or 5% of the
restaurant's total monthly cash flow. Any negative cash
flow in any month is borne by the Manager and the Company
still receives the $200 minimum amount for such month.
In fiscal 1997, the Company earned the minimum fee of
$2,400 and was also reimbursed by the manager for $4,084
of net cash flow shortfall for the year. In fiscal 1996,
the Company earned the minimum $1,800 amount for the nine
months the agreement was in effect. The amount retained
by the Manager during 1996 was $10,686.
The Company is seeking to sell this restaurant. (See
Notes 2, 3 and 9A).
(D) Adjudication and Settlement of Lawsuit:
In March 1997, the U.S. District Court reached a decision
in the lawsuit brought against the Company by the Host
Marriott Corporation. Such plaintiff was the landlord
for a prior location which the Company had acquired and
leased from the plaintiff. The property had been the
subject of a condemnation suit filed by the New Jersey
Department of Transportation. The related construction
project necessitated the closing of the restaurant in
July 1993. In January of 1994, the Company received
condemnation proceeds of $399,302 of which $105,909
comprised attorney fees and related expenses. The
Company considered the lease to be terminated and as of
February 1, 1994 ceased paying rent.
In September 1994, the landlord brought a lawsuit seeking
lost rent, payment for alleged loss of percentage rent,
recovery of the condemnation award paid to the Company
and punitive damages. The Company filed an answer
denying all liability and asserting various affirmative
defenses, among which was the failure of the plaintiff to
mitigate damages based on their refusal to assign the
lease to another tenant. In March 1996 the Company, as
defendant, and the plaintiff filed cross motions for
summary judgement. The matter subsequently proceeded to
trial in U.S. District Court in February 1997. On March
7, 1997, the Court decided in favor of the plaintiff and
awarded $229,893 plus reasonable legal fees.
F-10
Fast Food Operators, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 7 - COMMITMENTS AND CONTINGENCIES - (continued)
(D) Adjudication and Settlement of Lawsuit: (continued)
Such result was completely unexpected by the Company and
its counsel. On March 19, 1997, the Company filed a
notice of appeal of the District Court's decision with
the U.S. Court of Appeals for the Third Circuit. The
Company also sought to negotiate a settlement of the
judgement amount with the plaintiff. On April 9, 1997,
such settlement negotiations resulted in the plaintiff
agreeing to accept the Company's offer of $143,500 in
full satisfaction of the judgement amount. Payment
thereof was made on April 10, 1997. The Company accrued
the loss at December 29, 1996 and for the year then ended
in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies."
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 28 1997, the Company's financial instruments
consist of cash, note payable, bank and due to Integrated
Food Systems, Inc. The fair value of these accounts
approximates their carrying value at such date.
NOTE 9 - IMPAIRMENT/SALE OF RESTAURANT ASSETS
(A) Asset Impairment, Brooklyn Restaurant:
As of December 28, 1997, cognizant of the results of and
the future prospects for its managed Empire Boulevard
Restaurant in Brooklyn, the Company determined that the
historical cost-basis carrying value thereof would not be
recovered by the future cash inflows attributable to its
restaurant operations and sub-lease arrangement. The
Company further determined that it would seek to sell
this restaurant property including the related sub-lease.
In accordance with Financial Accounting Standard No. 121,
the Company has written down this restaurant's tangible
and intangible assets to $60,000, representing the
estimated fair value thereof less estimated costs to
sell. Such write-down results in a loss of $159,772.
Although there presently exists no written agreement for
such sale, the Company expects that the sale of this
restaurant will be consummated by the end of 1998. Prior
to such anticipated consummation, the Company expects to
continue the operation of this restaurant, subject to the
existing management agreement. (See Note 7C). For the
years ended December 28, 1997 and December 29, 1996, the
Empire Boulevard Restaurant had net divisional losses of
$28,809 and $42,641, respectively.
(B) Gain on Sale of Queens Restaurant:
On April 15, 1997, the Company consummated the sale of
its Hillside Avenue, Queens Restaurant to an unaffiliated
party, who had previously purchased two of the Company's
restaurants and also manages the Company's Empire
Boulevard Restaurant in Brooklyn. The purchase price for
this restaurant, the lease for which expires on July 31,
1998, was $30,000 plus closing adjustments of $11,331 for
inventory and prepaid/ accrued items. The price is
subject to increase by a minimum of $50,000, in the event
the purchaser obtains any extension of the lease. For
extensions of the lease term in excess of five years, the
price is increased by an additional $10,000 per year to a
maximum of $50,000. Therefore, for an extension of ten
years or more, the adjusted purchase price will be
$130,000.
F-11
Fast Food Operators, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10- INCOME TAXES
Due to available net operating tax loss carryforwards in
excess of taxable income for fiscal 1997 and 1996, the
Company did not incur any income taxes in either year.
At December 28, 1997, the Company has net operating loss
and jobs tax credit carryforwards of approximately
$1,489,000 and $91,000, respectively, which expire in
2009 and 2002.
Under FAS 109, the loss and tax credit carryforwards
referred to above as well as certain other book-tax
differences give rise to deferred tax assets which at
December 28, 1997 aggregated $586,200, all of which were
offset by an equivalent valuation allowance based on an
estimated likelihood of realizability of less than 50%.
Reconciliation of the tax on (benefit from) income (loss)
to the expected tax (benefit) computed by applying the
U.S. federal income tax rate to income (loss) before
income taxes is:
Percent of Pre-Tax Income (Loss)
--------------------------------
1997 1996
----- -----
Computed expected tax (benefit) 34.0 (34.0)
Benefit from net operating
tax loss carryforward (34.0) -
Net operating loss, providing
no federal income tax benefit - 34.0
----- -----
- -
===== =====
The tax effects of temporary differences that give rise
to deferred tax assets (before valuation allowances) and
deferred tax liabilities at December 28, 1997, none of
which gave rise to any deferred income tax provision or
benefit in either fiscal 1997 or 1996, are as follows:
Assets/Liabilities
Assets ------------------
Non-current:
Property and equipment, net of
accumulated depreciation $ 48,800
Deferred costs and expenses, net of
accumulated amortization 100
Net operating loss carryforward 446,700
Jobs tax credit carryforward 90,600
--------
Total deferred tax assets $586,200
========
For the year ended December 28, 1997, the valuation
allowance decreased by $14,450 to $586,200. The net
deferred tax asset at December 28, 1997 was therefore
zero.
F-12
Fast Food Operators, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 11 -SUBSEQUENT EVENTS
(A) Prepayment of Note Payable, Bank:
In January 1998, the Company retired its outstanding
indebtedness of $88,542 to the BSB Bank & Trust Company,
without prepayment penalty. The Company also paid
interest charges totalling $1,970, accrued through the
January 20, 1998 prepayment date.
(B) Renewal of Management Agreement:
On January 26, 1998, the management agreement pursuant to
which IFS manages the Company was renewed for an
additional year at its existing terms of $12,000 per
restaurant subject to an annual minimum of $96,000.
F-13
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ------- ------------------------------------------------
Not applicable.
PART III
--------
Item 9. DIRECTORS AND EXECUTIVE OFFICERS
- ------- --------------------------------
The following table sets forth information relating to each
of the directors and executive officers of the Company.
NAME AGE POSITION WITH THE COMPANY
Lewis E. Topper 48 Director, Chairman of the
Board, President, Chief
Executive Officer, and
Treasurer
Daniel A. Poganski 37 Director and Secretary
Wayne R. Lehrhaupt 50 Director
Lewis E. Topper has been the President, Treasurer, and a
Director of the Company since January 1988. Mr. Topper became
the Company's Chairman of the Board and Chief Executive Officer
on October 30, 1989. Mr. Topper has been the President of IFS
since December 1985. Mr. Topper is also Chairman of the Board,
Chief Executive Officer, President, Chief Financial Officer,
Chief Accounting Officer, Treasurer and a Director of Fast Food
Systems, Inc. the parent of IFS since November 1990. Since 1989,
Mr. Topper has also been an officer and a minority stockholder of
numerous corporations which operate Wendy's restaurants. Mr.
Topper is a graduate of Baruch College and a Certified Public
Accountant.
Daniel A. Poganski joined the Company in 1988 as its
Controller. He has been the Secretary since October 1989 and
Director since January 22, 1990. Mr. Poganski has served as the
Secretary and Controller of IFS since April 1989 and the
Secretary and Assistant Vice President of Fast Food Systems, Inc.
since November 1990 and a Director of such Company since December
1991. In January of 1996, Mr. Poganski resigned as a full-time
employee of IFS and Fast Food Systems, Inc. He retained his
positions as officer and director and now provides virtually all
management accounting and administrative services to those
entities and to the Company through his own service company, A &
B Accounting Services. He is a Certified Public Accountant and a
graduate of Moorhead State University.
Wayne R. Lehrhaupt has been a Director of the Company since
January, 1994. Mr. Lehrhaupt is an attorney at law and has been
a member of the New York Bar since 1974. He is a graduate of
Queens College and has a J.D. degree from St. John's University.
Since July 1992, Mr. Lehrhaupt has been counsel to the law firm
of Solovay, Marshall & Edlin in New York, New York. From 1987
until 1992, he was a partner in the law firm of Litman &
Lehrhaupt, New York, New York.
Item 10. EXECUTIVE COMPENSATION
- -------- ----------------------
During each of the fiscal years in the three-year period
ended December 28, 1997, the Company did not pay any executive
officers any compensation. The Company was charged $97,000,
$105,000 and $96,500 by IFS pursuant to the Management Agreement
during fiscal 1997, 1996 and 1995, respectively. The Management
Agreement has been renewed through January 25, 1999 at an annual
per restaurant fee of $12,000 subject to an annual minimum of
$96,000. In fiscal 1997 and 1996, the Company paid fees of
$49,000 and $60,000, respectively, to Mr. Poganski's service
company, A&B Accounting Services.
The Company maintains no employee benefit or stock option
plans, but may in the future adopt pension, profit sharing, stock
option, and other benefit plans.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------- ---------------------------------------------------
The following table sets forth as of April 6, 1997
information regarding the beneficial ownership of Common Stock
(i) by each person known by the Company to be the beneficial
owner of more than 5% of the outstanding Common Stock; (ii) by
each person who is a director or nominee for director; and (iii)
by all directors and executive officers as a group.
Name of Beneficial Amount and Nature
Owner and Address of of Beneficial Percent
Owner of More Than 5% Ownership of Class
- --------------------- ----------------- --------
Integrated Food
Systems, Inc. 3,000,000 shares (1) 33.7%
42-40 Bell Boulevard
Bayside, NY 11361
Lewis Topper 114,888 shares (1) 1.3%
Lois Schifrin 430,240 shares (2) 4.8%
300 East 56th Street
New York, NY 10022
Toni Wiener 430,240 shares (2) 4.8%
9 Harbor Court East
Roslyn, NY 11576
Bruce Schifrin 430,239 shares (2) 4.8%
16 Rodeo Circle
Syosset, NY 11791
Daniel A. Poganski 31,635 shares (1) 0.3%
Wayne R. Lehrhaupt -- --
All directors and executive
directors as a group
(three persons) 146,523 shares (1) 1.6%
(Footnotes to table appear on following page.)
- ----------------------------------------------
(Footnotes to table appearing on previous page.)
(1) Represents 3,000,000 shares of Common Stock issued June
25, 1992 upon shareholder approval of the 1990
Transactions. See Item 1. Business - Transactions
with IFS. Lewis Topper, the President and a Director
of IFS, and the Chairman of the Board, Chief Executive
Officer, Treasurer and a Director of Fast Food Systems
and Daniel A. Poganski, the Secretary, Controller and a
Director of IFS and Fast Food Systems, each disclaims
beneficial ownership of the shares of Common Stock
owned by IFS.
(2) Lois Schifrin, Toni Wiener and Bruce Schifrin are
siblings. Each has attained his or her majority and
disclaims beneficial ownership as to any of the shares
owned by such other persons.
Except as set forth in the footnotes, none of such shares is
known by the Company to be shares with respect to which the
beneficial owner has the right to acquire beneficial ownership.
Except as set forth in the footnotes, the Company believes the
beneficial holders listed above have sole voting and investment
power regarding the shares shown as being beneficially owned by
them.
Item 12. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The Company is managed by IFS, which has a 33.65% equity
interest in the Company. See Item 1. Business - Transactions
with IFS, and Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 6 to the
Consolidated Financial Statements.
The removal of IFS's designees from the Company's Board of
Directors without IFS's consent and without cause, or the failure
of the stockholders to elect IFS's designees to such position, or
the removal of Lewis Topper or any other designee of IFS without
IFS's consent and without cause from the office of President
constitutes a default under the provisions of the Management
Agreement.
Daniel A. Poganski, Secretary and Director of the Company
provides management accounting and administrative services to the
Company through his own service company, A & B Accounting
Services. For the fiscal years ended December 28, 1997 and
December 29, 1996, fees for such service aggregated $49,000 and
$60,000, respectively.
Wayne R. Lehrhaupt, a Director of the Company, provides
various legal services to the Company. For the fiscal years
ended December 28, 1997 and December 29, 1996, fees for such
services aggregated $3,083 and $5,663, respectively.
PART IV
-------
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
- -------- --------------------------------
(a) (3) Exhibits
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Company and all
amendments thereto, except for amendment referred to as
Exhibit 3.2. (1)
3.2 Amendment, dated as of January 30, 1990, to Certificate of
Incorporation. (7)
3.3 By-Laws of the Company. (2)
10.1 Development Agreement, dated as of January 22, 1985,
between the Company and Popeyes Famous Fried Chicken and
Biscuits, Inc., together with form of Franchise Agreement.
(3)
10.2 Amendment to Development Agreement. (5)
10.3 Secured Promissory Note, dated as of January 26, 1990,
from the Company to IFS. (4)
10.4 Loan Agreement, dated as of January 26, 1988, between the
Company and IFS. (4)
10.5 Security Agreement, dated as of January 26, 1988, between
the Company and IFS. (4)
10.6 Management Agreement, dated as of January 26, 1988,
between the Company and IFS. (4)
10.7 Amendment to Management Agreement, dated as of October 30,
1989. (7)
10.8 Amendment to Security Agreement, dated as of October 30,
1989. (7)
10.9 Amendment to Loan Agreement, dated as of October 30, 1989.
(7)
10.10 Secured Promissory Note, dated as of December 28, 1990,
from the Company to IFS. (6)
10.11 Amendment to Loan Agreement, dated as of December 28,
1990, between the Company and IFS. (6)
10.12 Amendment to Security Agreement, dated as of December 28,
1990, between the Company and IFS. (6)
10.13 Stock Subscription Agreement, dated as of December 28,
1990, between the Company and IFS. (6)
10.14 Amendment to Management Agreement, dated as of December
28, 1990, between the Company and IFS. (6)
10.15 Omnibus Agreement, dated as of December 28, 1990, between
the Company and IFS. (6)
10.16 Amended Secured Promissory Note, dated as of January 26,
1990, from the Company to IFS. (6)
10.17 Amendment to Loan Agreement, dated as of January 26, 1990,
between the Company and IFS. (6)
10.18 Amendment to Security Agreement, dated as of January 26,
1990, between the Company and IFS. (6)
10.19 Amendment to Management Agreement, dated as of January 26,
1990, between the Company and IFS. (6)
10.20 Amendment to Loan Agreement, dated as of January 26, 1992,
from the Company to IFS. (8)
10.21 Amended Secured Promissory Note, dated as of December 30,
1991, from the Company to IFS. (8)
10.22 Amendment to Management Agreement, dated as of January 26,
1992, between the Company and IFS. (8)
10.23 Amendment to Development Agreement, dated as of March 9,
1992, between the Company and Popeyes Famous Fried Chicken
and Biscuits, Inc. (8)
10.24 Amendment to Management Agreement, dated as of January 26,
1993, between the Company and IFS. (9)
10.25 Letter notification exercising renewal option for
restaurant premises at 1307 Teaneck Road, Teaneck, New
Jersey. (10)
10.26 Lease addendum extending and amending lease for restaurant
premises at 168-30 Hillside Avenue, Queens, New York. (10)
10.27 Letter notification exercising renewal option for
restaurant premises at 144-20 Hillside Avenue, Queens, New
York. (10)
10.28 Letter notification exercising renewal option for
subleased premises at 87-26 Roosevelt Avenue, Jackson
Heights, New York. (10)
10.29 Agreement to amend and modify lease for restaurant
premises at 372 Central Avenue, East Orange, New Jersey.
(10)
10.30 Lease modification, extension and amendment for restaurant
premises at 722 Seventh Avenue, New York, New York. (10)
10.31 Lease for restaurant premises at 1126 Eastern Parkway,
Brooklyn, New York. (10)
10.32 Lease surrender and termination agreement for subleased
premises at 848 Utica Avenue, Queens, New York. (10)
10.33 Second lease addendum extending and amending lease for
restaurant premises at 168-30 Hillside Avenue, Queens, New
York. (10)
10.34 Amendment to Management Agreement, dated as of January 26,
1994 between the Company and IFS. (10)
10.35 Asset Purchase Agreement, made October 21, 1994 for the
sale by the Company of the assets located at 168-30
Hillside Avenue, Jamaica, New York. (11)
10.36 Assignment and Assumption Agreement, made November 14,
1994 for the Assignment by the Company of the lease for
premises at 168-30 Hillside Avenue, Jamaica, New York.
(11)
10.37 Transfer and Release Agreement, made on or about November
14, 1994 for the transfer of the franchise rights for the
Company's restaurant at 168-30 Hillside Avenue, Jamaica,
New York. (11)
10.38 Asset Purchase Agreement, made on or about November 17,
1994 for the sale by the Company of the assets located at
1126 Eastern Parkway, Brooklyn, New York. (11)
10.39 Assignment and Assumption of lease, dated December 5, 1994
for the Assignment by the Company of the lease for
premises at 1126 Eastern Parkway, Brooklyn, New York.
(11)
10.40 Transfer and Release Agreement made on or about December
5, 1994 for the transfer of the franchise rights for the
Company's restaurant at 1126 Eastern Parkway, Brooklyn,
New York. (11)
10.41 Notice of Termination dated January 30, 1995 from the
Franchisor terminating the Development Agreement. (11)
10.42 Letter dated March 1, 1995 from Fast Food Systems, Inc. to
the Company detailing the credit to be given to the
Company for the termination of the sublease at 46-48 161st
Street, Bronx, New York. (11)
10.43 Asset Purchase Agreement, dated March 10, 1995, for the
sale of the Company's restaurant in Hillside New Jersey.
(11)
10.44 Amendment to Management Agreement dated as of January 26,
1995 between the Company and IFS. (11)
10.45 Asset Purchase Agreement, dated as of June 19, 1995,
between New Jersey Pop Corp. and S&K Chicken, L.L.C. (12)
10.46 Letter from Fast Food Operators, Inc. dated July 5, 1995,
in favor of S&K Chicken, L.L.C. (12)
10.47 Assignment dated July 1995, by and among 372 Central
Operating Co., Inc., Trunz Food Stores, Inc., 372 Holding
Corporation, A&T Management Co., Inc. and Robert Trunz.
(12)
10.48 Agreement dated as of July 5, 1995, by and among Fast Food
Operators, Inc., New Jersey Pop Corp. and S&K Chicken,
L.L.C. (12)
10.49 Asset Agreement Relative to the Sale of the Teaneck
Restaurant. (13)
10.50 Amendment to Management Agreement dated November 22, 1995.
(14)
10.51 Management Agreement for the Company's Restaurant at 40
Empire Boulevard, Brooklyn, New York. (15)
10.52 Modification and Extension Agreement for lease of
restaurant premises at 722 Seventh Avenue, New York, N.Y.
(15)
10.53 Assignment of Lease for premises at 97-26 Roosevelt
Avenue, Queens, New York. (15)
10.54 Amendment to Management Agreement dated as of January 26,
1997. (15)
10.55 Asset Purchase Agreement, dated January 15, 1997 for the
sale by the Company of the lease for premises and assets
located at 144-20 Hillside Avenue, Queens, N.Y. (15)
10.56 Amendment to Management Agreement dated as of January 26,
1998. (16)
22. List of Subsidiaries. (7)
- -------------------------------
(1) Incorporated by reference to Exhibit "B" of the Company's
Annual Report on Form 10-K for the year ended December 31,
1981.
(2) Incorporated by reference to Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1986.
(3) Incorporated by reference to Exhibit 10 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1984.
(4) Incorporated by reference to the Exhibits to the Company's
Current Report on Form 8-K, dated February 5, 1988.
(5) Incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1987.
(6) Incorporated by reference to the Exhibits to the Company's
Current Report on Form 8-K, dated January 4, 1991.
(7) Incorporated by reference to Exhibit 22 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 30, 1990.
(8) Incorporated by reference to Exhibits 10.20 through 10.23 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 1991.
(9) Incorporated by reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 27, 1992.
(10) Incorporated by reference to Exhibits 10.25 through 10.34 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 26, 1993.
(11) Incorporated by reference to Exhibits 10.35 through 10.44 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 25, 1994.
(12) Incorporated by reference to the Exhibits to the Company's
Current Report on Form 8-K dated July 5, 1995.
(13) Incorporated by reference to the Exhibits to the Company's
Current Report on Form 8-K dated November 20, 1995.
(14) Incorporated by reference to Exhibit 10.50 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
(15) Incorporated by reference to Exhibits 10.51 through 10.55 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 1996.
(16) Filed herewith.
(b) Reports on Form 8-K
-------------------
None.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By /s/ Lewis E. Topper
----------------------------------
Lewis E. Topper
Chairman of the Board,
President, Chief Executive
Officer, Treasurer and Director
Date: April 10, 1998
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title
/s/ Lewis Topper
---------------- Chairman of the
Lewis E. Topper Board, President,
Date: April 10, 1998 Chief Executive
Officer, Treasurer,
(Principal Financial
Officer and Principal
Accounting Officer),
and Director
/s/ Daniel A. Poganski Director and Secretary
----------------------
Daniel A. Poganski
Date: April 10, 1998
/s/ Wayne R. Lehrhaupt Director
----------------------
Wayne R. Lehrhaupt
Date: April 10, 1998
The foregoing constitute all of the Board of Directors.
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 276,956
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 28,202
<CURRENT-ASSETS> 392,490
<PP&E> 320,294
<DEPRECIATION> 0
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<CURRENT-LIABILITIES> 384,122
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0
0
<COMMON> 2,232,005
<OTHER-SE> (1,932,475)
<TOTAL-LIABILITY-AND-EQUITY> 721,968
<SALES> 5,247,779
<TOTAL-REVENUES> 5,247,779
<CGS> 1,697,245
<TOTAL-COSTS> 1,697,245
<OTHER-EXPENSES> 3,509,524
<LOSS-PROVISION> 0
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AMENDMENT TO MANAGEMENT AGREEMENT
Reference is made to the Management Agreement, made as of the
26th day of January, 1988 (the "Management Agreement"), the
amendments thereto executed on or about January 26, 1990 (the
"First Amendment"), December 29, 1990 (the "Second Amendment"),
January 26, 1992 (the "Third Amendment"), January 26, 1993 (the
"Fourth Amendment"), January 26, 1994 (the "Fifth Amendment"),
January 26. 1995 (the "Sixth Amendment"), January 26, 1996 (the
"Seventh Amendment") and January 26, 1997 (the "Eighth Amendment").
(All such amendments being collectively referred to herein as the
Amendments) by and between Integrated Food Systems, Inc., a New
Jersey corporation with offices at 42-40 Bell Boulevard, Suite 200,
Bayside, New York 11361 ("IFS"), and Fast Food Operators, Inc., a
New York corporation with offices at 42-40 Bell Boulevard, Suite
200, Bayside, New York 11361 ("FFO").
Terms used in the Management Agreement and the Amendments, is
hereby further amended as follows:
The Management Agreement, as amended by the Amendments, is
hereby further amended as follows:
1. Section 1 of the Seventh Amendment is hereby deleted and
replaced in its entirety by the following:
"For services to be rendered hereunder, beginning as of
January 26, 1998 FFO shall pay to IFS a fee (the "Management
Fee") equalling the greater of (i) Twelve Thousand ($12,000)
Dollars per annum per Restaurant, or (ii) Ninety Six Thousand
($96,000) Dollars per annum; provided, however, that if the
Management Fee payable to IFS hereunder is determined by
reference to subsection (i) above, if a Restaurant is not
operated for an entire 12 month period, the Management Fee
payable to IFS in relation to such Restaurant shall be pro
rated for the period of time such Restaurant is operated. In
addition to the Management Fee, IFS shall be entitled to
reimbursement of expenses incurred with respect to rendering
all of the services contemplated hereunder to the extent
permitted by section IV."
2. Section 2 of the Eighth Amendment is hereby deleted and
replaced in its entirety by the following:
"The agreement shall have an initial term expiring on January
25, 1999."
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the 26th day of January, 1998.
INTEGRATED FOOD SYSTEMS, INC.
By:____________________________
Lewis E. Topper, President
FAST FOOD OPERATORS, INC.
By:____________________________
Lewis E. Topper, President
