U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of
the Exchange Act
For the transition period from ____________ to ____________.
Commission file number 0-20203 and 1-11386
INTERNATIONAL FAST FOOD CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 65-0302338
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
------------------------------------------------
(Address of Principal Executive Office)
(305) 531-5800
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.01
per share as of May 11, 1998 was 44,641,247.
Traditional Small Business Disclosure Format: Yes [x] No [ ]
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM. 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and December 31,
1997 2 - 3
Consolidated Statements of Operations
for the Three Months Ended March 31,
1998 and 1997 4
Consolidated Statements of
Shareholders' Equity for the Three
Months Ended March 31, 1998 5
Consolidated Statements of Cash Flows
for the Three Months Ended March 31,
1998 and 1997 6 - 7
Notes to Consolidated Financial
Statements 8 - 22
ITEM. 2 Management's Discussion and Analysis
or Plan of Operation 23 - 35
PART II. OTHER INFORMATION
- ---------------------------
ITEM. 2 Legal Proceedings 36
ITEM. 6 Exhibits and Reports on Form 8K 37
SIGNATURES
1
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
------
March 31, December 31,
1998 1997
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 17,908,174 $ 18,642,335
Restricted cash 999,990 999,990
Receivables 195,595 101,528
Inventories 369,427 372,599
Prepaid expenses 283,538 130,711
------------ -----------
Total Current Assets 19,756,724 20,247,163
------------ -----------
FURNITURE, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, NET 6,497,068 5,959,378
DEFERRED DEBENTURE ISSUANCE COSTS,
NET OF ACCUMULATED AMORTIZATION
OF $165,724 AND $157,410,
RESPECTIVELY 266,601 274,915
DEFERRED ISSUANCE COSTS OF 11% CONVERTIBLE
SENIOR SUBORDINATED DISCOUNT NOTES
NET OF ACCUMULATED AMORTIZATION
OF $103,735 AND $41,049,
RESPECTIVELY 2,385,905 2,446,869
OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION OF $188,539 AND $199,484
RESPECTIVELY 330,684 333,533
BURGER DEVELOPMENT RIGHTS,
NET OF ACCUMULATED AMORTIZATION
OF $108,108 AND $81,081,
RESPECTIVELY 891,892 918,919
DOMINO'S DEVELOPMENT RIGHTS,
NET OF ACCUMULATED AMORTIZATION
OF $23,313 AND $15,542,
RESPECTIVELY 165,790 173,561
------------ -----------
Total Assets $ 30,294,664 $ 30,354,338
============ ===========
See Accompanying Notes
2
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1998 1997
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 881,268 $ 581,555
Accrued interest payable 85,623 17,911
Other accrued expenses 801,714 788,412
Current portion of bank credit
facilities payable 1,383,000 1,349,995
------------ ------------
Total Current Liabilities 3,151,605 2,737,873
11% CONVERTIBLE SENIOR SUBORDINATED
DISCOUNT NOTES DUE OCTOBER 31, 2007 20,889,680 20,354,680
LONG TERM BANK CREDIT FACILITIES 534,000 630,000
9% SUBORDINATED CONVERTIBLE
DEBENTURES, DUE DECEMBER 15, 2007 2,756,000 2,756,000
------------ ------------
Total Liabilities 27,331,285 26,478,553
------------ ------------
DEFERRED CREDIT 1,000,000 1,000,000
------------ ------------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED SUBSIDIARY 89,472 115,294
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value,
1,000,000 shares authorized;
33,450 and 33,450 shares issued
and outstanding, respectively (liquidation
preference of $3,345,000) 334 334
Common Stock, $.01 par value,
100,000,000 shares authorized;
44,641,247 and 44,641,247 shares
issued and outstanding, respectively 446,413 446,413
Additional paid-in capital 17,691,542 17,691,542
Accumulated deficit (16,264,382) (15,377,798)
------------ ------------
Total Shareholders' Equity 1,873,907 2,760,491
------------ ------------
Total Liabilities and
Shareholders' Equity $ 30,294,664 $ 30,354,338
============ ============
See Accompanying Notes
3
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
------------------------------
1998 1997
------------ ------------
REVENUES:
Restaurant sales $ 1,786,120 $ 1,358,610
Other operating, net 18,681 28,864
------------ ------------
Total Revenue 1,804,801 1,387,474
FOOD AND PACKAGING COSTS 696,524 568,943
------------ ------------
GROSS PROFIT 1,108,277 818,531
RESTAURANT OPERATING EXPENSES:
Payroll and related costs 325,366 216,852
Occupancy and other operating expenses 505,897 365,068
Depreciation and amortization 206,740 223,487
------------ ------------
Total Restaurant Operating
Expenses 1,038,003 805,407
------------ ------------
70,274 13,124
------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES 534,411 492,510
OTHER INCOME (EXPENSES):
Interest and other income 277,745 39,671
Interest expense, including
amortization of debenture
issuance costs ( 705,951) ( 105,547)
Gain on settlement of litigation,
net of applicable costs - 1,327,070
Foreign currency exchange loss (20,063) (23,234)
------------ ------------
Total other income (expenses) (448,269) 1,237,960
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST (912,406) 758,574
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED SUBSIDIARY 25,822 71,252
------------ ------------
NET INCOME (LOSS) $ (886,584) $ 829,826
============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (.02) $ .07
============ ============
Diluted $ (.02) $ .06
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 44,641,247 11,631,201
============ ============
Fully diluted 44,641,247 15,855,436
============ ============
See Accompanying Notes
4
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 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
Net loss for the period - - - - - (886,584) (886,584)
---------- -------- -------- ------- ------------ ------------ ------------
Balances,
March 31, 1998 44,641,247 $446,413 33,450 $ 334 $ 17,691,542 $(16,264,382) $ 1,873,907
========== ======== ======== ======= ============ ============= ============
</TABLE>
See Accompanying Notes
5
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (886,584) $ 829,826
Adjustment to reconcile net income
(loss) to net cash provided by
(used in)operating activities:
Amortization and depreciation of
furniture, equipment, leasehold
improvements and other assets 249,852 223,487
Amortization of debt discount
and issuance costs 604,278 8,314
Minority interest in losses of
subsidiary (25,822) (71,252)
Other operating items (11,942) 40,115
Changes in operating assets and
liabilities:
Receivables (94,067) (11,037)
Inventories 3,172 41,268
Prepaid expenses (152,827) (5,618)
Accounts payable and
accrued expenses 380,727 112,813
------------ ------------
Net cash provided by
operating activities 66,787 1,167,916
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Decrease in restricted cash - 26,422
Payments for furniture, equipment
and leasehold improvements, net (752,744) (45,039)
Refund of franchise fees 30,000
Changes in other assets, net 2,849 1,194
------------ ------------
Net cash (used in) provided by
investing activities (749,895) 12,577
------------ ------------
See Accompanying Notes
6
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
Three Months Ended March 31,
------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from (to) Affiliate, net - (25,696)
Repayments of bank credit
facilities (62,995) (241,500)
Increase in Payable to Litigation
Funding - 3,227,015
Net Proceeds from issuance of
Convertible promissory notes - 500,000
------------ ------------
Net cash (used in) provided by
financing activities (62,995) 3,459,819
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 11,942 (8,967)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (734,161) 4,631,345
BEGINNING CASH AND CASH EQUIVALENTS 18,642,335 194,269
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 17,908,174 $ 4,825,614
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 34,321 $ 36,248
============ ============
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING ACTIVITIES:
Quarter Ended March 31, 1998:
None
Quarter Ended March 31, 1997:
Issuance of 32,996 shares of Common Stock upon the exchange of 990
shares of Preferred Stock.
Issuance of 2,000,000 shares of Common Stock in payment of $200,000 for
legal fees.
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"). The Company currently operates eight Burger King
restaurants and eight Domino's Stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned (85%)
Polish subsidiary, International Fast Food Polska, Sp. zo.o. ("IFFP"), a limited
liability company, and IFFP's two wholly-owned Polish limited liability
companies. 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
eight 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 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 three months ended March 31, 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. 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 March 31, 1998 and 1997, the exchange rate was 3.432 and 3.076
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 March 31, 1998, IFFC had
working capital of approximately $16,605,119 and Cash and Cash Equivalents of
$17,908,174. IFFC's working capital and cash position were significantly
improved 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. 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 April 30, 1999, 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.
NET (LOSS) INCOME PER COMMON SHARE - The net (loss) income 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 income per common share amount reported for the
three months ended March 31, 1997. The basic net (loss) income per common share
in the accompanying statements of operations is based upon the net (loss) income
after preferred dividend requirements of $50,175 and $55,875 in 1998 and 1997,
respectively, divided by the weighted average number of shares outstanding
during each period. Diluted per share data for the three months ended March 31,
1998 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. Diluted net income per share for the three months ended
March 31, 1997 is based on net income for the period adjusted for the interest
expense on the 9% Subordinated Convertible Debentures and the 8% Convertible
Promissory Notes divided by the weighted average number of Common shares
outstanding after giving effect to dilutive warrants, the shares that would be
issuable on the assumed conversion of preferred stock as well as the shares that
would be issuable on the assumed conversion of the 9% Subordinated Convertible
Debentures and the 8% Convertible Promissory Notes.
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 March 31, 1998, the Company had a $999,990 certificate of deposit
hypothecated to an outstanding line of credit with Totalbank.
4. BANK CREDIT FACILITIES:
Bank credit facilities at March 31, 1998 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Amerbank in Poland, S.A., IFFP overdraft
credit line, variable rate approximately
equal to prime, expires March 1, 1999 $ 0
Amerbank, IFFP line of credit of $950,000
payable in twenty nine monthly installments
of $32,000 commencing on March 31, 1998,
interest payable monthly at 2.75% above LIBOR,
$22,000 due at maturity on August 12, 2000. 918,000
* Amerbank IFFP revolving credit facility, interest
is payable monthly at 2.50% above LIBOR, $1,500,000
maximum credit until August 1999, payable in thirty
five monthly installments thereafter of $42,000
with final payment of $30,000 due at maturity on August 12, 2002. 0
Totalbank IFFC line of credit of $999,000
payable in full on May 19, 1998,
interest at 6.5% payable quarterly
collateralized by certificates of
deposit in the amount $999,990 999,000
------------
Total Debt 1,917,000
Less: Current Maturities 1,383,000
------------
Long Term Debt $ 534,000
============
</TABLE>
*The Amerbank revolving facility for $1,500,000 had not been drawn upon as of
March 31, 1998.
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 March 31, 1998, the notes are comprised as follows:
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 ( 6,646,320)
-----------
Balance at March 31, 1998 $20,889,680
===========
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 :
12 Months Beginning Closing Price
------------------- -------------
October 31, 1999 $2.80
October 31, 2000 $3.25
The Company is 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. In the event a
registration statement is not declared effective by such date, the denominator
of the Conversion Ratio will be decreased by $.15 from $.70. If such
registration statement is declared effective but, subject to certain exceptions,
thereafter ceases to be effective, then IFFC is obligated to pay certain
liquidated damages to the holders of the Notes ranging from 1/2% to a maximum of
5.0% of the principal balance of such Notes, depending upon the length of the
period of time the registration statement is not effective.
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;
13
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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
three months ended March 31, 1998 is as follows:
Outstanding at beginning of period 570,000
Granted 100,000
Exercised -
Expired -
---------
Outstanding at end of period 670,000
=========
Exercisable at end of period 256,000
=========
Price range of options outstanding
at end of period $ .40
=========
Available for grant at end of period 1,330,000
=========
In July 1997, all options outstanding were repriced to $.40,
respectively, which was equivalent to the market price of the Common Stock on
such dates.
During the three months ended March 31, 1997, 32,996 shares of Common
Stock were issued upon exchange of 990 shares of Preferred Stock.
14
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At March 31, 1998, IFFC had reserved the following shares of Common
Stock for issuance:
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 1,115,000
Warrants to purchase 50,000 shares of
Common Stock at an exercise price of
$.2831 per share 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 43,117,178
==========
15
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. 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 the date hereof,
construction has commenced on three new restuarants.
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.
17
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
On January 23, 1998, the Company entered into a five year, project
management agreement with PMI Polska, Sp. z o.o. ("PMI"). Under the terms of the
agreement, PMI's responsibilities include the procurement of architects,
inspectors, engineers and contractors; the supervision of each during the
development of the new Burger King restaurants; as well as overall supervision
of each site. Under the terms of the agreement, PMI is to be paid $13,500 for
each of the initial ten (10) restaurant sites it supervises and $6,850 for each
thereafter. The fees for each restaurant site are paid over six months. PMI's
out of pocket costs are capped at 1,350 British pounds per site (approximately
$2,275 at March 31, 1998 exchange rates).
On January 30, 1998, IFFP entered into three (3), twenty (20) year
lease agreements with BP Poland, Sp. z o.o. ("BP") for purposes of constructing
three Burger King restaurants. Two of the three restaurants will be constructed
in the Southern region of Poland; and the third will be constructed in the
Warsaw region. All three sites will be built adjacent to BP gas stations. Under
the terms of the respective lease agreements, the Company's annual rental
payments for each lease is $30,000 ("minimum rent") or 5.0% of its net sales,
whichever is greater. The minimum rent payment is adjusted each year to
represent 75% of the previous year's total rent paid. Each lease contains two
(2), ten (10) year options, exercisable by IFFP at its sole and absolute
discretion, to renew under the same terms and conditions as the underlying
lease. Each lease grants IFFP right of first refusal on the right to purchase
the property from BP.
On March 1, 1998, the Company entered into an employment agreement with
Ian Scattergood. Mr. Scattergood was formerly Director of Development for Burger
King Corporation's European, Middle East and African territories where he served
for eleven years. Mr. Scattergood's employment agreement provides that he will
serve as IFFP's Director of Development for an initial term of one (1) year,
which the Company may extend for up to an additional two (2) years. His annual
salary for the first year is $105,000 plus a certain performance bonus. Mr.
Scattergood is to receive an automobile allowance of $500.00 per month and a
monthly housing allowance of $1,500. Additionally, under the terms of the
18
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
employment agreement, Mr. Scattergood shall be eligible to receive stock option
grants under the Company's Stock Option Plans in the discretion of the Company's
Board of Directors or Option Committees. The Company granted Mr. Scattergood a
stock option to acquire 100,000 shares of the Company's Common Stock at an
exercise price of $.40 per share equal to the current price of the Common Stock
on the date of the grant, such options to be exercisable in whole or in part and
cumulatively according to the following schedule: (i) twenty percent (20%) one
(1) year after the effective date of the employment agreement; (ii) sixty
percent (60%) two (2) years after the effective date of the employment
agreement; and (iii) one hundred percent (100%) three (3) years after the
effective date of the employment agreement. Mr. Scattergood shall be entitled to
three (3) weeks of paid vacation during each year of his employment. Mr.
Scattergood employment agreement provides for a payment of $20,000 in the event
his employment is terminated by reason of his death or disability and, in the
event his employment is terminated without cause, Mr. Scattergood is entitled to
a severance payment as follows: if the termination occurs (i) on or prior to
February 28, 1999, the severance amount will be $20,000. Mr. Scattergood's
employment agreement does not provide for a severance payment in the event his
employment is terminated for cause. Mr. Scattergood's employment agreement
requires that he not compete or engage in any business competitive with the
Company for the term of the agreement and for two (2) years thereafter.
On March 31, 1998, the Company commenced construction on its first
development site with Dupont-Conoco. The site is adjacent to an existing Conoco
Jet petrol station. The new restaurant will be located in the town of
Mikolow,which is in the Southern region of Poland. The restaurant is a standard
Burger King design with drive through facilities and will have approximately 80
seats. The Company estimates the total cost of the restaurant to approximate
$800,000 which costs include the road works, building, furniture package,
equipment, franchise fees and other pre-opening costs. The restaurant is
expected to be open in June 1998.
In March 1998, PKP opened its sixth and seventh Domino's stores in
Warsaw. The sixth Domino's store cost approximately $135,000 which costs include
leasehold improvements, equipment, furniture and fixtures, franchise fees and
other pre-opening costs. The store consists of approximately 100 square meters
and annual lease payments, excluding electricity, are approximately $6,700.
The lease was executed in January 1998 between PKP and the Municipality of
Warsaw. The lease is for an unlimited period of time, however, either party may
terminate the lease upon three months written notice to the other party. In the
event that the Municipality terminates the lease, PKP is entitled to recover its
costs, including leasehold improvements, net of depreciation.
PKP opened its seventh Domino's store which includes a new Domino's
approved training facility and cost approximately $141,000 which costs include
leasehold improvements, equipment, furniture and fixtures, franchise fees and
other pre-opening costs. The store consists of approximately 200 square meters
including a 70 square meter training facility. Annual lease payments, excluding
electricity, are approximately 23,574 zlotys (approximately $6,900 at March
31, 1998 exchange rates). The lease was executed in November 1997 between PKP
and the Municipality of Warsaw. The lease is for a ten year term.
On February 4, 1998, PKP entered into a lease for an unlimited period
of time with the Municipality of Modlinska, Warsaw for its eighth Domino's store
site consisting of approximately 100 square meters. The lease may be terminated
by PKP at any time upon three months' notice. The Municipality of Modlinksa,
Warsaw may terminate the lease at any time upon three months' notice. In the
event the Municipality of Modlinska, Warsaw terminates the lease, PKP is
entitled to recover its costs, including leasehold improvements, net of
depreciation. Annual lease payments, excluding utility charges are approximately
52,500 zlotys (approximately $15,200 at March 31, 1998 exchange rates). The
store was opened in April (See "Subsequent Events" below).
19
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On March 20, 1998, PKP entered into a lease for an unlimited period of
time with the Municipality of Bielany, Warsaw for a Domino's store site
consisting of approximately 137 square meters. Annual lease payments, excluding
utility charges are approximately 34,500 zlotys (or approximately $10,000 at
March 31, 1998 exchange rates). The Company paid the Municipality of Bielany
$25,000 in key money to acquire the site. The lease may be terminated by either
party at any time upon three months' notice. In the event the Municipality of
Bielany, Warsaw terminates the lease, PKP is entitled to recover its costs,
including key money paid, leasehold improvements, net of depreciation. The store
is expected to be open in June.
10. 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:
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
===========
20
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
At March 31, 1997, the payable to Litigation Funding was comprised as
follows:
Portion of net settlement proceeds due to
Litigation Funding $ 2,477,014
Reimbursement of legal fees and costs paid
by Litigation funding 750,001
-----------
Balance payable to Litigation Funding $ 3,227,015
===========
11. 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 PKP owns the
individual store franchises for Domino's Pizza stores and a Domino's approved
commissary 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.
Three months ended March 31,
----------------------------
1998 1997
Total revenues $1,804,801 $1,673,470
Net (loss) income (886,584) 609,529
Basic net (loss) income per share (.02) .05
Diluted net (loss) income per share (.02) .04
12. 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. IFFP is now in compliance with the tax law using
a parallel cash register system but was unable to modify and/or replace its Cash
Register System before July 1995. As a penalty for noncompliance, Polish tax
21
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. Although
IFFP's NCR Cash Register System (the "Cash Register System") is a modern system,
the Cash Register System cannot be modified. IFFP is currently in the process of
replacing the system with a new Siemen's system which complies with Polish
regulations. The Company has installed the new system in three of the eight
restaurants and expects to install the new system in the remaining five
restaurants during the second quarter of 1998. IFFP believes this new cash
register system will cost approximately $200,000 for the existing eight
restaurants.
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)
13. SUBSEQUENT EVENTS:
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 store financed; and (ii) the
guarantee of IFFC. The loan shall be paid in ten equal quarterly installments of
$30,000 commencing 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
3.0%. This rate approximates 8.75% as of May 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 May 12, 1998, approximately $102,470 was
outstanding on the facility.
On April 8, 1998, PKP entered into a new ten year lease with Industrial
Park Estate Sp. z o.o. for approximately 800 square meters of warehouse space to
be used for a new Domino's Commissary. Annual lease payments are $57,600 which
excludes the cost of electricity. Monthly lease payments commence on June 1,
1998 at $3,000 per month; increasing in September 1998 to $4,800 per month for
the remaining life of the lease. The lease contains one five year renewal clause
at the option of PKP under the same terms and conditions. The site has been
approved for its intended use by DPI. The Company expects to service
approximately 60 Domino's stores from this facility and expects it to be
operational by June 1998. The Company will be relocating its existing commissary
equipment to the new facility and estimates the costs to be approximately
$85,000 including leasehold improvements, equipment, and furniture and fixtures.
On April 29, 1998, IFFP entered into a five year lease agreement with
Praga Centrum Department Store, Sp. z o.o. ("Praga") for approximately 468
square meters of office space for its corporate offices in Warsaw. The minimum
annual lease payments under the lease agreement are approximately $112,000. The
lease commencement date is June 1, 1998, and IFFP will receive a rental rebate
of $4,500 for June. In addition, Praga is required to build out all IFFP
leasehold improvements at its expense.
On May 8, 1998, the Company's symbol on the electronic bulletin board
was changed from FOOD to IFFC.
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, 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 March 31, 1998, IFFC had working capital of approximately
$16,605,119 and Cash and Cash Equivalents of $17,908,174. IFFC's working capital
and cash position were significantly improved by the settlement of its
litigation with Burger King Corporation ("BKC") in March 1997 coupled with the
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 April 30, 1999, 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 majority owned (85%) 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.
24
<PAGE>
IFFC currently operates eight Traditional Burger King Restaurants and
eight 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 January 23, 1998, the Company entered into a five year, project
management agreement with PMI Polska, Sp. z o.o. ("PMI"). Under the terms of the
agreement, PMI's responsibilities include the procurement of architects,
inspectors, engineers and contractors; the supervision of each during the
development of the new Burger King restaurants; as well as overall supervision
of each site. Under the terms of the agreement, PMI is to be paid $13,500 for
each of the initial ten (10) restaurant sites it supervises and $6,850 for each
thereafter. The fees for each restaurant site are paid over six months. PMI's
out of pocket costs are capped at 1,350 British pounds per site (approximately
$2,275 at March 31, 1998 exchange rates).
On January 30, 1998, IFFP entered into three (3), twenty (20) year
lease agreements with BP Poland, Sp. z o.o. ("BP") for purposes of constructing
three Burger King restaurants. Two of the three restaurants will be constructed
in the Southern region of Poland; and the third will be constructed in the
Warsaw region. All three sites will be built adjacent to BP gas stations. Under
the terms of the respective lease agreements, the Company's annual rental
payments for each lease is calculated at 4.5% of its net sales or $30,000
("minimum rent"), whichever is greater. The minimum rent payment is adjusted
each year to represent 75% of the previous year's total rent paid. Each lease
contains two (2), ten (10) year options, exercisable by IFFP at its sole and
absolute discretion, to renew under the same terms and conditions as the
underlying lease. Each lease grants IFFP right of first refusal on the right to
purchase the property from BP.
On March 1, 1998, the Company entered into an employment agreement with
Ian Scattergood. Mr. Scattergood was formerly Director of Development for Burger
King Corporation's European, Middle East and African territories where he served
for eleven years. Mr. Scattergood's employment agreement provides that he will
serve as IFFP's Director of Development for an initial term of one (1) year,
which the Company may extend for up to an additional two (2) years. His annual
salary for the first year is $105,000 plus a certain performance bonus. Mr.
Scattergood is to receive an automobile allowance of $500.00 per month and a
monthly housing allowance of $1,500. Additionally, under the terms of the
employment agreement, Mr. Scattergood shall be eligible to receive stock option
grants under the Company's Stock Option Plans in the discretion of the Company's
Board of Directors or Option Committees. The Company granted Mr. Scattergood a
stock option to acquire 100,000 shares of the Company's Common Stock at an
exercise price of $.40 per share equal to the current price of the Common Stock
on the date of the grant, such options to be exercisable in whole or in part and
cumulatively according to the following schedule: (i) twenty percent (20%) one
(1) year after the effective date of the employment agreement; (ii) sixty
percent (60%) two (2) years after the effective date of the employment
agreement; and (iii) one hundred percent (100%) three (3) after the effective
date of the employment agreement. Mr. Scattergood shall be entitled to three (3)
weeks of paid vacation each year during his employment. Mr. Scattergood
employment agreement provides for a payment of $20,000 in the event his
employment is terminated by reason of his death or disability and, in the event
his employment is terminated without cause, Mr. Scattergood is entitled to a
severance payment as follows: if the termination occurs (i) on or prior to
February 28, 1999, the severance amount will be $20,000. Mr. Scattergood's
employment agreement does not provide for a severance payment in the event his
employment is terminated for cause. Mr. Scattergood's employment agreement
requires that he not compete or engage in any business competitive with the
Company's business for the term of the agreement and for two (2) years
thereafter.
25
<PAGE>
On March 31, 1998, the Company commenced construction on its first
development site with Dupont-Conoco. The site is adjacent to an existing Conoco
Jet petrol station. The new restaurant will be located in the town of
Mikolow,which is in the Southern region of Poland. The restaurant is a standard
Burger King design with drive through facilities and will have approximately 80
seats. The Company estimates the total cost of the restaurant to approximate
$800,000 which costs include road works, building, furniture package, equipment,
franchise fees and other pre-opening costs. The restaurant is expected to be
open in June 1998.
On February 4, 1998, PKP entered into a lease for an unlimited period
of time with the Municipality of Modlinska, Warsaw for its eighth Domino's store
site consisting of approximately 100 square meters. The lease may be terminated
by PKP at any time upon three months' notice. The Municipality of Modlinksa,
Warsaw may terminate the lease at any time upon three months' notice. In the
event the Municipality of Modlinska, Warsaw terminates the lease, PKP is
entitled to recover its costs, including leasehold improvements, net of
depreciation. Annual lease payments, excluding utility charges are approximately
52,500 zlotys (approximately $15,200 at March 31, 1998 exchange rates). The
store was opened in April.
In March 1998, PKP opened its sixth and seventh Domino's stores in
Warsaw. The sixth Domino's store cost approximately $135,000 which costs include
leasehold improvements, equipment, furniture and fixtures, franchise fees and
other pre-opening costs. The store consists of approximately 100 square meters
and annual lease payments, excluding electricity, are approximately $6,700.00.
The lease was executed in January 1998 between PKP and the Municipality of
Warsaw. The lease is for an unlimited period of time, however, either party may
terminate the lease upon three months written notice to the other party. In the
event that the Municipality terminates the lease, PKP is entitled to recover its
costs, including leasehold improvements, net of depreciation.
The seventh Domino's store includes a new Domino's approved training
facility. This site cost approximately $141,000 which costs include leasehold
improvements, equipment, furniture and fixtures, franchise fees and other
pre-opening costs. The store consists of approximately 200 square meters
including a 70 square meter training facility. Annual lease payments, excluding
electricity, are approximately 23,574 zlotys (approximately $6,900 at March
31, 1998 exchange rates). The lease was executed in November 1997 between PKP
and the Municipality of Warsaw. The lease is for a ten year period.
On March 20, 1998, PKP entered into a lease for an unlimited period of
time with the Municipality of Bielany, Warsaw for a Domino's store site
consisting of approximately 137 square meters. Annual lease payments, excluding
utility charges are approximately 34,500 zlotys (or approximately $10,000 at
March 31, 1998 exchange rates). The Company paid the Municipality of Bielany
$25,000 in key money to acquire the site. The lease may be terminated by either
party at any time upon three months' notice. In the event the Municipality of
Bielany, Warsaw terminates the lease, PKP is entitled to recover its costs,
including key money paid, leasehold improvements, net of depreciation. The store
is expected to be open in June (See "Subsequent Events").
On May 8, 1998, the Company's symbol on the Electronic bulletin board
was changed from FOOD to IFFC.
26
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THREE MONTHS ENDED MARCH 31, 1998 VS THREE MONTHS ENDED MARCH 31, 1997
RESULTS OF OPERATIONS
Results of operations for the three months ended March 31, 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. KP owns the exclusive development rights and PKP owns the
franchises for Domino's pizza stores and commissary in Poland.
During the three months ended March 31, 1998, KP and PKP generated
$407,163 of store sales from their seven Domino's pizza stores and incurred Food
and Packaging Costs of $137,229, Payroll and Related Costs of $94,472, Occupancy
and Other Operating Expenses of $122,468 and Depreciation and Amortization of
$40,875. As a percentage of sales, Food and Packaging Costs were 33.7%, Payroll
and Related Costs were 23.2%, Occupancy and Other Operating Expenses were 30.1%
and Depreciation and Amortization were 10.0%. Since the acquisition of KP and
PKP were accounted for as a purchase, no amounts are included in the
accompanying financial statements for the three months ended March 31, 1997.
For the three months ended March 31, 1998 and March 31, 1997, IFFC
generated Restaurant Sales of $1,786,120 and $1,358,610, respectively which
includes sales of $407,163 for the Domino's Pizza stores in 1998. In U.S. dollar
and Polish zloty terms IFFC's Burger King Restaurant Sales increased by
approximately 1.5% and 18.4%, respectively, for the three months ended March 31,
1998 as compared to the three months ended March 31, 1997. The increase is
primarily attributable to the increase in the average check price per
transaction resulting from the Company's menu price increase implemented in
January 1998.
During the three months ended March 31, 1998, IFFC incurred Food and
Packaging Costs of $696,524, Payroll and Related Costs of $325,366, Occupancy
and Other Operating Expenses of $505,897 and Depreciation and Amortization
Expense of $206,740.
Food and Packaging Costs applicable to Burger King restaurants for the
three months ended March 31, 1998 and 1997 were 40.5% and 41.8% of Restaurant
Sales, respectively. The 1.3% decrease as a percentage of Restaurant Sales is
primarily attributable to improved product sourcing, coupled with an increase in
Restaurant Sales.
Payroll and Related Costs applicable to Burger King restaurants for the
three months ended March 31, 1998 and 1997 were 16.7% and 15.9% of Restaurant
Sales, respectively. The .8% increase as a percentage of Restaurant Sales
increased primarily as a result of an increase in managerial salaries at the
restaurant level in order to keep pace with the labor market.
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<PAGE>
Occupancy and Other Operating Expenses applicable to Burger King
restaurants for the three months ended March 31, 1998 and 1997 were 25.7% and
26.8% of Restaurant Sales, respectively. The .9% decrease as a percentage of
Restaurant Sales is primarily attributable to 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 12.0% and 16.4% in the three
months ended March 31, 1998 and 1997, respectively. The decrease as a percentage
of restaurant sales is primarily attributable to an increase in Restaurant Sales
coupled with the fully depreciated status of certain assets still in use.
General and Administrative Expenses for the three months ended March
31, 1998 (which includes $52,118 applicable to KP and PKP) and 1997 were 29.9%
and 36.3% of Restaurant Sales, respectively. The 6.4% decrease as a percentage
of Restaurant Sales is primarily attributable to decreased professional fees.
For the three months ended March 31, 1998, General and Administrative Expenses
were comprised of executive and office staff salaries and benefits ("Salary
Expense") $209,388; legal and professional fees, office rent, travel, telephone
and other corporate expenses ("Corporate Overhead Expense") $281,911, and
depreciation and amortization $43,112. For the three months ended March 31,
1997, General and Administrative Expense included Salary Expenses of $125,669;
Corporate Overhead Expenses of $358,527, and depreciation and amortization of
$8,314.
For the three months ended March 31, 1998 and 1997 Interest and Other Income was
comprised as follows:
Three Months Ended March 31,
----------------------------
1998 1997
---------- ----------
Interest income $ 272,257 $ 35,923
Management fee -0- 3,902
All other, net ( 5,488) ( 154)
---------- ----------
$ 277,745 $ 39,671
========== ==========
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Interest Expense is comprised as follows:
Three Months Ended March 31,
----------------------------
1998 1997
---------- ----------
Interest Expense on 9% Subordinated
Convertible Debentures $ 62,010 $ 62,010
Interest Expense on 8% Convertible
Promissory Notes - 7,290
Amortization of Debt
Issuance Costs 69,278 8,314
Accretion of discount on 11%
Convertible Senior Subordinated
Discount Notes 535,000 -
Interest Expense on Bank
Facilities 39,663 27,933
---------- ----------
Total $ 705,951 $ 104,547
========== ==========
Interest Expense exceeded Interest and Other Income by $428,206 and
$65,876 for the three months ended March 31, 1998 and 1997, respectively. The
primary reason for the increase for the three month period ended March 31, 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 $39,663 and $27,933 for
the three months ended March 31, 1998 and 1997, respectively. The $11,700
increase is attributable to IFFC's increase of borrowings under bank credit
facilities.
During the three months ended March 31, 1997, IFFC recorded a
non-recurring gain of $1,327,070, or $.11 per share of IFFC's Common Stock in
connection with the settlement of the BKC Litigation. See Note 10 of Notes To
Consolidated Financial Statements for the components included in the calculation
of the gain.
As a result of the foregoing, the three months ended March 31, 1998,
IFFC generated a net loss of $(886,584) or $(.02) per share of IFFC's Common
Stock compared to net income of $829,826, or $.07 per share of IFFC's Common
Stock for the three months ended March 31, 1997. During the three months ended
March 31, 1997, IFFC recognized a non-recurring gain of $1,327,070 or $.11 per
share of IFFC's Common Stock in connection with the settlement of the BKC
Litigation.
IFFC anticipates that it will continue to incur certain expenses in
connection with its disputes with the Polish Fiscal Authorities. See "Item 2.
Legal Proceedings - Polish Fiscal Authority Disputes" for a description of such
matters.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCESAND CAPITAL RESOURCESCAPITAL RESOURCESRESOURCES
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.
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.
30
<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.
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 March 31, 1998, the notes are comprised as follows:
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 ( 6,646,320)
-----------
Balance at March 31, 1998 $20,889,680
===========
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<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 :
12 Months Beginning Closing Sale Price
------------------- ------------------
October 31, 1999 $2.80
October 31, 2000 $3.25
The Company is 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. In the event a
registration statement is not declared effective by such date, the denominator
of the Conversion Ratio will be decreased by $.15 from $.70. If such
registration statement is declared effective but, subject to certain exceptions,
thereafter ceases to be effective, then IFFC is obligated to pay certain
liquidated damages to the holders of the Notes ranging from 1/2% to a maximum of
5.0% of the principal balance of such Notes, depending upon the length of the
period of time the registration statement is not effective.
32
<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 3.
Legal Proceedings - Polish Fiscal Authority Disputes" for a description of such
matters and IFFC's best estimates of the expenses IFFC anticipates incurring and
the timing of such expenses.
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.
33
<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 June 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 March 31, 1998 and May 12, 1998, the Company had $335,881 and
$247,810, 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 of the private placement is
held in U.S. dollar accounts in U.S.
Banks.
34
<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 $29,137 at March 31, 1998
exchange rates). The credit facility which matured on March 30, 1998, bore
interest at a monthly adjusted rate. The note was secured by the guarantee of
IFFC. The balance of the credit facility was paid in full on March 30, 1998. The
Company has applied to Amerbank for the renewal of this facility for an
additional year.
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
immediately decreased to 200,000 zlotys (approximately $58,275 at March 31, 1998
exchange rates), and (ii) in March 1997, the credit facility was further amended
to 100,000 zlotys (approximately $29,137 at March 31, 1998 exchange rates). The
credit facility matured on March 31, 1998. In April 1998, the credit facility
was renewed under the same terms and conditions for an additional year. As of
March 31, 1998 and May 12, 1998, the outstanding balance on the credit facility
was $0.00 and $29,582, respectively.
35
<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 is due on May 19, 1998.
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 March 31, 1998 and May 14, 1998 was $918,000 and $854,000, respectively.
The second credit agreement is a development loan in the principal
amount of $1,500,000. The purpose of this loan is to provide partial credit for
the development of new Burger King restaurants. Borrowings under this credit
facility may be made until August 1999 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 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 is 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 have been
made on this facility.
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 3.0%. This rate approximates 8.75% as of May 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 May 12, 1998, approximately
$102,470 was outstanding on the 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 due in full on December 28, 1996. The obligation
was paid in full in June 1997.
36
<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 March 31, 1998 and May 12, 1998, the exchange rate was 3.432 and
3.3805 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.
37
<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. IFFP is now in compliance with the tax law using
a parallel cash register system but was unable to modify and/or replace its Cash
Register System before July 1995. As a penalty for noncompliance, Polish tax
authorities may disallow certain 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. Although
IFFP's NCR Cash Register System (the "Cash Register System") is a modern system,
the Cash Register System cannot be modified. IFFP is currently in the process of
replacing the system with a new Siemen's system which complies with Polish
regulations. The Company has installed the new system in three of the eight
restaurants and expects to install the new system in the remaining five
restaurants during the second quarter of 1998. IFFP believes this new cash
register system will cost approximately $200,000 for the existing eight
restaurants.
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.
38
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
------- -----------
27.1 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter
ended on March 31, 1998:
(i) On January 9, 1998 the Company filed a Form 8-K in connection
with the change of accountants to Arthur Andersen LLP.
(ii) On January 13, 1998 the Company filed a Form 8-K/A in connection
with the change of accountants to Arthur Andersen LLP.
39
<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: May 15, 1998 By: /s/ Mitchell Rubinson
-----------------------------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
DATE: May 15, 1998 By: /s/ James Martin
-----------------------------------------
James Martin, Chief Financial Officer
(Principal Financial and Accounting Officer)
40
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 18,008,164
<SECURITIES> 0
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<CURRENT-ASSETS> 19,756,724
<PP&E> 11,018,581
<DEPRECIATION> 4,521,513
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0
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<NET-INCOME> (886,584)
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