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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, 1999.
[ ] 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 April 30, 1998: Not Determinable.
Shares outstanding of the registrant's common stock as of April 30, 1999:
19,200,000 shares.
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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.
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.
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.
On December 16, 1996, a majority of the issued and outstanding voting
securities of the Company, by written consent, approved a 1 for 20 reverse stock
split of the Company's common stock and authorized an amendment to the Company's
Articles of Incorporation to change its authorized common shares to 25,000,000
shares of common stock and its par value to $.001 per share. The Amendment was
filed with the Nevada Secretary of State on December 18, 1996 and the reverse
stock split was effective on December 23, 1996.
(B) BUSINESS OF THE COMPANY
GENERAL
The Company has developed a patented French fries vending machine (the
"Machine"). The Company intends to manufacture and market the machine in both
domestic and international markets through a combination of exclusive,
territorial distributorships and traditional sales to established companies in
the vending industry. The Company may also own and operate machines itself. The
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Machines are expected to be located in high-traffic locations that have
historically been successful for vending operators, such as universities,
airports, bus and train stations, high schools, military bases, industrial
locations and recreational venues.
The Company has also developed a related proprietary potato product for
the production of French fries in the Machine (the "Potato Product"). Although
the Company has developed its own potato product, the Company presently intends
to purchase a comparable potato product for use in the machine from a third
party. This strategic determination is driven by the high costs associated with
establishing a production line to produce its own, proprietary Potato Product.
At such time as the economics of the business and the success of the machine
warrant the capital investment of a production line, the Company may manufacture
its own, proprietary Potato Product or license the product to a contract
manufacturer.
The Company's basic business strategy is to market the machines and the
ancillary products that are required to prepare each serving of French fries.
These ancillary products include the potato product, vegetable cooking oil and
serving cups (with salt and ketchup packets attached). The Company's long-term
profitability and success will be driven primarily by the revenue and
accompanying profit to the Company associated with each and every vended portion
sold from its installed base of Machines.
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.
DESIGN AND MANUFACTURING
In 1992, persons then associated with the Company filed a U.S. patent
application with respect to a device for the vending of fresh French fried
potatoes (the original machine) which was assigned to the Company on October 9,
1992. In January 1993, the Company entered into a manufacturing agreement with
Premier Design, Ltd. ("Premier") for the production of its vending machine (the
"Premier Agreement"). The Premier Agreement provided that Premier would refine
and manufacture the original machine. The Agreement called for the Company and
Premier to share the development costs of the project; such costs were to
include design, engineering and initial manufacturing costs projected over the
initial quantity of production machines. The Agreement also provided for Premier
to manufacture any additional or similar machines for the Company. The Premier
Agreement could not be terminated by either party so long as Premier provided
the Machines as required by the Company. Pursuant to the terms of the Premier
Agreement, the first initial production of machines was to be delivered by June
15, 1993.
As one element of the process undertaken by Premier, an engineering
review of the machine was to be performed. Mr. Harry Schmidt, president of
Premier, retained the services of Mr. Edward C. Kelly to perform said
evaluation. In February 1993, Kelly submitted the findings of his evaluation.
Mr. Kelly's study found the device failing to perform as anticipated and his
review identified significant and numerous mechanical and design problems. Mr.
Kelly and Premier's recommendation to prior management was that the existing
machine should be abandoned completely. Then-current management
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of the Company decided to abandon the original device. The Company then retained
Premier Design to design and develop a machine based on new and different
technology. Kelly and Premier began the process of designing a new machine in
March 1993.
Premier is a private company owned by Mr. Schmidt. Mr. Schmidt was
subsequently appointed to the Company's Board of Directors in May 1993, but did
not stand for reelection to the Board in September 1995. At the time of the
original Premier Agreement, neither Mr. Schmidt nor Mr. Kelly had any
affiliation with the Company. Edward C. Kelly joined the Company as Executive
Vice President in January 1994 and was subsequently appointed to the Company's
Board of Directors in February 1994. In June of 1994, he was named President of
the Company.
In December 1994, having completed much of the design and development of
the new Machine, Premier and the Company amended the original manufacturing
contract (the "Premier Amendment"). The Premier Amendment described the terms
under which Premier would: (i) manufacture the first 10 beta models of the new
machine and (ii) begin manufacture of the production units.
In July 1996, a U.S. patent was issued in Mr. Kelly's name for the
Machine. Mr. Kelly assigned the patent rights for the Machine to Premier based
upon the terms of the Premier Amendment and the express understanding between
Premier, the Company and Mr. Kelly (individually) that: (i) upon issuance, the
patent would be assigned 100% to Premier as consideration for the significant
funds expended by Premier in the development of the machine; (ii) Premier would
immediately assign the Company a 50% interest in the patent upon payment to
Premier by the Company of one-half of the total development costs.
The Company's 50% share of the development costs were later determined to
be $650,000 (not including the $350,000 paid by the Company for the 10 prototype
machines). The current balance due Premier is $350,000, after $100,000 payments
in each of July 1996, July 1997 and January 1998. Premier will also receive $250
per Machine manufactured by a third party. Management and the Board of Directors
agreed to these terms with Premier based upon the potentially prohibitive costs
to the Company resulting from protracted litigation (monetary and otherwise) and
the agreement of Premier to waive any rights it may have to manufacture the
machine.
In the Spring of 1996, the Company and Premier agreed that Premier would
be unable to manufacture the Machines under the terms of the Premier Amendment.
On June 17, 1996, the Company announced its intention to award the manufacturing
contract for the Machine to S&H Electronics of Robesonia, Pennsylvania ("S&H"),
an unaffiliated third party, and subsequently entered into a non-exclusive
manufacturing agreement with S&H for such purpose. S&H is a
contract-manufacturer which specializes in the assembly and testing of
electro-mechanical assemblies and equipment. The first 25 units will be produced
by a subcontract manufacturer located in Ivyland, PA. Tasty Fries is also
considering a manufacturing facility in the State of New Hampshire.
The Company completed the final stages of beta testing of its Machines in
the last quarter of the fiscal year ended January 31, 1996 and completed certain
modifications to and enhancements of the Machine based upon such tests.
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PRE-PRODUCTION TOOLING
The pre-production tooling stage for the machine is a critical element of
the process of getting the machine into commercial production. Consider that the
Tasty Fries device is comprised of approximately 3,100 individual parts. A
portion of these parts are basic, "off-the-shelf" manufacturing components such
as hardware, lighting and electrical components. However, approximately 75% of
the components are customized parts that require a subcontract supplier to
manufacture specifically for Tasty Fries. Because of the costs associated with
manufacturing these custom-designed parts, the most critical components have
been designed to be tooled, molded or cast by the various suppliers. While very
costly and time-consuming in the front-end of a project, the tooling of various
component parts will: (i) ensure the consistency and quality of the machine's
critical parts and (ii) greatly reduce the unit costs of both the individual
parts and the overall machine, as production volume increases. As with the
Company's overall business plan, the tooling process itself has been delayed
over the past 12-18 months due to the lack of capital available to complete the
process.
THE MACHINE
The Machine is designed to produce quality, freshly-made French fries
utilizing a unique method that automatically converts a dehydrated potato
product into rehydrated potato mix, delivers this mix into a proprietary forming
and cooking cycle, and finally into complete, high-quality, freshly-made French
fries. The potato product can be stored at room temperature, has a shelf-life of
between 12 and 24 months (depending on storage conditions), requires no
refrigeration or freezing, and occupies less storage space than frozen fries,
thereby offering greater storage capacity than competing technologies which use
frozen French fries. The French fries are delivered to the consumer in a 4-ounce
serving of 32 French fries. From the time currency is deposited, the total vend
time for an order of fries from the final production model Machine is estimated
to be approximately one and one-half minutes (although the pre-production
model's full cycle time is approximately 120 seconds). The utilization of a
state-of-the-art combination of computer driven mechanics makes this possible.
Attached to the bottom of the vended cup are individually prepackaged portions
of ketchup and salt.
The design of the Machine involves the use of a vegetable oil enabling
the process to deliver a cholesterol-free product. Each vend contains French
fries which are crisp and golden brown. The quality of the product is
consistently uniform in each vend. The Machine has the capacity to produce 500
vends before any refill of potato product or other ingredient 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
fries 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 currency mechanism.
The Machine requires a 220-volt electrical connection and is equipped
with modern computer technology using microprocessors and sensors. If the
machine operator desires, the Machine can communicate with a central data base,
via modem, to make available immediate information on product levels, service
issues or currency levels. The machine's cash management program enables it to
monitor the cash position at any time and the amount of vends, which allows for
spontaneous and immediate cash reporting to the vending operator.
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The Machines have been designed to be repaired on-site without the
necessity of being returned to the manufacturer. It is anticipated that ongoing
maintenance will be limited, and the majority of an operator's labor
expenditures will involve the replenishment of products into the Machines. At
such time oil and water will be replaced and additional cups (with condiment
packages attached) will be restocked. Water will also be changed at such time
unless the Machine is directly attached to a plumbing supply, which is not
necessary for the Machine's operation. The frequency with which the Machine must
be restocked depends completely upon the number of vends dispensed daily.
THE POTATO PRODUCT
The Company's proprietary Potato Product for use in the Machine was
developed in 1995 by a third party contractor. Management estimates that the
cost to establish a manufacturing line to produce the Potato Product is
significant. Due to the considerable costs involved and the current availability
of another potato product that is comparable with the Company's Potato Product
for use in the Machine, the Company does not currently intend to establish a
manufacturing line for the production of its own product. SEE "AVAILABILITY OF
RAW MATERIALS".
MARKETING
The Company has historically marketed the Machines and the products
exclusively through territorial distributorships. The Company currently intends
to market its products in both domestic and international markets through a
combination of exclusive, territorial distributorships and traditional sales to
established companies in the vending industry. The Company may also own and
operate machines itself.
The existing distributorship agreements vary from territory to territory,
but essentially require an up-front payment and minimum annual payments usually
over the life of the contract. Most distributors must also pay a specified sum
per Machine purchased as a credit toward the minimum annual payments. Most
distributorship agreements require a minimum number of Machines to be purchased
per year.
The Company has, to date, sold or granted an aggregate of 15 territorial
distributorships. In the course of normal business, some of these
distributorships have been reacquired by the Company and others have been
terminated due to default on behalf of the distributor. There are currently 9
distributorships which have not been terminated or reacquired. The distributor's
obligations to make further payments, after tendering the initial deposit
required upon execution of the distributorship agreement, are conditioned on the
Company's ability to ship its Machines and related products. Management believes
that once commercial production of Machines is commenced and distributors
notified and required to place orders for Machines, some of such distributors
may be financially unable to do so or may simply elect not to purchase Machines
and effectuate their respective agreement.
The Company has retained the services of Claridge Capital Corporation to
assist with the Marketing and Sales of the Machine. Claridge had been
instrumental in developing and maintaining the Company's web site (www.
tastyfries.com) and introducing the Company to the marketplace.
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CALIFORNIA FOOD & VENDING, INC.
In May 1991, the Company (via its predecessor, Adelaide Holdings, Inc.)
entered into a joint venture agreement with California Food & Vending, Inc.
("CFV"), another vending and food service company with a high interest in the
research and development of a French fry vending machine. The two companies
decided to create an alliance in which one entity would design and build a
machine, while the other company marketed the unit. The original joint venture
agreement called for CFV to develop and manufacture a French fry vending machine
which the Company would then market on a global basis. In March 1992, the two
parties subsequently amended the original agreement and effectively switched
roles in the transaction, so that the Company would design, develop and
manufacture a French fry machine, which CFV would then have primary
responsibility for marketing.
In March 1993, California Food & Vending initiated a legal action against
the Company, for lack of performance under their agreements. In February 1995,
the Company reached a settlement agreement with CFV which supersedes an
arbitration award from October 1994 granted in CFV's favor. The settlement
agreement provides for: (i) payment to CFV of a royalty per machine sold
consisting of $350 per machine for the first 500 machines sold and 35% of the
gross profit for machines sold thereafter, up to a limit of $500 per machine;
(ii) payment to CFV of a royalty consisting of $.25 for each pound of potato
product sold; (iii) issuance of an option to CFV for the purchase of 100,000
post-split shares of the Company's common stock at an exercise price of $2.00
per share (on a post-split basis) through February 1, 1999; (iv) CFV shall
receive an aggregate of $2,000,000 payable from 50% of all domestic and
international gross distribution fees received by the Company until paid in
full, and thereafter 25% of all international distribution fees received by the
Company; and (v) the granting to CFV of the distribution rights for the Machine
for the state of California (the documentation and specific terms of the
distribution agreement have not been determined). The royalties, fees, and
profits payable in the future to CFV could become material, but there is no way
to assign a dollar figure to this payable since it will be based on future
Company sales. These royalties will be expensed by the Company when incurred.
LEASE FINANCING
In September 1996, the Company entered into a vendor agreement (the
"Vendor Agreement") with Forrest Financial Corp., a leasing company, to provide
lease financing to distributors and others who may wish to lease Machines rather
than purchase them outright. The Vendor Agreement provides that up to $15
million will be made available to qualified lessees for this purpose. The
Leasing Company has since qualified approximately 1,400 vending companies which
it believes have the financial capability and experience to lease Machines from
the Leasing Company and place them in geographically desirable locations. The
Company believes that lease financing will be an important element of its
strategic plan, as leasing is a very prevalent financing structure used in the
vending industry.
COMPETITION
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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 may be currently 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 at least three
competitors in the French fry vending machine business: Ore-Ida, TEGE and
Vendotech.
Ore-Ida, a U.S.-based major manufacturer and distributor of frozen potato
products, has developed a machine that uses frozen, precut French fries which
are heated by a hot-air system. Ore-Ida has spent many years and considerable
capital in the development of their machine. They have been marketing their
machine domestically and abroad for a number of years. The Vendotech machine
also uses precut frozen fries, which it cooks in hot oil. Vendotech has a
marketing alliance with McCain's, a large Canadian potato producer. Because both
the Ore-Ida machine and the Vendotech machine are based on a premise of using
frozen, precut fries, the Company believes that they are not truly comparable
technologies. In contrast the Company's Machine cooks French fries which are
not, and have never been frozen; rather, its French fries are made fresh for
every serving from dehydrated potatoes which are mixed with water and cooked
only when a vend is actually purchased.
TEGE, a Swiss company, uses a dehydrated potato powder, which is used to
form French fries, which are then cooked in oil. TEGE has recently announced
that they have begun limited commercial production and have placed a number of
beta units on location in the United Kingdom. TEGE's current marketing strategy
is focused on four primary European markets.
Management believes, although no assurances are given, that due to
current consumer demand for French fried potatoes, that there may be additional
competition in the future in the area of French fry vending.
AVAILABILITY OF RAW MATERIALS
The raw materials or inputs used by the machine in the production of each
serving of fries are: potato product, cooking oil, water and serving cups (with
ketchup and salt packets attached to the bottom). Management believes that the
oil, condiments and serving cups used in the dispensing of French fries are
readily available from its current suppliers. In the event that one or more of
these materials were to be unavailable from a current supplier, the Company is
confident that comparable substitute products would be available from other
suppliers. The Company presently purchases its potato product from a single
source. The Company currently has no contract (exclusive or otherwise) or
licensing rights to purchase the potato product from this supplier. The loss of
the availability of the potato product from the current supplier may have an
adverse effect on the Company's business. The Company is in the process of
attempting to identify alternative sources for its potato product. At such time
in the future as may be warranted by the success of the Company's business, the
Company may elect to enter into the production of its own proprietary potato
product or enter into contract manufacturing for same. SEE "POTATO PRODUCT."
PATENTS AND PROPRIETARY RIGHTS
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The Machine's inventor, Edward C. Kelly, President and Chief Executive
Officer of the Company, was issued a patent by the U.S. Patent and Trademark
office in July 1996. In addition, the Company is seeking, but has not yet
received, patent protection in Canada, Japan, Israel, Brazil and the European
Patent office (which currently represents 17 European countries).
Management intends to seek patent, trademark and related legal protection
in the future where it deems the same to be beneficial. However, such legal
protections and precautions do not prevent third party development of
competitive products or technologies. There can be no assurance 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 the early entry into the marketplace of its Products
to further enhance its position as a leader in the field and protect its
technologies.
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's design complies with National Sanitation Foundation ("NSF") guidelines
as well as Underwriter's Laboratory ("UL") standards. The Machine will receive
UL and NSF 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 begun the process of obtaining UL
certification. The Company is also seeking certification from the National
Automatic Merchandising Association ("NAMA"). Management has been advised that
all certifications and approvals should be applied for upon commercial
production and would not issue until such time. Management believes, although no
assurance is given, that the required approvals from UL, 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.
RESEARCH AND DEVELOPMENT COSTS
For the fiscal years ended January 31, 1999 and 1998, the Company
incurred $460,417 and $533,458, respectively, in costs and expenses relating to
the research and development of its machine.
PERSONNEL
As of April 30, 1998 the Company had a total of five full-time employees.
Additional
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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.
If hired, such additional employees may include a director of marketing, 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.
ITEM 2. PROPERTIES.
The Company owns no significant properties. Since June 1994 it has leased
executive office space at the premises located at 650 Sentry Parkway, Suite One,
Blue Bell, Pennsylvania 19422. The Company's current lease commitments total
approximately $3,628 per month until May 31, 1999. At the present time,
management believes that this office space is sufficient; however, the Company
may require additional space during the next 12 months.
ITEM 3. LEGAL PROCEEDINGS.
CALIFORNIA FOOD AND VENDING
On August 17, 1998 California Food and Vending, Inc. ("CFV") filed a
multi-count law suit in the United States District Court for the Central
District of California against the Company. CFV asserted, in essence , that
Tasty Fries and its Chief Executive Officer, Edward C. Kelly breached the terms
of the settlement reached with it in the prior litigation by failing to sell
distributorships, failing to accede to CVF's to maintain its option at the
pre-reverse split level notwithstanding the fact that the Company's stock went
through a reverse split after the settlement and misrepresenting the Company's
condition at the time of the settlement. CFV's First Amended Complaint was
dismissed with leave to amend only some of the counts. It is the opinion of the
Company's counsel that CFV's law suit lacks merit and that the Company will
prevail.
PRIZE FRIZE LITIGATION-DISMISSED, ON APPEAL
On August 28, 1996, the Company, Edward C. Kelly and Premiere Design,
LTD., were added as defendants to a civil lawsuit in the Riverside County Branch
of the Superior Court of the State of California brought by Prize Frize, Inc.,
William Bartfield and Larry Wirth. The suit also named as defendants
approximately 25 other parties, all allegedly involved, in some manner, in the
pursuit of the French fry vending machine concept and/or business. The case was
removed to Federal Court. The Company successfully moved for dismissal of the
claim on behalf of itself and Mr. Kelly; the case was dismissed on June 2, 1997.
The plaintiffs are appealing the dismissal.
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 OTC 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 inter-dealer quotations, without
retail markup, markdown or commission and may not be reflective of actual
transactions.
High Bid Low Bid
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FISCAL 1997
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First Quarter $ 2.09 $ 1.00
Second Quarter 1.94 1.00
Third Quarter 1.69 .69
Fourth Quarter 1.38 .47
FISCAL 1998
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First Quarter $ .95 $ .51
Second Quarter $ .85 $ .45
Third Quarter $ 1.30 $ .38
Fourth Quarter $ .59 $ .32
FISCAL 1999
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February 1 through April 27 $ .91 $ .24
(B) HOLDERS.
The approximate number of record holders of the Company's common stock as
of April 30, 1999 is 1,155.
(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
The Company's basic business model is to market the Machines and the
ancillary products that are required to prepare each serving of French fries.
These ancillary products include the potato product, vegetable cooking oil and
serving cups (with salt and ketchup packets attached). The Company's long-term
profitability and success will be driven by a significant degree by the revenue
and accompanying profit to the Company associated with each and every vended
portion sold from its installed base of Machines.
With that business model in mind, the Company's current plan of operation
is to manufacture an initial quantity of 25 Machines. Management currently
estimates that a portion of these initial Machines will be sold to third parties
(existing distributors and others) and a number of them will be owned and
operated by the Company. The Company intends to place its Machines in locations
within the greater Philadelphia area, or as close to the Company's offices as
possible.
Management believes that, once in full production, the business cycle of
the Company will allow it to operate in a cash positive fashion. That is, the
Company will require a significant advance payment from its customers with
receipt of each order; therefore providing a good portion of the capital
necessary to fund the procurement of essential component parts for machine
production. If management is incorrect in this assumption, the Company's capital
needs for manufacturing may be greater than currently anticipated. In this
event, the Company will be required 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.
Based upon the Company's internal projections, the Company should receive
sufficient cash flow to support the modest expansion of operations over the next
12 months. Although management cannot assure the ultimate success of its plan,
it is reasonably confident that it will enable the Company to continue its
business and grow modestly.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has had no revenues from operations and
has relied almost exclusively on stockholder loans, limited distribution
deposits and sales of securities to raise working capital to fund operations. At
January 31, 1999 the Company had approximately $66,394 in cash.
In June 1997, the Company received $1,000,000 from three non-"U.S.
Persons", as defined in Regulation S, in exchange for notes convertible into the
Company's common stock. The financing was completed pursuant to Section
903(C)(2) of Regulation S under the Securities Act of 1933. Pursuant to the
terms of the financing, the Company issued 1,142,857 shares of common stock to
be held in escrow,
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pending the potential conversion of notes. The notes bear interest at 7%
annually and have a maturity date of May 14, 2000. In connection with the
financing, the Company also issued 250,000 common stock purchase warrants. In
September 1997, the note holders converted an aggregate of $397,679 of principal
into 700,000 shares of common stock. In November 1997, the Company issued an
additional 380,000 shares of common stock to be held in escrow for potential
conversion of notes. As of January 31, 1998, the aggregate outstanding principal
balance of the convertible notes was $602,321. The remaining 822,857 shares of
common stock in escrow were not deemed to be outstanding as of January 31, 1998.
In February 1998, an additional 444,000 shares of common stock were issued into
escrow, pending conversion of the notes. During the year ended January 31, 1999
the Company issued 1,480,280 shares of common stock in satisfaction of the
reaming $602,321 of convertible notes.
In November 1997, in a separate transaction, the Company received
$1,600,000 from six non-"U.S. persons", as defined in Regulation S, in exchange
for notes convertible into the Company's common stock. The financing was
completed pursuant to Section 903(C)(2) of Regulation S under the Securities Act
of 1933. Pursuant to the terms of the financing, the Company issued 2,400,000
shares of common stock to be held in escrow, pending the potential conversion of
notes. The notes bear interest at 6% annually and have a maturity date of
November 5, 2000. In connection with the financing, the Company also issued
720,000 common stock purchase warrants. As of January 31, 1998, the aggregate
outstanding principal balance of the convertible note is $1,600,000. The
2,400,000 shares of common stock in escrow are not deemed to be outstanding as
of January 31, 1998. In February 1998, an additional 960,000 shares of common
stock were issued into escrow pending the conversion of the notes. During the
year ended January 31, 1999 the Company issued 4,105,870 shares of common stock
in satisfaction of these convertible notes.
In January 1998, the Company and a private investment corporation, a
former investor in the Company from April 1996, terminated the stock purchase
agreement that had been the basis for the original investment in 1996, due to
lack of performance on the investor's part. SEE "CONSULTANTS & ADVISORS."
In April 1998, the Company entered into an agreement to receive
$1,500,000 in proceeds from the sale of restricted stock to a U.S. corporation.
The Company issued 3,000,000 post-split shares of common stock as consideration.
The Company also issued warrants to purchase 1,500,000 post-split shares of
common stock at an exercise price of $1.90; the warrants expire April 12, 2001.
The Company also issued 150,000 post-split shares of restricted stock as a
commission on the transaction. The Company and the investor have entered into an
escrow agreement for this transaction and the shares were issued into escrow,
pending funding. As of January 31, 1999 the Company has received $800,000 of the
total $1,500,000 financing and 1,600,000 of the total 3,000,000 shares have been
released. SEE "SUBSEQUENT EVENTS."
Although management currently estimates that the April 1998 financing
will allow it to proceed with its current plan of operation, the Company will
need to raise additional capital to enter into full scale production. If the
Company is unable to obtain the desired funding from any source, it is highly
unlikely that it will be able to generate a sufficient amount of cash to support
its operations during the 12 months following the date hereof, unless it is able
to obtain the necessary funds from the sale of debt and/or equity during such
period. Based upon its past history, management believes that it may be able to
obtain funding in such manner but is unable to predict with any certainty the
amount and terms
12
<PAGE>
thereof.
Subsequent to January 31, 1999, the Company has issued additional shares
and warrants to purchase common stock to various parties as payment for services
rendered. The Company intends to continue this practice.
RESULTS OF OPERATIONS, FISCAL YEARS ENDING JANUARY 31, 1998 & 1999
The Company had no revenues for the fiscal years ended January 31, 1998
and 1999. From fiscal 1997 to 1998, travel and entertainment expenses decreased
approximately 61% from approximately $147,372 in 1997 to approximately $57,656
in 1998 primarily due to significant decrease in business related travel.
Consulting expenses decreased from approximately $1,159,964 in fiscal 1997 to
$172,600 in fiscal 1998. The decrease in consulting expenses was primarily due
to the Company's reduced dependence on consultants to provide financial,
business and marketing expertise. Payroll and payroll taxes decreased
approximately 10% from approximately $640,267 in fiscal 1997 to approximately
$573,814 in fiscal 1998. The decrease payroll and payroll tax expense resulted
primarily from the release of personnel in 1998. Management believes, although
it cannot be assured, that it has made significant inroads in stabilizing its
operating and overhead costs and should be able to move forward with its
business plan as discussed herein.
CONSULTANTS & ADVISORS
The Company has in the past, and will in the future, retain consultants
with significant experience in areas such as marketing, advertising and
financing.
In April 1996, the Company engaged L. Eric Whetstone to provide business
consulting services. As compensation for these services, Mr. Whetstone received
a one-time grant of 250,000 shares of restricted stock and an annual grant of
37,500 shares of restricted stock for the five-year period of the consulting
agreement. In January 1998, the Company accelerated the payment of the annual
compensation to Mr. Whetstone called for over the term of the five-year contract
and issued him 175,000 shares of restricted stock. Also in January 1998, Mr.
Whetstone was issued a warrant to purchase 1,000,000 shares of common stock. The
warrants have an exercise price of $1.90 and an expiration date of January 5,
2001. The warrants were issued as part of the termination of the stock purchase
agreement from April 1996. SEE "SUBSEQUENT EVENTS."
ITEM 7. FINANCIAL STATEMENTS.
Audited, consolidated balance sheets as of January 31, 1999 and 1998, 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, 1999 are included after Item 12. herein.
13
<PAGE>
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.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
(A) IDENTIFICATION OF DIRECTORS & EXECUTIVE OFFICERS
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
---- --- ------------
Edward C. Kelly 63 President, Chief Executive Officer,
Treasurer and Chairman of the Board*
Leonard J. Klarich 65 Vice President, Secretary and
Director*
Jurgen A. Wolf 65 Director*
Ian D. Lambert 54 Director
Kurt R. Ziemer 44 Director
* Member of the Executive Committee of the Board of Directors. Mr. Klarich
was also appointed Secretary by the Board of Directors on June 3, 1996.
EDWARD C. KELLY - 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, and Chairman of the Board of
Directors after the removal of Mr. Arzt (by a 2/3 majority vote of shareholders)
in June 1996. From January 1994 until June 10, 1994 he was Executive Vice
President of the Company. Mr. Kelly has been involved in the engineering and
design of the machine since 1993 and
14
<PAGE>
was awarded a U.S. patent in July 1996. Mr. Kelly owned and operated Mega
Products Corporation, a subcontract manufacturing company, from 1970 through
1994. Mega serviced companies including IBM, GE, Dupont, Gulf & Western and
Kulick & Soffa.
LEONARD J. KLARICH - 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 was 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. In June
1997, his title was changed to Vice President. He was also appointed Secretary
in June 1996. 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 plastics manufacturing
company with revenue in excess of $40 million upon his sale of the company.
Prior thereto, he spent a number of years as a chief operating officer of
companies in need of turnaround due to financial concerns.
JURGEN A. WOLF - 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. From August
1992 to March 1993, Mr. Wolf was a director of Yukon Spirit Mines Ltd.
(currently known as Gainey Resources Ltd.). Mr. Wolf is also a director of four
Canadian public companies, which include: Consolidated Gulfside Industries,
Ltd., Shoreham Resources, Ltd., U.S. Oil Inc. and Key Capital Group, Inc.
IAN D. LAMBERT - 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., a stockholder in the Company and,
until November 1996, was President of Yukon Spirit Mines Ltd. (now doing
business as Gainey Resources Ltd.). International Tasty Fries and Yukon are
affiliated entities. International Tasty Fries has a distributorship agreement
with the Company for a number of European countries; Yukon's distribution
agreement was reacquired by the Company in April 1998. 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 a director of five publicly-traded companies of which only the
Company is a reporting company. 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. SEE "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" AND "SUBSEQUENT EVENTS."
KURT R. ZIEMER - Mr. Ziemer was appointed to the Board of Directors on
October 4, 1996 as the board designee of Whetstone Ventures Corporation, Inc.
pursuant to the April 30, 1996 Stock Purchase Agreement with the Company. Since
1989 he has owned and operated Ziemer Buick-Pontiac-GMC Truck, Inc. located in
New Holland, Pennsylvania. From 1977 until 1989, he served in several capacities
for the auto dealership.
(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
15
<PAGE>
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.
ITEM 10. EXECUTIVE COMPENSATION
(A) GENERAL
(B) SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1) ONE-TIME COMPENSATION
----------------------- ---------------------
FISCAL
NAME & YEAR
PRINCIPAL ENDED
POSITION JANUARY 31, SALARY BONUS RESTRICTED STOCK (2)
- -------- ----------- ------ ----- --------------------
<S> <C> <C> <C> <C>
Edward C. Kelly 1999 $267,000
President, CEO 1998 $289,000 $0 $1,031,250(4)
& Chairman (3) 1997 $240,000 $0
Christopher A. 1998 $93,750 $0
Plunkett, EVP (5)
Leonard J. Klarich 1999 $12,400 $0
Secretary, Director 1998 $60,000 $0
& Vice President (6) 1997 $40,000 $0
</TABLE>
(1) There were no long-term incentive payments made in the year-ended January
31, 1999.
(2) Value of restricted stock grants are determined by using the closing bid
price of the Company's common stock on the date of issuance.
(3) Mr. Kelly has served as President and Treasurer of the Company since June
10, 1994, a director since April 1994, Chairman of the Board since June
3, 1996, and was Executive Vice President from January 1994 to June 10,
1994. This table does not include: (i) accrued director compensation of
16
<PAGE>
approximately $833 per month since September 1995; (ii) a restricted
stock award of 9,206 post-split shares granted to Mr. Kelly as a
component of his compensation for the fiscal year ended January 31, 1996;
(iii) options granted to each of board member on October 1, 1996 by the
Board of Directors for 50,000 post-split shares of restricted common
stock exercisable for three years at $4.00 per share and an option
granted for 1,000,000 post-split shares of common stock exercisable for
two years at .50 per share.
(4) Represents the value assigned to a restricted stock grant of 1,500,000
post-split shares made to Mr. Kelly on September 11, 1997, pursuant to
the terms of the Stock Purchase Agreement from April 1996.
(5) Mr. Plunkett served as Executive Vice President of the Company from June
1997 through June of 1998.
(6) This table does not include: (i) accrued director compensation of
approximately $833 per month since September 1995; (ii) an option to
purchase 1,042 post-split shares of common stock exercisable at $2.40 per
share until December 15, 2005, automatically granted to each non-employee
director under the 1995 Stock Option Plan on December 15, 1995, (iii) an
option to purchase 4,082 post-split shares of common stock exercisable at
$2.45 per share until December 15, 2006, automatically granted to each
non-employee director under the 1995 Stock Option Plan; and (iv) an
option to purchase 50,000 post-split shares of common stock granted by
the Board of Directors on October 1, 1996 exercisable for $4.00 per share
until October 1, 1999.
(C) OPTIONS/S.A.R. GRANTS TABLE
OPTION GRANTS IN THE FISCAL YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options Granted
Underlying Options to Employee in Exercise Expiration
Name Granted Fiscal Year Price Date
- ---- -------------------- ---------------- -------- ----------
<S> <C> <C> <C> <C>
Edward C. Kelly 1,000,000(1) 100% .50 2000
7/1/98
</TABLE>
(1) Mr. Kelly was issued, by the Board of Directors, a stock option to
purchase an aggregate of 1,000,000 shares of common stock. See "EXECUTIVE
COMPENSATION TABLE"
(D) AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR VALUE
TABLE.
None.
(E) LONG TERM INCENTIVE PLAN ("LTIP") AWARDS TABLE.
17
<PAGE>
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 years
ending January 31, 1999 and 1998 have been accrued on a pro rata basis each year
and will be paid when the Company is financially able to do so.
(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 C. Kelly, its then President and Treasurer. The employment agreement was
for a three-year term commencing retroactively to October 1, 1993 and was
automatically renewable for additional one year terms after expiration on
September 30, 1996. The employment agreement was subsequently amended effective
May 1, 1995. SEE EXHIBIT 13.1 On June 16, 1997 the Company executed an
employment agreement with Christopher Plunkett who joined the Company as
Executive Vice President. On June 15, 1998 Mr. Plunkett's employment was
terminated with the Company.
(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 April 30, 1998, the ownership of
common stock by persons known to the Company who own beneficially more than 5%
of the outstanding shares of common stock:
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- --------
<S> <C> <C>
Edward C. Kelly 1,568,650 8.17%
18
<PAGE>
650 Sentry Parkway, Ste. One
Blue Bell, PA 19422 (1)
Lancaster Investment Corporation 2,200,000 11.46%
11 Waterfront Estates
Estates Drive
Lancaster, PA 17602 (2,3)
L. Eric Whetstone 539,000 2.81%
11 Waterfront Estates
Estates Drive
Lancaster, PA 17602 (3,4)
Whetstone Ventures Corporation, Inc. 277,000 1.44%
11 Waterfront Estates
Estates Drive
Lancaster, PA 17602 (3)
</TABLE>
- ----------
(1) Does not include an option for 50,000 post-split shares of common stock
granted by the Board of Directors on October 1, 1996 exercisable until
October 1, 1999 at $4.00 per share. Does not include an option for
1,000,000 post-split shares of common stock granted by the Board of
Directors on July 1, 1998 exercisable until July 1, 2000 at .50 per
share.
(2) Does not include 1,400,00 additional shares issued to Lancaster
Investments pursuant to the terms of the April 1998 financing. These
additional shares are being held in escrow pending the complete funding
of the transaction and will be released from escrow on a pro-rata basis
as the financing is completed. As of January 31, 1999, $800,000 of the
total $1,500,000 financing has been received and 1,600,000 of the total
3,000,000 shares have been released. SEE "LIQUIDITY AND CAPITAL
RESOURCES" AND "SUBSEQUENT EVENTS."
(3) Lancaster Investment Corporation and Whetstone Ventures Corp. are both
affiliates of L. Eric Whetstone. In aggregate, the 3,016,000 shares
currently owned by these three parties represent 15.71% of the
outstanding shares of the Company. Upon completion of the April 1998
financing, these three parties will own 4,416,000 total shares,
representing 23% of the then-outstanding shares. SEE "CHANGES IN CONTROL"
AND "SUBSEQUENT EVENTS."
(4) Includes 150,000 post-split shares of common stock issued to L. Eric
Whetstone in connection with the April 1998 financing from Lancaster
Investment Corp.
(B) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of April 30, 1999, the beneficial
common stock ownership of
19
<PAGE>
all directors, executive officers, and of all directors and officers as group:
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- --------
<S> <C> <C>
Edward C. Kelly 1,568,650 8.17%
650 Sentry Parkway, Ste. One
Blue Bell, PA 19422 (1)
Leonard J. Klarich 45,000 .24
839 Claybrook Court
Knoxville, TN 37923 (2)
Jurgen A. Wolf 107,361 .56
1285 West Pender Street
Vancouver, B.C. Canada (3)
Ian D. Lambert 374,952 1.95%
c/o International Tasty Fries, Inc.
595 Howe Street, Ste. 602
Vancouver, B.C. V6C 2T5 (4)
Kurt R. Ziemer 171,528 1.12
599 Valley View Drive
New Holland, PA 17557 (5)
All Officers and Directors 2,269,483 12.04%
as a group (5 persons)
</TABLE>
* less than 1%
(1) Does not include an option for 50,000 post-split shares of common stock
granted by the Board of Directors on October 1, 1996 exercisable until
October 1, 1999 at $4.00 per share. Does not include an option for
1,000,000 post-split shares of common stock granted by the Board of
Directors on July 1, 1998 exercisable until July 1, 2000 at .50 per
share.
(2) Does not include: (i) an option to purchase 1,042 post-split shares of
common stock exercisable at $2.40 per share until December 15, 2005,
automatically granted to each non-employee director under the 1995 Stock
Option Plan on December 15, 1995, (ii) an option to purchase 4,082
post-split shares of common stock exercisable at $2.45 per share until
December 15, 2006, automatically granted to each non-employee director
under the 1995 Stock Option Plan; and (iii) an option for 50,000
post-split shares of common stock granted by the Board of Directors on
October 1, 1996 exercisable for $4.00 per share until October 1, 1999.
(3) Does not include: (i) an option to purchase 1,042 post-split shares of
common stock exercisable at
20
<PAGE>
$2.40 per share until December 15, 2005, automatically granted to each
non-employee director under the 1995 Stock Option Plan on December 15,
1995, (ii) an option to purchase 4,082 post-split shares of common stock
exercisable at $2.45 per share until December 15, 2006, automatically
granted to each non-employee director under the 1995 Stock Option Plan;
(iii) an option to purchase 50,000 post-split shares of common stock
granted by the Board of Directors on October 1, 1996 exercisable at $4.00
per share until October 1, 1999.
(4) 436,952 post-split shares were issued to International Tasty Fries, Inc.
in 1995 as consideration for a financing. Mr. Lambert is the President of
International Tasty Fries and is a shareholder of that company. Does not
include: (I) an option to purchase 1,042 post-split shares of common
stock exercisable at $2.40 per share until December 15, 2005,
automatically granted to each non-employee director under the 1995 Stock
Option Plan on December 15, 1995, (ii) an option to purchase 4,082
post-split shares of common stock exercisable at $2.45 per share until
December 15, 2006, automatically granted to each non-employee director
under the 1995 Stock Option Plan; and (iii) an option for 50,000 post-
split shares of common stock granted by the Board of Directors on October
1, 1996 exercisable at $4.00 per share until October 1, 1999. SEE
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(5) Does not include 680 post-split shares underlying an option exercisable
at $2.45 per share until December 15, 2006, automatically granted to each
non-employee director under the 1995 Stock Option Plan. Mr. Ziemer's
option has been prorated to reflect the date he was appointed to the
Board of Directors on October 4, 1996.
(C) CHANGES IN CONTROL.
In connection with the Subscription Agreement dated April 13, 1998
between the Company and Lancaster Investment Corp., the Company granted
Whetstone Ventures, Inc. the right to name one of the five directors to the
Board of Directors of Tasty Fries, Inc. Together with a previous right of
appointment (from the April 1996 stock purchase agreement), Whetstone Ventures,
Inc. may appoint two members to the Board of Directors of Tasty Fries, Inc.
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.
Mr. Ian Lambert, a director of the Company since July 1995, is the
President and a shareholder of International Tasty Fries, Inc., a stockholder in
the Company and, until November 1996, was President of Yukon Spirit Mines Ltd.
(now doing business as Gainey Resources Ltd.). International Tasty Fries and
Yukon are affiliated entities. International Tasty Fries has a distributorship
agreement with the Company for a number of European countries; Yukon's
distribution agreement was reacquired by the Company in April 1998. Because of
the potentially conflicting interests that Mr. Lambert may face, given his role
as President of one of the Company's distributors and a director of the Company,
21
<PAGE>
Mr. Lambert may find it necessary to recuse himself from certain strategic
discussions in the normal course of business.
In May of 1995, the Company loaned an officer/director $50,000 at 10%
interest per annum. The loan was repaid in accordance with a payment plan over
the current and past fiscal years. The balance due the Company at January 31,
1999 and 1998 was $-0- and $24,747, respectively.
In August of 1996, the Company loaned a different officer/director
$50,000 at 10% interest per annum. The loan was repaid in accordance with a
payment plan over the current and past fiscal years. The balance due the Company
at January 31, 1999 and 1998 was $-0- and $5,630, respectively.
In the normal course of its business, the Company occasionally has legal
services performed by one of Mr. Kelly's sons. The Company believes that the
compensation paid for and services received in connection with such services are
comparable to those it could expect to receive from other attorneys.
SUBSEQUENT EVENTS
In January 1998, during the normal course of business, the Company
reached an agreement to re-acquire one of its territorial distributorships from
Yukon Spirits Mines, Ltd (now doing business as Gainey Resources Ltd.). The
agreement was subject to approval by Yukon's shareholders and the Vancouver
Stock Exchange. Yukon's distribution agreement included 23 U.S. states and seven
European countries. As consideration, the Company issued 250,000 post-split
shares of restricted stock and 100,000 warrants to purchase common stock. The
warrants have an exercise price of $.66 per share and expire on December 30,
2000. The transaction closed in April 1998.
In April 1998, the Company entered into an agreement to receive
$1,500,000 in proceeds from the sale of restricted stock to Lancaster Investment
Corporation. The Company issued 3,000,000 post-split shares of common stock as
consideration. The Company also issued warrants to purchase 1,500,000 shares of
common stock at an exercise price of $1.90; the warrants expire April 12, 2001.
In connection with the transaction, the Company also issued 150,000 post-split
shares of restricted stock to L. Eric Whetstone as a commission on the
transaction. The Company and the investor have entered into an escrow agreement
for this transaction. As of January 31,1999 $800,000 has been received by the
Company and 1,600,000 shares have been released to the investor. The terms of
this financing call for the Company to file a registration statement with the
Securities and Exchange Commission within 30 days of signing, which was April
13, 1998. The Company intends to register all of the restricted common shares
and warrant shares issued and/or granted under this transaction in a
registration statement as soon as is practicable. SEE "CHANGES IN CONTROL."
22
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
AND FOR THE PERIOD OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 1999
23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Tasty Fries, Inc.
We have audited the accompanying balance sheets of Tasty Fries, Inc. (a
development stage company) (formerly Adelaide Holdings, Inc.) as of January 31,
1999 and 1998, and the related 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, 1999. 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. as of January
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended and from October 18, 1985 (inception) to January 31, 1999, 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 (Note 1). The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Schiffman Hughes Brown
Blue Bell, Pennsylvania
March 30, 1999
24
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS AS OF JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 66,394 $ 380,136
Vending machines (Note 3) 195,000 70,000
Loans receivable, officers (Note 4) 30,377
Prepaid expenses 123,313
------------ ------------
Total Current assets 384,707 480,513
Property and equipment, net of accumulated
depreciation of $45,400 in 1999 and $33,595 in 1998 24,777 36,581
------------ ------------
Other assets:
Loan costs, net of accumulated amortization
of $107,026 in 1999 and $28,074 in 1998 129,831 208,782
------------ ------------
$ 539,315 $ 725,876
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses $ 1,070,751 $ 633,042
------------ ------------
Convertible notes payable (Note 7) 2,202,321
------------
Unearned revenue (Note 8) 261,000 376,000
------------ ------------
Commitments and contingencies (Note 9) Stockholders' equity (deficiency): Common
stock, $.001 par value; authorized 25,000,000 shares; issued and outstanding
17,995,606 shares at January 31, 1999 and
8,638,630 shares at January 31, 1998 17,996 8,638
Additional paid-in capital 13,426,963 9,570,693
Deficit accumulated in development stage (14,237,395) (12,064,818)
------------ ------------
(792,436) (2,485,487)
------------ ------------
$ 539,315 $ 725,876
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
25
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
AND FOR THE PERIOD OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 0 $ 0 $ 0
------------ ------------ ------------
Costs and expenses:
Research, machine
and product development 2,334,932 460,417 533,458
Selling, general and administrative 9,111,982 1,660,404 2,670,980
Nonrecurring compensation charge 1,031,250 1,031,250
------------ ------------ ------------
12,478,164 2,120,821 4,235,688
------------ ------------ ------------
Net loss before other income (expense) (12,478,164) (2,120,821) (4,235,688)
Other income (expense):
Interest income 21,274 1,354 10,892
Forfeited distributor deposits 15,000
Interest expense (575,755) (53,110) (459,104)
Litigation settlements (Note 11) (1,219,750) (114,688)
------------ ------------ ------------
(1,759,231) (51,756) (562,900)
------------ ------------ ------------
Net loss $(14,237,395) $ (2,172,577) $ (4,798,588)
============ ============ ============
Net loss per share of common stock $ (1.14) $ (.17) $ (.78)
============ ============ ============
Weighted average shares outstanding 12,518,419 6,128,198
========== =========
</TABLE>
The accompanying notes are an integral part
of these financial statements
26
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD JANUARY 31, 1996 TO JANUARY 31, 1999
<TABLE>
<CAPTION>
Paid Total
Common in Retained Stockholder
Stock Capital Earnings Equity
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1996 $ 3,850 $ 6,357,625 $ (5,093,970) $ 1,267,505
Redemption of 730,000 post-split shares issued
to Acumen Services, Ltd. in September 1995 (730) (2,091,270) (2,092,000)
Issued 1,455,000 post-split shares 1,455 1,506,045 1,507,500
Issued 125,000 post-split shares for services 125 324,875 325,000
Net loss for the year ended January 31, 1997 (2,172,260) (2,172,260)
------------ ------------ ------------ -----------
Balance, January 31, 1997 4,700 6,097,275 (7,266,230) (1,164,255)
Issuance of 1,500,000 post-split shares
for nonrecurring compensation 1,500 1,029,750 1,031,250
Issuance of 167,083 post-split shares of restricted stock 167 53,583 53,750
Issuance of 955,000 post-split shares for services 955 1,239,045 1,240,000
Issuance of 43,750 post-split shares for litigation settlement 44 54,644 54,688
Issuance of 700,000 post-split shares for convertible notes 700 396,979 397,679
Issuance of 452,772 post-split shares
for repayment of notes payable 452 523,587 524,039
Issuance of 120,000 post-split shares
for repayment of notes payable officer/director 120 175,830 175,950
Net loss for the year ended January 31, 1998 (4,798,588) (4,798,588)
------------ ------------ ------------ -----------
Balance, January 31, 1998 8,638 9,570,693 (12,064,818) (2,485,487)
Issuance of 2,251,307 shares 2,252 1,017,748 1,020,000
Issuance of 5,586,150 shares for convertible notes 5,586 2,196,735 2,202,321
Issuance of 42,704 shares for interest on convertible notes 43 26,385 26,428
Issuance of 1,226,815 shares for services 1,227 490,652 491,879
Issuance of 250,000 shares for repurchase of distributorship 250 124,750 125,000
Net loss for year ended January 31, 1999 (2,172,577) (2,172,577)
------------ ------------ ------------ -----------
$ 17,996 $ 13,426,963 $(14,237,395) $ (792,436)
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
27
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
AND FOR THE PERIOD OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,237,395) $(2,172,577) $(4,798,588)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 152,425 90,756 37,596
Common stock issued for services 3,748,015 491,879 2,299,411
Common stock issued for litigation settlement 524,689 54,689
Common stock issued on convertible notes 26,427 26,427
Accrued interest on notes and convertible
notes payable 398,577 398,577
Changes in assets and liabilities:
Other assets (318,313) (248,313) 9,027
Accounts payable and accrued expenses 1,070,752 437,709 (249,035)
Unearned revenue 386,000 10,000
------------ ----------- -----------
Net cash used by operating activities (8,248,823) (1,364,119) (2,248,323)
------------ ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (70,177) (22,827)
Loan costs (236,856) (236,856)
------------ -----------
Net cash used by investing activities (307,033) (259,683)
------------ -----------
Cash flows from financing activities:
Proceeds from convertible notes payable 2,600,000 2,600,000
Issuance of common stock 5,749,000 1,020,000 53,750
Loan receivable, officers 30,377 69,623
Note payable, current 193,250 133,250
Officer/director note 80,000 30,000
------------ ----------- -----------
Net cash provided by financing activities 8,622,250 1,050,377 2,886,623
------------ ----------- -----------
Net increase (decrease) in cash 66,394 (313,742) 378,617
Cash, beginning balance 380,136 1,519
------------ ----------- -----------
Cash, ending balance $ 66,394 $ 66,394 $ 380,136
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 45,851 $ 10,500
============ ===========
Supplemental disclosure of non-cash financing
activities:
Issuance of common stock for services $ 3,748,015 $ 491,879 $ 2,299,411
============ =========== ===========
Issuance of common stock for
conversion of note payable $ 2,675,000 $ 2,202,321 $ 397,679
============ =========== ===========
Issuance of common stock for
repurchase of distributorship $ 225,000 $ 125,000
============ ===========
Issuance of common stock for
litigation settlement $ 524,689 $ 54,689
============ ===========
Accrued interest on notes payable $ 398,577 $ 398,577
============ ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
28
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999 AND 1998
1. Description of Business:
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 incurred
research and development costs from inception to January 31, 1999
totaling $2,334,932. The Company has received ten pre-production
prototype machines used for demonstrative and sales purposes, and it is
anticipated that each machine can be sold for approximately $9,000. The
Company is currently in the process of producing its first 25 machines,
which are in process and included in vending machines at $125,000. The
difference between the anticipated selling price and the cost to obtain
the machines has been charged to research, machine and product
development costs. 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 significant revenues from operations
from the sale of its French fry vending machine since inception and its
ability to continue as a going concern is dependent on the continuation
of financing to fund the expenses relating to successfully manufacturing
and marketing the vending machine. Management is currently in
negotiations with several funding sources to provide the working capital
necessary to: (i) begin commercial production of the machines, and (ii)
bring them to market, at which time the Company believes that sufficient
cash will be generated to support its operations. Although management
cannot assure the ultimate success of the above plan, it is reasonably
confident that it will enable the Company to continue its business and
grow modestly.
2. Significant accounting policies:
Property and equipment:
Property and equipment are carried at cost. Depreciation is calculated
using the straight-line method over their estimated useful lives ranging
from 3 to 7 years. Depreciation expense for January 31, 1999 and 1998 was
$11,805 and $9,522, respectively.
Intangibles:
Intangibles, consisting of loan costs, are being amortized on a straight
line basis over three years.
29
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 1998
2. Significant accounting policies (continued):
Research, machine and product development:
Research and development costs consist of expenditures incurred by the
Company during the course of planned search and investigation aimed at
the discovery of new knowledge which will be used to develop and test a
vending machine and potato product for the formation of French fries.
Research and development costs also include costs for significant
enhancements or improvements to the machine and/or potato product. The
Company expenses all such research and development costs as they are
incurred.
Unearned revenue:
Represents monies received for distribution rights of the vending
machines which the Company is still in the process of developing and
testing. The Company records these monies as unearned revenue upon
receipt. These deferrals will be recognized as income over the life of
the machine upon commercial production of machines or upon forfeiture by
distributors as a result of breach of contract. Since commercial
production of the machine has not commenced, the unearned revenue is
classified as a noncurrent liability.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in its financial statements
and accompanying notes. Actual results could differ from those estimates.
Concentration of credit risk:
The Company occasionally maintains deposits in excess of federally
insured limits. The risk is managed by maintaining all deposits in high
quality financial institutions.
Earnings per share:
In March 1997, the FASB issued SFAS No. 128, Earnings per Share. The
statement requires the Company to disclose both basic earnings per share
and diluted earnings per share for annual and interim periods ending
after December 15, 1997. Basic net income per share is based on the
weighted average number of common shares outstanding, while diluted net
income per share is based on the weighted average number of common shares
and common share equivalents that would arise from the exercise of
options and warrants or conversions of convertible securities. The
Company incurred losses from operations in 1998 and 1997; therefore,
basic and diluted earnings per share have been computed in the same
manner since the exercise of warrants and the conversion of the
convertible notes payable would be antidilutive.
30
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 1998
3. Vending machines:
Vending machines are carried at the lower of cost or market. During the
year ended January 31, 1995, the Company paid to Premier, $246,600, for
the production of ten pre-production machines. In the year ended January
31, 1995, the Company charged $176,600 to research and development
expense. During the year ended January 31, 1999, the Company paid various
third parties $264,782 for the production of the first 25 commercial
machines. Of the amount paid, the Company charges $139,782 to research
and development expense.
4. Loans receivable, officers:
In May 1995, an officer borrowed $50,000 from the Company. The loan was
repaid, along with interest at 10% per annum, in accordance with a
payment plan over the current and past fiscal years. The balance due the
Company at January 31, 1999 and 1998 was $-0- and $24,747, respectively.
In August, 1996, another officer borrowed $50,000 from the Company. This
loan was repaid, along with interest at 10% per annum, in accordance with
a payment plan over the current and past fiscal years. The balance due
the Company at January 31, 1999 and 1998 was $-0- and $5,630,
respectively.
5. Notes Payable:
An unsecured note from a shareholder which bears interest at the rate of
8% per annum was due June 4, 1993 but was extended indefinitely. The
Company issued to the note holder, options for 400,000 pre-split shares
of its common stock on December 22, 1994, with an exercise price of $.35
per share. The Company issued 180,000 and 90,000 pre-split shares of its
common stock on December 22, 1994 and May 4, 1995, respectively, to the
note holder in addition to paying $30,600 on May 5, 1995. This payment of
$30,600 on May 5, 1995 includes a principal payment of $25,000 and
interest covering the period June, 1992 to March, 1995 in the amount of
$5,600. The 180,000 and 90,000 pre-split shares were issued as
consideration for indefinitely extending the repayment and recorded as a
financing expense which is included in selling, general and
administrative expense. In October, 1997, the Company issued 90,547
post-split shares of its common stock in satisfaction of this debt,
including interest. The balance at January 31,1998 was $0.
In November, 1996, an unrelated third party advanced the Company $35,000.
This advance bears no interest and repayment is due on demand. The
Company repaid $20,000 in March, 1997; $7,000 in May, 1997; and $8,000 in
June, 1997.
31
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 1998
5. Notes Payable (continued):
In March 1997, the Company received $282,000 in proceeds from loans made
to the Company by nine individuals, including two directors of the
Company (one of whom is also an officer). The principal and interest due
was repaid to these individuals in the form of restricted stock in
October 1997. The total number of post-split shares issued was 482,044.
6. Note Payable, Officer/Director:
Represents the unsecured note from a former officer/director 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 to $50,000 with a
principal payment of $79,947 on May 1, 1995. In addition to the principal
payment on May 1, 1995, the Company also paid interest in the amount of
$9,576. In April 1997, the Company paid $59,000 in satisfaction of this
note. Balance as of January 31, 1999 was $0.
7. Convertible Notes Payable:
In June 1997, the Company received $1,000,000 in exchange for notes
convertible into the Company's common stock. Pursuant to the terms of the
financing, the Company issued 1,142,857 post-split shares of common stock
to be held in escrow, pending the potential conversion of notes. In
September 1997, the note holders converted an aggregate of $397,679 of
principal into 700,000 post-split shares of common stock. In November
1997, the Company issued an additional 380,000 post-split shares of
common stock to be held in escrow for potential conversion of notes. As
of January 31, 1998, the aggregate outstanding principal balance of the
convertible notes is $602,321. The remaining 822,857 post-split shares of
common stock in escrow are not deemed to be outstanding as of January 31,
1998. In February 1998, an additional 444,000 post-split shares common
stock were issued into escrow, pending conversion of the notes; these
additional shares are not deemed to be outstanding as of January 31,
1998. During the year ended January 31, 1999, the Company issued
1,480,280 shares of common stock in satisfaction of the remaining
$602,321 of convertible notes.
In November 1997, in a separate transaction, the Company received
$1,600,000 in exchange for notes convertible into the Company's common
stock. Pursuant to the terms of the financing, the Company issued
2,400,000 post-split shares of common stock to be held in escrow, pending
the potential conversion of notes. As of January 31, 1998, the aggregate
outstanding principal balance of the convertible notes is $1,600,000. The
2,400,000 post-split shares of common stock in escrow are not deemed to
be outstanding as of January 31, 1998. In February 1998, an additional
960,000 shares common stock were issued into escrow, pending conversion
of the notes. During the year ended January 31, 1999, the Company issued
4,105,870 shares of common stock in satisfaction of these convertible
notes.
32
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 1998
8. Unearned Revenue:
Represents monies received for distribution rights of the vending
machines which the Company is still in the process of developing and
testing. Also includes monies received as deposits on machines in
production. The Company records these monies as unearned revenue upon
receipt.
During the year ended January 31, 1999, the Company issued 250,000 shares
of common stock to reacquire an existing distributorship valued at
$125,000. The Company also received during the year $10,000 as a
prepayment for a French fry machine. 9. Commitments and Contingencies:
During the years ended January 31, 1999 and 1998, the Company paid
$43,314 and $49,284, respectively, for the rental of office space. The
Company's current lease commitments total approximately $3,628 per month
until May 31, 1999.
10. Issuance of Common Stock:
After the return to treasury of a total of 287,500 shares, an aggregate
of 9,356,976 shares were issued during the year ended January 31, 1999.
The following shares were issued during the year: 2,251,307 shares were
sold in private placements by the Company; 5,628,854 shares were issued
pursuant to the terms of the Company's convertible note financing (this
figure includes shares issued for interest on the notes): 1,226,815
shares were issued in payment of services; 250,000 shares were issued as
consideration for the reacquisition of an existing distributorship.
An aggregate of 3,938,605 shares were issued during the year ended
January 31, 1998, including: 1,500,000 shares issued to Edward Kelly as a
one-time, nonrecurring compensation event; 3,922,857 shares issued into
escrow, pursuant to the June and November, 1997 convertible notes
financing; 572,772 shares issued for repayment of notes payable
(including notes payable to officers/director); 167,083 shares issued in
private placements of restricted common stock; 955,000 shares were issued
as payment for services; 43,750 shares issued for settlement of
litigation. 3,222,857 of the aggregate 3,922,857 shares issued into
escrow pursuant to the June and November, 1997 financing remain in escrow
and are not deemed to be outstanding as of January 31, 1998 (see Note 7).
Subsequent to January 31, 1999, the Company has issued additional shares
and warrants to purchase common stock to various parties as payment for
services rendered. The Company intends to continue this practice when
appropriate.
33
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 1998
11. Litigation:
CALIFORNIA FOOD AND VENDING LITIGATION
On August 17, 1998, California Food and Vending, Inc. ("CFV") filed a
multi-count law suit in the United States District Court for the Central
District of California against the Company. CFV asserted, in essence that
Tasty Fries and its Chief Executive Officer, Edward C. Kelly breached the
terms of the settlement reached with it in the prior litigation by
failing to sell distributorships, failing to accede to CFV's to maintain
its option at the pre-reverse split level notwithstanding the fact that
the Company's stock went through a reverse split after the settlement and
misrepresenting the Company's condition at the time of the settlement.
CFV's First Amended Complaint was dismissed with leave to amend only some
of the counts. It is the opinion of the Company's counsel that CFV's law
suit lacks merit and that the Company will prevail.
In February 1995, the Company reached a settlement agreement with
California Food & Vending, Inc. ("CFV") which supersedes an arbitration
award from October 1994 granted in CFV's favor that resulted from an
agreement between the two parties. In addition to a one-time cash
payment, the settlement agreement provides for: (i) payment to CFV of a
royalty per machine sold consisting of $350 per machine for the first 500
machines sold and 35% of the gross profit for machines sold thereafter,
up to a limit of $500 per machine; (ii) payment to CFV of a royalty
consisting of $.25 for each pound of potato product sold; (iii) issuance
of an option to CFV for the purchase of 100,000 shares of the Company's
common stock at an exercise price of $2.00 per share through February 1,
1999; and (iv) CFV shall receive an aggregate of $2,000,000 payable from
50% of all domestic and international gross distribution fees until paid
in full and thereafter 25% of all international distribution fees. The
royalties, fees, and profits payable in the future to CFV could become
material, but there is no way to assign a dollar figure to this payable
since it will be based on future Company sales. These royalties will be
expensed by the Company when incurred.
PRIZE FRIES LITIGATION - DISMISSED, ON APPEAL
On August 28, 1996, the Company, Edward C. Kelly and Premier Design,
Ltd., were added as defendants to a civil lawsuit in the Riverside County
Branch of the Superior Court of the State of California brought by Prize
Fries, Inc., William Bartfield and Larry Wirth. The suit also named as
defendants approximately 25 other parties, all allegedly involved, in
some manner, in the pursuit of the French fry vending machine concept
and/or business. The case was removed to Federal Court. The Company
successfully moved for dismissal of the claim on behalf of itself and Mr.
Kelly; the case was dismissed on June 2, 1997. The plaintiffs are
appealing the dismissal.
34
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 1998
12. Common Stock Option Plan:
The Company adopted incentive and non qualified 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. There were no options
granted as of January 31, 1999 or 1998 to any executive officers, but
non-employee directors received options as of January 31, 1997 to
purchase an aggregate of 12,926 shares of common stock, respectively, at
an exercise price of $2.45 per share.
Adoption of SFAS 123 by the Company would require an expense of $30,000
in 1997, as directors fees to be accrued for the 12,246 options at the
fair value of $2.45 on grant date .
13. Preferred stock:
On July 29, 1991, the Board of Directors authorized 5,000,000 shares of
preferred stock at a par value of $.001 per share. No shares of preferred
stock were issued as of January 31, 1999 and 1998, respectively.
14. Options & Warrants Outstanding:
As of January 31, 1999 and 1998, the Company had 5, 792,052 and 4,292,052
warrants and options, respectively, to purchase common stock outstanding.
15. April 1998 financing:
In April 1998, the Company entered into an agreement to receive
$1,500,000 in proceeds from the sale of restricted stock to a U.S.
corporation. The Company issued 3,000,000 shares of common stock as
consideration for the investment. The Company also issued warrants to
purchase 1,500,000 shares of common stock at an exercise price of $1.90;
the warrants expire April 12, 2001. The Company also issued 150,000
shares of restricted stock as a commission on the transaction. The
Company and the investor have entered into an escrow agreement for this
transaction and all of the shares were issued into escrow, pending
funding. As of January 31, 1999, $800,000 of the $1,500,000 in proceeds
has been received by the Company and 1,600,000 of the 3,000,000 shares of
restricted common stock held in escrow have been released to the
investor. The balance of funds due are anticipated to be received by June
30 1999.
35
<PAGE>
REPORTS ON FORM 8-K.
Forms 8-K dated June 3, 1997 and November 5, 1997 are hereby incorporated by
reference.
36
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TASTY FRIES, INC.
Date: April 28, 1999 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 Company and in the capacities and on the
dates indicated.
/s/ EDWARD C. KELLY April 28, 1999
- --------------------- Edward C. Kelly, Chairman, CEO
President, Treasurer & Director
/s/ LEONARD J. KLARICH April 28, 1999
- ---------------------- Leonard J. Klarich, Vice President,
Secretary & Director
/s/ JURGEN A. WOLF April 28, 1999
- ------------------ Jurgen A. Wolf, Director
/s/ IAN D. LAMBERT April 28, 1999
- ------------------ Ian D. Lambert, Director
/s/ KURT N. ZIEMER April 28, 1999
- ------------------ Kurt N. Ziemer, Director
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-01-1999
<CASH> 66,394
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 195,000
<CURRENT-ASSETS> 384,707
<PP&E> 70,177
<DEPRECIATION> 45,400
<TOTAL-ASSETS> 539,315
<CURRENT-LIABILITIES> 1,070,751
<BONDS> 0
0
0
<COMMON> 17,996
<OTHER-SE> (810,432)
<TOTAL-LIABILITY-AND-EQUITY> 539,315
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (2,119,467)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,110
<INCOME-PRETAX> (2,172,577)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,172,577)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> 0
</TABLE>
