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 March 31, 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 May 1, 1996 was 3,975,209.
Traditional Small Business Disclosure Format: Yes [x] No [ ]
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
PART I. FINANCIAL INFORMATION
ITEM. 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995
Consolidated Statements of Operations
for the Three Months Ended March 31, 1996
and 1995
Consolidated Statement of Shareholders'
Equity for the Three Months Ended March
31, 1996
Consolidated Statements of Cash Flows
for the Three Months Ended March 31,
1996 and 1995
Notes to Consolidated Financial
Statements
ITEM. 2 Management's Discussion and Analysis or
Plan of Operation
PART II. OTHER INFORMATION
ITEM. 6
SIGNATURES
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
[CAPTION]
<TABLE>
<S> <C> <C>
March 31, December 31,
1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 212,630 $ 253,510
Restricted cash 500,000 500,000
Receivables 39,341 50,866
Inventories 339,331 384,434
Advances to affiliate 11,331 49,087
Prepaid expenses 55,399 38,989
Total Current Assets 1,158,032 1,276,886
Furniture, equipment and
leasehold improvements, net 6,420,088 6,625,941
Deferred debenture issuance costs,
net of accumulated amortization
of $99,213 and $90,899,
respectively 333,112 341,426
Other assets, net 348,373 364,701
Burger King Development Rights,
net of accumulated amortization
of $248,322 and $229,462,
respectively 128,876 147,736
Total Assets $ 8,388,481 $ 8,756,690
See Accompanying Notes
</TABLE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
[CAPTION]
<TABLE>
<S> <C> <C>
March 31, December 31,
1996 1995
CURRENT LIABILITIES:
Accounts payable $ 444,726 $ 354,823
Accrued interest payable 83,590 21,580
Other accrued expenses 499,680 473,127
Due to affiliate 84,307 -
Bank credit facilities 1,476,506 1,604,248
Non-interest bearing obligation
payable to minority shareholder
of IFF Polska 500,000 500,000
Total Current Liabilities 3,088,809 2,953,778
Long term bank debt 160,000 -
9% subordinated convertible
debentures, due 2007 2,756,000 2,756,000
Total Liabilities 6,004,809 5,709,778
Minority interest in net assets of
consolidated subsidiary 617,355 689,681
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value,
(liquidation preference of $4,356,000
and $5,003,000), 1,000,000 shares
authorized; 43,560 and 50,030
shares issued and outstanding,
respectively 436 500
Common Stock, $.01 par value,
10,000,000 shares authorized;
3,975,209 and 3,759,564 shares
issued and outstanding,
respectively 39,752 37,595
Additional paid-in capital 14,044,478 14,046,571
Accumulated deficit (12,318,349) (11,727,435)
Total Shareholders' Equity 1,766,317 2,357,231
Total Liabilities and
Shareholders' Equity $ 8,388,481 $ 8,756,690
See Accompanying Notes
</TABLE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
[CAPTION]
<TABLE>
<S> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
SALES $ 1,268,674 $ 1,121,254
RESTAURANT OPERATING EXPENSES:
Food and Packaging 572,281 553,206
Payroll and Related Costs 185,489 182,701
Occupancy and Other Operating
Expenses 379,330 309,624
Depreciation and Amortization 246,496 202,483
Total Restaurant Operating
Expenses 1,383,596 1,248,014
GENERAL AND ADMINISTRATIVE EXPENSES 499,313 474,786
OPERATING LOSS (614,235) (601,546)
OTHER INCOME (EXPENSES):
Interest 87,905 17,262
Interest expense, including
amortization of debenture
issuance costs (108,596) (148,909)
Other income (expense) - (57,769)
Loss from foreign currency
translation (28,314) (21,395)
Total other expenses (49,005) (210,811)
Loss before minority interest (663,240) (812,357)
Minority interest in losses of
consolidated subsidiary 72,326 107,515
Loss before extraordinary
gain (590,914) (704,842)
Extraordinary gain - 1,106,642
NET INCOME (LOSS) $(590,914) $ 401,800
NET (LOSS) INCOME PER COMMON SHARE:
Loss before extraordinary gain $(.15) $(.20)
Extraordinary Gain $( -) $ .32
NET (LOSS) INCOME $(.15) $ .12
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,903,065 3,489,844
See Accompanying Notes
</TABLE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1996
(unaudited)
[CAPTION]
<TABLE>
<S> <C> <C>
Common Stock Preferred Stock
Shares Amount Shares Amount
Balances
Dec.31, 1995 3,759,564 $37,595 50,030 $ 500
Conversion of
Preferred Stock 215,645 2,157 (6,470) (64)
Net loss for
the period
Balances,
March 31, 1996 3,975,209 $39,752 43,560 $ 436
(continued)
<S> <C> <C> <C>
Additional (Accumu-
Paid In lated)
Capital (Deficit) Total
Balances
Dec.31, 1995 $ 14,046,571 $(11,727,435) $2,357,231
Conversion of
Preferred Stock (2,093) -
Net loss for
the period (590,914) (590,914)
Balances,
March 31, 1996 $(14,044,478) $(12,318,349) $1,766,317
See Accompanying notes
</TABLE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
[CAPTION]
<TABLE>
<S> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income $(590,914) $ 401,800
Adjustment to reconcile net
income(loss) to net cash
used in operating activities:
Amortization and depreciation 279,567 269,614
Extraordinary gain on the
debenture exchange for stock - (1,106,642)
Minority interest in losses of
subsidiary (72,326) (107,515)
Changes in operating assets and
liabilities:
Receivables 11,525 105,296
Accrued interest receivable - 3,990
Inventories 45,103 (30,355)
Prepaid expenses (16,410) (49,629)
Accounts payable and
accrued expenses 178,466 (135,123)
Net cash used in operating
activities (164,989) (648,564)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments for furniture, equipment
and leasehold improvements - (20,704)
Payments for other assets (30,212) (36,983)
Net cash used in
investing activities (30,212) (57,687)
See Accompanying Notes
</TABLE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(unaudited)
[CAPTION]
<TABLE>
<S> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from (to) affiliate, net 122,063 10,976
Repayments of bank credit
facilities (133,485) (122,277)
Borrowings under bank credit
facilities 165,743 -
Net cash (used in) provided
by financing activities 154,321 (111,301)
DECREASE IN CASH AND CASH
EQUIVALENTS (40,880) (817,552)
BEGINNING CASH AND CASH
EQUIVALENTS 253,510 2,600,696
ENDING CASH AND CASH
EQUIVALENTS $ 212,630 $ 1,783,144
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 38,272 $ 101,560
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING
ACTIVITIES:
During the quarter ended March 31, 1995, 56,368 shares of Preferred
Stock were issued upon the exchange of 5,636,000 of the 9%
Subordinated Convertible Debentures.
On March 28, 1995, the Company purchased 100% ownership of
International Hotel Corporation in exchange for 400,000 shares of
common stock.
During the quarter ended March 31, 1996, 6,470 shares of preferred
stock were converted into 215,645 shares of common stock.
See Accompanying Notes
</TABLE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 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 Polish economy is considered to be "highly inflationary".
Accordingly, 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. 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 March 31, 1996, the exchange rate was 25,875 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 December 31, 1995, Consolidated Balance Sheet included
herein was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting
principles.
The accompanying unaudited financial statements have been
prepared in accordance with the instructions for Form 10-QSB and
include all disclosures necessary for fair presentation of
financial position, results of operations and cash flows in
conformity with generally accepted accounting principles.
GOING CONCERN - The report of the Company's independent
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 j"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 in its fiscal 1996 year using the methodology prescribed by
FAS No. 121.
3. BANK CREDIT FACILITIES PAYABLE:
Amounts outstanding under bank credit facilities at March 31,
1996, consist of the following:
[CAPTION]
<TABLE>
<S> <C>
Amerbank in Poland, S.A.
overdraft credit line, variable
rate approximately equal to prime,
payable in full on October 30, 1996.
$ 10,763
Amerbank revolving credit facility,
12% interest, $90,000 plus interest
payable quarterly, payable in full on
July 31, 1997. 460,000
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. 165,743
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
1,636,506
Less: Current Maturities 1,476,506
Total Long Term Portion $ 160,000
</TABLE>
On April 12, 1996, the Company received an extension of the
maturity date of the overdraft credit line until October 30, 1996,
and a modification of the payment terms of the revolving credit
facility whereby the original amount due on April 30, 1996, will be
paid in quarterly installments through April 30, 1997, with a final
payment of principal and interest on July 31, 1997.
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 March 31, 1996:
[CAPTION]
<TABLE>
<S> <C>
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
</TABLE>
At March 31, 1996, IFFC had reserved the following shares of
Common Stock for issuance:
[CAPTION]
<TABLE>
<S> <C>
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 1,451,855
Total reserved shares 2,964,537
</TABLE>
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)
will have a liquidation preference value of $100 per share, (ii)
will be convertible into shares of the Company's Common Stock at a
conversion price of $3.00 per share, and (iii) will 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:
[CAPTION]
<TABLE>
<S> <C>
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
</TABLE>
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 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. In its
counterclaims, BKC alleges, among other things that the IFFC
Affiliate fraudulently induced BKC to enter into the BKC
Development Agreement, breached their contractual obligation to
make certain royalty payments and failed to repay BKC a loan in the
principal amount of $100,000. Accordingly, BKC has asked the court
to award it damages aggregating to at least $1,320,000, plus
certain costs, disbursements and attorney fees. The IFFC
Affiliates believe that BKC's counterclaims are without merit and
intend to vigorously defend themselves against BKC's counterclaims.
The IFFC Affiliates' and BKC's first effort at court ordered
mediation was unsuccessful. 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. Discovery is
proceeding and the trial with respect to the BKC Litigation is
scheduled to commence on August 26, 1996.
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.
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.
The Agreement to Assign Litigation Proceeds - In order to
secure additional funds to finance the BKC Litigation, 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 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.
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.
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.
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 or
expense 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 Domont
has been paid in full for the services it performed 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
determination by the Polish Fiscal Authorities. 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.
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.
THREE MONTHS ENDED MARCH 31, 1996 VS THREE MONTHS ENDED MARCH 31,
1995
RESULTS OF OPERATIONS
For the quarter ended March 31, 1996, IFFC incurred a net loss
of $590,914 or $.15 per share of IFFC's Common Stock compared to
net income of $401,800, or $.12 per share of IFFC's Common Stock
for the quarter ended March 31, 1995. IFFC's relatively superior
financial performance in the quarter ended March 31, 1995 is
primarily attributable to an extraordinary gain of $1,106,642
recognized in such quarter in connection with the Second Exchange
Offer and the factors discussed below.
For the quarters ended March 31, 1996 and March 31, 1995, IFFC
generated Sales of $1,268,674 and $1,121,254, respectively. In
U.S. dollar and Polish zloty terms, IFFC's Sales increased by
approximately 13.1% and 18.8%, respectively, in the quarter ended
March 31, 1996 relative to the quarter ended March 31, 1995. IFFC
believes the increase in Sales is attributable to more effective
marketing strategies and certain improvements in the Polish
economy. 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".
IFFC has experienced and expects in the future to experience
a decrease in the relative level of Sales from July through August
because consumers in Poland typically take vacations during such
months.
During the quarter ended March 31, 1996, IFFC incurred
$572,281, $185,489, $379,330 and $246,496 of Food and Packaging
Expense, Payroll and Related Costs, Occupancy and Other Operating
Expenses, and Depreciation and Amortization Expense, respectively.
Food and Packaging Costs for the quarter ended March 31, 1996,
and 1995 were 45.1% and 49.3% 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, primarily french fry 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 14.6%
for the quarter ended March 31, 1996 and 16.3% for the quarter
ended March 31, 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 Expenses for the quarters ended
March 31, 1996, and 1995 were 29.9% and 27.6% of Sales,
respectively. The increase in Occupancy and Other Operating
Expenses as a percentage of Sales is attributable to a relative
increase in advertising 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 19.4% in the quarter ended March 31, 1996 versus 18.0% in the
quarter ended March 31, 1995. The increase in Depreciation and
Amortization Expense as a percentage of Sales is primarily
attributable to IFFC's decision to allocate a greater proportion of
certain Depreciation and Amortization Expenses to its restaurant
operations rather than General and Administrative Expenses.
General and Administrative Expenses for the quarters ended
March 31, 1996 and 1995 totalled $499,313 and $474,786,
respectively. For the quarter ended March 31, 1996, General and
Administrative Expenses was comprised of executive and office staff
salaries and benefits ("Salary Expense") ($183,066); legal and
professional fees, office rent, travel, telephone and other
corporate expenses ("Corporate Overhead Expense") ($266,733),
including $44,252 of professional fees and expenses related to
increased audit fees and certain disputes with the Polish Fiscal
Authorities; and depreciation and amortization ($24,757). See
"Part II. Item 2. LEGAL PROCEEDINGS" for additional information
regarding the BKC Litigation and IFFC's disputes with Polish Fiscal
Authorities. For the quarter ended March 31, 1995, General and
Administrative Expense was comprised of executive and office staff
salaries ($167,313); legal and professional fees, office rent,
travel, telephone and other general corporate expenses ($225,751),
including $22,905 of professional fees and expenses related to the
Second Exchange Offer; and depreciation and amortization ($58,817).
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 quarter ended March 31, 1996 Interest and Other Income
was $87,905, which figure includes interest income of $63,776 and
a supply related rebate of $24,129. For the quarter ended March
31, 1995, Interest and Other Income was $17,262, which figure
represents interest income on invested funds.
Interest Expense is comprised as follows:
[CAPTION]
<TABLE>
<S> <C>
For the quarter ended
March 31,
1996 1995
Interest Expense on Debentures $62,010 $82,680
Amortization of Debenture Issuance Costs 8,314 8,314
Interest Expense on Bank Facilities 38,272 57,915
Total $108,596 $148,909
</TABLE>
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
56,360 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.
IFFC's interest expense on bank facilities was $38,272 and
$57,915 for the quarters ended March 31, 1996 and 1995,
respectively. The $19,643 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 Reserves."
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 March 31, 1996, IFFC had negative working capital of
approximately $1,930,777 and Cash and Cash Equivalents of $212,630.
Although IFFC believes it has sufficient funds to finance its
proposed plan of operations until May 31, 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 May 31, 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 May 31, 1996, IFFC would be required to seek additional
financing or curtail or cease its activities. After May 31, 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 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.
Litigation Funding has indicated that it would, under certain
circumstances, be willing to provide IFFC additional funds to
finance the BKC Litigation. Litigation Funding and IFFC are
currently in the process of exploring the different means by which
Litigation Funding could provide additional funds to IFFC.
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, proceeds from the Assignment
Agreement and credit extended to IFFC by Litigation Counsel.
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 6,470 shares of
Preferred Stock, as of May 6, 1996 there were 43,560 shares of
Preferred Stock outstanding. IFFC anticipates that at least the
next dividend payment with respect to its outstanding shares of
Preferred Stock will, to the extent IFFC has sufficient amounts of
authorized Common Stock, be paid in Common Stock.
IFFC maintains substantially all of its unutilized proceeds in
three bank accounts. As of March 31, 1996 and May 7, 1996, IFFC
had $35,959 and $19,347, respectively, in an account with Northern
Trust of Florida, N.A. As of March 31, 1996 and May 6, 1996, IFFC
had $617,285 and $500,000, respectively, in an account with
AmerBank and substantially all of such funds were held as European
Currency Unit denominated deposits. As of March 31, 1996 and May
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 March 31, 1996 and May 6, 1996,
IFFC had $47,704 and $87,467, respectively, in an operating account
with Bank Handlowy.
In January and February 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. In January 1996, QPQ Corporation, an affiliate of
IFFC, advanced IFFC $15,000.
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 in zlotys (approximately $81,000 at year
end exchange rates), and (ii) repayment of borrowings was deferred
until October 30, 1996. Interest is payable in arrears monthly.
All the borrowings under the credit facility were repaid in full in
April 1996.
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 April 12, 1996 AmerBank agreed to amend the credit
facility so that the outstanding principal balance became due and
payable at a rate of $75,000 plus interest every three months. As
of March 31, 1996 and May 6, 1996 approximately $460,000 and
$385,000, respectively, was outstanding under the February 23, 1994
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 letter of credit, IFFC
can make draws on the letter 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 March 31, 1996 and May 6,
1996, $165,665 and $300,000, respectively, of the credit facility
was outstanding.
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. 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 March 31,
1996 and May 6, 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.
Subject to market conditions, IFFC may generate additional
capital through the public or private sale of equity in IFFC or
IFFP. IFFC believes that its ability to raise additional equity
capital may be negatively impacted if its Common Stock ceases to be
quoted on the NASDAQ Small-Cap Market. In a letter dated May 7,
1996, the NASDAQ Stock Market advised IFFC that its Common Stock
would be delisted effective with the close of business on May 17,
1996. Although IFFC has been granted a formal hearing, there can
be no assurance that IFFC will succeed in retaining listing rights
for its Common Stock.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
IFFC's restaurant operations are conducted in Poland. The
Polish economy has historically been characterized by extremely
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 exceeded 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 highly
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 quarters ended March 31,
1996 and 1995, IFFC had a foreign currency translation gain (loss)
of approximately ($28,314) and ($21,395), 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 March 31, 1996, the
exchange rate was 25,875 zlotys per dollar.
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. In its
counterclaims, BKC alleges, among other things that the IFFC
Affiliate fraudulently induced BKC to enter into the BKC
Development Agreement, breached their contractual obligation to
make certain royalty payments and failed to repay BKC a loan in the
principal amount of $100,000. Accordingly, BKC has asked the court
to award it damages aggregating to at least $1,320,000, plus
certain costs, disbursements and attorney fees. The IFFC
Affiliates believe that BKC's counterclaims are without merit and
intend to vigorously defend themselves against BKC's counterclaims.
The IFFC Affiliates' and BKC's first effort at court ordered
mediation was unsuccessful. 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. Discovery is
proceeding and the trial with respect to the BKC Litigation is
scheduled to commence on August 26, 1996.
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. 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 "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.
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.
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 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.
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
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 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) Reports on Form 8-K:
IFFC filed a Form 8-K, dated January 26, 1996 relating to
developments in the BKC Litigation and the Funding
Agreement.
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: May 17, 1996 By: /s/ Mitchell Rubinson
Mitchell Rubinson, Chairman of the
Board, Chief Executive Officer and
President (Principal Executive Officer)
DATE: May 17, 1996 By: /s/ Stephen R. Groth
Stephen R. Groth, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 212,630
<SECURITIES> 0
<RECEIVABLES> 39,341
<ALLOWANCES> 0
<INVENTORY> 339,331
<CURRENT-ASSETS> 1,158,032
<PP&E> 6,420,088
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,388,481
<CURRENT-LIABILITIES> 3,088,809
<BONDS> 2,756,000
0
436
<COMMON> 39,752
<OTHER-SE> 1,726,129
<TOTAL-LIABILITY-AND-EQUITY> 8,388,481
<SALES> 1,268,674
<TOTAL-REVENUES> 1,268,674
<CGS> 572,281
<TOTAL-COSTS> 1,383,596
<OTHER-EXPENSES> 499,313
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,596
<INCOME-PRETAX> (590,914)
<INCOME-TAX> 0
<INCOME-CONTINUING> (590,914)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (590,914)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
