FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1996.
[ ] 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 No. 33-4460-NY
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TASTY FRIES, INC.. (FORMERLY ADELAIDE HOLDINGS, INC.)
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(Exact name of registrant as specified in its charter)
NEVADA 65-0259052
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State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
650 Sentry Parkway, Suite One
BLUE BELL, PA 19422
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 941-2109
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past
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 is not contained in this form, and no disclosure will 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: None
The aggregate market value of the common voting stock held by
non-affiliates as of June 1, 1996: Not Determinable.
Shares outstanding of the registrant's common stock as of June
1, 1996: 87,900,495 shares.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) GENERAL BUSINESS DEVELOPMENT
Tasty Fries, Inc. (the "Company"), was incorporated under the laws of
the State of Nevada on October 18, 1985, under the name Y.O., Systems, Ltd. The
Company was organized to raise capital and then seek out, investigate and
acquire any suitable asset, property or other business potential. No specific
business or industry was originally contemplated. The Company was formed as a
"blank check" company for the purpose of seeking a business acquisition without
regard to any specific industry or business.
In connection with its formation, the Company issued 150,000,000 shares
of its restricted common stock to its founders in October, 1986. In November,
1987, the Company consummated a public securities offering registered under Form
S-18 wherein it sold 10,000,000 units at $.01 per unit. Each unit consisted of
one share of common stock and one redeemable common stock purchase warrant to
purchase one share of common stock for $.04 per share.
On November 12, 1987, the Board of Directors of the Company declared a
five for one (5 for 1) forward split of the Company's common stock and warrants
to holders of record on November 27, 1987. The stock split resulted in an
increase in the number of issued and outstanding shares to 160,000,000 and
decreased the par value of each share to $.0002.
During 1987 through 1989 a total of 7,268,600 common stock purchase
warrants were exercised at $.04 per share, resulting in the issuance of
7,268,600 shares of common stock for aggregate proceeds to the Company of
$290,744.
The Company was unsuccessful in certain business proposals and began
actively looking for a business acquisition during 1990.
Effective July 29, 1991, the Company issued 13,500,000 shares of
restricted common stock (after giving effect to a 1 for 50 reverse stock split)
to the stockholders of Adelaide Holdings, Inc., a private Delaware corporation
incorporated in April, 1990 (hereafter referred to as "AHI"). The 13,500,000
shares represented approximately 80% of the 16,845,370 shares of common stock of
the Company outstanding after the acquisition.
As a part of the acquisition of AHI, the Company amended its Articles of
Incorporation to provide for a name change to Adelaide Holdings, Inc. and a
change in par value per share of common stock to $.01. The Company effectuated a
1 for 50 reverse stock split
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which reduced its prior outstanding shares of common stock to 3,345,372
effective as of July 31, 1991. The Company also reduced its authorized shares of
common stock to 100,000,000 shares and authorized 5,000,000 shares of $.001 par
value preferred stock to be issued at the discretion of the Board of Directors.
The Company also amended its Articles of Incorporation to include a
provision that officers and directors of the Company are not liable for damages
as a result of a breach of fiduciary duty except in certain specified instances
under Nevada law. In September, 1993, the Company amended its Articles of
Incorporation changing its name to Tasty Fries, Inc.
Since July, 1991, the Company has continued to pursue the business of
its wholly-owned subsidiary, Adelaide Robotic Technologies, Inc. ("ART"). The
business of ART is described below.
(B) BUSINESS OF THE COMPANY.
GENERAL
The Company has developed its own proprietary french fries vending
machine (the "Machine") and the related proprietary potato powder mix for the
production of french fries in the Machine (the "Potato Product") for marketing
on a worldwide basis. The Company had previously received a federally registered
trademark for its former name and logo, "Adelaide". The Company has subsequently
federally registered its name and logo "Tasty Fries" as a federal trademark on
the Supplemental Register and has been marketing the Machine and its products
under that name. See "Patents and Proprietary Rights" herein. The Company's
early plans were to principally market its products through an exclusive
distributorship network which management at that time believed would offer
uniform and consistent products to consumers worldwide. In furtherance of this
plan, the Company sold distributorships for different markets throughout the
United States and the world. The Company has changed its marketing focus by
commencing to re-acquire and negotiate the re-acquisition of certain
distributorships. It may, however, on a more limited basis, market and sell
distributorships in certain locations to larger distributors with significant
experience in the vending business where it is not deemed feasible by management
to be operated directly by the Company. The Machines are expected to be located
in high traffic locations such as airports, bus and train stations,
universities, schools, military bases, theaters, work areas and recreational
venues.
The Company has completed the final stages of beta testing of its
Machines and has completed certain modifications to the Machine
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based upon such tests. Further, the development of the Potato Product has been
completed. Management originally anticipated that the beta site testing and
development would be completed and Machines would be delivered by the end of the
1994 calendar year and then possibly by the end of the 1995 calendar year. This
did not occur because (i) of the unanticipated amount of additional time
necessary to completely design, develop and test a totally new Machine, (ii) the
continuous lack of working capital available to fund the testing of the Machine
and its commercial production, and (iii) the substantial time and funds
necessary to satisfy the arbitration award in favor of California Food &
Vending, Inc. See "Legal Proceedings" herein.
Further, beta site testing did not commence until early December, 1995
which was longer than originally anticipated and has therefore delayed the
commercial production and shipping of Machines for several months. See
"Marketing through Distributorships herein," "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Plan of Operation"
and "Audited Financial Statements and Notes" thereto.
HISTORY
The Company, in 1991, acquired the exclusive United States license from
a California-based entity to manufacture and market a device for the vending of
fresh french fried potatoes. Persons associated with the Company also filed a
U.S. patent application in 1992 with respect to such a device which was assigned
to the Company on October 9, 1992. Substantial testing and test-marketing of the
device resulted in the device failing to perform as anticipated and significant
and numerous mechanical and design imperfections were encountered. Then current
management of the Company decided to abandon the original device and utilized an
expert engineer to design and develop a completely new machine with totally
different technology. Production of such a device did not proceed as originally
scheduled due to the unanticipated significant amount of time needed to design
and engineer the new Machine. See "Legal Proceedings" herein and "Notes to
Audited Financial Statements."
DESIGN AND MANUFACTURING
In January,1993, the Company entered into an exclusive Manufacturing
Requirements Agreement ("Manufacturing Agreement") with Premier Design, Ltd., a
manufacturer based in Warminster, Pennsylvania ("Premier") which was formed by
Harry Schmidt and Edward Kelly, for the purpose of designing and manufacturing a
completely new french fries vending machine in a joint venture with the Company.
The President of Premier is Harry Schmidt who subsequently was appointed to the
Company's Board of Directors in
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May, 1993 but did not stand for re-election to the Board in September, 1995.
Edward Kelly, an owner of Premier but not an officer or director at the time,
subsequently was appointed President and Treasurer of the Company in June, 1994,
was Executive Vice President from January, 1994 to June, 1994, and has been a
member of its Board of Directors since February, 1994. See "Management."
The Manufacturing Agreement provided that the manufacturer, Premier,
would refine and manufacture the Machine which dispenses hot french fried
potatoes; however, due to the substantial design and engineering flaws in the
original licensed device, Premier, through Edward Kelly, in February, 1993,
recommended that the Company abandon said device and undertake the design and
engineering of a totally new Machine. The Company and the manufacturer (Premier)
then agreed to equally share the first $150,000 of development costs, which such
costs included design, engineering and initial manufacturing costs projected
over the initial 500 production machines or a lesser number as would be jointly
determined by the manufacturer and the Company. Development costs, if any, in
excess of $150,000 would be advanced by the manufacturer and reimbursed on the
basis of $500 per Machine up to the first 200 Machines produced or $100,000,
whichever was less. The first 500 Machines were to be priced at a cost to the
Company not to exceed $7,000 plus $500 reimbursement for excess development
costs, if any, with a goal of reducing the cost of the Machine in the future as
feasible. After the first 500 Machines, the Manufacturing Agreement required
that the Company purchase the Machines from the Manufacturer based on
manufacturing cost plus 20%. The Manufacturing Agreement could not be terminated
by either party so long as the manufacturer provided the Machines as required by
the Company. Pursuant to the terms of the Manufacturing Agreement, the first
initial production of Machines was to be delivered by June 15, 1993, but due to
the unanticipated amount of additional time necessary to completely design,
develop and test a totally new Machine, the Machines were not delivered. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Plan of Operation," "Management" and "Certain Relationships and
Related Transactions."
On December 30, 1994, the Company and Premier amended the Manufacturing
Agreement (the "Amendment") to provide that Premier supply the Company with ten
pre-production Machines to be used at beta test sites for testing by Premier at
a total cost of $35,000 per Machine for an aggregate purchase price of $350,000
to be paid by the Company. This amount was to be offset by the $125,000 advanced
by the Company in April, 1994 which amount was originally intended to be for
development costs. In addition, Premier agreed to field test the Machines and,
upon the Company receiving satisfactory results, agreed to manufacture the
Machines
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exclusively for the Company. The Amendment further provides, among other things,
that (i) the first 500 Machines manufactured for distributors after the
pre-production Machines, will be sold to the Company for $7,000 each, after
which the price per Machine will be manufacturer's cost plus 20%, (ii) delivery
of the Machines will take place within 180 days after receipt of a purchase
order from the Company, (iii) any foreign or U.S. patents issued on the Machine
or any aspects thereof shall be jointly owned by the Company and Premier upon
delivery to the Company of an audited accounting of development costs from
Premier and tender by the Company to Premier of 25% of such costs, with an
additional 25% payable to Premier within 12 months thereof, (iv) Premier and the
Company will seek independent bids on the manufacturing costs of the Machine
from independent manufacturers, and if the parties agree to the terms (a lower
manufacturing cost), Premier will purchase Machines from such manufacturer at
the lower cost and be permitted to add its 20% mark-up to such price, and (v)
the Company cannot license any party to manufacture the Machine without written
consent from Premier.
The Company, through Mr. Kelly as inventor, assigned the patent rights
for the Machine to Premier solely in consideration for and reliance upon
Premier's specific representations in the Amendment, with the express
understanding that Premier would immediately assign to the Company its one-half
interest in the patent upon delivery to the Company of the audited accounting of
development costs to be provided by Premier and payment by the Company thereof
in accordance with the terms of the Amendment. Premier did not provide the
Company with an audited accounting as required by the Amendment but with a
spread sheet of costs. Further, Premier did not conduct the beta testing of the
pre-production Machines as required by the Amendment and the Company incurred
the additional costs which are to be applied to the development costs. Because
no audited accounting of development costs was provided by Premier to the
Company as required, the Company retained its independent auditors to audit the
spreadsheet of development costs received from Premier. Based upon such audit,
the Company estimates that its share of the development costs are approximately
$417,500 after adjustment for certain charges which were applied to the
development costs by Premier but are unrelated to the development of the Machine
and other duplicative billing but not including the beta testing costs. After
payment of $350,000 for the ten pre-production beta test Machines and other
payments made, the Company's independent auditors estimate that the Company has
paid virtually all of its share of the development costs. Management is
currently in discussions with Premier regarding resolution of this matter and
assignment of the Company's patent rights to the Company. Although management
believes a favorable outcome is possible, no assurances can be given that this
will occur. The Company may be required to pay Premier additional sums
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or, alternatively, bring legal action to resolve the dispute between Premier and
the Company.
As commencement of commercial production is a Company priority and
Premier cannot manufacture the Machine under the terms of the Amendment, on June
17, 1996, the Company announced its intention to award the first manufacturing
contract for the Machine to S&H Electronics of Robesonia, Pennsylvania ("S&H"),
an unaffiliated third party. S&H is a contract manufacturer which specializes in
the assembly and test of electro-mechanical assemblies and equipment. The
Company's central procurement station is expected to be located within the
manufacturing site with initial manufacturing procedures to be supervised by
Company personnel to insure strict compliance with NAMA (as defined herein) and
U.S. Food & Drug Administration (FDA) regulations. As of the date hereof, no
final agreement has been entered into by the Company and S&H.
Although the Amendment provides for delivery of the pre-production
Machines within 180 days of a purchase order from the Company, Premier agreed to
use its best efforts to complete these pre-production Machines on or before July
14, 1995 although no assurances were given. In connection therewith, the Company
and Premier entered into an Escrow Agreement through which Premier was paid the
balance of $175,000 for the ten pre-production Machines (after deduction of the
$50,000 down payment made on May 5, 1995), in weekly increments of $17,500 over
a ten week period ending July 14, 1995, provided that Premier meet certain
pre-production schedule benchmarks during such time period. The pre-production
Machines were not completed by Premier within the intended time period and were
not delivered to the Company until mid-November 1995. As a result, beta testing
did not begin until early December, 1995. See "Certain Relationships and Related
Transactions."
THE MACHINE
The Machine is designed to produce quality fresh french fried potatoes
utilizing a unique method that automatically converts a specifically formulated
dehydrated Potato Product, with approximately an 18 month shelf life, into
rehydrated potato mix, delivers this mix into a proprietary forming and cooking
cycle, and finally into complete high-quality freshly made french fried
potatoes. The french fried potatoes are delivered to the consumer in a 10 ounce
cup of 32 french fries. This is accomplished from the dehydrated mix to a
completed order of quality fresh french fried potatoes in approximately 90
seconds. The utilization of a state-of-the-art combination of computer driven
mechanics makes this possible. Also attached to the bottom of the vended cup are
individually prepackaged portions of ketchup and salt. The
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attachment device currently has a patent pending before the U.S. Patent and
Trademark office. See "Patents and Proprietary Rights" herein.
The Machine has the capacity to produce 500 vends before any refill is
required. The Machine is computer controlled and communicates with the consumer
from the time the money is deposited into it until the time the vended cup of
fresh french fried potatoes is delivered. The Machine can accept dollar bills,
coins or any combination thereof, depending on the vend charge, which can be
changed at anytime by simply reprogramming the dollar bill/coin component.
The Machine is equipped with up-to-date computer technology, thus making
it possible to continuously monitor all vending parts and report any potential
problems. The Machine can report to a central data base, if required, to make
this information available to the service company/refill operator. The Machine
monitors the amount of vends, and simultaneously provides cash reports.
The Machine is designed to use a vegetable oil so that it delivers a
cholesterol-free product. Each vend contains french fries which are crisp and
golden. The quality of the product is consistently uniform in each vend.
The Machine requires a 220 volt electrical connection through a standard
220 volt outlet and does not require any plumbing or water connections or any
refrigeration device.
MARKETING THROUGH DISTRIBUTORSHIPS
The Company had, until late 1995, marketed the Machines and the related
supplies through exclusive territorial distributorships. Although it has
continued to market on a very limited basis through distributorships, it has
shifted its focus to ultimately place primarily Company-owned Machines in
locations not covered by distributorship agreements and re-acquire certain
existing distributorships, although no assurances are given that this marketing
plan will be followed or not be revised in some manner. Management anticipates,
but cannot assure, that new distributors, if any, will be larger and more
experienced distributors in the vending business with significant financial
resources.
The distributorship agreements may vary from territory to territory, but
essentially require a non-refundable down payment and minimum annual payments
usually over a five to ten year period. Most distributors must also pay $200 to
$500 per Machine purchased as a credit toward the minimum annual payments. Most
distributorship agreements require a minimum number of Machines to
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be purchased per year. The total price of the distributorship will vary
substantially based on the estimated market potential of the particular
territory which is usually based upon population and other relevant criteria.
The Company has, to date, sold or granted 15 territorial
distributorships some of which have been reacquired by the Company or terminated
by the Company for breach of the terms of the distributorship agreement. The
distributor's obligations to make further payments, after the deposit required
upon signing of the distributorship agreement, are conditioned on the Company's
ability to ship its Machines and related products. The 15 territories are listed
as follows:
MINIMUM
DEPOSIT YEAR
TERRITORY TOTAL PRICE RECEIVED PURCHASE
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1. New Jersey $ 773,600 $ 35,000 200 machines
2.(a) DE, D.C., $ 750,000 $ 50,000 100 machines
MD & VA
3.(b) CT, ME, MA, $1,250,000 $ 30,000 100 machines
NH, NY, RI & VT
4.(c) Georgia $ 550,000 $ 5,000 150 machines
5. Texas $ 750,000 $ 25,000 200 machines
6.(d) Israel $ 200,000 $ 40,000 100 machines
7.(e) Canada $1,000,000 $ 50,000 200-325
machines
8. Pennsylvania $ 750,000 $ -0- 200 machines
9.(f) United Kingdom $1,000,000 $ 50,000 200-325
machines
10. AR, AZ, CO $1,500,000 $ 65,000 300 machines
KS, LA, MI,
MN, MS, MO,
MT, NE, NV,
NM, ND, OK,
OR, UT, WA,
WI & WY
11. Austria, $1,550,000 $ 60,000 500 machines
Germany,
Switzerland,
Luxembourg,
Belgium,
Holland &
Lichenstein
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12.(g) Bulgaria, $4,000,000 $175,000 400 machines
Czechoslovakia, (year one)
(former), Denmark,
Finland, France, 800 machines
Greece, Italy, (years 2-9)
Norway, Poland,
Portugal, Romania, 850 machines
Spain, Sweden, (year 10)
Turkey
13. Dade, Broward, $ 250,000 $1,000 down 150 machines
Monroe & Palm & $4,000 upon
Beach County, delivery of
Florida first machine
14. Brazil $ 250,000 $100,000 250 machines
15.(h) California - - -
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(a) Assigned to a group which includes Harry Schmidt, a former director of
the Company and President of Premier. See "Certain Relationships and
Related Transactions."
(b) Terminated a prior September, 1992 letter of intent for Maine, New
Hampshire and Vermont with an unrelated distributor and returned a
$10,000 deposit in January, 1993.
(c) Deposit forfeited in September, 1993 for non-performance.
(d) Deposit forfeited in August, 1994 for non-performance and a new
distributor paid an aggregate deposit of $40,000 for this territory.
(e) Reacquired by the Company in September, 1995 from Adelaide Vending
(Canada) Ltd. which is controlled by Jurgen Wolf who was subsequently
elected a director of the Company by the shareholders at their annual
meeting on September 18, 1995, for the original price of approximately
$100,000 including costs and expenses paid for 1,000,000 shares of
common stock of the Company and an option to purchase an additional
1,000,000 shares for two years at a $.25 (USD) per share, all pursuant
to Regulation S. See "Management."
(f) Terminated in April, 1995 for non-payment of the full deposit. See
"Management."
(g) Granted to International Tasty Fries, Inc., a publicly traded Nevada
corporation. See "Management's Discussion and Analysis of Financial
Condition -Plan of Operation," "Principal Shareholders" and "Audited
Financial Statements and Notes" thereto.
(h) Granted to California Food & Vending by agreement and confirmed by the
award of the arbitrator and Federal court order. See "Legal Proceedings"
herein.
The exclusive territorial distributorship agreements generally have a
term of five to ten years, require the distributor to purchase all supplies for
the Machines directly from the Company, and set forth uniform standards of
operation. The agreements are transferable under certain conditions as uniformly
established in the agreement and require the prior approval of the Company for
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sub-licensing and for sub-distributors. The majority of the agreements can be
terminated by 30 day written notice from the Company in the event of default. In
September, 1993, August, 1994 and April, 1995 the Company terminated
distribution rights for Georgia, Israel and the United Kingdom, respectively,
due to a failure to fulfill certain contractual obligations pursuant to the
terms of the distributorship agreements and the respective deposits were
forfeited. In September, 1995 the Company repurchased the Canadian
distributorship for the original purchase price plus costs aggregating $100,000
(USD) for 1,000,000 shares of common stock at its then current market value and
an option to acquire 1,000,000 shares of common stock for two years at $.25
(USD) per share, all pursuant to Regulation S. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Plan of Operation"
and "Certain Relationships and Related Transactions."
COMPETITION
The Company faces competition from other suppliers of french fries,
including fast food outlets. The Company is aware of other companies which have
test marketed french fry vending machines or are in the process of developing
such machines. Certain of the companies which are viewed as competitors or which
may become competitors in the future, have more capital and greater resources
than the Company. Currently, the Company is aware of only one competitor which
is Ore-Ida, a major manufacturer and distributor of frozen potato products. The
Ore-Ida vending machine is not comparable to the Company's Machine for many
reasons, including that it only cooks frozen french fries as contrasted to the
Company's Machine which cooks only freshly made french fries.
Management believes, although no assurances are given, that due to
current consumer demand for french fried potatoes, it is anticipated that there
will be strong competition in the future in the area of french fry vending once
technological problems have been solved.
AVAILABILITY OF RAW MATERIALS AND PRINCIPAL SUPPLIERS
The Machine was initially intended to be manufactured by Premier
pursuant to the Manufacturing Agreement and the Amendment; however, it appears
that Premier will not be able to manufacture the Machine at a competitive price
or even the first 500 Machines at $7,000 as required by the Amendment. See
"Design and Manufacturing" herein. It is anticipated that certain individual
components of the Machine will be tooled from custom made molds owned by the
Company and produced by independent manufacturers or suppliers together with
other parts including those which are custom designed. Management believes there
are several alternative sources of supplies and manufacturers for such items and
that the
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loss of any one supplier would have no material adverse effect upon the Company,
although no assurance can be given. If substantial demand for the Machines
develops then management believes, although no assurance is given, that it has
or can obtain additional services for subcontract manufacturing.
The Company's consumable products used in the dispensing of french fries
are widely available from numerous suppliers. The Company is in final
negotiations with a manufacturer for its Potato Product and anticipates that
this will be completed in the third quarter of the current fiscal year. In the
interim, the Company will purchase potatoes from another supplier. Management
believes that other sources for the manufacture and/or supply of the Potato
Product are available, although no assurances can be given.
PATENTS AND PROPRIETARY RIGHTS
The Company currently has a patent pending for the Machine and the
attachment to the bottom of the vend cup in the United States Patent and
Trademark Office. In addition, the Company has received patent protection in
those countries which are parties to the Patent Cooperation Treaty (PCT). The
Company is also seeking patent protection in Japan and has a federally
registered trademark on the Supplemental Register for its name and logo, "Tasty
Fries." In connection with the Amendment to the Manufacturing Agreement, the
patent for the Machine was assigned to Premier in consideration for and with the
express requirement, agreement and understanding that upon payment by the
Company of its proportionate share of the Machine's audited development costs as
required by the Amendment, (which audit must be provided by Premier but was
not), the patent will be jointly owned by the Company and Premier. See "Design
and Manufacturing" herein. Management intends to seek patent, trademark and
related legal protection in the future where it deems the same to be beneficial.
No assurances can be given that the Company will ultimately receive a patent on
the Machine and/or the vend cup attachment in the United States or elsewhere. In
addition, such legal protections and precautions do not prevent third party
development of competitive products or technologies. There can be no assurance
however that the legal precautions and other measures taken by the Company will
be adequate to prevent misappropriation of the Company's proprietary technology.
Notwithstanding the foregoing, the Company does not intend to be solely
dependent upon patent protection for any competitive advantage. The Company
expects to rely on its technological expertise and early entry into the
marketplace with respect to its products.
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GOVERNMENTAL APPROVALS AND REGULATIONS
The Machine was designed and developed in consideration of applicable
governmental and industry rules and regulations. Management believes that the
Machine complies with National Food Sanitation guidelines as well as
Underwriter's Laboratory ("U.L.") procedures. The Machine must receive U.L. and
National Food Standards (N.F.S.) approvals prior to sale and installation. The
Company has requested that the Machine be inspected and expects to have the
Machine inspected by various regulatory agencies during the production process
but prior to sale and installation. In this regard, management has forwarded to
U.L. a listing of all individually numbered parts used in the Machine. The
Company is also seeking certification from the National Automatic Merchandising
Association (NAMA). NAMA has previously informally inspected the Machine, the
result of which was the subsequent installation of a sanitation cycle.
Management has been advised that all certifications and approvals will be sent
out at the same time. Management believes, although no assurance is given, that
the required approvals from U.L., NAMA and the various regulatory agencies are
obtainable and is not currently aware of anything that will delay the necessary
approvals.
Management is not aware of and does not believe that there are any
specifically applicable compliance requirements under state or federal
environmental or related laws relating to the manufacture and operation of the
Machine.
EMPLOYEES
As of June 1, 1996, the Company had five full-time employees located at
its executive office in Blue Bell, Pennsylvania including Edward Kelly,
President of the Company and Irene Kelly, his wife, who manages the Company's
executive office. The Company expects to hire additional new employees during
the next 12 months, including Leonard Klarich, a current director, as Executive
Vice President in June, 1996. Any other new employees would be hired upon
production and delivery of Machines, as to which no assurances can be given at
this time. See "Management's Discussion of Financial Condition and Results of
Operation - Plan of Operation" and "Management."
None of the Company's employees are covered under a collective
bargaining agreement.
RESEARCH AND DEVELOPMENT COSTS
The amount of funds expended by the Company in each of its last two
fiscal years (which are designated as having been expended on research and
development) is $47,400 for the year ended January
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31, 1995 and $26,015 for the year ended January 31, 1996. In addition, the
Company capitalized $246,600 for the ten pre-production Machines; however, it
will only realize revenues on such pre-production Machines of $7,000 each or
$70,000 in the aggregate. See "Audited Financial Statements and Notes" thereto.
ITEM 2. PROPERTIES.
The Company presently has no significant properties.
On June 10, 1994, upon the termination of Mr. Charles Hallinan as
President, the Company entered into a one year lease agreement for 700 square
feet of executive office space. The aggregate monthly rental was $955.
Management renewed its lease in May, 1995 for the premises located at 650 Sentry
Parkway, Suite One, Blue Bell, Pennsylvania for an additional 24 months which
commenced in June, 1995 at $955 per month. The Company thereafter increased its
office space in the fiscal year ended January 31, 1996 to 1,020 square feet and
the monthly rent increased to $1,650 plus additional base rent of $175.
Management believed at such time that the space would be sufficient to meet its
needs for the next 24 months; however, the Company may require more space if
additional administrative personnel are retained.
The Company's research and development facilities were located at 100
Park Avenue, Warminster, Pennsylvania in space provided by H&R Industries, Inc.,
an affiliate of Premier, which was expected to be the primary manufacturing
contractor. H&R Industries is owned by Harry Schmidt, a former director of the
Company who did not stand for re-election in September, 1995. The cost of this
space has been included in the Machine's development cost. In November, 1995,
the Company ceased conducting any research and development at H&R Industries.
See "Design and Manufacturing" herein and "Certain Relationships and Related
Transactions."
ITEM 3. LEGAL PROCEEDINGS.
In March, 1993, California Food & Vending, Inc. (CFV) filed a suit
against the Company, its then-serving management and others, in federal court in
California alleging: a) breach of contract, b) fraud, c) securities fraud, d)
constructive trust, seeking an accounting and declaratory relief. CFV sought to
prove its damages at trial, obtain an accounting and a declaration that it was
entitled to all inventions, processes and improvements relating to any french
fry machine developed by the Company. The lawsuit was stayed on July 6, 1993,
pending the outcome of arbitration regarding the matter because the original
agreement among the parties provided that the exclusive resolution of disputes
among the parties was to be determined by binding arbitration. Arbitration of
this matter took place in September 1994. On
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October 25, 1994 an award (the "Award") was rendered against the Company in the
aggregate amount of $279,500 for domestic and international distribution fees
owed to CFV pursuant to a March 17, 1992 Memorandum of Understanding (the
"Memorandum") and a May 14, 1991 international joint venture agreement between
the Company and CFV (the "Joint Venture Agreement"), and an additional $249,500
in compensatory damages, jointly and severally, as among the Company and two
former officers and directors of the Company. The award and compensatory damages
totaling $529,000 were recorded in the Company's financial statements as of
October 31, 1994.
The Award also ordered (a) the enforcement of the terms of the
Memorandum and the Joint Venture Agreement which, generally, provided for the
payment by the Company of certain royalties, fees and profits to CFV in
connection with future sales by the Company of the Company's vending machines
and related products, and (b) the issuance by the Company to CFV of an option
for the purchase of 2,000,000 shares of the Company's restricted common stock at
an exercise price of $2.00 per share through March 17, 1997.
In connection with the foregoing, an award was also entered in favor of
the cross-claimant, the brother of one of the former officers and directors of
the Company, which requires, among other things, that the Company issue him
1,000,000 shares of unrestricted common stock. The financial statements do not
reflect the issuance of these shares for the fiscal year ended January 31, 1996.
Such shares, with restriction, were issued to him in June, 1996. These shares
are to be included for registration in a selling shareholder registration
statement to be filed with the Securities and Exchange Commission (the
"Commission").
On December 23, 1994, a Supplemental Award of Arbitrator ("Supplemental
Award") was issued in connection with certain motions, oppositions, requests and
replies. In connection therewith, CFV was awarded (i) attorneys' fees of
$94,962.50 against the Company and (ii) costs of $29,896.43 against the Company
and its two former officers and directors, jointly and severally. In addition,
the cross-claimant was awarded $4,099.34 for certain specific costs against the
Company. The Company's Request for Clarification Re Fraud Damages was reviewed
by the Arbitrator and denied.
In February, 1995, the Company and CFV entered into a Settlement
Agreement which supersedes the Award and Supplemental Award. The Settlement
Agreement, which was subsequently amended on February 22, 1995 and February 23,
1995 (collectively the "Settlement Agreement"), provides, in pertinent part,
among other things that (i) the Company shall pay to CFV the sum of $25,000 on
or before February 28, 1995 and an additional $175,000 to be applied against the
Supplemental Award as partial payment for past
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<PAGE>
due royalties (which was paid), the balance payable over three (3) years
commencing six (6) months after February 1, 1995 and shall bear interest at 10%
per annum. The payment of the $175,000 originally due by March 10, 1995 was
extended by agreement between the Company and CFV to March 15, 1995 and was paid
by the Company, (ii) a royalty to CFV of $350 per machine for the first 500
machines and thereafter a royalty equal to 35% of the difference between the
price paid to the manufacturer and/or the wholesale price to the purchaser,
domestic or international, of a minimum of $350 up to a maximum of $500 per
machine (the Award provides for $500 for every machine and a 50% joint venture
interest); (iii) $.25 per pound of only potato product sold, commercially used
or distributed (the Award provides for 25% profit of all domestically related
sales and 50% of all internationally related sales of all products). CFV
expressly waives any and all rights to profit participation in any other
ancillary products of the Company upon timely payment of the royalty by the
Company; (iv) CFV shall receive $2,000,000 payable from domestic and
international gross distribution fees and utilization fees received by the
Company as consideration for the reduction by CFV of its international
distribution fee rights from 50% to 25% which shall be payable to CFV by receipt
by CFV of 50% of all such fees until paid in full; and (v) an option to purchase
2,000,000 shares of the Company's restricted Common Stock at $.10 per share
exercisable for four (4) years from February 1, 1995.
The aggregate amount of $200,000 to be paid by the Company to CFV was
paid in February and March, 1995 as agreed. An additional payment of $80,000 was
made in August, 1995. The Company thereafter defaulted in the payment of
$84,745.75 due February 1, 1996. As a result, CFV filed a Motion for a Temporary
Protective Order ("TPO") in February, 1996 in the Federal District Court for the
Central District of California seeking an injunction freezing certain assets of
the Company until such time as CFV's Motion for Assignment of Benefits
("Motion") could be heard by the Court on March 18, 1996. The TPO was issued by
the Court on February 21, 1996 and the Motion for Assignment of Benefits was
granted by the Court ex parte on March 15, 1996. The Order provided, among other
things, that the Company assign any monies it had in its possession at such time
or received from third parties for investment, royalties, distribution fees or
other sources be kept in a segregated account for the benefit of CFV and paid to
CFV until the entire sum due, including accrued interest from August, 1995 and
attorney's fees incurred in connection with enforcement of the judgment, were
paid in full. During April and May, 1996, the Company paid CFV an aggregate of
approximately $452,000 representing payment in full of all such amounts due and
in satisfaction of the Court Order. CFV has agreed to file a Partial
Satisfaction of Judgment with the appropriate tribunals.
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On June 24, 1994, a lawsuit was instituted against the Company and a
shareholder of the Company in Circuit Court for the 11th Judicial Circuit in and
for Dade County, Florida by Samuel Balan, brother of Martin Balan, the former
Chairman of the Board of the Company, alleging breach of contract, quantum
meruit and seeking a declaratory judgment for entitlement to 1,100,000 shares of
the Company's Common Stock and in excess of $300,000 for past due wages and
expenses. This action was heard by the arbitrator as part of the arbitration
between the Company and CFV. An award was entered in Mr. Balan's
(cross-claimant's) favor. The Company paid the award in May, 1996 and issued to
him 1,000,000 restricted shares of common stock in June, 1996 which will be
registered in a selling shareholder registration statement to be filed with the
Commission. The Company has been advised by Mr. Balan's counsel that a motion
will be filed with the Court to convert the award of stock into a cash award.
On May 23, 1995, a lawsuit was instituted against the Company and Mr.
Arzt, former Chairman of the Board of the Company, individually, by an alleged
former agent of the Company in the Circuit Court in the Ninth Judicial Circuit
in and for Orange County, Florida alleging (i) breach of contract, (ii) quantum
meruit, (iii) breach of verbal contract, and (iv) requesting an accounting and
seeking damages in excess of $15,000. The Company answered the Complaint and
commenced discovery. The case has not proceeded from that point to the present
and the plaintiff has not sought any discovery nor has the matter been set for
trial. Management intends to vigorously defend this matter and believes, based
upon the allegations in the complaint, that it will ultimately prevail; however,
no assurances can be given at this time that this will occur.
On January 15, 1996, a lawsuit was instituted in New Jersey against the
Company, Edward C. Kelly, its President and a director, and Michelle Kramish
Kain, individually, who is a shareholder of the law firm of Kipnis Tescher
Lippman Valinsky & Kain, counsel to the Company, by a former consultant and
current shareholder and his related companies alleging among other things: 1)
breach of contract, 2) fraudulent inducement and misrepresentation and 3)
violation of a New Jersey law relating to consumer contracts. The action relates
to an agreement entered into by the Company and to the individual plaintiff to
file a registration statement with the Commission in October, 1995 to register
certain securities of the plaintiff. The Company and Kelly, through their
independent counsel, answered the complaint and filed separate defenses.
Thereafter, they filed a Motion for Partial Summary Judgment to dismiss the
consumer fraud claims as a matter of law and sought leave to amend the answer to
assert counterclaims, both of which were granted on May 20, 1996. Defendant
Kain, through her counsel, answered the complaint by general denial and filed a
Motion to
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vacate the service of summons and complaint and dismiss the compliant for lack
of in personam jurisdiction. A hearing on the Motion was heard on May 10, 1996
and the Court entered an order on May 20, 1996 dismissing the action against Ms.
Kain for lack of personal jurisdiction. The Company, Mr. Kelly and the
plaintiffs are currently negotiating a settlement of this matter. No assurances
can be given that this matter will be settled by the parties. If not settled,
the Company and Mr. Kelly intend to vigorously defend and pursue this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders through
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this Report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS.
The Common Stock of the Company is quoted on the NASD Electronic
Bulletin Board, under the symbol TFRY. The following table sets forth the
highest and lowest bid prices for the Common Stock for each calendar quarter
during the last two years and subsequent interim periods as reported by the
National Quotation Bureau. The prices set forth below represent interdealer
quotations, without retail markup, markdown or commission and may not be
reflective of actual transactions.
FISCAL 1994 HIGH BID LOW BID
----------- -------- -------
First Quarter .66 .31
Second Quarter .50 .19
Third Quarter .41 .27
Fourth Quarter .28 .11
FISCAL 1995
-----------
First Quarter .44 .14
Second Quarter .21 .10
Third Quarter .21 .10
Fourth Quarter .17 .05
FISCAL 1996
-----------
First Quarter .095 .04
May 1 - June 18 .52 .09
(B) HOLDERS.
The approximate number of record holders of the Company's Common Stock
as of June 1, 1996 is 913.
(C) DIVIDENDS.
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for the
development of the Company's business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
PLAN OF OPERATION.
From 1993 the Company encountered significant delays in connection with
the production of its Machine which resulted from the necessity to design,
develop and test a totally new Machine commencing in late 1993. As a result, the
Company was unable to ship its Machine as originally anticipated by the end of
1993 or as intended in 1994. The Company completed the initial engineering
development of the Machine during the last quarter of 1994 but continued to
experience delays in the final stages of development and testing throughout
1995, much of which resulted from a material lack of working capital and the
necessity to allocate a material amount of the limited capital received from
equity and debt investment for litigation and related expenses, including
payments mandated to be paid to CFV by Court Order. See "Business - Legal
Proceedings." The Company anticipated that it would complete the testing of the
Machine by September 1, 1995 based upon the expected delivery of the ten
pre-production Machines in late July, 1995, but actual testing did not commence
until early December, 1995 due to the delayed delivery of such pre-production
Machines by Premier. As a result of such testing, certain modifications to the
Machine were made. Further, testing occurred on a more limited basis than
initially expected due to the lack of working capital discussed herein.
Accordingly, no Machines were shipped to distributors in the fiscal year ended
January 31, 1996 although a demonstration Machine was shipped to CFV in
February, 1996 pursuant to the Company's Settlement Agreement with CFV. See
"Business - Legal Proceedings." At the present time, the Company expects to
commence commercial production of the Machine in September or October, 1996,
although no assurances are given that this date will be met. See "Business -
Design and Manufacturing."
In connection with the development of the Machine, the Company paid
$75,000 toward the first $150,000 of development costs as provided in the
Manufacturing Agreement with Premier. In April 1994, the Company advanced
Premier $125,000 to be applied to the aggregate cost of manufacturing ten
pre-production Machines to be placed in strategic locations for beta testing to
gather data relating to, among other things, the Machine's performance,
marketing trends and customer satisfaction. From May to July, 1995, the Company
paid Premier an aggregate of an additional $250,000 ($35,000 for each of ten
pre-production Machines less the $125,000 paid in April, 1994). The cost of
these Machines was capitalized by the Company for $246,600; however, the only
revenue to be realized from the sale of the ten pre-production Machines will be
$7,000 per Machine or $70,000 in the aggregate. See
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"Business - Design and Manufacturing," and "Audited Financial Statements and
Notes" thereto.
The ten pre-production Machines were placed at beta test sites located
at bowling alleys and corporate office centers in the greater Philadelphia area
and were monitored over a 90 day period by the Company. Testing of these
Machines was successful based upon customer acceptance and approval, taste,
price, convenience, Machine operation and the minimum down time experienced. The
testing enabled management to correct and improve the Machine in certain key
areas to enhance performance and operation. The Company is in the process of
tooling certain production parts of the Machine which will then be assembled by
a manufacturer being chosen by management for such purpose. See "Business -
Design and Manufacturing." Once the Company is able to order Machines from the
manufacturer for delivery to purchasers, the Company will require payment from
such purchasers on terms which management believes will cover its cash payment
requirements to the manufacturer so that the Company will not have to advance
cash for Machines or build an inventory, although no assurances are given that
this will occur. If management is incorrect, the Company will be required to
advance cash to the manufacturer. This will require the Company to raise
additional funds. There can be no assurances given that any funding, including
that which may be required to be advanced, will be available or if available, on
terms satisfactory to the Company.
The Company presently estimates, based upon current distribution
agreements, that it will provide a minimum of up to approximately 2,400 Machines
to its existing and possible new distributors during the 12 months following
delivery of the first commercial production Machines. This number of Machines is
subject to the Company receiving adequate funding from purchasers of the
Machines, as to which no assurances are given. Further, although management
currently anticipates that commercial production will commence during in
September or October 1996, no assurance can be given that this timetable will be
met, when such Machines will be shipped or the number that will ultimately be
shipped in the next 12 months. If a lesser number of Machines is purchased, the
Company's financial condition and operations will be materially and adversely
effected.
The Company has expanded its distributor base during the past several
months which currently includes several foreign countries (see below), has
reacquired certain distributorships for stock and options and is negotiating the
reacquisition of others. Over the last several months, management has been in
discussions with parties, who have seen the Machine in its final development
stages, for distributorships in South America, the Far East and the Middle East.
To date, distribution agreements for Brazil, Israel, Egypt
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and Jordan have been executed and there are negotiations for other territories.
The Company has, however, changed its marketing focus and anticipates operating
in other territories directly rather than through distributorships with third
parties. See "Business-Marketing through Distributorships." No assurances are
given, however, that the Company will continue in this direction or that other
distribution agreements or joint venture agreements will not be entered into for
other territories. It is management's intention to work closely with its
distributors as they take delivery and install and maintain the Machines. This
working relationship has been postponed due to the persistent delays in testing
and developing a totally new Machine. Further, the Company's financial condition
may be materially and adversely effected if any current distributors breach
their respective distribution agreements and fail to accept delivery and pay for
Machines as required by such agreements. As of this date, however, management is
not aware that any existing agreements are currently in breach. Notwithstanding
the foregoing, management believes that there may be other channels to
distribute the Machine and related products of the Company, including joint
venture agreements, which could be as effective and profitable as the existing
distribution network is expected to be, although no assurances can be given.
Management will continue to seek the most efficient and profitable ways to
market and distribute the Machines and the products. See "Business-Marketing
through Distributorships."
As of June 1, 1996 the Company had a total of five (5) full-time
employees and expects to hire Leonard Klarich, currently a Company director who
has provided consulting services to the Company over the last several months,
later in the month. Mr. Klarich, experienced in operating larger companies than
the Company, will serve as Executive Vice President responsible for marketing,
distribution and administrative matters which will enable Mr. Kelly to
concentrate on tooling, production and assembly of the Machine and to secure
regulatory approvals and design enhancements. Additional employees are expected
to be hired during the next 12 months if the Company's proposed plan of
operation is successful and there is sufficient cash flow from operations, if
any, which remains constant to support such additional expense, as to which
there are no assurances. Such additional employees may include a food
technician, a chief operating officer with significant experience in the vending
machine business, a chief financial officer, and sales and marketing personnel.
At the present time, management is unable to estimate how many employees will be
needed during the next 12 months, if any.
Due to the continued and significant lack of working capital and the
restrictions on cash expenditures resulting from the CFV Order in the first
quarter of the current fiscal year, the Company had been unable to finalize new
and expansive marketing literature
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to assist it and its distributors in marketing its Machines. Management believes
that it has resolved the severe financial problems it has experienced in the
past and that the Company will now be able to move forward with its marketing
efforts. In this regard, the Company has completed all marketing and warranty
materials and the necessary technical manuals relative to the operation of the
Machine. Further, it has finalized its training program and completed an
instructional video for distributors and the technicians who will service the
Machine. In the past, the Company had retained and may in the future retain
consultants with significant experience in marketing and advertising and in the
food vending business to assist the Company with its marketing efforts as well
as other related matters. On May 23, 1996 the Company entered into a consulting
agreement with LBI, Group, Inc. ("LBI") to provide certain business consulting
services, including marketing, for a 12 month period, subject to prior
termination by either party upon at least 30 days prior notice. In consideration
thereof, the Company has agreed to grant an option to LBI to purchase 4,000,000
(pre-split) shares of free-trading common stock at an exercise price of $.05 per
share.
Since its inception, the Company has had no revenues from operations and
has relied almost exclusively on shareholder loans, distribution deposits and
private securities transactions to raise working capital to fund operations. At
January 31, 1996 the Company had approximately $5,200 in cash. Until the most
recent investment of $1,250,000, as described below, funding had been
substantially inadequate to allow the Company to complete its plan of operation.
Accordingly, the Company has raised additional funds through the sale of
restricted common stock to the extent possible (see below). The Company expects
that it will be required to seek additional funding for marketing and related
purposes but anticipates, although no assurances can be given, that working
capital, from revenues produced by the anticipated sale and distribution of
Machines sold in the current fiscal year, will help to fund this need. No
assurances can be given that the Company will be able to secure adequate
financing from any source to pursue its current plan of operation, to meet its
obligations or to expand marketing over the next 12 months.
In February, 1995, the Company received a $50,000 loan from an
unaffiliated accredited individual. The loan, evidenced by a promissory note
bearing interest at 12% per annum, was personally guaranteed by Mr. Gary Arzt,
then Chairman of the Board of the Company. As further consideration for the
loan, the individual received 100,000 shares of restricted common stock. In May,
1995, the loan was converted into 625,000 shares of restricted common stock at a
conversion price of $.08 per share. Accrued interest of $1,500 was paid at such
time. In August, 1995, the same investor
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<PAGE>
purchased an additional 625,000 shares of restricted common stock for $50,000.
See "Certain Relationships and Related Transactions."
In February, 1995 an option was granted to Jonathan Rahn, whom, through
his company J.R. Consultants, Inc., was a consultant to the Company. The option
was granted in lieu of any and all compensation to be paid to Mr. Rahn or his
company pursuant to an October 1, 1994 consulting agreement. The option was for
1,100,000 shares of common stock, at $.045 per share, to be registered on a
registration statement on Form S-8 which was filed with the Commission on March
15, 1995. The option was exercised in full in February, 1995 and the Company
received an aggregate of $50,000 from the exercise of this option.
In March, 1995, the Company received $175,000 in the form of a loan from
International Tasty Fries, Inc. (formerly known as Canadian Tasty Fries, Inc.),
a publicly traded Nevada corporation which, through its affiliates, was a
distributor of the Company's Machines in Canada, and in the seven German
speaking European countries. See "Business." In April, 1995, the loan was
converted into equity upon the further investment of $625,000 ($800,000 in the
aggregate) for the purchase of 10,000,000 shares of the Company's restricted
common stock at $.08 per share. In connection with such purchase, International
Tasty Fries ("ITF") received the exclusive distribution rights for certain
additional European countries for an aggregate exclusive distributorship fee of
$4,000,000 payable in accordance with the terms of its distributorship
agreement. In addition, ITF designated two members to serve on the Company's
Board of Directors and had agreed to purchase an additional 15,000,000 shares of
restricted common stock in July, 1995 at $.08 per share for aggregate gross
proceeds of $1,200,000 and a distribution agreement for several states in the
United States. This second tranche of funding was never consummated. Pursuant to
the agreement between the Company and ITF, one director was immediately removed
from the Board and ITF did not receive the additional distributorships in the
United States. See "Management" and "Certain Relationships and Related
Transactions."
In September, 1995, the Company entered into an agreement with Acumen
Services, Ltd. an off-shore Abaco, Bahamas company ("Acumen"), to purchase an
aggregate of 21,500,000 shares of common stock of the Company for a purchase
price of no less than $.10 per share payable pursuant to the terms of a
Promissory Note from Acumen providing for payment of the purchase price on the
earlier to occur of (i) the date that commercial production of the Machine
commences or (ii) January 2, 1996. In late November, 1995 when it was apparent
that the delayed beta testing was about to commence, management and Acumen
agreed to provide for payment of the purchase price to occur solely upon
commercial production of the Machine.
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The 21,500,000 shares were held in escrow until October, 1995 when the Company
agreed to the transfer of 3,900,000 shares from Acumen to its Trustee (an
off-shore, non-U.S. person pursuant to Regulation S) and subject to payment in
full for all shares so transferred as agreed. The Trustee and Acumen executed
Regulation S representation letters and the Trustee also executed a Guaranty and
Indemnity in favor of the Company agreeing to return the shares or pay for them
upon the written request of the Company. In January, 1996 the Company agreed to
the transfer of an additional 3,000,000 shares by Acumen to the Trustee in the
same manner and new Regulation S representation letters were executed by both
parties and a Guaranty and Indemnity relative to such shares was executed by the
Trustee. During the last quarter of the fiscal year ended January 31, 1996,
Acumen transferred 2,000,000 of such shares to two non-U.S. persons in two
separate off-shore transactions in conformity with Regulation S. Such non-U.S.
persons thereafter directly paid the Company for these shares, in the aggregate
amount of $100,000 (USD), representing a decrease in the price to be paid by
Acumen to $.05 per share, based upon the then current market price of the
Company's common stock. The balance of the shares issued to Acumen were
cancelled and returned to the Company's treasury in late May, 1996. A written
request for either the return of 3,900,000 shares transferred to the Trustee or
payment therefore was sent to the Trustee on May 30, 1996 but as of the date
hereof, the shares have not been returned or paid for. The Company is currently
determining what action it will take.
In September and October, 1995, the Company raised an aggregate of
$185,000 through the sale of an aggregate of 2,000,000 shares of common stock.
Of such amount, 1,000,000 restricted shares were sold to an Alabama investor at
$.085 per share and an additional 1,000,000 shares were sold to a non-U.S.
person in an off-shore transaction pursuant to Regulation S for $.10 (USD) per
share.
On April 30, 1996 the Company entered into a Stock Purchase Agreement
with an accredited investor to purchase an aggregate of 25,000,000 shares of
restricted common stock at a purchase price of $.05 per share for aggregate
gross proceeds to the Company of $1,250,000 payable (i) $500,000 on April 30,
1996 for 10,000,000 shares and (ii) the balance of $750,000 payable on or before
May 30, 1996. An aggregate of $1,250,000 was paid to the Company on or before
May 31, 1996. The Stock Purchase Agreement, among other things, also provides
for (i) the investor to receive 250,000 (post-split) shares of restricted common
stock in consideration for the investment after the reverse split is effective,
(ii) the appointment of a nominee to the Board of Directors, and (iii) the
purchase of up to an additional $1,000,000 of restricted common stock promptly
after a reverse stock split is approved by a majority of the Company's issued
and outstanding shares of voting
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stock. As of the date hereof, neither the date of the vote on the reverse stock
split nor the reverse stock split ratio have been set. Assuming the approval of
the reverse stock split by the shareholders, the number of post-split shares to
be purchased by the investor for the $1,000,000 shall be determined by dividing
$1,000,000 by the average of the bid and asked price of the common stock on the
effective date of the reverse split. Further, the Stock Purchase Agreement
provides that Edward Kelly, President of the Company, shall be issued 1,500,000
post-split shares of common stock for past, present and future services to the
Company, exclusive of any salary, bonus or other compensation in any form
received or to be received by Mr. Kelly, based upon a reverse split resulting in
no greater than 6,000,000 shares of the Company's common stock to be
outstanding. All shares received by the investor and Mr. Kelly will be
restricted and be registered in a registration statement, together with the
shares underlying the warrants described below, to be filed with the Commission
within 60 days from the date of payment for all 25,000,000 shares. Both the
investor and Mr. Kelly have agreed not to sell such shares for 60 days from the
effective date of such registration statement. The investor and Mr. Kelly shall
also receive anti-dilution warrants to purchase the lesser of (i) 5,000,000
shares of restricted common stock or (ii) such amount of shares to ensure that
each of them shall maintain ownership of no less than 25% of the issued and
outstanding common stock of the Company at any time for a period of three years
from May 29, 1996 at an exercise price equal to the average of the bid and asked
price per share on the effective date of the reverse split. See "Business" and
"Certain Relationships and Related Transactions."
ITEM 7. FINANCIAL STATEMENTS.
Audited consolidated balance sheets as of January 31, 1996 and 1995, and
related statement of operations, stockholders' equity (deficiency) and cash
flows for the years then ended and for the period from October 18, 1985
(inception) to January 31, 1996 are included after Item 12. herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Management is not aware, and has not been advised by any former
accountants, of any disagreement on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
Management has not consulted the accountants regarding either the application of
accounting principles to any specified transaction or any disagreement with any
former accountants.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT.
(A) IDENTIFICATION OF DIRECTORS.
The current directors of the Company will serve until the next annual
(or special in lieu of annual) meeting of shareholders at which directors are
elected and qualified. Names, age, period served and positions held with the
Company are as follows:
POSITIONS
NAME AGE WITH COMPANY
Gary J. Arzt 55 Chairman of the
Board, Secretary*
Edward Kelly 59 President,
Treasurer and
Director**
Jurgen A. Wolf 61 Director**
Leonard Klarich 61 Secretary/Director**
Ian Lambert 50 Director
- --------------------------------------------------------------------------------
* Mr. Arzt was removed as Director on June 1, 1996 by consent of
two-thirds of the shares entitled to vote in accordance with Nevada law
and was removed as Secretary by the Board of Directors on June 3, 1996.
** Member of Executive Committee of the Board of Directors. Mr. Klarich
was also appointed Secretary by the Board on June 3, 1996.
EDWARD KELLY, Blue Bell, Pennsylvania. Mr. Kelly has been President of
the Company since June 10, 1994, and a director since April, 1994. He was
appointed a member of the Executive Committee on September 18, 1995. From
January, 1994 until June 10, 1994 he was Executive Vice President of the
Company. Mr. Kelly was President and a Director of Mega Manufacturing Co., Inc.,
a private manufacturing company from 1980 to 1994. Mr. Kelly has been involved
in the engineering and design of the Machine and is part owner of Premier, the
Machine's manufacturer. Mr. Kelly received a degree in Mechanical Engineering
from Penn State University and is a member of the American Association of
Professional Engineers and the American Federation of Engineers. See "Business -
Design and Manufacturing."
27
<PAGE>
GARY J. ARZT, Bal Harbour, Florida. Mr. Arzt was Chairman of the Board
of Directors from June, 1993 and Secretary since February, 1995 until removed by
the shareholders by consent on June 1, 1996 and terminated by the Board on June
3, 1996, respectively. From September, 1992 until June, 1993 he was President of
the Company. Mr. Arzt is a private investor who has extensive business
experience in the United States and the Far East including marketing of consumer
products. Since August, 1991, he has been President of Threadneedle Holdings,
Inc., a private Florida corporation which is a venture capital and holding
company. Mr. Arzt graduated from the University of North Carolina with a B.S. in
Business Management in 1962. See "Certain Relationships and Related
Transactions."
JURGEN WOLF, Vancouver, British Columbia, Canada. Mr. Wolf has been a
director of the Company and a member of the Executive Committee of the Board of
Directors since September 18, 1995. Since 1983, he has been President of J.A.
Wolf Projects Ltd., a private Vancouver company engaged in commercial and
industrial contracting. He was a director of Yukon Spirit Mines and is a
director and the controlling shareholder of Adelaide Vending (Canada) Ltd.,
both of which are and were distributors, respectively, of the Company's Machine.
He also was a co- distributor of the Machine in the United Kingdom but those
rights were terminated in April, 1995 for non-payment of part of the
distribution deposit by his co-distributor. Mr. Wolf also serves as a director
of five (5) Canadian public companies, which include OJ Oil and Gas Corporation,
Gulfside Industries, Ltd., Shoreham Resources, Ltd., Zeus Oil and Gas
Corporation and Key Capital Group, Inc. See "Business - Marketing Through
Distributorships" and "Certain Relationships and Related Transactions."
IAN LAMBERT, North Vancouver, British Columbia, Canada. Mr. Lambert
was appointed as a director of the Company in July, 1995 and was re-elected to
the Board in September, 1995. He is the President of International Tasty Fries,
Inc. ("ITF"), a major shareholder in the Company, and Yukon Spirit Mines Ltd.,
both of which are affiliates of the other and each of which have distributorship
agreements with the Company for territories in North America and Europe. Mr.
Lambert has been involved with the financing and management of numerous resource
and industrial based public companies, both in Canada and the U.S., since the
early 1980's, and currently is on the Board of seven (7) publicly-traded
companies. Prior to that time, he was an Information Systems executive with
MacMillan Bloedel Ltd. and also the Manager, Systems Consulting for the
Vancouver office of Deloitte Haskins & Sells. Mr. Lambert received a Bachelor of
Commerce and Quantitative Analysis from the University of Saskatchewan in Canada
in 1970. See Business - Marketing Through Distributorships" and
28
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Plan of Operation."
LEONARD KLARICH, Knoxville, Tennessee. Since September, 1995, Mr.
Klarich has been a director of the Company and also was a consultant to
management from March through May, 1996. Mr. Klarich is expected to be retained
as Executive Vice President of the Company in June, 1996 to assist in the day to
day operations of the Company, with specific emphasis on distribution networks,
distributors and marketing. Mr. Klarich was Chairman of the Board of K & D, a
high-tech graphic design company located in Woodland Hills, California until
early 1996. From 1976 to 1989 he owned and operated Avecor, Inc., a color for
plastics manufacturing company with yearly sales in 1976 of $3,000,000. He sold
Avecor in 1989 when its sales exceeded $40,000,000. Prior thereto, he spent a
number of years as a chief operating officer of companies in need of turnaround
due to financial concerns. Mr. Klarich started his business career as a System
Engineer for I.B.M. He received a Bachelor of Arts from Hofstra University in
1967 and a Masters Degree in Marketing Research from the City College of New
York.
(B) DIRECTORSHIPS.
The current directors hold no other directorships in any Company with a
class of securities registered pursuant to Section 12 of the Exchange Act or
subject to the requirements of Section 15(d) of such Act or any Company
registered as an investment Company under the Investment Company Act of 1940,
except as disclosed herein.
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES.
None
(D) FAMILY RELATIONSHIPS.
None.
29
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
NAME FISCAL OTHER ALL
AND YEAR ANNUAL RESTD. OTHER
PRINCIPAL ENDED COMPEN- STOCK LTIP COMPEN-
POSITION JANUARY 31 SALARY BONUS SATION AWARDS OPTIONS PAYOUTS SATION
- -------------------------------------------------------------------------------
Gary D. 1996 $ 0 0.00 0 None None None (1)
Arzt(1) 1995 $ 0 0.00 0 None None None (1)
1994 $ 0 0.00 0 None None None (1)
1993 $ 0 0.00 0 None None None (1)
Edward C. 1996 (2) 0.00 0 None (2) None (2)
Kelly(3) 1995 (2) 0.00 0 None (2) None (2)
1994 (2) 0.00 0 None (2) None (2)
- -----------------------------
(1) Mr. Arzt, who was Chairman of the Board of Directors until
June 1, 1996, served as President from September, 1992 until June, 1993. See
"Management." He also served as Secretary from September, 1992 until June 3,
1996. He received 500,000 shares of common stock issued pursuant to a
Registration Statement on Form S-8 filed with the Commission in November, 1994
for services rendered to the Company during his tenure as President for which he
received no other compensation. He also received 500,000 shares of common stock
issued pursuant to a Registration Statement on Form S-8 filed with the
Commission on September 28, 1995. Such shares had previously been issued by
Board resolution for services rendered to the Company without cash compensation
and were subsequently cancelled and reissued under such Form S-8. Does not
include accrued director compensation or non-employee director options.
(2) Mr. Kelly has served as President and Treasurer of the Company
since June 10, 1994, a director since April, 1994 and was Executive Vice
President from January, 1994 to June 10, 1994. Mr. Kelly received $20,000 on
February 1,1994 for services rendered to the Company since October, 1993. He
was granted an option in April, 1994 for 250,000 shares of restricted common
stock exercisable at $.50 per share which was subsequently rescinded on July 8,
1994 by the Board and granted an option for 1,000,000 shares of restricted
common stock exercisable at $.10 per share at any time until March 15, 1997.
Pursuant to the terms of his October 1, 1994 employment agreement, Mr. Kelly
received 960,000 shares of Common Stock issued pursuant to a Registration
Statement on Form S-8 filed with the Commission in November, 1994 for services
rendered to the Company from February, 1994 to June, 1994. For the fiscal year
ended January 31, 1995, Mr. Kelly received an aggregate of $49,000 in cash
payments and Mr. Kelly or his assigns received an aggregate of 75,000 shares of
restricted common stock in accordance with the terms of his employment
agreement. For the fiscal year ended January 31, 1996, Mr. Kelly received an
aggregate salary of $180,000, consisting of $160,000 in cash and 2,184,127
shares of restricted common stock pursuant to the terms of his employment
agreement which was amended effective as of May 1, 1995 and provides (i) for
salary of $20,000 per month of which $10,000 accrues until the Company is
financially able to pay the accrued amount or Mr. Kelly elects to convert all or
part of such accrued amount into restricted common stock at a conversion price
of $.20 per share, (ii) an annual bonus or bonuses, if any, in an amount to be
determined by the Board of Directors in its sole discretion, (iii) 2,000,000
shares of common stock as additional compensation for all services provided to
the Company from June 4, 1994 through April 30, 1995 to be registered on Form
S-8. He received the 2,000,000
30
<PAGE>
shares of common stock issued under a Registration Statement on Form S-8 filed
with the Commission on September 28, 1995 for services rendered to the Company
from June 4, 1994 through April 30, 1995. This table does not include (i)
$10,000 paid each month by H&R Industries, Inc., from January, 1994 through
September, 1995, which amount is included in the total development cost of the
Machine, (ii) accrued director compensation, or (iii) shares and warrants to
be issued to Mr. Kelly pursuant to the Stock Purchase Agreement. See "Business -
Design and Manufacturing," "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Plan of Operation," "Management" and
"Certain Relationships and Related Transactions."
OPTION GRANTS IN 1995
There were no options granted in the fiscal year ended January 31, 1996
to any officer. See "Executive Compensation." Pursuant to the 1995 Stock Option
Plan adopted by the Board of Directors on July 1, 1995 and approved by the
shareholders on September 18, 1995, non-employee directors receive options under
a formula set forth in such Stock Option Plan determined by dividing the annual
director's fee paid or accrued (accrued approximately $2,500.00 on a pro rata
basis from September 18, 1995 through December 15, 1995) by the fair market
value per share of common stock on the date of the grant ($.12 at December 15,
1995). Each of Messrs. Arzt, Klarich, Wolf and Lambert received an option to
purchase 20,833 shares of common stock under the Stock Option Plan at an
exercise price of $.12 (representing fair market value per share as of December
15, 1995), which options expire December 15, 2005.
(D) AGGREGATED OPTION/SAR EXERCISES AND FISCAL
YEAR END OPTION/SAR VALUE TABLE
None
(E) LONG TERM INCENTIVE PLAN ("LTIP") AWARDS TABLE
None
(F) COMPENSATION OF DIRECTORS.
The Directors were not entitled to compensation prior to
September 18, 1995. At the Board of Directors meeting held on September 18,
1995, the Board voted to approve payment of annual directors' fees of $10,000
per director plus reasonable expenses commencing as of such date. Payments for
the fiscal year ending January 31, 1996 would be accrued on a pro rata basis for
the year and paid when the Company was financially able to do so. All such
accrued compensation has been included in the audited financial statements for
Gary J. Arzt, Edward C. Kelly, Jurgen Wolf, Ian Lambert and Leonard Klarich. See
"Audited Financial Statements."
31
<PAGE>
(G) EMPLOYMENT CONTRACTS AND TERMINATION OF
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
On October 1, 1994 the Company entered into an employment agreement with
Edward Kelly, its President and Treasurer. The employment agreement was for a
three year term commencing retroactively to October 1, 1993 (the date on which
Mr. Kelly began providing design, engineering and consulting services to the
Company) and was automatically renewable for additional one year terms after
expiration on September 30, 1996. Compensation was $10,000 per month commencing
on October 1, 1994, of which $4,000 was payable in cash and the balance of
$6,000 accrued until the Company was financially able to pay the balance or Mr.
Kelly converted the unpaid amount into restricted common stock at a conversion
price of $.20 per share. In addition, Mr. Kelly received 960,000 shares of
common stock registered on a Form S-8 registration statement filed with the
Commission in November, 1994 for services provided to the Company from October
1, 1993 through February 28, 1994 and 2,000,000 shares of common stock
registered on a Form S-8 registration statement filed with the Commission on
September 28, 1995. The employment agreement was subsequently amended but
effective as of May 1, 1995 to provide the following changes: (i) salary of
$20,000 per month payable $10,000 in cash with $10,000 accruing until the
Company is financially able to pay such amount or Mr. Kelly elects to convert
all or any part of such amount into restricted common stock based on a
conversion ratio of $.20 per share; (ii) an employment term until April 30,
2001; (iii) an annual bonus or bonuses, if any, in an amount to be determined by
the Board of Directors in its sole discretion; (iv) 2,000,000 shares of common
stock registered on Form S-8 as additional compensation for all services
provided by Mr. Kelly to the Company from June 4, 1995 to April 30, 1995. All
other terms and conditions of the October 1, 1994 employment agreement remain in
full force and effect. The employment agreement, as amended, is automatically
renewable for additional one (1) year terms without any further action by the
Company or Mr. Kelly. The employment agreement, as amended, may be terminated by
the Company for certain enumerated causes or upon written notice of the Company
to Mr. Kelly 60 days prior to the end of any term or renewal thereof.
The Company has from time to time entered into consulting agreements
with outside consultants relating to different aspects of its business; however,
it did not enter into any such agreements with current or former employees,
officers or directors during the fiscal year ended January 31, 1996. Commencing
in March, 1996, Leonard Klarich, a director of the Company since September,
1995, provided consulting services to the Company through May 31, 1996 and will
receive as compensation for such services 1,000,000 shares of common stock at a
price of $.05 per share to be paid by Mr. Klarich to the Company. Such shares
will be registered in and
32
<PAGE>
issued under a registration statement on Form S-8 to be filed with the
Commission in July, 1996.
(H) REPORT ON REPRICING OF OPTIONS/SARS
None
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following table sets forth, as of June 1, 1996, the ownership of
common stock by persons known to the Company who own beneficially more than 5%
of the outstanding shares of Common Stock:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
- ---------------- ----------------------- --------
International Tasty 10,300,000 11.7%
Fries, Inc.
Suite 602
595 Howe Street
Vancouver, B.C. V6C 2T5
Whetstone Ventures 25,000,000 28.4%
Corporation, Inc.
11 Waterfront Estates
Estates Drive
Lancaster, PA 17602
- --------------------------------------
(1) All of these shares are shown of record as of June 1, 1996,
pursuant to the Company's stock transfer records. Does not include (i) a
presently exercisable option held by California Food & Vending, Inc. to acquire
2,000,000 shares of restricted common stock at $.10 per share at any time until
February 1, 1999 and (ii) an option granted to LBI for business consulting
services for 4,000,000 pre-split shares exercisable at $.05 per share.
(b) SECURITY OWNERSHIP OF MANAGEMENT.
The following table sets forth, as of June 1, 1996 the beneficial common
stock ownership of all directors, executive officers, and of all directors and
officers as group:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ---------------- -------------------- --------
Edward C. Kelly 3,499,127 4.0%
650 Sentry Parkway
Suite One
Blue Bell, PA 19472(1)
33
<PAGE>
Jurgen A. Wolf 2,020,833 2.3%
1285 West Pender Street
Vancouver, B.C. Canada(2)(3)
Leonard Klarich 20,833 *
839 Claybrook Court
Knoxville, TN 37923(2)
Ian D. Lambert 10,320,833 11.7%
1220 Eastview Road
North Vancouver, B.C.
(Canada) V7J1L6(2)(4)
All Officers and Directors
as a group (4 persons) 15,861,626 18.0%
- ----------------------------------
* Less than 1%.
(1) Includes (i) an option for 1,000,000 shares of restricted common stock
presently exercisable at $.10 per share until March 15, 1997, as
calculated in accordance with Rule 13d-3, (ii) 349,127 shares of common
stock held by Irene Kelly, his wife, as to which Mr. Kelly claims
beneficial ownership, and (iii) 2,150,000 shares. Does not include
1,500,000 post-split shares and certain anti-dilution warrants to be
issued immediately after the effective date of the reverse stock split
of the outstanding common stock is approved by the shareholders pursuant
to the terms of the April 30, 1996 Stock Purchase Agreement.
(2) Includes options to purchase 20,833 shares of common stock exerciseable
at $.12 per share until December 15, 2005, granted to each non-employee
director under the 1995 Stock Option Plan on December 15, 1995.
(3) Includes 1,000,000 shares of common stock issued to Adelaide Vending
(Canada) Ltd. for the reacquisition by the Company of the Canadian
distributorship and an option granted to Adelaide for 1,000,000 shares
of common stock exercisable at $.25 per share until September 1, 1997,
as calculated in accordance with Rule 13d-3. Mr. Wolf is a director and
the controlling shareholder of Adelaide.
(4) Includes 10,300,000 issued to ITF for its purchase in 1995 of an
aggregate of 10,300,000 shares of restricted common stock. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operation - Plan of Operation."
(C) CHANGES IN CONTROL.
Except as described in this Report, there are no arrangements, known to
the Company, including any pledge by any person of securities of the Company or
of any of its parents, the operation of which may at a subsequent date result in
a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In April, 1993, the Company issued a promissory note to Mr. Gary Arzt,
then Chairman of the Board of the Company, for up to
34
<PAGE>
$300,000 in funds which may be advanced to the Company. Such note was
superseded on October 31, 1993 by a new promissory note in the amount of
$129,946.55 ("Note"). The Note, which bears interest at 8% per annum payable in
quarterly installments, was due on or before November 1, 1994. In April, 1995,
the Note was partially repaid in the amount of $79,947. As of June 1, 1996 there
is a principal balance of $50,000 plus accrued interest of $3,781.20 accruing at
8% per annum. The Note was extended, but required to be paid by the Company,
when funds became reasonably available to do so, by August 1, 1995. Mr. Arzt has
demanded that the Company pay this Note together with all accrued interest and
other expenses. See "Audited Financial Statements and Notes" thereto.
In February, 1995, the Company issued a promissory note to an
unaffiliated accredited individual for $50,000 plus 12% interest per annum. The
note was personally guaranteed by Mr. Arzt, then Chairman of the Board. The
note, payable in 90 days, was converted by the holder into 625,000 shares of
restricted common stock in May, 1995 at $.08 per share. Interest of $1,500 on
the note was paid by the Company in May, 1995. The individual also purchased an
additional 625,000 shares of restricted common stock at $.08 per share in
August, 1995 for aggregate gross proceeds to the Company of $50,000. See
"Management's Discussion and Analysis of Financial Condition - Plan of
Operation."
In May, 1995, the Company loaned Mr. Kelly $50,000 at 10% interest per
annum. As of June 1, 1996, Mr. Kelly owed the Company $55,000. Arrangements are
currently being made by the Company and Mr. Kelly for the repayment of this
loan.
In September, 1995 the Company reacquired its Canadian distributorship
from Adelaide Vending (Canada) Ltd. for 1,000,000 shares of common stock and an
option to purchase 1,000,000 shares of common stock for two years at an exercise
price of $.25 (USD) per share , all pursuant to Regulation S. Mr. Jurgen Wolf,
a director of the Company, is a director and the controlling shareholder of
Adelaide Vending (Canada) Ltd. See "Business-Marketing through
Distributorships" and "Management".
35
<PAGE>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996 AND 1995
AND FOR THE PERIOD OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 1996
36
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF TASTY FRIES, INC. AND SUBSIDIARY
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS OF TASTY FRIES,
INC. (FORMERLY ADELAIDE HOLDINGS, INC.) AND SUBSIDIARY (A DEVELOPMENT STAGE
COMPANY) AS OF JANUARY 31, 1996 AND 1995, AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS, STOCKHOLDER'S EQUITY (DEFICIENCY), AND CASH FLOWS FOR
THE YEARS THEN ENDED AND FOR THE PERIOD FROM OCTOBER 18, 1985 (INCEPTION) TO
JANUARY 31, 1996. THESE FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE
COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE
FINANCIAL STATEMENTS BASED ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE 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 FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN
ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF TASTY FRIES, INC. AND
SUBSIDIARY AS OF JANUARY 31, 1996 AND 1995, AND THE RESULTS OF ITS OPERATIONS
AND ITS CASH FLOWS FOR THE YEARS THEN ENDED AND FROM OCTOBER 18, 1985
(INCEPTION) TO JANUARY 31, 1996, IN CONFORMITY WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.
THE ACCOMPANYING FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT THE
COMPANY WILL CONTINUE AS A GOING CONCERN. AS SHOWN IN THE FINANCIAL STATEMENTS,
THE COMPANY HAS INCURRED NET LOSSES SINCE ITS INCEPTION AND HAS EXPERIENCED
LIQUIDITY PROBLEMS. UNLESS THE COMPANY CAN CONTINUE TO OBTAIN FINANCING FROM THE
ISSUANCE OF COMMON STOCK AND/OR THROUGH LOANS, SUBSTANTIAL DOUBT ARISES ABOUT
THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN. THE FINANCIAL STATEMENTS
DO NOT INCLUDE ANY ADJUSTMENTS THAT MIGHT RESULT FROM THE OUTCOME OF THIS
UNCERTAINTY.
SCHIFFMAN HUGHES BROWN
JUNE 10, 1996
37
<PAGE>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 1996 AND 1995
ASSETS
1996 1995
---- ----
CURRENT ASSETS:
CASH $ 5,273 $ 305
VENDING MACHINES 70,000 200,000
SUBSCRIPTIONS RECEIVABLE 2,092,000
LOAN RECEIVABLE, OFFICER (NOTE 2) 50,000
---------- ----------
TOTAL CURRENT ASSETS 2,217,273 200,305
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION OF
$16,834 IN 1996 AND $10,280 IN 1995 30,515 28,765
----------- ----------
$2,247,788 $ 229,070
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
NOTE PAYABLE (NOTE 3) $ 25,000 $ 50,000
NOTE PAYABLE, SHAREHOLDER/OFFICER (NOTE 4) 50,000 129,947
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 549,283 794,845
UNEARNED REVENUE (NOTE 5) 356,000 436,000
----------- ----------
TOTAL CURRENT LIABILITIES 980,283 1,410,792
----------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (DEFICIENCY):
COMMON STOCK, $.01 PAR VALUE;
AUTHORIZED 100,000,000 SHARES;
ISSUED AND OUTSTANDING 76,000,495
SHARES AT JANUARY 31, 1996 AND
31,226,993 AT JANUARY 31, 1995 760,005 312,270
ADDITIONAL PAID-IN CAPITAL 5,129,270 1,613,290
DEFICIT ACCUMULATED IN DEVELOPMENT STAGE (4,621,770) (3,107,282)
----------- -----------
1,267,505 (1,181,722)
----------- -----------
$2,247,788 $ 229,070
=========== ============
See independent auditor's report and notes to financial statements
38
<PAGE>
<TABLE>
<CAPTION>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1996 AND 1995
AND FOR THE PERIOD OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 1996
CUMULATIVE
SINCE
INCEPTION 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
REVENUES $ 618 $ 618 $ 0
------------ ------------ -----------
COSTS AND EXPENSES:
MACHINE AND PRODUCT DEVELOPMENT 759,104 402,615 47,400
SELLING, GENERAL AND ADMINISTRATIVE 3,822,585 1,086,033 1,426,638
------------ ------------ -----------
4,581,689 1,488,648 1,474,038
------------ ------------ -----------
NET LOSS BEFORE INTEREST AND
OTHER INCOME (4,581,071) (1,488,030) (1,474,038)
OTHER INCOME (EXPENSE):
OTHER INCOME 15,000 10,000
INTEREST EXPENSE (55,699) (26,458) (14,895)
------------ ------------ -----------
(40,699) (26,458) (4,895)
------------ ------------ -----------
NET LOSS $ (4,621,770) $ (1,514,488) $(1,478,933)
============ ============ ===========
NET LOSS PER SHARE OF COMMON STOCK ($ .06) ($ .03) ($ .05)
============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 46,498,559 27,401,329
============ ============
</TABLE>
See independent auditor's report and notes to financial statements
39
<PAGE>
<TABLE>
<CAPTION>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD FEBRUARY 1, 1994 TO JANUARY 31, 1996
PAID TOTAL
COMMON IN RETAINED STOCKHOLDER
STOCK CAPITAL EARNINGS EQUITY
------ ------- -------- -----------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1994 259,454 944,046 (1,628,349) (424,849)
ISSUED 3,129,999 SHARES 30,800 547,950 578,750
ISSUED 2,151,622 SHARES FOR SERVICES 22,016 121,294 143,310
NET LOSS FOR THE YEAR ENDED
JANUARY 31, 1995 (1,478,933) (1,478,933)
----------- ------------- ------------ ------------
BALANCE, JANUARY 31, 1995 312,270 1,613,290 (3,107,282) (1,181,722)
ISSUED 36,415,000 SHARES 364,150 3,000,350 3,364,500
ISSUED 6,733,502 SHARES FOR SERVICES 67,335 381,880 449,215
ISSUED 625,000 SHARES FOR
LOAN CONVERSION 6,250 43,750 50,000
ISSUED 1,000,000 SHARES FOR
REPURCHASE OF DISTRIBUTORSHIP 10,000 90,000 100,000
NET LOSS FOR THE YEAR ENDED
JANUARY 31, 1996 (1,514,488) (1,514,488)
--------- ------------ ----------- -----------
BALANCE, JANUARY 31, 1996 $760,005 $5,129,270 $(4,621,770) $1,267,505
========= =========== ============ ==========
</TABLE>
See independent auditor's report and notes to financial statements
40
<PAGE>
<TABLE>
<CAPTION>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1996 AND 1995
AND FOR THE PERIOD OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 1996
CUMULATIVE
SINCE
INCEPTION 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(4,621,770) $(1,514,488) $(1,478,933)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION 16,834 6,554 4,500
SUBSCRIPTIONS RECEIVABLE (2,092,000) (2,092,000)
OTHER ASSETS (70,000) 130,000 (125,000)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 549,284 (245,562) 682,889
UNEARNED REVENUE 356,000 (80,000) 80,000
----------- ----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (5,861,652) (3,795,496) (836,544)
----------- ----------- -----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (47,350) (8,304) (14,544)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
ISSUANCE OF COMMON STOCK 5,184,250 3,564,500 578,750
ISSUANCE OF COMMON STOCK FOR SERVICES 630,025 449,215 143,310
CONVERSION OF NOTE PAYABLE INTO
COMMON STOCK 75,000 (50,000)
LOAN RECEIVABLE, OFFICER (50,000) (50,000)
NOTE PAYABLE, CURRENT 25,000 (25,000)
SHAREHOLDER NOTE 50,000 (79,947)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,914,275 3,808,768 722,060
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 5,273 4,968 (129,028)
CASH, BEGINNING BALANCE 0 305 129,333
----------- ----------- -----------
CASH, ENDING BALANCE $ 5,273 $ 5,273 $ 305
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 35,351 $ 22,636 $ 11,620
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
ISSUANCE OF COMMON STOCK FOR SERVICES $ 630,025 $ 449,215 $ 143,310
=========== =========== ===========
ISSUANCE OF COMMON STOCK FOR
CONVERSION OF NOTE PAYABLE $ 50,000 $ 50,000 $
=========== =========== ===========
</TABLE>
See independent auditor's report and notes to financial statements
41
<PAGE>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
ON JULY 31, 1991 METRO SYSTEMS INC., A NEVADA CORPORATION, ACQUIRED 100%
OF THE OUTSTANDING STOCK OF ADELAIDE HOLDINGS, INC., A DELAWARE
CORPORATION, FOR 13,500,000 SHARES OF ITS COMMON STOCK. THE ACQUISITION
HAS BEEN ACCOUNTED FOR AS A RECAPITALIZATION. METRO SYSTEMS INC. HAD NO
ASSETS OR LIABILITIES AT THE TIME OF THE RECAPITALIZATION AND CHANGED THE
NAME OF METRO SYSTEMS INC. TO ADELAIDE HOLDINGS, INC. EFFECTIVE OCTOBER 1,
1993 ITS NAME WAS CHANGED TO TASTY FRIES, INC.
THE COMPANY IS A DEVELOPMENT STAGE COMPANY SINCE IT HAS NOT COMPLETED
DESIGNING, TESTING, AND MANUFACTURING ITS SOLE PRODUCT, A VENDING MACHINE
WHICH WILL COOK AND DISPENSE FRENCH FRIES. THE COMPANY HAS ENTERED INTO A
MANUFACTURING REQUIREMENTS AGREEMENT WITH A COMPANY WHICH MANUFACTURES AND
ASSEMBLES A VARIETY OF HIGH TECHNOLOGY EQUIPMENT. THE COMPANY HAS RECEIVED
TEN MACHINES AND IT IS ANTICIPATED THAT EACH MACHINE CAN BE SOLD FOR
APPROXIMATELY $7,000. THE DIFFERENCE BETWEEN THE ANTICIPATED SELLING PRICE
AND THE COST TO OBTAIN THE MACHINES HAS BEEN CHARGED TO MACHINE AND
PRODUCT DEVELOPMENT COST. THE PRESIDENT OF THE MANUFACTURING COMPANY IS A
DIRECTOR OF TASTY FRIES, INC. AND THE PRESIDENT OF TASTY FRIES, INC. OWNS
50% OF THE MANUFACTURING COMPANY. FROM THE CORPORATION'S DATE OF
INCEPTION, OCTOBER 18, 1985, TO DATE IT HAS ENGAGED IN VARIOUS BUSINESS
ACTIVITIES THAT WERE UNPROFITABLE. THE COMPANY HAD NO REVENUES FROM
OPERATIONS SINCE INCEPTION AND ITS ABILITY TO CONTINUE AS A GOING CONCERN
IS DEPENDENT ON THE CONTINUATION OF EQUITY FINANCING TO FUND THE EXPENSES
RELATING TO SUCCESSFULLY MARKETING THE VENDING MACHINE AND RESOLVING
EXISTING LITIGATION (NOTE 9).
ALL INTERCOMPANY ACCOUNTS AND TRANSACTIONS HAVE BEEN ELIMINATED.
2. LOAN RECEIVABLE, OFFICER:
REPRESENT MONIES BORROWED FROM THE COMPANY BY AN OFFICER IN MAY, 1995.
THE LOAN IS DUE ON DEMAND, ALONG WITH INTEREST AT 10% PER ANNUM.
3. NOTE PAYABLE:
REPRESENTS A SINGLE UNSECURED NOTE FROM A THIRD PARTY SHAREHOLDER WHICH
BEARS INTEREST AT THE RATE OF 8% PER ANNUM. THE NOTE WAS DUE JUNE 4, 1993
BUT HAS BEEN EXTENDED INDEFINITELY. THE COMPANY ISSUED TO THE NOTEHOLDER,
OPTIONS FOR 400,000 SHARES OF ITS COMMON STOCK WITH AN EXERCISE PRICE OF
35 CENTS PER SHARE. THE COMPANY ISSUED 180,000 AND 90,000 SHARES OF ITS
COMMON STOCK ON DECEMBER 22, 1994 AND MAY 4, 1995, RESPECTIVELY, TO THE
NOTEHOLDER IN ADDITION TO PAYING $30,600 ON MAY 5, 1995.
42
<PAGE>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1995
4. NOTE PAYABLE, SHAREHOLDER/OFFICER:
THE UNSECURED NOTE FROM EXISTING SHAREHOLDER/OFFICER OF THE COMPANY WHICH
BEARS INTEREST AT THE RATE OF 8% PER ANNUM AND IS DUE AND PAYABLE ON
DEMAND. THE COMPANY REDUCED THIS NOTE WITH A PAYMENT OF $79,947 ON MAY 1,
1995 TO $50,000.
5. UNEARNED REVENUE:
THIS REPRESENTS MONIES RECEIVED FOR DISTRIBUTION RIGHTS OF THE VENDING
MACHINES WHICH THE COMPANY IS STILL IN THE PROCESS OF DEVELOPING AND
TESTING. DURING THE YEAR ENDED JANUARY 31, 1995, ONE DISTRIBUTOR FORFEITED
ITS RIGHTS, AND THE COMPANY RECOGNIZED THE $10,000 RECEIVED DURING 1994 AS
OTHER INCOME. THE COMPANY, ON SEPTEMBER 5, 1995, ISSUED 1,000,000 SHARES
OF ITS COMMON STOCK TO REPURCHASE THE CANADIAN DISTRIBUTORSHIP RIGHTS
WHICH THE COMPANY HAS SHOWN AS UNEARNED REVENUE IN THE AMOUNT OF $100,000.
6. RELATED PARTY TRANSACTIONS:
THE COMPANY PAID SALARY TO MR. EDWARD KELLY, THE PRESIDENT AND DIRECTOR,
DURING THE FISCAL YEAR ENDING JANUARY 31, 1996 TOTALING $160,000. IN
ADDITION, THE COMPANY ALSO ISSUED AN AGGREGATE OF 2,184,127 SHARES OF
COMMON STOCK TO MR. EDWARD KELLY REPRESENTING SALARY PAYMENTS IN LIEU OF
CASH COMPENSATION FOR SERVICES. DURING THE YEAR ENDING JANUARY 31, 1995,
THE COMPANY PAID CONSULTING FEES TO MR. EDWARD KELLY OF $49,000. THE
COMPANY ALSO ISSUED 960,000 AND 500,000 SHARES OF COMMON STOCK TO MR.
EDWARD KELLY AND MR. GARY ARZT, RESPECTIVELY, FOR THE SERVICES OF MR.
EDWARD KELLY PRIOR TO BECOMING PRESIDENT IN JUNE, 1994 AND FOR THE
SERVICES OF MR. GARY ARZT AS PRESIDENT FROM SEPTEMBER, 1992 TO JUNE, 1993.
MR. GARY ARZT WAS THE COMPANY'S CHAIRMAN OF THE BOARD UNTIL JUNE 1, 1996.
7. COMMITMENTS AND CONTINGENCIES:
DURING THE YEAR ENDED JANUARY 31, 1996 AND 1995, THE COMPANY PAID $17,400
AND $9,600, RESPECTIVELY, FOR RENTAL OF OFFICE SPACE. THE COMPANY HAS
LEASED THIS OFFICE SPACE AT A MONTHLY RENTAL OF $1,650 UNTIL MAY 31, 1997.
43
<PAGE>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1995
8. ISSUANCE OF COMMON STOCK:
THE TOTAL SHARES ISSUED DURING THE YEAR ENDED JANUARY 31, 1996 WAS
45,773,502; 37,415,000 SHARES WERE SOLD IN PRIVATE PLACEMENTS BY THE
COMPANY; 6,733,502 SHARES WERE ISSUED IN PAYMENT FOR ADVERTISING,
MARKETING, CONSULTING AND LEGAL SERVICES; 625,000 SHARES WERE ISSUED FOR
CONVERSION OF A $50,000 LOAN TO COMMON STOCK AND 1,000,000 SHARES WERE
ISSUED FOR THE REPURCHASE OF THE CANADIAN DISTRIBUTORSHIP (SEE NOTE 5).
THE TOTAL SHARES ISSUED DURING THE YEAR ENDED JANUARY 31, 1995 WAS
5,281,621 SHARES; 3,129,999 SHARES WERE SOLD IN PRIVATE PLACEMENTS BY THE
COMPANY AND 2,151,622 SHARES WERE ISSUED IN PAYMENT FOR ADVERTISING,
MARKETING, CONSULTING AND LEGAL SERVICES.
9. LITIGATION:
FORMER OFFICERS OF THE COMPANY CAUSED THE COMPANY TO GUARANTEE A LEASE
FOR ANOTHER CORPORATION OWNED BY THEM. THE OTHER CORPORATION BREACHED ITS
LEASE OBLIGATION AND THIS ACTION CAUSED THE LANDLORD TO ASSERT A CLAIM
AGAINST THE COMPANY AS GUARANTOR THAT IT WAS DUE APPROXIMATELY $110,000.
IN OCTOBER, 1994 THE COMPANY, WITHOUT ADMITTING ANY LIABILITY, SETTLED
THE LITIGATION BY PAYING THE LANDLORD $76,000.
ON OCTOBER 25, 1994 THE COMPANY RECEIVED A COPY OF THE AWARD OF THE
ARBITRATOR IN THE AMERICAN ARBITRATION ASSOCIATION MATTER OF CALIFORNIA
FOOD & VENDING, INC. (CFV) VS. TASTY FRIES, INC. ET.AL. AN AWARD WAS
RENDERED AGAINST THE COMPANY IN THE AGGREGATE AMOUNT OF $279,500 FOR
DOMESTIC AND INTERNATIONAL DISTRIBUTION FEES OWED TO THE PLAINTIFF AND
$249,500 IN COMPENSATORY DAMAGES. THE AWARD AND COMPENSATORY DAMAGES
TOTALING $529,000 HAVE BEEN RECORDED IN THE FINANCIAL STATEMENTS AS OF
OCTOBER 31, 1994. PAYMENT PURSUANT TO A SETTLEMENT AGREEMENT WHICH
SUPERSEDES THE AWARD BEGAN IN FEBRUARY, 1995 AND WAS SATISFIED IN FULL IN
MAY, 1996.
THE ARBITRATION AWARD ALSO ORDERED (A) THE ENFORCEMENT OF THE TERMS OF
THE MEMORANDUM OF UNDERSTANDING DATED MARCH 17, 1992 AND JOINT VENTURE
AGREEMENT DATED MAY 14, 1991 WHICH, GENERALLY, PROVIDE FOR THE PAYMENT BY
THE COMPANY OF CERTAIN ROYALTIES, FEES AND PROFITS TO CFV IN CONNECTION
WITH FUTURE SALES OF COMPANY VENDING MACHINES AND RELATED PRODUCTS, AND
(B) THE ISSUANCE OF THE COMPANY TO CFV OF AN OPTION FOR THE PURCHASE OF
2,000,000 SHARES OF THE COMPANY'S COMMON STOCK AT A EXERCISE PRICE OF
$2.00 PER SHARE THROUGH MARCH 17, 1997.
44
<PAGE>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1995
9. LITIGATION (CONTINUED):
IN CONNECTION WITH THE FOREGOING, AN AWARD WAS ENTERED IN FAVOR OF
CROSS-CLAIMANT, WHICH REQUIRES, AMONG OTHER THINGS, THAT THE COMPANY
ISSUE 1,000,000 SHARES OF UNRESTRICTED COMMON STOCK TO THE CROSS-CLAIMANT.
THE FINANCIAL STATEMENTS DO NOT REFLECT THE ISSUANCE OF THESE SHARES.
ON JANUARY 5, 1995, THE ARBITRATOR IN THE CASE OF CALIFORNIA FOOD AND
VENDING, INC. (CFV) VS. THE COMPANY AWARDED CFV AND CROSS-CLAIMANT LEGAL
FEES AMOUNTING TO $94,963 AND $4,099, RESPECTIVELY. THE TOTAL OF $99,062
IS RECORDED IN THE FINANCIAL STATEMENTS AS OF JANUARY 31, 1995. PAYMENT
PURSUANT TO A SETTLEMENT AGREEMENT WHICH SUPERSEDES THE AWARD BEGAN IN
FEBRUARY, 1995 AND WAS SATISFIED IN FULL IN MAY, 1996.
ON MARCH 15, 1996, THE FEDERAL DISTRICT COURT FOR THE CENTRAL DISTRICT OF
CALIFORNIA ISSUED A TEMPORARY PROTECTIVE ORDER (TPO) AGAINST THE COMPANY
SINCE THE COMPANY DEFAULTED ON THEIR FEBRUARY, 1996 INSTALLMENT PAYMENT
TO CFV. THE TPO PROVIDED THAT ANY MONIES RECEIVED BY THE COMPANY CURRENTLY
WERE TO BE PAID TO CFV UNTIL ALL MONIES DUE CFV WERE PAID IN FULL. THE
COMPANY SATISFIED, IN FULL, THE CFV JUDGMENT IN APRIL AND MAY, 1996 AND
RENDERED THE TPO VOID.
THE COMPANY IS A DEFENDANT IN SEVERAL LAWSUITS ARISING FROM NORMAL
BUSINESS ACTIVITIES. MANAGEMENT HAS REVIEWED PENDING LITIGATION WITH
LEGAL COUNSEL AND BELIEVES THAT THOSE ACTIONS ARE WITHOUT MERIT OR THAT
THE ULTIMATE LIABILITY, IF ANY, RESULTING FROM THEM WILL NOT MATERIALLY
AFFECT THE COMPANY'S FINANCIAL POSITION.
10. SUBSEQUENT EVENTS:
IN APRIL, 1996 THE COMPANY BORROWED $100,000 FROM A THIRD PARTY AND
SUBSEQUENTLY FORWARDED THIS MONEY TO CFV IN PARTIAL SATISFACTION OF THE
TPO. THESE BORROWED MONIES ARE INTENDED TO BE REPAID BY THE COMPANY
DURING THE FISCAL YEAR ENDING JANUARY 31, 1997 INCLUDING INTEREST AT 10%
PER ANNUM.
ON APRIL 30, 1996, THE COMPANY RECEIVED $500,000 IN FINANCING FROM AN
INVESTOR, WHICH ENABLED THE COMPANY TO SATISFY THE CFV TEMPORARY
PROTECTIVE ORDER AND WILL ALLOW THE COMPANY TO FACILITATE THE PRODUCTION
OF ITS VENDING MACHINE. THE SECOND PHASE OF FINANCING OF $750,000
OCCURRED ON MAY 31, 1996. IN MAY, 1996, 10,000,000 SHARES OF THE COMPANY'S
RESTRICTED COMMON STOCK WAS ISSUED TO THE INVESTOR AT $.05 PER SHARE FOR
THE INVESTMENT OF $500,000. THE COMPANY ISSUED AN ADDITIONAL 15,000,000
SHARES OF ITS RESTRICTED COMMON STOCK AT $.05 PER SHARE UPON RECEIPT OF
$750,000.
45
<PAGE>
TASTY FRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1995
11. COMMON STOCK OPTION PLAN:
THE COMPANY ADOPTED INCENTIVE AND NONQUALIFIED STOCK OPTION PLANS FOR
EMPLOYEES EFFECTIVE AS OF SEPTEMBER 18, 1995. THE PLAN ALSO PROVIDES FOR
STOCK OPTIONS TO BE ISSUED TO NON-EMPLOYEE DIRECTORS BASED UPON A
FORMULA SET FORTH IN THE DOCUMENT. THE INCENTIVE STOCK OPTION PLAN IS
INTENDED TO QUALIFY UNDER SECTION 422 OF THE INTERNAL REVENUE CODE. UNDER
THE TERMS OF THE PLAN, OPTIONS TO PURCHASE COMMON STOCK ARE GRANTED AT NOT
LESS THAN THE ESTIMATED FAIR MARKET VALUE AT THE DATE OF THE GRANT AND ARE
EXERCISABLE DURING SPECIFIED FUTURE PERIODS.
46
<PAGE>
ITEM 13. EXHIBITS.
(A) THE FOLLOWING EXHIBITS ARE FILED AS A PART OF THIS
REPORT:
*10.1 Employment Agreement of Edward Kelly dated October
1, 1994
10.2 Amendment to Employment Agreement
*10.3 Amendment to Manufacturing Requirements Agreement
*10.4 Promissory Note from the Company dated February 7,
1995
**10.5 Guarantee of Gary Arzt dated February 7, 1995
**10.6 Stock Option Agreement between the Company and
Edward C. Kelly dated July 8, 1994
***10.7 Lease Agreement between the Company and Blue Bell
Executive Suites dated May 23, 1995
****10.8 1995 Stock Option Plan
10.9 Stock Purchase Agreement between the Company and
Whetstone Ventures Corporation, Inc. dated April 30,
1996
27 Financial Data Schedule
- -----------------------------------
* Filed as an exhibit to the Company's Form 10-QSB for the fiscal
quarter ended October 31, 1994 and incorporated herein by such reference.
** Filed as an exhibit to the Company's Form 10-KSB for the fiscal year
ended January 31, 1994 and incorporated herein by such reference.
*** Filed as an exhibit to the Company's Form 10-KSB for the fiscal year
ended January 31, 1995 and incorporated herein by such reference.
**** Filed as an exhibit to the Company's Form 10-QSB for the fiscal
quarter ended October 31, 1995 and incorporated herein by such reference.
(B) REPORTS ON FORM 8-K.
Two Form 8-K's, dated February 27, 1995 and February
21, 1996, were filed with the Commission.
47
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TASTY FRIES, INC.
Date: June 19, 1996 By: /s/ EDWARD C. KELLY
---------------------------
Edward C. Kelly
President and Principal
Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ EDWARD C. KELLY June 19, 1996
- ---------------------------
Edward Kelly,
President, Treasurer &
Director
/s/ JURGEN A. WOLF June 19, 1996
- ---------------------------
Jurgen A. Wolf, Director
/s/ LEONARD KLARICH June 19, 1996
- -------------------------
Leonard Klarich,
Secretary & Director
/s/ IAN D. LAMBERT June 19, 1996
- -------------------------
Ian D. Lambert, Director
48
AMENDMENT TO EMPLOYMENT AGREEMENT
DATED OCTOBER 1, 1995
This amendment (the "Amendment") dated October 1, 1995 but effective as
of May 1, 1995 to the Employment Agreement of Edward C. Kelly dated October 1,
1994 (the "Agreement"), by and between Edward C. Kelly, residing at 1060 Appleby
Court, Blue Bell, Pennsylvania 19422 (the "Employee") and Tasty Fries, Inc., a
Nevada Corporation (the "Employer"), located at 650 Sentry Parkway, Suite One,
Blue Bell, Pennsylvania 19422.
WHEREAS, the Employer and the Employee wish to amend the Agreement as
set forth herein.
NOW, THEREFORE, in consideration of mutual covenants and undertakings,
the parties agree to amend the Agreement as follows:
1. SECTION 2. TERM OF EMPLOYMENT
The term of this Agreement shall be for a term of five (5) years
which shall commence from May 1, 1995 through April 30, 2001 and shall be
automatically renewable for additional terms of one (1) year without any action
on the part of the Employer or the Employee, except, however, that Employer may
terminate this Agreement: (i) at the end of any one (1) year upon written notice
to Employee given not less than sixty (60) days prior to the end of any term and
(ii) as provided in Section 5 hereof.
2. SECTION 3. COMPENSATION
(a) During the term of this Agreement, Employee shall
receive a salary of $20,000 per month as of May 1, 1995 of which amount $10,000
shall be paid in cash by the Employer. The balance of $10,000 per month shall be
accrued until such time as (i) Employer is financially able to pay the accrued
amount, or (ii) Employee elects to convert all or part of such accrued amount
into shares of Employer's restricted common stock, $.01 par value ("Common
Stock"), at a conversion price of $.20 per share for each share converted. In
addition, Employee shall receive an annual bonus or bonuses, if any, in an
amount to be determined by the Board of Directors in its sole discretion.
(c) In addition, Employee shall receive, upon execution of
this Agreement, 2,000,000 shares of restricted Common Stock as additional
compensation for all services provided by Employee to Employer from June 4, 1994
through April 30, 1995.
Said 2,000,000 shares of Common Stock shall be registered
on a Form S-8 registration statement or equivalent for to be filed by Employer
with the Securities and Exchange Commission (SEC) provided the Employer's
current in its filings under the Securities Act of
<PAGE>
1934 (the "Act") for the previous 12 calendar month period and is otherwise in
compliance with the Act. If the Employer is not current in its filing under the
Act, it shall use its best efforts to become current and shall register the
Common Stock issued or to be issued to Employee with in thirty (30) days of
becoming current in its filing under the Act. Notwithstanding the foregoing, the
number of shares to be registered on a Form S-8 registration statement shall not
exceed 1% of the aggregate number or shares of Common Stock issued and
outstanding at such time on such S-8.
3. All other terms and conditions in the Employment Agreement
dated October 1, 1994 as amended hereby, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.
EMPLOYER:
TASTY FRIES INC., a Nevada Corporation
By: /S/ GARY ARZT
---------------------------------
Chairman of the Board
EMPLOYEE:
By: /S/ EDWARD C. KELLY
---------------------------------
Edward C. Kelly
STOCK PURCHASE AGREEMENT
THIS AGREEMENT (the "Agreement") by and between Tasty Fries, Inc., a
Nevada corporation, located at 650 Sentry Parkway, Suite One, Blue Bell,
Pennsylvania 19422, (hereinafter referred to as "Seller") and Whetstone
Ventures Corporation, Inc., a Pennsylvania corporation, located at 11 Waterfront
Estates, Estates Drive, Lancaster, Pennsylvania 17602 (hereinafter referred to
as "Buyer") this 30th day of April, 1996.
A. SECURITIES TO BE PURCHASED: An aggregate of 25,000,000 shares
of the Company's restricted common
stock, $.01 par value (the "Common"
Stock").
B. PURCHASE PRICE: $1,250,000.00 ($.05 per share)
C. FIRST CLOSING DATE: April 30, 1996
W I T N E S S E T H
WHEREAS, the Seller desires to sell and the Buyer desires to purchase
25,000,000 shares of restricted Common Stock of Seller (the "Stock") on the
terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and for the mutual covenants,
representations, warranties and conditions hereinafter set forth, the parties
agree as follows:
1. SECURITIES TO BE PURCHASED
A. NUMBER OF SHARES. Buyer shall purchase from Seller
Twenty Five Million (25,000,000) shares of restricted Common Stock (the "Stock")
of Tasty Fries, Inc., a Nevada corporation (hereinafter referred to as the
"Seller" or the "Company").
B. RESTRICTION; SUBSEQUENT REGISTRATION; LOCK-UP. Buyer
agrees that the Stock issued by Seller will be restricted as to transferability
under the Securities Act of 1933, as amended (the "Securities Act"). Seller
agrees to register the Stock by filing an appropriate registration statement
(the "Registration Statement") with the U.S. Securities and Exchange Commission
(the "SEC") within sixty (60) days from the date of purchase of all 25,000,000
shares of Stock. In connection with the registration of the Stock, Buyer hereby
agrees not to sell such Stock for a period of sixty (60) days from the date the
Registration Statement is declared effective by the SEC (the "Lock-Up").
<PAGE>
2. PURCHASE PRICE
The total purchase price of the Stock is One Million Two Hundred
Fifty Thousand Dollars ($1,250,000.00) in United States currency payable by
Buyer in two installments of Five Hundred Thousand Dollars ($500,000) at the
First Closing (as defined below) and Seven Hundred Fifty Thousand Dollars
($750,000) at the Second Closing (as defined below), each in the form of a
certified bank check or wire transfer into the Seller's bank account.
3. PAYMENT
A. On the date of the First Closing of this Agreement (the
"First Closing"), Buyer shall pay Seller the first installment of Five Hundred
Thousand Dollars ($500,000.00), as set forth in Paragraph 2 herein.
B. The balance of Seven Hundred Fifty Thousand Dollars
($750,000.00) shall be paid in a second installment, as set forth in Paragraph
2, on or before thirty (30) days from the date of First Closing (the "Second
Closing").
4. FIRST AND SECOND CLOSING
A. LOCATION. The First Closing shall take place at the
Seller's executive offices, 650 Sentry Parkway, Suite One, Blue Bell,
Pennsylvania 19422 at 11:00 a.m. or at such other time and place as shall be
mutually agreeable to the parties. The Second Closing shall occur at such time
and place and in such manner as Seller and Buyer may mutually agree.
B. DELIVERY OF STOCK CERTIFICATES
(i) At the First Closing, Seller shall deliver to Buyer,
free and clear of all encumbrances except for the Securities Act restrictive
legend as described in Paragraph 1.B. herein, certificate(s) for the Stock (as
set forth in Paragraph 1) in the aggregate amount of 10,000,000 shares of Stock
and a corporate resolution authorizing the sale and transfer of such 10,000,000
shares of Stock to Buyer upon receipt of the first installment of the Purchase
Price from Buyer in accordance with Paragraphs 2 and 3.A. herein.
(ii) Upon the Second Closing, Seller shall deliver to
Buyer, free and clear of all encumbrances except for the Securities Act
restrictive legend as described in Paragraph 1.B. herein, certificate(s) for the
Stock (as set forth in Paragraph 1) in the amount of 15,000,000 shares of Stock
and a corporate resolution authorizing the sale and transfer of such 15,000,000
shares of Stock upon receipt of the second installment of the Purchase Price
from Buyer in accordance with Paragraphs 2 and 3.A. herein.
C. SIMULTANEOUS TRANSACTIONS. All transactions at the First
Closing and at the Second Closing shall be considered to take place
simultaneously. No delivery shall be considered to be made until all
transactions are consummated in accordance with this Agreement.
<PAGE>
5. DELIVERY AT FIRST AND SECOND CLOSING
A. The documents set forth below shall be delivered by
Seller to Buyer:
(i) Stock certificate(s) for an aggregate of 10,000,000
shares of Stock at the First Closing and 15,000,000 shares of Stock at the
Second Closing as required by Paragraph 4.B. herein.
(ii) A corporate resolution at each of the First and
Second Closing as required by Paragraph 4.B. herein.
B. The Buyer shall deliver to Seller:
(i) A bank check or written evidence of wire transfer,
which such wire shall have actually been received by Seller, in the aggregate
amount of $500,000.00 at the First Closing and in the aggregate amount of
$750,000.00 at the Second Closing.
C. Fully executed copies of this Agreement and the
Subscription Agreement attached hereto and made a part hereof shall be delivered
to each of the Seller and Buyer at the First Closing.
6. REPRESENTATIONS AND WARRANTIES OF SELLER
A. Seller hereby represents and warrants as follows:
(a) ORGANIZATION; RIGHT TO SELL. Seller is a
corporation duly incorporated and validly existing in the State of Nevada and
its status is active. Seller has all necessary capacity and authority to execute
this Agreement, to sell the Stock to Buyer and to carry out its obligations
hereunder. The undersigned, Edward C. Kelly, President of the Company, is an
authorized agent of the Company empowered by the Board of Directors of the
Company to enter into and bind the Seller to the terms and conditions of this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereunder have been duly authorized by all
necessary action on the part of Seller.
(b) STOCK OWNERSHIP. Seller is the sole beneficial
owner of the Stock, all of which is free and clear of any liens or encumbrances
except being subject to the rules and regulations relating to transferability
under the Securities Act.
(c) ENFORCEABILITY OF OBLIGATIONS. This Agreement and
the other agreements contemplated hereunder constitute valid and binding
obligations of Seller enforceable against it in accordance with the terms hereof
and thereof.
(d) COMPLIANCE WITH LAWS AND AGREEMENTS. The Seller,
to its knowledge, has complied with all applicable federal and state laws,
rules and regulations. Seller
<PAGE>
is not prevented by any provisions of any articles, bylaws, contracts,
mortgages, indenture or other instrument from selling the Stock as contemplated
herein.
(e) CONTRACTS TO SELL STOCK. Seller has not entered
into any other contract to sell all or any part of the Stock as represented
herein.
(f) POWER OF ATTORNEY. There is no Power of Attorney
outstanding with respect to the Stock.
(g) COOPERATION OF SELLER. Seller agrees and
represents that it will fully cooperate with Buyer in providing, executing and
delivering any other documentation necessary to complete the transactions
contemplated by this Agreement.
7. REPRESENTATIONS AND WARRANTIES OF BUYER
A. Buyer hereby represents and warrants as follows:
(a) ORGANIZATION; RIGHT TO PURCHASE. In executing
this Agreement to purchase the Stock, Buyer has (and all persons acting on
Buyer's behalf) have the requisite power and authority to execute and deliver
this Agreement and is acting solely for itself and its investors and for no
other person, firm, partnership, corporation, or entity and that no person, firm
or corporation (including, without limitation, Buyer), is or may be entitled to
a broker's fee, or similar payment from any party hereto, any of Buyer's
investors or any other person, firm or corporation for arranging the
transactions contemplated herein.
(b) INVESTMENT INTENT. Buyer is acquiring the Stock
for the benefit of its own investors and not with any view to its distribution
or transfer to any other person(s), firm, partnership, corporation or entity.
(c) FINANCIAL CAPABILITY. Buyer's assets, net worth
and financial resources generally are sufficient to permit Buyer to purchase the
Stock in accordance with the terms and conditions of this Agreement and is able
to bear the economic and other substantial risks associated with its purchase of
the Stock including the risk of a total loss of its investment therein; that it
has no need for liquidity in this investment; that its overall commitment to
investments that are not readily marketable or not disproportionate to its net
worth; that its investment in the Stock will not cause such overall commitment
to become excessive; and that when received from Seller, the Stock will be
"restricted" (as such term is defined within Rule 144 of the Securities Act).
(d) NO CONFLICTS. Buyer has no interest, direct or
indirect, that would conflict with the business of the Company.
(e) COMPLIANCE WITH LAW AND AGREEMENTS. Buyer is not
prevented by any federal or state laws, rules and regulations or by any
provisions of any articles, by laws,
<PAGE>
contract, mortgage, indenture or other instrument from purchasing the Stock as
contemplated herein.
(f) EVALUATION OF INVESTMENT. Buyer and its investors
have such knowledge and experience in financial and business matters generally,
and with respect to the business and other activities of the Company and are
capable of evaluating the merits and risks of the investment in the Stock, and
Buyer has instituted this transaction and has satisfied itself of the financial
and business condition of the Company and is not making this purchase of Stock
based upon any representations of Seller other than the representations
contained in Paragraph 6 herein. In connection with the financial and business
condition of the Company as of the date hereof, Seller has provided Buyer with
and Buyer acknowledges receipt of all information relating to the materially
adverse condition of the Company, including but not limited to, (i) the pendency
of a writ of execution to be executed against the Company and substantially all
of its assets pursuant to an order of the Federal District Court for the Central
District of California in satisfaction of a judgment against the Company in
favor of California Food & Vending, Inc. ("CFV") in the approximate amount of
$440,000, (ii) the outstanding monetary judgment in favor of Samuel Balan of
approximately $10,000 pursuant to which a writ of execution against the
Company's assets is pending, (iii) the total lack of capital to pay any employee
of the Company past due but accrued wages for approximately nine weeks, (iv)
unpaid rent and utilities for the Company's executive offices for two months;
(v) unpaid trade debt and other financial obligations; and (vi) payment to
Premier Design Ltd. for its share of development costs for the Company's
proprietary french fry vending machine.
8. APPOINTMENT OF BOARD MEMBER
Seller agrees to appoint an individual selected by Buyer to
serve as a member of the Board of Directors of the Company, which individual
shall serve in such capacity until the next annual (or special in lieu of
annual) meeting of shareholders at which directors are elected and qualified.
9. REVERSE SPLIT OF COMMON STOCK
Seller agrees that upon completion of all of the transactions
contemplated by this Agreement, Seller shall, by and through its Board of
Directors, pass a resolution to reverse split (the "Reverse Split") its
currently issued and outstanding Common Stock, including the Stock, on a one for
twenty basis or at such other ratio as is approved by the Board of Directors.
The result of such Reverse Split shall be that the total issued and outstanding
number of shares of Common Stock of the Company, including the Stock, shall be
no greater than six million (6,000,000) shares. Thereafter, the Board of
Directors shall seek to obtain the vote of its shareholders to approve and
ratify the Reverse Split as required by applicable law.
<PAGE>
10. ISSUANCE OF ADDITIONAL SHARES
A. It is further agreed by Seller that, as a condition for
Buyer to purchase the Stock and to help to assure the success and development of
the Company and its products, Seller shall issue, after the Reverse Split is
effected, one million five hundred thousand (1,500,000) shares of post-Reverse
Split Common Stock to Edward C. Kelly, President of the Company ("Kelly"), for
past, present and future services rendered to the Company (the "Kelly Shares"),
which Kelly Shares shall be issued as consideration for such services, exclusive
of any salary, bonus or other compensation in any form received or to be
received by Kelly.
B. After the First Closing, the Second Closing and the
Reverse Split, the Company shall issue an additional 250,000 shares of
post-Reverse Split Common Stock to Buyer (the "Additional Stock").
C. In addition to the Shares and the issuance of the
Additional Stock, it is further agreed by Buyer that, upon the effective date of
the Reverse Split, Buyer shall purchase that number of shares of Reverse Split
Common Stock as shall be equal to $1,000,000 at a purchase price determined at
65% of the average of the bid and asked price of the Common Stock on the
effective date of the Reverse Split.
D. It is understood and agreed by Buyer, Seller and Kelly
that the Additional Stock and the Kelly Shares will be restricted in accordance
with the Rule 144 of the Securities Act. Such Additional Stock and Kelly Shares
shall also be included in the Registration Statement to be filed with the SEC
in accordance with Paragraph 1.B.herein. It is further understood, and agreed to
by Buyer and Kelly that such Additional Stock and Kelly Shares shall be subject
to the same 60 day Lock-Up period as the Stock as set forth in Paragraph 1.B.
herein.
11. ISSUANCE OF POST-REVERSE SPLIT WARRANTS
Seller agrees to issue to each of Buyer and Kelly warrants (the
"Anti-Dilution Warrants") to purchase THE LESSER OF (i) 5,000,000 shares of
restricted Common Stock or (ii) such amount of shares of Common Stock which will
insure, in either event, that each of Buyer and Kelly shall maintain ownership
of no less than twenty-five percent (25%) of the issued and outstanding Common
Stock of the Company at any time, exercisable for a period of three (3) years
commencing May 29, 1996 and ending May 29, 1999 at an exercise price per share
equal to the average of the bid and asked price per share on the effective date
of the Reverse Split. Such Anti-Dilution Warrants shall provide for usual and
customary anti-dilution rights for each of Buyer and Kelly to maintain their
respective 25% ownership interest in the Company's issued and outstanding
Reverse Split Common Stock upon exercise thereof.
<PAGE>
12. INDEMNIFICATION.
A. INDEMNIFICATION OF SELLER BY BUYER. Buyer shall
indemnify and hold harmless Seller and its agents, officers, directors,
employees, attorneys, accountants and shareholders from and against any and all
damages, claims, liabilities, losses, costs and expenses whatsoever, including,
without limitation, reasonable attorneys' fees incurred by Seller or asserted
against Seller as a result of or arising out of (i) any material breach of a
representation or warranty, or misrepresentation by or on behalf of Buyer under
this Agreement, or the material breach or material nonperformance of any
covenant, agreement or obligation to be performed by Buyer; (ii) any material
misrepresentation in, or material omission from, any certificate or instrument
executed and delivered or to be executed and delivered by or on behalf of Buyer
in connection with this Agreement which cannot be corrected promptly without
having a material adverse effect on Seller; (iii) any material claim, judgment,
action or proceeding asserted against Seller with respect to any obligations or
liabilities of Buyer of any type whatsoever, whether now existing or hereafter
arising or acquired, whether contingent or liquidated, direct or indirect,
occurring on or prior to or existing on the date hereof, including, without
limitation, any obligations or liabilities of Buyer pertaining to claims
asserted against Buyer by reason of the failure of Buyer to satisfy any
obligations.
B. INDEMNIFICATION OF BUYER BY SELLER. Seller shall
indemnify and hold harmless Buyer from and against any and all damages, claims,
liabilities, losses, costs and expenses whatsoever including, without
limitation, reasonable attorneys' fees incurred by Buyer or asserted against
Buyer as a result of or arising out of (i) any material breach of a
representation or warranty, or misrepresentation by or on behalf of Seller under
this Agreement, or the material breach or material non-performance of any
covenant or obligation to be performed by Seller pursuant to this Agreement; or
(ii) any material misrepresentation in, or material omission from any
certificate or instrument executed and delivered or to be executed and delivered
by or on behalf of Seller pursuant to this Agreement which cannot be corrected
promptly without having a material adverse effect on Buyer.
13. GENERAL.
A. EXPENSES. All costs and expenses (including, without
limitation, the fees and disbursements of legal counsel) incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expenses.
B. ENTIRE AGREEMENT. This Agreement, together with the
agreements and other documents to be delivered pursuant hereto, constitute the
entire agreement between the parties pertaining to the subject matter hereof and
supersede all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the parties and there are no warranties,
representations or other agreements between the parties in connection with the
subject matter hereof except as specifically set forth herein. No supplement,
modification or waiver or termination of this Agreement shall be deemed or shall
constitute a waiver of any
<PAGE>
other provision (whether or not similar) nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
C. APPLICABLE LAW. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of Pennsylvania,
without giving effect to principles of conflict of laws. The parties hereto
expressly submit themselves to, and agree that all actions arising out of this
Agreement shall occur solely in the venue and jurisdiction of the state and
federal courts encompassing Montgomery County, Pennsylvania.
D. SEVERABILITY. If any provision of this Agreement shall
be held or deemed to be, or shall in fact be, invalid, inoperative or
unenforceable as applied to any particular case in any jurisdiction or
jurisdictions, or in all jurisdictions or in all cases, because of the conflict
of any provision with any constitution or statute or rule of public policy or
for any other reason, such circumstance shall not have the effect of rendering
the provision or provisions in question invalid, inoperative or unenforceable in
any other jurisdiction or in any other case or circumstance or of rendering any
other provision or provisions herein invalid, inoperative or unenforceable to
the extent that any such other provisions themselves actually conflict with such
constitution, statute or rule of public policy, but this Agreement shall be
reformed and construed in any such jurisdiction or case as if such invalid,
inoperative or unenforceable provision had never been contained herein and such
provision reformed so that it would be valid, operative and enforceable to the
maximum extent permitted in such jurisdiction or in such case.
E. ACTIONS TO ENFORCE AGREEMENT. If any party hereto shall
fail to perform any covenant or condition hereof or shall otherwise be in breach
of this Agreement, such party shall pay to the non-defaulting party or parties
its/their reasonable attorneys' fees and costs incurred as a result of its/their
efforts to enforce this Agreement (whether or not litigation is commenced, at
trial and appellate levels).
F. RULE OF CONSTRUCTION THAT AMBIGUITIES ARE TO BE
CONSTRUED AGAINST THE DRAFTER NOT APPLICABLE. The parties to this Agreement
acknowledge that they have each carefully read and reviewed this Agreement with
their respective counsel, and therefore agree that the rule of construction that
ambiguities shall be construed against the drafter of the document shall not be
applicable.
G. NOTICES. Any and all notices required to be given
hereunder or other communications to or from the parties hereto shall be in
writing and be sent by hand-delivery, by nationally recognized overnight
delivery service or by certified mail, postage prepaid, return receipt
requested, to the parties as follows:
If to Buyer: Whetstone Ventures Corporation, Inc.
11 Waterfront Estates
Estates Drive
Lancaster, PA 17602
Attention: Eric Whetstone, President
<PAGE>
with a copy to: ------------------------
------------------------
------------------------
------------------------
If to Seller: Tasty Fries, Inc.
650 Sentry Parkway
Suite One
Blue Bell, PA 19422
Attention: Edward C. Kelly, President
with a copy to: Kipnis Tescher Lippman Valinsky & Kain
One Financial Plaza, Suite 2308
Fort Lauderdale, FL 33394
Attention: Michelle Kramish Kain, Esq.
or such other address as the parties may direct by notice given in accordance
herewith. All notices shall be deemed given on the date received or the date
noted on the return receipt or delivery receipt as the date when delivery was
refused.
H. ASSIGNMENT. This Agreement may not be assigned by any
party hereto without the express written consent of the other parties.
I. FURTHER ASSURANCES. The parties hereto, with reasonable
diligence, shall do all such things and provide all such reasonable assurances
as may be required to consummate the transactions contemplated hereby, and each
party hereto shall provide such further documents or instruments required by any
other party hereto as may be reasonably necessary or desirable to effect the
purpose of this Agreement and to carry out its provisions, whether before or
after the First Closing and the Second Closing.
J. REMEDIES. Nothing contained in this Agreement is
intended to or shall be construed to limit the remedies which any party hereto
may have against the other parties hereto in the event of a default by such
party with respect to their obligations hereunder or in the event of a breach by
such party of any representation, warranty or agreement made in or pursuant to
this Agreement, it being intended that any and all remedies shall be cumulative
and non-exclusive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
which is effective as of April 30, 1996.
TASTY FRIES, INC.
By: /s/ EDWARD C. KELLY
- --------------------------- -----------------------------
Witness Edward C. Kelly, President
<PAGE>
WHETSTONE VENTURES CORPORATION, INC.
By: /s/ ERIC WHETSTONE
- --------------------------- ------------------------------
Witness Eric Whetstone, President
AS TO PARAGRAPHS 10 AND 11:
/s/ EDWARD C. KELLY
- -------------------------- -----------------------------
Witness Edward C. Kelly, Individually
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