U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
[ ] Transition Report Under Section 13 or 15(d) of
the Exchange Act
For the transition period from ____________ to ____________.
Commission file number 0-20203 and 1-11386
INTERNATIONAL FAST FOOD CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 65-0302338
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
------------------------------------------------
(Address of Principal Executive Office)
(305) 531-5800
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.01
per share as of August 15, 1997 was 43,474,727.
Traditional Small Business Disclosure Format: Yes [x] No [ ]
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM. 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 2 - 3
Consolidated Statements of Operations
for the Three and Six Months Ended
June 30, 1997 and 1996 4
Consolidated Statements of
Shareholders' Equity for the Six
Months Ended June 30, 1997 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30,
1997 and 1996 6 - 7
Notes to Consolidated Financial
Statements 8 - 21
ITEM. 2 Management's Discussion and Analysis
or Plan of Operation 22 - 41
PART II. OTHER INFORMATION
- ---------------------------
SIGNATURES
1
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
------
June 30, December 31,
1997 1996
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,762,230 $ 194,269
Restricted cash and
certificates of deposit 1,446,291 500,000
Note receivable 500,000
Receivables 44,235 42,348
Inventories 263,026 300,217
Advances to affiliate 106,147 228,984
Prepaid expenses 41,100 53,794
------------ -----------
Total Current Assets 4,163,029 1,319,612
------------ -----------
FURNITURE, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, NET 5,378,045 5,586,844
DEFERRED DEBENTURE ISSUANCE COSTS,
NET OF ACCUMULATED AMORTIZATION
OF $140,783 AND $124,155,
RESPECTIVELY 291,542 308,170
OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION OF $276,238 and
$206,792 523,741 618,978
BURGER KING DEVELOPMENT
RIGHTS, NET OF ACCUMULATED
AMORTIZATION OF $27,027 972,973 -
------------ -----------
Total Assets $ 11,329,330 $ 7,833,604
============ ===========
See Accompanying Notes
2
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1997 1996
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 464,767 $ 454,697
Accrued interest payable 52,587 10,335
Other accrued expenses 393,294 1,009,606
Bank credit facilities payable 1,978,701 1,220,495
Other notes payable - 69,307
Payable to affiliate - 149,382
Non-interest bearing obligation
payable to minority shareholder
of IFF Polska - 500,000
------------ ------------
Total Current Liabilities 2,889,349 3,413,822
LONG TERM BANK CREDIT FACILITIES 100,000 300,000
NOTE PAYABLE TO LITIGATION FUNDING 2,198,494 -
9% SUBORDINATED CONVERTIBLE
DEBENTURES, DUE DECEMBER 15, 2007 2,756,000 2,756,000
------------ ------------
Total Liabilities 7,943,843 6,469,822
------------ ------------
DEFERRED CREDIT 1,000,000 -
------------ ------------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED SUBSIDIARY 337,862 460,361
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value,
(liquidation preference of
$3,695,000 , 1,000,000 shares
authorized; 36,950 and 38,240
shares issued and outstanding,
respectively 369 382
Common Stock, $.01 par value,
100,000,000 shares authorized;
17,565,516 and 10,322,521 shares
issued and outstanding, respectively 175,655 103,225
Additional paid-in capital 15,150,944 14,523,361
Accumulated deficit (13,304,241) (13,706,261)
Accumulated translation adjustment 24,898 ( 17,286)
------------ ------------
Total Shareholders' Equity 2,047,625 903,421
------------ ------------
Total Liabilities and
Shareholders' Equity $ 11,329,330 $ 7,833,604
============ ============
See Accompanying Notes
3
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $ 1,393,949 $ 1,346,092 $ 2,752,559 $ 2,614,766
Other operating 22,614 30,792 51,478 68,869
------------ ------------ ------------ ------------
Total Revenue 1,416,563 1,376,884 2,804,037 2,683,635
FOOD AND PACKAGING 550,079 590,907 1,119,022 1,163,188
------------ ------------ ------------ ------------
GROSS PROFIT 866,484 785,977 1,685,015 1,520,447
RESTAURANT OPERATING EXPENSES:
Payroll and Related Costs 223,218 198,380 440,070 383,869
Occupancy and Other Operating
Expenses 399,649 328,069 764,717 707,399
Depreciation and Amortization 213,388 229,496 436,875 475,992
------------ ------------ ------------ ------------
Total Restaurant Operating
Expenses 836,255 755,945 1,641,662 1,567,260
------------ ------------ ------------ ------------
30,229 30,032 43,353 ( 46 813)
------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE
EXPENSES 222,376 269,824 714,886 769,137
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest and other, net ( 119,282) 54,890 ( 102,845) 106,799
Interest expense, including
amortization of debenture
issuance costs ( 167,624) ( 117,865) ( 273,171) ( 228,542)
Gain on settlement of
litigation, net of applicable
costs - - 1,327,070 -
------------ ------------ ------------ ------------
Total other income
(expenses) ( 286,906) ( 62,975) 951,054 ( 121,743)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY
INTEREST ( 479,053) ( 302,767) 279,521 ( 937,693)
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED SUBSIDIARY 51,247 45,335 122,499 117,661
------------ ------------ ------------ ------------
NET INCOME (LOSS) $( 427,806) $( 257,432) $ 402,020 $( 820,032)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Primary $( .03) $( .06) $ .03 $( .20)
============ ============ ============ ============
Fully diluted $( .03) $( .06) $ .03 $( .20)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Primary 13,115,361 4,462,168 13,007,129 4,182,621
============ ============ ============ ============
Fully diluted 13,115,361 4,462,168 17,453,364 4,182,621
============ ============ ============ ============
</TABLE>
See Accompanying Notes
4
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1997
(Unaudited)
Common Stock Preferred Stock Additional Accumulated
------------------- ------------------ Paid In Translation Accumulated
Shares Amount Shares Amount Capital Adjustment Deficit Total
--------- -------- -------- -------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1996 10,322,521 $103,225 38,240 $ 382 $ 14,523,361 $( 17,286) $(13,706,261) $ 903,421
Conversion of
Preferred Stock 42,995 430 ( 1,290) ( 13) ( 417) - -
Common Stock issued in
exchange for professional
services 2,000,000 20,000 - - 180,000 - - 200,000
Common Stock issued in
exchange for Underwriter
and debenture warrants 200,000 2,000 - - ( 2,000) - -
Conversion of 8% Convertible
Promissory Notes 5,000,000 50,000 - - 450,000 - 500,000
Translation adjustments - - - - - 42,184 - 42,184
Net income for the period - - - - - 402,020 402,020
---------- -------- -------- ------- ------------ ------------ ------------ -----------
Balances,
June 30, 1997 17,565,516 $175,655 36,950 $ 369 $ 15,150,944 $ 24,898 $(13,304,241) $ 2,047,625
========== ======== ======== ======= ============ ============ ============ ===========
</TABLE>
See Accompanying Notes
5
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 402,020 $( 820,032)
Adjustment to reconcile net income
(loss) to net cash provided by
(used in)operating activities:
Amortization and depreciation 484,764 539,477
Minority interest in losses of
subsidiary ( 122,499) ( 117,661)
Changes in operating assets and
liabilities:
Receivables ( 1,887) ( 45,857)
Inventories 37,191 ( 945)
Prepaid expenses 12,694 1,321
Accounts payable and
accrued expenses ( 363,990) 189,642
------------ ------------
Net cash provided by (used in)
operating activities 448,293 ( 254,055)
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Note receivable ( 500,000) -
Increase in restricted cash and
certificates of deposit ( 946,291) -
Payments for furniture, equipment
and leasehold improvements, net ( 162,864) -
Payments for other assets ( 4,209) ( 52,306)
Disposition of furniture & equipment - 133,215
Refund of franchise fees 30,000 -
------------ ------------
Net cash provided by (used in)
investing activities ( 1,583,364) 80,909
------------ ------------
See Accompanying Notes
6
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
Six Months Ended June 30,
------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Sale of common shares for cash - 110,000
Sale of options for cash - 10,000
Advances from (to) Affiliate, net ( 26,545) 68,099
Repayments of bank credit
facilities ( 440,794) ( 219,248)
Increase in Payable to Litigation
Funding 3,227,015 -
Payment to Litigation Funding ( 1,028,521) -
Payment of other notes payable ( 69,307) -
Payment of non-interest bearing
obligation to minority share-
holder of IFF Polska ( 500,000) -
Borrowings under bank credit
facilities 999,000 300,000
Net Proceeds from issuance of
convertible promissory notes 500,000 -
------------ ------------
Net cash provided by financing
activities 2,660,848 268,851
------------ ------------
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT 42,184 ( 94,098)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,567,961 1,607
BEGINNING CASH AND CASH EQUIVALENTS 194,269 253,510
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 1,762,230 $ 255,117
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 214,291 $ 175,815
============ ============
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING
ACTIVITIES:
SIX MONTHS ENDED JUNE 30, 1997:
Issuance of 42,995 shares of Common Stock upon the exchange of 1,290
shares of Preferred Stock.
Issuance of 2,000,000 shares of Common Stock in payment of $200,000 of
legal fees.
Issuance of 5,000,000 shares of Common Stock upon conversion of $500,000
principal amount of 8% Convertible Promissory Notes.
Issuance of 200,000 shares of Common Stock in exchange for the
cancellation of 130,000 Underwriter Common Stock warrants and Underwriter
$1,000,000 debenture warrants.
SIX MONTHS ENDED JUNE 30, 1996:
Issuance of 293,970 shares of Common Stock upon the exchange of 8,820
shares of Preferred Stock.
See Accompanying Notes
7
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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"). IFFC operates under an
exclusive Development Agreement (the "New BKC Development Agreement"). The
agreement expires 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 accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the annual
consolidated financial statements. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the footnotes thereto contained in the Annual Report on Form
10-KSB for the year ended December 31, 1996 of International Fast Food
Corporation and Subsidiaries (the "Company"), as filed with the Securities and
Exchange Commission. The December 31, 1996 consolidated balance sheet was
derived from audited consolidated financial statements, but does not include all
disclosures required by generally accepted accounting principles.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of the financial statements. The
results of operations for the six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
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 new zlotys. At June 30, 1997 and
8
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1996, the exchange rate was 3.2640 and 2.7720 new 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. Due
to the reduction in Polands inflation rate, effective for the year ended
December 31, 1996, IFFC was no longer required pursuant to generally accepted
accounting principles to recognize currency translation gains or losses in its
statement of operations. As a result of this change the net loss and net loss
per common share for the three and six months ended June 30, 1996, were
decreased by $65,784 and $94,098 and $.01 and $.02, respectively.
LIQUIDITY AND PLAN OF OPERATIONS - As of June 30, 1997, IFFC had working
capital of approximately $1,273,680 and Cash and Cash Equivalents of $1,762,230.
IFFC's working capital and cash position were significantly improved by the
settlement of the BKC Litigation in March 1997 (See Note 8). 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. Other than its
existing Bank Credit Facilities (See Note 4), 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.
NET INCOME (LOSS) PER COMMON SHARE - Primary net income per share for the
six months ended June 30, 1997 is based on net income for the period divided by
the weighted average number of common shares outstanding after giving effect to
dilutive warrants and the shares that would be issuable on the assumed
conversion of preferred stock. Fully diluted net income per share for the six
months ended June 30, 1997 is based on net income for the period adjusted for
the interest expense on the 9% Subordinated Convertible Debentures and the 8%
Convertible Promissory Notes divided by the weighted average number of Common
shares outstanding after giving effect to dilutive warrants, the shares that
would be issuable on the assumed conversion of preferred stock as well as the
shares that would be issuable on the assumed conversion of the 9% Subordinated
Convertible Debentures and the 8% Convertible Promissory Notes.
For the six months ended June 30, 1996, primary and fully diluted net loss
per share are the same and are based on the net loss for the period divided by
the weighted average number of common shares outstanding. Both computations do
not include the assumed exercise of any options or warrants or the assumed
conversion of any outstanding convertible securities since their inclusion would
be anti-dilutive.
9
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
RECLASSIFICATION - Certain amounts in the 1996 financial statements have
been reclassified to conform with the 1997 presentation.
3. RESTRICTED CASH:
At June 30, 1997 the Company had $1,446,291 of restricted cash and
certificates of deposit, $446,301 of which represents collateral for an
outstanding letter of credit and $999,990 represents collateral for an
outstanding line of credit.
4. BANK CREDIT FACILITIES:
Bank credit facilities at June 30, 1997 consists of the following:
Amerbank in Poland, S.A. overdraft
credit line, variable rate
approximately equal to prime, expires
March 31, 1998 $ 19,701
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 June 30, 1997, with the
remaining principal and all accrued
interest payable in full on September
30, 1997 110,000
Bank Handlowy Warszawie, S.A., IFFP
credit facility in the original
principal amount of $1,000,000,
payable $100,000 on and September 30,
1997, with 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
$500,000 650,000
Totalbank line of credit of $999,000
payable in full on May 19, 1998,
interest at 6.5% payable quarterly
collateralized by certificates of
deposit in the amount $999,990 999,000
------------
2,078,701
Less: Current Maturities 1,978,701
------------
Total Long Term Debt $ 100,000
==============
10
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. 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 for the
six months ended June 30, 1997 follows:
1997
-------
Outstanding at beginning of period 210,000
Granted -
Exercised -
Expired ( 50,000)
-------
Outstanding at end of period 160,000
=======
Exercisable at end of period 156,000
=======
Price range of options outstanding
at end of period $ 1.375
=======
Available for grant at end of period 490,000
=======
During the six months ended June 30, 1997 and 1996, 42,995 and 293,970
shares of Common Stock were issued upon exchange of 1,290 and 8,820 shares of
Preferred Stock.
6. CONVERTIBLE PROMISSORY NOTES:
In January and March 1997, IFFC sold to the Company's Chairman of the
Board, Chief Executive Officer and President and his wife as well as other
members of his family an aggregate of $500,000 8% convertible promissory notes
due January 1999. The notes were converted into 5,000,000 shares of Common Stock
on June 19, 1997.
At June 30, 1997, IFFC had reserved the following shares of Common Stock
for issuance:
Stock option plan 650,000
Warrants issued in connection with
1994 exchange offer, exercisable at
$7.00 per share through August 1,
1999 290,800
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 1,231,548
Warrants to purchase 50,000 shares
of Common Stock at an exercise price
of $.2831 per share 50,000
---------
Total reserved shares 2,546,583
=========
11
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES:
From September 1991 to May 1996, 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.
The BKC Litigation was settled between the parties on March 11, 1997. In
connection with the settlement of the BKC Litigation, (see Note 8) 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;
IFFC continues to remain 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
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.
12
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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, Chief Operating
Officer, and Managing Director has been approved by BKC.
13
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
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.
8. 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
14
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
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".
15
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
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.
16
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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, 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.
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's legal
fees and related costs in connection with the BKC litigation, exclusive of the
$750,001 paid by Funding, were approximately $1,447,082, of which $200,000 was
paid by issuance of 2,000,000 shares of Common Stock to Litigation Counsel, in
April 1997.
The gain on settlement of the BKC Litigation is comprised as follows:
Settlement Proceeds:
Cash received from BKC $ 5,000,000
Forgiveness of liabilities due
to BKC499,768
Value attributable to Development
Agreement 1,000,000
-----------
Total proceeds 6,499,768
Less Settlement Costs and Deferred Credits:
Legal fees and costs paid by
IFFC (1,447,082)
Legal fees and costs paid by
Funding ( 750,001)
Deferred Credit (1,000,000)
-----------
Net settlement proceeds 3,302,685
17
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Portion of net settlement proceeds
due to Funding (2,477,014)
Legal fees and costs paid by IFFC
in prior periods and charged
against operations 501,399
-----------
IFFC gain on settlement $ 1,327,070
==========
IFFC has valued the New Development Agreement at $1,000,000 which is its
best estimate of the cost that it would incur in obtaining such agreement from
BKC exclusive of all other matters associated with the BKC settlement. Due to
the uncertainty relating to IFFC's ability to meet the performance requirements
specified in the New Development Agreement, which must be achieved by September
30, 1999, coupled with the $1,000,000 amount that will be payable to BKC if the
minimum performance requirements are not met, IFFC has recorded a Deferred
Credit of $1,000,000 in connection with recognition of gain on settlement of the
BKC Litigation. If the minimum performance objectives required by the New
Development Agreement are achieved by September 30, 1999, $562,500 of the
Deferred Credit will become payable to Funding, and $187,500 will be recognized
by IFFC as additional gain on the BKC Litigation settlement and $250,000 will
become payable to BKC. If the maximum performance objectives required by the New
Development Agreement are achieved by September 30, 1999, $750,000 of the
Deferred Credit will become payable to Funding and $250,000 will be recognized
by IFFC as additional gain on the BKC Litigation settlement. If the minimum
performance objectives are not met the $1,000,000 Deferred Credit will become
payable to BKC.
At June 30, 1997, the payable to Funding is comprised as follows:
Portion of net settlement proceeds
due to Funding $ 2,477,014
Reimbursement of legal fees and
costs paid by Funding 750,001
-----------
Balance due to Funding 3,227,015
Payment made in May, 1997 1,028,521
-----------
Promissory note payable $ 2,198,494
==========
The promissory note bears interest at prime plus 1%, and matures on
December 31, 1998. Interest is payable quarterly beginning on July 1, 1997. The
note may be prepaid in whole or part at any time without penalty. The note is
collateralized by the Company's equity interest in IFFP. As more fully described
in Note 10 the amounts due to Funding were satisfied subsequent to June 30, 1997
by issuance of 25,909,211 shares of the Company's common stock.
18
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
ROMANSKA - NINKOWIC - In April 1997, Ms. Romanska - Ninkowic filed suit in
Voivodship Court in Krakow, Poland against IFFP. Ms. Romanska - Ninkowic alleges
that IFFP owes her approximately 266,831 PLN (approximately $82,000 at the June
30, 1997 exchange rate) in final settlement for the construction of IFFP's
Katowice restaurant. IFFP is in the process of filing a countersuit against Ms.
Romanska - Ninkowic citing, among other things, failure to comply with the terms
of the contractor's agreement. No court date has been set. IFFP believes the
charges are without merit.
9. OTHER TRANSACTIONS:
On May 23, 1997, IFFC entered into an Undertaking and Loan Agreement (the
"Loan Agreement") with QPQ Corporation, a Florida corporation ("QPQ") and Pizza
King Polska Sp, z.o.o., a Polish limited liability company ("PKP"), whereby IFFC
granted to QPQ a loan in the amount of $500,000, plus interest at the rate of 9%
per annum. By the terms of the Loan Agreement, the Loan was repayable by QPQ (in
U.S. Dollars) in full no later than 3 months from the date of the Loan
Agreement. QPQ also had the right to prepay the principal amount without
penalty. In order to secure IFFC's rights under the Loan Agreement, QPQ
transferred to IFFC 41,258 shares of Common Stock of PKP (the "PKP Shares")
owned by QPQ pursuant to an Agreement on Transfer of Shares as Collateral dated
May 23, 1997 (the "Transfer Agreement"). Under the Transfer Agreement, IFFC
agreed to transfer the PKP Shares back to QPQ upon full repayment of the Loan.
IFFC also entered into a revolving loan agreement with PKP for a maximum of
$250,000. The loan is unsecured, bears interest at 9% per annum and is repayable
in full, including accrued interest on August 23, 1997. At June 30, 1997 and
August 11, 1997, the balance outstanding on the loan was $30,000 and 70,000,
respectively.
19
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On May 20, 1997, IFFP and PKP executed a management agreement in Poland.
Under the terms of the agreement, IFFP will provide bookkeeping and
administrative services to PKP in exchange for 10% of the annual net sales of
PKP. The term of the agreement is for an unlimited period of time but may be
canceled by either party upon thirty (30) days written notice to the other
party.
On June 27, 1997, IFFC, QPQ and PKP mutually agreed to terminate the
Transfer Agreement and IFFC transferred the shares of PKP back to QPQ. QPQ sold
the PKP shares to Krolewska Pizza Sp.zo.o ("KP") and transferred QPQ's $500,000
liability owing to IFFC to KP. See Note 10 for a description of IFFC's purchase
of KP on July 18, 1997.
10. SUBSEQUENT EVENTS:
On July 14, 1997, International Fast Food Corporation, Inc. (the
"Company") and IFFC Acquisition, Inc., a wholly-owned subsidiary of the Company
("Acquisition Sub") entered into a Merger Agreement with Litigation Funding,
Inc. ("Funding") and Mitchell and Edda Rubinson, the sole shareholders of
Funding. Under the terms of the Agreement, Funding was merged with and into
Acquisition Sub. The 25,909,211 shares of common stock of the Company to be
received by the Funding shareholders is determined by dividing the $3,021,014
value assigned to Funding by the book value per share ($.1166) of the Company's
common stock as of June 30, 1997, before reduction for the liquidation
preference applicable to the 36,950 outstanding shares of Preferred Stock.
The value assigned to Funding represents (i) the $2,198,494 plus accrued
interest owed to Funding by the Company pursuant to a promissory note and (ii)
$750,000 which represents seventy-five percent (75%) of the value attributable
to the New Development Agreement between Burger King Corporation ("BKC" and IFFC
and its affiliates which was executed on March 14, 1997 in connection with the
Company's settlement of its litigation against BKC. Funding was entitled to
receive seventy-five percent (75%) of the litigation proceeds under its prior
agreements with the Company. For a more detailed discussion of the Company's
agreements with Funding, see "Note 8 - Litigation."
On July 18, 1997, the Company purchased 100% of Krolewska Pizza Sp.z.o.o.
("KP"), a limited liability company, for a nominal consideration and assumption
of all liabilities, including the liabilities of KP to the Company under a
$500,000 promissory note. KP and its wholly-owned subsidiary own the exclusive
development rights and franchises of Dominos pizza stores in Poland.
The acquisition will be accounted for by the purchase method of
accounting, and the net assets acquired will be included in the Company's
consolidated balance sheet based upon their estimated fair values at the date of
acquisition. Results of operations of KP will be included in the Company's
consolidated statement of operations subsequent to the date of acquisition. The
excess of the net assets acquired over the purchase price will be accounted for
as a reduction of furniture, equipment and leasehold improvements.
20
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following unaudited pro-forma summary presents the consolidated
results of operations as if the acquisition had occurred at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisition actually been made as of such date or of results
which may occur in the future.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Total Revenues $ 1,719,006 $ 1,639,041 $ 3,392,476 $ 3,200,773
Net income (loss) $( 513,390) $( 365,922) $ 105,690 $(1,123,181)
Net income loss
per share $( .04) $( .08) $ .01 $( .27)
On July 7, 1997, IFFP and British Petroleum ("BP") of Poland, executed a
letter of intent for the co-development of Burger King restaurants and BP petrol
stations throughout the Republic of Poland. The letter, although not binding,
states that BP will provide IFFP with packages of between 5 and 10 development
sites each. These sites will be available to IFFP to lease for a specific term
plus option periods at IFFP's discretion subject to Burger King approval. IFFP
anticipates these locations will open in 1998 and beyond. Rental terms will be
based on a minimum monthly rental fee and/ or a percentage of sales. IFFP and BP
are currently negotiating the terms of the master lease.
On July 10, 1997, IFFP and Du Pont Conoco ("Conoco") of Poland, executed a
letter of intent for the co-development of Burger King restaurants and Conoco
petrol stations throughout the Republic of Poland. The letter, although not
binding, states that Conoco will provide IFFP with packages of between 5 and 10
development sites each. These sites will be available to IFFP to lease for a
specific term plus option periods at IFFP's discretion subject to Burger King
approval. IFFP anticipates these locations will open in 1998 and beyond. Rental
terms will be based on a minimum monthly rental fee and/ or a percentage of
sales. IFFP and Conoco are currently negotiating the terms of the master lease.
Presently, IFFP is negotiating with other petrol companies for the
co-development of Burger King restaurants throughout the Republic of Poland.
IFFP, in coordination with Burger King Corporation, is presently evaluating
these sites to determine the feasibility of each.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Managements Discussion and Analysis or Plan of Operation contains various
"forward looking statements" within the meaning of the Securities Act of 1933
and the Securities And Exchange Act of 1934, which represents the Company's
expectations or beliefs concerning future events including without limitation
the following; fluctuations in the Polish economy; ability of the Company to
obtain financing on terms and conditions that are favorable; ability of the
Company to improve levels of profitability and sufficiency of cash provided by
operations, investing and financing activities.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those contained in the forward looking statements, including without
limitations, general economic and political conditions in Poland, the demand for
the Company's products and services, changes in the level of operating expense
and the present and future level of competition. Results actually achieved may
differ materially from expected results included in these statements.
As of June 30, 1997, IFFC had working capital of approximately $1,273,680
and Cash and Cash Equivalents of $1,762,230. 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.
IFFC currently operates its business in Poland 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.
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
22
<PAGE>
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 Part II. Item 2.
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
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
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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 (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 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 would vary depending upon
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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 connection with the settlement of the BKC Litigation and pursuant to
the provisions of the Funding Agreement as of June 30, 1997, IFFC is indebted to
Funding for an aggregate amount of $2,198,494 pluss accrued interest. See Notes
8 and 10 of Notes To Consolidated Financial Statements for a description of the
amounts due to Funding and the subsequent satisfaction thereof.
On July 14, 1997, International Fast Food Corporation, Inc. (the
"Company") and IFFC Acquisition, Inc., a wholly-owned subsidiary of the Company
("Acquisition Sub") entered into a Merger Agreement with Litigation Funding,
Inc. ("Funding") and Mitchell and Edda Rubinson, the sole shareholders of
Funding. Under the terms of the Agreement, Funding was merged with and into
Acquisition Sub. The 25,909,211 shares of common stock of the Company to be
received by the Funding shareholders is determined by dividing the $3,021,014
value assigned to Funding by the book value per share ($.1166) of the Company's
common stock as of June 30, 1997, before reduction for the liquidation
preference applicable to the 36,950 outstanding shares of Preferred Stock.
The value assigned to Funding represents (i) the $2,198,494 plus accrued
interest owed to Funding by the Company pursuant to a promissory note and (ii)
$750,000 which represents seventy-five percent (75%) of the value attributable
to the New Development Agreement between Burger King Corporation ("BKC" and IFFC
and its affiliates which was executed on March 14, 1997 in connection with the
Company's settlement of its litigation against BKC. Funding was entitled to
receive seventy-five percent (75%) of the litigation proceeds under its prior
agreements with the Company. For a more detailed discussion of the Company's
agreements with Funding, see "Note 8 - Litigation."
On May 23, 1997, IFFC entered into an Undertaking and Loan Agreement (the
"Loan Agreement") with QPQ Corporation, a Florida corporation ("QPQ") and Pizza
King Polska Sp, z.o.o., a Polish limited liability company ("PKP"), whereby IFFC
granted to QPQ a loan in the amount of $500,000, plus interest at the rate of 9%
per annum (the "Loan"). By the terms of the Loan Agreement, the Loan was
repayable by QPQ (in U.S. Dollars) in full no later than 3 months from the date
of the Loan Agreement. QPQ also had the right to prepay the principal amount
without penalty. In order to secure IFFC's rights under the Loan Agreement, QPQ
transferred to IFFC 41,258 shares of Common Stock of PKP (the "PKP Shares")
owned by QPQ pursuant to an Agreement on Transfer of Shares as Collateral dated
May 23, 1997 (the "Transfer Agreement"). Under the Transfer Agreement, IFFC
agreed to transfer the PKP Shares back to QPQ upon full repayment of the Loan.
IFFC also entered into a revolving loan agreement with PKP for a maximum of
$250,000. The loan is unsecured, bears interest at 9% per annum and is repayable
in full, including accrued interest on August 23, 1997. At June 30, 1997 and
August 11, 1997, the balance outstanding on the loan was $30,000 and 70,000,
respectively.
On May 20, 1997, IFFP and PKP executed a management agreement in Poland.
Under the terms of the agreement, IFFP will provide bookkeeping and
administrative services to PKP in exchange for 10% of the annual net sales of
PKP. The term of the agreement is for an unlimited period of time but may be
canceled by either party upon thirty (30) days written notice to the other
party.
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On June 27, 1997, IFFC, QPQ and PKP mutually agreed to terminate the
Transfer Agreement and IFFC transferred the shares of PKP back to QPQ. QPQ sold
the PKP shares to Krolewska Pizza Sp.zo.o ("KP") and transferred QPQ's $500,000
liability owing to IFFC to KP.
On July 18, 1997, the Company purchased 100% of Krolewska Pizza Sp.z.o.o.
("KP"), a limited liability company, for a nominal consideration and assumption
of all liabilities, including the liabilities of KP to the Company under a
$500,000 promissory note. KP and its wholly-owned subsidiary own the exclusive
development rights and franchises of Dominos pizza stores in Poland.
The acquisition will be accounted for by the purchase method of
accounting, and the net assets acquired will be included in the Company's
consolidated balance sheet based upon their estimated fair values at the date of
acquisition. Results of operations of KP will be included in the Company's
consolidated statement of operations subsequent to the date of acquisition. The
excess of the net assets acquired over the purchase price will be accounted for
as a reduction of furniture, equipment and leasehold improvements.
The following unaudited pro-forma summary presents the consolidated
results of operations as if the acquisition had occurred at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisition actually been made as of such date or of results
which may occur in the future.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1996 1997 1996
------------------------- -------------------------
Total Revenues $ 1,719,006 $ 1,639,041 $ 3,392,476 $ 3,200,773
Net income (loss) $( 513,390) $( 365,922) $ 105,690 $(1,123,181)
Net income loss
per share $( .04) $( .08) $ .01 $( .27)
On July 7, 1997, IFFP and British Petroleum ("BP") of Poland, executed a
letter of intent for the co-development of Burger King restaurants and BP petrol
stations throughout the Republic of Poland. The letter, although not binding,
states that BP will provide IFFP with packages of between 5 and 10 development
sites each. These sites will be available to IFFP to lease for a specific term
plus option periods at IFFP's discretion subject to Burger King approval. IFFP
anticipates these locations will open in 1998 and beyond. Rental terms will be
based on a minimum monthly rental fee and/ or a percentage of sales. IFFP and BP
are currently negotiating the terms of the master lease.
On July 10, 1997, IFFP and Du Pont Conoco ("Conoco") of Poland, executed a
letter of intent for the co-development of Burger King restaurants and Conoco
petrol stations throughout the Republic of Poland. The letter, although not
binding, states that Conoco will provide IFFP with packages of between 5 and 10
development sites each. These sites will be available to IFFP to lease for a
specific term plus option periods at IFFP's discretion subject to Burger King
approval. IFFP anticipates these locations will open in 1998 and beyond. Rental
terms will be based on a minimum monthly rental fee and/ or a percentage of
sales. IFFP and Conoco are currently negotiating the terms of the master lease.
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Presently, IFFP is negotiating with petrol companies for the
co-development of Burger King restaurants throughout the Republic of Poland.
IFFP, in coordination with Burger King Corporation, is presently evaluating
these sites to determine the feasibility of each.
27
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SIX MONTHS ENDED JUNE 30, 1997 VS SIX MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
For the six months ended June 30, 1997 and June 30, 1996, IFFC generated
Restaurant Sales of $2,752,559 and $2,614,766, respectively. In U.S. dollar and
Polish zloty terms IFFC's Restaurant Sales increased by approximately 5.3% and
24.9% for the six months ended June 30, 1997 as compared to the six months ended
June 30, 1996. The increase is primarily attributable to improved local store
marketing and the general improvements in the Polish economy.
During the six months ended June 30, 1997, IFFC incurred Food and
Packaging Expense of $1,119,022, Payroll and Related Costs of $440,070 ,
Occupancy and Other Operating Expenses of $764,717, and Depreciation and
Amortization Expense of $436,875.
Food and Packaging Costs for the six months ended June 30, 1997 and 1996
were 40.7% and 44.5% of Restaurant Sales, respectively. The 3.8% decrease as a
percentage of Restaurant Sales is primarily attributable to improved product
sourcing, the implementation of tighter cost controls, a decrease in custom
duties and import tax on paper goods coupled with an increase in Restaurant
Sales.
Payroll and Related Costs for the six months ended June 30, 1997 and 1996
were 16.0% and 14.6% of Restaurant Sales, respectively. The 1.4% as a percentage
of Restaurant Sales increased primarily as a result of an increase in the
minimum wage rate and related benefits in Poland effective January 1, 1997.
Occupancy and Other Operating Expenses for the six months ended June 30,
1997 and 1996 were 27.8% and 27.1% of Restaurant Sales, respectively. The .7%
increase as a percentage of Restaurant Sales is primarily attributable to an
increase in utilities and repairs and maintenance.
Depreciation and Amortization Expense as a percentage of Restaurant Sales
was 15.9% and 18.2% in the six months ended June 30, 1997 and 1996,
respectively. The 2.3% decrease as a percentage of restaurant sales is primarily
attributable to an increase in Restaurant Sales coupled with the fully
depreciated status of certain assets still in use as well as the increase in
amortization expense associated with the deferred leased costs associated with
the renegotiation of the Dantex lease.
General and Administrative Expenses for the six months ended June 30, 1997
and 1996 were 26.0% and 29.4% of Restaurant Sales, respectively. The 3.4%
decrease as a percentage of Restaurant Sales is primarily attributable to
reductions of salaries and related benefits and legal fees. IFFC does not
anticipate its General and Administrative Expenses will increase significantly
over the next twelve months. For the six months ended June 30, 1997, General and
Administrative Expenses were comprised of executive and office staff salaries
and benefits ("Salary Expense") $248,681; legal and professional fees, office
rent, travel, telephone and other corporate expenses ("Corporate Overhead
Expense") $418,226, and depreciation and amortization $47,979. For the six
months ended June 30, 1996, General and Administrative Expense were comprised of
executive and office staff salaries $316,956; legal and professional fees,
office rent, travel, telephone and other general corporate expenses $405,324,
and depreciation and amortization $46,857.
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For the six months ended June 30, 1997, IFFC generated net income of
$402,020 or $.03 per share of IFFC's Common Stock compared to a net loss of
$(820,032), or $(.20) per share of IFFC's Common Stock for the six months ended
June 30, 1996. During the six months ended June 30, 1997, IFFC recognized a
non-recurring gain of $1,327,070 or $.10 per share of IFFC's Common Stock in
connection with the settlement of the BKC Litigation.
IFFC anticipates that it will continue to incur certain expenses in
connection with its disputes with the Polish Fiscal Authorities. See "Item 2.
Legal Proceedings - Polish Fiscal Authority Disputes" for a description of such
matters.
For the six months ended June 30, 1997 and 1996 Interest and Other Income was
comprised as follows:
Six Months Ended June 30,
---------------------------
1997 1996
---------- ----------
Interest income $ 70,193 $ 49,932
Foreign exchange (losses)
gains, net ( 25,862) ( 1,507)
Management fee 9,580 10,996
All other, net ( 156,756) 47,378
---------- ----------
$( 102,845) $ 106,799
========== ==========
All other, net includes various non-recurring charges and credits not
specifically related to operating activity.
Interest Expense is comprised as follows:
Six Months Ended June 30,
---------------------------
1997 1996
---------- ----------
Interest Expense on Subordinated
Convertible Debentures $ 124,020 $ 124,020
Interest Expense on Note Payable
to Litigation Funding 43,671 -
Interest Expense on Convertible
Promissory Notes 16,178 -
Amortization of Debenture
Issuance Costs 16,628 16,628
Interest Expense on Bank
Facilities 72,674 87,894
---------- ----------
Total $ 273,171 $ 228,542
========== ==========
Interest Expense exceeded Interest and Other Income by $376,016 and
$121,743 for the six months ended June 30, 1997 and 1996, respectively.
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IFFC's interest expense on bank facilities was $72,674 and $87,894 for the
six months ended June 30, 1997 and 1996, respectively. The $15,220 decrease is
attributable to IFFC's lower level during the 1997 period of borrowings under
bank credit facilities.
During the six months ended June 30, 1997, IFFC recorded a non-recurring
gain of $1,327,070, or $.10 per share of IFFC's Common Stock in connection with
the settlement of the BKC Litigation. See Note 8 of Notes To Consolidated
Financial Statements for the components included in the calculation of the gain.
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.
From September 1991 to May 1996, 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.
The BKC Litigation was settled between the parties on March 11, 1997. 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 14, 1997; IFFC continues
to remain 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
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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.
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 the 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 the failure of IFFC 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 the
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.
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On May 17, 1996, IFFC's Common Stock was deleted from the NASDAQ Stock
Market and has traded on the over the counter market (Electronic bulletin board)
since that date.
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 various bank credit
facilities and proceeds from the sale of certain equity securities of IFFC's
formerly wholly-owned subsidiary and the BKC Settlement Agreement,
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 preferred dividends that were due on June 15, 1996,
December 15, 1996 and June 15, 1997 and as of June 30, 1997, $332,550 of
preferred dividends remain in arrears. At June 30, 1997 there were 36,950 shares
of Preferred Stock outstanding.
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.
In September 1996, the Company had working capital needs, and had 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 at
$.10 per share. Marilyn Rubinson, Jaime Rubinson and Kim Rubinson , the mother
and daughters of Mitchell Rubinson, the Company's President purchased 250,000
shares each or a total of 750,000 shares of the offering.
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
at $.10 per share. Jaime Rubinson purchased 250,000 shares and Kim Rubinson
purchased 250,000 shares. Both are the daughters of Mitchell Rubinson, the
Company's President.
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.
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 promissory notes,
respectively. The notes bear interest at 8% per annum and mature on January 13,
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1999. The notes are convertible into shares of the Company's Common Stock at
$.10 per share. The proceeds from the sale of the notes 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 purchased
from the Company a convertible promissory note in the aggregate principal amount
of $100,000. In June, 1997 the $500,000 principal amount of the convertible
promissory notes was converted into 5,000,000 shares of Common Stock.
On March 14, 1997, IFFC issued a promissory note in the original principal
amount of $2,198,494 to Litigation Funding as partial payment of amounts due to
Litigation Funding in connection with the settlement of the BKC Litigation. The
note bears interest at prime plus 1%, is payable in full on December 31, 1998,
and may be prepaid in whole or in part at anytime, without penalty.
See Note 9 of notes to consolidated financial statements for a description
of transactions involving the payment of amounts due to Litigation Funding by
issuance of 25,909,211 shares of Common Stock.
As of June 30, 1997 and August 11, 1997, IFFC had $482,076 and $531,094,
respectively, in accounts with AmerBank and substantially all of such funds were
held as European Currency Unit denominated deposits. As of June 30, 1997 and
August 11, 1997, $446,301 and $429,742, respectively of the cash on deposit with
Amerbank was restricted and secured outstanding balances of IFFP's Credit
Facility with Bank Handlowy. Substantially all of the Company's remaining cash
is held in U.S. Banks.
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 300,000 new zlotys.
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. On April
12, 1996, the credit facility was amended as follows: (i) to 200,000 new zlotys
(approximately $61,275 at June 30, 1997 exchange rates), and (ii) in March 1997,
the credit facility was further amended to 100,000 new zlotys (approximately
$30,600 at June 30, 1997 exchange rates). The credit facility matures on March
31, 1998. As of June 30, 1997 and August 11, 1997, the outstanding balance on
the credit facility was $19,701 and $28,095 , 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 six
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
33
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that the outstanding principal balance becomes due and payable at a rate of
$100,000 on June 30, 1997 and $110,000 on September 30, 1997 plus interest every
six months. As of June 30, 1997 and August 11, 1997, approximately $110,000 was
outstanding under the AmerBank credit facility.
On February 16, 1996, IFFP entered into a $300,000 line of credit with
AmerBank, the proceeds of which may be used to finance IFFP's business
operations. Pursuant to the line of credit, IFFC could make draws on the line of
credit until June 30, 1996. IFFP is required to make interest payments on the
outstanding principal amount of the credit facility at AmerBank's prime rate.
IFFP is also obligated to pay AmerBank a 1% per annum commission on the daily
average unutilized principal balance of the credit facility. Interest and
commission expenses are payable monthly. The outstanding principal balance of
the loan is payable 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 June 30, 1997 and May 8, 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 June 30, 1997 and May 8, 1997, $650,000 was outstanding
under the Bank Handlowy credit facility, respectively.
On May 19, 1997, IFFC entered into a $999,000 credit facility with
Totalbank which is collateralized by $999,990 of certificates of deposit. The
credit facility bears interest at 6.5% per annum and is payable in full on May
19, 1998.
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
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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. As of June 30, 1997, the obligation was paid in full.
As of January 1, 1995, IFFC and IFFP entered into a five year consulting
agreement (the "IFFP Consulting Agreement") pursuant to which IFFC is to provide
IFFP consultation and advice with respect to the selection, design and equipping
of IFFC's offices and facilities, the maintenance of IFFP's financial records,
reporting to IFFP's Board of Directors, the procurement of financing, the
performance of cash management functions, the hiring of employees and officers,
the strategic planning of 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 old zlotys per dollar, respectively. Payment of interest and principal on
the Debentures and payment of franchise fees to BKC for each IFFC restaurant
opened are in United States currency. Additionally, IFFC is dependent on certain
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 in the future.
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. Due
to the reduction in Polands inflation rate, effective for the year ended
December 31, 1996, IFFC was no longer required pursuant to generally accepted
accounting principles to recognize currency translation gains or losses in its
statement of operations.
35
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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
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. At June 30, 1997, the exchange
rate was 3.2640 new zlotys per dollar.
36
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PART II. OTHER INFORMATION
ITEM 2. 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 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
37
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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
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
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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
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, 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's legal
fees and related costs in connection with the BKC litigation, exclusive of the
$750,001 paid by Funding, were approximately $1,447,082, of which $200,000 was
paid by issuance of 2,000,000 shares of Common Stock to Litigation Counsel, in
April 1997. The 2,000,000 shares of Common Stock have been reflected as
outstanding in the accompanying Consolidated Financial Statements as of June 30,
1997.
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The gain on settlement of the BKC Litigation is comprised as follows:
Settlement Proceeds:
Cash received from BKC $ 5,000,000
Forgiveness of liabilities due
to BKC 499,768
Value attributable to Development
Agreement 1,000,000
----------
Total proceeds 6,499,768
Less Settlement Costs and Deferred Credits:
Legal fees and costs paid by
IFFC (1,447,082)
Legal fees and costs paid by
Funding ( 750,001)
Deferred Credit (1,000,000)
----------
Net settlement proceeds 3,302,685
Portion of net settlement proceeds
due to Funding (2,477,014)
Legal fees and costs paid by IFFC
in prior periods and charged
against operations 501,399
----------
IFFC gain on settlement $ 1,327,070
==========
IFFC has valued the New Development Agreement at $1,000,000 which is its
best estimate of the cost that it would incur in obtaining such agreement from
BKC exclusive of all other matters associated with the BKC settlement. Due to
the uncertainty relating to IFFC's ability to meet the performance requirements
specified in the New Development Agreement, which must be achieved by September
30, 1999, coupled with the $1,000,000 amount that will be payable to BKC if the
minimum performance requirements are not met, IFFC has recorded a Deferred
Credit of $1,000,000 in connection with recognition of gain on settlement of the
BKC Litigation. If the minimum performance objectives required by the New
Development Agreement are achieved by September 30, 1999, $562,500 of the
Deferred Credit will become payable to Funding, and $187,500 will be recognized
by IFFC as additional gain on the BKC Litigation settlement and $250,000 will
become payable to BKC. If the maximum performance objectives required by the New
Development Agreement are achieved by September 30, 1999, $750,000 of the
Deferred Credit will become payable to Funding and $250,000 will be recognized
by IFFC as additional gain on the BKC Litigation settlement. If the minimum
performance objectives are not met the $1,000,000 Deferred Credit will become
payable to BKC.
At June 30, 1997, the payable to Funding is comprised as follows:
Portion of net settlement proceeds
due to Funding $ 2,477,014
Reimbursement of legal fees and
costs paid by Funding 750,001
----------
Balance due to Funding 3,227,015
Payment made in May, 1997 1,028,521
-----------
Promissory note payable $ 2,198,494
==========
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The promissory note bears interest at prime plus 1%, and matures on
December 31, 1998. Interest is payable quarterly beginning on July 1, 1997. The
note may be prepaid in whole or part at any time without penalty. The note is
collateralized by the Company's equity interest in IFFP. As more fully described
in Note 10 of notes to the consolidated financial statements the amounts due to
Funding were satisfied subsequent to June 30, 1997 by issuance of 25,909,211
shares of the Company's common stock.
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 of 1995, 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.
ROMANSKA - NINKOWIC - In April 1997, Ms. Romanska - Ninkowic filed suit in
Voivodship Court in Krakow, Poland against IFFP. Ms. Romanska - Ninkowic alleges
that IFFP owes her approximately 266,831 PLN (approximately $82,000 at the June
30, 1997 exchange rate) in final settlement for the construction of IFFP's
Katowice restaurant. IFFP is in the process of filing a countersuit against Ms.
Romanska - Ninkowic citing, among other things, failure to comply with the terms
of the contractor's agreement. No court date has been set. IFFP believes the
charges are without merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
-------
10.1 Undertaking and Loan Agreement, dated May 23, 1997, by and
among QPQ, International Fast Foot Corporation and Pizza
King Polska Sp,z.o.o.
10.2 Agreement on Transfer of Shares as Collateral, dated May 23,
1997 by and among QPQ and International Fast Food
Corporation.
(b) The following reports on Form 8-K were filed during the quarter
ended on June 30, 1997:
(i) On April 4, 1997, the Company filed a Form 8-K in connection
with the settlement of litigation with Burger King
Corporation.
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SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of
1934, International Fast Food has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INTERNATIONAL FAST FOOD CORPORATION
DATE: August 15, 1997 By: /s/ Mitchell Rubinson
-----------------------------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
DATE: August 15, 1997 By: /s/ James Martin
-----------------------------------------
James Martin, Chief Financial Officer
(Principal Financial and Accounting Officer)
UNDERTAKING AND LOAN AGREEMENT
This Agreement is entered into this 23 day of May 1997, by and between:
1. International Fast Food Corporation, with its registered office in 1000
Lincoln Road, Suite 200, Miami Beach, Florida 33139 USA (hereinafter
referred to as IFFC), duly represented by: Mitchell Rubinson
and
1. QPQ Corporation with its registered office in 7777 Glades, Suite 213, Boca
Raton, Florida 33139, USA (hereinafter referred to as QPQ), duly
represented by: Larry Rutstein and,
3. Pizza King Polska Sp, z o.o, with its registered office in Warsaw at Jasna
2/4, Poland (hereinafter referred to as PKP), duly represented by: Leon
Blumenthal
Whereas QPQ is willing to obtain a loan up to the amount of USD 500.000 (in
words: five hundred thousand United States Dollars), and IFFC is willing to
grant such loan on terms and conditions described below,
Whereas PKP is willing to obtain a loan up to the amount of USD 250.000 (in
words: two hundred fifty thousand United States Dollars), and IFFC is willing to
grant such loan on terms and conditions described below, and also in separate
agreements concluded between IFFC and PKP,
Whereas QPQ owns 41.258 shares of a value of PLN 148.49 each (hereinafter
referred to as the Shares) in the PKP and agrees to transfer the Shares to IFFC
to secure its rights resulting from this Agreement or any loan agreement
concluded pursuant to this Agreement. Agreement on Transfer of Shares as
Collateral (hereinafter referred to Transfer Agreement) is attached hereto as
Exhibit 1.
Now therefore the Parties of this Agreement, hereby have agreed as follows:
<PAGE>
LOAN
----
1. Terms and conditions of loan to be granted to QPQ
- -------------------------------------------------------
1) IFFC agrees, on terms and conditions adopted in this Agreement to grant a
loan to the QPQ for its investment in Poland, and in accordance with QPQ
request, in the amount up to USD 500.000 (hereinafter referred the Loan)
in one installment.
2) QPQ shall give to IFFC not less than 1 business day notice of the
installment.
3) QPQ shall pay interest at the rate of 9% p.a. (hereinafter referred to as
the Rate). Interest shall be calculated on a daily basis over 360 days in
a year and shall accrue on all amounts outstanding, hereunder at the Rate.
4) The Loan and interest shall be repaid by QPQ in full not later than 3
months from the date this Agreement, has been signed. QPQ shall have the
right to prepay the principal amount, without penalty.
5) All payments shall be made without any set-off or counterclaim and shall
be made in full without any deduction or withholding whatsoever.
6) All repayments of the Loan shall be made by QPQ in USD (US dollars) to the
bank account indicated under separate notification made by IFFC to QPQ
TERMS AND CONDITIONS OF IFFC UNDERTAKING.
2. UNDERTAKING to grant loan and/or loans to PKP
- ---------------------------------------------------
1) IFFC agrees, on terms and conditions adopted in this Agreement and also
separate loan agreements, to grant a loan and/or loans to PKP, for the
development of the network of its restaurants in Poland, or for repayment
of PKP current liabilities and in accordance with PKP's request and/or
requests, in the aggregate amount not exceeding USD 250.000 (in words: two
hundred and fifty). The amount of each drawdown shall be described in PKP
request as above.
2) PKP shall given to IFFC not less than 1 Business Days notice of the
drawdown.
3) Other terms and conditions of the above mentioned loans such as interest
rate and manner of repayment, shall be defined in separate loan agreement
and/or agreements to be concluded by and between IFFC and PKP.
4) The provisions of this Agreement executed by and between the
parties,hereto shall apply and shall be effective in respect to the
2
<PAGE>
validity and performance of any separate loan agreement concluded by and
between IFFC and PKP pursuant to this Agreement.
3. Event of Default.
- -----------------------
IFFC may declare the outstanding amounts to be immediately due and payable and
any undrawn portion shall cease to be available if any of the following shall
occur.
1) There is a failure to make a repayment of any principal or interest due
hereunder when the same is due, or
2) There is a failure to make a repayment of any principal or interest due
under any loan agreement concluded pursuant to this Agreement when the
same is due, or
3) any legal proceeding are started for the liquidation or bankruptcy of the
QPQ and/or PKP
4) QPQ and/or PKP shall use or any portion of any loan, granted by IFFC for
purposes other than provided for in this Agreement or any separate loan
agreement concluded pursuant to Agreement without IFFC prior approval in
writing.
4. Exclusive Rights.
- -----------------------
Upon happening of any Event of Default IFFC in addition to any other right IFFC
may have IFFC shall be released from its obligation to transfer the Shares back
to QPQ (which obligation results from that Transfer Agreement) and shall have
the right to apply the Shares as repayment of PKP or QPQ obligations hereunder.
If IFFC elects to do so (retain the ownership of shares) the parties shall be
free from any obligations or claims against each other in particular PKP and/or
QPQ shall be free from obligations resulting from this Agreement and/or
agreements entered into pursuant to this Agreement.
5. Exclusive Agreement.
- --------------------------
This Agreement supersedes all prior agreements and understandings,either verbal
or written, in the matters relating to the Loan or any loans granted upon this
Agreement.
6. Governing Law.
- --------------------
This Agreement is subject to the law of the Republic of Poland.
7. Counterparts
- ------------------
This Agreement has been signed in three counterparts, one copy for each Party
and all of which constitute one and the same document.
3
<PAGE>
9. Controversies
- -------------------
Any claims disputes or controversies which shall arise in connection with this
Agreement or any other agreement concluded pursuant to this Agreement, which may
not be settled amicably shall be settled before Arbitration Court by Polish
Chamber of Commerce (Krajowa Izba Gospodarcza) in Warsaw in accordance with the
rules of this Court. The language of arbitration shall be English.
In the name of IFFC: /s/ Mitchell Rubinson
-------------------------------
In the name of QPQ: /s/ C. Lawrence Rutstein
-------------------------------
In the name of PKP: /s/ Leon Blumenthal
-------------------------------
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by its
duly authorized representatives on the day and year first above written.
4
Agreement on Transfer the Shares as Collateral
(przewlaszczenie na zabezpieczenie)
This Agreement is entered into this 23 day of May, 1997, by and between:
1. QPQ Corporation, with its registered office in 7777 Glades Road, Suite
213, Boca Raton, Florida 33139, USA (hereinafter referred to as QPQ), duly
represented by Larry Rutstein
and
2. International Fast Food Corporation, with its registered office in 1000
Lincoln Road, Suite 200, Miami Beach, Florida 33139, USA (hereinafter referred
to as IFFC), duly represented by Mitchell Rubinson.
Recitals:
1. QPQ, IFFC and Pizza King Polska Sp. z o.o. have entered into Undertaking
and Loan Agreement of May 23, 1997 (hereinafter referred to as the Loan
Agreement).
2. QPQ owns shares in the company Pizza King Polska Sp. z o.o. and is willing
to transfer them to IFFC to secure its rights resulting from the Loan Agreement.
Now it is hereby agreed as follows:
ss.1. QPQ represents and declares that:
1) It owns 41,258 shares of a value of PLN 148.49 each (hereinafter referred
to as the Shares), in the company Pizza King Polska Sp. z o.o., a limited
liability company having its registered office in Warsaw, Poland, entered into
commercial register kept by the District Court for the city of Warsaw under No.
RHB 34669 (hereinafter referred to as the Company).
2) The Company is duly organized and validly existing, with full corporate
power and authority to conduct its business.
3) There are no governmental or corporate permits or consents needed for the
transfer of Shares by QPQ.
4) One Share entitles its holder to one vote at the shareholders' meetings.
5) The Shares are fully paid and clear of any claims and encumbrances.
<PAGE>
ss.2. IFFC represents and warrants:
1) It is acting solely for itself and for no other person, firm, partnership,
corporation or entity in executing this Agreement.
2) It is not prevented by any law or by any provisions of any contract,
indenture, or other instrument from acquiring the Shares as contemplated by this
Agreement.
ss.3.1. QPQ hereby transfers to IFFC and IFFC hereby acquires 41,258 Shares of a
total value of PLN 6,126,400.42, with 41,258 votes, to secure its rights
resulting from the Loan Agreement.
ss.3.2. The transfer of ownership of the Shares back to QPQ shall occur upon
full repayment of all loans with interest and shall be made pursuant to separate
transfer agreement. In case of Event of Default (as defined in the Loan
Agreement) IFFC shall automatically be released from the obligation to transfer
the Shares back to QPQ and shall have the right to apply the Shares against the
sums due under the Loan Agreement (or any loan agreement entered pursuant to the
Loan Agreement) in the way described in the Loan Agreement.
ss.4. Acquisition of the Shares shall be notified by the parties to this
Agreement to the Management Board of the Company in order for the Management
Board to comply with the obligation arising out of Article 188ss.1 and 3 of the
Polish Commercial Code.
ss.5. This Agreement is subject to the laws of Poland. If any disputes between
the parties arise out of, or in relation to, this Agreement, the parties shall
always use their best efforts to reach an amicable settlement. Any disputes
which cannot be resolved amicably by the parties shall be submitted for
settlement to the Arbitration Court in the Polish Chamber of Commerce (Sad
Arbitrazowy przy Krojowez lzbie Gospodarczej) in Warsaw, in accordance with the
rules of the said Court.
ss.6. IFFC declares and assures that it shall keep confidential any information
obtained from QPQ or the Company, concerning the Company, its properties,
operations and business.
ss.7. This Agreement has been executed, as of the date first above written, in 2
copies, and each demand to be an original.
QPQ Corporation International Fast Food Corporation
/s/ C. Lawrence Rutstein /s/ Mitchell Rubinson
- ------------------------------ -----------------------------------
Larry Rutstein Mitchell Rubinson
Title: Title:
2
<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 SIX
MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,208,521
<SECURITIES> 0
<RECEIVABLES> 544,235
<ALLOWANCES> 0
<INVENTORY> 263,026
<CURRENT-ASSETS> 4,163,029
<PP&E> 8,394,664
<DEPRECIATION> 3,016,619
<TOTAL-ASSETS> 11,329,330
<CURRENT-LIABILITIES> 2,889,349
<BONDS> 2,756,000
0
369
<COMMON> 175,655
<OTHER-SE> 1,871,601
<TOTAL-LIABILITY-AND-EQUITY> 11,329,330
<SALES> 2,752,559
<TOTAL-REVENUES> 2,804,037
<CGS> 1,119,022
<TOTAL-COSTS> 1,641,662
<OTHER-EXPENSES> 817,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273,171
<INCOME-PRETAX> 402,020
<INCOME-TAX> 0
<INCOME-CONTINUING> 402,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 402,020
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
