U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition Report Under Section 13 or 15(d) of
the Exchange Act
For the transition period from ____________ to ____________.
Commission file number 1-11386
INTERNATIONAL FAST FOOD CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 65-0302338
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
------------------------------------------------
(Address of Principal Executive Office)
(305) 531-5800
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.01
per share as of November 11, 1998 was 44,791,640.
Traditional Small Business Disclosure Format: Yes [x] No [ ]
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM. 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and December 31,
1997 2 - 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 1998 and 1997 (unaudited) 4
Consolidated Statement of
Shareholders' Equity for the Nine
Months Ended September 30, 1998 (unaudited) 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September
30, 1998 and 1997 (unaudited) 6 - 7
Notes to Consolidated Financial
Statements 8 - 23
ITEM. 2 Management's Discussion and Analysis
or Plan of Operation 24 - 36
PART II. OTHER INFORMATION
- ---------------------------
ITEM. 2 Legal Proceedings 37
ITEM. 4 Results of Votes of Security Holders 38
SIGNATURES 39
</TABLE>
1
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $12,099,905 $18,642,335
Restricted cash 999,990 999,990
Receivables 563,063 101,528
Inventories 567,493 372,599
Prepaid expenses 876,792 130,711
------------ -------------
Total Current Assets 15,107,243 20,247,163
FURNITURE, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, NET 9,519,151 5,959,378
DEFERRED DEBENTURE ISSUANCE COSTS,
NET OF ACCUMULATED AMORTIZATION
OF $182,352 AND $157,410,
RESPECTIVELY 249,973 274,915
DEFERRED ISSUANCE COSTS OF 11% CONVERTIBLE
SENIOR SUBORDINATED DISCOUNT NOTES
NET OF ACCUMULATED AMORTIZATION
OF $230,851 AND $41,049,
RESPECTIVELY 2,287,523 2,446,869
OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION OF $251,521 AND $199,484
RESPECTIVELY 1,128,179 333,533
BURGER KING DEVELOPMENT RIGHTS,
NET OF ACCUMULATED AMORTIZATION
OF $162,162 AND $81,081,
RESPECTIVELY 837,838 918,919
DOMINO'S DEVELOPMENT RIGHTS,
NET OF ACCUMULATED AMORTIZATION
OF $38,855 AND $15,542,
RESPECTIVELY 150,248 173,561
COSTS IN EXCESS OF NET ASSETS ACQUIRED 1,538,213 -
------------ -------------
Total Assets $30,818,368 $30,354,338
============ =============
</TABLE>
See Accompanying Notes
2
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- ----------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,507,844 $ 581,555
Accrued interest payable 120,105 17,911
Other accrued expenses 781,514 788,412
Current portion of bank credit
facilities payable 1,511,370 1,349,995
-------------- --------------
Total Current Liabilities 3,920,833 2,737,873
11% CONVERTIBLE SENIOR SUBORDINATED
DISCOUNT NOTES DUE OCTOBER 31, 2007 22,035,228 20,354,680
LONG TERM BANK CREDIT FACILITIES 1,797,024 630,000
9% SUBORDINATED CONVERTIBLE
DEBENTURES, DUE DECEMBER 15, 2007 2,756,000 2,756,000
-------------- --------------
Total Liabilities 30,509,085 26,478,553
-------------- --------------
DEFERRED CREDIT 1,000,000 1,000,000
-------------- --------------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED SUBSIDIARY - 115,294
--------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value,
1,000,000 shares authorized;
32,985 and 33,450 shares issued
and outstanding, respectively (liquidation
preference of $3,298,500) 330 334
Common Stock, $.01 par value,
100,000,000 shares authorized;
44,791,643 and 44,641,247 shares
issued and outstanding, respectively 447,917 446,413
Additional paid-in capital 17,790,392 17,691,542
Accumulated deficit (18,929,356) (15,377,798)
-------------- --------------
Total Shareholders' Equity (Deficit) ( 690,717) 2,760,491
-------------- --------------
Total Liabilities and Shareholders' Equity $30,818,368 $30,354,338
============== ==============
</TABLE>
See Accompanying Notes
3
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $ 2,016,349 $ 1,493,656 $ 5,705,371 $ 4,246,215
Other operating 16,098 14,780 50,872 66,258
------------ ------------ ------------ ------------
Total Revenue 2,032,447 1,508,436 5,756,243 4,312,473
FOOD AND PACKAGING 784,067 595,406 2,235,433 1,714,428
------------ ------------ ------------ ------------
GROSS PROFIT 1,248,380 913,030 3,520,810 2,598,045
RESTAURANT OPERATING EXPENSES:
Payroll and Related Costs 404,748 309,633 1,076,095 749,703
Occupancy and Other Operating
Expenses 577,761 488,491 1,642,846 1,253,208
Depreciation and Amortization 312,365 263,285 832,744 700,160
------------ ------------ ------------ ------------
Total Restaurant Operating
Expenses 1,294,874 1,061,409 3,551,685 2,703,071
------------ ------------ ------------ ------------
Loss From Restaurant Operations (46,494) (148,379) (30,875) (105,026)
------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE
EXPENSES 837,308 523,397 1,979,714 1,238,283
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest and other, net 112,142 443,934 629,108 366,951
Interest expense, including
amortization of debenture
issuance costs (775,399) (147,305) (2,189,941) (420,476)
Gain on settlement of
litigation, net of applicable
costs -- -- -- 1,327,070
Foreign currency exchange
gain/(loss) 9,337 (221,266) 4,736 (247,128)
------------ ------------ ------------ ------------
Total other income
(expenses) (653,920) 75,363 (1,556,097) 1,026,417
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY
INTEREST (1,537,722) (596,413) (3,566,686) (316,892)
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED SUBSIDIARY 48,000 83,848 115,478 206,347
------------ ------------ ------------ ------------
NET LOSS $ (1,489,722) $ (512,565) $ (3,451,208) $ (110,545)
============ ============ ============ ============
BASIC AND DILUTED NET
LOSS PER COMMONS SHARE $ (.03) $ (.01) $ (.08) $ (.01)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 44,784,064 37,005,288 44,697,347 20 ,239,892
============ ============ ============ ============
</TABLE>
See Accompanying Notes
4
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Nine months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
------------ --------------- Paid In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1997 44,641,247 $446,413 33,450 $334 $17,691,542 $(15,377,798) $2,760,491
Issuance of common
stock in payment
of dividends on
preferred stock 134,896 1,349 - - 99,001 (100,350) -
Conversion of preferred stock 15,500 155 (465) (4) (151) - -
Net loss for the period - - - - - (3,451,208) (3,451,208)
----------- --------- --------- ------- ------------- -------------- ----------
Balances, September 30, 1998 44,791,643 $447,917 32,985 $330 $17,790,392 $(18,929,356) $( 690,717)
=========== ========= ========= ======= ============= ============== ==========
</TABLE>
See Accompanying Notes
5
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(3,451,208) $ (110,545)
Adjustment to reconcile net loss
to net cash provided by
(used in)operating activities:
Amortization and depreciation
of furniture and equipment,
leasehold improvements and
other assets 937,138 766,218
Amortization of debt discount
and issuance costs 1,895,292 24,942
Minority interest in losses of
subsidiary (115,478) (206,347)
Gain on forgiveness of indebtedness -- (337,859)
Other operating items 4,679 132,833
Changes in operating assets and
liabilities, net of acquisition
of business:
Receivables (461,535) 435
Inventories (194,894) 20,488
Prepaid expenses (746,081) (22,612)
Accounts payable and
accrued expenses 1,021,585 (284,943)
----------- -----------
Net cash used in operating
activities (1,110,502) (17,390)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of business, net of
cash acquired - (500,849)
Increase in restricted cash and
certificates of deposit - (499,990)
Payments for furniture, equipment
and leasehold improvements (4,340,480) (247,764)
Payments for other assets (846,683) (25,866)
Purchase of minority interest in
subsidiary (1,538,029) -
Refund of franchise fees - 30,000
----------- -----------
Net cash used in
investing activities (6,725,192) (1,244,469)
----------- -----------
</TABLE>
See Accompanying Notes
6
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------- -------------
<S> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from (to) Affiliate, net - 79,602
Repayments of bank credit
facilities (246,624) (1,515,232)
Net proceeds from settlement of
litigation - 3,288,440
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 1,575,023 1,974,282
Net Proceeds from issuance of
convertible promissory notes - 500,000
Payment of registration costs (30,456) -
----------- -----------
Net cash provided by financing
activities 1,297,943 2,729,264
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (4,679) (21,534)
DECREASE (INCREASE)IN CASH AND
CASH EQUIVALENTS (6,542,430) 1,445,871
BEGINNING CASH AND CASH EQUIVALENTS 18,642,335 194,269
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $12,099,905 $ 1,640,140
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 192,456 $ 312,005
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING ACTIVITIES:
Nine Months Ended September 30, 1998:
Issuance of 134,896 shares of common stock in payment of $100,350 of
dividends on preferred stock.
Issuance of 15,500 shares of Common Stock upon the exchange of 465
shares of Preferred Stock.
Nine Months Ended September 30, 1997:
Issuance of 159,650 shares of Common Stock upon the exchange of 4,790
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.
Issuance of 25,909,211 shares of Common Stock in payment of $2,198,424
principal amount of a promissory note payable to Litigation Funding
plus $61,425 of accrued interest.
See Accompanying Notes
7
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION:
International Fast Food Corporation ("IFFC" or the "Company"), was
incorporated in December 1991 as a Florida corporation. The Company, has,
subject to certain exceptions, the exclusive right to develop franchised Burger
King restaurants and Domino's Pizza stores ("Domino's Stores") in the Republic
of Poland ("Poland").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned Polish
limited liability company, International Fast Food Polska, Sp. z o.o. ("IFFP").
IFFP currently operates eleven Burger King restaurants in Poland. Additionally,
the consolidated financial statements include the accounts of the Company's two
wholly owned Polish limited liability companies, Krolewska Pizza, Sp. z
o.o.("KP") and Pizza King Polska, Sp. z o.o. ("PKP") for the period from their
acquisition in July 1997. KP and PKP presently operate ten Domino's Pizza stores
and a Domino's approved commissary. 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
reporting period. Actual results could differ from those 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, 1997 of International Fast Food
Corporation and Subsidiaries (the "Company"), as filed with the Securities and
Exchange Commission. The December 31, 1997 consolidated balance sheet contained
herein 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 nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
8
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
IFFC's restaurant and store 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 years ended December 31, 1996 and 1997, the rates of inflation
and devaluation improved. For the years ended December 31, 1993, 1994, 1995,
1996, and 1997 the annual inflation rate in Poland was 35%, 32%, 21.6%, 19.5%,
and 13.0% respectively. For the twelve months ended September 30, 1998 the
inflation rate was 10.42%. Payment of interest and principal on the 9%
Convertible Subordinated Debentures, 11% Convertible Senior Subordinated
Discount Notes and payment of franchise fees to Burger King Corporation ("BKC")
and Domino's Pizza, Inc. ("DPI") for each restaurant and store 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 are 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.
The official currency of 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. At September 30, 1998 and 1997, the exchange rates were 3.55 and 3.42
zlotys per dollar, respectively. The accounts of IFFC's Polish subsidiaries are
maintained in zlotys and are remeasured into U.S. dollars, the functional
currency, at the end of each reporting period. Monetary assets and liabilities
are remeasured, using current exchange rates. Non-monetary assets, liabilities,
and related expenses, primarily furniture, equipment, leasehold improvements and
related depreciation and amortization, are remeasured using historical exchange
rates. Income and expense accounts, excluding depreciation and amortization, are
remeasured using an annual weighted average exchange rate. Transaction gains and
losses that arise from exchange rate fluctuations in transactions denominated in
a currency other than the functional currency are included in the results of
operations as incurred.
LIQUIDITY AND PLAN OF OPERATIONS - As of September 30, 1998, IFFC had
working capital of approximately $11,186,410 which includes Cash and Cash
Equivalents of $12,099,905. IFFC's working capital and cash position were
significantly improved since March 1997 by the settlement of its litigation with
Burger King Corporation ("BKC") in March 1997, the restructuring of bank debt,
the merger with Litigation Funding, Inc., conversion of the 8% convertible
promissory notes and the placement of the 11% Convertible Senior Subordinated
Discount Notes, Due October 31, 2007.
9
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Although IFFC believes that it has sufficient funds to finance its
present plan of operations through December 31, 1998, IFFC cannot reasonably
estimate how long it will be able to satisfy its cash requirements. The capital
requirements relating to implementation of the BKC Development Agreement and the
New Master Franchise Agreement with Dominos 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 and store operations. In
order to satisfy the capital requirements of the BKC Development Agreement and
the New Master Franchise Agreement with Dominos, IFFC will require resources
substantially greater than the amounts it presently has or amounts that can be
generated from restaurant and store operations. Other than its existing Bank
Credit Facilities, IFFC has no current arrangements with respect to, or sources
of additional financing and there can be no assurance that IFFC will be able to
obtain additional financing or that additional financing will be available on
acceptable terms to fund future commitments for capital expenditures.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less at the time of
acquisition to be cash equivalents. The Company maintains its U.S. cash in bank
deposit accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on cash and cash equivalents.
COST IN EXCESS OF NET ASSETS ACQUIRED - Cost in excess of net assets
acquired principally represents the excess of cost over fair value of the net
assets of IFFP which were acquired with the purchase of the remaining interest
of IFFP's minority shareholder, Agros Investments, S.A. in September, 1998. The
amount is being amortized on the straight-line method over 20 years commencing
in October 1998. When events and circumstances so indicate, all long-term
assets, including the Cost In Excess Of Net Assets Acquired are assessed for
recoverability based upon cash flow forecasts.
NET LOSS PER COMMON SHARE - The net loss per common share in the
accompanying statements of operations has been computed based upon the
provisions of SFAS No. 128, Earnings per Share, which became effective for
reporting periods ending after December 15, 1997, and requires restatement of
previously reported per share amounts. The adoption of SFAS No. 128 did not
require a change in the net loss per common share amount reported for the nine
months ended September 30, 1997. The basic net loss per common share in the
accompanying statements of operations is based upon the net loss after preferred
dividend requirements of $98,955 and $100,350 in 1998 and 1997, respectively,
divided by the weighted average number of shares outstanding during each period.
Diluted per share data for all periods presented is the same as basic per share
data since the inclusion of all potentially dilutive common shares that would be
issuable upon the exercise of options and warrants and the assumed conversion of
convertible debt and preferred stock would be anti-dilutive.
PREPAID EXPENSES - The Company capitalizes start-up costs associated
with opening new restaurant locations. Upon commencement of revenue producing
activities at a restaurant location, the related capitalized start-up costs are
amortized over one-year. As of September 30, 1998 the Company had recorded
approximately $840,000 of start-up costs which are included in prepaid expenses
in the accompanying consolidated balance sheet. Amortization expense for the
nine months ended September 30, 1998 and 1997 were $41,000 and $4,000,
respectively.
On April 3, 1998 the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities". SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998.
The Company will adopt SOP 98-5 on January 1, 1999. The impact of the
initial application SOP 98-5 will be reported as a cumulative effect of a change
in accounting principle.
10
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Reclassification - Certain amounts in the 1997 financial statements
have been reclassified to conform with the 1998 presentation.
3. RESTRICTED CASH:
At September 30, 1998, the Company had a $999,990 certificate of
deposit hypothecated to an outstanding line of credit with Totalbank.
4. BANK CREDIT FACILITIES:
<TABLE>
<CAPTION>
Bank credit facilities at September 30, 1998 consists of the following:
<S> <C>
Amerbank, S.A, IFFP overdraft
credit line, variable rate approximately
equal to prime, expires March 1, 1999 $ -
Amerbank, S.A., PKP overdraft
credit line, variable rate approximately
equal to prime, expires June 1, 1999 8,371
Amerbank, PKP line of credit of $300,000
payable in ten quarterly installments
of $30,000 commencing on December 26, 1998,
interest payable monthly at 3-1/8% above LIBOR,
due at maturity March 26, 2001 275,023
Amerbank, IFFP line of credit of $950,000
payable in twenty nine monthly installments
of $32,000 commencing on March 12, 1998, interest
payable monthly at 2.50% above LIBOR, due at
maturity on August 12, 2000. 726,000
Amerbank, IFFP revolving development loan,
interest is payable monthly at 2.50%
above LIBOR, $1,300,000 maximum credit until
June 2000, payable in thirty five monthly
installments thereafter of $36,111 with final
payment of $36,115 due at maturity on May 18, 2003. 1,300,000
Totalbank, IFFC line of credit of $999,000 payable
in full on February 18, 1999, interest at 6.5%
payable quarterly collateralized by certificates of
deposit in the amount of $999,990 999,000
------------
Total Debt 3,308,394
Less: Current Maturities 1,511,370
------------
Long Term Debt $1,797,024
============
</TABLE>
11
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. 9% CONVERTIBLE SUBORDINATED DEBENTURES:
The 9% Convertible Subordinated Debentures (the "Debentures") mature on
December 15, 2007 and provide for the payment of cash interest, semi-annually on
June 15 and December 15, until maturity.
The Debentures are subordinated and subject in right of payment to the
prior payment of all Senior Indebtedness as defined in the Debentures. The
indenture contains no provision restricting the incurrence of additional debt or
the issuance of additional securities. The Debentures may be redeemed together
with accrued interest at the option of the Company in whole or in part, at any
time on at least 30 days notice to Debentureholders at decreasing redemption
prices from 109% in 1993 to 100% in 2002 and thereafter. The Debentures are
redeemable through the operation of a sinking fund beginning 1998 through 2006.
Sinking fund payments will be reduced for Debentures previously converted or
redeemed by the Company.
6. 11% CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES:
On November 5, 1997, the Company sold $27,536,000 of 11% Convertible
Senior Subordinated Discount Notes Due October 31, 2007 ( the "Notes") in a
private offering. At September 30, 1998, the notes are comprised as follows:
<TABLE>
<CAPTION>
<S> <C>
Face amount of notes at maturity $27,536,000
Unamortized discount to be accreted as
interest expense and added to the
original principal balance of the
notes over a period of three years ( 5,500,772)
-----------
Balance at September 30, 1998 $22,035,228
===========
</TABLE>
The Company received net proceeds of $17,662,174 after reduction of the
face of the notes for unamortized discount of $7,535,908 and placement costs in
the amount of $2,337,918. In addition to the placement costs incurred, the
Company also issued to the placement agent 500,000 shares of Common Stock which
were valued at $150,000.
The Notes mature on October 31, 2007, and interest is payable
semi-annually, in cash, on April 30 and October 31 of each year, commencing
April 30, 2001.
The Notes are redeemable at the option of the Company, in whole or in
part, at any time or from time to time on and after October 31, 2002; initially
at 105.5% of their accreted value on the date of redemption, plus accrued
interest, declining ratably to 100% of their principal amount, plus accrued
interest, on and after October 31, 2006.
12
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Notes are convertible, at the option of the holder, into Common
Stock at any time after November 5, 1998. The number of shares of Common Stock
issuable upon conversion of the Notes is equal to the Accreted Value of the
Notes being converted, on the date of conversion, divided by $.70 (the
"Conversion Ratio"), subject to adjustment in certain events. Accordingly, the
number of shares of Common Stock available for issue upon conversion of the
Notes will increase as the accreted value of the Notes increases. In addition,
(a)if the closing sale price (the "closing price") of the Common Stock on the
Nasdaq National Market or other securities exchange or system on which the
Common Stock is then traded or (b) if not so traded, then the best bid offered
price on the OTC Bulletin Board Service (the "BBS") on the days when
transactions in the Common Stock are not effected, or on such days as
transactions are effected on the BBS, the highest price at which a trade was
executed, during any period described below has exceeded the price for such
period for at least 20 consecutive trading days (the "Market Criteria Period"),
and a registration statement with respect to the resale of Common Stock to be
issued upon conversion of the Notes is effective, all of the Notes will be
automatically converted into Common Stock at the close of business on the last
day of the Market Criteria Period; provided, however, that if the Market
Criteria is satisfied during the third year after the closing date of the
offering, the conversion will occur only if the Closing Price or OTC Price, as
applicable, of the Common Stock is at least $2.80 on such date :
<TABLE>
<CAPTION>
12 Months Beginning Closing Price
------------------- -------------
<S> <C> <C>
October 31, 1999 $2.80
October 31, 2000 $3.25
</TABLE>
The Company was obligated to cause to be declared effective, before
November 5, 1998, a registration statement registering the resale of the shares
of Common Stock to be issued upon conversion of the Notes. The Company filed a
registration statement with the SEC which became effective on September 10,
1998.
In the event of a change of control, as defined in the Convertible
Senior Subordinated Discount Notes Indenture (the "Indenture"), the holders of
the Notes will have the right to require the Company to purchase the Notes at a
purchase price of 101% of their Accreted Value on the date of such purchase,
plus accrued interest.
The Indenture contains certain covenants which among other things,
restrict the ability of IFFC and its Restricted Subsidiaries (as defined in the
Indenture) to: incur additional indebtedness; create liens, pay dividends or
make distributions in respect to their capital stock; make investments; or make
certain other restricted payments; sell assets, issue or sell stock of
Restricted Subsidiaries; enter into transactions with stockholders or
affiliates; engage in unrelated lines of business; or consolidate, merge, or
sell all or substantially all of their assets. In addition, Mitchell Rubinson
must remain the Company's Chief Executive Officer.
The Indenture specifically requires that any temporary cash investments
can only be placed in banks that have total capital in excess of $100 million.
13
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. 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
nine months ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Outstanding at beginning of period 920,000
Granted 100,000
Exercised -
Expired -
------------
Outstanding at end of period 1,020,000
============
Exercisable at end of period 370,500
============
Price range of options outstanding
at end of period $.81 to $.40
============
Available for grant at end of period 980,000
============
</TABLE>
14
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At September 30, 1998, IFFC had reserved the following shares of Common
Stock for issuance:
<TABLE>
<CAPTION>
<S> <C>
Stock option plan 2,000,000
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 on or before
December 15, 2007 324,235
Preferred Stock convertible into Common
Stock at a conversion price of $3.00
per share 1,099,500
Warrants to purchase 50,000 shares of
Common Stock at an exercise price of
$.2831 per share on or before January 5, 2004 50,000
Convertible Senior Subordinated Discount
Notes convertible into Common Stock, after
November 5, 1998, at a conversion price
of $.70 per share 39,337,143
----------
Total reserved shares 43,101,678
==========
</TABLE>
15
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. COMMITMENTS AND CONTINGENCIES:
On March 14, 1997, IFFC and Burger King Corporation ("BKC") entered
into a new Development Agreement (the "BKC Development Agreement"), which was
then assigned by IFFC to IFFP; IFFC continues to remain liable for the
obligations contained in the BKC Development Agreement. Pursuant to the 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 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
restaurant. A Burger King kiosk restaurant shall, for purposes of the BKC
Development Agreement, be considered one quarter restaurant.
Pursuant to the BKC Development Agreement, IFFC is to open three
restaurants through September 30, 1998, four restaurants in each year beginning
October 1, 1998 and ending September 30, 2001 and five restaurants in each year
beginning October 1, 2001 and ending September 30, 2007. As of September 30,
1998, the Company had complied with the BKC Development Agreement by opening
three new restaurants.
Pursuant to the 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(as defined below) 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 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.
16
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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.
On August 28, 1997, KP entered into a New Master Franchise Agreement
with Domino's Pizza International, Inc. ("Domino's"), granting KP the exclusive
right to develop and operate and to sub-license Domino's Pizza stores and to
operate a commissary for the Domino's system and the use of the Domino's and
related marks in the operation of stores in Poland. IFFC also agreed that
additional capital as may be required above such amount will also be dedicated
to KP as needed to permit KP to meet its development quotas. The term of the New
Master Franchise Agreement will expire on December 31, 2003, and if KP is in
compliance with all material provisions of the New Master Franchise Agreement,
it may be extended for an addition ten (10) years in accordance with certain
minimum development quotas which KP and Domino's may agree upon by execution of
an amendment to the New Master Franchise Agreement. Under the terms of the New
Master Franchise Agreement, KP shall be obligated to open 5, 6, 7, 8, 9, and 10
stores, respectively, beginning in 1998 and ending in the year 2003 for a total
of fifty (50) stores. Of such stores, third party franchise stores shall not
exceed 25% of the number of open and operating stores and all stores located in
Warsaw, Poland shall be corporate stores.
During the term of the New Master Franchise Agreement, KP and its
controlling shareholders, including the controlling shareholder of IFFC, will
not have any interest as an owner, investor, partner, licensee or in any other
capacity in any business engaged in sit-down, delivery or carry-out pizza or in
any business or entity which franchises or licenses or otherwise grants to
others the right to operate a business engaged in such business which is located
in Poland. The latter restriction shall apply for a period of one (1) year
following the effective date of termination of the New Master Franchise
Agreement.
17
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On July 1, 1998, IFFP entered into a new twenty-year lease with Statoil
Polska, Sp. z o.o. ("Statoil") for purposes of constructing a Burger King
restaurant in Pabianice, Poland. The site will be built adjacent to a Statoil
gas station. Under the terms of the lease agreement, IFFP's annual rental
payments for the lease equals the Polish equivalent of $36,000 ("minimum rent")
or 4.0% of its net sales, whichever is greater. The minimum rent payment is
adjusted quarterly to Polish inflation index. The lease contains a 10 year
option, exercisable by IFFP at its sole and absolute discretion, to renew under
the same terms and conditions as the underlying lease. The Company expects to
open this Burger King restaurant in the fourth quarter of 1998.
On July 10, 1998, IFFP opened its ninth Burger King restaurant in
Mikolow. Poland. The restaurant is attached to a Conoco-Jet gas station. The
restaurant has 60 interior seats and an outdoor playground with 20 additional
seats. Annual lease payments for the restaurant are 2.25% of net sales with no
minimum lease payments required. The lease was executed in November 1997 between
IFFP and Dupont-Conoco for a twenty year term. The lease contains two (2) ten
(10) year renewal options.
On July 20, 1998, PKP opened its tenth Domino's store in Warsaw. The
store consists of approximately 94 square meters. Annual lease payments,
excluding electricity, are approximately 15,000 zlotys (approximately $4,225 at
September 30, 1998 exchange rates). The lease was executed in April 1998 between
PKP and the Municipality of Ursynow. The lease is for an unlimited term.
On July 21, 1998, IFFP entered into two (2) twenty year lease
agreements with Statoil Polska, Sp. z o.o. ("Statoil") for purposes of
constructing a Burger King restaurant in Olsztyn and Raciborz, Poland. The sites
will be built adjacent to Statoil gas stations. Under the terms of the lease
agreements, the Company's annual rental payments for each lease is the Polish
zloty equivalent of $36,000 ("minimum rent") or 4.0% of its net sales, whichever
is greater. The minimum rent payment is adjusted quarterly to the Polish
inflation index. Both leases contain a ten (10) year option, exercisable by IFFP
at its sole and absolute discretion, to renew under the same terms and
conditions as the underlying leases. The Company expects to open these Burger
King restaurants in the fourth quarter of 1998.
On August 25, 1998, IFFP opened its tenth Burger King restaurant in
Torun, Poland. The restaurant is a stand alone adjacent to a BP gas station. The
restaurant has 80 interior seats and an outdoor playground with 20 additional
seats. Annual lease payments for the restaurant are 5.00% of net sales with a
$30,000 annual minimum lease payment required. The lease was executed in January
1998 between IFFP and BP for a twenty year term. The lease contains two (2) ten
(10) year renewal options.
On August 27, 1998, IFFP entered into a twenty year lease agreement
with Statoil Polska, Sp. z o.o. ("Statoil") for purposes of constructing a
Burger King restaurant in Krakow, Poland. The site will be built adjacent to a
Statoil gas station. Under the terms of the lease agreement, the Company's
annual rental payment equals the Polish zloty equivalent of $36,000 ("minimum
rent") or 4.0% of its net sales, whichever is greater. The minimum rent payment
is adjusted quarterly to the Polish inflation index. The lease contains a ten
(10) year option, exercisable by IFFP at its sole discretion, to renew under the
same terms and conditions as the underlying lease. The Company expects to open
this Burger King restaurant in the fourth quarter of 1998.
On September 1, 1998, PKP entered into a ten year lease with Paprocki
Centrum for purposes of constructing a Domino's Pizza store within 125 square
meters of space in Lublin, Poland. Annual lease payments, excluding utility
charges, are 54,000 Polish zlotys (approximately $15,500 at September 30, 1998
exchange rates). The store is expected to be opened in the fourth quarter of
1998.
18
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On September 4, 1998, IFFP opened its eleventh Burger King restaurant
in Plonsk, Poland. The restaurant is a stand alone adjacent to a BP gas station.
The restaurant has 80 interior seats and an outdoor playground with 20
additional seats. Annual lease payments for the restaurant are 5.00% of net
sales with a $30,000 annual minimum lease payment required. The sublease was
executed in April 1998 between IFFP and BP for a twenty year term. The lease
contains two (2) ten (10) year renewal options.
On September 4, 1998, the company purchased the remaining minority
interest of IFFP from Agros Investments, S.A. for $1,500,000 in cash plus
expenses associated with the purchase. The transaction was accounted for as a
purchase. (See Note 2 to the Consolidated Financial Statements.)
On September 23, 1998, IFFP entered into a new twenty year lease with
British Petroleum ("BP") for purposes of constructing a Burger King restaurant
in Wroclaw, Poland. The site will be built adjacent to a BP gas station. Under
the terms of the lease agreement, IFFP's annual rental payments for the lease is
$30,000 ("minimum rent") or 5.0% of its net sales, whichever is greater. The
lease contains two (2) 10 year options, exercisable by IFFP at its sole and
absolute discretion, to renew under the same terms and conditions as the
underlying lease. The Company expects to open this Burger King restaurant in the
fourth quarter of 1998.
On September 30, 1998, IFFP entered into a new twenty year lease with
British Petroleum ("BP") for purposes of constructing a Burger King restaurant
in Opole, Poland. The site will be built adjacent to a BP gas station. Under the
terms of the lease agreement, IFFP's annual rental payments for the lease is
$30,000 ("minimum rent") or 5.0% of its net sales, whichever is greater. The
lease contains two (2) 10 year options, exercisable by IFFP at its sole and
absolute discretion, to renew under the same terms and conditions as the
underlying lease. The Company expects to open this Burger King restaurant in the
fourth quarter of 1998.
19
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. GAIN ON SETTLEMENT OF BURGER KING LITIGATION:
On March 11, 1997, the Company and all other parties to the BKC
Litigation settled the litigation and the Company realized a gain on the
settlement which is comprised as follows:
<TABLE>
<CAPTION>
<S> <C>
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 Litigation
Funding pursuant to the litigation
financing agreements (750,001)
Deferred Credit (1,000,000)
------------
Net settlement proceeds 3,302,685
Portion of net settlement proceeds due to
Litigation Funding pursuant to the
litigation financing agreements (2,477,014)
Legal fees and costs paid by IFFC
in years prior to 1997 and charged
against operations 501,399
------------
IFFC gain on settlement $1,327,070
============
</TABLE>
20
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
At September 30, 1997, the payable to Litigation Funding was comprised
as follows:
<TABLE>
<CAPTION>
<S> <C>
Portion of net settlement proceeds due to
Litigation Funding $2,477,014
Reimbursement of legal fees and costs paid
by Litigation funding 750,001
Original principal balance payable to Litigation Funding 3,227,015
Principal payment in May, 1997 (1,028,521)
----------
Balance due at September 30, 1997 $2,198,494
==========
</TABLE>
10. OTHER TRANSACTIONS
In July 1997, the Company purchased 100% of KP and PKP, two Polish
limited liability companies, for a nominal consideration and assumption of all
liabilities, including the liabilities of KP to the Company under a $500,000
promissory note. KP owns the exclusive master franchise rights and a Domino's
approved commissary. PKP owns the individual store franchises for Domino's Pizza
stores in Poland.
The acquisition was accounted for under the purchase method of
accounting, and the net assets acquired are included in the Company's
consolidated balance sheet based upon their estimated fair values at the date of
acquisition. Results of operations of KP are 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 are 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.
<TABLE>
<CAPTION>
Three Months Ended, Nine months Ended,
---------------------------------------------- ----------------------------------------------
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total Revenues $ 2,016,349 $1,493,656 $ 5,705,371 $ 4,834,654
Net income (loss) $(1,489,722) $( 512,565) $(3,451,208) $( 426,047)
Net income loss per share $( .03) $( .01) $( .08) $( .02)
</TABLE>
21
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. LITIGATION:
Polish Fiscal Authority Disputes
As of July 1995, IFFP likely became 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") was a modern system, the Cash Register System could not
be modified. IFFP has replaced the system with a new Siemen's system which
complies with Polish regulations. As a penalty for noncompliance, Polish tax
authorities may disallow certain value added tax deductions for July and August
1995. Additionally, penalties and interest may be imposed on these disallowed
deductions. IFFP believes that its potential exposure is approximately $400,000,
which amount was accounted for in its 1997 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 Minister's ruling.
Other Litigation
The Company is not a party to any litigation or governmental
proceedings that management believes would result in any judgements or penalties
that would have a material adverse effect on the Company
22
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. SUBSEQUENT EVENTS:
On October 1, 1998, the Company executed an amendment with Amerbank for
the revolving credit facility of IFFP. Under the terms of the amendment, the
maximum borrowing under the credit increased from $1,300,000 to $1,500,000 or by
a total of $200,000. With the increase in credit, the repayment terms changed as
follows: thirty five monthly equal installments of $41,666 starting in June
2000, with a final payment of $41,690 due at maturity on May 18, 2003.
On October 1, 1998, IFFP entered into a twenty year lease agreement
with Statoil Polska, Sp. z o.o. ("Statoil") for purposes of constructing a
Burger King restaurant in Gorzow, Poland. The site will be built adjacent to a
Statoil gas station. Under the terms of the lease agreement, the Company's
annual rental payments for this lease equals the Polish zloty equivalent of
$36,000 ("minimum rent") or 4.0% of its net sales, whichever is greater. The
minimum rent payment is adjusted quarterly to the Polish inflation index. Both
leases contain a ten-(10) year option, exercisable by IFFP at its sole and
absolute discretion, to renew under the same terms and conditions as the
underlying leases. The Company expects to open this Burger King restaurant in
the fourth quarter of 1998.
On October 15, 1998, PKP entered into a lease for an unlimited period
of time with Karol, Kristina and Miroslaw Stanaszek of Lomianki, Warsaw for
purposes of constructing a Domino's Pizza store within 87 square meters of
space. The lease may be terminated by PKP at any time upon three months' notice.
The lessor may terminate the lease at any time upon three months' notice. In the
event that the lessor terminates the lease, PKP is entitled to recover its costs
including leasehold improvements, net of depreciation. Annual lease payments,
excluding utility charges, are $9,600. The Company was required to prepay the
first year's rent. The store is expected to be opened in the fourth quarter of
1998.
On October 19, 1998, IFFP entered into a twenty year lease agreement
with Statoil Polska, Sp. z o.o. ("Statoil") for purposes of constructing a
Burger King restaurant in Warsaw, Poland. The site will be built adjacent to a
Statoil gas station. Under the terms of the lease agreement, the Company's
annual rental payments for the lease equals the Polish zloty equivalent of
$36,000 ("minimum rent") or 4.0% of its net sales, whichever is greater. The
minimum rent payment is adjusted quarterly to the Polish inflation index. Both
leases contain a ten (10) year option, exercisable by IFFP at its sole and
absolute discretion, to renew under the same terms and conditions as the
underlying leases. The Company expects to open this Burger King restaurant in
the fourth quarter of 1998.
On October 21, 1998, PKP entered into a ten year lease with Jerzy and
Wieslawa Piwqwarscy of Piaseczno, Warsaw for purposes of constructing a Domino's
Pizza store within 92 square meters of space. Annual lease payments, excluding
utility charges are $7,800. The store is expected to be opened in the fourth
quarter of 1998.
On October 27, 1998, PKP entered into a ten year lease with Stanislaw
and Barbara Kolat of Lodz, Poland for purposes of constructing a Domino's Pizza
store within 211 square meters of space. Annual lease payments through 2001,
excluding utility charges, are $6,840. Thereafter the annual lease payments will
be $13,680. The store is expected to be opened in the fourth quarter of 1998.
On October 29, 1998, PKP entered into a ten year lease with Mieczyslawa
and Boguslaw Leczynski of Legionowo, Warsaw for the purposes of constructing a
Domino's Pizza store within 120 square meters of space. Annual lease payments,
excluding utility charges are $10,800. The store is expected to be opened in the
fourth quarter of 1998.
On November 2, 1998, IFFP entered into a new twenty (20) year lease
with BP for purposes of constructing a Burger King Restaurant in Warsaw, Poland.
The site will be built adjacent to a BP gas station. Under the terms of the
lease agreement, IFFP's annual rental payments for the lease is $30,000
("minimum rent") or 5.0% of its net sales, whichever is greater. The lease
contains two (2) 10 year options, exercisable by IFFP at its sole and absolute
discretion, to renew under the same terms and conditions as the underlying
lease. The Company expects to open this Burger King restaurant in the fourth
quarter of 1998.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Management's 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
the future growth of the Company's business, the ability to obtain suitable
restaurant sites, the Company's future liquidity and capital resource needs,
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 September 30, 1998, IFFC had working capital of approximately
$11,186,410 which includes Cash and Cash Equivalents of $12,099,905. IFFC's
working capital and cash position were significantly improved beginning in March
1997 by the settlement of its litigation with Burger King Corporation ("BKC")
coupled with recent debt consolidation, merger with Litigation Funding, Inc. and
placement of the 11% Convertible Senior Subordinated Discount Notes, Due October
31, 2007. Although IFFC believes that it has sufficient funds to finance its
present plan of operations through December 31, 1998, IFFC cannot reasonably
estimate how long it will be able to satisfy its cash requirements. The capital
requirements relating to implementation of the BKC Development Agreement and the
New Master Franchise Agreement with Dominos 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 and store operations. In
order to satisfy the capital requirements of the BKC Development Agreement and
the New Master Franchise Agreement with Dominos, IFFC will require resources
substantially greater than the amounts it presently has or amounts that can be
generated from restaurant and store operations. Other than its existing Bank
Credit Facilities, 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 Burger King restaurant business in Poland
through its wholly owned Polish subsidiary, IFFP, and its wholly-owned Polish
limited liability corporations, IFF Polska-Kolmer and IFF-DX Management. IFFC
operates its Domino's Pizza business in Poland through its two wholly-owned
Polish subsidiaries, Krolewska Pizza, Sp. z o.o. and Pizza King Polska, Sp. z
o.o. Unless the context indicates otherwise, references herein to IFFC include
all of its operating subsidiaries.
IFFC currently operates eleven Burger King Restaurants and ten Domino's
Pizza stores. IFFC has incurred losses and anticipates that it will continue to
incur losses until, at the earliest, it establishes a number of restaurants and
stores 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.
On July 1, 1998, IFFP entered into a new twenty year lease with Statoil
Polska, Sp. z o.o. ("Statoil") for purposes of constructing a Burger King
restaurant in Pabianice, Poland. The site will be built adjacent to a Statoil
gas station. Under the terms of the lease agreement, IFFP's annual rental
payments for the lease equals the Polish zloty equivalent of $36,000 ("minimum
rent") or 4.0% of its net sales, whichever is greater. The minimum rent payment
is adjusted quarterly to Polish inflation index. The lease contains a 10 year
option, exercisable by IFFP at its sole and absolute discretion, to renew under
the same terms and conditions as the underlying lease. The Company expects to
open this Burger King restaurant in the fourth quarter of 1998.
24
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On July 10, 1998, IFFP opened its ninth Burger King restaurant in
Mikolow. Poland. The restaurant is attached to a Conoco-Jet petrol station. The
restaurant has 60 interior seats and an outdoor playground with 20 additional
seats. Annual lease payments for the restaurant are 2.25% of net sales with no
minimum lease payments required. The lease was executed in November 1997 between
IFFP and Dupont-Conoco for a twenty year term. The lease contains two (2) ten
(10) year renewal options.
On July 20, 1998, PKP opened its tenth Domino's store in Warsaw. The
store consists of approximately 94 square meters. Annual lease payments,
excluding electricity, are approximately 15,000 zlotys (approximately $4,225 at
September 30, 1998 exchange rates). The lease was executed in April 1998 between
PKP and the Municipality of Ursynow. The lease is for an unlimited term.
On July 21, 1998, IFFP entered into two (2) twenty year lease
agreements with Statoil Polska, Sp. z o.o. ("Statoil") for purposes of
constructing a Burger King restaurant in Olsztyn and Raciborz, Poland. The sites
will be built adjacent to Statoil gas stations. Under the terms of the lease
agreements, the Company's annual rental payments for each lease equals the
Polish zloty equivalent of $36,000 ("minimum rent") or 4.0% of its net sales,
whichever is greater. The minimum rent payment is adjusted quarterly to the
Polish inflation index. Both leases contain a ten (10) year option, exercisable
by IFFP at its sole and absolute discretion, to renew under the same terms and
conditions as the underlying leases. The Company expects to open these Burger
King restaurants in the fourth quarter of 1998.
On August 25, 1998, IFFP opened its tenth Burger King restaurant in
Torun, Poland. The restaurant is a stand alone adjacent to a BP gas station. The
restaurant has 80 interior seats and an outdoor playground with 20 additional
seats. Annual lease payments for the restaurant are 5.00% of net sales with a
$30,000 annual minimum lease payment required. The lease was executed in January
1998 between IFFP and BP for a twenty year term. The lease contains two (2) ten
(10) year renewal options.
On August 27, 1998, IFFP entered into a twenty year lease agreement
with Statoil Polska, Sp. z o.o. ("Statoil") for purposes of constructing a
Burger King restaurant in Krakow, Poland. The site will be built adjacent to a
Statoil gas station. Under the terms of the lease agreement, the Company's
annual rental payment equals the Polish zloty equivalent of $36,000 ("minimum
rent") or 4.0% of its net sales, whichever is greater. The minimum rent payment
is adjusted quarterly to the Polish inflation index. The lease contains a ten
(10) year option, exercisable by IFFP at its sole and absolute discretion, to
renew under the same terms and conditions as the underlying lease. The Company
expects to open this Burger King restaurant in the fourth quarter of 1998.
On September 1, 1998, PKP entered into a ten year lease with Paprocki
Centrum for purposes of constructing a Domino's Pizza store within 125 square
meters of space in Lublin, Poland. Annual lease payments, excluding utility
charges, are 54,000 Polish zlotys (approximately $15,500 at September 30, 1998
exchange rates). The store is expected to be opened in the fourth quarter of
1998.
On September 4, 1998, IFFP opened its eleventh Burger King restaurant
in Plonsk, Poland. The restaurant is a stand alone adjacent to a BP gas station.
The restaurant has 80 interior seats and an outdoor playground with 20
additional seats. Annual lease payments for the restaurant are 5.00% of net
sales with a $30,000 annual minimum lease payment required. The sublease was
executed in April 1998 between IFFP and BP for a twenty year term. The lease
contains two (2) ten (10) year renewal options.
On September 4, 1998, the company purchased the remaining minority
interest of IFFP from Agros Investments, S.A. for $1,500,000 in cash. The
transaction was accounted for as a purchase. (See Note 2 to the Consolidated
Financial Statements.)
25
<PAGE>
On September 23, 1998, IFFP entered into a new twenty (20) year lease
with British Petroleum ("BP") for purposes of constructing a Burger King
restaurant in Wroclaw, Poland. The site will be built adjacent to a BP gas
station. Under the terms of the lease agreement, IFFP's annual rental payments
for the lease is $30,000 ("minimum rent") or 5.0% of its net sales, whichever is
greater. The lease contains two (2) 10 year options, exercisable by IFFP at its
sole and absolute discretion, to renew under the same terms and conditions as
the underlying lease. The Company expects to open this Burger King restaurant in
the fourth quarter of 1998.
On September 30, 1998, IFFP entered into a new twenty (20) year lease
with BP for purposes of constructing a Burger King restaurant in Opole, Poland.
The site will be built adjacent to a BP gas station. Under the terms of the
lease agreement, IFFP's annual rental payments for the lease is $30,000
("minimum rent") or 5.0% of its net sales, whichever is greater. The lease
contains two (2) 10 year options, exercisable by IFFP at its sole and absolute
discretion, to renew under the same terms and conditions as the underlying
lease. The Company expects to open this Burger King restaurant in the fourth
quarter of 1998.
26
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 VS NINE MONTHS ENDED SEPTEMBER 30, 1997
RESULTS OF OPERATIONS
Results of operations for the three months and nine months ended
September 30, 1998, include the results of Krolewska Pizza Sp. z o.o. ("KP"),
and Pizza King Polska, Sp. z o.o. ("PKP") which were acquired in July 1997 in a
transaction accounted for as a purchase. (The results of operations for the
three months and nine months ended September 30, 1997 include the results for
the three months ended September 30, 1997 of KP and PKP). KP owns the exclusive
development rights and PKP owns the franchises for Domino's pizza stores and
commissary in Poland.
For the nine months ended September 30, 1998 and September 30, 1997,
IFFC generated Restaurant Sales of $5,705,371 and $4,246,215, respectively which
includes sales of $1,455,499 and $275,075 respectively for the Domino's Pizza
stores in 1998 and 1997. In U.S. dollar and Polish zloty terms IFFC's Burger
King Restaurant Sales increased by approximately 7% and 11.1%, respectively, for
the nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. The increase is primarily attributable to the addition of
three new restaurants opened during the quarter ended September 30, 1998.
For the nine months ended September 30, 1998, IFFC incurred Food and
Packaging Costs of $2,235,433, Payroll and Related Costs of $1,076,095,
Occupancy and Other Operating Expenses of $1,642,846 and Depreciation and
Amortization Expense of $832,744.
Food and Packaging Costs applicable to Burger King restaurants for the
nine months ended September 30, 1998 and 1997 were 40.6% and 40.5% of Restaurant
Sales, respectively.
Payroll and Related Costs applicable to Burger King restaurants for the
nine months ended September 30, 1998 and 1997 were 17.4% and 16.6% of Restaurant
Sales, respectively. The .8% increase as a percentage of Restaurant Sales is
primarily the result of an increase in managerial salaries at the restaurant
level.
Occupancy and Other Operating Expenses applicable to Burger King
restaurants for the nine months ended September 30, 1998 and 1997 were 27.2% and
28.8% of Restaurant Sales, respectively. The 1.6% decrease as a percentage of
Restaurant Sales is primarily attributable to a decrease in advertising
expenditures; and the decrease in royalties payable to Burger King Corporation
in accordance with the New BKC Development Agreement.
Depreciation and Amortization Expense applicable to Burger King
restaurants as a percentage of Restaurant Sales was 14.3% and 16.5% in the nine
months ended September 30, 1998 and 1997, respectively. The 2.2% decrease as a
percentage of restaurant sales is primarily attributable to the increase in
Restaurant Sales.
For the nine months ended September 30, 1998, KP and PKP incurred Food
and Packaging Costs of $510,205 Payroll and Related Costs of $337,309, Occupancy
and Other Operating Expenses of $488,179 and Depreciation and Amortization of
$223,615. As a percentage of sales, Food and Packaging Costs were 35.1%, Payroll
and Related Costs were 23.2%, Occupancy and Other Operating Expenses were 33.5%.
General and Administrative Expenses for the nine months ended September
30, 1998 (which includes $212,577 applicable to KP and PKP) and 1997 were 34.7%
and 29.2% of Restaurant Sales, respectively. The 5.5% increase as a percentage
of Sales is primarily attributable to the addition of PKP, and new hires and
increased salaries and related benefits related to the anticipated rapid
development of the Burger King and Domino's concepts. For the nine months ended
September 30, 1998, General and Administrative Expenses were comprised of
executive and office staff salaries and benefits ("Salary Expense") $788,652;
legal and professional fees, office rent, travel, telephone and other corporate
expenses ("Corporate Overhead Expense") $964,399, and depreciation and
amortization $226,663. For the nine months ended September 30, 1997, General and
Administrative Expense included Salary Expenses of $423,393; Corporate Overhead
Expenses of $723,799, and depreciation and amortization of $91,091.
27
<PAGE>
For the nine months ended September 30, 1998 and 1997 Interest and
Other Income was comprised as follows:
<TABLE>
<CAPTION>
Nine months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Interest income $ 711,936 $ 104,409
Management fee - 13,904
All other, net ( 82,828) 248,638
--------- -----------
$ 629,108 $ 366,951
========= ===========
</TABLE>
All other, net includes various non-recurring charges and credits not
specifically related to operating activity.
Interest Expense is comprised as follows:
<TABLE>
<CAPTION>
Nine months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Interest Expense on 9% Subordinated
Convertible Debentures $186,030 $186,030
Interest Expense on 8% Convertible
Promissory Notes - 16,178
Interest Expense on Note Payable
to Litigation Funding - 73,767
Amortization of Debenture
Issuance Costs 214,744 24,942
Accretion of discount on 11%
Convertible Senior Subordinated
Discount Notes 1,680,548 -
Interest Expense on Bank
Facilities 108,619 119,559
Total
------------ --------------
$2,189,941 $ 420,476
============ ==============
</TABLE>
Interest Expense exceeded Interest and Other Income by $1,560,833 and
$53,525 for the nine months ended September 30, 1998 and 1997, respectively. The
primary reason for the increase for the nine month period ended September 30,
1998, is due to the accretion of the 11% Convertible Senior Subordinated
Discount Notes and the related amortization of debt issuance costs.
IFFC's interest expense on bank facilities was $108,619 and $119,559
for the nine months ended September 30, 1998 and 1997, respectively. The $10,940
decrease is attributable to IFFC's lower average level of borrowings under bank
credit facilities during the nine month period ended September 30, 1998.
During the nine months ended September 30, 1997, IFFC recorded a
non-recurring gain of $1,327,070, or $.07 per share of IFFC's Common Stock in
connection with the settlement of the BKC Litigation. See Note 9 of Notes To
Consolidated Financial Statements for the components included in the calculation
of the gain.
As a result of the foregoing, the nine months ended September 30, 1998,
IFFC generated a net loss of $3,451,208 or $.08 per share of IFFC's Common Stock
compared to a net loss of $110,545, or $.01 per share of IFFC's Common Stock for
the nine months ended September 30, 1997.
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.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
IFFC's material commitments for capital expenditures in its restaurant
and store business relate to the provisions of the BKC Development Agreement and
the New Master Franchise Agreement with Domino's.
On March 14, 1997, a new Development Agreement (the "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 BKC Development Agreement. Pursuant to the BKC
Development Agreement, IFFC has been granted the exclusive right until September
30, 2007 to develop and be franchised to operate Burger King restaurants in
Poland with certain exceptions discussed below. Pursuant to the 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 BKC Development
Agreement, be considered one quarter of a unit. Pursuant to the 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. As of September 30, 1998, the Company had complied with the BKC
Development Agreement by opening three new restaurants.
Pursuant to the 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 undertaking of Mr.
Mitchell Rubinson, IFFC's Chairman, that the Rubinson Group (as defined below)
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.
29
<PAGE>
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.
On August 28, 1997, KP entered into a New Master Franchise Agreement
with Domino's Pizza International, Inc. ("Domino's"), granting KP the exclusive
right to develop and operate and to sub-license Domino's Pizza stores and to
operate a commissary for the Domino's system and the use of the Domino's and
related marks in the operation of stores in Poland. As a condition to the New
Master Franchise Agreement, IFFC shall contribute or cause other entities to
contribute to KP a minimum amount of $2,000,000 by December 31, 1997. As of
December 31, 1997, IFFC had contributed $2,000,000 to KP. IFFC also agreed that
any additional capital required above such amount will also be dedicated to KP
as needed to permit KP to meet its development quotas. The term of the New
Master Franchise Agreement will expire on December 31, 2003, and if KP is in
compliance with all material provisions of the New Master Franchise Agreement,
it may be extended for an additional ten (10) years in accordance with certain
minimum development quotas which KP and Domino's may agree upon by execution of
an amendment to the New Master Franchise Agreement.
Under the terms of the New Master Franchise Agreement, KP shall be
obligated to open 5, 6, 7, 8, 9, and 10 stores, respectively, beginning in 1998
and ending in the year 2003 for a total of 45 new stores. Of such stores, third
party franchise stores shall not exceed 25% of the number of open and operating
stores and all stores located in Warsaw, Poland shall be company owned stores.
The Company has met its obligation for 1998.
During the term of the New Master Franchise Agreement, KP and its
controlling shareholders, including the controlling shareholder of IFFC, will
not have any interest as an owner, investor, partner, licensee or in any other
capacity in any business engaged in sit-down, delivery or carry-out pizza or in
any business or entity which franchises or licenses or otherwise grants to
others the right to operate a business engaged in such business which is located
in Poland. The latter restriction shall apply for a period of one (1) year
following the effective date of termination of the New Master Franchise
Agreement.
On November 5, 1997, the Company sold $27,536,000 11% Convertible
Senior Subordinated Discount Notes Due October 31, 2007 (the "Notes") in a
private offering. At September 30, 1998, the notes are comprised as follows:
<TABLE>
<CAPTION>
<S> <C>
Face amount of notes at maturity $27,536,000
Unamortized discount to be accreted as
interest expense and added to the
original principal balance of the
notes over a period of three years (5,500,772)
-----------
Balance at September 30, 1998 $22,035,228
===========
</TABLE>
30
<PAGE>
The Company received net proceeds of $17,662,174 after reduction of the
face of the notes for unamortized discount of $7,535,908 and placement costs in
the amount of $2,337,918. In addition to the placement costs incurred, the
Company also issued to the placement agent 500,000 shares of Common Stock which
were valued at $150,000. The Notes mature on October 31, 2007, and interest is
payable semi-annually, in cash, on April 30 and October 31 of each year,
commencing April 30, 2001. The Notes are redeemable at the option of the
Company, in whole or in part, at any time or from time to time on and after
October 31, 2002 ; initially at 105.5% of their Accreted Value on the date of
redemption, plus accrued interest, declining ratably to 100% of their principal
amount, plus accrued interest, on and after October 31, 2006.
The Notes are convertible, at the option of the holder, into Common
Stock at any time after November 5, 1998. The number of shares of Common Stock
issuable upon conversion of the Notes is equal to the accreted value of the
Notes being converted, on the date of conversion, divided by $.70 (the
"Conversion Ratio"), subject to adjustment in certain events. Accordingly, the
number of shares of Common Stock issuable upon conversion of the Notes will
increase as the Accreted Value of the Notes increases. In addition, (a) if the
closing sale price (the "closing price") of the Common Stock on the Nasdaq
National Market or other securities exchange or system on which the Common Stock
is the traded or (b) if not so traded, then the best bid offered price on the
OTC Bulletin Board Service (the "BBS") on the days when transactions in the
Common Stock are not effected, or on such days as transactions are effected on
the BBS, the highest price at which a trade was executed, during any period
described below has exceeded the price for such period for at least 20
consecutive trading days (the "Market Criteria Period"), and a registration
statement with respect to the resale of Common Stock to be issued upon
conversion of the Notes is effective, all of the Notes will be automatically
converted into Common Stock at the close of business on the last day of the
Market Criteria Period; provided, however, that if the Market Criteria is
satisfied during the third year after the closing date of the offering, the
conversion will occur only if the Closing Price or OTC Price, as applicable, of
the Common Stock is at least $2.80 on such date :
<TABLE>
<CAPTION>
12 Months Beginning Closing Sale Price
------------------- ------------------
<S> <C>
October 31, 1999 $2.80
October 31, 2000 $3.25
</TABLE>
The Company was obligated to cause to be declared effective, before
November 5, 1998, a registration statement registering the resale of the shares
of Common Stock to be issued upon conversion of the Notes. The Company filed a
registration statement with the SEC, which became effective on September 10,
1998.
31
<PAGE>
In the event of a change of control, as defined in the Convertible
Senior Subordinated Discount Notes Indenture (the "Indenture"), the holders of
the Notes will have the right to require the Company to purchase the Notes at a
purchase price of 101% of their accreted value on the date of such purchase,
plus accrued interest.
The Indenture contains certain covenants which among other things,
restrict the ability of IFFC and its Restricted Subsidiaries (as defined in the
Indenture) to: incur additional indebtedness; create liens, pay dividends or
make distributions in respect to their capital stock; make investments; or make
certain other restricted payments; sell assets, issue or sell stock of
Restricted Subsidiaries; enter into transactions with stockholders or
affiliates; engage in unrelated lines of business; or consolidate, merge, or
sell all or substantially all of their assets. In addition, Mitchell Rubinson
must remain the Company's Chief Executive Officer.
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 and IFFC's best estimates of the expenses IFFC anticipates incurring and
the timing of such expenses.
To date, IFFC's business operations have been principally financed by
proceeds from public and private offerings of IFFC's equity and debt securities,
proceeds from various bank credit facilities, the BKC Settlement Agreement, and
proceeds from the private sale of the 11% Convertible Senior Subordinated
Discount Notes.
32
<PAGE>
In January 1997, Mr. Rubinson and his wife, Marilyn Rubinson, Jaime
Rubinson and Kim Rubinson, purchased $100,000, $300,000, $50,000 and $50,000
aggregate principal amount of convertible promissory notes, respectively. The
notes bore interest at 8% per annum and were to mature on January 13, 1999. The
notes were converted 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 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, Inc. ("Funding") as
partial payment of amounts due to Funding in connection with the settlement of
the BKC Litigation.
On July 14, 1997, IFFC and Acquisition Sub entered into a Merger
Agreement with 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 received
by the Funding shareholders was 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 September 30, 1997, before reduction for the liquidation preference
applicable to the 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 BKC Development Agreement. Funding was entitled to receive
seventy-five percent (75%) of the litigation proceeds, as defined, under its
prior agreements with the Company.
As of September 30, 1998 and November 12, 1998, the Company had
$342,566 and $845,833, respectively, in Polish bank accounts with substantially
all of such funds held as U.S. dollar denominated deposits. Substantially all of
the Company's remaining cash, including the net proceeds from the 11% Senior
Subordinate Convertible Discount Notes, is held in U.S. dollar accounts in U.S.
Banks.
33
<PAGE>
IFFC has also financed its operations through the use of credit
facilities, which credit facilities are described below.
On September 30, 1996, PKP entered into a revolving credit facility
with Amerbank totaling 100,000 zlotys (approximately $28,170 at September 30,
1998 exchange rates). The credit facility was renewed on May 27, 1998 and
matures on June 1, 1999. The credit facility bears interest at a floating rate.
The note is secured by the guarantee of IFFC. As of September 30, 1998 and
November 12, 1998 the balance of the credit facility was approximately $8,371
and $29,038, respectively.
As of January 28, 1993, IFFP entered into a revolving credit facility
with American Bank of Poland S.A. ("AmerBank") totaling 300,000 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) credit available was
decreased to 200,000 zlotys (approximately $56,980 at September 30, 1998
exchange rates), and (ii) in March 1997, the credit facility was further amended
to 100,000 zlotys (approximately $28,170 at September 30, 1998 exchange rates).
In April 1998, the credit facility was renewed under the same terms and
conditions for an additional year. As of September 30, 1998 and November 12,
1998, there was $0 and $28,488 outstanding on the credit facility.
34
<PAGE>
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 matured on August 19, 1998.
The credit facility was renewed for six months under the same terms and
conditions.
On August 12, 1997, the Company executed two credit agreements with the
American Bank in Poland ("Amerbank"). The first credit facility was in the
amount of $950,000. The purpose of this facility was to consolidate existing
debt owed to Amerbank totaling $300,000 with existing debt owed to Bank Handlowy
of $650,000. Pursuant to the terms of the new loan, interest is payable monthly
at the prevailing one month LIBOR rate plus 2.75%. This rate approximates 8.5%
as of May 12, 1998. Commencing in March 1998, the loan is to be repaid in
monthly installments of $32,000 for twenty nine months with a balloon payment of
$22,000 due at maturity (August 12, 2000). The loan is secured by all existing
restaurant assets and the guarantee of IFFC. The balance of this credit facility
as of September 30, 1998 and November 10, 1998 was $726,000 and $694,000,
respectively.
The second credit agreement was a development loan in the principal
amount of $1,500,000. The purpose of this loan was to provide partial credit for
the development of new Burger King restaurants. Borrowings under this credit
facility were to be made until August 1999 and were to be secured by: (i) fixed
assets of each new restaurant financed; and (ii) a guarantee of IFFC. The loan
was scheduled to be repaid in thirty five equal installments of $42,000 starting
in September 1999 with a balloon payment of $30,000 due at maturity (August 12,
2002). Interest was to be paid monthly at the prevailing one month LIBOR rate
plus 2.5%. According to the terms of the agreement, the proceeds of the loan
could be used to finance up to fifty percent (50%) of the costs of furnishing
and commencing operation of Burger King restaurants operated by IFFP. No
advances were made on this facility and it was canceled in favor of a new credit
facility as described below.
On April 2, 1998, PKP entered into a $300,000 development loan with The
American Bank in Poland ("Amerbank") for the development of its Domino's stores.
Borrowings under this credit facility may be made until December 26, 1998 and
are secured by: (i) fixed assets of each new restaurant financed; and (ii) a
guarantee of IFFC. The loan is required to be repaid in ten equal quarterly
installments of $30,000 starting on December 26, 1998 with a final payment due
at maturity (March 26, 2001). Interest is paid monthly at the prevailing one
month LIBOR rate plus 3-1/8%. This rate approximates 8.75% as of August 12,
1998. According to the terms of the agreement, the proceeds of the loan could be
used to finance up to fifty percent (50%) of the costs of furnishing and
commencing operation of Domino's stores operated by PKP. As of September 30,
1998 and November 12, 1998, approximately $275,023 was outstanding on the
facility.
On June 19, 1998, a development loan in the principal amount of
$1,300,000 was executed with Amerbank for IFFP. The purpose of this loan is to
provide partial credit for the development of new Burger King restaurants.
Borrowings under this credit facility are to be made until June 18, 2000 and are
secured by: (i) fixed assets of each new restaurant financed; and (ii) a
guarantee of IFFC. The loan is scheduled to be repaid in thirty five equal
installments of $36,111 starting in June 2000 with a final payment of $36,115
due at maturity (May 18, 2003). Interest is to be paid monthly at the prevailing
one month LIBOR rate plus 2.5%. According to the terms of the agreement, the
proceeds of the loan are be used to finance up to fifty percent (50%) of the
costs of furnishing and commencing operation of Burger King restaurants operated
by IFFP. On October 1, 1998, the company executed an amendment to this facility
with Amerbank. The amendment increased the borrowing limit to $1,500,000. The
scheduled loan payments are as follows: thirty five equal installments of
$41,666 starting in June 2000 with a final payment due of $41,690 due at
maturity on May 18, 2003. As of September 30, 1998 and November 10, 1998,
$1,300,000 and $1,500,000 was outstanding on this credit facility.
On December 28, 1995, IFFC increased its equity interest in IFFP from
80% to 85% by purchasing from the minority shareholder 5% (25% of the minority
holdings) of the outstanding capital stock of IFFP in exchange for a $500,000
non-interest bearing obligation was paid in full in June 1997. On September 4,
1998, the Company purchased the remaining 15% of the outstanding capital stock
of IFFP from the minority shareholder in exchange for $1,500,000 in cash, plus
expenses associated with the purchase.
35
<PAGE>
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The accounts of IFFC's Polish subsidiaries are maintained using the
Polish zloty.
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. At September 30, 1998 and November 12, 1998, the exchange rates were
3.55 and 3.44 zlotys per dollar, respectively.
IFFC's restaurant and store 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 years ended December 31, 1996 and 1997, the rates of inflation
and devaluation improved. For the years ended December 31, 1993, 1994, 1995,
1996, and 1997 the annual inflation rate in Poland was 35%, 32%, 21.6%, 19.5%,
and 13.0% respectively, and as of December 31, 1993, 1994, 1995, 1996, and 1997
the exchange rate was 2.134, 2.437, 2.468, 2.872, and 3.514 zlotys per dollar,
respectively. Payment of interest and principal on the 9% Convertible
Subordinate Debentures, 11% Convertible Senior Subordinated Discount Notes and
payment of franchise fees to BKC and DPI for each restaurant and store 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.
YEAR 2000 COMPUTER ISSUE
The SEC has issued Staff Legal Bulletin No. 5 (CF/IM) stating that
public operating companies should consider whether there will be any anticipated
costs, problems and uncertainties associated with the Year 2000 issue, which
affects many existing computer programs that use only two digits to identify a
year in the date field. The Company anticipates that its business operations
will electronically interact with third parties very minimally, if at all, and
the issues raised by Staff Legal Bulletin No. 5 are not applicable in any
material way to the Company's business or operations.
The Company and its operating systems are currently Year 2000 compliant
and the Company intends that any computer systems that the Company may purchase
or lease that are incident to the Company's business will have already addressed
the Year 2000 issue. However, the Company has not fully assessed the impact of
the Year 2000 issue on third parties with whom the Company has material
relationships. The Company is currently formulating a contingency plan to
address the Year 2000 issue with respect to its material third party
relationships.
36
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
Polish Fiscal Authority Disputes
As of July 1995, IFFP likely became 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") was a modern system, the Cash Register System could not
be modified. IFFP has replaced the system with a new Siemen's system which
complies with Polish regulations. As a penalty for noncompliance, Polish tax
authorities may disallow certain value added tax deductions for July and August
1995. Additionally, penalties and interest may be imposed on these disallowed
deductions. IFFP believes that its potential exposure is approximately $400,000,
which amount was accounted for in its 1997 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 Minister's ruling.
Other Litigation
The Company is not a party to any litigation or governmental
proceedings that management believes would result in any judgments or fines that
would have a material adverse effect on the Company.
37
<PAGE>
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The Company's Annual Shareholders' Meeting was held on September 10, 1998.
At the Annual Meeting, the Company's shareholders were asked to consider and
vote upon the following matters:
The election of five members to the Company's Board of
Directors to serve until the Company's 1999 Annual Meeting of
Shareholders or until their successors are duly elected and
qualified; and
To consider and vote upon a proposal to increase the number of
authorized shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), from 100,000,000 to
200,000,000 shares and to increase the number of authorized
shares of the Company's preferred stock, par value $.01 per
share (the "preferred Stock"), from 1,000,000 to 2,000,000
shares by amending the Company's Articles of Incorporation.
The following five members of the Company's Board of Directors were duly
elected,
<TABLE>
<CAPTION>
Director Votes for Votes withheld
---------------------- ------------ --------------
<S> <C> <C>
Mitchell Rubinson 43,497,927 21,325
Larry H. Schatz 43,497,927 21,325
Michael Welch 43,497,927 21,325
James F. Martin 43,497,927 21,325
Dr. Mark Rabinowitz 43,497,927 21,325
</TABLE>
The results of the vote on the Company's proposal to increase the number of
authorized shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), from 100,000,000 to 200,000,000 shares and to increase the
number of authorized shares of the Company's preferred stock, par value $.01 per
share (the "preferred Stock"), from 1,000,000 to 2,000,000 shares by amending
the Company's Articles of Incorporation, were as follows,
<TABLE>
<CAPTION>
Votes for Votes against Abstentions
--------- ------------- -----------
<S> <C> <C>
40,286,011 62,729 1,642
</TABLE>
38
<PAGE>
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: November 13, 1998 By: /s/ Mitchell Rubinson
---------------------------------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
DATE: November 13, 1998 By: /s/ James Martin
---------------------------------------------
James Martin, Chief Financial Officer
(Principal Financial and Accounting Officer)
39
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,099,895
<SECURITIES> 0
<RECEIVABLES> 563,063
<ALLOWANCES> 0
<INVENTORY> 567,493
<CURRENT-ASSETS> 15,107,243
<PP&E> 14,845,181
<DEPRECIATION> (5,326,030)
<TOTAL-ASSETS> 30,818,368
<CURRENT-LIABILITIES> 3,920,833
<BONDS> 24,791,228
0
330
<COMMON> 447,917
<OTHER-SE> (1,138,964)
<TOTAL-LIABILITY-AND-EQUITY> 30,818,368
<SALES> 5,705,371
<TOTAL-REVENUES> 5,756,243
<CGS> 5,787,118
<TOTAL-COSTS> 5,787,118
<OTHER-EXPENSES> 1,230,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,189,941
<INCOME-PRETAX> (3,451,208)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,451,208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,451,208)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
