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FORM 10-KSB/A
Amendment No. 1
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, 2000
[ ] 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 26, 2000: Not Determinable.
Shares outstanding of the registrant's common stock as of April 26, 2000:
30,983,902 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 assets, 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 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
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.
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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, Mr. 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. Prior management, none of
whom are presently connected with us, believed they had developed a viable
production model French fry vending machine. They decided to abandon the
original device. We retained Premier Design to design and develop a
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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, the partners amended the original manufacturing contract
(the "Premier Amendment"). The Premier Amendment described the terms under which
Premier would manufacture the 10 prototype models of the new machine and 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. In January 2000, the Company opened
an assembly facility in Portsmouth, New Hampshire and are hiring subcontractors
to produce the first 25 units. These first 25 units will be produced by
subcontract manufacturers located in Portsmouth, New Hampshire.
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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: (a) ensure the consistency and quality of the machine's
critical parts and (b) greatly reduce the unit costs of both the individual
parts and the overall machine, as production volume increases. As with our
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 pre-production tooling stage is complete. The Company is
considering, but has not made a determination to produce a table top model of
the machine. Modifying the existing machine for table top use and ordering
tooling would cost approximately $200,000 to $300,000. Customized parts will be
marketed to operators of the machine, be they owners or leasees. No third
parties will have any interest in the sale of the parts. The Company is unable
to estimate when sale of the parts might commence but when they do, revenues are
not expected to be significant.
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. 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.
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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.
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.
There will be 2 certifications that will provide independent
confirmation of the uniform quality of our product - Underwriter's Laboratory
("UL") and National Automatic Merchandising Association. The Company has
undergone preliminary testing from UL and our pre-production models have met
with their approval. However, neither group will award certification pending
examination of commercial production. The Company expects to receive approvals
with commercial production.
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.
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The Company has 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 7
distributorships, which have not been terminated or reacquired. Termination of a
distributorship territory requires refund of the distribution deposit. The
Company has complied with all refund request. The distributor's obligations to
make further payments, after tendering the initial deposit required upon
execution of the distributorship agreement, are conditioned on our 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 has been
instrumental in developing and maintaining the Company's web site
(www.tastyfries.com) and introducing the Company to the marketplace.
CALIFORNIA FOOD & VENDING, INC.
In May 1991, the Company entered into a joint venture agreement with
California Food & Vending ("CFV"), another vending and food service company with
a high interest in the research and development of a French fry vending machine.
The companies planned to work together in the manufacturing and marketing of a
French fry machine. Disputes arose between the parties, litigation was
instituted by CFV and in July 1999 the disputes were settled and the litigation
dismissed. Pursuant to the settlement agreement, the Company regained our
distributorship rights for the State of California; agreed to pay CFV the sum of
$1,000,000 which has been paid; issue 250,000 shares of our common stock to CFV;
and CFV will receive $350 for each of the first 500 machines produced and $450
thereafter and $.25 for each pound of potato product sold by Tasty Fries.
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.
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COMPETITION
The technology in Tasty Fries' machine has been awarded U.S. patent
#5,537,916 issued June 23, 1996. Other attempts to bring a French fry vending
machine to market have not utilized the Company's patented technology. Tasty
Fries process of using dehydrated potato is the difference between us and the
competition. Most attempts use either a frozen or pre-cooked potato and are
heated by microwave or convection oven. Our patented process is unique and we
believe produces the best tasting product. 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
viewed as competitors or may become competitors in the future. Tasty Fries 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. Ore-Ida
has produced 500 machines of which approximately 100 are installed in the United
States and Europe. Vendotech, a European company, also utilizes a frozen, precut
French fry, which it cooks in oil. Vendotech has a marketing alliance with
McCain, a large Canadian potato producer. Vendotech has no readily available
information regarding placement or performance of their machines. TEGE uses a
dehydrated potato powder, which is formed into French fries, and cooked in oil.
TEGE installed one machine in a department store in Europe but subsequently
removed it due to technical difficulties. TEGE's current marketing strategy is
focused on four primary European markets. Ore-Ida, Vendotech and TEGE have had
substantially greater financial resources to obtain market share for their
products.
Management believes, although no assurances are given, that due to
current 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. We presently purchase potato product from two unrelated sources. We
currently have no contract (exclusive or otherwise) or licensing rights to
purchase the potato product from any supplier. At such time in the future as may
be warranted by the success of our business, we may elect to enter into the
production of our own proprietary potato product or enter into contract
manufacturing for the same. SEE "POTATO PRODUCT."
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PATENTS AND PROPRIETARY RIGHTS
The Machine's inventor, Edward C. Kelly, is Tasty Fries' President and
Chief Executive Officer and 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). The Israel
patent has been granted; the Company is awaiting examinations of the European
and Brazil applications; the Canada and Japan applications have been deferred,
the Company can not estimate when these patents will be granted.
The Company intends to seek patent, trademark and related legal
protection in the future where it deems the same to be beneficial. However,
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 our 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, 2000 and 1999, the Company
incurred $144,403 and $460,417, respectively, in costs and expenses relating to
the research and development of its machine.
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The Company could incur additional research and development costs over
the next year should a counter top model of our French fry vending machine be
introduced. No decision has been made regarding introduction of such a model.
Projected costs to design, develop and manufacture this model should not exceed
$300,000 as much of the technology can be transferred from the standard vending
machine.
PERSONNEL
As of January 31, 2000, the Company had a total of two full-time
employees. Additional employees are expected to be hired during the next 12
months if the Company's proposed plan of operation is successful and there is
sufficient cash flow from operations, if any, which remains constant to support
such additional expense. 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 $2,085 per month until May 31, 2000. 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.
On August 28, 1996, the Company, Edward C. Kelly and Premier Design,
Ltd. were added as defendants to a civil law suit 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 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
dismissal was reversed on appeal by the Federal Court and the case was remanded
to State Court. The plaintiffs' claim against Tasty Fries was severed. The
claims against Edward C. Kelly and Premier Design, Ltd. were dismissed. The
claim brought by Prize Frize asserts that the Company has usurped its trade
secrets by developing a French fry vending machine which utilizes the Basic
American Food potato product. The Company denies the allegations and is
vigorously defending the litigation. It is the opinion of the Company's counsel
that Prize Frizes' lawsuit lacks merit and that the Company will prevail.
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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.
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.
<TABLE>
<CAPTION>
High Bid Low Bid
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<S> <C> <C>
FISCAL 1998
First Quarter $ .95 $ .51
Second Quarter $ .85 $ .45
Third Quarter $1.30 $ .38
Fourth Quarter $ .59 $ .32
FISCAL 1999
First Quarter $ .87 $ .25
Second Quarter $ .78 $ .42
Third Quarter $ .84 $ .35
Fourth Quarter $ .73 $ .34
FISCAL 2000
February 1 through April 27 $ .73 $ .38
</TABLE>
(B) HOLDERS.
The approximate number of record holders of the Company's common stock
as of April 26, 2000 is 1,186.
(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. Tasty Fries intends to place its Machines in
locations within the greater Portsmouth, New Hampshire area.
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, 2000, the Company had approximately $10,703 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, 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
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<PAGE>
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 remaining
$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 930(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 was $1,600,000. The
2,400,000 shares of common stock in escrow were 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, 2000, 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 thereof.
12
<PAGE>
Subsequent to January 31, 2000, 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, 1999 & 2000
The Company had no revenues for the fiscal years ended January 31, 1999
and 2000. From fiscal 1998 to 1999, travel and entertainment expenses decreased
approximately 9% from approximately $57,656 in 1998 to approximately $52,434 in
1999 primarily due to moderate decrease in business related travel. Consulting
expenses increased from approximately $172,600 in fiscal 1998 to $1,737,432 in
fiscal 1999. The increase in consulting expenses was primarily due to the
Company's increased dependence on consultants to provide financial, business and
marketing expertise. Payroll and payroll taxes decreased approximately 31% from
approximately $573,814 in fiscal 1998 to approximately $395,700 in fiscal 1999.
The decrease payroll and payroll tax expense resulted primarily from the release
of personnel in 1999. Legal fees increased approximately 220% from approximately
$200,750 in fiscal 1999 to approximately $641,575 in fiscal 2000 due to the
defense of various lawsuits and additional filings with SEC in association with
registration statement. 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, 2000, 1999 and
1998, and related statements 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:
<TABLE>
<CAPTION>
Positions with
Name Age Company
---- --- -------
<S> <C> <C>
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
</TABLE>
*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 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.
14
<PAGE>
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 such Act or any Company
registered as an investment Company under the Investment Company Act of 1940,
except as disclosed herein.
15
<PAGE>
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES.
None.
(D) FAMILY RELATIONSHIPS.
None.
ITEM 10. EXECUTIVE COMPENSATION
(A) GENERAL
(B) SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATON (1)
----------------------
Fiscal Year
Name & Ended Restricted
Principal Position January 31, Salary Bonus Stock (2)
<S> <C> <C> <C> <C>
Edward C. Kelly 2000 $240,000
President, CEO 1999 $267,000 $1,031,250 (4)
& Chairman (3) 1998 $289,000 $0
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, 2000.
(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 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
16
<PAGE>
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 Granged 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.
None.
17
<PAGE>
(F) COMPENSATON 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, 2000, 1999, 1998, and 1997 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 26, 2000, 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 5%
650 Sentry Parkway, Suite One
Blue Bell, PA 19422 (1)
Lancaster Investment Corporation 2,200,000 7%
11 Waterfront Estates, Estates Drive
Lancaster, PA 19601 (2,3)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
<S> <C> <C>
L. Eric Whetstone 539,000 1%
11 Waterfront Estates, Estates Drive
Lancaster, PA 19601 (3,4)
Whetstone Ventures Corporation, Inc. 777,000 2%
11 Waterfront Estates, Estates Drive
Lancaster, PA 17602 (3)
</TABLE>
- ---------------------------------------------------
(1) 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 1,400,000 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 3,516,000 shares
currently owned by these three parties represent 11% 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 14%
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 26, 2000, the beneficial
common stock ownership of 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 5%
650 Sentry Parkway, Suite One
Blue Bell, PA 19422 (1)
Leonard J. Klarich 0 0
839 Claybrook Court
Knoxville, TN 37923 (2)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
<S> <C> <C>
Jurgen A. Wolf 0 0
1285 West Pender Street
Vancouver, B.C. Canada (3)
Ian D. Lambert 230,000 1%
c/o International Tasty Fries, Inc.
595 Howe Street, Suite 602
Vancouver, B.C. V6C 2T5 (4)
Kurt R. Ziemer 640,000 2%
599 Valley View Drive
New Holland, PA 17557 (5)
All Officers and Directors 2,438,650 7%
as a group (5 persons)
* less than 1%
</TABLE>
(1) 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 $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.
(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
20
<PAGE>
each non-employee director under the 1995 Stock Option Plan. 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,
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
past fiscal years. The balance due the Company at January 31, 2000 and 1999 was
$0.
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 past fiscal years. The balance due the Company at January 31,
2000 and 1999 was $0.
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 the services received in connection with such services
are comparable to those it could expect to receive from other attorneys.
21
<PAGE>
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, 2000, $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>
REPORTS ON FORM 8-K.
Forms 8-K dated May 19, 1999, June 17, 1999, July 20, 1999, August 11,
1999, October 14, 1999 and November 20, 1999 are hereby incorporated by
reference.
23
<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 29, 2000 By:
-----------------------------------
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.
________________________________ April 29, 2000
Edward C. Kelly, Chairman, CEO
President, Treasurer & Director
________________________________ April 29, 2000
Leonard J. Klarich, Vice President,
Secretary & Director
________________________________ April 29, 2000
Jurgen A. Wolf, Director
________________________________ April 29, 2000
Ian D. Lambert, Director
________________________________ April 29, 2000
Kurt N. Ziemer, Director
24
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
JANUARY 31, 2000, 1999 AND 1998
<PAGE>
TASTY FRIES, INC.
TABLE OF CONTENTS
JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report 3
Financial Statements:
Balance Sheets 4
Statements of Operations 5
Statements of Changes in Stockholder's Equity (Deficiency) 6
Statements of Cash Flows 7
Notes to Financial Statements 8-18
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Tasty Fries, Inc.
We have audited the accompanying balance sheet of Tasty Fries, Inc. (a
development stage company) as of January 31, 2000, and the related statements of
operations, stockholders' equity (deficiency), and cash flows for the year ended
January 31, 2000 and for the period from October 18, 1985 (inception) to January
31, 2000. 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 audit. The financial statements of Tasty Fries, Inc. (a
development stage company) as of January 31, 1999 and 1998 were audited by
Schiffman Hughes Brown, PC (whose practice became a part of Larson, Allen,
Weishair & Co., LLP effective January 1, 2000) whose report dated March 30, 1999
expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides 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, 2000, and the results of its operations and its cash flows for the year
ended January 31, 2000 and from October 18, 1985 (inception) to January 31,
2000, 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 a net capital
deficiency, which raises substantial doubt about its ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
LARSON, ALLEN, WEISHAIR & CO., LLP
Blue Bell, Pennsylvania
March 31, 2000
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
JANUARY 31, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash $ 10,703 $ 66,394
Prepaid expenses 123,313
------------ -----------
Total current assets 10,703 189,707
------------ -----------
Furniture and office equipment, net of accumulated
depreciation of $57,437 in 2000 and $45,400 in 1999 20,258 24,777
------------ -----------
Other assets:
Vending machines 195,000 195,000
Loan costs, net of accumulated amortization
of $107,026 in 1999 129,831
------------ -----------
195,000 324,831
------------ -----------
$ 225,961 $ 539,315
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 773,576 $ 1,070,751
Shareholder loan payable 900,000 --
------------ -----------
Total current liabilities 1,673,576 1,070,751
------------ -----------
Unearned revenue 320,000 261,000
------------ -----------
Commitments and contingencies
Stockholders' deficiency:
Common stock, $.001 par value; authorized
50,000,000 shares; issued and outstanding
27,719,011 shares at January 31, 2000 and
17,995,606 shares at January 31, 1999 27,719 17,996
Additional paid-in capital 17,347,811 13,426,963
Deficit accumulated in development stage (19,143,145) (14,237,395)
------------- -----------
(1,767,615) (792,436)
------------- -----------
$ 225,961 $ 539,315
============ ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
AND FOR THE PERIOD OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2000
<TABLE>
<CAPTION>
Cumulative
Since
Inception 2000 1999 1998
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 0 $ 0 $ 0 $ 0
------------ ----------- ----------- -----------
Costs and expenses:
Research, machine and product development 2,479,335 144,403 460,417 533,458
Selling, general and administrative 12,517,877 3,405,895 1,660,404 2,670,980
Reacquired distributorships 221,500 221,500
Litigation settlements 2,344,750 1,125,000 114,688
Non-recurring compensation charge 1,031,250 1,031,250
------------ ----------- ----------- -----------
18,594,712 4,896,798 2,120,821 4,350,376
------------ ----------- ----------- -----------
Net loss before other income (expense) (18,594,712) (4,896,798) (2,120,821) (4,350,376)
------------ ----------- ----------- -----------
Other income (expense):
Interest income 21,274 1,354 10,892
Forfeited distributor deposits 15,000
Interest expense (584,707) (8,952) (53,110) (459,104)
------------ ----------- ----------- -----------
(548,433) (8,952) (51,756) (448,212)
------------ ----------- ----------- -----------
Net loss $(19,143,145) $(4,905,750) $(2,172,577) $(4,798,588)
============ =========== =========== ===========
Net loss per share of common stock $(.23) $(.17) $(.78)
====== ===== =====
Weighted average shares outstanding 21,341,885 12,518,419 6,128,198
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD JANUARY 31, 1996 TO JANUARY 31, 2000
<TABLE>
<CAPTION>
Paid Total
Common in Retained Stockholder
Stock Capital Earnings Equity
----- ------- -------- ------
<S> <C> <C> <C> <C>
Balance, February 1, 1997 $ 4,700 $6,097,275 $(7,266,230) $(1,164,255)
Issuance of 1,500,000 shares for non-recurring compensation 1,500 1,029,750 1,031,250
Issuance of 167,083 shares of restricted stock 167 53,583 53,750
Issuance of 955,000 shares for services 955 1,239,045 1,240,000
Issuance of 43,750 shares for litigation settlement 44 54,644 54,688
Issuance of 700,000 shares for convertible notes 700 396,979 397,679
Issuance of 452,772 shares for repayment of notes payable 452 523,587 524,039
Issuance of 120,000 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)
-------- ------------ ------------ -----------
Balance, February 1, 1999 17,996 13,426,963 (14,237,395) (792,436)
Issuance of 3,789,000 shares 3,789 1,152,384 1,156,173
Issuance of 250,000 shares for litigation settlement 250 124,750 125,000
Issuance of 5,184,405 shares for service 5,184 2,394,214 2,399,398
Issuance of 500,000 shares for repurchase of distributorship 500 249,500 250,000
Net loss for year ended January 31, 2000 -- -- (4,905,750) (4,905,750)
-------- ------------ ------------ -----------
Balance, January 31, 2000 $ 27,719 $ 17,347,811 $(19,143,145) $(1,767,615)
======== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
AND FOR THE PERIOD OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2000
<TABLE>
<CAPTION>
Cumulative
Since
Inception 2000 1999 1998
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(19,143,145) $(4,905,750) $(2,172,577) $(4,798,588)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 294,293 141,869 90,756 37,596
Common stock issued for services 6,147,413 2,399,398 491,879 2,299,411
Common stock issued for litigation settlement 649,689 125,000 54,689
Common stock issued for interest on convertible notes 26,427 26,427
Common stock issued for repurchase of distributorships 250,000 250,000
Accrued interest on notes and convertible notes payable 398,577 398,577
Changes in assets and liabilities:
Other assets (195,000) 123,313 (248,313) 9,027
Accounts payable and accrued expenses 773,577 (297,175) 437,709 (249,035)
Unearned revenue 445,000 59,000 10,000
------------ ----------- ------------ -----------
Net cash used by operating activities (10,353,169) (2,104,345) (1,364,119) (2,248,323)
------------ ----------- ------------ -----------
Cash flows from investing activities:
Purchase of furniture and office equipment (77,695) (7,519) (22,827)
Loan costs (236,856) (236,856)
------------ ----------- -----------
Net cash used by investing activities (314,551) (7,519) (259,683)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from convertible notes payable 2,600,000 2,600,000
Issuance of common stock 6,905,173 1,156,173 1,020,000 53,750
Loan receivable, officers 30,377 69,623
Note payable, current 1,093,250 900,000 133,250
Officer/director note 80,000 30,000
------------ ----------- ----------- -----------
Net cash provided by financing activities 10,678,423 2,056,173 1,050,377 2,886,623
------------ ----------- ----------- -----------
Net increase (decrease) in cash 10,703 (55,691) (313,742) 378,617
Cash, beginning balance 66,394 380,136 1,519
------------ ----------- ------------ -----------
Cash, ending balance $ 10,703 $ 10,703 $ 66,394 $ 380,136
============ =========== ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 54,803 $ 8,952 $ 10,500
============ =========== ===========
Supplemental disclosures of non-cash financing activities:
Issuance of common stock for services $ 5,877,413 $ 2,399,398 $ 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 $ 475,000 $ 250,000 $ 125,000
============ =========== ==============
Issuance of common stock for
litigation settlement $ 649,689 $ 125,000 $ 54,689
============ =========== ===========
Accrued interest on notes payable $ 398,577 $ 398,577
============ ===========
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000, 1999 AND 1998
Note 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 that will cook and dispense french fries. The Company has
incurred research and development costs from inception to January 31,
2000 totaling $2,479,335. The Company has received ten pre-production
prototype machines primarily 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 approximately 70% complete and included in
vending machines at $125,000. The difference between the anticipated
manufacturing price per machine ($7,000) 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.
Note 2 Significant accounting policies:
Furniture and office equipment:
Furniture and office 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,
2000, 1999 and 1998 was $12,037, $11,805 and $9,522, respectively.
Intangibles:
Intangibles, consisting of loan costs, were amortized on a
straight-line basis over three years.
8
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 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.
Impairment of long-lived assets:
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"), assets are generally evaluated
on a market-by-market basis in making a determination as to whether
such assets are impaired. At each year-end, the Company reviews its
long-lived assets for impairment based on estimated future
nondiscounted cash flows attributable to the assets. In the event such
cash flows are not expected to be sufficient to recover the recorded
value of the assets, the assets are written down to their estimated
fair values.
Income taxes:
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of
balance sheet items for financial and income tax reporting. There is no
difference between the basis for financial and income tax reporting,
thus no deferred tax asset or liability was recorded.
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 non-current liability.
9
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 2 Significant accounting policies (continued):
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 conversion of convertible securities. The
Company incurred losses from operations in 2000, 1999 and 1998;
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.
Recent accounting pronouncement:
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133, which is effective,
as amended, for all quarters in fiscal years beginning after June 15,
2000, establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those
instruments, as well as other hedging activities. As the Company does
not currently engage in derivative or hedging activities, the adoption
of this standard is not expected to have a significant impact on the
Company's financial statements.
Note 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 preproduction machines. In the year ended January
31, 1995, the Company charged $176,600 to research and development
expense. Balance as of January 31, 2000 is $70,000.
10
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 3 Vending machines (continued):
During the year ended January 31, 2000 and 1999, the Company paid
various third parties $82,907 and $264,782, respectively, for the
production of the first 25 commercial machines. Of the amount paid, the
Company charged $82,907 and $139,782, respectively, to research and
development expense. Balance as of January 31, 2000 and 1999 is
$125,000.
Note 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, 1998 was $24,747 and was fully repaid the
following year.
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, 1998 was $5,630. This loan
was repaid in full during the following year.
Note 5 Prepaid expenses:
Prepaid expenses consisted of payments for legal services not rendered
as of January 31, 1999.
Note 6 Notes payable:
A $50,000 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 noteholder options for 20,000
shares of its common stock on December 22, 1994, with an exercise price
of $.35 per share in consideration for extending the note indefinitely.
The Company issued 9,000 and 4,500 shares of its common stock on
December 22, 1994 and May 4, 1995, respectively, to the noteholder in
addition to paying $30,600 on May 5, 1995. 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 9,000 and 4,500 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 shares of its
common stock in satisfaction of this debt, including interest. The
balance at January 31, 2000, 1999 and 1998 was $0.
In November, 1996, Mr. McLaughlin, 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.
11
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 6 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). These loans were payable on
demand and accrued interest at 10% per annum. The principal and
interest due was repaid to these individuals in the form of restricted
stock in October 1997. The total number of shares issued was 482,044.
In October, 1999, the Company received $900,000 in proceeds from a loan
made to the Company by a shareholder. The loan bears an interest rate
of 18% per annum and is due on June 30, 2000. Accrued interest on this
loan as of January 31, 2000 was $53,550.
Note 7 Convertible notes payable:
In June 1997, the Company received $1,000,000 in exchange for notes
convertible into the Company's common stock. These convertible notes
bear interest at the rate of 7% per annum and are due May 14, 2000. The
holders of these notes were entitled, at their option, to convert any
or all of the principal into the Company's common stock at a conversion
price for each share of common stock equal to 70% of the average
closing bid price of common stock for the five business days
immediately preceding the date of receipt of notice of conversion.
Pursuant to the terms of the financing, the Company issued 1,142,857
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 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 is $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 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. These convertible notes bear interest at the rate of 6% per
annum and are due May 14, 2000. The holders of these notes were
entitled, at their option, to convert any or all of the principal into
the Company's common stock at a conversion price for each share of
common stock equal to 70% of the average closing bid price of common
stock for the five business days immediately preceding the date of
receipt of notice of conversion. 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. As of
January 31, 1998, the aggregate outstanding principal balance of the
convertible notes is $1,600,000.
12
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 7 Convertible notes payable (continued):
The 2,400,000 shares of common stock in escrow were 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
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.
Note 8 Unearned revenue:
Unearned revenue represents monies received for the distribution rights
of the vending machines, which the Company is still in the process of
developing and testing, and 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
deposit on the machines in production.
During the year ended January 31, 2000, the Company issued 500,000
shares of common stock to reacquire the existing distributorships
valued at $41,000. The Company received $100,000 as a deposit on the
machines in production. At January 31, 2000, 1999 and 1998, amounts
related to distribution rights were $210,000, $251,000 and $376,000,
respectively. As of January 31, 2000 and 1999, deposits on machines
totaled $110,000 and $10,000, respectively.
Note 9 Commitments and contingencies:
During the years ended January 31, 2000, 1999 and 1998, the Company
paid $42,946, $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, 2000.
Note 10 Issuance of common stock:
The Company issued an aggregate of 9,723,405 shares during the year
ended January 31, 2000. 3,789,000 shares were sold in private
placements by the Company, 5,184,405 shares were issued in payment of
services, 250,000 shares were issued for litigation settlement and
500,000 shares were issued for repurchase of distributorships.
13
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 10 Issuance of common stock (continued):
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 re-acquisition 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 the President
as a one-time, non-recurring 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.
The total shares issued during the year ended January 31, 1997 were
1,580,000 shares; 1,455,000 shares were sold in private placements by
the Company and 125,000 shares were issued in payment for consulting
and legal services.
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.
Note 11 Litigation:
CALIFORNIA FOOD AND VENDING INC. LITIGATION
On July 12, 1999, the Company and California Food and Vending Inc.
(CFV) settled the case. Tasty Fries regained its State of California
distributorship which was owned by CFV. CFV gave up its rights to share
equally in the first $4,000,000 of international and domestic
distributorship fees to be paid to Tasty Fries when it commences the
commercial delivery of its machines and twenty five percent of all such
fees paid to Tasty Fries after the first $4,000,000. CFV will receive a
royalty of $350 for each of the first 500 machines produced and $450
thereafter. CFV will also receive $.25 for each pound of potato product
sold by Tasty Fries. CFV received 250,000 shares of the Company's
common stock valued at $125,000 and $1,000,000 cash.
14
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 11 Litigation (continued):
CALIFORNIA FOOD AND VENDING LITIGATION (continued)
On August 17, 1998, CFV filed a multi-count law suit in the United
States District Court for the Central District of California alleging
that Tasty Fries and its Chief Executive Officer, Edward C. Kelly, had
not complied with the parties prior settlement agreement by failing to
sell distributorships, misrepresenting the Company's financial
condition at the time of the settlement and completing a reverse split
of the Company's stock after the settlement, reducing the number of
CFV's options to purchase the Company's stock and increasing the cost
of the options. Tasty Fries countersued California Food & Vending
charging that it had breached its fiduciary responsibility as Tasty
Fries' distributor by failing to market and promote the TFRY French fry
vending machine and by unsuccessfully attempting to introduce its own
machine.
In February, 1995, the Company reached a settlement agreement with 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, however,
the Company is unable to estimate the amount of this payable since it
will be based on future Company sales. These royalties will be expensed
by the Company when incurred.
In connection with the foregoing, an award was entered in favor of
cross-claimant, which requires, among other things, that the Company
issue 1,000,000 shares of unrestricted common stock to the
cross-claimant. These 1,000,000 shares of common stock were accounted
for in the financial statements at market value at the time of the
award (October 25, 1994). The shares were not issued by the Company
until June 1996. On March 4, 1997, the Company agreed to pay the
cross-claimant $60,000 and issue 43,750 shares of common stock at fair
value of $54,688 in settlement of pending litigation.
15
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 11 Litigation (continued):
PRIZE FRIZE LITIGATION
On August 28, 1996, the Company, the President of the Company and
Premier Design, Ltd., were added as defendants to a civil law suit 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 its President; the case was
dismissed on June 2, 1997. The dismissal was reversed on appeal by the
Federal Court and the case was remanded to State Court. The
plaintiffs' claim against Tasty Fries was severed. The claims against
the President of the Company and Premier Design, Ltd. were dismissed.
The claim brought by Prize Frize asserts that the Company has usurped
its trade secrets by developing a French fry vending machine which
utilizes the basic American food potato product. The Company denies the
allegations and is vigorously defending the litigation. It is the
opinion of the Company's counsel that Prize Frize's lawsuit lacks merit
and that the Company will prevail.
Note 12 Incentive stock option plan:
As of September 18, 1995, the Company established an incentive stock
option plan (the Plan) and presently has reserved 1,500,000 shares of
the Company's common stock for issuance under the Plan. Options granted
pursuant to the Plan at January 31, 1997 were 12,926, and those options
were granted to certain non-employee directors of the Company. The
exercise price was $2.45 and vested immediately. In 1999 and 1998 no
options were granted All issuances were granted at not less than fair
market value of the Company's common stock at time of grant. As of
January 31, 2000 and 1999, no options have been exercised.
Transactions in the Plan since inception are as follows:
<TABLE>
<CAPTION>
Exercise Price Weighted Average
Granted Vested Per Vested Exercise Price Per
Shares Shares Common Stock Vested Common Share
------ ------ ------------ -------------------
<S> <C> <C> <C> <C>
Balance, January 31, 1996 0 0
Activity during the year
ended January 31, 1997 12,926 12,926 $2.45 $2.45
------ ------
Balance, January 31, 1997,
1998, 1999, 2000 12,926 12,926 $2.45
====== ======
</TABLE>
16
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 12 Incentive stock option plan (continued):
The Company accounts for stock-based compensation in accordance with
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION which permits the
use of the intrinsic value method described in APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and requires the Company to
disclose the pro forma effects of accounting for stock-based
compensation using the fair value method as described in the optional
accounting requirements of SFAS No. 123. As permitted by SFAS No. 123,
the Company will continue to account for stock-based compensation under
APB Opinion No. 25, under which the Company has recognized no
compensation expense.
Had compensation cost for the Company's stock option plan been
determined based on the fair value of the Company's common stock at the
dates of awards under the fair value method of SFAS No. 123, the
Company's net income and net income per common share would have been
reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $(4,905,750) $(2,172,577) $(4,798,588)
Pro forma (4,905,750) (2,172,577) $(4,798,588)
Net loss per common share:
As reported (.23) (.17) (.78)
Pro forma (.23) (.17) (.78)
</TABLE>
Significant assumptions used to calculate the above fair value of the
awards are as follows:
<TABLE>
<S> <C>
Risk free interest rates of return 5.00%
Expected option life 60 months
Volatility 20%
Expected dividends $0
</TABLE>
Note 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, 2000, 1999, and 1998,
respectively.
Note 14 Options and warrants issued and outstanding:
As of January 31, 2000, 1999 and 1998, the Company had 5,792,052 and
4,292,052 warrants and options, respectively, to purchase common stock
outstanding. The warrants and options are exercisable at share prices
between $.50 and $3.50 per share and expire at various dates between
July, 2000 and December, 2006.
17
<PAGE>
TASTY FRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
Note 15 Income taxes:
The Company has $18,002,847 in net operating loss carryovers, which can
be used to offset future taxable income. The net operating loss
carryforwards expire through 2015.
The components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net operating loss carryforwards $6,300,900 $4,620,000 $3,860,600
Valuation allowance (6,300,900) (4,620,000) (3,860,600)
---------- ---------- ----------
Deferred tax asset $ 0 $ 0 $ 0
=========== ========== ==========
</TABLE>
Note 16 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, 2000, $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 have not been received as of the
report date.
Note 17 Non-recurring compensation charge:
The restricted share issuance of 1,500,000 shares was negotiated
between the Company's President, individually, the Company and a
third-party investor as a component of the April 1996 private placement
investment. The transaction received full approval from the board of
directors. The parties in September 1997 agreed to such issuance in
light of the amount and nature of service performed by the President on
the Company's behalf from the time of his original involvement, as an
outside third-party, to the approximate time of the financing's
completion.
Note 18 Directors' fees:
The Company has accrued unpaid Board of Directors' fees for the years
ended January 31, 1997 through January 31, 2000. Interest has not been
accrued on the unpaid balance. At January 31, 2000 and 1999, the
accrued directors' fees were $210,000 and $160,000, respectively.
18
<PAGE>
ACCOUNTANT'S CONSENT
To the Stockholders and Board of Directors of
Tasty Fries, Inc.
We consent to the use of our Independent Auditor's Report dated March 31, 2000
and accompanying financial statements of Tasty Fries, Inc. for the year ended
January 31, 2000. The Report will be included in the Form 10-KSB/A which is to
be filed with the Securities and Exchange Commission for Tasty Fries, Inc.
Larson, Allen, Weishair & Co., LLP
Certified Public Accountants
Blue Bell, Pennsylvania
May 16, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 10,703
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,703
<PP&E> 77,695
<DEPRECIATION> 57,437
<TOTAL-ASSETS> 225,961
<CURRENT-LIABILITIES> 1,673,576
<BONDS> 0
0
0
<COMMON> 27,719
<OTHER-SE> (1,795,334)
<TOTAL-LIABILITY-AND-EQUITY> 225,961
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (4,896,798)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,952
<INCOME-PRETAX> (4,905,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,905,750)
<EPS-BASIC> (.23)
<EPS-DILUTED> 0
</TABLE>
