1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18917
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FAST FOOD SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
42-40 BELL BOULEVARD
BAYSIDE, NEW YORK
(Address of principal executive offices)
11361
(Zip Code)
13-3562193
(IRS Employer Identification Number)
(718) 229-1113
(Registrant's telephone number, including area code)
Indicate by check mark 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 [ ]
The number of shares outstanding of each of the issuer's classes of
common stock was 2,178,400 shares of common stock, par value $.01, outstanding
as at August 9, 1996.
2
FAST FOOD SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q THIRD QUARTER 1996
INDEX
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PART I PAGE NO.
- - ------ -------
Financial Information:
Condensed Consolidated Balance Sheets-
June 30, 1996 and September 24, 1995 3
Condensed Consolidated Statements of
Operations-for the Three and Nine Month
Periods Ended June 30, 1996 and June 25, 1995 4-5
Condensed Consolidated Statements of
Cash Flows-for the Nine Month Periods Ended
June 30, 1996 and June 25, 1995 6-7
Notes to Condensed Consolidated Financial
Statements 8-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II
- - -------
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote
of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
Financial Data Schedules 12-13
3
FAST FOOD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 24,
1996 1995
(UNAUDITED) *
----------- ------------
ASSETS
Current assets:
Cash $ 55,998 $ 150,945
Notes receivable, current maturities 145,612 95,266
Inventories 0 99,513
Other current assets 39,595 141,264
---------- ----------
Total current assets 241,205 486,988
---------- ----------
Property, and equipment, net 54,640 2,806,735
---------- ----------
Other assets
Notes receivable, less current
maturities 1,312,059 1,046,353
Interests in managed entities 214,311 314,324
Security deposits 1,242 58,375
Intangible assets 0 115,738
---------- ----------
Total other assets 1,527,612 1,534,790
---------- ----------
Total assets $1,823,457 $4,828,513
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Current maturities of capital lease
obligations $ 0 $ 21,451
Accounts payable, accrued expenses 24,790 731,668
Taxes payable, other than on income 0 104,441
Due to managed entities 0 147,458
---------- ----------
Total current liabilities 24,790 1,005,018
Capital lease obligations, non
current 0 378,119
Deferred credits 30,000 215,371
---------- ----------
Total liabilities 54,790 1,598,508
---------- ----------
Shareholders' equity:
Common stock and additional paid-in
capital 7,328,625 8,435,825
Accumulated deficit (5,559,958) (5,205,820)
---------- ----------
Total shareholders' equity 1,768,667 3,230,005
---------- ----------
Total liabilities and shareholders'
equity $1,823,457 $4,828,513
========== ==========
See accompanying notes to condensed consolidated financial statements.
*Condensed from audited financial statements.
4
FAST FOOD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30, June 25,
1996 1995
---------- ----------
Sales $ 0 $3,931,714
Cost of sales 0 1,321,255
---------- ----------
Gross Profit 0 2,610,459
---------- ----------
Store labor expenses 0 1,140,981
Store operating and occupancy expenses 0 1,012,953
Advertising and royalty expenses 0 327,563
General and administrative expenses 104,716 371,047
Interest expense 0 9,193
Management fee income (43,832) (70,078)
Interest income (37,635) (29,544)
Loss (gain) on sale of assets, net 0 302,047
Impairment of intangible franchise
affiliation value 0 340,850
Other income, net of other expense (52,930) (155,744)
---------- ----------
(29,681) 3,249,268
---------- ----------
Net income (loss) $ 29,861 $ (638,809)
========== ==========
Weighted average number of shares
outstanding 2,214,400 2,198,971
========== ==========
Net income (loss) per share $ (.01) $ .29
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
FAST FOOD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
June 30, June 25,
1996 1995
---------- ----------
Sales $1,103,236 $14,179,459
Cost of sales 387,156 4,688,479
---------- -----------
Gross Profit 716,080 9,490,980
---------- -----------
Store labor expenses 423,993 4,192,332
Store operating and occupancy expenses 321,852 3,551,988
Advertising and royalty expenses 89,518 1,226,051
General and administrative expenses 506,599 1,232,207
Interest expense 2,642 101,982
Management fee income (123,240) (216,696)
Interest income (146,276) (30,517)
Loss (gain) on sale of assets, net 40,351 50,999
Impairment of intangible franchise
affiliation value 0 340,850
Other income, net of other expense (45,221) (198,613)
---------- -----------
1,070,218 10,250,583
---------- -----------
Net loss $ (354,138) $ (759,603)
========== ===========
Weighted average number of shares
outstanding 2,214,400 2,185,257
========== ===========
Net loss per share $ (.16) $ (.35)
========== ===========
See accompanying notes to condensed consolidated financial statements.
6
FAST FOOD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30, June 25,
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (354,138) $ (759,603)
---------- ----------
Adjustments to reconcile net loss to
net cash required by operating
activities:
Depreciation and amortization 16,814 590,186
Impairment of intangible franchise
affiliation fee 0 340,850
Deferred credits applied (76,812) (88,608)
Imputed interest expense 0 16,479
Net loss (gain) on asset dispositions 40,351 50,999
Loss (income) attributable to equity
investments 23,610 (11,765)
Recognition of deferred gain 0 (3,644)
Change in due/to from managed entities (147,458) 322,995
Decrease in inventory 31,167 52,635
Decrease (increase) in other current
assets (12,045) 110,040
Decrease in accounts payable, accrued
expenses and other liabilities (729,975) (769,212)
---------- ----------
Total adjustments (854,348) 610,955
---------- ----------
Net cash required by operating
activities (1,208,486) (148,648)
---------- ----------
Cash flows from investing activities:
Proceeds of asset dispositions 1,626,633 1,740.000
Acquisition of tangible and intangible
assets (3,910) (206,401)
Collections on notes receivable 563,513 11,011
Distributions from managed entities 76,403 1,403
Cash paid on lease termination (18,000) 0
Increase in security deposits and other (23,900) (14,011)
---------- ----------
Net cash provided by investing
activities 2,220,739 1,532,002
---------- ----------
Cash flows from financing activities:
Repayments to shareholder 0 (545,295)
Principal payments on capital leases 0 (36,527)
Return of capital distributions paid (1,107,200) (664,320)
Proceeds of stock option exercise 0 36,000
---------- ----------
Net cash required by financing activities: (1,107,200) (1,210,142)
---------- ----------
Net increase (decrease) in cash (94,947) 173,212
Cash, beginning of period 150,945 155,181
---------- ----------
Cash, end of period $ 55,998 $ 328,393
========== ==========
See accompanying notes to condensed consolidated financial statements.
7
FAST FOOD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30, June 25,
1996 1995
---------- ----------
Additional Cash Flow Information:
Interest expense paid during the period $ 2,642 $ 94,214
=========== ===========
Income taxes paid during the period $ 0 $ 0
=========== ===========
Non-cash investing and financing activities:
Imputed contribution to paid-in capital $ 0 $ 16,479
=========== ===========
Notes and escrow receivables arising
from asset sales $ 1,833,566 $ 1,175,000
=========== ===========
Net book value of property and equipment
sold or abandoned $ 2,854,929 $ 3,040,843
=========== ===========
Capitalized value of sale-leaseback
debt extinguished $ 395,570 $ 1,259,102
=========== ===========
Security deposits surrendered and
related costs incurred to obtain
assigned lease extension (1996)/
termination of lease (1995) $ 21,760 $ 253,596
=========== ===========
Other restaurant asset dispositions:
Inventory $ 68,346 $ 10,394
=========== ===========
Prepayments $ 101,954 $ 5,915
=========== ===========
Security deposits $ 47,133 $ 13,000
=========== ===========
Liabilities and credits assumed by purchasers:
Accrued expenses $ 81,344 $ 0
=========== ===========
Deferred credits $ 108,559 $ 0
=========== ===========
Impairment of intangible franchise
affiliation value on operating
restaurants $ 0 $ 340,850
=========== ===========
Intangible assets written-of on sale
of restaurants:
Intangible franchise affiliation value $ 0 $ 929,852
=========== ===========
Other $ 0 $ 22,350
=========== ===========
See accompanying notes to condensed consolidated financial statements.
8
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position
as of June 30, 1996, and the results of operations and cash flows for the
three and nine-month periods ended June 30, 1996 and June 25, 1995,
respectively.
2. The condensed consolidated results of operations for the three and nine-
month periods ended June 30, 1996, are not necessarily indicative of the
results to be expected for the full year.
3. On October 9, 1995, the sale of eight New York City restaurants to
Wendnew, L.L.C. was closed in escrow and Wendnew took provisional operational
and financial control of the restaurants pending approval by the Company's
shareholders. The Company realized neither gain nor loss on such transaction
as the carrying value of the property, equipment and intangibles sold less the
book value of liabilities and deferred credits assumed by the purchaser had
been reduced to equal the consideration for the sale.
On December 20, 1995, the Company, Wendnew and the lessor of the Fulton
Street, Brooklyn (Wendton) restaurant agreed to terms for a ten-year extension
of such restaurant's lease. The Company was required to surrender its security
deposit of $10,000 and the accrued interest thereon in the amount of $11,760.
The Company was also required to pay $9,000 for a retroactive rent increase of
which $2,710 was charged to Wendnew for the period they were operating the
restaurant. The aggregate $28,050 cost to the Company of obtaining the lease
extension has been charged as a loss on the sale of the restaurants to
Wendnew. However, securing the lease extension removes a contingency loss to
the Company of approximately $430,913 representing the estimated forgiveness
of debt that would have been required if the lease were not extended for at
least three years beyond its scheduled April 30, 1997 expiration.
Approval of the sale by the Company's shareholders was obtained on
January 26, 1996. On such date the Company received the escrowed proceeds and
three installment payments on the $150,000 mortgage note. The Company agreed
to defer principal payments on the $750,000 term note until March 1, 1996.
The Company did receive payment of accrued interest on such note of
approximately $18,000. The Company also offered Wendnew a 5% (or $17,500)
discount on a $350,000 prepayment subject to Wendnew's obtaining financing
therefor. (See Notes 9 and 10).
4. On November 10, 1995, the Company consummated the sale of its Wendbridge
(New Jersey) restaurant. The Company received proceeds of $562,500 plus
certain closing adjustments. The Company realized neither gain nor loss on
such sale as the restaurant's Intangible Franchise Affiliation Value (IFAV)
had been written down to equate the carrying value of the property, equipment
and intangibles with the consideration therefor. From the sale proceeds the
Company paid a $.20 per share return of capital distribution aggregating
$442,880 on November 28, 1995.
5. On December 22, 1995, the Company consummated the sale of the Sayreville
restaurant, agreed to on December 12, 1995. The Company received gross
proceeds of $100,000 less certain minor closing adjustments and recorded a
gain of $73,524.
9
FAST FOOD OPERATORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. In January 1996, The Company obtained a lease termination agreement for
its Wendchester restaurant in the Bronx. Such termination agreement provided
for the Company to surrender possession of the premises no later than June 30,
1996, subject to acceleration of such date upon five days written notice from
the landlord. In addition, the monthly rent effective January 1, 1996 was
reduced from $7,833 to $6,000. The Company must also forfeit its $21,250
security deposit. The Company had previously written down this store's
property and equipment to $50,000. (See Note 8).
7. On January 26, 1996, the Company declared a $.30 per share return of
capital distribution aggregating $664,320 payable from the Wendnew proceeds to
shareholders of record as of February 12, 1996. The distribution was paid on
February 16, 1996.
8. On March 18, 1996, the Company closed the consistently unprofitable
Wendchester restaurant, its last owned operating location. The Company
sustained a loss of $85,825 thereon, consisting of the write-off of the
undepreciated improvements and non-salvageable equipment thereat in the amount
of $50,225, less salvage proceeds of $3,650; the forfeited security deposit
therefor of $21,250 and a newly agreed termination penalty of $18,000.
9. On February 21, 1996, Wendnew prepaid $350,000 of the note receivable
due the Company, less a $17,500 offered discount (See Notes 3 and 10).
10. Notes receivable including their current maturities as of June 30, 1996
consist of the following:
Notes Receivable Arising Total Current
from the Sale of (to) Receivable Maturities
------------------------ ---------- ----------
Wendway/Wendwick $ 725,187 $ 76,601
Wendtrip 345,879 26,052
Wendnew (term note) (1) 386,605 42,959
Wendnew (mortgage) (2) 0 0
---------- ----------
Totals: 1,457,671 $ 145,612
Less: Current maturities 145,612 ==========
----------
Long-term maturities $1,312,059
==========
(1) A $332,500 prepayment, net of a $17,500 discount, was received on
February 21, 1996.
(2) The Company also offered the purchaser a 5% discount on the prepayment
of the mortgage note. On April 8, 1996, Wendnew prepaid the balance of the
mortgage note, less the 5% prepayment discount, which amounted to $7,408. The
proceeds were $141,657, including interest of $905.
11. Income (loss) per share is based upon the income (loss) for the period
divided by the weighted average number of common shares outstanding during the
period.
10
Item 2
- - ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On January 26, 1996, the Company's shareholders approved the sale to Wendnew,
L.L.C. of eight New York City restaurants. (See Note 3 to the Condensed
Consolidated Financial Statements. Provisional operational and financial
control of such restaurants had been transferred on October 9, 1995 when the
sale was closed in escrow pending the stockholder vote.
On November 10 and December 22, 1995, the Company sold its Wendbridge and
Sayreville, New Jersey restaurants. (See Notes 4 and 5 to the Condensed
Consolidated Financial Statements.)
The above transactions left the Company with one operating restaurant, the
Wendchester location in the Bronx. In January 1996, the Company signed a
lease termination agreement, which provided for the surrender of the premises
on the earlier of June 30, 1996 or five days after written notice from the
landlord requesting such earlier surrender is received. The Company also
agreed to forfeit its $21,250 security deposit. On March 15, 1996, the
termination agreement was modified. Pursuant thereto on March 18, 1996, the
Company paid the landlord an additional $18,000, terminated the lease and
vacated the premises. (See Notes 6 and 8 to the Condensed Consolidated
Financial Statements.)
The Company had also agreed to defer principal payments on the $750,000 note
due from Wendnew until March 1, 1996. The Company had also offered Wendnew a
5% discount on the prepayment of $350,000 of such note principal. Wendnew
sought and obtained financing to fund such prepayment and on February 21,
1996, paid the Company $332,500 of principal, net of the $17,500 discount.
The outstanding amount of such note principal is no longer subject to partial
forgiveness as the Company, Wendnew and the landlord of the Wendton restaurant
sold to Wendnew have agreed to a lease extension. (See Notes 3, 9 and 10 to
the Condensed Consolidated Financial Statements.)
The Company's remaining operations now consist of (i) managing Fast Food
Operators, Inc. ("FFO") in which it has a 33.65% equity interest; (ii)
overseeing the operations of Wendtwo Limited Partnership ("Wendtwo") in which
it has a 1% equity interest and (iii) collecting on its outstanding notes
receivable. The Company is not presently operating any restaurants for its
own account and has no plans to do so in the future.
As amended effective January 26, 1996, the management agreement with FFO
provides for an annual fee of $12,000 per managed restaurant subject to an
annual minimum of $108,000. As FFO presently owns and operates six
restaurants, the Company's future management fee income therefrom is expected
to remain constant at $27,000 per quarter. For the three and nine-month
periods ended June 30, 1996, the Company's share of FFO's results of
operations was quarterly income of $20,945 and a year-to-date loss of $25,114.
During the quarter ended December 31, 1995, FFO paid a return of capital
distribution of $.025 per share; the Company accordingly received $75,000 of
such distribution, which was recorded as a reduction of the Company's equity
investment therein.
11
The Company has subcontracted the day-to-day management of Wendtwo. Such
arrangement effectively reduces the Company's management fee therefrom to 1%
of Wendtwo's sales.
The Company no longer receives consulting income assigned by its President.
Such agreement terminated November 1, 1995.
The Company earned interest income of $37,635 for the 1996 quarter and
$146,276 for the 1996 nine months, principally on the notes receivable arising
from the sales of the restaurants. (See Note 10 to the condensed consolidated
financial statements).
The Company incurred no income tax expense for any of the periods reported
herein.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital improved by $734,445 from a deficit of $518,030
at September 24, 1995 to a surplus of $216,415 at June 30, 1996 due
principally to the sale of ten restaurants for cash and receivables less the
payments on November 28, 1995 and February 16, 1996 of return of capital
distributions in the respective amounts of $442,880 and $664,320. The latter
distribution was facilitated by the receipt of escrowed receivables and
related monies of approximately $954,000 on January 26, 1996. The February
1996 distribution brought the total of such distributions paid during the
previous nine months to $1.00 per share or $2,214,400.
During the nine months ended June 30, 1996, the Company's cash balance
decreased by $94,947 from $150,945 to $55,998. Operating activities required
$1,208,486 of which $319,008 was attributable to restaurant and related
operations and $889,478 to net reductions in current payables. At June 30,
1996, current payables totaled $24,790.
Investing activities produced $2,220,739 principally from $2,190,146 of cash
proceeds from the restaurant sales and the collections of notes and escrow
receivables related thereto. Included in such collections was a $332,500
prepayment received on the Wendnew note, net of a $17,500 discount. On April
8, 1996, the Wendnew mortgage note was also prepaid, again net of a 5%
discount. From the latter prepayment, the Company received proceeds of
$141,657 including interest of $905. From such proceeds, the Company retired
its current payable to Wendtwo. Distributions from managed entities provided
$76,403 including $75,000 received from FFO. Investing outflows included
$18,000 to terminate the Wendchester lease and $27,810 for other individually
insignificant items.
Financing activities consisted of the two return of capital distributions
aggregating $1,107,200 as described in the third preceding paragraph.
12
PART II. OTHER INFORMATION
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Item 1-5. Not Applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAST FOOD SYSTEMS, INC.
Date: August 9, 1996 By \s\ Lewis E. Topper
-------------------
Lewis E. Topper
Chairman of the Board,
President, Chief
Executive Officer,
Treasurer and Director,
Principal Financial and
Accounting Officer