SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
[ ] Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _______ to _______.
Commission file number 0-20203 and 1-11386
INTERNATIONAL FAST FOOD CORPORATION
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(Name of Small Business Issuer in Its Charter)
Florida 65-0302338
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
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(Address of Principal Executive Offices) (Zip Code)
(305) 531-5800
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b)
of the Securities Exchange Act of 1934:
Name of Each Exchange
Title of Each Class on Which Registered
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None
Securities registered pursuant to Section 12(g)
of the Securities ExchangeAct of 1934:
Common Stock, par value $.01 per share
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(Title of Class)
Units, each Unit consisting of 160 shares of Common Stock and
Redeemable Common Stock Purchase Warrants (the "Warrants")
to purchase 100 shares of Common Stock
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(Title of Class)
Warrants
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(Title of Class)
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Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State registrant's revenues for its most recent fiscal year: $5,351,427.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant on March 31, 1997, computed by reference to the
closing bid price ($ .32 ) on that date: $3,313,765.
APPLICABLE ONLY TO CORPORATE ISSUERS
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The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share (the "IFFC Common Stock"), as of March 31, 1997, was
10,355,517.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
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NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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GENERAL
International Fast Food Corporation, a Florida corporation ("IFFC"), was
organized in December 1991 by Capital Brands, Inc., a Florida corporation
("Capital Brands"), to develop franchised Burger King restaurants in Poland
pursuant to a development agreement (the "BKC Development Agreement") with
Burger King Corporation, a Florida corporation ("BKC"), and commenced its
planned principal operations as of January 1, 1993. The BKC Development
Agreement, the initial term (the "Initial Term") which expired in September
1996, granted IFFC the exclusive right to develop such restaurants for the five
year term of the agreement and a renewal term, subject to certain restrictions
and site exceptions, and required IFFC to open and operate a minimum number of
restaurants in accordance with a specified schedule during the Initial Term.
IFFC is required to enter into a franchise agreement with BKC with respect to
each restaurant.
The BKC Development Agreement required IFFC to open at least 13
full-service traditional restaurants prior to September 1996, including seven
traditional restaurants by September 24, 1994 and three additional traditional
restaurants during each of the two following twelve-month periods. Through the
period ended September 24, 1994 IFFC was ahead of the required development
schedule.
IFFC currently operates eight restaurants. However, during the term of
this Development Agreement certain disputes arose between IFFC and BKC and, on
March 17, 1995, IFFC and its majority owned (85%) subsidiary, International Fast
Food Polska ("IFFP"), filed suit (the "BKC Litigation") against BKC in the
Eleventh Circuit Court of the State of Florida. IFFC alleged that BKC did not
provide all of the support, supervision and assistance required of it under the
BKC Development Agreement and the eight Franchise Agreements (the "Franchise
Agreements") between BKC and IFFC. 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 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 believed that the Development
Agreement had terminated pursuant to its terms.
On March 11, 1997, IFFC, BKC, IFFP, Mitchell Rubinson, IFFC's chairman and
Litigation Funding, Inc. entered into a settlement agreement regarding the BKC
litigation. The settlement agreement provided for IFFC and BKC to enter into an
agreement to cancel the existing Development Agreement between BKC and IFFC and
enter a new ten year Development Agreement (the "New Development Agreement")
which provides that IFFC shall be granted the exclusive right, with certain
exceptions, to develop Burger King restaurants in Poland. In addition, the
settlement agreement provided that IFFC and BKC terminate their eight (8)
existing Franchise Agreements between the parties and enter into new Franchise
Agreements. See Item 3. Legal Proceedings - BKC Litigation.
IFFC currently operates its business in Poland primarily through its
majority owned (85%) subsidiary, International Fast Food Polska, and three
wholly-owned Polish limited liability corporations, IFF Polska-Kolmer, IFF-DX
Management and IFF Polska i Spolka. Unless the context indicates otherwise,
references herein to IFFC include all of its operating subsidiaries.
CUSTOMERS
Although IFFC believes that there is growing demand for Western products
and services in Poland, Polish consumers have had limited, but increasing,
exposure to American-style fast food. As a result, achieving consumer awareness
of, and generating demand for, such products has required substantial efforts
and expenditures by IFFC. In general, market reception has been positive. IFFC
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believes, based upon its experience, over the last five years, the discretionary
disposable income of Polish consumers is relatively limited and that Polish
consumers are somewhat sensitive to price changes in its products. IFFC believes
that the prices of its products are comparable to the products of its
American-style fast food competitors. See "-- Competition."
RELATIONSHIP WITH BURGER KING CORPORATION
THE BURGER KING RESTAURANT SYSTEM. IFFC believes that its prospects should
be enhanced by its affiliation with the Burger King restaurant system. The
Burger King restaurant system is one of the world's largest restaurant systems,
with approximately 8,500 restaurants currently located in the United States and
55 foreign countries, including extensive company-owned and franchised
operations in Europe. IFFC has no other affiliation or relationship with BKC
than as provided for in the BKC Development Agreement.
BKC has developed a restaurant format and operating system, which includes
a recognized design, decor and color scheme for restaurant buildings; kitchen
and dining room equipment and layout; service format; quality and uniformity of
products and services offered; procedures for inventory and management control;
and the Burger King marks, which include such trade marks, services marks and
other marks as BKC may authorize from time to time for use in connection with
Burger King restaurants (the "Burger King System"). All Burger King restaurants
are required to be operated in accordance with BKC standards. Most Burger King
restaurants offer a substantially similar core menu, featuring flame-broiled
hamburgers, cheeseburgers, french fries, and soft drinks. Other menu items may
include salads, pastries, chicken sandwiches, fish sandwiches, ice cream
sundaes, milkshakes and breakfast menu items. IFFC's menu has historically been
more limited than the menus of the United States and many European Burger King
franchises. Sandwich menu items account for the most significant amount of
system-wide sales. Prices for the menu items are determined by IFFC and,
accordingly, may vary from other Burger King restaurants in other countries.
DEVELOPMENT AGREEMENTS. The relationship between IFFC and BKC is governed
principally by the BKC Development Agreement and by a franchise agreement
relating to each restaurant, as described below. Capital Brands entered into the
BKC Development Agreement in September 1991 and, in December 1991, assigned its
rights and obligations under the BKC Development Agreement to IFFC. Pursuant to
the BKC Development Agreement, IFFC was granted the exclusive right until
September 24, 1996 to develop and to be franchised to operate Burger King
restaurants in Poland, with certain exceptions. IFFC was obligated to open and
did open one traditional restaurant by December 24, 1992, three additional
traditional restaurants by September 24, 1993 and three additional traditional
restaurants by September 24, 1994, which IFFC did in a timely manner. Pursuant
to the BKC Development Agreement, IFFC was required to open three additional
traditional restaurants during each of the two following twelve-month periods,
for a total of 13 traditional restaurants open and operating by the end of the
Initial Term. Through the period ended September 24, 1994, IFFC was ahead of the
required development schedule. However, during the term of this Development
Agreement certain disputes arose between IFFC and BKC and, on March 17, 1995,
IFFC and IFFP filed suit against BKC in the Eleventh Circuit Court of the State
of Florida. IFFC alleged that BKC did not provide all of the support,
supervision and assistance required of it under the BKC Development Agreement
and the eight Franchise Agreements (the "Franchise Agreements") between BKC and
IFFC. 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 believed that the BKC
Development Agreement had terminated pursuant to its terms.
In connection with the settlement of the BKC Litigation, the New
Development Agreement was entered into between BKC and IFFC, which was then
assigned by IFFC to IFFP on March 14, 1997; however, IFFC remains liable for the
obligations contained in the New BKC Development Agreement. Pursuant to the New
BKC Development Agreement, IFFC has been granted the exclusive right until
September 30, 2007 to develop and be franchised to operate Burger King
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restaurants in Poland with certain exceptions discussed below. Pursuant to the
New BKC Development Agreement, IFFC is required to open 45 Development Units
during the term of the Agreement. Each traditional Burger King restaurant,
in-line Burger King restaurant, or drive-thru Burger King restaurant shall
constitute one unit. A Burger King kiosk restaurant shall, for purposes of the
New BKC Development Agreement, be considered one quarter unit. Pursuant to the
New BKC Development Agreement, IFFC is to open three Development Units through
September 30, 1998, four units in each year beginning October 1, 1998 and ending
September 30, 2001, and five units in each year beginning October 1, 2001 and
ending September 30, 2007.
Pursuant to the New BKC Development Agreement, IFFC shall pay BKC
$1,000,000 as a development fee. IFFC shall not be obligated to pay the
development fee if IFFC is in compliance with the development schedule by
September 30, 1999, and have achieved gross sales of $11,000,000 for 12 months
preceding the September 30, 1999 target date. If the development schedule has
been achieved but gross sales were less than $11,000,000, but greater than
$9,000,000, the development fee shall be reduced to $250,000. If the development
fee is payable due to failure to achieve the performance targets set forth
above, IFFC, at its option, may either pay the development fee or provide BKC
with the written and binding undertaking of Mr. Mitchell Rubinson, IFFC's
Chairman, that the Rubinson Group will completely divest themselves of any
interest in IFFC and the Burger King restaurants opened or operated by IFFC in
Poland within six (6) months of the date the development fee payment is due. The
Rubinson Group shall include any entity that Mr. Rubinson or they directly or
indirectly own an aggregate interest of ten percent (10%) or more of the legal
or beneficial equity interest and any parent, subsidiary or affiliate of a
Rubinson entity. Mr. Rubinson has personally guaranteed payment of the
development fee.
BKC may terminate rights granted to IFFC under the BKC Development
Agreement, including franchise approvals for restaurants not yet opened, for a
variety of possible defaults by IFFC, including, among others, failure to open
restaurants in accordance with the schedule set forth in the BKC Development
Agreement; failure to obtain BKC site approval prior to the commencement of each
restaurant's construction; failure to meet various operational, financial, and
legal requirements set forth in the BKC Development Agreement, including
maintaining IFFP's net worth of $7,500,000 beginning on June 1, 1999. Upon
termination of the BKC Development Agreement, whether resulting from default or
expiration of its terms, BKC has the right to license others to develop and
operate Burger King restaurants in Poland, or to do so itself.
The BKC Development Agreement requires IFFC to designate a full-time
Managing Director to be responsible for the restaurants to be developed pursuant
to the New BKC Development Agreement. Such General Manager must be acceptable to
BKC. Leon Blumenthal, who has served as IFFC's Senior Vice President, Chief
Operating Officer will serve as Managing Director, and has been approved by BKC.
Specifically excluded from the scope of the BKC Development Agreement are
restaurants on United States military establishments. BKC has also reserved the
right to open restaurants in hotel chains with which BKC has, or may in the
future have, a multi-territory agreement encompassing Poland. With respect to
restaurants in airports, train stations, hospitals and other hotels, IFFC has
the right of first refusal. If IFFC waives such right, BKC or its affiliates or
designated third parties may do so. Generally, IFFC is restricted from engaging
in the fast food hamburger restaurant business when such business would compete
with a restaurant operating under the BKC System.
FRANCHISE AGREEMENTS
In connection with the Settlement Agreement, IFFC and BKC terminated the
existing Franchise Agreements for eight (8) stores and entered into a new
Franchise Agreement for each existing franchise. The franchise agreements shall
supersede the existing Franchise Agreement and each new Franchise Agreement
shall be effective for the remainder of the existing term of the corresponding
Franchise Agreement and shall not require the payment of an additional franchise
fee for such franchises.
The New BKC Development Agreement entitles IFFC to obtain franchises for
individual Burger King restaurants, each of which must be approved by BKC to
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assure compliance with its operational, financial and legal standards. The
typical franchise agreement for a traditional restaurant has a twenty-year term
and permits the franchisee to use the Burger King System. After obtaining
franchise approval for a restaurant, IFFC must apply for and obtain site
approval for each restaurant. Each restaurant must be constructed, equipped,
furnished and operated at the cost and expense of IFFC in accordance with
specifications approved from time to time by BKC.
For each restaurant opened, IFFC is obligated to pay BKC an initial fee of
up to $40,000 for franchise agreements with a term of 20 years and $25,000 for
franchise agreements with a term of ten years payable not later than twenty days
prior to the restaurant's opening. Each franchised restaurant must also pay a
percentage of the restaurant's gross sales, irrespective of profitability, as a
royalty for the use of the Burger King System and the Burger King Marks. The
annual royalty fee is five percent (5%) of gross sales, various taxes, including
VAT and sales taxes, are excluded from gross sales . Payment of all amounts due
to BKC is guaranteed by IFFC. The New BKC Development Agreement calls for
certain cash contributions from BKC to IFFC over the term of the Development
Agreement and additional sums based on an incentive arrangement when earned to
be retained by IFFC out of BKC's future royalties. IFFC must also spend 6% of
the restaurant's gross sales, on advertising, sales promotion, and public
relations.
BKC may terminate the franchise agreement for any restaurant for, among
other things, failure to pay amounts due with respect to that restaurant,
failure to operate the restaurant in accordance with prescribed operating
standards, and persistent breaches of the franchise agreement. Upon termination
or expiration, the franchisee's rights to use the Burger King Marks and Burger
King System terminates, and BKC becomes entitled to purchase the restaurant or
the leasehold interest at the fair market value thereof.
Each franchise agreement provides that the franchisee nor IFFC may not
directly or indirectly have any interest in a fast food hamburger restaurant
during the term of the agreement. For a period of one year after termination or
expiration of the franchise agreement franchisee nor IFFC may not have any
interest in a fast food hamburger restaurant within two kilometers of the Burger
King restaurant it had operated.
Each franchisee must comply strictly with the Burger King System, as the
standards, specifications and procedures comprising such System may be changed
from time to time. Each restaurant must be decorated, furnished and equipped
with equipment, furnishings, and fixtures that meet BKC's specifications.
Compliance with requirements as to signage, equipment, service, hygiene, hours
of operation, and the like are similarly prescribed. BKC reserves the right to
enter each restaurant, conduct inspection activities, and require prompt
correction of any features that deviate from the requirements of the relevant
franchise agreement.
Under the terms of the standard franchise agreement, all menu items and
brands which BKC may deem appropriate are required to be served at a BKC
restaurant, and items excluded from the BKC manual of operations or other forms
of authorization may not be served. Under the terms of the standard franchise
agreement, all food, drinks and other items are required to be served and sold
in packaging that conforms to BKC's specifications. The standard franchise
agreement also provides that only food and supplies from approved sources (which
expression includes source of both product and distribution) may be used in a
BKC restaurant.
BKC requires extensive training of restaurant personnel at IFFC's expense.
All general managers and senior restaurant managers must successfully complete
BKC's training program. In addition, each Burger King restaurant must and does
utilize the services of at least one full-time restaurant manager who has
completed BKC's then current basic operations training course. There are
continuing training programs to implement current operational standards. Each
franchisee must implement a training program for restaurant employees in
accordance with training, standards and procedures prescribed by BKC and must
staff the restaurant at all times with a sufficient number of trained employees.
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Subject to certain exceptions, as long as IFFC is a principal of IFFP, BKC
has the right to review and consent to certain types of new stock issuances of
IFFC for which the consent will not be unreasonably withheld, provided that IFFC
has complied with all reasonable conditions then established by BKC in
connection with the proposed sale or issuance of applicable equity securities.
RESTAURANT DEVELOPMENT
IFFC's restaurant development strategy is to lease prominent traditional
restaurant sites in major Polish metropolitan areas. Such locations are expected
to yield a high volume of traffic and generate significant market exposure.
IFFC considers restaurant location to be critical to its success and has
devoted and intends to continue to devote significant efforts to locating and
evaluating potential sites. The site selection process involves an evaluation of
a variety of factors, including demographics (such as population density);
specific site characteristics (such as visibility, accessibility and traffic
volume); proximity to activity centers (such as office or retail shopping
districts and hotel and office complexes); and potential competition in the
area. IFFC's personnel inspect and approve a proposed site for each restaurant
prior to the execution of a lease. All sites are subject to the approval of BKC.
The opening of restaurants is contingent upon, among other things, locating
satisfactory sites, negotiating acceptable leases or similar rights to a site,
completing any necessary construction, and securing required government permits
and approvals.
The standard restaurant is a full-service restaurant consisting of a
kitchen/preparation area and ordering counter and customer seating area. The
design for a restaurant, which must comply with specified BKC standards, is
relatively flexible and may be located in an existing building or a specially
constructed free-standing building with varying floor plans and configurations.
IFFC has initially sought to locate restaurant sites in existing buildings. IFFC
currently estimates that once space has been leased and made available to IFFC,
approximately 120 days are required to complete construction, obtain necessary
licenses and approvals and open a restaurant. IFFC currently estimates the cost
of opening a restaurant to be approximately $450,000 to $1,000,000, including
leasehold improvements, the initial franchise fee, furniture, fixtures, and
equipment, opening inventories and staff training. Such estimates, however, vary
depending on the size and condition of a proposed restaurant and the extent of
leasehold improvements required.
IFFC has obtained all required BKC, government and regulatory approvals
and permits for its first eight traditional restaurants.
SOURCES OF SUPPLY
IFFC is substantially dependent upon BKC approved vendors for all of its
capital equipment, food products and other supplies. IFFC currently obtains a
majority of its food products from Polish sources, some of which, including
Coca-Cola syrup and french fries, are imported into Poland. The remainder of
IFFC's food products, come from Western Europe. IFFC currently obtains its
restaurant furniture and fixtures in Poland and obtains its restaurant
equipment, point of sale equipment and paper products primarily from BKC
approved sources in the United States and Western Europe. All remaining supplies
are from Polish sources.
IFFC has entered into purchase agreements with its suppliers of hamburger
buns, meat, soft drinks and for its distribution.
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RESTAURANT OPERATIONS AND PERSONNEL
IFFC operates its restaurants under uniform standards set forth in BKC's
confidential operating manual, including specifications relating to food quality
and preparation, design and decor and day-to-day operations. IFFC believes that
its operations are similar to those of other European Burger King restaurants.
However, IFFC believes its menu is more limited than those of other European or
United States Burger King restaurants. For instance, IFFC does not currently
sell salads, pastries or breakfast menu items.
IFFC's General Manager and Operations Manager, are residents of Poland.
They have significant involvement in managing the operations of IFFC's
restaurants. As of March 21, 1997, IFFC employed 16 general and clerical
personnel, 37 restaurant managers and assistant managers and 260 crew employees.
IFFC's restaurant managers are responsible for supervising the day-to-day
operations of the restaurants, including food preparation, customer relations,
restaurant maintenance, inventory and cost control and personnel relations. In
addition, restaurant managers are responsible for selecting and training new
crew personnel, who undergo on-the-job training.
IFFC utilizes BKC training techniques and manuals and solicits the
assistance and counsel of BKC personnel. IFFC is responsible, at its expense,
for the translation of BKC manuals into Polish and pays BKC for certain support
services relating to employee training. IFFC maintains financial, accounting and
management controls for its restaurants through the use of centralized
accounting systems, detailed budgets and computerized management information
systems.
ADVERTISING AND PROMOTION
IFFC's franchise agreements with BKC provide that each franchised
restaurant will spend 6% of its gross sales on advertising, sales promotion, and
public relations. The New BKC Development Agreement calls for certain cash
contributions from BKC to IFFC over the term of such Agreement and additional
sums based upon an incentive arrangement when earned to be retained by IFFC out
of BKC's future royalties. IFFC contributes these funds into a marketing fund
administered by IFFC. All expenditures are based on a marketing plan created by
IFFC and BKC, except for local store marketing programs. In addition, the fund
reimburses IFFC up to a certain amount for its marketing manager.
COMPETITION
IFFC faces competition from a number of American-style fast-food
franchisors and/or their licensees, including McDonald's, Pizza Hut, Kentucky
Fried Chicken, Taco Bell and Domino's. IFFC also encounters competition from a
broad range of existing Polish restaurants and food service establishments,
including local quick-service restaurants offering products that are familiar to
Polish consumers and have achieved broad market acceptance, as well as existing
restaurants offering American-style fast food, including hamburgers.
Additionally, it can be expected that, in the event of perceived initial market
acceptance of American-style fast food concepts, there will be a rapidly
increasing number of market entrants offering such products, including
additional American franchisors and Polish or other companies seeking to imitate
the American-style fast-food concepts. IFFC believes that it competes on the
basis of price, service and food quality. See "--Customers."
TRADEMARKS
IFFC is authorized to use such trademarks, service marks and such other
marks as BKC may authorize from time to time for use in connection with Burger
King restaurants (collectively, the "Burger King Marks"). BKC has applied for
and received trademark registrations in Poland for certain Burger King Marks
(the "Burger King" logo, the words "Burger King" and the word "Whopper"). Under
the terms of the New BKC Development Agreement and the individual franchise
agreements, IFFC is required to assist in the defense of any action relating to
the right to use or the validity of the Burger King Marks and to cooperate in
the prosecution of any action to prevent the infringement, imitation, illegal
use or misuse of the Burger King Marks or the Burger King System. BKC is
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obligated to bear the legal expenses and costs incidental to IFFC's
participation in any such action. However, BKC has made no warranty or
representation that the Burger King Marks will be available to IFFC on an
exclusive basis or at all.
FOREIGN CURRENCY AND EXCHANGE
Revenues from operations in Poland, if any, must be maintained in
zloty-denominated accounts, although they may be freely converted into foreign
currencies, at then current official exchange rates, for purposes of paying for
foreign goods and for repatriation of profits. There are presently no
limitations on IFFC's ability to repatriate profits. The exact amount of
profits, if any, that IFFC repatriates at a given time will depend on, among
other factors, IFFC's financial condition, results of operations and capital
requirements. Unless and until IFFC is able to obtain all its supplies of local
Polish origin and priced in Polish currency, it will be subject to risks from
exchange rate fluctuations. IFFC has not but, may seek to limit its exposure to
the risk of currency fluctuations by engaging in hedging or other transactions,
which transactions could expose IFFC to substantial risk of loss. IFFC has no
experience in hedging or in managing international transactions and has not yet
formulated a strategy to protect IFFC against currency fluctuations. See "Item
6. "Management's Discussion and Analysis or Plan of Operation."
UNITED STATES INCOME TAXES
In general, income of IFFC's Polish subsidiaries will not be subject to
U.S. Federal income tax until it is distributed to IFFC. When distributed, it
will be includable in IFFC's gross income to the extent it is paid out of a
subsidiary's earnings and profits. IFFC, however, may claim a foreign tax credit
against its U.S. tax liability for Polish corporate income tax paid by the
subsidiary and for Polish tax withheld from the dividend, subject to
limitations. Because the 40% Polish corporate income tax rate exceeds the
current maximum U.S. corporate income tax rate, IFFC does not anticipate that
significant U.S. Federal income tax will be payable on the income of its Polish
subsidiaries. In certain circumstances, a portion of a Polish subsidiary's
income may be includable in IFFC's gross income before it is distributed,
although a foreign tax credit for Polish corporate income tax paid by the
subsidiary would be available to IFFC as if the income actually had been
distributed.
CONSULTING AGREEMENT WITH QPQ CORPORATION/PIZZA KING POLSKA
On July 25, 1993, IFFC entered into a three year consulting agreement (the
"Consulting Agreement") with QPQ Corporation ("QPQ"). Under the terms of such
agreement, IFFC is to assist QPQ generally with operational and administrative
matters. Pursuant to the Consulting Agreement, as amended on July 27, 1994 and
January 1, 1995, IFFC provided to QPQ: (1) the services of IFFC's Chief
Financial Officer for not more than 30% of his business time; (2) the services
of IFFC's Controller for not more than 30% of her business time; and (3) the
services of managerial, general office and staff personnel of IFFC. In exchange
for such services, QPQ is required to pay IFFC: (1) 30% of the cost of all
compensation and benefits provided by IFFC to its Chief Financial Officer; (2)
27.5% of all compensation and benefits provided by IFFC to its Controller; and
(3) all costs and expenses incurred by IFFC in connection with the services
rendered pursuant to the Consulting Agreement. In the year ended December 31,
1996 and the year ended December 31, 1995, QPQ's obligations to IFFC pursuant to
the terms of the Consulting Agreement aggregated $4,225 and $218,742,
respectively. QPQ terminated the agreement with IFFC in July 1996. In addition
to the reimbursable costs paid by QPQ, QPQ had granted IFFC an option to
purchase up to 250,000 shares of QPQ's Common Stock at an exercise price of
$6.00 per share. This option was terminated in June 1996 for $10,000 paid by QPQ
to IFFC.
As of April, 1995, IFFC's majority-owned subsidiary, IFFP, entered into a
consulting agreement (the "Subsidiary Consulting Agreement") with QPQ's
wholly-owned subsidiary, Pizza King Polska ("PKP"), pursuant to which IFFP has
agreed to provide PKP with all general staff and administrative support required
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by PKP to operate its Domino's Store business. The services of Leon Blumenthal
were made available to PKP and QPQ pursuant to the Subsidiary Consulting
Agreement. In exchange for such services, IFFP received from PKP a sum
equivalent to 10% of PKP's sales and a reimbursement of expenses. In the years
ended December 31, 1996 and December 31, 1995, PKP's obligations to IFFP
pursuant to the terms of the Subsidiary Consulting Agreement aggregated to
$64,999 and $116,723. In June 1996 this agreement was terminated.
EMPLOYEES
As of March 21, 1997, IFFC had 56 full-time employees and 260 part-time
employees. Mitchell Rubinson, IFFC's Chairman of the Board, President and Chief
Executive Officer, has entered into an employment agreement with IFFC pursuant
to which he is required to devote a substantial portion of his business time to
IFFC. IFFC has also entered into an employment agreement with Leon Blumenthal,
IFFC's Senior Vice President, Chief Operating Officer and General Manager. Jim
Martin serves as IFFC's Chief Financial Officer, Treasurer and a Director. The
success of IFFC is dependent, in part, upon its ability to hire and retain
additional qualified personnel. IFFC continues to recruit personnel for its
operations in Poland. IFFC utilizes local employees to staff its restaurants.
Such employees are not represented by labor unions. Substantially all of IFFC's
management and employees resident in Poland speak Polish and substantially all
of IFFC's senior management team in Poland is also able to communicate in
English. Messrs. Rubinson, Martin and Blumenthal do not speak Polish. All
members of IFFC's senior management team have obtained the requisite Polish work
permits, when necessary. See "Foreign Investment Law and Government
Regulation--Employees and Wages."
INTERNATIONAL FAST FOOD POLSKA
All of IFFC's operations in Poland are conducted through International
Fast Food Polska ("IFFP"). As of December 14, 1994, Agros Holding S.A., a Polish
joint stock corporation which produces agricultural products ("Agros"), acquired
a 20% 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. The
difference between the $2,000,000 purchase price and the sum of the transaction
expenses and the book value of IFFP was recognized by IFFC as $516,708 increase
to shareholder's equity in IFFC.
On December 28, 1995, IFFC and Agros entered into an agreement evidencing
the IFFP Share Sale. Pursuant to the agreement, IFFC purchased 5% of IFFP, or
25% or Agro's holding, for $500,000 payable to Agros by December 29 1996. Such
transaction was evidenced by a non-interest bearing note. The amount remains
unpaid. In December 1996, Agros sold the balance of its interest in IFFP to its
Polish parent corporation.
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 IFFP'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 the business and the management of IFFP's business.
The IFFC Consulting Agreement automatically renews each 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.
INSURANCE
IFFC maintains liability, casualty and business interruption insurance in
amounts which it believes to be adequate.
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ECONOMIC AND BUSINESS CONDITIONS IN POLAND
The Republic of Poland is situated between the southern coast of the
Baltic Sea and the Carpathian Mountains. Its geographic neighbors are the
Republic of Belarus, the Czech Republic, the Federal Republic of Germany, the
Republic of Lithuania and the Ukraine. It has a total area of approximately
120,700 square miles and a population of approximately 38.6 million. Poland has
an extensive network of roads, railways and canals, and has four major ports on
the Baltic sea. Poland's major cities and their approximate populations are:
Warsaw (1,900,000); Lodz (950,000); Katowice (950,000); Krakow (750,000);
Wroclaw (650,000); Poznan (600,000); and Gdansk (500,000). Poland today is
ethnically almost homogeneous.
Since the fall of the Communist government in 1989, Poland has embarked on
a program of economic reforms, based on a transition to a market economy and
private ownership. Seven (7) years into its transition to a market economy,
Poland has become the first former centrally planned economy in Central and
Eastern Europe to end its recession and return to growth. Poland's
transition-induced recession bottomed out in the second quarter of 1991, and for
the last seven (7) years the Polish economy has enjoyed an accelerated growth.
Since 1989, the Polish government has sought to attract foreign capital
by, among other actions, executing investment protection agreements with major
industrialized countries, and adopting a law the express intent of which is to
encourage foreign investment in Poland. Poland has further evidenced its
commitment to a market system by opening a stock exchange in Warsaw and
introducing a system designed to result in the development of a Western system
of banking. The tax system was reformed to provide equal tax treatment of all
economic entities.
The sweeping economic reforms introduced in 1989 removed price control,
eliminated subsidies to industry, opened Poland's markets to international
competition, and imposed strict budgetary and monetary discipline. These reforms
have achieved impressive results in reducing inflation--from almost 600% in 1990
to 32%, 21.6% and 19.5% in 1994, 1995 and 1996.
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FOREIGN INVESTMENT LAW AND GOVERNMENT REGULATION
GENERAL
The Polish Law of June 14, 1991 on companies with foreign participation
(the "Foreign Investment Law") sets forth the legal requirements governing
foreign investment in Poland. The Foreign Investment Law states that, unless
provided otherwise, the Polish Commercial Code of 1934 (the "Commercial Code")
is the commercial law generally applicable to domestic business. The Commercial
Code governs corporate and partnership formation, governance and activity, and
is generally similar to corresponding regulations of countries in the EEC.
Under the relevant portions of the Foreign Investment Law, a foreign
investor may establish a limited liability company (roughly analogous to a
closely held corporation in the United States), in which it will hold 100% of
the shares; establish a limited liability company, with the equity jointly
contributed by it and other foreign and/or Polish parties; or enter business in
Poland through acquisition of stock of an existing Polish limited liability
company. The Foreign Investment Law also governs foreign investment in "joint
stock companies," which are roughly analogous to publicly held corporations in
the United States. Since IFFC anticipates that its business in Poland will be
conducted solely through one or more of its wholly owned limited liability
companies for the foreseeable future, the following discussion addresses only
limited liability companies.
The Foreign Investment Law defines the range of economic activities in
which a limited liability company with foreign participation (a "CFP") may
engage to include "participation in revenues from the operation of enterprises
in the territory of the Republic of Poland." The Foreign Investment Law does not
restrict the scope of economic activities of a CFP, which is thus permitted to
engage in any business in which a domestic Polish limited liability company
without foreign participation may engage. IFFC's development and operation of
restaurants is not included in one of those enumerated sectors, and do not
require special licensing. Moreover, access to raw materials and supplies in the
domestic market is afforded without distinction as to cooperatives and state
enterprises on the one hand, and private business entities, including a CFP, on
the other. All private business entities have equal access to raw materials and
labor and are treated equally for tax purposes. A CFP is free to set prices for
its products and services.
A CFP must comply with certain formal requirements preceding the
commencement of revenue producing activities, which formal requirements have
been complied with by IFFC's subsidiaries. The Founding Act of a CFP
(essentially equivalent to articles of incorporation and bylaws in the case of a
CFP that is a 100% owned subsidiary) must be prepared and executed before a
notary public (who is a lawyer and who reviews the Founding Act as to its
compliance with applicable law) in the form of a Notarial Deed. The CFP must
then be registered by the District Court responsible for the conduct of the
Commercial Register. The registration process for a newly formed CFP generally
takes from one to three months. The CFP commences its legal existence upon
registration. The CFP must then register with the Local Statistical Office to
obtain a National Economy Code Number ("REGON") and register with the Treasury
Office to obtain a Tax Indemnification Number ("NIP"). Without a REGON and a
NIP, a CFP may not complete mandatory registration with the local Fiscal Office
and Social Security Office, and may not open bank accounts or proceed with
customs clearance. These formal requirements are identical to those required for
a domestic Polish limited liability company without foreign participation.
CONTRIBUTION TO CAPITAL
Other than pursuant to provisions of the Commercial Code generally
applicable to all limited liability companies, there is no minimum level of
investment required of a CFP. The minimum capital required for establishment of
any limited liability company is 40,000,000 zlotys (about $1,301 as published by
the National Bank of Poland on March 21, 1997), which must be made in Polish
currency obtained from the sale of convertible currency (including United States
or West European funds) to a foreign exchange bank, or, to the extent designated
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in the CFP's Founding Act, through in-kind, nonmonetary contributions that are
transferred from abroad or purchased with Polish currency obtained from the sale
of convertible currency to a foreign exchange bank. To the extent designated in
the CFP's Founding Act, fixed assets may constitute in-kind, non-monetary
contributions to equity.
TAXATION
A CFP is subject to the same taxes, and general tax reductions, as
domestic Polish companies without foreign participation. Tax exemptions
specifically reserved for foreign investors or companies with foreign
participation are no longer available after January 1, 1994 and such tax
exemptions can only be utilized if the right to such exemptions was acquired
prior to January 1, 1994. A CFP is subject to corporate income tax, VAT, which
is known in Poland as the "Tax on Goods and Services," and excise tax and,
depending on the nature of its business activities, may also be subject to real
estate tax, local tax, and stamp duty. The corporate income tax rate was 40
percent of taxable income until December 31, 1996 and is currently 38 percent.
The rate is generally calculated by the extent to which revenues exceed
expenses, including operating losses, which may be carried forward for three
years. The shareholder of a limited liability company is liable for any income
taxes not paid by the company.
All goods and services, including imported goods and services, are subject
to a VAT and excise tax, based on the value of such items. With respect to
imports, the value of such items is equal to the customs' value plus any
customs' duties. The VAT basic rate is 22%, but in the case of certain products,
it is reduced to 7% or entirely. Under the VAT system, credit is given for VAT
paid against VAT collected.
A CFP's employees are subject to a personal income tax, and a CFP is
required to make contributions for employees' health and pension insurance,
commonly referred to as the social security fund. Currently, an employer must
remit to the social security fund, the unemployment fund and the Fund of
Guaranteed Employees' Payments 45%, 3% and .2%, respectively, of the amount of
wages paid to an employee before withholding for personal income tax. Both
Polish and foreign employees are governed by the same social security, health,
pension, and unemployment insurance provisions.
Currently, dividends are taxed at the rate of 20%. However, Poland has
executed a bilateral tax agreement with the United States, pursuant to which the
tax on dividends of corporations in which at least 10% of the voting stock is
held by a United States corporation may not exceed 5%. Thus, though current
regulations would otherwise provide for a 20% tax on dividends, taxes on
dividends paid by a CFP which is a subsidiary of IFFC will be at the rate of 5%.
CUSTOMS DUTIES AND IMPORT RESTRICTIONS
Customs duties on imported goods are regulated by the Customs Law of 1989
(as amended). The tariff is coordinated and integrated with international
regulations and the provisions of the General Agreement on Tariffs and Trade.
IFFC's operations may be subject to various levels of customs duties on certain
types of items imported into Poland. Customs duties and other similar fees,
however, are not levied on non-monetary, in-kind contributions to capital,
provided that such contributions constitute "fixed assets" and are not disposed
of during the three-year period following customs clearance. Although IFFC has
contributed as capital substantially all of its subsidiaries' furniture,
fixtures and equipment, there can be no assurance that such equipment will
ultimately qualify as "fixed assets" for purposes of this exclusion.
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On February 4, 1994 the Parliament passed a law imposing countervailing
duties on certain agricultural and food products imported from abroad, which law
became effective as of April 14, 1994. The law is intended to protect local
producers by increasing the cost of importation of certain agricultural and food
products, such as meat, milk, wheat flour, processed tomatoes, vegetable oil,
pork, poultry and dairy products, through the imposition of countervailing
duties up to a level comparable to the local prices of such products as
determined by the Minister of Agriculture. Recently, a new customs law was
enacted to be effective July 1, 1997, which is consistent with the European
Economic Union's customs regulations. IFFC currently purchases most of its
products in Poland and accordingly these duties presently have minimal impact on
IFFC's costs.
CENTRAL EUROPEAN FREE TRADE ASSOCIATION
The Central European Free Trade Association (CEFTA) was established on December
21, 1992, effective on March 1, 1993. The purpose of the Association was to
increase trade between Eastern and Central European countries including Poland
Czech Republic, Slovakia, and Hungary.
Originally the CEFTA agreement called for a free-trade zone by the year 2001.
However, in August of 1995, the foreign ministers met and agreed to amend the
original agreement. The amendment shortened the time period for reducing customs
duties and taxes on certain categories. As of January 1996, customs duties on
approximately one third of all agricultural products traded between the
Association have been eliminated. Included in this category for 1996 were citrus
fruits, coffee, tea, rice, bread, flour, fish and corn. By January 1st, 1998,
customs duties and taxes on all agricultural products traded between the
Association will be eliminated.
POLISH CURRENCY AND FOREIGN EXCHANGE
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. Domestic persons and CFPs are entitled to hold foreign currency
acquired through the conduct of an economic activity in their own accounts.
Foreign currency may only be converted into zlotys, by selling the foreign
currency to a foreign exchange bank. Proceeds from economic activities in Poland
must be maintained in zloty denominated accounts, but may be converted into hard
currencies for certain purposes as discussed below. Typically, the transfer of
foreign currency abroad requires a foreign exchange permit, but no permit is
required for the repatriation to foreign investors in hard currency of up to
100% of the profits of a CFP. Similarly, foreign investors may repatriate in
foreign currency all proceeds of the sale or liquidation of equity interests in
the CFP, all proceeds of the liquidation of a CFP, and compensation resulting
from expropriation or similar government acts. The zloty is also tradeable and
exchangeable into foreign currency for the purpose of purchasing goods and
services abroad. On March 21, 1997, the exchange rate was 30,745 zlotys per
dollar as published by National Banking Poland. Foreign exchange banks are
required to sell foreign currency to domestic persons, including a CFP, when
such currency is needed for repatriation as set forth above, and to satisfy
foreign currency obligations to foreign persons resulting from the purchase of
goods and certain services. Foreign employees may repatriate their after-tax
earnings in hard currencies without having to obtain an individual foreign
exchange permit.
FOREIGN EXCHANGE LAW
Effective January 1, 1995, a new Polish Foreign Exchange Law became
effective. The expressed objectives of the new law are (i) to apply uniform
standards to all Foreign Exchange Banks operating in Poland, (ii) to create a
legal framework for market valuation of the Polish currency, and (iii) to move
toward full convertibility of the zloty. The new law is also designed to permit
greater freedom (less restrictions) on certain foreign trade transactions
accounted for in Polish currency.
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REPORTING AND AUDIT
The balance sheet and profit and loss statements of a CFP must be prepared
in accordance with Polish accounting principles and in compliance with the
requirements of the Commercial Code. As Poland becomes more integrated with the
EEC, it is anticipated that its financial reporting requirements will become
substantially similar to generally accepted accounting principles in the EEC
which are generally similar to those in the United States. For financial
reporting purposes in the United States, IFFC prepares its financial statements
in accordance with generally accepted accounting principles.
LEASES AND PURCHASE OF LAND
A CFP may lease real property from private parties without substantial
restrictions. The acquisition of real property is regulated by the Acquisition
of Real Property Estate by Foreign Persons Act of 24 March 1920. Since IFFC does
not presently intend to acquire real property in Poland, these statutes are not
described herein.
EMPLOYEES AND WAGES
All employees, Polish and foreign, must be paid in zlotys. Foreign
employees require work permits from local authorities, which are typically not
difficult to obtain for executive or managerial employees, and are typically
obtained in due course. Employers are required to pay a minimum wage. As set
forth above, all wages are subject to payroll taxes payable by the employer, and
income tax payable by the employee.
GOVERNMENTAL REGULATION OF RESTAURANT OPERATIONS
Restaurant operations are subject to a number of national and local laws
and regulations, primarily related to sanitation. All imported meat and other
food products are subject to specific sanitary requirements. Restaurants are
subject to national regulations relating to health and sanitation standards,
generally implemented, administered and enforced at the local level. All
properties are subject to local zoning, building code and land-use regulations.
In general, necessary approvals and permits for restaurant operations are
granted without undue delay, and are typically granted within 14 days of
application therefor.
TRADEMARK PROTECTION
Under Polish law, the registrant of a trademark in Poland acquires the
exclusive right to use the trademark in commerce for goods and services covered
by the registration. If the trademark is infringed, the registrant is entitled
to demand injunctive relief, monetary damages, and seizure of infringing items.
In general, the first applicant is entitled to the registration of a trademark
from the date the application is filed with the Patent Office. Foreign nationals
generally have the same rights as Polish citizens with regard to trademarks.
UNITED STATES-POLAND TREATY
On March 21, 1990, the President of the United States and the Prime
Minister of Poland signed a treaty concerning business and economic relations,
which was ratified by both countries. The ratification instruments were
exchanged in Warsaw on July 7, 1994 and the treaty became effective as of August
6, 1994. The aim of the treaty is to encourage and facilitate United States
investments in Poland by providing internationally recognized protections and
standards. The treaty sets certain minimum standards; in some cases, Polish
legislation more favorable than that required by the treaty has been enacted.
Some of the key elements of the treaty include the following:
o Poland agreed to treat United States investors in Poland the same as
Polish nationals or investors from other countries, whichever is
more favorable.
o The United States and Poland agreed to internationally recognized
standards for expropriation; expropriation will be permitted only
for a public purpose, and must include prompt payment at fair market
value.
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o The United States and Poland agreed to abide by internationally
recognized standards for arbitration that ensure that an investor
has the right to resort to international arbitration.
o Poland guaranteed that United States firms will have the right to
market goods and services both at the wholesale and retail level;
obtain access to public utilities and financial institutions; obtain
commercial rental space and raw materials on a non-discriminatory
basis; conduct market studies and distribute commercial information
of all kinds; and obtain registrations, licenses, permits and other
approvals on an expeditious basis.
o Poland agreed to adopt major new intellectual property standards,
including adherence to the Paris Act of the Berne Convention;
copyright protection for computer software; and protection of
proprietary information.
o Poland agreed to permit immediate and complete repatriation of
export earnings and capital from Poland to the United States. In
addition, Poland agreed to progressively eliminate restrictions on
repatriation of United States investor zloty profits. All such
restrictions on the repatriation of profits have been eliminated.
See "Polish Currency and Foreign Exchange."
ITEM 2. DESCRIPTION OF PROPERTY.
OFFICES. Since February 1992, IFFC has maintained its executive offices in
approximately 1,100 square feet of leased office space at 1000 Lincoln Road,
Suite 200, Miami Beach, Florida 33139. Annual lease payments under the lease,
which terminated in December 31, 1996, were approximately $11,900 plus tax. IFFC
has exercised its second of three, two-year renewal options under the lease, and
its current lease payment for 1997 is $13,285. See ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--Shared Facilities."
QPQ and IFFC share equally the cost and use of office space in Poland. In
November 1993, QPQ entered into a ten-year lease (the "Cogik Lease") with Cogik,
a Polish limited liability corporation ("Cogik"), and on September 30, 1994, the
Cogik Lease was amended. The Cogik Lease pertains to 325 square meters of office
space. Annual lease payments, excluding utility charges, aggregate to
approximately $73,200. The Cogik Lease automatically extends for another
ten-year term unless QPQ or Cogik gives the other party notice otherwise. QPQ
and Cogik can each terminate the lease upon six months written notice.
Renovation costs, including leasehold improvements, were $61,600. In November
1996, Cogik exercised its option to terminate the lease upon six (6) months
notice. Accordingly, QPQ and IFFC must vacate such premises in May 1997. They
anticipate being able to find available office space in Warsaw.
SALUS RESTAURANT. In August 1992, IFFC entered into a three year and eight
month noncancellable sublease agreement with SAZ, a Polish limited liability
corporation ("SAZ"), for a traditional restaurant site (the "Salus Restaurant
Site"). In November 1993, IFFC agreed to pay SAZ $370,000 in consideration of
certain leasehold improvements and SAZ's agreement to cancel its underlying
lease with the Garrison Flats Administration and its sublease with IFFC. In
addtion to the $370,000, IFFC paid approximately $960,000 for leasehold
improvements, furniture, fixtures and equipment.
In January 1994, IFFC entered into a five year lease with the Garrison
Flats Administration for the Salus Restaurant Site consisting of approximately
522 square meters. IFFC has the option to extend the lease for an additional
five years. Thereafter, IFFC has the option to extend the lease for another five
years upon terms no less favorable than those offered to another lessee. Annual
lease payments are payable in zlotys and, excluding utility payments, are the
United States dollar equivalent of $30,115. In addition to the occurrence of
certain events of default by the Garrison Flats Administration, IFFC has the
right to terminate the lease if its permit or license to operate a Burger King
restaurant at the site is revoked.
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GALAXY RESTAURANT. In October 1992, IFFC entered into a lease for an
unlimited period of time with the Municipal House Administration for a
traditional restaurant site consisting of approximately 799 square meters. After
October 26, 1997, the lease may be terminated by IFFC at any time upon three
months' notice. The Municipal House Administration may terminate the lease at
any time upon three months' notice provided that it reimburses IFFC for all of
its capital expenditures for the site. Renovation costs, including leasehold
improvements and furniture, fixtures and equipment, were approximately $887,300.
Annual lease payments, excluding utility charges, are currently 943,908,000
zlotys, approximately $32,860 at year end exchange rates. Annual lease payments
may be increased by the rate of inflation in Poland.
KOLMER RESTAURANT. In September 1992, IFFC was assigned and assumed all
rights, duties and obligations of Kolmer, a Polish limited liability company
("Kolmer"), pursuant to a lease for a traditional restaurant site consisting of
approximately 868 square meters. In March 1995 the lease was amended. The lease
is for an unlimited period of time. The lease may be terminated by IFFC at any
time upon three months' notice. The lessor, the Warsaw District
Authorities-Srodmiescie, may terminate the lease at any time upon three months'
notice provided that it reimburses IFFC for the then current value of its
capital expenditures for the site. Renovation costs, including leasehold
improvements and furniture, fixtures and equipment, were approximately $808,000.
Annual lease payments, excluding utility charges, are 1,828,680,000 zlotys,
approximately $63,662 at year end exchange rates.
DANTEX RESTAURANT. In August 1992, IFFC entered into a sublease agreement
with Dantex, a Polish limited liability company ("Dantex"), for a traditional
restaurant site consisting of approximately 355 square meters. As of December
1992, the sublease was amended. The sublease, as amended, and the underlying
lease are for an unlimited amount of time; however, the sublease is terminable
by the lessor or IFFC upon three months' notice. IFFC has advanced funds for
renovation costs incurred in the course of preparing the premises for use.
Renovation costs, including leasehold improvements and furniture, fixtures and
equipment, were approximately $790,000. IFFC's annual sublease payments are
equivalent to Dantex's annual lease payments of 698,803,200 zlotys,
approximately $24,327 at year end exchange rates. Commencing July 7, 1996,
IFFC's monthly sublease payments are equal to the sum of (i) Dantex's lease
payments, and (ii) one-half of the difference between 10% of the restaurant's
gross sales and the lessor of Dantex's lease payments or 4% of the restaurant's
gross sales. In June 1995 and January 1996, IFFC entered into an agreement with
the lessee of the Dantex Restaurant premises to cancel the sublease in favor of
a primary lease with the lessor. In consideration for this concession, the
lessee will be paid a total of $348,000. IFFC paid the lessee $30,000 in 1995,
$158,000 in 1996 and $57,500 in March of 1997. The balance of $102,500 is due on
April 20, 1997. IFFP is currently a co-lessee of the premises.
KIELCE RESTAURANT. In May 1993, IFFC entered into a master lease agreement
(the "Master Lease Agreement") with Domy Towarowe Centrum, a Polish state owned
enterprise ("Centrum"), with respect to fast food restaurant sites. In
accordance with the terms of the Master Lease Agreement, in December 1993 IFFC
entered into a 20-year lease agreement with Centrum for a traditional restaurant
site consisting of approximately 390 square meters. IFFC's monthly lease
payments are approximately 4.4% of the restaurant's "net sales" as such term is
defined in the lease. In addition to the occurrence of certain defaults by
Centrum, IFFC has the right to terminate the lease if its permit or license to
operate a Burger King restaurant at the site is revoked.
LUBLIN RESTAURANT. In January 1994, IFFC entered into a 20-year sublease
agreement with Multico, a Polish limited liability corporation ("Multico"), for
a traditional restaurant site consisting of 600 square meters. IFFC's monthly
sublease payments, excluding utility payments, are the greater of: (i)
approximately 4.1% of the restaurant's "net sales," as such term is defined in
the sublease; or (ii) $4,500, as adjusted for inflation. In addition to the
occurrence of other events of default, IFFC has the right to terminate the
sublease if IFFC loses its permit or license to operate a Burger King restaurant
at the site.
PARNAS RESTAURANT. In January 1994, IFFC entered into agreements with each
of PTTK, the Warsaw district Department of Tourism (the "Lessor"), and its
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lessees, Mr. Tadeusz Hofmokl ("Hofmokl") and Polish-Greek Production and Trading
Enterprises ("Ambrozja") (collectively, Hofmokl and Ambrozja are referred to as
the "Lessees"), in order to secure until 2009 approximately 240 square meters of
space for use as a Burger King restaurant.^ In January 1996, IFFC terminated its
lease with Ambrozja and entered into a new lease with Turmaco, Sp.zo.o. under
the same terms. Pursuant to the agreement between IFFC and the Lessor, the
Lessor has consented to IFFC's sublease of space from the Lessees. In addition,
the Lessor has agreed, upon the termination of each lease between the Lessor and
the individual Lessees, to enter into a lease with IFFC on comparable terms,
with the exception of certain lease expenses and termination dates.
With respect to the 225 square meters of space subleased from Turmaco,
IFFC has agreed to pay Turmaco annual sublease payments, excluding utility fees,
of the zloty equivalent of $67,500, which sublease payments increase annually by
three percent. The sublease is for a term of ten years and may be extended for
five years upon IFFC's election. In the event that IFFC is required to vacate
the restaurant site due to no fault of its own, IFFC will be entitled to
compensation from Turmaco for their leasehold improvements to the restaurant
site.
With respect to the 20 square meters of space subleased from Hofmokl, IFFC
has agreed to pay Hofmokl annual sublease payments, excluding utility fees, of
the zloty equivalent of $7,500, which sublease payments increase annually by
three percent. The sublease is for a term of five years. Neither Hofmokl nor
IFFC has the right to unilaterally extend the term of the sublease. In addition
to the occurrence of other events of default by Hofmokl, IFFC has the right to
terminate the sublease if IFFC loses its permits or licenses to operate Burger
King restaurants.
Renovation costs at the Parnas Restaurant, including leasehold
improvements and furniture, fixtures and equipment, were approximately $399,000.
KATOWICE RESTAURANT. In November 1993, IFFC entered into a ten-year lease
(the "Katowice Lease") with Jan Kosmowski, Justine Irena Kosmowski and Krysztof
Kosmowski (collectively, the "Lessor") for a traditional restaurant site
consisting of 550 square meters. As of March 25, 1994, IFFC paid the Lessor a
one-time fee of $50,000, which fee may be refunded to IFFC if the Lessor
improperly terminates the lease. As of November 15, 1993 and November 15, 1994,
the Katowice Lease was amended. IFFC's monthly lease payments, excluding utility
payments, are the greater of: (i) approximately 4.5% of the restaurant's "net
sales," as such term is defined in the lease; or (ii) approximately $7,600. The
Katowice Lease does not provide either IFFC or the Lessor a means of
unilaterally extending the term of the lease. In addition to the occurrence of
certain events of default by the Lessor, IFFC has the right to terminate the
Katowice Lease upon three months' notice if its permit or license to operate a
Burger King restaurant at the site is revoked due to no fault of IFFC.
The following table sets forth, as of March 21, 1997, the name, location,
opening date and lease or sublease expiration date (including all renewal
options) for each of IFFC's restaurants:
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Restaurant Date
Name Location Opening Date Lease Expiration
- ------------ ------------------- ------------------ ------------------
Salus Warsaw, Poland December 1993 January 2009
Galaxy Warsaw, Poland April 1993 (1)
Kolmer Warsaw, Poland May 1993 (1)
Dantex Warsaw, Poland July 1993 (1)
Kielce Kielce, Poland May 1994 May 2013
Lublin Lublin, Poland March 1994 January 2014
Parnas Warsaw, Poland March 1994 January 2009(2)
Katowice Warsaw, Poland October 1994 November 2003
________________________________
(1) Indicates lease is for an unlimited period of time.
(2) Of the 245 square meters under lease, 20 square meters are under lease
only until January 1999.
None of IFFC's restaurant sites is leased or subleased from an affiliate
of IFFC.
For a discussion of IFFC's real estate investment policies, see "Item 1.
Description of Business - Restaurant Development." Thus far, IFFC has not
incurred nor does it anticipate incurring any material costs or expenses
associated with compliance with the environmental laws of the United States or
Poland.
ITEM 3. LEGAL PROCEEDINGS.
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 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 March 11, 1997, BKC, IFFC, IFFP and Rubinson, individually and on
behalf of Litigation Funding, Inc. entered into a Settlement Agreement. In
connection with the execution of the Settlement Agreement, IFFC and BKC entered
into the New BKC Development Agreement and eight (8) new Franchise Agreements.
BKC paid to IFFC the sum of $5,000,000 (less $21,865 of royalties owed by IFFP
to BKC for February 1997) for a net amount of $4,978,135. In addition, BKC
forgave $499,768 representing all monies owed BKC by IFFP and IFFC through
January 31, 1997. Under the terms of the Settlement Agreement, a portion of such
proceeds, not to exceed $2,000,000 cash may be used to immediately satisfy the
actual legal fees and costs of IFFC and IFFP incurred in connection with the BKC
litigation, including IFFC's and IFFP's obligation under the agreement between
IFFC, IFFP and Litigation Funding, Inc. The remaining $3,000,000 is to be used
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by IFFC and IFFP for the development of additional BKC restaurants in Poland or
working capital for IFFP pursuant to the New BKC Development Agreement. All
parties to the litigation stipulated to dismissal of the litigation and executed
mutual releases.
LITIGATION FINANCING AGREEMENTS. IFFC 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"). This agreement was later amended in July 1996.
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 amended Funding Agreement, Funding agreed to pay on behalf
of IFFC and/or IFFP up to $750,001 (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 Sales 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) seventy-five percent
(75%) 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) seventy-five
percent (75%) of any Proceeds, excluding any Sales Proceeds, in excess of the
sum of Funding's Expenses and the IFFC Affiliates' Expenses and (iii)
seventy-five percent (75%) 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
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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, Sales 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.
In September 1996, IFFP assigned the balance of its rights to the Proceeds
to IFFC in exchange for $125,000 of debt owed to IFFC by IFFP.
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 appraiser (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.
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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.
IFFC and Funding are currently reviewing the Settlement Agreement to
determine the amounts required to be paid Funding.
DOMONT LITIGATION. On May 31, 1995, legal action was filed against IFFP 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 alleged that IFFP failed to pay invoices due to Domont for work
performed. Domont sought payment and damages of approximately $126,236. In
mid-1996, IFFP settled the claim with Domont for $46,126 (based upon the
exchange rate at December 31, 1996).
POLISH FISCAL AUTHORITY DISPUTES. As of July 1995, IFFP may have became
subject to penalties for failure to comply with a tax law implemented in May
1994 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 supplemented and may
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
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Cash Register System before July 1995. As a penalty for noncompliance, Polish
tax authorities have indicated that they intend to disallow approximately
$68,000 of VAT deductions claimed by IFFP in July and August 1995. Additionally,
penalties and interest may be imposed on these disallowed deductions which is
currently estimated at $42,000. In March 1997, IFFP requested a final
determination by the Polish Minister of Finance. The Company is unable to
predict the timing and nature of the Minister's ruling. IFFP has not yet made a
decision whether or not to replace its Cash Register System. IFFP believes a new
cash register system would cost approximately $250,000.
In letters dated October 17, 1995 and January 11, 1996 (the "VAT
Letters"), IFFP was informed by the Polish Fiscal Authorities that they believed
IFFP had failed to properly account for VAT taxes in certain instances in the
period between July 1993 and December 1995. The VAT Letters identify three
different types of alleged errors made by IFFP: (1) the posting of VAT
deductions prematurely; (2) the posting of VAT deductions in periods when the
appropriate records were not maintained by IFFP; and (3) transcription errors
when posting VAT deductions. The VAT Letters indicated that the Polish Fiscal
Authorities intended to disallow approximately $72,000 of IFFP's VAT deductions
and impose $87,000 of administrative fines, penalties and interest.
IFFP has filed an objection to the VAT Letters with the Warsaw Tax Office
in which it has made both factual and legal arguments. ^Due to the complexities,
uncertainties and expenses associated with filing the objection with the Warsaw
Tax Office and, if necessary, filing an appeal with respect to the decision of
the Warsaw Tax Office, except as described above, IFFP cannot reasonably
estimate the amount it will ultimately be required to pay the Polish Fiscal
Authorities. IFFP does not anticipate being required to pay the Polish Fiscal
Authorities any amounts identified in the VAT Letters until, at the earliest,
June 1997. Among other factors, such estimate is subject to the response of the
Warsaw Tax Office, and possibly the Polish Supreme Tax Court, to IFFP's
objections to the VAT Letters.
As of December 31, 1996, IFFC had an accrued liability of $150,000 in
connection with the foregoing disputes with the Polish Fiscal Authorities.
Aside from the matters discussed above, IFFC is not a party to any
litigation or governmental proceedings that management believes would result in
any judgments or fines that would have a material adverse effect on IFFC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
IFFC's Common Stock was quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") under the symbol "FOOD" until May
29, 1996 and was listed on the Pacific Stock Exchange (the "Exchange") under the
symbol "FOD" until December 4, 1996. The Common Stock is now listed on the OTC
Electronic Bulletin Board under the symbol "FOOD." The following table sets
forth, for the period since January 1, 1995, the high and low closing bid
quotations for the Common Stock as reported by NASDAQ and the OTC electronic
Bulletin Board.
High Low
----------- -----------
1995
First Quarter........................................ 2 1/4 1 1/4
Second Quarter....................................... 1 5/8 7/8
Third Quarter........................................ 1 1/8 3/4
Fourth Quarter....................................... 1 1/2
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1996
First Quarter....................................... .8125 .1875
Second Quarter...................................... .21875 .1875
Third Quarter....................................... .43 .06
Fourth Quarter...................................... .24 .15
As of March 21, 1997, there were 70 record holders of IFFC's Common Stock.
The Company believes that there are over 300 beneficial holders of IFFC's Common
Stock.
IFFC has not paid any cash dividends on its Common Stock and does not
currently intend to declare or pay cash dividends in the foreseeable future.
IFFC intends to retain any earnings that may be generated to provide funds for
the operation and expansion of IFFC's business.
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ITEM I. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
IFFC currently operates its business in Poland primarily through its
majority owned (85%) subsidiary, International Fast Food Polska, and three
wholly-owned Polish limited liability corporations, IFF Polska-Kolmer, IFF-DX
Management and IFF Polska i Spolka. Unless the context indicates otherwise,
references herin to IFFC include all of its operating subsidiaries.
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.
The BKC Development Agreement required IFFC to open at least 13
full-service traditional restaurants prior to September 1996, including seven
traditional restaurants by September 24, 1994 and three additional traditional
restaurants during each of the two following twelve-month periods. IFFC
currently operates eight restaurants. Through the period ended September 24,
1994, IFFC was ahead of the required development schedule. However, during the
term of this Development Agreement certain disputes arose between IFFC and BKC
and, on March 17, 1995, IFFC and its majority owned (85%) subsidiary,
International Fast Food Polska ("IFFP"), filed suit (the "BKC Litigation")
against BKC in the Eleventh Circuit Court of the State of Florida. IFFC alleged
that BKC did not provide all of the support, supervision and assistance required
of it under the BKC Development Agreement and the eight Franchise Agreements
(the "Franchise Agreements") between BKC and IFFC. 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 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 believed that
the Development Agreement had terminated pursuant to its terms. Throughout the
term of this Development Agreement certain disputes arose between IFFC and BKC
and, on March 17, 1995, IFFC and its majority owned (85%) subsidiary,
International Fast Food Polska ("IFFP"), filed suit (the "BKC Litigation")
against BKC in the Eleventh Circuit Court of the State of Florida. IFFC alleged
that BKC did not provide all of the support, supervision and assistance required
of it under the BKC Development Agreement and the eight Franchise Agreements
(the "Franchise Agreements") between BKC and IFFC. On March 11, 1997, IFFC, BKC,
IFFP, Mitchell Rubinson, IFFC's chairman and Litigation Funding, Inc. entered
into a settlement agreement regarding the BKC litigation. See Item 3. Legal
Proceedings - BKC Litigation.
On March 11, 1997, BKC, IFFC, IFFP, and Rubinson, individually and on
behalf of Litigation Funding, Inc. entered into a Settlement Agreement. In
connection with the execution of the Settlement Agreement, IFFC and BKC entered
into the New BKC Development Agreement and new Franchise Agreements. BKC paid to
IFFC for the benefit of IFFC and IFFP the sum of $5,000,000 (less $21,865 of
royalties owed by IFFP to BKC for February 1997) for a net amount of $4,978,135.
BKC forgave $499,768 representing all monies owed BKC by IFFP and IFFC to BKC
through and including January 31, 1997. Under the terms of the Settlement
Agreement, a portion of such proceeds, not to exceed $2,000,000 cash may be used
to immediately satisfy the actual legal fees and costs of IFFC and IFFP incurred
in connection with the BKC litigation, including IFFC's and IFFP's obligation
under the agreement between IFFC, IFFP and Litigation Funding, Inc. The
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remaining 3,000,000 may be used by IFFC and IFFP for the development of
additional BKC restaurants in Poland or working capital for IFFP pursuant to the
New BKC development Agreement. All parties to the litigation stipulated to
dismissal of the litigation and executed mutual releases.
In order to secure additional funds to finance the BKC Litigation, IFFC
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"). This agreement was
later amended in July 1996. 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 amended Funding Agreement, Funding agreed to pay on behalf
of IFFC and/or IFFP up to $750,001 (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 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) seventy five percent
(75%) 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) seventy five
percent (75%) of any Proceeds, excluding any Sales Proceeds, in excess of the
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sum of Funding's Expenses and the IFFC Affiliates' Expenses (as such term is
defined below, the "IFFC Affiliates' Expenses"); and (iii) seventy five percent
(75%) 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.
IFFC and Funding are currently reviewing the Settlement Agreement to
determine the amounts required to be paid Funding. Funding and IFFC may select
an appraiser to review the value of the non-cash proceeds to be received in the
settlement.
As of December 31, 1996, IFFC had negative working capital of
approximately $2,094,210 and Cash and Cash Equivalents of $194,269. IFFC's
working capital and cash position were significantly improved by the settlement
of the BKC Litigation in March 1997. Although IFFC believes that it has
sufficient funds to finance its present plan of operations through December 31,
1997, IFFC cannot reasonably estimate how long it will be able to satisfy its
cash requirements. The capital requirements relating to implementation of the
New BKC Development Agreement are significant. Based upon current assumptions,
IFFC will seek to implement its business plan utilizing its Cash and Cash
Equivalents and cash generated from restaurant operations. In order to satisfy
the capital requirements of the New BKC Development Agreement IFFC will require
resources substantially greater than the amounts it presently has or amounts
that can be generated from restaurant operations. Except as discussed below,
IFFC has no current arrangements with respect to, or sources of additional
financing and there can be no assurance that IFFC will be able to obtain
additional financing or that additional financing will be available on
acceptable terms to fund future commitments for capital expenditures.
27
<PAGE>
YEAR ENDED DECEMBER 31, 1996 VS YEAR ENDED DECEMBER 31, 1995
RESULTS OF OPERATIONS
For the year ended December 31, 1996, IFFC incurred a net loss of
$(1,978,826) or $.37 per share of IFFC's Common Stock compared to a net loss of
$(1,509,909), or $ .50 per share of IFFC's Common Stock for the year ended
December 31, 1995. During the year ended December 31, 1995, IFFC recognized an
extraordinary gain of $1,106,642 in connection with the exchange of $5,636,000
principal amount of Convertible Subordinated Debentures for $56,360 shares of
Series A 6% Convertible Preferred Stock.
For the years ended December 31, 1996 and December 31, 1995, IFFC
generated Sales of $5,351,427 and $4,688,707, respectively. In U.S. dollar and
Polish zloty terms IFFC's Sales increased by approximately 14% and 27% in the
years ended December 31, 1996 and December 31, 1995, respectively. The increase
is primarily attributable to improved local store marketing through expansion of
media advertising and general improvements in the Polish economy.
During the year ended December 31, 1996, IFFC incurred $2,286,261 of Food
and Packaging Expense, $916,048 of Payroll and Related Costs, $1,535,378 of
Occupancy and Other Operating Expenses, and $984,707 of Depreciation and
Amortization Expense.
Food and Packaging Costs for the years ended December 31, 1996 and 1995
were 43% and 47% of Sales, respectively. IFFC believes the 4% decrease as a
percentage of Sales is primarily attributable to improved product sourcing and
the implementation of tighter cost controls.
Payroll and Related Costs as a percentage of Sales were 15% for the year
ended December 31, 1996 and 16% for the year ended December 31, 1995. Payroll
and Related Costs as a percentage of Sales declined as sales increased at the
restaurants without a corresponding increase in the labor force. In addition,
IFFC has not had any significant training costs in 1996.
Occupancy and Other Operating Expenses for the years ended December 31,
1996 and 1995 were 28.7% and 29.0% of Sales, respectively. Included in Occupancy
and Other Operating Expenses for the year ended December 31, 1995 is $220,000 of
pre-opening costs.
Depreciation and Amortization Expense as a percentage of Sales was 18.4%
and 17.9% in the years ended December 31, 1996 and 1995, respectively.
General and Administrative Expenses for the years ended December 31, 1996
and 1995 were 29.0% and 48.5% of Sales, respectively. The 19.5% decrease
as a percentage of Sales is primarily attributable to reduced legal and
professional fees as well as the percentage reduction resulting from the
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<PAGE>
increase in restaurant sales. IFFC does not anticipate its General and
Administrative Expenses will increase significantly over the next twelve months.
For the year ended December 31, 1996, General and Administrative Expenses was
comprised of executive and office staff salaries and benefits ("Salary
Expense") ($709,188); legal and professional fees, office rent, travel,
telephone and other corporate expenses ("Corporate Overhead Expense")
($685,067), and depreciation and amortization ($156,874). For the year ended
December 31, 1995, General and Administrative Expense was comprised of executive
and office staff salaries ($683,561); legal and professional fees, office
rent, travel, telephone and other general corporate expenses ($1,413,756), and
depreciation and amortization ($176,026).
IFFC anticipates that it will continue to incur certain expenses in
connection with its disputes with the Polish Fiscal Authorities. See "Item 3.
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.
Interest and Other Income for the years ended December 31, 1996 was
$60,511, which figure primarily represents interest earned on invested cash
balances. For the year ended December 31, 1995, Interest and other income was
$115,203, which figure includes interest income of $62,967 and a supply related
rebate of $52,236.
Interest Expense is comprised as follows:
For the year ended
December 31,
-----------------------------
1996 1995
------------ ------------
Interest Expense on Debentures................. $248,040 $267,769
Amortization of Debenture Issuance Costs...... 33,256 33,256
Interest Expense on Bank Facilities............ 165,265 218,844
------------ ------------
Total.................................... $446,561 $ 519,869
============ ============
Interest Expense exceeded Interest and Other Income by $386,050 and
$404,666 for the years ended December 31, 1996 and 1995, respectively. As a
result of IFFC's consummation of the Second Exchange Offer (defined below) as of
January 13, 1995, IFFC's Interest Expense on Debentures has dropped and should
not exceed $248,000 in the year ended December 31, 1997. The decrease in the
level of Interest Expense on Debentures will be partially offset by IFFC's
payment of dividends with respect to the 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, or through the issuance of IFFC Common Stock or a combination thereof. The
June 15, 1996 and December 15, 1996 dividend payments were not made and as of
December 31, 1996 dividends in arrears aggregated $229,440
29
<PAGE>
IFFC's interest expense on bank facilities was $165,265 and $218,844 for
the years ended December 31, 1996 and 1995, respectively. The $53,579 decrease
is attributable to IFFC's reduction of borrowings under bank credit facilities.
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.
The relationship between IFFC and Burger King Corporation ("BKC") was
governed principally by the BKC Development Agreement and by a franchise
agreement relating to each restaurant, as described below. A former majority
shareholder entered into the BKC Development Agreement in September 1991 and, in
December 1991, assigned its rights and obligations under the BKC Development
Agreement to IFFC. Pursuant to the BKC Development Agreement, IFFC was granted
the exclusive right until September 24, 1996 to develop and to be franchised to
operate Burger King restaurants in Poland, with certain exceptions. IFFC was
obligated to open and did open one traditional restaurant by December 24, 1992,
three additional traditional restaurants by September 25, 1993 and three
additional traditional restaurants by September 24, 1994, which IFFC did in a
timely manner. Pursuant to the BKC Development Agreement, IFFC was required to
open three additional traditional restaurants during each of the two following
twelve-month periods, for a total of 13 traditional restaurants open and
operating by the end of the Initial Term. Through the period ended September 24,
1994, IFFC was ahead of the required development schedule. However, during the
term of this Development Agreement certain disputes arose between IFFC and BKC
and, on March 17, 1995, IFFC and its majority owned (85%) subsidiary,
International Fast Food Polska ("IFFP"), filed suit (the "BKC Litigation")
against BKC in the Eleventh Circuit Court of the State of Florida. IFFC alleged
that BKC did not provide all of the support, supervision and assistance required
of it under the BKC Development Agreement and the eight Franchise Agreements
(the "Franchise Agreements") between BKC and IFFC. 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 believed that the BKC Development Agreement had
terminated pursuant to its terms.
In connection with the settlement of the BKC Litigation, a new Development
Agreement (the "New BKC Development Agreement") was entered into between BKC and
IFFC, which was then assigned by IFFC to IFFP on March 11, 1997; however, IFFC
remains liable for the obligations contained in the New BKC Development
Agreement. Pursuant to the New BKC Development Agreement, IFFC has been granted
the exclusive right until September 30, 2007 to develop and be franchised to
operate Burger King restaurants in Poland with certain exceptions discussed
below. Pursuant to the New BKC Development Agreement, IFFC is required to open
45 Development Units during the term of the Agreement. Each traditional Burger
King restaurant, in-line Burger King restaurant, or drive-thru Burger King
restaurant shall constitute one unit. A Burger King kiosk restaurant shall, for
purposes of the New BKC Development Agreement, be considered one quarter unit.
Pursuant to the New BKC Development Agreement, IFFC is to open three Development
Units through September 30, 1998, four units in each year beginning October 1,
1998 and ending September 30, 2001 and five units in each year beginning October
1, 2001 and ending September 30, 2007.
30
<PAGE>
Pursuant to the New BKC Development Agreement, IFFC shall pay BKC
$1,000,000 as a development fee. IFFC shall not be obligated to pay the
development fee if IFFC is in compliance with the development schedule by
September 30, 1999, and has achieved gross sales of $11,000,000 for 12 months
preceding the September 30, 1999, target date. If the development schedule has
been achieved but gross sales were less than $11,000,000, but greater than
$9,000,000, the development fee shall be reduced to $250,000. If the development
fee is payable due to failure to achieve the performance targets set forth
above, IFFC, at its option, may either pay the development fee or provide BKC
with the written and binding undertaken of Mr. Mitchell Rubinson, IFFC's
Chairman, that the Rubinson Group will completely divest themselves of any
interest in IFFC and the Burger King restaurants opened or operated by IFFC in
Poland within six (6) months of the date the development fee payment is due. The
Rubinson Group shall be defined to include any entity that Mr. Rubinson directly
or indirectly owns an aggregate interest of ten percent (10%) or more of the
legal or beneficial equity interest and any parent, subsidiary or affiliate of a
Rubinson entity. Mr. Rubinson has personally guaranteed payment of the
development fee.
BKC may terminate rights granted to IFFC under the BKC Development
Agreement, including franchise approvals for restaurants not yet opened, for a
variety of possible defaults by IFFC, including, among others, failure to open
restaurants in accordance with the schedule set forth in the BKC Development
Agreement; failure to obtain BKC site approval prior to the commencement of each
restaurant's construction; failure to meet various operational, financial, and
legal requirements set forth in the BKC Development Agreement, including
maintaining of IFFP's net worth of $7,500,000 beginning on June 1, 1999. Upon
termination of the BKC Development Agreement, whether resulting from default or
expiration of its terms, BKC has the right to license others to develop and
operate Burger King restaurants in Poland, or to do so itself.
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. If cash is
unavailable from those sources, IFFC will have to curtail any additional
development until additional cash resources are secured.
IFFC anticipates that it will continue to 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.
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.
31
<PAGE>
To date, IFFC's business operations have been principally financed by
proceeds from public offerings of IFFC's equity and debt securities, private
offerings of equity and debt securities, proceeds from a number of bank credit
facilities and proceeds from the sale of certain equity securities of IFFC's
formerly wholly-owned subsidiary.
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 December 15, 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.
IFFC did not pay the required preferred dividends that were due on June 15, 1996
and December 15, 1996, and as of December 31, 1996, $229,440 of preferred
dividends were in arrears. At December 31, 1996 there were 38,240 shares of
Preferred Stock outstanding.
32
<PAGE>
During the year ended December 31, 1996, IFFC raised $445,000 of capital
from the private placement of 5,550,000 shares of Common Stock and received
$10,000 for termination of a stock option.
As of December 31, 1996 and March 21, 1997, IFFC had $556,089 and
$478,433, respectively, in accounts with AmerBank and substantially all of such
funds were held as European Currency Unit denominated deposits. As of December
31, 1996 and March 21, 1997, $500,000 and $471,549, respectively of the cash on
deposit with Amerbank was restricted and secured outstanding balances of IFFP's
Credit Facility with Bank Handlowy. As of December 31, 1996 and March 21, 1997,
IFFC had $17,956 and $64,798, respectively, in an operating account with Bank
Handlowy.
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. The credit facility matures on April 30, 1997. As of December
31, 1996 and March 21, 1997, the outstanding balance on the credit facility was
$10,495 and $12,636, respectively.
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 December 31, 1996 and March 21,
1997, 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
33
<PAGE>
average unutilized principal balance of the credit facility. Interest and
commission expenses are payable monthly. The outstanding principal balance of
the loan is payable in three quarterly installments of $100,000 commencing on
March 31, 1998. The credit facility is secured by: (i) a promissory note of IFFP
and (ii) a guarantee of IFFC. As of December 31, 1996 and March 21, 1997,
$300,000 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 were required to be repaid on December 16, 1996. The
maturity date and payment terms of the facility were further amended and
principal payments of $100,000 and $50,000 were made in December 1996 and
January 1997, respectively. The remaining principal balance is payable in
quarterly installments of $100,000 commencing on March 31, 1997 through
September 30, 1997, with the remaining principal balance payable in full on
December 16, 1997. 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 in the amount of $500,000. The Letter of Credit is valid until
December 30, 1997. As of December 31, 1996 and March 21, 1997, $900,000 and
$850,000 were outstanding under the Bank Handlowy credit facility, respectively.
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 purchasing from Agros
5% (25% or the Agros holdings) of the outstanding capital stock of IFFP in
exchange for a $500,000 non-interest bearing obligation due in full on December
28, 1996. In December 1996, IFFC requested an extension on the repayment of the
obligation which was refused by Agros and Agros demanded payment. As of March
21, 1997, the obligation was still outstanding.
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
34
<PAGE>
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 IFFP's business and the management of IFFP's business.
The IFFP 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.
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, 1996, the rates of inflation and devaluation improved.
For the years ended December 31, 1993, 1994, 1995 and 1996, the annual inflation
rate in Poland was 35%, 32%, 21.6% and 19.5%, respectively, and as of December
31, 1993, 1994, 1995 and 1996 the exchange rate was 21,344, 24,372, 24,680 and
28,725 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 is subject to the
risk of currency fluctuations. IFFC has and intends to maintain substantially
all of its unutilized funds in United States or Western European currency
denominated securities and/or European Currency Units. There can be no assurance
that IFFC will successfully manage its exposure to currency fluctuations or that
such fluctuations will not have a material adverse effect on IFFC.
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. There can be no assurance that
inflationary conditions in Poland will not have an adverse effect on IFFC.
The accounts of IFFP are measured using the Polish zloty. Due to
Poland's highly inflationary environment through December 31, 1995, generally
accepted accounting principles required IFFC to calculate and recognize on its
statement of operations its currency translation gains or losses associated with
IFFP. For the year ended December 31, 1995 , IFFC had a foreign currency
translation gain of $96,525. Due to the reduction in Polands inflation rate,
effective for the year ended December 31, 1996, IFFC is no longer required
pursuant to generally accepted accounting principles to recognize currency
translation gains or losses in its statement of operations. Accordingly, for the
year ended December 31, 1996, IFFC recognized a currency translation loss of
$17,286 which is included in shareholders' equity under the caption Accumulated
Translation Adjustment.
The official currency 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
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<PAGE>
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
zloty (a "new zloty"). New zlotys are equivalent to 10,000 old zlotys ('old
zlotys"). Old zlotys remained legal tender until December 31, 1996, after which
date they are only exchangeable at certain banks. All references in this
document to zlotys are to old zlotys. At December 31, 1996, the exchange rate
was 28,725 zlotys per dollar.
ITEM 7. FINANCIAL STATEMENTS.
See "Index to Financial Statements" for a description of the financial
statements included in this Form 10- KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On February 3, 1997, Coopers & Lybrand resigned as the Company's auditors.
During the two most recent fiscal years and interim period subsequent to
December 31, 1996, there have been no disagreements with Coopers & Lybrand on
any matter of accounting principals or practices, financial statement disclosure
or auditoring scope or procedure, or any reportable events. The report of
Coopers & Lybrand for the fiscal year end December 31, 1995 did not contain an
adverse opinion, disclaimer of opinion, qualification or modification as to
uncertainty, audit scope, or accounting principles, except the Company's
financial statements for the year ended December 31, 1995 contain a going
concern opinion. The Company has received from Coopers & Lybrand a letter
addressed to the Securities and Exchange Commission stating that it agrees with
the statements made by the Company. On February 5, 1997, the Board of Directors
of the Company appointed Moore Stephens Lovelace, P.L. as independent auditors
of the Company for the fiscal year ended December 31, 1996.
36
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mitchell Rubinson............ 50 Chairman of the Board, Chief Executive
Officer and President
Leon Blumenthal.............. 56 Senior Vice President, Chief Operating Officer
and General Manager
James F. Martin.............. 36 Chief Financial Officer, Treasurer and Director
Dr. Mark Rabinowitz.......... 49 Director
</TABLE>
MITCHELL RUBINSON has served as the Chairman of the Board, Chief Executive
Officer and President of the Company since its incorporation in December 1991.
Mr. Rubinson served as the Chairman of the Board, Chief Executive Officer and
President of Capital Brands, Inc. ("Capital Brands") from March 1988 to April
26, 1996 and served as the Treasurer of Capital Brands from March 1992 to April
1993. Mr. Rubinson has served as the Chairman of the Board, Chief Executive
Officer and President of QPQ Corporation, since July 1993 and has served as the
Chief Operating Officer of QPQ since October 1995. QPQ is the exclusive
developer and operator of Domino's Pizza stores in Poland.
JAMES F. MARTIN, CPA, has served as the Vice President, Chief Financial
Officer and Director of IFFC since April 1, 1997. Mr. Martin has served as the
Vice President and Chief Financial Officer of QPQ Corporation since October 1,
1996. Mr. Martin served as the Director of Finance for IFFP and Pizza King
1997. Polska, Sp.zoo,the wholly owned subsidiary of QPQ Corporation located in
the Republic of Poland, from November 1993 through February 1995. From May 1995
through September 1996, Mr. Martin was a 50% owner in an information systems and
software consulting company located in South Florida. Additionally, Mr. Martin
has nine years of commercial banking experience.
DR. MARK RABINOWITZ has served as a director of the Company since January
1996. Dr. Rabinowitz has also served as a director of QPQ since January 1996.
Since 1983, Dr. Rabinowitz' principal occupations have been serving as a medical
doctor for and the Vice President of Jose E. Gilbert and Mark Rabinowitz MDS,
P.A. and serving as a medical doctor for the President of Women's Centre for
Health, Inc.
LEON BLUMENTHAL has served as the Senior Vice President, Chief Operating
Officer and General Manager of the Company since March 1995. Mr. Blumenthal's
appointment as General Manager has obtained final approval of the Burger King
37
<PAGE>
Corporation. Mr. Blumenthal has served as the Senior Vice President and Chief
Operating Officer of Pizza King Polska, a wholly owned subsidiary of QPQ, since
March 1995. Mr. Blumenthal served as General manager of Hanna Holding Fast Foods
from January 1991 to March 1994. As General Manager, Mr. Blumenthal was
responsible for the operation of 20 Burger King restaurants within Denmark,
Sweden and Norway. From 1986 to 1990, Mr. Blumenthal owned and operated two
franchised restaurants of C.& M. Foods, Inc., d/b/a Bojangles Chicken & Biscuits
in Lilburn, Georgia. From 1968 to 1982, Mr. Blumenthal served as the Director of
European Operations for the Burger King Corporation.
The Company's officers are elected annually by the Board of Directors and
serve at the discretion of the Board. The Company directors hold office until
the next annual meeting of shareholders or until their successors have been duly
elected and qualified. The Company reimburses all directors for their expenses
in connection with their activities as directors of the Company. It is
anticipated that the directors will make themselves available to consult with
the Company's management. Directors of the Company who are also employees of the
Company will not receive additional compensation for their services as
directors.
The Company has agreed for a period expiring May 20, 1997, if so requested
by Whale Securities Co., L.P. ("Whale") to nominate and use its best efforts to
elect a designee of Whale as a director of the Company or, at Whale's option, as
a non-voting adviser to the Company Board of Directors. Whale has not yet
exercised its right to designate such a person.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the Company's fiscal year ended December 31, 1996, the Company
Board of Directors took action twelve (12) times by unanimous written consent.
The Board does not currently have a stock, audit, nomination, compensation
or similar committee.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's outstanding Common Stock, to file with the securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock. Such persons are required by SEC
regulation to furnish the Company with copies of all such reports they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representation that no other
reports were required. All Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners have been
complied with.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation paid to the
Named Executive Officers (as defined below). None of the company's other
executive officers total annual salary and bonus for the year ended December 31,
1996 was $100,000 or more.
38
<PAGE>
<TABLE>
<CAPTION>
Long Term
Annual Compensation(1) Compensation
---------------------- ------------
Number of
Name and Fiscal Other Annual Options All Other
Principal Position Year Salary Compensation Granted(2) Compensation
- ------------------ ---- ------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Mitchell Rubinson, 1996 $181,093 $12,993(6) 0
Chief Executive Officer 1995 $159,976 $15,223(3) 0
1994 $149,382 $ 5,912(4) 0(5)
Stephen R. Groth* 1996 $84,375(13) $11,179(7) 0
Chief Financial Officer 1995 $117,962(8) $12,084(9) 0
1994 $150,000(10) $16,396(11) 0(12)
- ----------------------
* Mr. Groth resigned his positions from the Company effective April 1, 1997.
(1) The columns for "Bonus," "Restricted Stock Awards" and "LTIP Payouts" have been omitted
because there is no compensation required to be reported in such columns.
(2) See "Aggregated Fiscal year-End Options Value table" for additional information concerning
options granted.
(3) Represents an automobile allowance of $12,000 and medical insurance premiums of $3,223.
(4) Represents medical insurance premiums of $5,912.
(5) As of February 27, 1995 each of the options held by Mr. Rubinson was amended to reduce the
stated exercise price therein to the fair market value of the Common Stock of such date
($1.375). See "Option Repricings."
(6) Represents an automobile allowance of $12,000 and medical insurance premiums of $993.
(7) Represents an automobile allowance of $7,687 and medical insurance premiums of $3,492.
(8) Paid by the Company, which figure includes $35,389 paid by QPQ to the Company for Mr. Groth's
services.
(9) Represents an automobile allowance of $9,000 and medical insurance premiums of $3,084. Such
figure also represents the following sums paid by QPQ to IFFC for Mr. Groth's services: an
automobile allowance of $2,700 and medical insurance premiums of $925.
(10) Paid by the Company, which figures include $75,000 paid by QPQ to the Company for Mr. Groth's
services.
(11) Represents an automobile allowance of $4,500, medical insurance premiums of $1,896 and a
housing allowance in Poland of $10,000. Such figure also represents the following sums paid by
QPQ to the Company for Mr. Groth's services: an automobile allowance of $2,250, medical
insurance premiums of $948 and a housing allowance in Poland of $5,000.
39
<PAGE>
(12) As of February 27, 1995 each of the options held by Mr. Groth was amended to reduce the stated
exercise price therein to the fair market value of the Common Stock on such date ($1.375). See
"Option Repricings."
(13) Paid by the Company, which figure includes $1,869 paid by QPQ to the Company for Mr. Groth's
services.
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mitchell Rubinson,
effective June 1, 1992. Mr. Rubinson's employment agreement provides that he
will serve as Chairman of the Board, Chief Executive Officer and President for
an initial term of three years, which the Company may extend for up to two
additional years. His annual salary for the first year is $125,000, subject to
annual 10% increases. Additionally, Mr. Rubinson is entitled to receive an
annual incentive bonus in the amount of 2.5% of the Company's net income, after
tax. Pursuant to the employment agreement, Mr. Rubinson is required to devote
such portion of his business time to the Company as may be reasonably required
by the Company's Board of Directors. Mr. Rubinson is entitled to four weeks of
paid vacation during the first year of the Initial Term and six weeks of paid
vacation during any subsequent year of his employment with the Company. As of
November 1, 1994, Mr. Rubinson's employment agreement with the Company was
amended to provide that for each day of vacation that Mr. Rubinson elects not to
take, the Company will pay him an amount of money equal to the quotient of his
then annual salary divided by 260. Mr. Rubinson's employment agreement requires
that he not compete or engage in any business competitive with the Company's
business for the term of the agreement and for one year thereafter. Mr. Rubinson
is, in addition to salary, entitled to certain fringe benefits including an
automobile allowance. Mr. Rubinson's employment agreement, as amended, provides
for a payment of $125,000 in the event his employment is terminated by reason of
his death or disability and a severance payment of twice the minimum annual
salary then in effect plus the incentive bonus paid in the prior year, in the
event his employment is terminated by the Company without cause. Mr. Rubinson's
employment agreement does not provide for a severance payment in the event his
employment is terminated for cause. On November 7, 1996, the Company amended its
Employment Agreement with Mr. Rubinson pursuant to which the Agreement was
extended to December 31, 1999. The Amended Agreement provides for a minimum
annual salary of $183,012.50, during the first year and subject to a 10% annual
increase for each of the remaining two years.
AGGREGATED FISCAL YEAR-ENDED OPTIONS VALUE TABLE
The following table sets forth certain information concerning unexercised
stock options held by the Named Executive Officers as of December 31, 1996. No
stock options were exercised by the Named Executive Officers during the year
ended December 31, 1996. No stock appreciation rights were granted or are
outstanding.
<TABLE>
<CAPTION>
Number of Unexercised Options Held Value of Unexercised In-the-Money Options
at December 31, 1996(1) at December 31, 1996
----------------------------------- -----------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mitchell Rubinson........ 150,000 0 $ 0 $ 0
Stephen R. Groth......... 40,000 10,000 $ 0 $ 0
(1) The closing bid quotation for the Company's Common Stock as reported by the Wall Street
Journal on December 31, 1996 was $.16 and $.30 on March 21, 1997.
</TABLE>
OPTION REPRICINGS
Since the Company's inception, the Company has issued, pursuant to the
terms of the 1993 Stock Option Plan and 1993 Directors Stock Option Plan, a
number of stock options to directors, executive officers and key employees. See
40
<PAGE>
"SECURITY OWNERSHIP" for more information regarding the options granted to
Mitchell Rubinson and Stephen R. Groth. As of February 27, 1995 the exercise
price of each of the stock options granted by the Company was above the fair
market value of the Common Stock underlying the stock options. In an effort to
provide the holders of the stock options additional incentive to use their best
efforts on behalf of the Company, as of February 27, 1995 each of the stock
option agreements between the Company and Mitchell Rubinson and Stephen R. Groth
was amended to reduce the exercise stated therein to the fair market value of
the underlying common Stock on such date ($1.375).
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 1, 1997, the number of shares
of Common Stock of the company which were owned beneficially by (i) each person
who is known by the Company to own beneficially more than 5% of its Common
Stock, (ii) each director and nominee for director, (iii) the Chief Executive
Officer and the Chief Financial Officer of the Company (collectively, the "Named
Executed Officer") and (iv) all directors and executive officers of the Company
as a group:
Amount
Nature Percentage of
Name and Address of Beneficial Outstanding
Beneficial Owner(1) Ownership Shares Owned(2)
------------------- --------- ---------------
Mitchell Rubinson................ 4,650,000(3) 40.42%
Marilyn Rubinson................. 4,750,000(4) 35.57%
Jaime Rubinson................... 1,000,000(5) 9.21%
Kim Rubinson..................... 1,000,000(6) 9.21%
James F. Martin.................. 6,000 *
Dr. Mark Rabinowitz.............. 86,197 *
All directors and executive officers
as a group
(four persons)................... 4,742,197(7) 41.22%
_______________________________
* Less than 1%.
(1) The address of each of the listed beneficial owners identified is 1000
Lincoln Road, Suite 200, Miami, Florida 33139. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Amendment
upon the exercise of options. Each beneficial owner's percentage ownership
is determined by assuming that options that are held by such person (but
not those held by any other person) and that are exercisable within 60
days from the date of this Amendment have been exercised. As of April 1,
1997 there were 10,355,517 shares of Common Stock outstanding.
41
<PAGE>
(3) Represents options to purchase 150,000 shares of Common Stock granted to
Mr. Rubinson pursuant to the Company's Stock Option Plan that are
immediately exercisable at an exercise price of $1.375 per share. Includes
80,000 shares of Common Stock presently owned by Mitchell and Edda
Rubinson which are subject to an option granted to Whale Securities Co.,
L.P. ("Whale") to purchase at any time until August 30, 1998 at a purchase
price of $5.50 per share. Includes 1,000,000 shares of Common Stock
issuable upon conversion of a convertible debenture in the principal
amount of $100,000 held by Mitchell and Edda Rubinson. Includes 3,500,000
shares of Common Stock owned by Mitchell and Edda Rubinson as tenants in
the entirety.
(4) Includes 3,000,000 shares of Common Stock issuable upon conversion of a
convertible debenture in the aggregate principal amount of $300,000.
(5) Includes 500,000 shares issuable upon conversion of a convertible
debenture in the principal amount of $50,000.
(6) Includes 500,000 shares issuable upon conversion of a convertible
debenture in the principal amount of $50,000.
(7) See Note (3) above.
POSSIBLE CHANGES IN CONTROL OF THE COMPANY
As of March 21, 1997, Mitchell Rubinson beneficially owned 40.42%, of the
outstanding Common Stock. To the extent that non-affiliates of Mitchell Rubinson
utilize (and Mr. Rubinson does not) the following described securities to
purchase shares of the Company's Common Stock. Mitchell Rubinson's percentage
ownership of the Company will be reduced. As of March 21, 1997, the Company had
10,355,517 shares of Common Stock issued and outstanding and ^shares of Common
Stock reserved for issuance including: (i) 1,274,667 shares of Common Stock
reserved for issuance upon conversion of ^shares of the Company's Preferred
Stock (conversion price of $3.00 per share); (ii) 290,800 shares of Common Stock
reserved for issuance upon exercise of warrants (exercise price of $7.00 per
share); (iii) 324,235 shares of Common Stock reserved for issuance upon
conversion of $2,756,000 in principal amount of Debentures (conversion price of
$8.50 per share); (iv) 117,647 shares of Common Stock reserved for issuance upon
conversion of $1,000,000 in principal amount of Debentures underlying warrants
(conversion price of $8.50 per share); (v) 650,000 shares of Common Stock
reserved for issuance upon the exercise of outstanding options under the
Company's Stock Option Plan and Directors Stock Option Plan (collectively, the
"Plans"); (vi) 130,000 shares of Common Stock reserved for issuance upon
exercise of warrants (exercisable at $6.50 per share); and (vii) 5,000,000
shares of Common Stock reserved for issuance conversion of $500,000 in principal
amount of Debentures (conversion price of $.10 per share).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
SHARED FACILITIES
The Company has shared with QPQ the use and cost of office space, Suites
200 and 206 and 210 at 1000 Lincoln Road, Miami, Florida. With respect to Suite
200, the Company and QPQ were responsible for $2,563 and $11,315, respectively
of the lease payments made in the year ended December 31, 1996, $10,274 and $0,
respectively, of the lease payments made in the year ended December 31, 1995.
With respect to Suite 206, the Company and QPQ were ultimately responsible for
$0 and $5,438, respectively of the lease payments made in the year ended
December 31, 1996, $0 ^and $756, respectively, of the lease payments made in the
year ended December 31, 1995.
42
<PAGE>
The Company operates a Burger King restaurant adjacent to a Domino's pizza
restaurant operated by QPQ in Poland. The restaurant has its own counter service
and kitchen area, but share common seating area. The Company and QPQ are jointly
and severally liable under the lease, and costs are allocated between the
companies.
BUSINESS OPPORTUNITIES
Mitchell Rubinson serves as the Chairman of the Board, Chief Executive
Officer and President of each of the Company and QPQ. In order to limit possible
future conflicts of interest the Company and QPQ have agreed that QPQ will not
engage in hamburger fast-food operations and the Company and QPQ will not engage
in pizza fast-food operations.
CONSULTING AGREEMENT WITH QPQ CORPORATION
On July 25, 1993 the Company entered into a three year consulting
agreement (the "Consulting Agreement") with QPQ, of which Mitchell Rubinson and
Capital Brands owned approximately 18% and 22.8%, respectively, of the
outstanding common stock as of April 15, 1995. Under the terms of such
agreement, the Company is required to assist QPQ generally with operational and
administrative matters. Pursuant to the consulting Agreement, as amended on July
27, 1994 and January 1, 1995, the company provides to QPQ: (1) the services of
the Company chief Financial Officer for not more than 30% of his business time;
(2) the services of the Company's Controller for not more than 30% of his
business time; and (3) the services of managerial, general office and staff
personnel of the Company. In exchange for such services, QPQ is required to pay
the company; (1) 30% of the cost of all compensation and benefits provided by
the Company to its Chief Financial Officer; (2) 27.5% of all compensation and
benefits provided by the company to its Controller; and (3) all costs and
expenses incurred by the company in connection with the services rendered
pursuant to the Consulting Agreement. In the year ended December 31, 1996 and
the year ended December 31, 1995, QPQ's obligations to the Company pursuant to
the terms of the Consulting Agreement aggregated to $4,225 and $218,742,
respectively. QPQ terminated the agreement with IFFC in June 1996. In connection
with the signing of the Consulting Agreement, QPQ granted the Company an option
to purchase up to 250,000 shares of QPQ's Common Stock at an exercise price of
$6.00 per share. This option was terminated in June 1996 for a $10,000 cash
payment to the Company from QPQ.
In April 1995 IFFC's majority-owned subsidiary (85%), IFFP, entered into a
consulting agreement (the "Subsidiary consulting Agreement") with the
wholly-owned subsidiary of QPQ, Pizza King Polska, pursuant to which IFFP has
agreed to provide Pizza King Polska with all general staff and administrative
support required by Pizza King Polska to operate its Domino's Store business.
The services of Leon Blumenthal have been made available to Pizza King Polska
and QPQ pursuant to the Subsidiary Consulting Agreement. In exchange for such
services IFFP receives from Pizza King Polska a sum equivalent to 10% of Pizza
King Polska's sales and reimbursement of expenses. In the years ended December
31, 1996 and December 31, 1995 Pizza King Polska's obligations to IFFP pursuant
to the terms of the subsidiary Consulting Agreement aggregated to $64,999 and
$116,723. In June 1996 this agreement was terminated.
PRIVATE PLACEMENT WITH RUBINSON
In June 1996, after considering various alternatives and including the
market price for the Company's Common Stock, its trading volume and various time
constraints the Board of Directors authorized the issuance of 2,200,000 shares
of the Company's Common Stock for a total purchase price of $110,000 to Mitchell
Rubinson and his wife Edda. The Company used the proceeds from the sale of the
shares for payment of interest on the Company's Convertible Subordinated
Debentures.
43
<PAGE>
TRANSACTION WITH CAPITAL BRANDS
In connection with the share exchange between CompScript and Capital
Brands in April 1996, CompScript required Capital Brands to exchange 1,300,000
shares of Common Stock of IFFC for 1,300,000 shares of Capital Brands Common
Stock owned by Mr. Rubinson and his wife Edda. This transaction was consummated
on April 26, 1996.
ADDITIONAL SECURITIES TRANSACTIONS
In January 1997, Marilyn Rubinson, the mother of Mitchell Rubinson, Jaime
Rubinson and Kim Rubinson, Mr. Rubinson's daughters, purchased $300,000, $50,000
and $50,000 aggregate principal amount of convertible debentures, respectively.
The debentures bear interest at 8% per annum and mature on January 13, 1999. The
debenture are convertible into shares of the Company's Common Stock at $.10 per
share. The proceeds from the sale of debentures were used to fund the cost and
expenses in connection with the Company's litigation against BKC and general
working capital. In January 1997, Mr. Rubinson and his wife, Edda purchased from
the Company convertible debentures in the aggregate principal amount of
$100,000. The debentures bear interest at 8% percent per annum and mature on
January 13, 1999. The debentures convert into shares of the Company's Common
Stock at $.10 per share.
Each party has taken the position that they have not entered into any
contracts, arrangements, or understandings with Mr. Rubinson with respect to
control of the Company.
LITIGATION FINANCING AGREEMENT
See Item 3 Legal Proceedings.
SECURITIES PURCHASES
In September 1996, the Company had woring capital needs, as well as,
incurred additional expenses in connection with the BKC Litigation. The Board of
Directors of IFFC authorized the sale of 2,500,000 shares of common stock, of
which IFFC sold 250,000 shares each to Marilyn Rubinson, Jaime Rubinson and Kim
Rubinson, the mother and daughters of Mitchell Rubinson, the Company's President
at $.10 per share.
In November 1996, the Company had additional working capital needs. The
Board of Directors of IFFC authorized the sale of 500,000 shares of common stock
of IFFC. IFFC sold 250,000 shares each to Jaime Rubinson and Kim Rubinson, the
daughters of Mitchell Rubinson, the Company's President at $.10 per share.
In December 1996, IFFC had outstanding an interest payment of
approximately $125,000 in connection with its Convertible Subordinated
Debentures and additional working capital needs. After considering various
alternatives and factors, the Board of Directors of IFFC authorized the sale of
1,500,000 shares of common stock of IFFC to Marilyn Rubinson, the Mother of
Mitchell Rubinson, the Company's President at $.10 per share.
Each party has taken the position that they have not entered into any
contracts, arrangements, or understandings with Mr. Rubinson with respect to
control of the Company.
44
<PAGE>
<TABLE>
<CAPTION>
PART IV
ITEM 1. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
(I) GENERAL
EXHIBIT DESCRIPTION
------- -----------
<C> <C>
3.1 IFFC's Articles of Incorporation(1), as amended(12,20)
3.2 IFFC's Bylaws(1)
4.1 Specimen Common Stock Certificate(1)
4.2 Warrant Agreement, dated May 21, 1992, between IFFC and Whale Securities
Co., L.P. ("Whale")(1)
4.3 Form of Indenture relating to 9% Convertible Subordinated Debentures Due
2007 (including form of Debenture)(2)(4.3)(3)
4.4 Form of Warrant Agreement, dated December 28, 1992, between IFFC and
Whale(4.4)(2)
4.5 Warrant Agreement, dated January 14, 1994, between IFFC and Continental
Stock Transfer & Trust Company, including form of Warrants(8)
4.6 Unit Certificate(8)
4.7 Series A 6% Convertible Preferred Stock Certificates(12)
10.1 Development Agreement, dated as of September 24, 1991, between Capital
Brands, Mitchell Rubinson and BKC (including form of Burger King Franchise
Agreement) (the "Development Agreement")(1)
10.2 Modification of Development Agreement, dated as of March 26, 1992, between
BKC, Capital Brands, Mitchell Rubinson and IFFC(1)
10.3 Assignment and Assumption Agreement, dated as of March 26, 1992, between
BKC, Capital Brands and IFFC assigning the Development Agreement to IFFC(1)
10.4 IFFC's 1992 Stock Option Plan(1)
10.5 IFFC's 1992 Directors Stock Option Plan(1)
10.6 Employment Agreement, dated February 1, 1993, between IFFC and Stephen R.
Goth(4)
10.7 Amendment, dated December 12, 1995, to credit facility, dated May 20, 1994,
between IFFC and Bank Handlowy (15)
10.8 Product Distribution Agreement, dated September 21, 1994, between IFFC and
Logistic and Distribution Systems Sp.zo.o(13)(10.2)
10.9 Form of Indemnification Agreement between IFFC and each of IFFC's Directors
and Executive Officers(1)
10.10 Agreement to Assign Litigation Proceeds, dated as of January 25, 1996, among
IFFC, IFFP and Funding, with exhibits including the Escrow Indemnity
Agreement among IFFC, IFFP, Funding and Escrow Agent(16)(10.1)
10.11 Amendment, dated August 31, 1995, to credit facility, dated January 28,
1993, between IFFP and AmerBank (15)
10.12 Restaurant Site Lease, dated October 26, 1992, between IFFC and the
Municipal Houses Administration(2)
45
<PAGE>
10.13 Restaurant Site Lease, dated September 24, 1991, between Kolmer and the
Warsaw District Authorities-Scrodmicscie, including appendix to the lease
agreement, dated September 7, 1992, between IFFC and the District
Authorities Warzawa-Scrodmicscie(2)
10.14 Franchise Agreement, dated September 17, 1992, between IFFC and BKC(2)
10.15 Franchise Agreement, dated September 17, 1992, between IFFC and BKC(2)
10.16 Franchise Agreement, dated December __, 1992, between IFFC and BKC(4)
10.17 Schedule of Franchise Agreements(12)
10.18 Litigation Fee Agreement, dated April 7, 1996, among Joel Hirschhorn, P.A.,
IFFC and IFFP (15)
10.19 Amendment, dated October 30, 1995, to credit facility, dated January 28,
1993, between IFFP and AmerBank (15)
10.20 Credit Facility, dated February 1, 1996, between IFFP and AmerBank (15)
10.21 Intentionally Omitted
10.22 Credit Facility, dated February 11, 1993, between IFFC and Credit Suisse(4)
10.23 Credit Facility, dated February 12, 1993, between IFFC and AmerBank in
Poland S.A.(4)
10.24 Credit Facility, dated January 28, 1993, between IFFC and AmerBank in Poland
S.A.(4)
10.25 Employment Agreement, dated as of January 28, 1992, between IFFC and
Mitchell Rubinson, as amended(5)(19.1)
10.26 Restaurant Site Sublease, dated December 21, 1992, between IFFC and Dantex,
amending that restaurant site sublease, dated August 5, 1992, between IFFC
and Dantex(5)(19.2)
10.27 Franchise Agreement, dated June 28, 1993, between IFFC and BKC(10.1)(6)
10.28 Consulting Agreement, effective as of July 25, 1993, between IFFC and
IPC(6)(10.2)
10.29 Stock Option Agreement, effective as of July 25, 1993, between IFFC and
IPC(6)(10.3)
10.30 Key Man Life Insurance Policy, dated August 7, 1993, insuring life of
Mitchell Rubinson with IFFC as beneficiary(10.1)(7)
10.31 Agreement dated June 8, 1995, to purchase the sublease rights relating to
Dantex(14)(10.1)
10.32 Restaurant Site Lease and Lease Option Agreement, dated January 17, 1994,
between PTTK, IFFC and IPC(8)
10.33 Restaurant Site Sublease, dated January 17, 1994, between Ambrozja, IFFC and
IPC(8)
10.34 Restaurant Site Sublease, dated January 17, 1994, between Hofmokl, IFFC and
IPC(8)
10.35 Restaurant Site Master Lease Agreement, dated May 21, 1993, between IFFC and
Centrum(8)
10.36 Restaurant Site Lease, dated December 24, 1993, between IFFC and Centrum(8)
10.37 Restaurant Site Lease, dated November 16, 1993, between IFFC and Jan
Kosmowski, Justine Irene Kosmowski and Krysztof Kosmowski(8)
10.38 Restaurant Site Lease, dated January 10, 1994, between IFFC and Multico(8)
10.39 Stock Option Agreement, dated as of May 21, 1992, between IFFC and Mitchell
Rubinson(8)
10.40 Stock Option Agreement, dated as of February 1, 1993, between IFFC and
Steven R. Groth(8)
46
<PAGE>
10.41 Stock Option Agreement, dated as of February 1, 1993, between IFFC and
Mitchell Rubinson(8)
10.42 Registration Rights Agreement, dated as of August 31, 1993, between IFFC and
Whale(8)
10.43 Restaurant Site Lease, dated January 19, 1994, between IFFC and Garrison
Flats Administration(8)
10.44 First Amendment to Consulting Agreement, dated July 27, 1994, between IFFC
and IPC(10)
10.45 Second Amendment to Consulting Agreement, effective as of January 1, 1995,
between IFFC and IPC (12)
10.46 Management Agreement, dated January 1, 1995, between IFFC and IFFP(12)
10.47 Consulting Agreement, dated as of July 27, 1994, between IFFC and Capital
Brands(10)
10.48 Amendment No. 2 to Employment Agreement, dated March 31, 1995, between IFFC
and Mitchell Rubinson(12)
10.49 Credit Facility, dated February 23, 1994, between IFFC and American Bank in
Poland, S.A.(12)
10.50 Credit Facility, dated May 30, 1994, between IFFC and Bank
Handlowy(10)(10.1)
10.51 Office Site Lease, dated November 25, 1993, between IPC and Cogik and
Amendment to Office Site Lease, dated September 9, 1994, between IPC and
Cogik(12)
10.52 Restaurant Site Lease, dated __ 12, 1994 between IFFC and Centrum [Katowicz
2](11)(10.1)
10.53 First Amendment to Restaurant Site Lease, dated February 24, 1994, between
IFFC and Jan Kosmowski, Justine Kosmowski and Krysztof Kosmowski(12)
10.54 Second and Third Amendment to Restaurant Site Lease, dated May 9, 1994,
between IFFC and Jan Kosmowski, Justine Kosmowski and Krysztof Kosmowski(12)
10.55 Hamburger Bun Supply Agreement, dated February 1994, between IFFC and Danish
Food Products, Poland(12)
10.56 Commitment Letter, dated April 12, 1996 from AmerBank to IFFC regarding two
credit facility amendments.
10.57 Amendment No. 3 to Employment Agreement, dated November 7, 1996 between
Mitchell Rubinson and IFFC.(20)
10.58 Restaurant Development Agreement dated March 14, 1997 between IFFC and
BKC.(19)
10.59 Franchise Agreement dated March 14, 1997 between IFFC and BKC.(19)
10.60 Amendment to Agreement to Assign Litigation Proceeds, dated as of July 3,
1996, among IFFC, IFFP and Funding.(17)(10.1)
10.61 Agreement to Assign Litigation Proceeds, dated as of September 11, 1996,
among IFFC and IFFP(20)
14.1 Trademark Protection Certificate No. 74441; Trademark [logo] Burger King;
Owner: BKC(12)
14.2 Trademark Protection Certificate No. 74442; Trademark [word] Whopper; Owner:
BKC(12)
14.3 Trademark Protection Certificate No. 74443; Trademark [words] Burger King;
Owner: BKC(12)
22.1 Subsidiaries of IFFC(12)
47
<PAGE>
(II) EXECUTIVE COMPENSATION PLANS
EXHIBIT DESCRIPTION
------- -----------
10.4 IFFC's 1992 Stock Option Plan(1)
10.5 IFFC's 1992 Directors Stock Option Plan(1)
10.6 Intentionally Omitted
10.7 Intentionally Omitted
10.8 Intentionally Omitted
10.9 Form of Indemnification Agreement between IFFC and each of IFFC's Directors
and Executive Officers(1)
10.10 Employment Agreement, dated as of January 28, 1992, between IFFC and
Mitchell Rubinson, as amended(19.1)(5)
10.39 Stock Option Agreement, dated as of May 21, 1992, between IFFC and Mitchell
Rubinson(8)
10.40 Stock Option Agreement, dated as of February 1, 1993, between IFFC and
Steven R. Groth(8)
10.41 Stock Option Agreement, dated as of February 1, 1993, between IFFC and
Mitchell Rubinson(8)
10.48 Amendment No. 2 to Employment Agreement, dated March 31, 1995, between IFFC
and Mitchell Rubinson(12)
10.57 Amendment No. 3 to Employment Agreement, dated November 7, 1996 between
Mitchell Rubinson and IFFC.(20)
27 Financial Data Schedule (Electronic filing only)
_____________________
(1) Incorporated by reference to the exhibit of the same number filed with IFFC's
Registration Statement on Form S-1 (File No. 33-46784)
(2) Incorporated by reference to the exhibit of the same number filed with IFFC's
Registration Statement on Form S-1 (File No. 33-55284)
(3) Incorporated by reference to the exhibit number indicated filed with IFFC's Registration
Statement on Form S-1 (File No. 33-55284)
(4) Incorporated by reference to the exhibit of the same number filed with the Company's
Form 10-KSB for the fiscal year ended December 31, 1992.
(5) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 10-KSB
for the fiscal year ended December 31, 1992.
(6) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 10-QSB
for the quarterly period ended June 30, 1993
(7) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 10-QSB
for the quarterly period ended September 30, 1993
(8) Incorporated by reference to the exhibit of the same number filed with IFFC's Form
10-KSB for the year ended December 31, 1993.
(9) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 10-QSB
for the quarterly period ended March 31, 1994.
(10) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 10-QSB
for the quarterly period ended June 30, 1994
(11) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 10-QSB
for the quarterly period ended September 31, 1994.
(12) Incorporated by reference to the exhibit of the same number filed with IFFC's From
10-KSB for the year ended December 31, 1994.
48
<PAGE>
(13) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 10-QSB
for the quarter ended March 31, 1995.
(14) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 10-QSB
for the quarter ended June 30, 1995.
(15) Incorporated by reference the exhibit number indicated filed with IFFC's Form 10-K for
the year ended December 31, 1995.
(16) Incorporated by reference to the exhibit number indicated filed with IFFC's Form 8-K
dated January 30, 1996.
(17) Incorporated by reference to the exhibit number inidcated filed with IFFC's Form 8-K
dated July 3, 1996.
(18) Incorporated by reference the exhibit number indicated filed IFFC's Form 8-K dated
December 3, 1996.
(19) Incorporated by reference the exhibit number indicated filed with IFFC's Form 8-K dated
March 14, 1997.
(20) Filed herewith.
(B) REPORTS ON FORM 8-K:
IFFC filed a report dated December 3, 1996 on Form 8-K during the quarterly period ended
December 31, 1996 with respect to the delisting of the Company's Common Stock on the
Pacific Stock Exchange.
</TABLE>
49
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, IFFC has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTERNATIONAL FAST FOOD CORPORATION
DATE: April 14, 1997 By:/s/ Mitchell Rubinson
--------------------------------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer and President
[Principal Executive Officer]
DATE: April 14, 1997 By:/s/ James F. Martin
--------------------------------------------
James F. Martin, Vice President, Chief
Financial Officer and Treasurer [Principal
Financial Officer and Principal Accounting
Officer]
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of IFFC and in the
capacities and on the dates indicated:
DATE: April 14, 1997 /s/ Mitchell Rubinson
-----------------------------------------------
Mitchell Rubinson, Director
DATE: April 14, 1997 /s/ James F. Martin
-----------------------------------------------
James F. Martin, Director
DATE: April 14, 1997 /s/ Dr. Mark Rabinowitz
-----------------------------------------------
Dr. Mark Rabinowitz, Director
50
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Accountants F-2 - F-3
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F-4 - F-5
Consolidated Statements of Operations
for the Years Ended December 1996 and
1995 F-6
Consolidated Statements of
Shareholders' Equity for the Years
Ended December 31, 1996 and 1995 F-7
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996
and 1995 F-8 - F-10
Notes to Consolidated Financial
Statements F-11 - F-25
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
Board of Directors
International Fast Food Corporation
Miami Beach, Florida
We have audited the accompanying consolidated balance sheet of International
Fast Food Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Fast Food Corporation and subsidiaries as of December 31, 1996,
and the consolidated results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
Moore Stephens Lovelace, P. L.
Certified Public Accountants
Orlando, Florida
March 27, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors
of International Fast Food Corporation
We have audited the accompanying consolidated balance sheet of International
Fast Food Corporation and Subsidiaries as of December 31, 1995, and the related
consolidated statement of operations, shareholders equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis. evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of International Fast
Food Corporation and Subsidiaries as of December 31, 1995, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the accompanying
1995 financial statements, the Company incurred a substantial operating loss and
has entered into litigation with Burger King Corporation. This litigation may
result in significant cash requirements, which could impair the Company's
ability to fund its operations or meet its capital requirements, These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements, as of and for
the year ended December 31, 1995, do not include any adjustments related to the
recoverability and classification of asset carrying amounts (including
recoverability of Burger King Developments Rights) or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
COOPERS & LYBRAND L.L.P.
Miami, Florida
March 29, 1996, except for the information
In Note 6, as to which the date is April 12, 1996
F-3
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------------
1996 1995
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 194,269 $ 253,510
Restricted cash 500,000 500,000
Receivables 42,348 50,866
Inventories 300,217 384,434
Advances to affiliate 228,984 49,087
Prepaid expenses 53,794 38,989
------------ -----------
Total Current Assets 1,319,612 1,276,886
------------ -----------
FURNITURE, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, NET 5,586,844 6,625,941
DEFERRED DEBENTURE ISSUANCE COSTS,
NET OF ACCUMULATED AMORTIZATION
OF $124,155 AND $90,899,
RESPECTIVELY 308,170 341,426
OTHER ASSETS, NET 618,978 364,701
BURGER KING DEVELOPMENT RIGHTS,
NET OF ACCUMULATED AMORTIZATION
OF $229,462 IN 1995 - 147,736
------------ -----------
Total Assets $ 7,833,604 $ 8,756,690
============ ===========
See Accompanying Notes
F-4
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
------------------------------
1996 1995
------------ -----------
CURRENT LIABILITIES:
Accounts payable $ 454,697 $ 354,823
Accrued interest payable 10,335 21,580
Other accrued expenses 1,009,606 473,127
Bank credit facilities payable 1,220,495 1,604,248
Other notes payable 69,307 -
Payable to affiliate 149,382 -
Non-interest bearing obligation
payable to minority shareholder
of IFF Polska 500,000 500,000
------------ ------------
Total Current Liabilities 3,413,822 2,953,778
------------ ------------
LONG TERM CREDIT FACILITIES PAYABLE 300,000 -
9% SUBORDINATED CONVERTIBLE
DEBENTURES, DUE 2007 2,756,000 2,756,000
------------ ------------
Total Liabilities 6,469,822 5,709,778
------------ ------------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED SUBSIDIARY 460,361 689,681
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value,
(liquidation preference of
$3,824,000), 1,000,000 shares
authorized; 38,240 and 50,030
shares issued and outstanding,
respectively 382 500
Common Stock, $.01 par value,
100,000,000 shares authorized;
10,322,521 and 3,759,564 shares
issued and outstanding, respectively 103,225 37,595
Additional paid-in capital 14,523,361 14,046,571
Accumulated deficit (13,706,261) (11,727,435)
Accumulated translation adjustment ( 17,286) -
------------ ------------
Total Shareholders' Equity 903,421 2,357,231
------------ ------------
Total Liabilities and
Shareholders' Equity $ 7,833,604 $ 8,756,690
============ ============
See Accompanying Notes
F-5
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------
1996 1995
------------ ------------
SALES $ 5,351,427 $ 4,688,707
FOOD AND PACKAGING COSTS 2,286,261 2,202,133
------------ ------------
GROSS PROFIT 3,065,166 2,486,574
RESTAURANT OPERATING EXPENSES:
Payroll and related costs 816,048 737,434
Occupancy and other operating expenses 1,535,378 1,359,705
Depreciation and amortization 984,707 839,610
------------ ------------
Total Restaurant Operating
Expenses 3,336,133 2,936,749
------------ ------------
(270,967) (450,175)
------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES 1,551,129 2,273,343
OTHER INCOME (EXPENSES):
Interest and other income 60,511 115,203
Interest expense, including
amortization of debenture
issuance costs ( 446,561) ( 519,869)
Gain from foreign currency
translation - 96,525
------------ ------------
Total other expenses ( 386,050) ( 308,141)
------------ ------------
LOSS BEFORE MINORITY INTEREST
AND EXTRAORDINARY GAIN ( 2,208,146) ( 3,031,659)
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED SUBSIDIARY 229,320 419,108
------------ ------------
LOSS BEFORE EXTRAORDINARY GAIN ( 1,978,826) ( 2,612,551)
EXTRAORDINARY GAIN FROM EXCHANGE
OF DEBENTURES - 1,106,642
------------ ------------
NET LOSS $( 1,978,826) $( 1,505,909)
============ ============
LOSS PER COMMON SHARE:
Before extraordinary gain $( .37) $( .80)
Extraordinary gain - .30
------------ ------------
NET LOSS $( .37) $( .50)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,967,325 3,630,742
============ ============
See Accompanying Notes
F-6
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
Common Preferred Additional Accumulated
Stock Stock Paid In Translation Accumulated
Shares Amount Shares Amount Capital Adjustment Deficit Total
-------- -------- -------- -------- ---------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1994 3,472,044 $ 34,720 - $ - $10,277,698 - $( 9,928,670) $ 383,748
Exchange of
9% Convertible
Debentures for
preferred stock - - 56,360 564 3,757,026 - - 3,757,590
Forfeiture of
escrow shares ( 200,000) ( 2,000) - - 2,000 - - -
Stock dividends 276,542 2,765 - - 290,091 - ( 292,856) -
Conversion of
preferred stock 210,978 2,110 ( 6,330) ( 64) ( 2,046) - - -
Loss on repurchase
of common stock
of consolidated
subsidiary - - - - ( 278,198) - - ( 278,198)
Net loss for the
year - - - - - - ( 1,505,909) (1,505,909)
---------- -------- -------- ------- ----------- --------- ------------ -----------
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 392,957 3,930 ( 11,790) ( 118) ( 3,812) - - -
Common Stock issued
in exchange for
professional services 620,000 6,200 - - 81,102 - - 87,302
Private placement of
Common Stock
for cash 5,550,000 55,500 - - 389,500 - - 445,000
Payment received for
termination of stock
option - - - - - 10,000 - - 10,000
Translation adjustments - - - - - ( 17,286) - ( 17,286)
Net loss for the year - - - - - - ( 1,978,826) (1,978,826)
---------- -------- -------- ------- ----------- --------- ------------ -----------
Balances,
December 31,1996 10,322,521 $103,225 38,240 $ 382 $14,523,361 $( 17,286) $(13,706,261) $ 903,421
========== ======== ======== ======= =========== ========= ============ ===========
</TABLE>
See Accompanying Notes
F-7
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $( 1,978,826) $( 1,505,909)
Adjustment to reconcile net
loss to net cash used in
operating activities:
Amortization and depreciation 1,174,837 1,048,892
Extraordinary gain on debenture
exchange for stock - ( 1,106,642)
Minority interest in losses of
subsidiary ( 229,320) ( 419,108)
Changes in operating assets and
liabilities:
Receivables 8,518 280,350
Accrued interest receivable - 3,990
Inventories 84,217 1,984
Prepaid expenses ( 14,805) 978
Accounts payable and
accrued expenses 552,410 ( 9,161)
------------ ------------
Net cash used in operating
activities ( 402,969) ( 1,704,626)
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Sale of (Payments for)
furniture, equipment and
leasehold improvements, net 129,113 ( 331,030)
Changes in other assets, net ( 178,138) 4,928
------------ ------------
Net cash used in
investing activities ( 49,025) ( 326,102)
------------ ------------
See Accompanying Notes
F-8
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Year Ended December 31,
------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from (to) Affiliate, net 38,792 ( 4,833)
Repayments of bank credit
facilities ( 383,753) ( 311,625)
Payment for termination of option 10,000 -
Borrowings under bank credit
facilities 300,000 -
Net Proceeds from issuance of
IFF Common stock 445,000 -
------------ ------------
Net cash provided by (used in)
financing activities 410,039 ( 316,458)
------------ ------------
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT ( 17,286) -
------------ ------------
DECREASE IN CASH AND
CASH EQUIVALENTS ( 59,241) ( 2,347,186)
BEGINNING CASH AND CASH EQUIVALENTS 253,510 2,600,696
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 194,269 $ 253,510
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 424,550 $ 546,524
============ ============
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING
ACTIVITIES:
Year Ended December 31, 1995:
Issuance of 56,360 shares of Preferred Stock upon the exchange of
$5,636,000 of the 9% Subordinated Convertible Debentures.
Contribution by Capital Brands, Inc. ("CBI") of 200,000 shares of the
Company's Common Stock back to the capital of the Company.
Declaration and payment of stock dividends of 276,542 shares of Common
Stock to Preferred Shareholders.
Issuance of 210,978 shares of Common Stock upon the exchange of 6,330
shares of Preferred Stock.
Assignment of 400,000 shares of Common Stock back to the Company in
connection with a Stock Repurchase Agreement with CBI, Mitchell Rubinson
and Marilyn Rubinson for 336,364, 31,818 and 31,818 shares, respectively.
See Accompanying Notes
F-9
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING
ACTIVITIES, Continued:
Repurchase of 5% of the outstanding shares of IFFP in exchange for a
non-interest bearing obligation in the amount of $500,000.
Year Ended December 31, 1996:
Issuance of 392,957 shares of Common Stock upon the exchange of 11,790
shares of Preferred Stock.
Issuance of 620,000 shares of Common Stock in payment of legal and
professional fees.
See Accompanying Notes
F-10
<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 former majority shareholder
of the Company, Capital Brands, Inc. ("CBI") entered into an exclusive
development agreement (the "Development Agreement") with Burger King Corporation
("BKC") and assigned all its rights and obligations under the Development
Agreement to the Company. On September 24, 1996, the Development Agreement
expired and on March 11, 1997 was replaced with a new ten year agreement
expiring on September 30, 2007.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - The accompanying consolidated 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 IFFP's 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 official 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. On January 1, 1995, the National Bank of Poland introduced
a new currency unit a zloty (a "new zloty"). New zlotys are equivalent to 10,000
old zlotys ("old zlotys"). Old zlotys remained legal tender until December 31,
1996, after which date they are only exchangeable at certain banks. All
references in this document to zlotys are to old zlotys. At December 31, 1996
and 1995, the exchange rate was 28,725 and 24,680 old zlotys per dollar,
respectively. 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 accounts of IFFP are measured using the zloty. Due to Poland's highly
inflationary environment through December 31, 1995, generally accepted
accounting principles required IFFC to calculate and recognize on its statement
of operations its currency translation gains or losses associated with IFFP. For
the year ended December 31, 1995 , IFFC had a foreign currency translation gain
of $96,525. Due to the reduction in Polands inflation rate, effective for the
year ended December 31, 1996, IFFC is no longer required pursuant to generally
accepted accounting principles to recognize currency translation gains or losses
in its statement of operations. Accordingly, for the year ended December 31,
1996, IFFC recognized a currency translation loss of $17,286 which is included
in shareholders' equity under the caption Accumulated Translation Adjustment.
F-11
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
LIQUIDITY AND PLAN OF OPERATIONS - As Of December 31, 1996, IFFC had
negative working capital of approximately $2,094,210 and Cash and Cash
Equivalents of $194,269. IFFC's working capital and cash position were
significantly improved by the settlement of the BKC Litigation in March 1997
(See Note 13). Although IFFC believes that it has sufficient funds to finance
its present plan of operations through December 31, 1997. IFFC cannot reasonably
estimate how long it will he able to satisfy its cash requirements. The capital
requirements relating to implementation of the New BKC Development Agreement are
significant. Based upon current assumptions, IFFC will seek to implement its
business plan utilizing its Cash and Cash Equivalents and cash generated from
restaurant operations. In order to satisfy the capital requirements of the New
BKC Development Agreement IFFC will require resources substantially greater than
the amounts it presently has or amounts that can be generated from restaurant
operations. Other than its existing Bank Credit Facilities (See Note 6), IFFC
has no current arrangements with respect to, or sources of additional financing
and there can be no assurance that IFFC will be able to obtain additional
financing or that additional financing will be available on acceptable terms to
fund future commitments for capital expenditures.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less at the time of
acquisition to be cash equivalents. The Company maintains its U.S. cash in bank
deposit accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on cash and cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (first in, first
out) or market and consist primarily of restaurant food items.
NET LOSS PER COMMON SHARE - The computation of net loss per common share
in the accompanying statements of operations is based on the net loss after
preferred dividend requirements and the weighted average number of shares
outstanding during the periods presented, reduced by 200,000 "Escrow Shares",
which were forfeited by CBI in 1995 since certain earnings of the Company were
not achieved by December 31, 1994. The net loss per common share does not
include the assumed exercise of any common stock options or warrants since their
inclusion would be anti-dilutive. Fully dilutive per share data has not been
presented since the inclusion of common stock equivalents arising from stock
options and warrants and the assumed issuance of common shares upon conversion
of the 9% Convertible Subordinated Debentures and the Preferred Stock would be
anti-dilutive.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Furniture, equipment and
leasehold improvements are stated at cost. Maintenance and repairs are charged
to expense when incurred. Additions, major renewals and betterments are
capitalized. Leasehold improvements, upon completion, are amortized over the
life of the respective lease. Furniture and equipment is being depreciated over
lives ranging from three to five years on a straight-line basis. When items are
sold, or otherwise disposed of, the related costs and accumulated amortization
or depreciation are removed from the accounts and any resulting gains or losses
are recognized.
ACQUISITION COSTS OF BURGER KING DEVELOPMENT RIGHTS - All costs associated
with the acquisition of Burger King Development Rights were capitalized. The
cost of these rights was amortized over the period from December 24, 1992, the
opening date of the Company's first full service restaurant, through the
expiration date of the agreement in September 1996.
DEFERRED CHARGES AND OTHER ASSETS - All costs incurred in connection with
the organization of the Company were deferred and were amortized on a
straight-line basis over 5 years through December 31, 1996. Software costs are
being amortized on a straight line basis over five years. Franchise fees are
amortized over the primary term of each agreement ranging from five to twenty
years. Debt issue costs related to the issuance of the 9% Convertible
Subordinated Debentures due 2007 have been capitalized and are being amortized
using the straight line method over the term of the debentures, which does not
differ materially from the effective interest method. Deferred lease costs are
being amortized over periods ranging from five to ten years.
F-12
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
INCOME TAXES - Deferred Income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts. Deferred tax assets are also
established for the future tax benefits of loss and credit carryforwards.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized.
ADVERTISING AND PROMOTION EXPENSES - Production costs of future media
advertising are deferred until the advertising occurs. All other advertising and
promotion costs are expensed when incurred. At December 31, 1996 and 1995, the
Company had no significant deferred advertising costs.
RECLASSIFICATIONS - Certain amounts in the 1995 financial statements have
been reclassified to conform with the 1996 presentation.
3. RESTRICTED CASH:
At December 31, 1996 and 1995, the Company had $500,000 of restricted
cash, which represents collateral for an outstanding letter of credit.
4. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment and leasehold improvements at December 31, 1996 and
1995 are as follows:
1996 1995
------------ --------
Vehicles $ 79,581 $ 95,752
Office Furniture and Equipment 183,851 271,162
Restaurant Equipment 3,238,242 3,370,430
Leasehold Improvements 4,775,487 4,836,711
---------- ----------
8,277,161 8,574,055
Less: accumulated depreciation and
amortization (2,690,317) (1,948,114)
---------- ----------
$ 5,586,844 $ 6,625,941
=========== ===========
Depreciation and amortization
expense $ 909,984 $ 902,624
=========== ===========
F-13
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5 OTHER ASSETS:
Other assets at December 31, 1996 and 1995 are as follows:
1996 1995
------------ -----------
Organization Costs $ - $ 8,148
Deposits 393 393
Franchise Fees 337,512 337,512
Deferred Lease Costs 421,160 72,987
Software and Other Intangibles 66,705 62,469
---------- ----------
825,770 481,509
Less: accumulated amortization ( 206,792) ( 116,808)
---------- ----------
$ 618,978 $ 364,701
=========== ===========
6. BAND CREDIT FACILITIES:
Bank credit facilities at December 31, 1996 and 1995 consists of the following:
1996 1995
---------- ----------
Amerbank in Poland, S.A.
overdraft credit line, variable
rate approximately equal to prime,
expires April 30, 1997 $ 10,495 $ 54,248
Amerbank, IFFP line of credit of
$300,000 payable in three quarterly
installments of $100,000 commencing
on March 31, 1998, interest payable
monthly at Amerbank prime, guaranteed
by IFFC. 300,000 -
Amerbank revolving credit facility,
12% interest, $100,000 plus interest
payable on March 31, 1997 and June 30,
1997, remaining principal and all
accrued interest payable in full on
September 30, 1997 310,000 550,000
Bank Handlowy Warszawie, S.A., IFFP
credit facility of $1,000,000 payable
$50,000 on January 31, 1997, $100,000
quarterly commencing on March 31, 1997
through September 30, 1997, and the
remaining balance payable in full on
or before December 16, 1997, interest
at LIBOR plus 3.875%, collateralized
by amounts on deposit with Bank Handlowy,
unconditional guarantee of IFFC, fixed
assets of IFFP of $1,250,000 and a
letter of credit in the amount of
$500,000 900,000 1,000,000
------------ ----------
1,520,495 1,604,248
Less: Current Maturities 1,220,495 1,604,248
------------ -----------
Total Long Term Debt $ 300,000 $ -0-
============ ===========
F-14
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. CONVERTIBLE SUBORDINATED DEBENTURES:
The Convertible Subordinated Debentures (the "Debentures") mature on
December 15, 2007 and provide for the payment of interest at 9% semi-annually
until maturity.
The Debentures are subordinated and subject in right of payment to the
prior payment of all Senior Indebtedness. The indenture contains no provision
restricting the incurrence of additional debt or the issuance of additional
securities. The Debentures may be redeemed together with accrued interest at the
option of the Company in whole or in part, at any time on at least 30 days
notice to Debentureholders at decreasing redemption prices from 109% in 1993 to
100% in 2002 and thereafter. The Debentures are redeemable through the operation
of a sinking fund beginning 1998 through 2006. Sinking fund payments will be
reduced for Debentures previously converted or redeemed by the Company.
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.
IFFC recognized an extraordinary gain of $1,106,642, the difference
between (a) the $3,757,590 estimated fair value of the 56,360 shares of
Preferred Stock issued and (b) the sum of the carrying value of the Debentures
and accrued interest, net of unamortized Debenture issuance costs. The estimated
fair value of the 56,360 shares of Preferred Stock was applied to shareholders'
equity. The fair value of the 56,360 shares of Preferred Stock issued pursuant
to the second exchange offer was calculated by the Company to be $3,757,590, the
product of the aggregate number of common shares issuable upon conversion of the
Preferred Stock and the per share market value of the Company's common stock on
January 13, 1995.
The components of the extraordinary gain on the exchange are calculated as
follows:
Debentures tendered $ 5,636,000
Less: Value assigned to preferred stock 3,757,590
Less: Reduction of unamortized debenture
issuance costs related to
debentures tendered 771,768
-----------
Extraordinary gain $ 1,106,642
===========
F-15
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. FINANCIAL INSTRUMENTS:
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash, cash
equivalents, receivables, accounts payable, accrued expenses and bank credit
facilities payable approximate fair value because of the short maturity of these
items. The fair value of the Company's 9% Subordinated Convertible Debentures is
not readily determinable at December 31, 1996, due to the lack of trading
activity.
The fair value of the letter of credit is estimated to be the contract
amount as the value is fixed over the life of the commitment.
9. 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 December 31:
1996 1995
-------- ------
Outstanding at beginning of year 282,000 365,000
Granted - 4,000
Exercised - -
Expired (82,000) (87,000)
------- -------
Outstanding at end of year 200,000 282,000
======= =======
Exercisable at end of year 190,000 246,000
======= =======
Price range of options outstanding
at end of year $ 1.375 $1.375 - $6.4375
======= ================
Available for grant at end of year 450,000 368,000
======= =======
SFAS No. 123, "Accounting for Stock-Based Compensation ("SFAS 123") was
issued during 1995 and is effective for the year ended December 31, 1996. This
pronouncement establishes financial accounting and reporting standards for
stock-based employee compensation plans. It encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Companies that choose not to adopt the new fair value accounting rules
will be required to disclose proforma net income and earnings per share under
the new method. The Company has adopted the disclosure provisions of SFAS 123.
Had compensation costs for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under SFAS 123 for options granted in
1996 and 1995, the Company's net loss and net loss per share for those years
would have increased by approximately $5,000 and $50,000, or $.00 and $.01 per
share, respectively. The fair value of the options granted during 1995 is
estimated at $58,000 on the dates of grant using the Black-Scholes
option-pricing model with the following assumptions: volatility of 107%,
expected dividends of 0, risk-free interest rate of 5%, and terms of 7.9 years.
On February 27, 1995, the stock option agreements were amended to reduce
the exercise price to $1.375, which represented the market price per share on
that date.
F-16
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Pursuant to the Underwriting Agreement, the Company has sold to the
Underwriter for $130.00, warrants to purchase up to 130,000 shares of Common
Stock at an exercise price of $6.50 per share.
Substantially all of IFFC's operations in Poland are conducted through IFF
Polska. As of December 14, 1994, Agros Holding S.A., a Polish agricultural
company ("Agros"), acquired a 20% voting and property interest in IFF Polska,
pursuant to a subscription agreement (the "Agreement"), dated November 30, 1994.
Under the terms of the Agreement, the Company consented to an increase in the
number of authorized shares of IFF Polska's capital stock and the issuance of
such shares to Agros. Agros purchased the newly authorized shares from IFF
Polska for the zloty equivalent of $2,000,000. The difference between 20% of the
net book value of IFF Polska and the $2,000,000 purchase price, net of related
expenses of $130,857, was recognized as an increase of $516,708 to additional
paid in capital of the Company.
On December 28, 1995, the Company repurchased 5% of the outstanding
capital stock of IFF Polska, owned by Agros, in exchange for a non-interest
bearing obligation due in full on December 31, 1996. The difference between 5%
of the net book value of IFF Polska and the $500,000 purchase price was
recognized as a decrease of $278,198 to additional paid in capital of the
Company. Pursuant to the agreement, IFFC was required to pay Agros $500,000 by
December 31, 1996. In December 1996, IFFC requested an extension of the
repayment of the obligation which was refused by Agros and Agros has demanded
payment.
On June 15, 1995 and December 15, 1995, IFFC paid dividends with respect
to its outstanding shares of Series A 6% Convertible Preferred Stock by issuing
an aggregate of 276,542 additional shares of its Common Stock to the holders of
such preferred shares. The June 15, 1996 and December 15, 1996 dividend payments
were not declared or made and as of December 31, 1996 dividends in arrears
aggregated $229,440.
During the years ended December 31, 1996 and 1995, 392,957 and 210,978
shares of Common Stock were issued upon exchange of 11,790 and 6,330 shares of
Preferred Stock.
At December 31, 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
F-17
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 1,274,667
Warrants to purchase 50,000 shares of
Common Stock at an exercise price of
$.2831 per share 50,000
---------
Total reserved shares 2,837,349
=========
10. INCOME TAXES:
As of December 31, 1996 and 1995, the Company had net operating loss
carryforwards of approximately $6,200,000 and $5,700,000, respectively, for U.S.
tax purposes which expire in various years through 2011. Deferred tax assets as
of December 31, 1996 and 1995 of approximately $2,300,000 and $2,100,000,
respectively, were subject to and presented net of a 100% valuation allowance.
As of December 31, 1996 and 1995, the Company's Poland subsidiary had net
operating loss carryforwards of approximately $7,100,000 and $5,400,000,
respectively, which expire in various years through 1998. Deferred tax assets as
of December 31, 1996 and 1995 of approximately $2,800,000 and $2,200,000,
respectively, were subject to and presented net of a 100% valuation allowance.
11. RELATED PARTY TRANSACTIONS:
As of April 1995, QPQ Corporation ("QPQ"), an affiliate of the
Company, and its majority-owned subsidiary, Pizza King Polska, Sp.zo.o ("PK
Polska"), entered into a consulting agreement (the "Subsidiary Consulting
Agreement") with IFFC's wholly-owned subsidiary, International Fast Food Polska
("IFFP"), pursuant to which IFFP agreed to provide PK Polska with all general
staff and administrative support required by PK Polska to operate its Domino's
Store business. In exchange for such services, IFFP receives from PK Polska a
sum equivalent to 10% of PK Polska's sales and a reimbursement of expenses. In
the years ended December 31, 1996 and 1995, PK Polska's obligations to IFFP
pursuant to the terms of the Subsidiary Consulting Agreement aggregated $64,999
and $116,723, respectively. IFFC terminated the agreement with QPQ in June 1996.
In connection with the signing of the Consulting Agreement, QPQ granted IFFC an
option to purchase 250,000 shares of QPQ's common stock at an exercise price of
$6.00 per share. The option was also terminated in July 1996 for a $10,000 cash
payment from QPQ.
F-18
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In June 1996, IFFC terminated its consulting agreement with QPQ relating
to QPQ's reimbursement of costs associated with services provided by IFFC's
Chief Financial Officer and Controller. For the years ended December 31, 1996
and 1995, QPQ was charged $1,869 and $70,495 for such services.
In addition to the costs allocated from IFFC in connection with the
Consulting Agreement noted above, certain common general and administrative
expenses were allocated to QPQ. For the years ended December 31, 1996 and 1995,
these costs were $2,386 and $148,247, respectively.
During 1996, the Company sold an aggregate of 4,950,000 shares of common
stock to members of the family of the Company's Chairman of the Board, Chief
Executive Officer and President and received aggregate proceeds of $385,000 in
connection with such sales.
12. COMMITMENTS AND CONTINGENCIES:
The relationship between IFFC and Burger King Corporation ("BKC") was
governed principally by the BKC Development Agreement and by a franchise
agreement relating to each restaurant, as described below. A former majority
shareholder entered into the BKC Development Agreement in September 1991 and, in
December 1991, assigned its rights and obligations under the BKC Development
Agreement to IFFC. Pursuant to the BKC Development Agreement, IFFC was granted
the exclusive right until September 24, 1996 to develop and to be franchised to
operate Burger King restaurants in Poland, with certain exceptions. IFFC was
obligated to open and did open one traditional restaurant on December 24, 1992,
three additional traditional restaurants by September 25, 1993 and three
additional traditional restaurants by September 24, 1994, which IFFC did in a
timely manner. Pursuant to the BKC Development Agreement, IFFC was required to
open three additional traditional restaurants during each of the two following
twelve-month periods, for a total of 13 traditional restaurants open and
operating by the end of the Initial Term. Through the period ended September 24,
1994, IFFC was ahead of the required development schedule. However, during the
term of this Development Agreement certain disputes arose between IFFC and BKC
and, on March 17, 1995, IFFC and its majority owned (85%) subsidiary,
International Fast Food Polska ("IFFP"), filed suit (the "BKC Litigation")
against BKC in the Eleventh Circuit Court of the State of Florida. IFFC alleged
that BKC did not provide all of the support, supervision and assistance required
of it under the BKC Development Agreement and the eight Franchise Agreements
(the "Franchise Agreements") between BKC and IFFC. 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 believed that the BKC Development Agreement had
terminated pursuant to its terms.
In connection with the settlement of the BKC Litigation, (see Note 13) a
new Development Agreement (the "New BKC Development Agreement") was entered into
between BKC and IFFC, which was then assigned by IFFC to IFFP on March 14, 1997;
however, IFFC remains liable for the obligations contained in the New BKC
Development Agreement. Pursuant to the New BKC Development Agreement, IFFP has
been granted the exclusive right until September 30, 2007 to develop and be
franchised to operate Burger King restaurants in Poland with certain exceptions
discussed below. Pursuant to the New BKC Development Agreement, IFFC is required
to open 45 restaurants during the term of the Agreement. Each traditional Burger
F-19
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
King restaurant, in-line Burger King restaurant, or drive-thru Burger King
restaurant shall constitute one unit. A Burger King kiosk restaurant shall, for
purposes of the New BKC Development Agreement, be considered one quarter unit.
Pursuant to the New BKC Development Agreement, IFFC is to open three Development
Units through September 30, 1998, four units in each year beginning October 1,
1998 and ending September 30, 2001 and five units in each year beginning October
1, 2001 and ending September 30, 2007.
Pursuant to the New BKC Development Agreement, IFFC shall pay BKC
$1,000,000 as a development fee. IFFC shall not be obligated to pay the
development fee if IFFC is in compliance with the development schedule by
September 30, 1999, and has achieved gross sales of $11,000,000 for 12 months
preceding the September 30, 1999 target date. If the development schedule has
been achieved but gross sales were less than $11,000,000, but greater than
$9,000,000, the development fee shall be reduced to $250,000. If the development
fee is payable due to failure to achieve the performance targets set forth
above, IFFC, at its option, may either pay the development fee or provide BKC
with the written and binding undertaking of Mr. Mitchell Rubinson, IFFC's
Chairman, that the Rubinson Group will completely divest themselves of any
interest in IFFC and the Burger King restaurants opened or operated by IFFC in
Poland within six (6) months of the date the development fee payment is due. The
Rubinson Group shall be defined to include any entity that Mr. Rubinson directly
or indirectly owns an aggregate interest of ten percent (10%) or more of the
legal or beneficial equity interest and any parent, subsidiary or affiliate of a
Rubinson entity. Mr. Rubinson has personally guaranteed payment of the
development fee.
For each restaurant opened, IFFC is obligated to pay BKC an initial fee of
up to $40,000 for franchise agreements with a term of 20 years and $25,000 for
franchise agreements with a term of ten years payable not later than twenty days
prior to the restaurant's opening. Each franchised restaurant must also pay a
percentage of the restaurant's gross sales, irrespective of profitability, as a
royalty for the use of the Burger King System and the Burger King Marks. The
annual royalty fee is five percent (5%) of gross sales. The franchises must also
contribute a monthly advertising and promotion fee of 6% of the restaurant's
gross sales, to be used for advertising, sales promotion, and public relations.
Payment of all amounts due to BKC is guaranteed by IFFC. The New BKC Development
Agreement calls for certain cash contributions from BKC to IFFC over the term of
the Development Agreement and additional sums based on an incentive arrangement
when earned to be retained by IFFC out of BKC's future royalties.
BKC may terminate rights granted to IFFC under the BKC Development
Agreement, including franchise approvals for restaurants not yet opened, for a
variety of possible defaults by IFFC, including, among others, failure to open
restaurants in accordance with the schedule set forth in the BKC Development
Agreement; failure to obtain BKC site approval prior to the commencement of each
restaurant's construction; failure to meet various operational, financial, and
legal requirements set forth in the BKC Development Agreement, including
maintaining of IFFP's net worth of $7,500,000 beginning on June 1, 1999. Upon
termination of the BKC Development Agreement, whether resulting from default or
expiration of its terms, BKC has the right to license others to develop and
operate Burger King restaurants in Poland, or to do so itself.
The BKC Development Agreement requires IFFC to designate a full-time
Managing Director to be responsible for the restaurants to be developed pursuant
to the New BKC Development. Such General Manager must be acceptable to BKC. Leon
Blumenthal, who has served as IFFC's Senior Vice President and Chief Operating
Officer will serve as Managing Director, and has been approved by BKC.
Specifically excluded from the scope of the BKC Development Agreement are
restaurants on United States military establishments. BKC has also reserved the
right to open restaurants in hotel chains with which BKC has, or may in the
future have, a multi-territory agreement encompassing Poland. With respect to
restaurants in airports, train stations, hospitals and other hotels, IFFC has
the right of first refusal with the owners of such sites. If IFFC is unable or
unwilling to reach a mutually acceptable agreement, BKC or its affiliates or
F-20
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
designated third parties may do so. IFFC is restricted from engaging in the fast
food hamburger restaurant business without the prior written consent of BKC,
which consent may not be withheld so long as IFFC and the franchisees operating
Burger King restaurants by designation of IFFC are adequately funded.
Subject to certain exceptions, as long as IFFC is a principal of IFFP, BKC
has the right to review and consent to certain types of new stock issuances of
IFFC for which the consent will not be unreasonably withheld, provided that IFFC
has complied with all reasonable conditions then established by BKC in
connection with the proposed sale or issuance of applicable equity securities by
IFFC.
On December 23, 1991, the Company entered into a 3-year noncancellable
operating lease for its principal offices consisting of approximately 1,100
square feet. Annual lease payments for the three year term were $10,800 per
year. On December 23, 1994, the Company exercised a 2 year renewal option at an
annual rate of $11,900 and on December 23, 1996 exercised an additional two year
renewal option at an annual rate of $13,285. An additional two year renewal
option is available and requires a 5% annual increase in rent.
IFF Polska and PK Polska share equally the cost and use of office space in
Poland. In November 1993, PK Polska entered into a ten year lease agreement with
a third party, and on September 30, 1994, the lease was amended for 325 square
meters of office space. Annual lease payments aggregate to approximately
$73,200. The lease provides for a ten year renewal option, however, it can be
terminated at any time with six months written notice. In November 1996, the
landlord exercised its option to terminate the lease upon six months notice.
Accordingly, IFFP must vacate the premises in May 1997.
The Company has entered into 3-year employment agreements with certain key
officers. Initial annual salaries under these agreements aggregate $278,000 with
annual increases of 10% during the initial term. Annual increases range from
13-15% during the optional two year extension periods.
In connection with the procurement of restaurant sites, IFF Polska has
entered into various long-term arrangements for restaurant space. The terms of
the various agreements range from approximately two to ten years, plus
extensions based upon agreement between the parties. The following is a schedule
by years of minimum future rentals on noncancelable operating leases as of
December 31, 1996, based on the year end exchange rate:
Year Ending December 31:
------------------------
POLAND U.S.A.
---------- ---------
1997 $ 391,018 $ 13,285
1998 391,271 13,285
1999 356,943 -
2000 353,799 -
2001 353,799 -
Thereafter 1,598,609 -
---------- ---------
$3,445,439 $ 26,570
========== =========
Rent expense charged for 1996 and 1995 was $450,752 and $490,172,
respectively.
IFF Polska has entered into long-term purchase agreements with its
suppliers for meat and buns. The range of prices and volume of purchases under
the agreements may vary according to the minimum quantity stipulated to buy, IFF
Polska's demand for the products and fluctuations in market rates.
F-21
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. 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 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 March 11, 1997, BKC, IFFC, IFFP and Rubinson, individually and on
behalf of Litigation Funding, Inc. entered into a Settlement Agreement. In
connection with the execution of the Settlement Agreement, IFFC and BKC entered
into the New BKC Development Agreement and eight (8) new Franchise Agreement.
BKC paid to IFFC the sum of $5,000,000 (less $21,865 of royalties owned by IFFP
to BKC for February 1997) for a net amount of $4,978,135. In addition, BKC
forgave $499,768 representing all monies owed BKC by IFFP and IFFC through
January 31, 1997. Under the terms of the Settlement Agreement, a portion of such
proceeds, not to exceed $2,000,000 cash may be used to immediately satisfy the
actual legal fees and costs of IFFC and IFFP incurred in connection with the BKC
litigation, including IFFC's and IFFP's obligation under the agreement between
IFFC, IFFP and Litigation Funding, Inc. The remaining $3,000,000 is to be used
by IFFC and IFFP for the development of additional BKC restaurants in Poland or
working capital for IFFP pursuant to the New BKC Development Agreement. The New
BKC Development Agreement calls for certain cash contributions from BKC to IFFC
over the term of such Agreement and additional sums based upon an incentive
arrangement when earned to be retained by IFFC out of BKC's future royalties.
IFFC contributes these funds into a marketing fund administered by IFFC. All
parties to the litigation stipulated to dismissal of the litigation and executed
mutual releases.
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"). This agreement was later amended in July 1996.
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 amended Funding Agreement, Funding agreed to pay on behalf
of IFFC and/or IFFP up to $750,001 (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
F-22
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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) seventy five percent
(75%) 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) seventy five
percent (75%) of any Proceeds, excluding any Sales Proceeds, in excess of the
sum of Funding's Expenses and the IFFC Affiliates' Expenses; and (iii) seventy
five percent (75%) 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.
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
F-23
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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
interest. 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, the 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.
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 Company estimates
that its maximum legal fees and related costs in connection with the BKC
litigation, exclusive of the $750,001 paid by Funding, may approximate
$1,700,000. The Company is presently negotiating with Litigation Counsel as to
the final amount of such fees, as well as the method of payment.
IFFC and Funding are currently reviewing the Settlement Agreement to
determine the amounts required to be paid Funding. Funding and IFFC may select
an appraiser to review the value of the non-cash proceeds to be received in the
settlement.
DOMONT LITIGATION - On May 31, 1995, legal action was filed against IFFP
an 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. In mid 1996, IFFP settled the claim with
Domont for $46,126, based upon the exchange rate at December 31, 1996.
F-24
<PAGE>
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
modern system, the System cannot 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 using a parallel cash register system 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 financial statements. IFFP has requested a final
determination by the Polish Minister of Finance. The Company is unable to
predict the timing and nature of the Ministers ruling. IFFP has not yet made a
decision whether or not to replace its Cash Register System. IFFP believes a new
cash register system would cost approximately $250,000.
14. SUBSEQUENT EVENTS:
In January 1997, the Company's Chairman of the Board, Chief Executive
Officer and President along with his wife and other members of his family
purchased an aggregate of $500,000 of convertible debentures from the Company.
The debentures bear interest at 8% per annum, mature on January 13, 1999, are
collateralized by the Company's equity interest in IFFP and are convertible into
shares of the Company's Common Stock at $.10 per share.
F-25
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
INTERNATIONAL FAST FOOD CORPORATION
Pursuant to Section 607.1006 of the Business Corporation Act of the State
of Florida, the undersigned President of INTERNATIONAL FAST FOOD CORPORATION, a
corporation organized and existing under and by virtue of the Business
Corporation Act of the State of Florida, does hereby certify:
First: That pursuant to Unanimous Written Consent of the Board of
Directors and Majority Consent of the Shareholders of said Corporation, which
were adopted on August 19, 1996, the Shareholders and Directors approved the
amendment to the Corporation's Articles of Incorporation as follows:
Article III of the Articlews of Incorporation of this Corpoartion is
amended to read in its entirety as follows:
ARTICLE III
CAPITAL STOCK
The aggregate number of shares of all classes of capital stock that this
Corporation shall have authority to issue is One Hundred and One Million
(101,000,000) shares, consisting of (i) One Hundred Million (100,000,000) shares
of common stock, par value $0.01 per share (the "Common Stock"), and (ii) one
million (1,000,000) shares of preferred stock, par value $0.01 per share (the
"Preferred Stock").
The designations and the preferences, limitations and relative rights of
the Preferred Stock and the Common Stock are as follows:
A. PROVISIONS RELATING TO THE PREFERRED STOCK.
1. GENERAL. The Preferred Stock may be issued from time to time
in one or more classes or series, the shares of each class or series to have
such designations and powers, preferences, and rights, and qualifications,
limitations and restrictions thereof as are stated and expressed herein and in
the resolution or resolutions providing for the issue of such class or series
adopted by the Board of Directors as hereinafter prescribed.
2. PREFERENCES. Subject to the rights of the holders of the
Corporation's common stock, as set forth in Section B of this Article III,
authority is hereby expressly granted to and vested in the Board of Directors to
<PAGE>
authorize the issuance of the Preferred Stock from time to time in one or more
classes or series, to determine and take necessary proceedings fully to effect
the issuance and redemption of any such Preferred Stock, and, with respect to
each class or series of the Preferred Stock, to fix and state by the resolution
or resolutions from time to time adopted providing for the issuance thereof the
following:
a. whether or not the class or series is to have voting
rights, full or limited, or is to be without voting rights;
b. the number of shares to constitute the class or series
and the designations thereof;
c. the preferences and relative, participating, optional or
other special rights, if any, and the qualifications, limitations or
restrictions thereof, if any, with respect to any class or series;
d. whether or not the shares of any class or series shall
be redeemable and if redeemable the redemption price or prices, and the time or
times at which and the terms and conditions upon which such shares shall be
redeemable and the manner of redemption;
e. whether or not the shares of a class or series shall be
subject to the operation of retirement or sinking funds to be applied to the
purchase or redemption of such shares for retirement, and if such retirement or
sinking fund or funds be established, the annual amount thereof and the terms
and provisions relative to the operation thereof;
f. the dividend rate, whether dividends are payable in
cash, stock of the Corporation, or other property, the conditions upon which and
the times when such dividends are payable, the preference to or the relation to
the payment of the dividends payable on any other class or classes or series of
stock, whether or not such dividend shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate;
g. the preferences, if any, and the amounts thereof that
the holders of any class or series thereof shall be entitled to receive upon the
voluntary or involuntary dissolution of, or upon any distribution of the assets
of, the Corporation;
h. whether or not the shares of any class or series shall
be convertible into, or exchangeable for, the shares of any other class or
classes or of any other series of the same or any other class or classes of the
Corporation and the conversion price or prices or ratio or ratios or the rate or
rates at which such conversion or exchange may be made, with such adjustments,
if any, as shall be stated and expressed or provided for in such resolution or
resolutions; and
<PAGE>
i. such other special rights and protective provisions with
respect to any class or series as the Board of Directors may deem advisable.
The shares of each class or series of the Preferred Stock may vary from
the shares of any other series thereof in any or all of the foregoing respects.
The Board of Directors may increase the number of shares of Preferred Stock
designated for any existing class or series by a authorized and unissued shares
of Preferred Stock not designated for any other class or series. The Board of
Directors may decrease the number of shares of the Preferred Stock designated
for any existing class or series by a resolution, subtracting from such series
unissued shares of the Preferred Stock designated for such class, or series, and
the shares so subtracted shall become authorized, unissued and undesignated
shares of the Preferred Stock.
3. PROVISIONS RELATING TO THE SERIES A PREFERRED STOCK.
a. DESIGNATION AND RANK.
The series of preferred stock is designated "Series A Convertible
Preferred Stock", and the number of shares which shall constitute such Series
shall be 83,920 shares, par value $.01 per share. All shares of Series A
Convertible Preferred Stock shall rank equally and be identical in all respects
and shall rank equally with respect to dividend payments and liquidation
preferences with the highest ranking preferred stock of the Company hereinafter
designated by the Board of Directors.
b. DIVIDENDS.
The Company shall pay dividends on the Series A Convertible
Preferred Stock at an annual rate of 6% ($6.00 per share) and no more. All such
dividends may, at the option of the Company, be paid through the issuance of
shares of the Company's common stock, $.01 par value per share (the "Common
Stock"), cash or a combination of cash and Common Stock, whether or not such
dividends have been declared by the Company's Board of Directors. Dividends
shall accrue cumulatively from and including the date of issuance of the Series
A Convertible Preferred Stock and shall be paid in equal semi-annual payments on
June 15 and December 15 (the "Dividend Payment Dates") in each year through the
date of conversion or redemption of such preferred stock, to all holders of
record on a date not more than 10 days prior to the date on which such dividends
are payable. For purposes of paying dividends in Common Stock, the price of the
Common Stock shall be the average of the daily closing prices of the Common
Stock for the 30 consecutive full business days preceding the day in question.
The closing price for each business day shall be the last reported sale price,
or, in the case that no such reported sale takes place on such day, the average
of the last reported sale prices for the last three trading days, in either case
as officially reported by the principal securities exchange on which the Common
Stock is listed or admitted for trading or as reported in the National
<PAGE>
Association of Securities Dealers Automated Quotation System ("NASDAQ") or, if
the Common Stock is not listed or quoted on a principal securities exchange or
NASDAQ (or if NASDAQ ceases to report closing sales prices), the closing bid
price furnished by the National Association of Securities Dealers, Inc. through
NASDAQ, or similar organization if NASDAQ is no longer reporting such
information, or if the Common Stock is not quoted by NASDAQ, then as reported by
the National Quotation Bureau Incorporated, or if not quoted by the National
Quotation Bureau Incorporated, the average of the closing bid and asked prices
as furnished by any member of the National Association of Securities Dealers,
Inc. selected from time to time by the Company for that purpose.
i) The Series A Convertible Preferred Stock shall be
preferred as to the payment of dividends over the shares of all Common Stock and
any other class or classes of stock of the Company but shall rank in parity with
any class of preferred stock of the Company, if any, which so provides.
Dividends (whether current or in arrears) on the Series A Convertible Preferred
Stock shall be paid before any dividends on any junior stock shall be declared
and set apart for payment or paid.
ii) All dividends payable on the Series A Convertible
Preferred Stock shall be cumulative.
iii) Accruals of dividends shall not bear interest.
c. DISSOLUTION, LIQUIDATION OR WINDING-UP.
In the event of a dissolution, liquidation or winding-up of the Company,
whether voluntary or involuntary, the holders of each share of Series A
Convertible Preferred Stock by reason of their ownership thereof, shall be
entitled to receive in exchange for and in redemption of their Series A
Convertible Preferred Stock, prior and in preference to any distribution of any
of the assets or surplus funds of the Company to the holders of Common Stock and
any other class or classes of stock of the Company (except those that shall rank
in parity with the Series A Convertible Preferred Stock), an amount equal to One
Hundred Dollars ($100) per share, plus all accrued but unpaid dividends, whether
or not declared, on such shares.
If upon any such liquidation, dissolution or winding up of the Company,
its net assets shall be insufficient to permit the payment in full of the
amounts to which holders of all outstanding shares of the Series A Convertible
Preferred Stock are entitled as above provided, the entire net assets of the
Company remaining shall be distributed among the holders of shares of Series A
Convertible Preferred Stock in amounts proportionate to the full preferential
amounts to which they and holders of shares of preferred stock if any, ranking
in parity with the Series A Convertible Preferred Stock as to rights and
preferences are respectively entitled. For the purpose of this Section III, the
voluntary sale, lease, exchange or transfer, for cash, shares of stock,
securities or other consideration, of all or substantially all the Company's
<PAGE>
property or assets to, or its consolidation or merger with, one or more
corporations, shall not be deemed to be a liquidation, dissolution or winding up
of the Company, voluntary or involuntary.
d. VOTING RIGHTS.
Except as otherwise specifically provided by the Company's Articles of
Incorporation or by Florida law, the holders of Series A Convertible Preferred
Stock shall not be entitled to vote on any matters required or permitted to be
submitted to the shareholders of the Company for their approval.
e. CONVERSION PROVISIONS.
The holders of the Series A Convertible Preferred Stock shall have
conversion rights as follows:
i) RIGHT TO CONVERT. Subject to the provisions for
adjustment set forth below, after June 30, 1995 (the "Conversion Date"), and for
a period prior to its earlier redemption or repurchase by the Company, each of
Series A Convertible Preferred Stock shall be convertible, at the option of the
holder thereof and upon surrender of the certificate or certificates evidencing
the shares to be converted to the transfer agent or the Company for the Series A
Convertible Preferred Stock, into fully paid and nonassessable shares of Common
Stock of the Company at a conversion price of $3.00 per share (the "Conversion
Price"), subject to adjustment as described in paragraph (c) below. The right to
convert shares of the Series A Convertible Preferred Stock called for redemption
shall terminate on the date fixed for redemption provided that the Company has
complied with Section VI(c).
ii) ISSUANCE OF SHARES OF COMMON STOCK ON CONVERSION.
As promptly as practicable after the surrender of shares of Series A Convertible
Preferred Stock for conversion in the manner herein provided, the Company shall
deliver or cause to be delivered, at the office or agency at which such
surrender is made, to or upon the written order of the holder of shares of
Series A Convertible Preferred Stock so surrendered, certificates representing
the number of duly authorized, validly issued, fully paid and nonassessable
shares of Common Stock of the Company into which such shares of Series A
Convertible Preferred Stock may be converted and cash in respect of any fraction
of a share of Common Stock issuable upon such conversion. Any such conversion
shall be deemed to have been made immediately prior to the close of business on
the date on which such share(s) of Series A Convertible Preferred Stock shall
have been surrendered for conversion in the manner herein provided accompanied
by written notice, so that the rights of the holder of such share(s) of Series A
Convertible Preferred Stock as holders thereof, shall cease at such time and the
person or persons entitled to receive the shares of Common Stock upon conversion
of the Series A Convertible Preferred Stock shall be treated for all purposes as
having become the record holder or holders of such shares of Common Stock at
such time; provided, however, that no such surrender on any date when the stock
<PAGE>
transfer books of the Company shall be closed shall be effective to constitute
the person or persons entitled to receive shares of Common Stock, upon
conversion of such shares of Series A Convertible Preferred Stock, as the record
holder or holders of such shares on such date, but such surrender shall be
effective to constitute the person or persons entitled to receive such shares of
Common Stock as the record holder or holders thereof for all purposes at the
opening of business on the next succeeding day on which such stock transfer
books are open and such conversion shall be at the applicable Conversion Price
in effect at such time.
iii) ADJUSTMENT OF CONVERSION PRICE. The Conversion
Price shall be subject to adjustment from time to time as follows:
a) In the event that the Company shall at any
time after the date hereof subdivide or combine the outstanding shares of Common
Stock or issue additional shares of Common Stock as a dividend or other
distribution on the Common Stock, the Conversion Price in effect immediately
prior to such subdivision or combination of such shares or share dividend or
distribution shall be proportionately adjusted so that, with respect to each
such subdivision of shares or share dividend or distribution, the number of
shares of Common Stock deliverable upon conversion of each share of Series A
Convertible Preferred Stock shall be increased in proportion to the increase in
the number of shares of the then outstanding Common Stock resulting from such
subdivision of shares or share dividend or distribution, and with respect to
each such combination of shares, the number of shares of the Common Stock
deliverable upon conversion of each share of Series A Convertible Preferred
Stock shall be decreased in proportion to the decrease in the number of shares
of the then outstanding Common Stock resulting from such combination of shares.
Any such adjustment in the Conversion Price shall become effective, in the case
of any such subdivision or combination of shares, at the close of business on
the effective date thereof, and, in the case of any such share dividend or
distribution, at the close of business on the record date fixed for the
determination of shareholders entitled thereto or on the first business day
during which the stock transfer books of the Company shall be closed for the
purpose of such determination, as the case may be.
b) In the case of any capital reorganization
or any reclassification of the Common Stock, or in the case of the consolidation
or merger of the Company with or into any other corporation or in case of any
sale or transfer of all or substantially all of the assets of the Company, the
holder of each share of Series A Convertible Preferred Stock then outstanding
shall have the right thereafter to convert the Series A Convertible Preferred
Stock into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification, consolidation,
merger, sale or transfer by a holder of the number of shares of Common Stock of
the Company into which such share(s) of Series A Convertible Preferred Stock
might have been converted immediately prior to such reorganization,
reclassification, consolidation, merger, sale or transfer; and, in any such
<PAGE>
case, appropriate adjustment (as determined in good faith by the Board of
Directors of the Company) shall be made in the application of the provisions of
this Section V(c) (including provisions with regard to the adjustment of the
Conversion Price) in order that the rights and interests of the holders
thereafter shall be as nearly equivalent as may be practicable to the rights and
interests provided for in this Section.
c) Whenever the Company shall fix a record
date for the holders of the Common Stock for the purpose of determining the
holders entitled (for a period expiring within 45 days after such record date)
to subscribe for or purchase shares of Common Stock at a price per share less
than the Market Price (as defined below) of the Common Stock as of such record
date, the Conversion Price shall be adjusted so that the number of shares of the
Common Stock into which each share of Series A Convertible Preferred Stock shall
thereafter be convertible shall be determined by multiplying the number of
shares of the Common Stock into which each share of Series A Convertible
Preferred Stock was theretofore convertible by a fraction of which the numerator
shall be the number of shares of the Common Stock outstanding immediately prior
to the taking of such record plus the number of additional shares of Common
Stock offered for subscription or purchase, and of which the denominator shall
be the number of shares of the Common Stock outstanding immediately prior to the
taking of such record plus the number of shares of the Common Stock which the
aggregate offering price (without deduction of any expenses, including
commissions or discounts) of the total number of shares of the Common Stock so
offered would purchase at the Market Price of the Common Stock as of the record
date. In the case of the proposed issuance of Common Stock for a consideration
in whole or in part other than cash, the consideration other than cash shall be
deemed to be the fair market value thereof as determined by the Board of
Directors of the Company. This subsection shall not apply in the case of any
shares of Common Stock proposed to be issued by the Company as or as a result of
a stock dividend payable in shares of Common Stock or as a result of any
subdivision or split-up of the outstanding shares of Common Stock.
The term "Market Price" means the
average of the daily closing prices of the Common Stock for the 30 consecutive
full business days preceding the day in question. The closing price for each
business day shall the last reported sale price, or, in the case that no such
reported sale takes place on such day, the average of the last reported sale
prices for the last three trading days, in either case as officially reported by
the principal securities exchange on which the Common Stock is listed or
admitted for trading or as reported on NASDAQ or, if the Common Stock is not
listed or quoted on a principal securities exchange or NASDAQ (or if NASDAQ
ceases to report closing sales prices), the closing bid price furnished by the
National Association of Securities Dealers, Inc. through NASDAQ, or similar
organization if NASDAQ is no longer reporting such information, or if the Common
Stock is not quoted by NASDAQ, then as reported by the National Quotation Bureau
Incorporated, or if not quoted by the National Quotation Bureau Incorporated,
the average of the closing bid and asked prices as furnished by any member of
the National Association of Securities Dealers, Inc. selected from time to time
by the Company for that purpose.
<PAGE>
d) Whenever the Company shall fix a record
date for the holders of the Common Stock for the purpose of determining the
holders entitled to receive any distribution of evidences of its indebtedness,
capital stock or assets (other than dividends or distributions payable out of
earnings or earned surplus and dividends payable in stock for which adjustment
is made pursuant to subparagraph i) of this Section V(c)), or rights to
subscribe for or purchase any evidences of the Company's indebtedness or assets
(other than rights referred to in the preceding subparagraph iii)), the
Conversion Price shall be adjusted so that the number of shares of Common Stock
into which each share of Series A Convertible Preferred Stock shall thereafter
be convertible shall be determined by multiplying the number of shares of the
Common Stock into which each share of Series A Convertible Preferred Stock was
theretofore convertible by a fraction of which the numerator shall be the
aggregate Market Price of the Common Stock as of the record date and of which
the denominator shall be the aggregate Market Price of the Common Stock as of
the record date less the difference between the aggregate fair market value (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive) of the portion of the assets, capital stock or evidences of
indebtedness so distributed or of such subscription or purchase rights and the
aggregate consideration, if any, received therefor, applicable to the Common
Stock.
e) Notwithstanding anything to the contrary
provided herein, no adjustment in the Conversion Price shall be required unless
such adjustment would result in an increase or decrease of at least 1% in the
Conversion Price or the Conversion Price as last adjusted, as the case may be;
provided however, that any adjustments which by reason of this subparagraph v)
are not required to be made shall be carried forward until used and taken into
account in any subsequent adjustment.
f) The provisions of this Section V(c) shall
similarly apply to successive subdivisions, combinations, reorganizations,
reclassifications, consolidations, mergers, sales or transfers. Adjustments made
pursuant to subparagraphs iii) and iv) of this Section V(c) shall be made
successively whenever any record date referred to therein is fixed; and in the
event that any rights offering or subscription referred to in such subparagraphs
is not made, the Conversion Price shall again be adjusted to be Conversion Price
which would be in effect if such record date had not been fixed.
g) For the purpose of making the
adjustments referred to in the applicable provisions of this Section V, the
books of the Company shall, absent manifest error, control absolutely in
<PAGE>
determining the number of outstanding shares of Common Stock and the number of
additional shares issued or decreased as a result of any stock dividend,
subdivision or combination.
iv) NO FRACTIONAL SHARES TO BE ISSUED. No fractional
share of Common Stock shall be issued upon the conversion of the Series A
Convertible Preferred Stock. Instead of any fractional share of Common Stock
which would otherwise be issuable upon conversion of any share(s) of Series A
Convertible Preferred Stock, the Company shall pay to the holder thereof, a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the closing price per share of Common Stock (determined in the manner
provided in the second sentence of the definition of "Market Price" in Section
V(c)(iii) above) as of the business day next preceding the date of such
conversion as of which the closing price can be determined.
v) RESERVATION OF COMMON STOCK ISSUABLE UPON
CONVERSION. The Company shall at all times reserve and keep available out of its
authorized but unissued shares the full number of shares of Common Stock into
which all shares of Series A Convertible Preferred Stock from time to time
outstanding are convertible.
vi) PAYMENT OF TAXES UPON CONVERSION. The Company will
pay any and all issue and other taxes that may be payable in respect of any
issue or delivery of shares of Common Stock on conversion of shares of Series A
Convertible Preferred Stock. The Company shall not, however, be required to pay
any tax which may be payable in respect of any transfer involved in the issue
and delivery of Common Stock in a name other than that in which the shares of
Series A Convertible Preferred Stock converted were registered, and no such
issue or delivery shall be made unless and until the person requesting such
issue has paid to the Company the amount of any such tax, or has established, to
the satisfaction of the Company, that such tax has been paid.
vii) NOTICES OF RECORD DATE. In the event of any taking
by the Company of a record of the holders of securities other than the Series A
Convertible Preferred Stock for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Company
shall mail to each holder of the Series A Convertible Preferred Stock at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or rights, and the amount and character of such dividend,
distribution or rights.
<PAGE>
f. REDEMPTION.
i) OPTIONAL REDEMPTION. Shares of the Series A
Convertible Preferred Stock may, at the option of the Company, be redeemed by
the Company at any time, provided that the closing price of the Common Stock
exceeds 150% of the Conversion Price of the Series A Convertible Preferred Stock
for a period of ten (10) consecutive trading days prior to such redemption. If
the Company should determine to redeem the Series A Convertible Preferred Stock,
such shares shall be redeemable at the Company's election in whole or in part at
any time or from time to time, with funds legally available for such purpose
under Florida law, at a redemption price of One Hundred Dollars ($100) per share
plus an amount equal to all accrued and unpaid dividends.
ii) PRO RATA REDEMPTION. If less than all shares of
Series A Convertible Preferred Stock are redeemed at any time under this Section
IV, shares of Series A Convertible Preferred Stock held by each holder of record
thereof shall be called for redemption pro rata, according to the number of
shares of Series A Convertible Preferred Stock held by such holder, subject,
however, to such adjustment as may be equitably determined by the Company in
order to avoid the redemption of fractional shares.
iii) REDEMPTION PROCEDURES. Any redemption of any or
all of the outstanding shares of Series A Convertible Preferred Stock, whether
mandatory or optional, shall be effected as follows:
a) Any such redemption shall be effected by
written notice given by certified or registered mail, postage prepaid, not less
than thirty (30) days nor more than fifty (50) days prior to the date fixed for
redemption to the holders of record of Series A Convertible Preferred Stock
whose shares are to be redeemed at their respective addresses as the same shall
appear on the books of the Company. Each such notice of redemption shall specify
the date fixed for redemption, the redemption price and place of payment
thereof, and if less than all outstanding shares of Series A Convertible
Preferred Stock are to be redeemed, the number of shares of Series A Convertible
Preferred Stock held by each holder of record thereof which are being called for
redemption.
b) On the date fixed for redemption of any
shares of Series A Convertible Preferred Stock, the Company shall, at least one
business day prior to such date deposit the aggregate amount of the redemption
price of the shares called for redemption, except that no such deposit shall be
required with respect to any such shares which prior to the date of such deposit
shall have been converted pursuant to the exercise of any conversion right, with
the transfer agent or with a paying agent designated in the notice of such
redemption, for payment to the holders of the shares of Series A Convertible
Preferred Stock being called for redemption and deliver irrevocable written
instructions authorizing such transfer agent to apply such deposit solely to the
<PAGE>
redemption of the shares of Series A Convertible Preferred Stock called for
redemption except that any of such deposit which shall not be required for such
redemption because of the exercise of any conversion right of the shares called
for redemption shall be released or repaid to the Company.
c) Notice of redemption having been duly
given, the redemption price of the shares being called for redemption having
been deposited as aforesaid, then on the date for such redemption, the
certificates for the Series A Convertible Preferred Stock called for redemption
(whether or not surrendered) shall be deemed no longer outstanding for any
purpose, and all rights with respect to such shares shall thereupon cease and
terminate, except the right of the holders of such shares to receive, out of
such deposit in trust, on the redemption date, the redemption price to which
they are entitled, without interest.
d) If any holder of shares of Series A
Convertible Preferred Stock called for redemption shall, after the mailing by
the Company of notice of such redemption and prior to the date fixed for such
redemption, convert any shares of Series A Convertible Preferred Stock, such
shares of Series A Convertible Preferred Stock so converted by such holder (not
exceeding, however, the number of shares of Series A Convertible Preferred Stock
held by such holder which shall have been called for redemption) shall be deemed
to constitute shares of Series A Convertible Preferred Stock held by such holder
which shall have been so called for redemption.
e) In case any certificate for shares of
Series A Convertible Preferred Stock shall be surrendered by the holder thereof
for payment in connection with the redemption of only a portion of the shares
represented thereby, the Company shall deliver to or upon the order of the
holder thereof a certificate or certificates for the number of shares of Series
A Convertible Preferred Stock represented by such surrendered certificate which
are not being redeemed.
In case any holder of Series A
Convertible Preferred Stock called for redemption shall not, within ninety (90)
days after deposit by the Company of funds for the redemption thereof, claim the
amount deposited for redemption thereof, the bank trust company or transfer
agent with which such funds were deposited shall, upon demand, pay over to the
Company the balance of such amount so deposited and such bank, trust company or
transfer agent shall thereupon be relieved of all responsibility to such holder,
who shall thereafter look solely to the Company for payment of the redemption
price of his shares.
iv) NO REISSUE. Shares of Series A Convertible
Preferred Stock which have been converted by the holder thereof or redeemed,
purchased or otherwise acquired by the Company shall be canceled and may not be
reissued, but may be redesignated as provided in Section IV hereof.
<PAGE>
g. REACQUIRED SHARES.
Any shares of Series A Convertible Preferred Stock that have been issued
and subsequently reacquired by the Company upon their conversion for shares of
Common Stock or redeemed or purchased or otherwise acquired by the Company in
any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof. All such shares upon their cancellation shall become
authorized but unissued shares of the preferred stock, par value $.01 per share,
of the Company and may be reissued as part of a new series of preferred stock of
the Company to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth in
the Company's Articles of Incorporation.
B. PROVISIONS RELATING TO THE COMMON STOCK.
1. VOTING RIGHTS. Except as otherwise required by law or as may
be provided by the resolutions of the Board of Directors authorizing the
issuance of any class or series of the Preferred Stock, as hereinabove provided,
all rights to vote and all voting power shall be vested exclusively in the
holders of the Common Stock.
2. DIVIDENDS. Subject to the rights of the holders of the
Preferred Stock, the holders of the Common Stock shall be entitled to receive
when, as and if declared by the Board of Directors, out of funds legally
available therefor, dividends payable in cash, stock or otherwise.
3. LIQUIDATING DISTRIBUTIONS. Upon any liquidation, dissolution
or winding-up of the Corporation, whether voluntary or involuntary, and after
the holders of the Preferred Stock shall have been paid in full the amounts to
which they shall be entitled (if any) or a sum sufficient for such payment in
full shall have been set aside, the remaining net assets of the Corporation
shall be distributed pro rata to the holders of the Common Stock in accordance
with their respective rights and interests to the exclusion of the holders of
the Preferred Stock.
The foregoing amendment was adopted by the Board of Directors of the
Corporation pursuant to Unanimous Written Consent of the Board of Directors, and
by majority of the Shareholders of the Common Stock of the Corporation at the
Corporation's Annual Meeting of Shareholders, which shares consenting and voted
at such meeting represented a majority of the total issued and outstanding
capital stock of the Corporation entitled to vote. Therefore, the number cast
for the amendment to the Corporation's Articles of Incorporationwas sufficient
for approval.
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the President of this
Corporation, has executed these Articles of Amendment as of August 20, 1996.
INTERNATIONAL FAST FOOD CORPORATION
By: /S/ Mitchell Rubinson
----------------------------------------------
Mitchell Rubinson, President
AMENDMENT #3 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT #3 TO EMPLOYMENT AGREEMENT (the "Agreement") is entered
into by and between International Fast Food Corporation (the "Company"), a
Florida corporation and Mitchell Rubinson (the "Executive"), this 7TH day of
NOVEMBER, 1996.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Executive have entered into an Employment
Agreement dated January 28, 1992 and amended March 3, 1992 and November 1, 1994
governing the relationship between the parties thereto with respect to the
employment of the Executive by the Company;
WHEREAS, the Company and the Executive desire to amend the amount of time
which the Executive agrees to devote to the performance of his duties under this
Agreement; and
WHEREAS, the Company and the Executive desire to extend the duration of
the Executive's employment with the Company and effect an annual 10% increase in
salary through the duration of the Agreement;
NOW, THEREFORE, it is agreed as follows:
1. SECTION 1(C) OF EMPLOYMENT AGREEMENT. The Executive hereby agrees to
devote such portion of his business time, attention and efforts to the
performance of his duties hereunder as may be reasonably required by the Board,
it being understood that the Executive has certain other business interests to
which he must devote a portion of his business time.
2. SECTION 2 OF EMPLOYMENT AGREEMENT. The term of this Agreement, and
the employment of the Executive hereunder, shall be for a period expiring on
December 31, 1999.
3. SECTION 3(A) OF EMPLOYMENT AGREEMENT. The Executive's minimum salary
during the first year of the term of this Agreement shall be $183,012.50 per
annum, payable by check in equal bi-weekly installments or in such other
periodic installments as may be in accordance with the regular payroll policies
of the Company as from time to time in effect, less such deductions or amounts
to be withheld as shall be required by applicable law and regulations, provided
that for each subsequent year during the term, the minimum salary shall be
increased by ten percent (10%) per annum.
3. NO FURTHER AMENDMENT. Except as otherwise provided herein and in
Amendment #1 and Amendment #2, the terms and provisions of the Employment
Agreement remain unchanged.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Agreement as of the date first above written.
INTERNATIONAL FAST FOOD CORPORATION,
a Florida corporation
By: /S/ Jim Martin
----------------------------------------
Its: Vice President
----------------------------------------
/S/ Mitchell Rubinson
-------------------------------------------
Mitchell Rubinson
AGREEMENT TO ASSIGN LITIGATION PROCEEDS
---------------------------------------
THIS AGREEMENT ("Agreement") is made and entered into as of September 11,
1996, between International Fast Food Corporation, a Florida corporation (the
"Buyer") and International Fast Food Polska, a Polish limited liability
corporation ("IFFP").
RECITALS
--------
A. The Buyer and IFFP (collectively, the "Companies") are parties to that
certain cause of action known as International Fast Food Corporation and
International Fast Food Polska Sp. zo.o. v. Burger King Corporation (Case
No. 95-05130 CA 02) in the Circuit Court of the 11th Judicial Circuit in
and for Dade County, Florida (the "BKC Litigation").
B. IFFP desires to assign the IFFP Assigned Proceeds (as hereinafter defined)
to Buyer in order to discharge part of its obligations to the Buyer and to
assign to Buyer all of IFFP's claims against Burger King Corporation
asserted in the BKC Litigation.
C. Buyer desires to purchase the IFFP Assigned Proceeds for the purchase
price of $125,000.00 (the "Purchase Price), under the terms and conditions
set forth herein.
D. IFFP and Buyer agree that the value of the IFFP Assigned Proceeds cannot
be readily determined and that there is a substantial risk that the IFFP
Assigned Proceeds may have a value that is less than the Purchase Price
and that it may be zero.
E. IFFP entered into similar agreements in January 1996, as amended in July
1996, and assigned part of its proceeds (defined in said agreement, as
amended) to Litigation Funding Inc. (collectively "Agreement with
Litigation Funding Inc."). The Agreement with Litigation Funding Inc. is
attached to this Agreement as Exhibit 1 and incorporated herein by
reference.
F. IFFP owes to the Buyer a sum in excess of $125,000 (Owed Sum) which debt
results from funds advanced and expenses incurred.
G. Buyer will pay the legal fees of IFFP in connection with the BKC
litigation.
H. All terms used in this Agreement shall have the meaning described thereto
in Agreement with Litigation Funding Inc. unless this Agreement provides
otherwise.
AGREEMENT
---------
NOW, THEREFORE, for and in consideration of the premises and of the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
<PAGE>
1. PURCHASE PRICE. The Buyer hereby agrees to pay IFFP for the IFFP
Assigned Proceeds (as defined below) the consideration of $125,000.00 payable as
set forth herein.
2. ASSIGNMENT. In consideration of the Purchase Price payable pursuant
to Section 1., IFFP hereby assigns, sets over, transfers and conveys the IFFP
Assigned Proceeds to Buyer free of any claims, liens or other encumbrances
whatsoever, other than the rights of Litigation Funding, Inc. under the
Agreement with Litigation Funding, Inc. In addition, IFFP also assigns to Buyer
all of IFFP's rights and interest in and to all claims and causes of action
alleged in arising out of the BKC Litigation.
3. IFFP PROCEEDS. For the purposes hereof the "IFFP Assigned Proceeds"
shall be defined as the difference between the Proceeds and the Assigned
Proceeds (as such terms are defined under the Agreement with Litigation Funding,
Inc.) to which IFFP shall be entitled with exclusion of other parties.
a. Proceeds other than cash shall be deemed to have a value equal
to the fair market value of such assets on the date such Proceeds payable
to IFFP or Buyer are, for any reasons whatsoever, not to be fully paid
within ninety (90) days after a Judgment or Settlement, then the net
present value of the cash Proceeds to be paid shall be calculated,
applying a discount rate equivalent to the prime lending rate of Citibank,
N.A., by an independent certified public accountant (the "Appraiser")
selected by IFFP and the Buyer. The value of non-cash Proceeds (including,
but not limited to Debt Relief Proceeds and Contract Modifications
Proceeds) shall be determined by the Appraiser. To the extent that any of
the foregoing provisions of this paragraph are inconsistent with the
provisions of this Agreement and/or the Agreement with Litigation Funding,
Inc., specifically pertaining to the calculation of Sales Proceeds, the
provisions of this Agreement and/or the Agreement with Litigation Funding,
Inc., specifically pertaining to the calculation of Sales Proceeds shall
prevail if Sales Proceeds are being calculated.
b. In the event that IFFP and the Buyer cannot agree upon an
Appraiser, IFFP and the Buyer agree to retain as the Appraiser the first
firm on an alphabetical list of the United States of America's six largest
accounting firms which is willing to perform the Appraisal and does not
have a conflict. The computation of the market value of non-cash Proceeds
by the Appraiser shall be final and binding upon the parties hereto. IFFP
and the Buyer shall share equally the cost of Appraisal.
4. SETTLEMENT OF DEBTS. IFFP hereby acknowledges it owes Buyer in
excess of the Purchase Price. The parties agree that, as a result of payment by
crediting the Purchase Price, the amounts owned by IFFP to Buyer shall be
reduced by the Purchase Price.
5. ADDITIONAL COVENANTS OF IFFP.
a. IFFP agrees that IFFP shall pay to Buyer all Proceeds to which Buyer
is entitled pursuant to this Agreement promptly after receipt, in no event
- 2 - 09/11/96
<PAGE>
later than ten (10) business days following IFFP's receipt of such
Proceeds, and all such amounts shall be paid without offset or deduction
of any amounts, other than any adjustments based upon the rights of
Litigation Funding, Inc.
b. IFFP will make, execute and deliver to Buyer any and all
powers of attorney and other instruments, papers and documents which it
may lawfully make, execute and deliver, which may be or become necessary
to carry out and effectuate the intent and purposes of this Agreement, and
otherwise proper or convenient to enable Buyer to reduce to possession,
collect, enforce, own or enjoy any and all rights and benefits in, to,
with respect to, or in connection with the BKC Litigation, the IFFP
Assigned Proceeds, or any part of portion thereof, and upon Buyer's
request, to take, in its corporate name, any and all steps and to do any
and all things which may be or become convenient or desirable to enable
Buyer to enforce such rights (including but not limited to the execution
of UCC-1s and other security instruments evidencing Buyer's interests in
the IFFP Assigned Proceeds, and the execution and delivery of its notice
to Burger King Corporation regarding the assignment of Proceeds to the
Buyer hereunder to the extend required by law).
6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and
warrants that:
a. The Buyer shall be responsible for the payment of any costs of
litigation, including, without limitation, attorneys fees, witness fees,
out-of-pocket expenses and other charges incident to the prosecution of
the BKC Litigation.
b. The Buyer is not aware of any current settlement offers by the
BKC Entities which, if accepted by the IFFP, would entitle the Buyer to
compensation pursuant to the terms of this Agreement.
c. The Buyer represents and acknowledges that all matters
relating to IFFP and this Agreement have been explained to its
satisfaction and that it understands the speculative nature and risks
involved in its investment.
d. The Buyer is acquiring the IFFP Assigned Proceeds for
investment solely for its own account and not for distribution, transfer,
or resale to others.
e. The Buyer has been afforded the opportunity to ask questions
of, and receive answers from, IFFP and to obtain any additional
information, to the extent that IFFP possesses such information or could
have acquired it without unreasonable effort or expense, and has in
general had access to all information it deemed material to an investment
decision with respect to its acquisition of the IFFP Assigned Proceeds.
- 3 - 09/11/96
<PAGE>
f. The Buyer acknowledges that it has discussed this Agreement
with counsel and understands the meaning and legal consequences of the
representations and warranties herein.
g. Buyer acknowledges that its rights and interests in the IFFP
Assigned Proceeds is subject and subordinate to all rights granted by IFFP
in the Agreement with Litigation Funding, Inc.
7. REPRESENTATIONS AND WARRANTIES OF IFFP. IFFP hereby represents and
warrants to the Buyer, as follows:
a. IFFP is a corporation duly organized, validly existing and in
good standing under the laws of the Republic of Poland, with corporate
power to own its properties and to conduct in business as now conducted.
b. IFFP has full legal right, power and authority to enter into
and perform this Agreement, and the execution and delivery of this
Agreement by IFFP and the consummation of the transactions contemplated
hereby have been duly authorized by the Board of Directors of IFFP. This
Agreement constitutes a valid and binding agreement of IFFP.
c. IFFP is not aware of any offers by the BKC Entities which, if
IFFP, would entitle the Buyer to compensation pursuant to the terms of
this Agreement.
d. IFFP has made no admission of insolvency, has made no
assignment for the benefit of creditors, and has paid its obligations in
the ordinary course of business.
8. MISCELLANEOUS.
a. IFFP and Buyer shall each pay their own expenses and costs
(including without limitation all counsel fees) in connection with this
Agreement and the transactions contemplated hereby.
b. The assignment of the IFFP Assigned Proceeds pursuant to this
Agreement is without recourse, and IFFP does not guarantee the payment of
judgments which may be entered in its favor. However, IFFP shall not (i)
release, discharge or otherwise reduce the benefits of any judgment in its
favor arising in connection with the BKC Litigation, nor (ii) enter into a
settlement with respect to the BKC Matter without the Buyer's prior
written consent.
c. In the event any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof and this
Agreement shall be construed as if such invalidity, illegality or
- 4 - 09/11/96
<PAGE>
unenforceability shall not affect any other provision hereof and this
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
d. Any notice required to be given pursuant to this Agreement
must be in writing and may be given by registered or certified mail and,
if given by registered or certified mail, shall be deemed to have been
given and received when a registered or certified letter containing such
notice, properly addressed with postage prepaid, is deposited in the
United States mail; and if given otherwise than by registered or certified
mail, it shall be deemed to have been given when delivered to and received
by the party to whom addressed. Notices shall be given to the parties
hereto at the following addresses:
If to the Buyer:
----------------
Stephen Groth, Chief Financial Officer
International Fast Food Corporation
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
If to IFFP:
-----------
Leon Blumenthal, President
International Fast Food Polska, Sp. zo.o.
Jasna 2/4, 3rd Floor
00-950 Warszawa, Poland
Any party hereto may, by giving five calendar days' written notice to the
other parties, designate any other address in substitution of the
foregoing address to which notices shall be given.
f. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, legal representatives,
successors and permitted assigns, provided that none of the parties hereto
may transfer or assign all or any part of their rights or obligations
hereunder except to the extent expressly permitted herein. The Buyer may
assign its rights and obligations hereunder to an affiliate to any third
party.
g. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Florida. Each of the parties to
this Agreement hereby irrevocably submit to the jurisdiction of the state
or federal courts located in Dade County, Florida in connection with any
suit, action or proceeding that the suit, action or proceeding arising out
of or is brought relating to this Agreement and the transactions
contemplated hereby, and hereby agree not to assert, by way of motion, as
a defense, or otherwise in any suit, action or proceeding that the suit,
- 5 - 09/11/96
<PAGE>
action or proceeding is brought in an inconvenient forum, that the venue
of the suit, action or proceeding is improper or that this Agreement or
the subject matter hereof may not be enforced by such courts. IFFP
expressly waives any rights it may have which conflict with the foregoing
agreements of IFFP in this paragraph.
IFFP AND THE BUYER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVE ANY AND ALL RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION (INCLUDING BUT NOT LIMITED TO ANY CLAIMS, CROSSCLAIMS AND THIRD
PARTY CLAIMS) ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT
OR THE SECURITY INTEREST GRANTED HEREIN. EACH OF THEM HEREBY CERTIFIES
THAT NO REPRESENTATIVE OR AGENT OF THE OTHER NOR THE OTHER'S COUNSEL HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER WOULD NOT, IN THE
EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS JURY WAIVER PROVISION. EACH
OF THEM ACKNOWLEDGES THAT THIS JURY WAIVER HAS BEEN A MATERIAL INDUCEMENT
TO THE BUYER TO ENTER INTO THIS AGREEMENT.
h. This Agreement constitutes the entire agreement and
understanding between the parties hereto with respect to the subject
matter hereof, and may not be modified or amended except in writing signed
by all of the parties hereto.
i. No term or condition of this Agreement shall be deemed to have
been waived nor shall there be any estoppel to enforce any provision of
this Agreement except by written instrument of the party charged with such
waiver or estoppel.
j. IFFP shall defend and hold Buyer harmless against all
liability, loss or damage, together with all reasonable costs and expenses
related thereto (including legal and accounting fees and expenses),
arising from this Agreement, provided written notice of any claim is
furnished to IFFP on or prior to the second anniversary hereof and such
liability, loss or damage is not the result of any (i) actual untruth,
inaccuracy or breach, of or default under any representation, warranty,
covenant or agreement of Buyer made herein; (ii) violation of law by the
Buyer; or (iii) violation of law by an affiliate to the Buyer for the
benefit of the Buyer. The Buyer shall have the right to appoint counsel of
its own choosing to defend any litigation for which IFFP holds Buyer
harmless. Buyer shall, with respect to the representations, warranties,
covenants and agreements made by Buyer herein, indemnify, defend and hold
the IFFP harmless against all liability, loss or damage, together with all
reasonable costs and expenses related thereto (including legal and
accounting fees and expenses), arising from the actual or alleged untruth,
inaccuracy or breach of or default under any of such representations,
warranties, covenants or agreements of Buyer provided that written notice
of such claim for indemnification is furnished to Buyer on or prior to the
second anniversary hereof.
- 6 - 09/11/96
<PAGE>
k. In case any one or more of the covenants and/or agreements set
forth in this Agreement shall have been breached, the non-breaching party
may proceed to protect and enforce its rights either by suit in equity
and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific
performance of any such covenant or agreement contained in this Agreement.
The party prevailing on the merits in any such suit or action, shall be
indemnified against all liability, loss or damage, together with all
reasonable costs and expenses related thereto (including legal and
accounting fees and expenses).
l. The Buyer hereby agrees to cover, indemnify, defend and hold
IFFP harmless from and against the full amount of all claims, costs,
damages, judgments, fees, expenses, obligations, taxes, assessments,
liabilities, actions, suits or charges including without limitation,
reasonable trial and attorneys fees and expenses made against IFFP or to
be paid by IFFP in connection with BKC Litigation.
This Agreement may be executed in several counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same agreement. The copies of manually executed signature pages shall be
deemed originals until the parties have received manually executed signature
pages.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
BUYER:
INTERNATIONAL FAST FOOD CORPORATION
By: /s/ Stephen Groth
----------------------------------------
Stephen Groth
INTERNATIONAL FAST FOOD POLSKA SP. Zo.o.
By: /s/ Leon Blumenthal
----------------------------------------
Leon Blumenthal, President
- 7 - 09/11/96
<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 TWELVE
MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-30-1996
<CASH> 694,269
<SECURITIES> 0
<RECEIVABLES> 42,348
<ALLOWANCES> 0
<INVENTORY> 300,217
<CURRENT-ASSETS> 1,319,612
<PP&E> 8,277,161
<DEPRECIATION> (2,690,317)
<TOTAL-ASSETS> 7,833,604
<CURRENT-LIABILITIES> 3,413,822
<BONDS> 2,756,000
0
382
<COMMON> 103,225
<OTHER-SE> 799,814
<TOTAL-LIABILITY-AND-EQUITY> 7,833,604
<SALES> 5,351,427
<TOTAL-REVENUES> 5,351,427
<CGS> 5,622,394
<TOTAL-COSTS> 5,622,394
<OTHER-EXPENSES> 1,551,129
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 446,561
<INCOME-PRETAX> (1,978,826)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,978,826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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