U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition Report Under Section 13 or 15(d) of
the Exchange Act
For the transition period from ____________ to ____________.
Commission file number 0-20203 and 1-11386
INTERNATIONAL FAST FOOD CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 65-0302338
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
------------------------------------------------
(Address of Principal Executive Office)
(305) 531-5800
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 [ ]
The number of shares outstanding of the issuer's common stock, par value $.01
per share as of November 7, 1996 was 8,310,856.
Traditional Small Business Disclosure Format: Yes [x] No [ ]
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM. 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and December 31,
1995 3-4
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 1996 and 1995 5
Consolidated Statements of
Shareholders' Equity for the Nine
Months Ended September 30, 1996 6
Consolidated Statements of Cash Flows
for the Nine Months Ended September
30, 1996 and 1995 7-8
Notes to Consolidated Financial
Statements 9-17
ITEM. 2 Management's Discussion and Analysis
or Plan of Operation 18-26
PART II. OTHER INFORMATION
- ---------------------------
SIGNATURES
2
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
------
September 30, December 31,
1996 1995
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 213,303 $ 253,510
Restricted cash 500,000 500,000
Receivables 36,654 50,866
Inventories 304,425 384,434
Advances to affiliate 195,474 49,087
Prepaid expenses 45,300 38,989
------------ ------------
Total Current Assets 1,295,156 1,276,886
------------ ------------
Furniture, equipment and
leasehold improvements, net 5,855,304 6,625,941
Deferred debenture issuance costs,
net of accumulated amortization
of $115,841 and $90,899,
respectively 316,484 341,426
Other assets, net 380,172 364,701
Burger King Development Rights,
net of accumulated amortization
of $286,042 and $229,462,
respectively 91,156 147,736
------------ ------------
Total Assets $ 7,938,272 $ 8,756,690
============ ============
See Accompanying Notes
3
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1996 1995
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 561,629 $ 354,823
Accrued interest payable 78,545 21,580
Other accrued expenses 313,840 473,127
Notes payable 69,307 -
Payable to affiliates 135,179 -
Bank credit facilities 1,649,401 1,604,248
Dividends payable on Preferred Stock 132,858 -
Non-interest bearing obligation
payable to minority shareholder
of IFF Polska 500,000 500,000
------------ ------------
Total Current Liabilities 3,440,759 2,953,778
------------ ------------
9% SUBORDINATED CONVERTIBLE
DEBENTURES, DUE 2007 2,756,000 2,756,000
------------ ------------
Total Liabilities 6,196,759 5,709,778
------------ ------------
MINORITY INTEREST IN NET ASSETS
OF CONSOLIDATED SUBSIDIARY 523,489 689,681
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value,
(liquidation preference of $3,859,000
and $5,003,000), 1,000,000 shares
authorized; 38,590 and 50,030
shares issued and outstanding,
respectively 386 500
Common Stock, $.01 par value,
100,000,000 shares authorized;
8,310,856 and 3,759,564 shares
issued and outstanding, respectively 83,108 37,595
Additional paid-in capital 14,343,477 14,046,571
Accumulated deficit (13,208,947) (11,727,435)
------------ ------------
Total Shareholders' Equity 1,218,024 2,357,231
------------ ------------
Total Liabilities and
Shareholders' Equity $ 7,938,272 $ 8,756,690
============ ============
See Accompanying Notes
4
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $ 1,328,937 $ 1,139,784 $ 4,049,772 $ 3,577,878
------------ ------------ ------------ ------------
RESTAURANT OPERATING EXPENSES:
Food and Packaging 529,358 482,406 1,692,546 1,640,454
Payroll and Related Costs 210,361 177,635 594,230 549,296
Occupancy and Other Operating
Expenses 372,460 498,955 1,113,972 1,067,857
Depreciation and Amortization 208,625 184,242 684,617 632,906
------------ ------------ ------------ ------------
Total Restaurant Operating
Expenses 1,320,804 1,343,238 4,085,365 3,890,513
------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE
EXPENSES 349,949 435,774 1,119,086 1,432,086
------------ ------------ ------------ ------------
OPERATING LOSS ( 341,816) ( 639,228) ( 1,154,679) ( 1,744,721)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest and other income ( 13,936) 12,794 89,776 58,303
Interest expense, including
amortization of debenture
issuance costs ( 115,685) ( 160,008) ( 344,227) ( 456,899)
Other expense, net - 41,720 - ( 13,743)
Gain (loss) from foreign
currency translation ( 11,618) 3,047 ( 105,716) 47,266
------------ ------------ ------------ ------------
Total other income
(expenses) ( 141,239) ( 102,447) ( 360,167) ( 365,073)
------------ ------------ ------------ ------------
Loss before minority interest ( 483,055) ( 741,675) ( 1,514,846) ( 2,109,794)
Minority interest in losses of
consolidated subsidiary 48,531 73,742 166,192 249,015
------------ ------------ ------------ ------------
Loss before extraordinary gain ( 409,524) ( 667,933) ( 1,348,654) ( 1,860,779)
Extraordinary gain - - - 1,106,642
------------ ------------ ------------ ------------
NET INCOME (LOSS) $( 434,524) $( 667,933) $( 1,348,654) $( 754,137)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Loss before extraordinary
gain $( .06) $( .18) $( .27) $( .52)
Extraordinary Gain - - .31
------------ ------------ ------------ ------------
NET INCOME (LOSS) $( .06) $( .18) $( .27) $( .21)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 6,776,544 3,746,453 5,053,117 3,575,955
============ ============ ============ ============
</TABLE>
See Accompanying Notes
5
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
---------------------- ---------------------- Paid In Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- --------- --------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 3,759,564 $ 37,595 50,030 $ 500 $14,046,571 $(11,727,435) $2,357,231
Conversion of preferred stock 381,292 3,813 ( 11,440) (114) ( 3,699) - -
Sale of common stock for cash 3,550,000 35,500 - - 209,500 - 245,000
Common stock issued in exchange
for professional services 620,000 6,200 - - 81,105 - 87,305
Sale of warrants for cash - - - - 10,000 - 10,000
Net loss for the period - - - - - ( 1,348,654) (1,348,654)
Preferred dividends - - - - - ( 132,858) ( 132,858)
--------- --------- --------- ---------- ----------- ------------ ----------
Balances, September 30, 1996 8,310,856 $ 83,108 38,590 $ 386 $14,343,477 $(13,208,947) $1,218,024
========= ========= ========= ========== =========== ============ ==========
</TABLE>
See Accompanying Notes
6
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
-------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income $( 1,348,654) $( 754,137)
Adjustment to reconcile net
income(loss) to net cash
used in operating activities:
Amortization and depreciation 776,174 790,238
Extraordinary gain on the
debenture exchange for stock - ( 1,106,642)
Minority interest in losses of
subsidiary ( 166,192) ( 249,015)
Changes in operating assets and
liabilities:
Receivables 14,212 229,634
Accrued interest receivable - 3,990
Inventories 80,009 39,043
Prepaid expenses ( 6,311) ( 37,012)
Accounts payable and
accrued expenses 191,789 ( 398,580)
------------ ------------
Net cash used in operating
activities ( 458,973) ( 1,482,481)
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments for furniture, equipment
and leasehold improvements - ( 134,371)
Payments for other assets ( 53,794) ( 38,402)
Disposition of furniture and equipment 114,308 -
------------ ------------
Net cash provided by (used in)
investing activities 60,514 ( 172,773)
------------ ------------
See Accompanying Notes
7
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(unaudited)
Nine Months Ended
September 30,
-------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Sale of Common Shares for cash 245,000 -
Sale of Options for cash 10,000 -
Advances from (to) affiliate, net 58,099 ( 56,117)
Repayments of bank credit
facilities ( 294,248) ( 252,812)
Borrowings under bank credit
facilities 339,401 -
------------ ------------
Net cash provided by (used in)
financing activities 358,252 ( 308,929)
------------ ------------
DECREASE IN CASH AND CASH
EQUIVALENTS ( 40,207) ( 1,964,183)
BEGINNING CASH AND CASH
EQUIVALENTS 253,510 2,600,696
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 213,303 $ 636,513
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 262,320 $ 346,527
============ ============
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING
ACTIVITIES:
During the nine months ended September 30, 1996, 11,440 shares of preferred
stock were converted into 381,292 shares of Common Stock.
In September 1996, the Company paid $87,305 of legal and professional fees by
issuance of 620,000 shares of Common Stock.
See Accompanying Notes
8
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
International Fast Food Corporation (the "Company" or "IFFC") was
organized for the purpose of developing and operating franchised Burger King
restaurants in the Republic of Poland ("Poland"). A then major shareholder of
the Company, Capital Brands, Inc. ("CBI") entered into a development agreement
(the "Development Agreement") with Burger King Corporation ("BKC") and assigned
all its rights and obligations under the Development Agreement to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - The accompanying financial statements include the
accounts of the Company and its majority-owned (85%) Polish subsidiary,
International Fast Food Polska ("IFF Polska" or "IFFP"), a limited liability
corporation, and three wholly-owned Polish limited liability corporations. All
significant intercompany transactions and balances have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
The value of the zloty is pegged pursuant to a system based on a basket of
currencies, as well as all other economic and political factors that effect the
value of currencies generally. The U.S. dollar is considered to be the
functional currency of IFF Polska. The only currency that may be used in Poland
is the zloty. As of January 1, 1995, the National Bank of Poland introduced a
new currency unit which is named a "zloty" (a "new zloty"). New zlotys are
equivalent to 10,000 old zlotys ("old zlotys"). Old zlotys will remain legal
tender until December 31, 1996, after which date they will only be exchangeable
at certain banks. All references in this document to zlotys are to old zlotys.
At September 30, 1996, the exchange rate was 28,010 old zlotys per dollar.
Monetary assets and liabilities are translated from the local currency, the
"zloty", to U.S. dollars at the period end exchange rate. Non-monetary assets,
liabilities, and related expenses, primarily furniture, equipment, leasehold
improvements and related depreciation and amortization, are translated using
historical exchange rates. Income and expense accounts, excluding depreciation
and amortization, are translated at an annual weighted average exchange rate.
The accompanying consolidated financial statements as of September 30,
1996 and 1995 are unaudited. The consolidated Balance sheet as of December 31,
1995, was derived from the December 31, 1995 audited balance sheet. These
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principals have been condensed or
9
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
omitted pursuant to such rules and regulations. The Company believes it has made
sufficient disclosures such that the information presented is not misleading. In
the opinion of management, the financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to state fairly the
financial position and results of operations as of and for the periods
indicated.
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 1995, included in the Company's Form 10-KSB. Results for the nine
month period ended September 30, 1996, are not necessarily indicative of the
results to be achieved for the year ending December 31, 1996.
GOING CONCERN - The report of the Company's independant accountants on
their audit of the Company's December 31, 1995 consolidated financial statements
contained uncertainties relating to the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
FINANCIAL ACCOUNTING STANDARDS NO. 121 (FAS NO. 121) - In March 1995, the
FASB issued FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of". This statement, which is effective for
the Company's financial statements for its 1996 fiscal year, requires that long
lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the estimated
undiscounted cash flows that are expected to result from the use of the asset
are less than the carrying amount of the asset, an impairment loss is recorded
equal to the excess of the carrying amount over the fair value of the assets.
The Company will review for impairment of its long-lived assets during the year
ending December 31, 1996, using the methodology prescribed by FAS No. 121.
3. BANK CREDIT FACILITIES PAYABLE:
Amounts outstanding under bank credit facilities at September 30, 1996,
consist of the following:
Amerbank in Poland, S.A.
overdraft credit line, variable
rate approximately equal to prime,
payable in full on October 30, 1996. $ 39,401
Amerbank revolving credit facility, 12%
interest, interest payable quarterly,
payable in full on September 30, 1997. 310,000
10
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. BANK CREDIT FACILITIES PAYABLE, Continued:
Amerbank, IFFP line of credit of $300,000
payable in full on or before
February 1, 1997, interest payable
monthly at Amerbank prime, guaranteed
by IFFC. 300,000
Bank Handlowy Warszawie, S.A., IFFP
credit facility of $1,000,000 payable in
full on or before December 16, 1996,
LIBOR plus 3.875% interest, collateralized
by amounts on deposit with Bank Handlowy,
unconditional guarantee of IFFC, fixed
assets of IFFP of $1,250,000 and an
irrevocable standby letter of credit
in the amount of $500,000 issued by the
Credit Suisse Miami Agency 1,000.000
-----------
1,649,401
Less: Current Maturities 1,649,401
-----------
Total Long Term Portion $ -
===========
On April 12, 1996, the Company received an extension of the maturity date
of the overdraft credit line until October 30, 1996. On October 24, 1996, a
formal request was made to AmerBank asking for an extension of the maturity date
to April 30, 1997. As of November 7, 1996, AmerBank has not formally granted the
requested extension. No assurance can be given that AmerBank will grant the
requested extension or otherwise modify the terms of the credit facility in a
manner that would be acceptable to IFFP. As of November 7, 1996, the outstanding
balance on the credit facility was $27,070.
On November 7, 1996 the Company modified the payment terms of the
revolving credit facility whereby principal payments of $100,000 are due on
March 31, 1997 and June 30, 1997 with a final payment of $110,000 on September
30, 1997.
IFFP's $1,000,000 credit facility with Bank Handlowy matures on December
16, 1996. On October 29, 1996, IFFP formally requested an extension of the
maturity date of the facility. No assurance can be given that Bank Handlowy will
grant the requested extension or otherwise modify the terms of the credit
facility in a manner that would be acceptable to IFFP.
11
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. SHAREHOLDERS' EQUITY:
The Company's stock option plan provides for the granting of options to
qualified employees and directors of the Company. Stock option activity is shown
below at September 30, 1996:
1996
Outstanding at beginning of year 282,000
Granted -
Exercised -
Expired -
-------
Outstanding at end of period 282,000
=======
Exercisable at end of period 246,000
=======
Price range of options outstanding at end
of period $1.375 - $6.4375
================
Available for grant at end of period 368,000
=======
At September 30, 1996, IFFC had reserved the following shares of Common
Stock for issuance:
Stock option plan 650,000
Underwriter warrants, exercisable
at $6.50 per share through
May 31, 1997 130,000
Warrants issued in connection with
1994 exchange offer, exercisable at
$7.00 per share through August 1, 1999 290,800
Warrants to purchase $1,000,000
principal amount of debentures
convertible into Common Stock at a
conversion price of $8.50 per share
through December 16, 1997 117,647
Convertible Debentures convertible
into Common Stock at a conversion price
of $8.50 per share 324,235
Preferred Stock convertible into Common
Stock at a conversion price of $3.00
per share 1,286,208
---------
Total reserved shares 2,798,890
=========
12
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In May, 1996, IFFC sold 2,200,000 shares of Common Stock to its Chairman
of the Board, Chief Executive Officer and President for $110,000 cash and on
September 12, 1996 sold 1,350,000 shares of Common Stock to seven private
investors for $135,000 cash. In September 1996 IFFC issued 370,000 shares of
Common Stock in payment of $62,305 of legal fees and expense and 250,000 shares
of Common Stock in payment of $25,000 of professional fees.
5. CONVERTIBLE SUBORDINATED DEBENTURES:
The Convertible Subordinated Debentures (the "Debentures") mature in 2007
and provide for the payment of interest at 9% semi-annually until maturity.
On November 7, 1994, the Company initiated an Exchange Offer whereby each
$1,000 in principal amount of the Debentures validly tendered, will be exchanged
for ten shares of the Company's Series A 6% Convertible Preferred Stock (the
"Series A Convertible Preferred Stock"). The Series A Convertible Preferred
Stock (i) has a liquidation preference value of $100 per share, (ii) is
convertible into shares of the Company's Common Stock at a conversion price of
$3.00 per share, and (iii) is entitled to receive dividends, payable
semi-annually on each June 15 and December 15, at the rate of $6.00 per annum,
which dividends may, at the option of the Company, be paid in cash, through the
issuance of Common Stock or a combination of cash and Common Stock and (iv) may
be redeemed by the Company under certain circumstances. The Exchange Offer
expired on January 13, 1995, and resulted in $5,636,000 of the $8,392,000 in
Debentures then outstanding being tendered and accepted by the Company for
exchange.
The Company calculated the fair value of the 56,380 shares of preferred
stock to aggregate $3,757,590, which represents the value of the aggregate
number of common shares that could be obtained through a conversion of the
preferred stock applied to the per share market value of the Company's common
stock on January 13, 1995.
The Company recognized an extraordinary gain on the exchange which is
calculated as follows:
Debentures tendered $ 5,636,000
Value assigned to preferred stock 3,757,590
Reduction of unamortized debenture
issuance costs related to
debentures tendered ( 771,768)
-----------
Extraordinary gain $ 1,106,642
===========
6. LITIGATION:
BKC LITIGATION - On March 17, 1995, IFFC and IFFP (collectively, the "IFFC
Affiliates"), filed suit against BKC in the Eleventh Judicial Circuit Court of
the State of Florida. In their amended complaint, the IFFC Affiliates alleged,
among other things, that BKC breached certain of its express and implied
obligations under the BKC Development Agreement and the eight existing franchise
13
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. LITIGATION, Continued:
agreements (the "Franchise Agreements") pertaining to IFFP's eight Burger King
restaurants. The IFFC Affiliates further alleged that in connection with BKC's
sale of certain of its rights pursuant to the BKC Development Agreement and the
Franchise Agreements, BKC failed to timely deliver to the IFFC Affiliates a
complete and accurate franchise offering circular in accordance with rules
promulgated by the Federal Trade Commission (the "FTC Count"). The IFFC
affiliates also alleged that BKC committed certain acts which constitute fraud
and/or deceptive and unfair business practices. The IFFC Affiliates have asked
the court to, among other things, award them compensatory damages of not less
that $15,000,000 punitive damages and certain costs and expenses.
On August 21, 1995, BKC filed an answer which asserts nineteen affirmative
defenses and three counterclaims. Subsequently BKC voluntarily dismissed its
counterclaims and the parties agreed that to the extent that IFFC may owe money
to BKC for royalties, any such amount will be deducted from any judgment in
favor of IFFC.
The IFFC Affiliates' and BKC's efforts at court ordered mediation and
voluntary settlement discussions have not been successful. The IFFC Affiliates'
five count suit has not survived all of BKC's motions to dismiss. On February
14, 1996, the Eleventh Judicial Circuit Court granted BKC's motion for summary
judgement with respect to the FTC Count. The Eleventh Judicial Circuit Courts'
decision was based upon its belief that, as a matter of law, such a count could
not be maintained by "sophisticated business entities". The IFFC Affiliates
believe the court's decision was made in error and if their claims are not
satisfactorily addressed at the conclusion of the trial the IFFC Affiliates
intend to appeal the court's decision. The trial is scheduled to commence on
January 21, 1997.
IFFC cannot reasonable estimate how long it will take or the amount of
money it will need to expend in order to resolve the BKC Litigation. Even if
IFFC knew BKC desired to settle the BKC Litigation, IFFC could not reasonably
estimate the structure of a proposed settlement. Even if IFFC prevails on
certain of the issues disputed in the BKC Litigation, there can be no assurance
as to the remedies granted by the courts. Termination of the BKC Development
Agreement and/or Franchise Agreements for any reason could have a material
adverse effect on the Company.
Under the BKC Development Agreement, IFFC was required to have ten
restaurants open by September 24, 1995. Given that IFFC operates eight
restaurants, IFFC is in technical default under the BKC Development Agreement.
By letter dated June 30, 1995, BKC notified IFFC that, at that time, BKC would
not elect to declare IFFC to be in default under the BKC Development Agreement.
BKC further stated that such notice was not a waiver of its legal rights under
the BKC Development Agreement to, in the future, declare IFFC's failure to
develop the requisite number of BKC Restaurants an act of default.
The Agreement to Assign Litigation Proceeds - In order to secure
additional funds to finance the BKC Litigation, as of January 25, 1996, the IFFC
14
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Affiliates entered into an Agreement to Assign Litigation Proceeds (the "Funding
Agreement") with Litigation Funding, Inc., a Florida Corporation ("Funding").
Mitchell Rubinson, the Chairman of the Board, Chief Executive Officer and
President of IFFC is also the Chairman of the Board, Chief Executive Officer and
President and the principal shareholder of Funding.
Pursuant to the Funding Agreement, Funding agreed to pay on behalf of IFFC
and/or IFFP up to $500,001 (the "Amount") for all expenses (including attorneys'
fees, court costs and other related expenses, but not judgements or amounts paid
in settlement) actually incurred by or on behalf of IFFC and/or IFFP in
connection with investigating, defending, prosecuting, settling or appealing the
BKC Litigation and any and all claims or counterclaims of BKC against IFFC
and/or IFFP (collectively, the "BKC Matter"). Funding has paid all amounts it
has been requested to pay pursuant to the Funding Agreement. On July 3, 1996,
the Company and Funding executed an amendment to the Funding Agreement. To
Complete the BKC matter, Funding has agreed to pay up to an additional $250,000
so that the maximum amount paid by Funding would be $750,001.
In consideration of the Amount, IFFC and IFFP each assigned to Funding a
portion of any and all benefits and gross sums, amounts and proceeds that each
of them may receive, collect, realize, otherwise obtain or benefit from in
connection with, resulting from or arising in connection with the BKC Matter or
any related claim, demand, appeal, right and/or cause of action of the IFFC
Affiliates, including, but not limited to, amounts received or entitled to be
received by the IFFC Affiliates in respect to (i) the gross proceeds of any
court ordered decision or judgement (a "Judgement") entered in favor of IFFC
and/or IFFP, (ii) the Sale Proceeds (as such term is defined in the agreement,
the "Sales Proceeds") of any sale of the assets of IFFC and/or IFFP to BKC, any
of BKC's affiliates and/or any entity which is introduced to the IFFC Affiliates
by BKC (collectively, the "BKC Entities") in connection with a settlement of the
BKC Matter, (iii) any amounts paid in compromise or settlement (a "Settlement")
of the BKC Matter in whole or in part, (iv) any liabilities or indebtedness of
IFFC or IFFP assumed or satisfied by the BKC Entities (the "Debt Relief
Proceeds") and (v) the monetary value to the IFFC Affiliates of any concessions
made by BKC with respect to its rights under (a) the Development Agreement
and/or (b) the Franchise Agreements and any future franchise agreements between
BKC and IFFP and/or IFFC (the "Contract Modification Proceeds"). All of the IFFC
Affiliates' rights, titles and interests, legal and equitable, in and to such
aforementioned benefits and gross sums, amounts and proceeds are collectively
referred to herein as the "Proceeds".
Specifically, IFFC and IFFP each individually assigned, set over,
transferred and conveyed to Funding all of its right, title and interest in and
to the sum of the following (the "Assigned Proceeds"); (i) fifty percent (50%)
of the Proceeds to the extent that such amount does not exceed Funding's
Expenses (Funding's Expenses") which are defined as the sum of the aggregate
amount of money paid by Funding as the Amount and the amount of money expended
by Funding if it assumes the prosecution of the BKC Matter; (ii) fifty percent
(50%) of any Proceeds, excluding any Sales Proceeds, in excess of the sum of
Funding's Expenses and the IFFC Affiliates' Expenses (as such term is defined
below, the "IFFC Affiliates' Expenses"); and (iii) fifty percent (50%) of any
Sales Proceeds in excess of the sum of Funding's Expenses and the IFFC
Affiliates' Expenses.
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INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Subject to Funding's recovery of Funding's Expenses, IFFC and IFFP have
retained the right in and shall be entitled to recover from the Proceeds the sum
of (i) $303,731, and (ii) all of the amounts they may expend in the future in
connection with the BKC Matter, before Funding shall be entitled to receive any
other Proceeds.
For consideration of the additional $250,000 payment Funding received an
additional twenty five percent (25%) of the Proceeds, and the term "Assigned
Proceeds" remains unchanged from its meaning in the Funding Agreement except for
the twenty five percent (25%) increase to seventy five percent (75%).
The IFFC Affiliates have also entered a second agreement to assist in the
financing of the BKC Litigation. On April 7, 1996 the IFFC Affiliates entered
into a letter agreement (the "Fee Agreement") with the law firm (the "Litigation
Counsel") representing the IFFC Affiliates in the BKC Litigation. Pursuant to
the Fee Agreement, IFFC and IFFP have agreed to pay Litigation Counsel the
greater of (a) Litigation Counsel's accrued hourly fees for legal services
provided in connection with the BKC Litigation; and (b) a certain percentage of
any final monetary recovery obtained by the IFFC Affiliates in the BKC
Litigation, in exchange for Litigation Counsel's services. The percentage of any
monetary recovery payable to Litigation Counsel varies depending upon whether or
not: (1) the BKC Litigation is settled at or before mediation; (2) the BKC
Litigation is settled after mediation but before a verdict; (3) the BKC
Litigation is resolved by a jury or court verdict; and (4) the IFFC Affiliates
successfully appeal a verdict in the BKC Litigation or if they successfully
defend against an appeal by BKC of the verdict in the BKC Litigation. In the
event the IFFC Affiliates recover in excess of $10,000,000 in the BKC
Litigation, IFFC has agreed to issue the Litigation Counsel 200,000 shares of
IFFC Common Stock. Under the Fee Agreement, the IFFC Affiliates are not required
to make any future legal fee payments to Litigation Counsel until there is an
award with respect to or settlement of the BKC Litigation.
DOMONT LITIGATION - On May 31, 1995, legal action was filed against IFFP a
85% owned subsidiary of the Company, in Polish Court in the city of Warsaw. The
suit was filed by Domont S.C., a general contractor formerly hired by IFFP to
construct several of its Restaurants in Poland. The suit alleges that IFFP
failed to pay invoices due to Domont for work performed. Domont seeks payment
and damages of approximately $126,236. IFFP contends that it has fulfilled its
contractual obligations and believes that Domont's claims and allegations are
without merit.
POLISH FISCAL AUTHORITY DISPUTES - As of July 1995, IFFC may have become
subject to penalties for failure to comply with a recently amended tax law
requiring the use of cash registers with certain calculating and recording
capabilities and which are approved for use by the Polish Fiscal Authorities.
Although IFFP's NCR Cash Register System (the "Cash Register System") is a new
and modern system, IFFP's Cash Register System had to be modified and will
ultimately need to be replaced in order to comply with the new tax law. IFFP is
now in compliance with the tax law but was unable to modify and/or replace its
Cash Register System before July 1995. As a penalty for noncompliance, Polish
tax authorities may disallow certain VAT deductions for July and August, which
were previously deducted by IFFP. Additionally, penalties and interest may be
imposed on these disallowed deductions. IFFP believes that its potential
exposure is approximately $150,000, which amount has been provided for in the
accompanying December 31, 1995 financial statements. IFFP is currently in the
process of requesting a final determination by the Polish Fiscal Authorities.
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INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. LITIGATION, Continued:
IFFC believes this situation could have been avoided if BKC were providing the
service, support and assistance promised to IFFC in the BKC Development
Agreement and the Franchise Agreements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
IFFC currently operates eight Traditional Burger King Restaurants. IFFC
has incurred losses and anticipates that it will continue to incur losses until,
at the earliest, it establishes a number of restaurants generating sufficient
revenues to offset its operating costs and the costs of its proposed continuing
expansion. There can be no assurance that IFFC will be able to successfully
establish a sufficient number of restaurants to achieve profitable operations.
IFFC believes that it will not generate sufficient revenues to offset its
operating costs until, at least, the BKC Litigation is favorably resolved and/or
BKC provides the support promised to IFFC in the Development Agreement and
Franchise Agreements so that IFFC's per restaurant sales are increased and/or
its Food and Packaging Expenses and General and Administrative Expenses as a
percentage of Sales are decreased. IFFC's independent auditors have included an
explanatory paragraph in their report for the year ended December 31, 1995 and
December 31, 1994 stating that IFFC's financial statements have been prepared
assuming IFFC will continue as a going concern although IFFC's recurring losses
and the potentially significant cash requirements of the BKC Litigation raise
substantial doubt about IFFC's ability to do so.
Certain disputes have arisen between IFFC and BKC and, on March 17, 1995,
IFFC and its majority owned (85%) subsidiary, IFFP, filed suit against BKC in
the Eleventh Judicial Circuit Court of the State of Florida. IFFC believes that
BKC has not provided all of the support, supervision and assistance required of
it under the BKC Development Agreement and eight Franchise Agreements between
BKC and IFFC. Pendency of the litigation has affected the relationship of BKC
and IFFC, including the ability of IFFC to develop additional Burger King
restaurants. See "---Results of Operations," "Liquidity and Capital Resources"
and "Part II. Item 2. LEGAL PROCEEDINGS."
In order to secure additional funds to finance the BKC Litigation, as of
January 25, 1996, the IFFC Affiliates entered into the Funding Agreement with
Litigation Funding, Inc. ("Funding") and, as of April 7, 1996, IFFC entered into
the Fee Agreement with Litigation Counsel. Pursuant to the Funding Agreement,
funding has agreed to pay on behalf of IFFC and/or IFFP up to $500,001 for all
expenses actually incurred by IFFC and/or IFFP in connection with their
prosecution and defense of the BKC Litigation. In exchange, IFFC and IFFP have
each assigned funding a substantial portion of any and all benefits and gross
sums, amounts and proceeds that each of them may receive, collect, realize,
otherwise obtain or benefit from in connection with the BKC Litigation. See
"Part II, Item 2. LEGAL PROCEEDINGS." Pursuant to the Fee Agreement, IFFC and
IFFP have agreed to pay Litigation Counsel the greater of (i) Litigation
counsel's accrued hourly fees for legal services provided in connection with the
BKC Litigation; and (ii) a certain percentage of any final monetary recovery
obtained by the IFFC Affiliates in the BKC Litigation, in exchange for
Litigation Counsel's services. Under the Fee Agreement, the IFFC Affiliates are
not required to make any future legal fee or expense payments to Litigation
Counsel until there is an award with respect to or a settlement of the BKC
Litigation. See "Part II, Item 2. LEGAL PROCEEDINGS" for a detailed description
on the Funding Agreement and the Fee Agreement. On July 3, 1996, the Company and
Funding executed an amendment to the Funding Agreement. To complete the BKC
matter, Funding has agreed to pay up to an additional $250,000 so that the
minimum total amount paid by Funding would be $750,001.
18
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NINE MONTHS ENDED SEPTEMBER 30, 1996 VS NINE MONTHS ENDED SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
For the nine month period ended September 30, 1996, IFFC incurred a net
loss of $1,348,654 or $(.27) per share of IFFC's Common Stock compared to a net
loss $754,137 or $(.21) per share of IFFC's Common Stock for the nine month
period ended September 30, 1995.
For the nine month periods ended September 30, 1996 and September 30,
1995, IFFC generated Sales of $4,049,772 and $3,577,878, respectively. In U.S.
dollar and Polish zloty terms, IFFC's Sales increased by approximately 13.2%, in
the nine months ended September 30, 1996 relative to the nine months ended
September 30, 1995. IFFC believes the increase in Sales is attributable to more
effective marketing strategies. IFFC believes that it has been experiencing a
lower level of sales per restaurant than most other franchises in the Burger
King System. IFFC also believes its Sales would be higher if BKC were providing
the service, support and assistance promised to IFFC in the BKC Development
Agreement and the Franchise Agreements. See discussion below regarding BKC
Litigation, "Part II, Item 2. LEGAL PROCEEDINGS" and "---Liquidity and Capital
Resources".
During the nine month period ended September 30, 1996, IFFC incurred
$1,692,546 of Food and Packaging Expense, $594,230 of Payroll and Related Costs,
$1,113,972 of Occupancy and Other Operating Expenses, $684,617 of Depreciation
and Amortization Expense, respectively.
Food and Packaging Costs for the nine month period ended September 30,
1996, and 1995 were 41.8% and 45.8% of Sales, respectively. IFFC believes the
decrease in Food and Packaging Costs as a percentage of Sales is primarily
attributable to a reduction of certain foods costs. IFFC believes that it has
been experiencing higher food costs as a percentage of sales than most other
franchises in the Burger King System. In addition to IFFC's negotiations with
BKC, IFFC continues to have discussions with certain of its food suppliers in an
attempt to lower its food costs. See "---Liquidity and Capital Resources" and
"Part II, Item 2. LEGAL PROCEEDINGS."
Payroll and Related Costs as a percentage of Sales were 14.7% for the nine
month period ended September 30, 1996 and 15.4% for the nine month period ended
September 30, 1995. Payroll and Related Costs as a percentage of Sales has
declined as IFFC has implemented a more efficient scheduling of its labor force
and as IFFC has not had any significant training costs in 1996.
Occupancy and Other Operating Expense for the nine month period ended
September 30, 1996 and 1995 were 27.5% and 29.8% of Sales, respectively. The
decrease in Occupancy and Other Operating Expenses as a percentage of Sales is
attributable primarily to increased sales volume in relation to fixed costs
expenses. IFFC believes that its advertising expenses would be lower as a
percentage of Sales if BKC were providing IFFC all of the support and assistance
required of BKC in the Development Agreement and Franchise Agreements. See
discussion below regarding BKC Litigation, "Part II. Item 2. LEGAL PROCEEDINGS"
and "---Liquidity and Capital Resources."
Depreciation and Amortization Expense as a percentage of Sales was 16.9%
in the nine month period ended September 30, 1996 versus 17.7% in the nine month
period ended September 30, 1995.
19
<PAGE>
General and Administrative Expenses for the nine month period ended
September 30, 1996 and 1995 totalled $1,119,086 and $1,432,086, respectively.
For the nine month period ended September 30, 1996, General and Administrative
Expenses was comprised of executive and office staff salaries and benefits
("Salary Expense") ($401,573); legal and professional fees, office rent, travel,
telephone and other corporate expenses ("Corporate Overhead Expense")
($650,898), including $47,327 of professional fees and expenses related to
increased audit fees and certain disputes with the Polish Fiscal Authorities;
and depreciation and amortization ($66,615). For the nine month period ended
September 30, 1995, General and Administrative Expenses were comprised of
executive and office staff salaries ($526,327); legal and professional fees,
office rent, travel, telephone and other general corporate expenses ($772,969),
including $22,905 of professional fees and expenses related to the Second
Exchange Offer, $239,871 related to the lawsuit against Burger King; and
depreciation and amortization ($132,790). See "Part II. Item 2. LEGAL
PROCEEDINGS" for additional information regarding the BKC Litigation and IFFC's
disputes with Polish Fiscal Authorities.
IFFC believes it has been experiencing lower per restaurant Sales and
higher Food and Packaging Expenses, Advertising Expense, and General and
Administrative Expenses as a percentage of Sales than most other franchises in
the Burger King system. IFFC believes its per restaurant Sales would be higher
and its Food and Packaging Expenses, Advertising Expense, and General and
Administrative Expenses as a percentage of Sales would be lower if BKC were
providing to IFFC the services and support promised to IFFC in the BKC
Development Agreement and the eight franchise agreements between IFFC and BKC
with respect to IFFC's BKC restaurants. In an effort to increase sales, reduce
costs, and recuperate certain losses, on March 17, 1995, the IFFC Affiliates
filed suit against BKC in the Eleventh Judicial Circuit Court of the State of
Florida. See "---Liquidity and Capital Resources" and Part II. Item 2. Legal
Proceedings."
For the nine month period ended September 30, 1996, Interest and Other
Income was $89,776, which figure includes interest income of $49,949 and
miscellaneous non operating income totalling $39,827, net. For the nine month
period ended September 30, 1995, Interest and Other Income was $58,303, which
figure represents interest income on invested funds.
Interest Expense is comprised as follows:
For the Nine Months Ended
September 30,
-------------------------------
1996 1995
----------- -----------
Interest Expense on Debentures $ 186,030 $ 205,759
Amortization of Debenture Issuance Costs 24,942 24,942
Interest Expense on Bank Facilities 133,255 225,198
---------- ----------
Total $ 344,227 $ 456,899
=========== ==========
As a result of IFFC's consummation of the Second Exchange Offer (defined
below) as of January 13, 1995, IFFC's annual interest expense with respect to
Debentures has dropped and should not exceed $248,000 in the year ended December
31, 1996. The decrease in the level of Interest Expense on Debentures will be
partially offset by IFFC's payment of dividends with respect to the 38,590
shares of Preferred Stock (defined below) issued in the Second Exchange Offer.
Each share of Preferred Stock receives dividends, payable semi-annually on each
June 15 and December 15, at a rate of $6.00 per annum, which dividends may, at
the option of IFFC, be paid in cash, through the issuance of IFFC Common Stock
or a combination thereof. As of June 30, 1996, IFFC accrued $132,858 of
dividends which were payable as of June 15, 1996.
20
<PAGE>
IFFC's interest expense on bank facilities was $133,255 and $225,198 for
the nine month period ended September 30, 1996 and 1995, respectively. The
$91,943 decrease is attributable to IFFC's reduction of borrowings under short
and long term bank facilities.
In connection with the Second Exchange Offer in the quarter ended March
31, 1995, IFFC recognized an extraordinary gain of $1,106,642 and applied
$3,757,590 to Shareholders' Equity. See "---Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
IFFC's material commitments for capital expenditures in its restaurant
business relate to the restaurants that it is required to open in order to
comply with the provisions of the BKC Development Agreement. Pursuant to the BKC
Development Agreement, IFFC is required to open and operate 13 restaurants
during the five-year initial term. Due to the factors which led to the BKC
Litigation, IFFC has opened and operates eight of the ten restaurants required
to be opened by September 24, 1995. Accordingly, IFFC is in technical default
under the BKC Development Agreement. By letter dated June 30, 1995, BKC notified
IFFC that, at that time, BKC would not elect to declare IFFC to be in default
under the BKC Development Agreement. BKC further stated that such notice was not
a waiver of its legal rights under the BKC Development Agreement to, in the
future, declare IFFC's failure to develop the requisite number of BKC
Restaurants an act of default. IFFC cannot reasonably estimate how long it will
take or the amount of money it will need to expend in order to resolve the BKC
Litigation. Even if IFFC prevails on certain of the issues disputed in the BKC
Litigation, there can be no assurance as to the remedies granted by the courts.
Termination of the BKC Development Agreement and/or Franchise Agreements for any
reason could have a material adverse effect on the Company. See "Part II. Item
2. LEGAL PROCEEDINGS - BKC Litigation" for a description of the BKC Litigation.
As of September 30, 1996, IFFC had negative working capital of
approximately $2,145,603 and Cash and Cash Equivalents of $213,303 Although IFFC
believes it has sufficient funds to finance its proposed plan of operations
until December 16, 1996, IFFC cannot reasonably estimate how long it will be
able to satisfy its cash requirements. IFFC may be compelled to adjust its plans
based on the outcome of the BKC Litigation. Based on current assumptions, IFFC
will seek to implement its business plan, utilizing its Cash and Cash
Equivalents and cash generated from restaurant operations. Any implementation of
IFFC's business plan beyond December 16, 1996 may require resources
substantially greater than currently available to IFFC. If plans change,
assumptions prove to be inaccurate, or the capital resources available otherwise
prove to be insufficient to implement its business plan (as a result of the BKC
Litigation or unanticipated expenses, problems or difficulties, or otherwise)
prior to December 16, 1996, IFFC would be required to seek additional financing
or curtail or cease its activities. IFFP's $1,000,000 credit facility with Bank
Handlowy matures on December 16, 1996. On October 29, 1996, IFFP formally
requested an extension of the maturity date of the facility. No assurance can be
given that Bank Handlowy will grant the requested extension or otherwise modify
the terms of the credit facility in a manner that would be acceptable to IFFP.
After December 16, 1996, if IFFC does not secure additional financing, or
generate significant amounts of cash from operations, IFFC will be required to
curtail or cease its activities. In an effort to conserve its financial
resources, IFFC may close some or all of the Traditional Restaurants. IFFC
anticipates that even if it elects to close some or all of the Traditional
Restaurants, to the extent it is financially capable, it will continue to
prosecute its claims in the BKC Litigation. IFFC has not yet determined whether
or not it would be in its best interests to attempt to liquidate the assets
associated with the Traditional Restaurants it may elect to close. Except as
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<PAGE>
discussed below, IFFC has no current arrangements with respect to, or sources
of, additional financing. There can be no assurance that IFFC will generate
sufficient, or any, cash flow from operations in the future or that additional
financing will be available on acceptable terms, or at all, to fund future
commitments for capital expenditures or Operations.
On July 3, 1996, the Company and Funding executed an amendment to the
Funding Agreement. To complete the BKC matter, Funding has agreed to pay up to
an additional $250,000 so that the minimum total amount paid by Funding would be
$750,001. Litigation Funding is not currently obligated to provide additional
funds to IFFC and there can be no assurances that Litigation Funding and IFFC
will ever agree upon the structure and terms of such an investment. The board of
directors of IFFC has not yet determined whether or not it would be in IFFC's
best interests to secure additional funds from Litigation Funding or any other
party.
Until April 26, 1996 Mitchell Rubinson, IFFC's Chairman of the Board,
Chief Executive Officer and President, controlled IFFC through Capital Brands,
Inc. From IFFC's inception until April 1996, Capital Brands beneficially owned
at least 1,300,000 shares (32.7%) of IFFC's outstanding common stock. In
connection with and as a condition of a share exchange between Capital Brands,
Inc. and certain shareholders of CompScript, Inc., Capital Brands, Inc.
exchanged 1,300,000 shares of IFFC common stock for 1,300,000 shares of common
stock of Capital Brands, Inc. owned by Mr. and Mrs. Rubinson. Accordingly, as of
the date of this report, Mr. and Mrs. Rubinson directly controlled IFFC.
IFFC believes BKC is required under Polish law to pay certain taxes in
connection with its receipt of royalty payments from IFFC. If BKC fails to make
the requisite tax payments, IFFC may, under certain circumstances, be required
by the Polish government to pay the taxes. IFFC believes it would have an
additional legal claim against BKC if IFFC was required to pay such taxes. IFFC
estimates that as of the date of this report, BKC may owe the Polish government
up to $200,000 of taxes, interest and penalties.
IFFC anticipates that it will incur certain expenses in connection with
its disputes with the Polish Fiscal Authorities. See "Part II. Item 2. LEGAL
PROCEEDINGS - Polish Fiscal Authority Disputes" for a description of such
matters and IFFC's best estimates of the expenses IFFC anticipates incurring and
the timing of such expenses.
IFFC currently estimates the cost of opening a Traditional Restaurant to
be approximately $450,000 to $1,000,000, including leasehold improvements,
furniture, fixtures, equipment, and opening inventories. Such estimates vary
depending primarily on the size of a proposed restaurant and the extent of
leasehold improvements required. The development of additional restaurants is
contingent upon, among other things, IFFC's ability to generate cash from
operations and/or securing additional debt or equity financing and the favorable
outcome of the BKC Litigation. If cash is unavailable from those sources, IFFC
will have to curtail any additional development until additional cash resources
are secured.
To date, IFFC's business operations have been principally financed by
proceeds from public offerings of IFFC's equity and debt securities, proceeds
from a number of bank credit facilities, proceeds from the sale of certain
equity securities of IFFC's formerly wholly-owned subsidiary and proceeds from
the Assignment Agreement.
22
<PAGE>
In June 1992, IFFC consummated an underwritten initial public offering of
1,495,000 shares of its common stock for an aggregate of $7,475,000, yielding
IFFC proceeds of approximately $6,134,000. In December 1992 and January 1993,
IFFC consummated an underwritten public offering of an aggregate of $11,400,000
in principal amount of 9% Convertible Subordinated Debentures due 2007 (the
"Debentures") for aggregate net proceeds of approximately $9,701,000.
On January 14, 1994, IFFC proposed to exchange (the "First Exchange
Offer") each $1,000 in principal amount of its Debentures validly tendered for
one Unit consisting of 160 newly issued shares of its Common Stock and Warrants
to purchase 100 shares of its Common Stock at an exercise price of $7.00 per
share. Upon completion of the First Exchange Offer on February 11, 1994,
$2,908,000 in principal amount of Debentures were tendered and accepted by IFFC
for exchange.
On November 7, 1994, IFFC proposed to exchange (the "Second Exchange
Offer") for each $1,000 in principal amount of Debentures validly tendered ten
shares of IFFC's Series A 6% Convertible Preferred Stock (the "Preferred
Stock"). The Preferred Stock (i) has a liquidation preference value of $100 per
share, (ii) is convertible into shares of IFFC's Common Stock at a conversion
price of $3.00 per share, and (iii) receives dividends, payable semi-annually on
each June 15 and December 15, at the rate of $6.00 per annum, which dividends
may, at the option of IFFC, be paid in cash, through the issuance of Common
Stock or a combination of cash and Common Stock, and (iv) are redeemable under
certain circumstances. Upon completion of IFFC's Second Exchange Offer on
January 13, 1995 $5,636,000 in principal amount of Debentures were tendered and
accepted by IFFC in exchange for 56,360 shares of Preferred Stock. IFFC
recognized an extraordinary gain of $1,106,642, the difference between (a) the
estimated fair value of the 56,360 shares of Preferred Stock issued ($3,757,590)
and (b) the sum of the carrying value of the Debentures and accrued interest,
net of unamortized Debenture issuance costs. Since the consummation of the
second exchange offer in January 1995, IFFC has had $2,756,000 in principal
amount of 9% Subordinated Convertible Debentures due 2007 outstanding.
On June 15, 1995 and December 15, 1995, rather than expend its cash
resources, IFFC paid dividends with respect to its outstanding shares of
Preferred Stock by issuing 107,630 and 168,912 additional shares of Common
Stock, respectively. These stock dividends had no effect on total stockholders
equity as common stock and additional paid in capital were increased and
retained earnings were decreased by $142,778 in connection with the first
dividend payment and $150,078 in connection with the second dividend payment. As
a result of the conversion of an aggregate of 11,440 shares of Preferred Stock,
as of September 30, 1996 there were 41,210 shares of Preferred Stock
outstanding. As of September 30, 1996, IFFC did not pay its scheduled dividend
payment and recorded a liability of $132,858 relating to the dividend payment
due on June 15, 1996, with a corresponding decrease in retained earnings on such
date.
IFFC maintains substantially all of its unutilized proceeds in various
bank accounts. As of September 30, 1996 and November 7, 1996, IFFC had $34,060
and $15,443, respectively, in accounts with Northern Trust of Florida, N.A. As
of September 30, 1996 and November 7, 1996, IFFC had $543,066 and $531,058,
respectively, in accounts with AmerBank and substantially all of such funds were
held as European Currency Unit denominated deposits. As of September 30, 1996
and November 7, 1996, $500,000 of the cash on deposit with Amerbank was
restricted and secured outstanding balances of IFFP's Credit Facility with Bank
Handlowy. As of September 30, 1996 and November 7, 1996, IFFC had $43,532 and
$47,286, respectively, in an operating account with Bank Handlowy.
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During the nine months ended September 30, 1996, Capital Brands loaned
IFFC an aggregate of approximately $69,000, which indebtedness is evidenced by
promissory notes. The promissory notes are payable in full on April 25, 1997.
During the nine months ended September 30, 1996, QPQ Corporation ("QPQ")
advanced IFFC $122,000. In addition, QPQ purchased for $10,000 cash, options to
purchase 250,000 shares of QPQ Common Stock. In addition QPQ acquired various
furniture, fixtures and leasehold improvements from IFFC in exchange for
approximately $57,000 cash.
IFFC has also financed its operations through the use of credit
facilities, which credit facilities are described below.
As of January 28, 1993, IFFP entered into a revolving credit facility with
American Bank of Poland S.A. ("AmerBank") totalling 3,000,000,000 zloty, or
approximately $123,000 at-year end exchange rates. Borrowings under the January
28,1993 AmerBank credit facility are secured by a guarantee of IFFC and bear
interest at a monthly adjusted variable rate approximately equal to AmerBank's
prime rate. Borrowings under the January 28, 1993 AmerBank credit facility were
repayable as of January 28, 1996. However, on October 30, 1995 and April 12,
1996, the credit facility was amended as follows: (i) the immediately available
credit available was decreased to 2,000,000,000 in zlotys (approximately $81,000
at year end exchange rates), and (ii) repayment of borrowings was deferred until
October 30, 1996. On October 24, 1996, a formal request was made to AmerBank
asking for an extension of the maturity date to April 30, 1997. As of November
7, 1996, AmerBank has not formally granted the requested extension. No assurance
can be given that AmerBank will grant the requested extension or otherwise
modify the terms of the credit facility in a manner that would be acceptable to
IFFP. As of November 7, 1996, the outstanding balance on the credit facility was
$27,070.
As of February 23, 1994, IFFC terminated a credit facility created on
February 12, 1993 and entered into a new $1,000,000 credit facility with
AmerBank. The new credit facility was structured as a revolving credit facility
through May 31, 1994. During this initial period, draws could be made in minimum
increments of $40,000 to purchase, and are secured by, furniture, equipment and
related items for restaurants. During the initial period, interest accrued on
the outstanding balance at a rate of 12% per annum and was due and payable
quarterly. As of July 31, 1994, the outstanding balance under the credit
facility became due and payable at a rate of $90,000 plus interest every three
months with any principal outstanding as of April 30, 1996 immediately due and
payable. On November 7, 1996 AmerBank agreed to amend the credit facility so
that the outstanding principal balance becomes due and payable at a rate of
$100,000 on March 31, 1997, $100,000 on June 30, 1997 and $110,000 on September
30, 1997 plus interest every three months. As of September 30, 1996 and November
7, 1996 approximately $310,000 was outstanding under the AmerBank credit
facility.
On February 16, 1996, IFFP entered into a $300,000 line of credit with
AmerBank, the proceeds of which may be used to finance IFFP's business
operations. Pursuant to the line of credit, IFFC could make draws on the line of
credit until June 30, 1996. IFFP is required to make interest payments on the
outstanding principal amount of the credit facility at AmerBank's prime rate.
IFFP is also obligated to pay AmerBank a 1% per annum commission on the daily
average unutilized principal balance of the credit facility. Interest and
commission expenses are payable monthly. The outstanding principal balance of
the loan is payable on February 1, 1997. The credit facility is secured by: (i)
a promissory note of IFFP and (ii) a guarantee of IFFC. As of September 30, 1996
and November 7, 1996, $300,000 of the credit facility was outstanding.
24
<PAGE>
On May 30, 1994, IFFC's subsidiary, IFFP, entered into a credit facility
with Bank Handlowy Warszawie, S.A. ("Bank Handlowy") in the principal amount of
$10,000,000. Borrowings under the Bank Handlowy credit facility could be made
until May 31, 1997 and were secured by: (i) amounts on deposit with Bank
Handlowy; (ii) an unconditional guarantee of IFFC; (iii) the fixed assets of
IFFP; and (iv) a letter of credit (described below). Borrowings under the Bank
Handlowy credit facility were required be repaid in fourteen equal semi-annual
installments with the first installment due on November 30, 1997. Interest
accrued on the amount outstanding under the credit facility at the London
Interbank Offered Rate (LIBOR) for nine month deposits plus 3.875% per annum.
The proceeds could be used to finance up to forty percent (40%) of the costs of
furnishing and commencing operation of fast food restaurants operated by IFFP.
On December 13, 1995, the credit facility with Bank Handlowy was amended. The
principal amount of the credit facility was reduced to $1,000,000 and borrowings
under the credit facility are required to be repaid on December 16, 1996. On
October 29, 1996, IFFP formally requested an extension of the maturity date of
the facility. No assurance can be given that Bank Handlowy will grant the
requested extension or otherwise modify the terms of the credit facility in a
manner that would be acceptable to IFFP. Borrowings under the amended credit
facility are secured by: (i) amounts on deposit with Bank Handlowy; (ii) an
unconditional guarantee of IFFC; (iii) fixed assets of IFFP having a value of
$1,250,000; and (iv) a letter of credit. On July 15, 1994 Credit Suisse Miami
Agency established an irrevocable standby letter of credit of $500,000 (the
"Credit Suisse Letter of Credit") in Bank Handlowy's favor. The Letter of Credit
supported borrowings of $1,000,000 under the Bank Handlowy's credit facility.
The Letter of Credit is valid until December 30, 1996 and is secured by a letter
of credit issued by AmerBank. As of September 30, 1996 and November 7, 1996,
$1,000,000 was outstanding under the Bank Handlowy credit facility.
IFFC has financed its operations in part through the use of proceeds
acquired in connection with a private offering of IFFP's equity capital. As of
December 14, 1994, Agros Holding S.A., a joint stock corporation which produces
agricultural products ("Agros"), acquired a 20% voting and property interest in
IFFP pursuant to a subscription agreement (the "Subscription Agreement"), dated
November 30, 1994, between IFFC and Agros. Agros purchased the 20% interest from
IFFP for the zloty equivalent of $2,000,000. On December 28, 1995, IFFC
increased its equity interest in IFFP from 80% to 85% by repurchasing from Agros
5% of the outstanding capital stock of IFFP in exchange for a $500,000
non-interest bearing obligation due in full on December 28, 1996.
As of January 1, 1995, IFFC and IFFP entered into a five year consulting
agreement (the "IFFP Consulting Agreement") pursuant to which IFFC is to provide
IFFP consultation and advice with respect to the selection, design and equipping
of IFFC's offices and facilities, the maintenance of IFFP's financial records,
reporting to IFFP's Board of Directors, the procurement of financing, the
performance of cash management functions, the hiring of employees and officers,
the strategic planning of IFFC's business and the management of IFFP's business.
The IFFC Consulting Agreement automatically renews for an additional year unless
terminated by either party. In exchange for its services, IFFC receives from
IFFP, on a monthly basis, the greater of (a) 5% of IFFP's Sales for the month,
or (b) $50,000 (the "Management Fee"). IFFC receives reimbursement for all
out-of-pocket expenses it incurs in connection with the fulfillment of its
obligations under the IFFP Consulting Agreement and any tax, duty or fee imposed
on the Management Fee.
On May 17, 1996, IFFC's Common Stock was deleted from the NASDAQ Stock
Market and has traded on the over the counter market since that date and
accordingly, IFFC believes that its ability to raise additional equity capital
has been negatively impacted.
25
<PAGE>
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
IFFC's restaurant operations are conducted in Poland. The Polish economy
has historically been characterized by high rates of inflation and devaluation
of the Polish zloty against the dollar and European currencies. However, in the
year ended December 31, 1995, the rates of inflation and devaluation improved.
For the years ended December 31, 1993, 1994 and 1995, the annual inflation rate
in Poland was 35%, 32% and 21.6%, respectively, and as of December 31, 1993,
1994 and 1995 the exchange rate was 21,344, 24,372 and 24,680 zlotys per dollar,
respectively. Payment of interest and principal on the Debentures and payment of
franchise fees to BKC for each IFFC restaurant opened will be in United States
currency. Additionally, IFFC is dependent on foreign sources of supply which
require payment in European or United States currencies. Since IFFC's revenues
from operations will be in zlotys, IFFC will be subject to the risk of currency
fluctuations. In order to protect its funds against declines in the value of the
Polish zloty and to acquire foreign goods imported into Poland, IFFC intends to
invest its unutilized funds in United States or Western European currency
denominated securities and/or European Currency Units. Thus far, IFFC's revenues
have been used to fund restaurant operations and IFFC's expansion. As a result,
such revenues have been relatively insulated from inflationary conditions in
Poland.
The accounts of International Fast Food Polska, IFF Polska-Kolmer, IFF-DX
Management and IFF Polska i Spolka, subsidiaries of IFFC, are measured using the
Polish zloty. Due to Poland's inflationary environment, generally accepted
accounting principles require IFFC to calculate and recognize on its statement
of operations its currency translation gains or losses associated with
International Fast Food Polska. For the nine month periods ended September 30,
1996 and 1995, IFFC had a foreign currency translation gain (loss) of
approximately ($105,716) and $47,266, respectively.
The only currency that may be used in Poland is the zloty. The value of
the zloty is pegged pursuant to a system based on a basket of currencies, as
well as all other economic and political factors that effect the value of
currencies generally. As of January 1, 1995, the National Bank of Poland
introduced a new currency unit which is named a "zloty" (a "new zloty"). New
zlotys are equivalent to 10,000 old zlotys ('old zlotys"). Old zlotys will
remain legal tender until December 31, 1996, after which date they will only be
exchangeable at certain banks. All references in this document to zlotys are to
old zlotys. At September 30, 1996, the exchange rate was 28,010 zlotys per
dollar.
26
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
-----------------
BKC LITIGATION. On March 17 1995, the IFFC Affiliates filed suit
against BKC in the Eleventh Judicial Circuit Court of the State of Florida. In
their amended complaint, the IFFC Affiliates alleged, among other things, that
BKC breached certain of its express and implied obligations under the BKC
Development Agreement and the eight existing franchise agreements (the
"Franchise Agreements") pertaining to IFFP's eight Burger King restaurants. The
IFFC Affiliates further alleged that in connection with BKC's sale of certain of
its rights pursuant to the BKC Development Agreement and the Franchise
Agreements, BKC failed to timely deliver to the IFFC Affiliates a complete and
accurate franchise offering circular in accordance with rules promulgated by the
Federal Trade Commission (the "FTC Count"). The IFFC Affiliates also alleged
that BKC committed certain acts which constitute fraud and/or deceptive and
unfair business practices. The IFFC Affiliates have asked the court to, among
other things, award them compensatory damages of not less than $15,000,000,
punitive damages and certain costs and expenses.
On August 21, 1995, BKC filed an answer which asserts nineteen
affirmative defenses and three counterclaims. Subsequently BKC voluntarily
dismissed its counterclaims and the parties agreed that to the extent that IFFC
may owe money to BKC for royalties, any such amount will be deducted from any
judgment in favor of IFFC.
The IFFC Affiliates' and BKC's efforts at court ordered mediation and
voluntary settlement discussions have not been successful The IFFC Affiliates'
five count suit has not survived all of BKC's motions to dismiss. On February
14, 1996, the Eleventh Judicial Circuit Court granted BKC's motion for summary
judgement with respect to the FTC Count. The Eleventh Judicial Circuit Courts'
decision was based upon its belief that, as a matter of law, such a count could
not be maintained by "sophisticated business entities." The IFFC Affiliates
believe the court's decision was made in error and, if their claims are not
satisfactorily addressed, at the conclusion of the trial the IFFC Affiliates
intend to appeal the court's decision. The trial with respect to the BKC
Litigation is scheduled to commence on January 21, 1997.
IFFC cannot reasonably estimate how long it will take or the amount of
money it will need to expend in order to resolve the BKC Litigation. Even if
IFFC knew BKC desired to settle the BKC Litigation, IFFC could not reasonably
estimate the structure of a proposed settlement. In the event that IFFC prevails
on certain of the issues disputed in the BKC Litigation, there can be no
assurance as to the remedies granted by the courts. Termination of the BKC
Development Agreement and/or Franchise Agreements for any reason could have a
material adverse effect on the Company. See "Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION."
Due to the factors identified above, IFFC has opened and operates eight
of the ten restaurants required to be opened by September 24, 1995. Accordingly,
IFFC is in technical default under the BKC Development Agreement. By letter
dated June 30, 1995, BKC notified IFFC that, at that time, BKC would not elect
to declare IFFC to be in default under the BKC Development Agreement. BKC
further stated that such notice was not a waiver of its legal rights under the
BKC Development Agreement to, in the future, declare IFFC's failure to develop
the requisite number of BKC Restaurants an act of default.
27
<PAGE>
By letter dated May 2, 1996, BKC notified IFFC that BKC believes that
the Development Agreement had terminated pursuant to its terms. IFFC believes
that the Development Agreement has not terminated.
The IFFC Affiliates have advised BKC that the IFFC Affiliates may close
their eight Traditional Restaurants. Even if some or all of the Traditional
Restaurants are closed, the IFFC Affiliates intend, to the extent they are
financially capable, to continue to prosecute their claims in the BKC
Litigation.
LITIGATION FINANCING AGREEMENTS. IFFC has entered into two agreements
specifically designed to assist it in financing the BKC Litigation. First, as of
January 25, 1996, the IFFC Affiliates entered into an Agreement to Assign
Litigation Proceeds (the "Funding Agreement") with Litigation Funding, Inc., a
Florida corporation ("Funding"). Mitchell Rubinson, the chairman of the board,
chief executive officer and president of IFFC is also the chairman of the board,
chief executive officer and president and the principal shareholder of Funding.
Pursuant to the Funding Agreement, Funding agreed to pay on behalf of
IFFC and/or IFFP up to $500,001 (the "Amount") for all expenses (including
attorneys' fees, court costs and other related expenses, but not judgments or
amounts paid in settlement) actually incurred by or on behalf of IFFC and/or
IFFP in connection with investigating, defending, prosecuting, settling or
appealing the BKC Litigation and any and all claims or counterclaims of BKC
against IFFC and/or IFFP (collectively, the "BKC Matter"). Funding has paid all
amounts it has been requested to pay pursuant to the Funding Agreement. On July
3, 1996, the Company and Funding executed an amendment to the Funding Agreement.
To complete the BKC matter, Funding has agreed to pay up to an additional
$250,000 so that the minimum total amount paid by Funding would be $750,001.
In consideration of the Amount, IFFC and IFFP each assigned to Funding
a portion of any and all benefits and gross sums, amounts and proceeds that each
of them may receive, collect, realize, otherwise obtain or benefit from in
connection with, resulting from or arising in connection with the BKC Matter or
any related claim, demand, appeal, right and/or cause of action of the IFFC
Affiliates, including, but not limited to, amounts received or entitled to be
received by the IFFC Affiliates in respect of (i) the gross proceeds of any
court ordered decision or judgment (a "Judgment") entered in favor of IFFC
and/or IFFP, (ii) the Sale Proceeds (as such term is defined below, the "Sales
Proceeds") of any sale of the assets of IFFC and/or IFFP to BKC, any of BKC's
affiliates and/or any entity which is introduced to the IFFC Affiliates by BKC
(collectively, the "BKC Entities") in connection with a settlement of the BKC
Matter, (iii) any amounts paid in compromise or settlement (a "Settlement") of
the BKC Matter in whole or in part, (iv) any liabilities or indebtedness of IFFC
or IFFP assumed or satisfied by the BKC Entities (the "Debt Relief Proceeds")
and (v) the monetary value to the IFFC Affiliates of any concessions made by BKC
with respect to its rights under (a) the Development Agreement and/or (b) the
Franchise Agreements and any future franchise agreements between BKC and IFFP
and/or IFFC (the "Contract Modification Proceeds"). All of the IFFC Affiliates'
rights, titles and interests, legal and equitable, in and to such aforementioned
benefits and gross sums, amounts and proceeds are collectively referred to
herein as the "Proceeds."
Specifically, IFFC and IFFP each individually assigned, set over,
transferred and conveyed to Funding all of its right, title and interest in and
to the sum of the following (the "Assigned Proceeds"): (i) fifty percent (50%)
of the Proceeds to the extent that such amount does not exceed Funding's
Expenses ("Funding's Expenses"), which are defined as the sum of the aggregate
amount of money paid by Funding as the Amount and the amount of money expended
28
<PAGE>
by Funding if it assumes the prosecution of the BKC Matter; (ii) fifty percent
(50%) of any Proceeds, excluding any Sales Proceeds, in excess of the sum of
Funding's Expenses and the IFFC Affiliates' Expenses (as such term is defined
below, the "IFFC Affiliates' Expenses"); and (iii) fifty percent (50%) of any
Sales Proceeds in excess of the sum of Funding's Expenses and the IFFC
Affiliates' Expenses.
Subject to Funding's recovery of Funding's Expenses, IFFC and IFFP have
retained the right to and shall be entitled to recover from the Proceeds the sum
of (i) $303,731, and (ii) all of the amounts they may expend in the future in
connection with the BKC Matter, before Funding shall be entitled to receive any
other Proceeds.
In consideration of the additional $250,000 payment Funding received an
additional twenty five percent (25%) of the Proceeds, and the term "Assigned
Proceeds" remains unchanged from its meaning in the Funding Agreement except for
the twenty five percent (25%) increase to seventy five percent (75%).
The definition of Sales Proceeds in the Funding Agreement varies
depending upon whether the transaction is structured as (1) a sale by IFFC of
all or substantially all of its equity interest in IFFP (an "Equity Sale"), or
(2) a sale by IFFP of all or substantially all of its assets (an "Asset Sale").
In the event of an Equity Sale, Sale Proceeds are defined as the difference
between the value of the consideration paid to or for the benefit of IFFC and a
sum which is designed to roughly approximate the net market value of the assets
and liabilities underlying the equity interest purchased. In the event of an
Asset Sale, Sale Proceeds are defined as the difference between the value of the
consideration paid to or for the benefit of IFFP and a sum which is designed to
roughly approximate the net market value of the assets and liabilities
purchased.
Pursuant to the Funding Agreement, proceeds other than cash are deemed
to have a value equal to the fair market value of such assets on the date such
Proceeds are payable to IFFC, IFFP or Funding. Provided, however, if such cash
Proceeds are not all to be paid within 90 days of a Judgment or Settlement, then
the net present value of the cash Proceeds to be paid are to be calculated by an
independent certified public accountant (the "Appraiser") selected by the
Company and Funding. The value of non-cash Proceeds are to be determined by the
Appraiser.
In connection with the execution and delivery of the Funding Agreement,
IFFC, IFFP, Funding and a law firm (the "Escrow Agent") entered into an Escrow
Agreement. Pursuant to the Funding Agreement and the Escrow Agreement, except
for Proceeds which the Escrow Agent cannot reduce to physical possession, all
Proceeds, if any, resulting from the BKC Matter are to be delivered to the
Escrow Agent before they are delivered to the IFFC Affiliates and/or Funding.
The Escrow Agent is required to dispose of Proceeds only in accordance with (1)
the joint written instructions of the Company, IFFP and Funding, or (2) the
instructions of a court of competent jurisdiction. The Funding Agreement
provides that the Escrow Agent shall first apply all Readily Available Cash
Proceeds (as such term is defined below, the "Readily Available Cash Proceeds")
to satisfy Funding's rights to Proceeds (assigned to Funding by IFFC or IFFP)
before any non- Readily Available Cash Proceeds are delivered to Funding by the
Escrow Agent on behalf of such company. Readily Available Cash Proceeds are
defined to be all cash Proceeds payable to IFFC, IFFP or Funding within one (1)
year of a Judgement or Settlement. In the event that the Readily Available Cash
Proceeds are not sufficient to satisfy Funding's rights in Proceeds (assigned to
Funding by such company), then IFFC and IFFP have each agreed to pay out of its
individually available "cash and cash equivalents" (the "Cash Resources") an
amount of Cash Resources to satisfy the deficiency. In the event that the
29
<PAGE>
Readily Available Cash Resources of a company are insufficient to cover the
deficiency, such company, subject to Funding's agreement, will have the right to
elect which assets it will deliver to Funding in satisfaction of Funding's
rights to receive Proceeds. In the event that Funding is unable to agree with a
company with respect to which assets such company will deliver to Funding, then
the matter shall be submitted to a court of competent jurisdiction.
In consideration of the Amount, IFFC also assigned to Funding a
security interest (the "Security Interest") in its entire equity interest in
IFFP (the "IFFP Stock"). The Security Interest secures the delivery to Funding
of all the Assigned Proceeds. In order to perfect the Security Interest, IFFC
has agreed to take all such actions as are necessary under the laws of the
Republic of Poland ("Poland") and the State of Florida to transfer title to the
IFFP Stock to the Escrow Agent; provided, however, that IFFC has retained
beneficial ownership of the IFFP Stock, including the right to vote the IFFP
Stock, unless Funding does not receive the Assigned Proceeds in accordance with
the terms of the Funding Agreement and such nonreceipt is not rectified within
45 days (an "Event of Default"). IFFC has further agreed to deliver to the
Escrow Agent such documents as are necessary to file with the appropriate
authorities in Poland to, if an Event of Default occurs, officially transfer
legal and beneficial title to the IFFP Stock to Funding. IFFC and Funding have
agreed that record title to the IFFP Stock is being transferred to the Escrow
Agent to provide Funding a perfected security interest in the IFFP Stock without
being forced to rely on Poland's apparently deficient system of recording and
perfecting security interests. If (1) Funding receives the Assigned Proceeds in
accordance with the terms of the Funding Agreement or (2) it becomes apparent
that Funding shall not ever be entitled to receive any Proceeds, then Funding is
required to immediately issue a notice to the Escrow Agent with respect to the
IFFP Stock, and the Security Interest is to be satisfied and extinguished.
In the event the IFFP Stock is transferred to Funding, the proceeds of
any sale of, or other realization upon, all or any part of the IFFP Stock shall
be applied by Funding in the following order of priority: first, to payment of
the expenses of such sale or other realization, including all expenses,
liabilities and advances incurred or made by the Funding or its counsel in
connection therewith or in connection with the care or safekeeping of any or all
of the IFFP Stock; second, to payment of Funding's right to the Assigned
Proceeds; and finally, any surplus then remaining shall be paid to the Company,
or its successors or assigns, or to whosoever may be lawfully entitled to
receive the same or as a court of competent jurisdiction may direct.
In the event that the IFFC Affiliates fail to use their best efforts to
vigorously pursue their claims against BKC, then Funding shall have the right
to, at its own expense, participate in and assume the prosecution of the IFFC
Affiliates' claims in the BKC Matter ("Assume the Prosecution"). In order for
Funding to Assume the Prosecution, it must first provide the IFFC Affiliates
written notice of its intention to Assume the Prosecution and identify which
material action or actions the IFFC Affiliates failed to take in order to
vigorously pursue their claims against BKC. If the IFFC Affiliates do not or
cannot take action or actions to compensate for their past failure or failures
to take action, then Funding may Assume the Prosecution.
In connection with the execution of the Funding Agreement, the Chairman
of the Board unconditionally guaranteed to the IFFC Affiliates Funding's payment
of the Amount.
The IFFC Affiliates have also entered a second agreement to assist in
the financing of the BKC Litigation. On April 7, 1996, the IFFC Affiliates
entered into a letter agreement (the "Fee Agreement") with the law firm (the
"Litigation Counsel") representing the IFFC Affiliates in the BKC Litigation.
Pursuant to the Fee Agreement, IFFC and IFFP have agreed to pay Litigation
Counsel the greater of (a) Litigation Counsel's accrued hourly fees for legal
30
<PAGE>
services provided in connection with the BKC Litigation; and (b) a certain
percentage of any final monetary recovery obtained by the IFFC Affiliates in the
BKC Litigation, in exchange for Litigation Counsel's services. The percentage of
any monetary recovery payable to Litigation Counsel varies depending upon
whether or not: (1) the BKC Litigation is settled at or before mediation; (2)
the BKC Litigation is settled after mediation but before a verdict; (3) the BKC
Litigation is resolved by a jury or court verdict; and (4) the IFFC Affiliates
successfully appeal a verdict in the BKC Litigation or if they successfully
defend against an appeal by BKC of the verdict in the BKC Litigation. In the
event the IFFC Affiliates recover in excess of $10,000,000 in the BKC
Litigation, IFFC has agreed to issue the Litigation Counsel 200,000 shares of
IFFC Common Stock. Under the Fee Agreement, the IFFC Affiliates are not required
to make any future legal fee or expense payments to Litigation Counsel until
there is an award with respect to or settlement of the BKC Litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(b) No Reports on Form 8-K were filed during the quarter ended
September 30, 1996.
31
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNATIONAL FAST FOOD CORPORATION
DATE: November 12, 1996 By: /s/ Mitchell Rubinson
--------------------------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
DATE: November 12, 1996 By: /s/ Stephen R. Groth
--------------------------------------
Stephen R. Groth, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTERNATIONAL FAST FOOD CORPORATION, INC. FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 713,303
<SECURITIES> 0
<RECEIVABLES> 232,128
<ALLOWANCES> 0
<INVENTORY> 304,425
<CURRENT-ASSETS> 1,295,156
<PP&E> 8,354,515
<DEPRECIATION> (2,499,211)
<TOTAL-ASSETS> 7,938,272
<CURRENT-LIABILITIES> 3,440,759
<BONDS> 2,756,000
0
386
<COMMON> 83,108
<OTHER-SE> 1,134,530
<TOTAL-LIABILITY-AND-EQUITY> 7,938,272
<SALES> 4,049,772
<TOTAL-REVENUES> 4,049,772
<CGS> 4,085,365
<TOTAL-COSTS> 4,085,365
<OTHER-EXPENSES> 1,135,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344,227
<INCOME-PRETAX> (1,348,654)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,348,654)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,348,654)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
