SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
/ / Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ________________ to ________________.
Commission file number 0-20203 and 1-11386
INTERNATIONAL FAST FOOD CORPORATION
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(Name of Small Business Issuer in Its Charter)
Florida 65-0302338
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
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(Address of Principal Executive Offices) (Zip Code)
(305) 531-5800
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the
Securities Exchange Act of 1934:
Name of Each Exchange
Title of Each Class on Which Registered
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None
Securities registered pursuant to Section 12(g) of
the Securities Exchange Act of 1934:
Common Stock, par value $.01 per share
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(Title of Class)
Warrants
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Title Class
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Check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes /X/ No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
State registrant's revenues for its most recent fiscal year:
$6,083,011.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant on March 25, 1998, computed by reference to the
closing bid price ($.51) on that date: $7,163,838.
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share (the "IFFC Common Stock"), as of March 24, 1998, was
44,641,247.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Description of Business.
General
International Fast Food Corporation ("IFFC" or the "Company"), was
incorporated in December 1991 as a Florida corporation. In May 1992, IFFC
completed its initial public offering of approximately 1.5 million shares of
common stock priced at $5 per share. 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 believes that Burger King and Domino's Pizza are
recognized brand names in Poland. The Company currently operates eight Burger
King restaurants and seven Domino's Stores. The Burger King restaurants and the
majority of the Domino's Stores are similar to their respective U.S. versions
and are developed to the strict corporate standards set out in the respective
development agreements and franchise agreements.
The Company believes that its diversified revenue base, with sales in
both the hamburger and pizza segments, should provide more balanced growth than
a single concept franchise. In addition, with respect to menu, location and
services offered, the Company believes that Burger King dine-in services appeal
to a different customer segment than the delivery services offered by the
Domino's Stores. Due to the exclusive nature of the Company's franchise rights,
the Company believes that it will be able to strategically locate its Burger
King restaurants and Domino's Stores without adversely affecting sales at its
existing Burger King restaurants and Domino's Stores.
By October 1994, IFFC and International Fast Food Polska, Sp.z.o.o.,
the Company's majority owned (85%) Polish subsidiary ("IFFP"), had opened eight
Burger King restaurants in urban locations, including five in Warsaw, and had
created an organizational infrastructure to manage future growth. During 1994, a
dispute emerged between IFFC, IFFP, and Burger King Corporation ("BKC")
regarding BKC's logistical development support and other matters which resulted
in litigation between the parties in March 1995. In March 1997, IFFC, IFFP and
BKC settled the litigation. During the period from the beginning of the dispute
with BKC in 1994 until this settlement, IFFC and IFFP curtailed the Burger King
restaurant expansion and did not execute additional leases for new Burger King
restaurant sites. Pursuant to the settlement, BKC and the Company entered into a
new ten year development agreement (the "New BKC Development Agreement"),
whereby the Company is required to develop 45 additional Burger King restaurants
by September 30, 2007, and BKC agreed to pay the Company approximately $5.5
million in cash and forgiveness of debt in addition to certain spend-back and
incentive provisions to be retained by IFFP for the benefit of IFFP's marketing
fund. In addition, the parties agreed that if certain sales targets and
development deadlines were reached by September 30, 1999, BKC would reduce or
waive the $1.0 million development fee payable on that date.
On July 18, 1997, the Company acquired 100% of the outstanding common
stock of Krolewska Pizza Sp.zo.o. ("KP") and Pizza King Polska, Sp.zo.o.
("PKP"), two Polish limited liability companies, for nominal consideration and
assumption of all liabilities, including the liabilities of KP to the Company
under a $500,000 promissory note. KP and PKP own the exclusive development
rights and franchises, respectively, for Domino's pizza stores in Poland. PKP
operates seven Domino's Stores and a commissary in Warsaw, Poland.
Business Description--IFFP/Burger King
Under the New BKC Development Agreement, the Company must develop a
minimum of 45 Burger King restaurants by September 30, 2007. Subject to
negotiation of definitive agreements, the Company intends to develop a majority
of the new Burger King restaurants in conjunction with oil companies which are
presently expanding throughout Poland. The Company has executed a development
agreement with Statoil Polska ("Statoil") for twenty-two sites, and letters of
intent with British Petroleum ("BP") and Dupont-Conoco, to co-locate new Burger
King
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restaurants on selected service station properties. This agreement and the
letters of intent provide for the initial development of over 40 Burger King
restaurant locations, plus additional locations in the future. There can be no
assurance that the transactions contemplated by such agreement and letters of
intent will be consummated. The Company anticipates that the majority of the new
restaurants will be traditional free standing and attached type of drive-thru
restaurants with a seating capacity of up to 85 people. The Company is in
various stages of evaluating and/or receiving BKC approval for over 40 sites.
Presently, the Company has executed five leases, four leases with the oil
companies and one lease with a non oil company. The Company continues to explore
opportunities with others for the development of Burger King restaurants
throughout Poland.
IFFP is also supported by BKC through BKC's London-based office. BKC
may provide direct and indirect support to IFFP in areas including site
selection and construction review, operating systems and controls, marketing,
sourcing of food and equipment, distribution and training, and other operational
matters.
IFFP has established BKC-approved lines of supply for all major
ingredients used in its menu with substantially all of its inventory needs
sourced in Poland. The Company believes local sourcing is important because it
avoids expensive import duties and taxes. IFFP has entered into multi-year
supply contracts with its major suppliers of soft drinks, buns, meat patties and
condiment supplies. In addition, IFFP has entered into a long term agreement for
the distribution of its supplies to each of its restaurants throughout Poland.
The distributor has been the Company's comprehensive logistics and distribution
coordinator since 1994, providing state of the art inventory and cost controls
to complement IFFP's point of sale system which electronically disseminates
information on a daily basis, controls inventory levels and maintains
promotional, marketing and food preference information.
New BKC Development Agreement
On March 14, 1997, pursuant to the New BKC Development Agreement, IFFP
is required to open 45 Development Units prior to September 30, 2007. Each
traditional restaurant or drive-thru restaurant constitutes one Development Unit
and each kiosk constitutes a quarter of a Development Unit. The schedule for
IFFP's opening of the Development Units are as follows:
Number of
Development Units
To Be Opened
Time Period During Time Period
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From the present through September 30, 1998 3
October 1, 1998 through September 30, 1999 4
October 1, 1999 through September 30, 2000 4
October 1, 2000 through September 30, 2001 4
October 1, 2001 through September 30, 2002 5
October 1, 2002 through September 30, 2003 5
October 1, 2003 through September 30, 2004 5
October 1, 2004 through September 30, 2005 5
October 1, 2005 through September 30, 2006 5
October 1, 2006 through September 30, 2007 5
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Total units to be opened by September 30, 2007 45
There is no assurance that the Company will be able to fulfill its
commitments pursuant to the BKC Development Agreement.
Pursuant to the New BKC Development Agreement, IFFP is required to pay
BKC a $1,000,000 development fee unless IFFP 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 September 30, 1999. If the development
schedule has been achieved
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but gross sales are less than $11,000,000, but greater than $9,000,000, the
development fee will be $250,000. If the development fee is payable due to
failure to achieve the performance targets described above, IFFP, at its option,
may either pay the development fee or provide BKC with the written and binding
undertaking of Mr. Mitchell Rubinson that the Rubinson Group (as defined in the
Agreement) will completely divest themselves or itself of any interest in IFFP
and the Burger King restaurants opened or operated by IFFP in Poland within six
months of the date that the development fee payment is due but not paid.
Pursuant to the New BKC Development Agreement, the "Rubinson Group" has been
defined to include any entity of which Mr. Rubinson directly or indirectly owns
an aggregate interest of 10% or more of the legal or beneficial equity interest
and any parent, subsidiary or affiliate thereof. Mr. Rubinson has personally
guaranteed payment of the development fee.
For each restaurant opened, IFFP 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. Each such fee is payable not
later than 20 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 Burger
King trademarks. The annual royalty fee is 5% of gross sales, subject to certain
credits due to incentives which provide for sums to be retained by IFFP for the
benefit of its marketing fund. The restaurants must also contribute a monthly
advertising and promotion fee of 6% of gross sales, to be used for advertising,
sales promotion, and public relations. Payment of all amounts due to BKC is
guaranteed by IFFC.
BKC may terminate rights granted to IFFP under the New BKC Development
Agreement, including franchise approvals for restaurants not yet opened, for a
variety of possible defaults by IFFP, including, among others, failure to open
restaurants in accordance with the development schedule; failure to obtain BKC
site approval prior to the commencement of each restaurant's construction; and
failure to meet various operational, financial, and legal requirements,
including the maintenance of IFFP's net worth at $7,500,000 beginning on June 1,
1999. Upon termination of the New BKC Development Agreement, whether resulting
from default or expiration of its terms, BKC has the right to license others to
develop and operate Burger King restaurants in Poland, or to do so itself.
The New BKC Development Agreement requires IFFP to designate a
full-time Managing Director to be responsible for the restaurants to be
developed pursuant to the Agreement. Such Managing Director must be acceptable
to BKC. Leon Blumenthal, who has served as IFFC's Senior Vice President, Chief
Operating Officer, and Managing Director has been approved by BKC.
Specifically excluded from the scope of the New 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,
IFFP has the right of first refusal with the owners of such sites. If IFFP is
unable or unwilling to reach a mutually acceptable agreement, BKC or its
affiliates or designated third parties may do so. Other than pursuant to the New
BKC Development Agreement, IFFP and the Rubinson Group are restricted from
engaging in the fast food hamburger restaurant business.
Subject to certain exceptions, as long as IFFC is a principal of IFFP,
BKC has the right to review and consent to equity issuances by IFFC, such
consent not to 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.
The Company has obtained all required BKC, government and regulatory
approvals and permits for its first (eight) restaurants.
Burger King Restaurant System
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The Burger King restaurant system is one of the world's largest
restaurant systems, with approximately 9,640 restaurants currently located in
the United States and 56 foreign countries including extensive company-owned and
franchised operations in Europe. IFFC has no other affiliation or relationship
with BKC other than as provided for in the New BKC Development Agreement.
BKC has developed a restaurant format and operating system, which
includes a recognized design, decor and color scheme for restaurant buildings;
kitchen and dining room equipment and layout; service format; quality and
uniformity of products and services offered; procedures for inventory and
management control; and the Burger King marks, which include such trademarks,
services marks and other marks as BKC may authorize from time to time for use in
connection with Burger King restaurants. All Burger King restaurants are
required to be operated in accordance with BKC standards. Most Burger King
restaurants offer a substantially similar core menu, featuring flame-broiled
hamburgers, cheeseburgers, french fries, and soft drinks. Other menu items may
include salads, pastries, chicken sandwiches, fish sandwiches, ice cream
sundaes, milk shakes and breakfast menu items. The Company's restaurant's menu
has historically been more limited than the menus of the United States and many
European Burger King franchises. Sandwich menu items account for the most
significant amount of system-wide sales. Prices for the menu items are
determined by the Company and, accordingly, may vary from other Burger King
restaurants in other countries.
The Company's restaurant development strategy is to lease prominent
traditional restaurant sites in major Polish metropolitan areas. The Company has
executed a development agreement with Statoil for twenty-two sites, and letters
of intent with BP and Dupont-Conoco, to co-locate new Burger King restaurants on
selected service station properties. The Company is in various stages of
evaluating and/or receiving BKC approval for over 40 sites. Presently, the
Company has executed five leases, four leases with the oil companies and one
lease with a non oil company. The Company continues to explore opportunities
with others for the development of Burger King restaurants throughout Poland.
The Company considers restaurant location to be critical to its success
and has devoted and intends to continue to devote significant efforts to
locating and evaluating potential sites. The site selection process involves an
evaluation of a variety of factors, including demographics (such as population
density); specific site characteristics (such as visibility, accessibility and
traffic volume); proximity to activity centers (such as office or retail
shopping districts and hotel and office complexes); and potential competition in
the area. The Company's personnel inspect and approve a proposed site for each
restaurant and a detailed site package is prepared for BKC review and approval
prior to the execution of a lease. All sites are subject to the approval of BKC.
The opening of restaurants is contingent upon, among other things, locating
satisfactory sites, negotiating acceptable leases or similar rights to a site,
completing any necessary construction, and securing required government permits
and approvals.
The standard restaurant is a full-service restaurant consisting of a
kitchen/preparation area and ordering counter and customer seating area. The
design for a restaurant, which must comply with specified BKC standards, is
relatively flexible and may be located in an existing building or a specially
constructed free-standing building with varying floor plans and configurations.
The Company currently estimates that once space has been leased and made
available to the Company, approximately 120 days are required to complete
construction, obtain necessary licenses and approvals and open a restaurant. The
Company currently estimates the cost of opening a restaurant to be approximately
$450,000 to $1,000,000, including leasehold improvements, the initial franchise
fee, furniture, fixtures, and equipment, opening inventories and staff training
(this amount excludes the cost of land). Such estimates, however, vary depending
on the size and condition of a proposed restaurant and the extent of leasehold
improvements required.
Sources of Supply
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IFFP is substantially dependent upon BKC-approved suppliers for all of
its capital equipment (including furniture, fixtures and equipment), food
products and other supplies. Pursuant to the New BKC Development Agreement and
the standard franchise agreements, all of these supplies must be of a quality
and conform to specifications acceptable to BKC. IFFP currently obtains
substantially all of its supplies and food products from Polish sources.
Additionally, IFFP currently obtains its restaurant furniture and fixtures and
point of sale equipment in Poland and obtains its restaurant equipment and paper
products from BKC-approved sources in the United States and Europe. Shipments of
food and supplies are delivered directly to the Burger King restaurants. IFFP
maintains approximately a 7 to 30 day inventory of food products and supplies
for its Burger King restaurants.
The Company has entered into purchase agreements with its suppliers of
hamburger buns, meat and soft drinks and a distribution agreement.
Restaurant Operations and Personnel
The Company operates its restaurants under uniform standards set forth
in BKC's confidential operating manual, including specifications relating to
food quality and preparation, design and decor and day-to-day operations. The
Company believes that, while its operations are similar to those of other
European Burger King restaurants, its menu is more limited than those of other
European or United States Burger King restaurants. For instance, the Company
does not currently sell salads or breakfast menu items.
IFFP's Managing Director, Director of Operations and all key personnel
reside in Poland. They have significant involvement in managing the operations
of the Company's restaurants. As of December 31, 1997, IFFP employed 17
administrative personnel, 35 restaurant managers and assistant managers and 216
other full-time and part-time crew employees. IFFP's restaurant managers are
responsible for supervising the day-to-day operations of the restaurants,
including food preparation, customer relations, restaurant maintenance,
inventory and cost control and personnel relations. In addition, restaurant
managers are responsible for selecting and training new crew personnel, who
undergo on-the-job training.
IFFP utilizes BKC training techniques and manuals and solicits the
assistance and counsel of BKC personnel. IFFP is responsible, at its expense,
for the translation of BKC manuals into Polish and pays BKC for certain support
services relating to employee training in BKC facilities in Europe and the U.S.
In addition, IFFP operates its own training facility in Poland.
IFFP maintains financial, accounting and management controls for its
restaurants through the use of centralized accounting systems, detailed budgets
and computerized management information systems.
Advertising and Promotion
IFFP's franchise agreements with BKC provide that each franchised
restaurant must spend a certain percentage of its gross sales on advertising,
sales promotion, and public relations. The annual royalty fee due to BKC under
the New BKC Development Agreement is subject to certain incentive credits due
back to IFFP. The Company contributes these funds into a self-administered
marketing fund. All expenditures are based on a marketing plan created jointly
by the Company and BKC, except for local store marketing programs. In addition,
the fund reimburses the Company up to a certain amount for its marketing
manager.
Trademarks
IFFC is authorized to use such trademarks, service marks and such other
marks as BKC may authorize from time to time for use in connection with Burger
King restaurants (collectively, the "Burger King Marks"). BKC has applied for
and received trademark registrations in Poland for certain Burger King Marks
(the "Burger King" logo, the words "Burger King" and the word "Whopper"). Under
the terms of the New BKC Development Agreement
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and the individual franchise agreements, IFFC is required to assist in the
defense of any action relating to the right to use or the validity of the Burger
King Marks and to cooperate in the prosecution of any action to prevent the
infringement, imitation, illegal use or misuse of the Burger King Marks or the
Burger King System. BKC is obligated to bear the legal expenses and costs
incidental to IFFC's participation in any such action. However, BKC has made no
warranty or representation that the Burger King Marks will be available to IFFC
on an exclusive basis or at all.
Business Description--KP/Domino's Pizza
On July 14, 1997, IFFC purchased all the outstanding shares of KP and
PKP. PKP develops and operates Domino's Stores in Poland. KP has the exclusive
right to develop, operate and franchise to unrelated third parties
("Non-Affiliated Franchisees") Domino's stores in Poland pursuant to the New
Domino's Master Franchise Agreement executed in August 1997. KP has also entered
into a Commissary Agreement with Domino's Pizza International ("DPI") pursuant
to which KP has been granted the exclusive right to open and operate one or more
Commissaries for all Domino's stores in Poland for the term of the New Domino's
Master Franchise Agreement and any renewal term. Through PKP, the Company has
seven Domino's stores which began operations in March 1994, May 1994, August
1994, June 1997, December 1997 and two in March 1998, respectively.
The Company's seven existing Domino's stores are located in Warsaw and
managed by PKP. These stores feature carry-out services and delivery services to
all customers who can be reached in approximately 30 minutes. The stores also
provide limited customer seating.
Under the New Domino's Master Franchise Agreement, Domino's is required
to provide, on an ongoing basis, certain information and materials necessary to
allow KP to become familiar with the Domino's system and the methods used to
operate and manage its Domino's stores and its Commissary, including, without
limitation, plans and specifications for Domino's stores and Commissaries, site
selection criteria, advertising and marketing plans, methods and procedures for
the preparation, serving and delivery of food and beverages and control systems.
Such information is to be provided by Domino's to KP in the form of the Domino's
Operations Manual, memoranda or through consultations with Domino's staff
members.
In conjunction with its exclusive right to develop and franchise
Domino's stores in Poland, KP has the exclusive right to develop and operate the
Commissary from which all affiliated franchisees and Non-Affiliated Franchisees
in Poland purchase food and supplies. In January 1995, a 1,500 square foot,
full-service Commissary, located adjacent to one of KP's Domino's stores
commenced operations. KP has the right to develop additional Commissaries as
needed. KP conducts all of its purchasing, distribution and major food supply
preparation operations at or from the Commissary.
KP currently obtains substantially all of its supplies and food
products, including cheese, soft drinks and meats, from Polish sources. The
balance of KP's supplies and food products come from Europe and the U.S.
Under the New Domino's Master Franchise Agreement, the Company must
develop a minimum of 46 Domino's stores by December 31, 2003. The typical
Domino's store size is approximately 1,000 square feet and located in
a residential area with a high base of telephone installations.
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New Domino's Master Franchise Agreement and Standard Franchise Agreement
The relationship between KP and Domino's is governed principally by the
New Domino's Master Franchise Agreement and six standard franchise agreements
(the "Standard Franchise Agreements"). Pursuant to the New Domino's Master
Franchise Agreement, the Company has the exclusive right to develop, operate and
franchise Domino's stores in Poland, and KP is required to open 46 Domino's
stores prior to December 31, 2003. The schedule for KP's opening of new Domino's
stores is as follows:
Number of Stores
To Be Opened
Time Period During Time Period
August 1997 through December 31, 1997 1
January 1, 1998 through December 31, 1998 5
January 1, 1999 through December 31, 1999 6
January 1, 2000 through December 31, 2000 7
January 1, 2001 through December 31, 2001 8
January 1, 2002 through December 31, 2002 9
January 1, 2003 through December 31, 2003 10
--
Total stores to be opened by December 31, 2003 46
There is no assurance that the Company will be able to fulfill its
commitments pursuant to the New Domino's Master Franchise Agreement.
Pursuant to the New Domino's Master Franchise Agreement, Domino's
acknowledged receipt of $300,000 as a non-refundable development fee. On
December 29, 1997, the Company invested $2,000,000 in KP pursuant to the New
Domino's Development Agreement.
With respect to each operating Domino's store, KP is required to
execute a separate Standard Franchise Agreement, to pay an initial franchise
fee, and to pay DPI (or a subsidiary thereof) a monthly royalty fee equal to a
percentage of each Domino's store's gross sales net of taxes, irrespective of
profitability. KP's royalty payments to DPI are payable in U.S. currency, or at
DPI's option, in local currency. Although DPI may elect to accept payment in
alternative currencies if payment in U.S. currency is prohibited by applicable
law, DPI may terminate the New Domino's Master Franchise Agreement if KP is
unable to pay DPI in U.S. currency for a period of one year.
Under the terms of the New Domino's Master Franchise Agreement,
Domino's is required to provide, on an ongoing basis, all information and
materials necessary to make KP familiar with the Domino's system and the methods
used to operate and manage Domino's stores and the Commissary, including,
without limitation, plans and specifications for Domino's stores and
commissaries, site selection criteria, advertising and marketing plans, methods
and procedures for the preparation, serving and delivery of food and beverages
and management control systems. Such information is to be provided by DPI to KP
in the form of the Domino's Operations Manual, memoranda or through
consultations with Domino's experienced staff members.
The New Domino's Master Franchise Agreement requires KP to designate a
full-time general manager to be responsible for the Domino's stores to be
developed pursuant to the Agreement. Such general manager must be acceptable to
DPI. On August 28, 1997, KP designated and DPI confirmed Andrzej Janus as its
General Manager.
Domino's has reserved the right to review and audit certain of KP's
operations, financial and tax accounting reports, statements and returns.
Domino's may terminate rights granted to KP under the New Domino's Master
Franchise Agreement, including franchise approvals for stores not yet opened,
for a variety of possible defaults by
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KP, including, among others, failure to open Domino's stores in accordance with
the schedule set forth in such Agreement; failure to obtain Domino's site
approval prior to the commencement of each Domino's store's construction;
failure to obtain Domino's approval of any Non-Affiliated Franchisee; and
failure to meet various operational, financial, and legal requirements set forth
in the Agreement and the Standard Franchise Agreements. Upon termination of the
New Domino's Master Franchise Agreement, whether resulting from default or
expiration of its terms, Domino's has the right to license others to develop and
operate Domino's stores in Poland, or to do so itself. If KP fails to meet its
development schedule during the initial term of the Agreement or any successor
development term, KP would lose its rights to develop and franchise additional
Domino's stores, but would be entitled to continue to act as a master franchiser
and a franchisee with respect to all franchise agreements theretofore granted
and executed. Under certain other circumstances of default, Domino's has the
right to terminate the New Domino's Master Franchise Agreement and force the
sale of, at the then current market value, all of KP's rights and interests as a
master franchiser of Domino's stores and all of the assets of each Domino's
store controlled by KP.
To purchase KP's rights and interests as a master franchisor, within
ten days of termination of the New Domino's Master Franchise Agreement, Domino's
is required to request an appraisal of all of KP's rights and interests as a
master franchiser and is entitled to full access to all of KP's books and
records. If KP and Domino's are unable to agree upon the fair market value of
KP's rights and interests as a master franchiser within 30 days of Domino's
request for appraisal, the fair market value is determined by an appraiser,
which appraiser is selected according to a prescribed method and within 20 days
after the expiration of the 30 days. The appraiser is required to submit an
appraisal report within 60 days of his/her appointment and Domino's then has the
option within 30 days of such submission to purchase all of KP's rights and
interests as a master franchiser at the fair market value stated in the
appraisal report.
If Domino's exercises its option to purchase KP's rights and interests
as a master franchisor, Domino's will also have the option for 30 days from the
date of the New Domino's Master Franchise Agreement's termination to give notice
of appraisal, review KP's books and records, and purchase, at fair market value,
all of the assets of each Domino's store controlled by KP. Fair market value of
the assets of each Domino's store is determined through a process similar to
that described above.
Prior to the opening of each Domino's store, KP is required to pay
Domino's a franchise fee and, as master franchisor, is required to enter into a
Standard Franchise Agreement with each Affiliated Franchisee or Non-Affiliated
Franchisee (collectively, a "Franchisee") which will be operating a Domino's
store. Each Franchisee and each Domino's store location is subject to the
approval of Domino's, which approval may not be unreasonably withheld. The
Standard Franchise Agreement for a Domino's store has a ten-year term with a
ten-year renewal option. During such periods the franchisee is permitted to use
the Domino's system in an exclusive area, free of competition from other
franchisees. With respect to each of its operating Domino's stores, a Franchisee
is required to pay KP an initial franchise fee and a monthly royalty and
advertising fee of a percentage of each Domino's store's gross sales net of
taxes, irrespective of profitability. The financial terms of the Standard
Franchise Agreement may be renewed at the expiration of the term if the
Franchisee executes Domino's then current standard franchise agreement. A
Franchisee's rights under a Standard Franchise Agreement may not be transferred
without the consent of KP and Domino's.
Each Franchisee must comply strictly with the Domino's system, as the
standards, specifications and procedures comprising such system may be changed
from time to time. Each Domino's store must be constructed, equipped, furnished
and operated at the cost and expense of the Franchisee in accordance with
Domino's specifications. Each Domino's store is required to offer for sale only
those pizza and beverage products authorized by Domino's. In addition, each
Domino's store is obligated to offer delivery services to all customers within a
prescribed delivery area, which delivery area is restricted to allow a delivery
order to be satisfied within 30 minutes. All of the food products and other
supplies used in Domino's stores must be of a quality that conforms to Domino's
specifications. Compliance with requirements as to signage, equipment, menu,
service, hygiene, hours of operation, data and voice communications and the like
is similarly prescribed. Domino's and KP reserve the right to enter each
Domino's store, conduct inspection activities, and require prompt correction of
any features that deviate from the
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requirements of the relevant Standard Franchise Agreement. Similarly, KP has the
right to review and audit each Franchisee's operations, financial and tax
accounting statements, reports and returns. KP is obligated to use its best
efforts to ensure that each Non-Affiliated Franchisee complies with its
franchise agreement and local laws and regulations.
Under the terms of the Standard Franchise Agreement, each Franchisee is
entitled to receive from KP, on an ongoing basis, all information and materials
necessary to make the Franchisee familiar with the Domino's system and the
methods used to operate and manage Domino's stores. Domino's and KP require
extensive training of Domino's store personnel. All Franchisees, or their
designees, must successfully complete KP's Domino's store manager training
program and any additional training programs required by Domino's or KP. Each
Franchisee must implement a training program for store employees in accordance
with training standards and procedures prescribed by Domino's and KP and must
staff each Domino's store at all times with a sufficient number of trained
employees.
The Standard Franchise Agreement provides that a Franchisee may not
have any interest in, be employed by, advise or assist any other business that
is the same as or similar to a Domino's store during the term of the agreement
and, for a period of one year after termination or expiration of the franchise
agreement, may not have any interest in, be employed by, advise or assist any
other business that is the same as or similar to a Domino's store within ten
miles of the Domino's store it had operated.
KP may terminate the franchise agreement for any Domino's store for,
among other things, failure to pay amounts due with respect to that Domino's
store, failure to operate the Domino's store in accordance with prescribed
operating standards, and persistent breaches. Upon termination, the Franchisee's
rights to use the Domino's trademarks and Domino's store system terminate, and
KP becomes entitled to assume the Franchisee's leasehold interest and purchase
the Domino's store at the fair market value thereof.
The Domino's Store System
The Company believes that its prospects should be enhanced by the
recognition and reputation of the Domino's system as well as the support,
supervision, and assistance that is available by Domino's. The Domino's system
is one of the world's largest franchisors of fast food outlets, with more than
5,900 stores in over 58 countries. The Company has no affiliation or
relationship with Domino's other than as provided for in the New Domino's Master
Franchise Agreement, the Standard Franchise Agreements, and the Commissary
Agreement. The Company does not believe that the success or lack thereof of
Domino's stores in the United States or Europe should be taken as indicative of
the Company's performance in Poland.
Domino's has developed a store format and operating system, which
system includes a recognized design, decor and color scheme for store buildings;
kitchen and dining room equipment and layout; service format; quality and
uniformity of products and services offered; procedures for inventory and
management control; and a delivery system; and the Domino's system. All Domino's
stores are required to be operated in accordance with Domino's standards.
Domino's stores feature carry-out services and delivery services to all
customers located within prescribed service areas. Domino's stores offer a
substantially similar core menu including various, types of pizza and soft
drinks. Other menu items include salads, sandwiches and breadsticks. Pizza
accounts for the most significant amount of systemwide sales. Prices for
Domino's menu items are determined by the various operators of Domino's stores
and, accordingly, may vary throughout the Domino's store system.
Domino's Store Development
The Company's seven existing Domino's stores began operations in
Warsaw, Poland in March 1994, May 1994, August 1994, June 1997, December 1997
and two in March 1998, respectively. To date the Company has concentrated its
efforts on the development of Domino's stores in Warsaw, Poland, and expects to
complete the
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development in Warsaw by 1999, when it intends to focus most of its future
Domino's store development efforts on other Polish cities.
In addition, the Company intends to focus its efforts on the
development of traditional Domino's stores which provide only delivery and
pick-up services (collectively, "Take-out Services"). The Company considers a
Domino's store location to be critical to its prospects and has devoted and
intends to devote significant efforts to the investigation and evaluation of
potential leases and sites. The Company believes that the Domino's store concept
may be successful in a wide variety of areas within a city. Accordingly, the
site selection process involves an evaluation of a variety of factors, including
demographics (such as population density); specific site characteristics (such
as visibility, accessibility and traffic volume); proximity to activity centers
(such as office or retail shopping districts and apartment, hotel and office
complexes); potential competition in the area; construction or renovation costs;
and lease terms and conditions. The Company has sought and seeks to place
Domino's stores in metropolitan areas with adequate levels of residential and/or
business telephone ownership. The Company personnel will inspect and approve a
proposed site for each Domino's store prior to the execution of a Standard
Franchise Agreement or lease. All sites are subject to the approval of Domino's.
To date, Domino's has and the Company anticipates that Domino's will continue to
initially indicate its approval of franchisees and Domino's stores designs and
locations verbally, which verbal consents are confirmed by Domino's execution of
a Domino's store Certification Agreement.
Domino's stores typically consist of a kitchen/preparation area and
ordering counter. The design for a Domino's store, which must comply with
specified Domino's standards and specifications, is relatively flexible.
Domino's stores may incorporate varying floor plans and configurations and be
located in a specially constructed freestanding building or in existing
buildings.
The Company's initial Domino's stores are in existing buildings and
range from 1,000 square feet to 2,500 square feet, depending primarily upon
whether only Take-out Services or Take-out Services and counter service with
limited seating for customers is offered. In the future Domino's stores
developed by the Company should range in size from 900 to 1200 square feet. The
Company estimates that once the space has been leased and made available to the
Company, approximately 30-90 days is required to renovate, equip and furnish the
store, obtain necessary licenses and approvals and open a Domino's store. The
Company estimates the cost of opening a Domino's store to be between $120,000
and $160,000, including leasehold improvements, furniture, fixtures, equipment,
the initial franchise fee and opening inventories. Such estimates may vary
depending on the size and condition of a proposed Domino's store and the extent
of leasehold improvements required.
Commissary Development
In conjunction with its exclusive right to develop and franchise
Domino's stores in Poland, the New Domino's Master Franchise Agreement grants
the Company the exclusive right to develop and operate a Commissary from which
all Affiliated Franchisees and Non-Affiliated Franchisees in Poland will
purchase food and supplies. Domino's has provided and has agreed to provide the
Company, on an ongoing basis, all information and materials necessary to make
the Company familiar with the methods used to operate and manage a Domino's
Commissary.
In January 1995, KP commenced its own full-service Commissary
operations. KP, through PKP, has developed approximately 1,500 square feet of
the Jana Pawla Domino's store as its Commissary. KP conducts all of its
purchasing, distribution and major food supply preparation operations at or from
the Commissary. KP believes that the present Commissary will be able to service
up to 15 Domino's stores. The Company expects to build a new commissary in mid
1998 to accommodate the growth of additional stores in Poland.
Sources of Supply
KP is substantially dependent upon third parties for all of its capital
equipment (including furniture, fixtures and equipment), food products, and
other supplies. Pursuant to the New Domino's Master Franchise Agreement and
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the Standard Franchise Agreements, all of these supplies must be of a quality
and conform to specifications acceptable to Domino's. KP currently obtains
substantially all of its supplies and food products, including cheese, soft
drinks, cold cuts and paper products from Polish sources. KP currently obtains
its store furniture and fixtures from sources in Poland and obtains its
restaurant equipment, flour and tomato sauce primarily from Domino's approved
sources in the United States and Europe. KP currently has no written, long-term
supply agreements. Shipments of food and supplies are delivered directly to the
Company's Commissary or Domino's stores. KP maintains approximately a 7 to 30
day inventory of food products and supplies for its Domino's stores.
Store Operations and Personnel
The Company operates its Domino's stores under uniform standards set
forth in Domino's confidential Operations Manual, including specifications
relating to food quality and preparation, design and decor and day-to-day
operations. The Company's operations are similar to those of other Domino's
stores.
The Company's Domino's stores offer various types of pizza, soft
drinks, salads, sandwiches, breadsticks and ice cream, and the Company
anticipates that its future Domino's stores will offer other food items. The
Company typically offers pizzas for the zloty equivalent of approximately
between $1.55 to $8.75, depending upon the size of the pizza and the number of
toppings selected. The Company believes, to the extent a comparison is possible,
that the prices it charges for meals is comparable to the prices charged by the
Company's American-style fast food competitors in Poland.
The Company hires Domino's stores managers who are responsible for
supervising the day-to-day operations of the Domino's stores, including food
preparation, customer relations, store maintenance, cost control and personnel
relations. In addition, Domino's store managers are responsible for selecting
and training new employees, who undergo on-the-job training. As of December 31,
1997, the Company employed 15 administrative personnel, 12 store managers and
assistant managers and 99 other full-time and part-time crew employees.
To date, the Company believes that it has successfully attracted and
trained local managers and other employees. The Company expects to open and
operate its own training facility in Poland, with assistance from Domino's. The
Company expects to utilize Domino's training techniques and manuals and to
solicit the assistance and counsel of Domino's personnel. The Company will be
responsible, at its expense, for the translation of Domino's manuals into Polish
and expects to pay Domino's for certain support services related to employee
training. The Company maintains financial, accounting and management controls
for its Domino's stores through the use of centralized accounting systems,
detailed budgets and computerized management information systems.
Advertising and Promotion
The Domino's Standard Franchise Agreement provides that each Franchisee
will contribute a monthly advertising and promotion fee equal to a percentage of
its gross sales to a fund self-administered by each Franchisee to be used for
advertising, sales promotion and public relations. Each Franchisee is
responsible for using the proceeds of the advertising fund to develop and
implement advertising and promotional plans, materials and activities on behalf
of the Domino's stores in Poland, which plans, materials and activities are
subject to Domino's approval. Non-Affiliated Franchisees are permitted to
conduct their own advertising and promotion subject to the Company's and
Domino's approval. Domino's is required to provide certain advertising and
promotional assistance to the Company. The Company believes that certain
marketing methods that have proven successful for Domino's are adaptable to the
Polish market. Most marketing efforts by currently operating Domino's stores in
continental Europe have been carried out on a local store basis, through
newspaper coupons, flyers and similar media.
Trademarks
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The Company is authorized to use such trademarks, service marks and
such other marks as Domino's may authorize from time to time for use in
connection with Domino's stores. Domino's has received trademark approval in
Poland for certain marks including the "Domino's" logo and the words "Domino's
Pizza."
United States Income Taxes
In general, income of the Company's Polish subsidiaries will not be
subject to U.S. Federal income tax until it is distributed to the Company. When
distributed, it will be includable in the Company's gross income to the extent
it is paid out of a subsidiary's earnings and profits. The Company, however, may
claim a foreign tax credit against its U.S. tax liability for Polish corporate
income tax paid by the subsidiary and for Polish tax withheld from the dividend,
subject to limitations. Because Polish corporate income tax, which is currently
36% of taxable income, exceeds the current maximum U.S. corporate income tax
rate, the Company does not anticipate that significant U.S. Federal income tax
will be payable on the income of its Polish subsidiaries. In certain
circumstances, a portion of a Polish subsidiary's income may be included in the
Company's gross income before it is distributed, although a foreign tax credit
for Polish corporate income tax paid by the subsidiary would be available to the
Company as if the income actually had been distributed.
Competition
The Company's operations in Poland faces competition from a number of
American-style fast-food franchisors and/or their licensees, including
McDonald's, Pizza Hut, Kentucky Fried Chicken, and Taco Bell. IFFC also
encounters competition from a broad range of existing Polish restaurants and
food service establishments, including local quick-service restaurants offering
products that are familiar to Polish consumers and have achieved broad market
acceptance, as well as existing restaurants offering American-style fast food,
including hamburgers. Additionally, it can be expected that, in the event of
perceived initial market acceptance of American-style fast food concepts, there
will be a rapidly increasing number of market entrants offering such products,
including additional American franchisors and Polish or other companies seeking
to imitate the American-style fast-food concepts. IFFC believes that it competes
on the basis of price, service and food quality.
Employees of the Company
As of December 31, 1997, the Company had approximately 82 full-time
employees and 315 part-time employees. The Company has entered into employment
agreements with Mitchell Rubinson, IFFC's Chairman, President and Chief
Executive Officer, Leon Blumenthal, IFFC's Senior Vice President, Chief
Operating Officer and General Manager and IFFP's and KP's President and Jim
Martin, IFFC's Chief Financial Officer, Treasurer and Director. The success of
the Company is dependent, in part, upon its ability to hire and retain
additional qualified personnel. The Company continues to recruit personnel for
its operations in Poland. The Company utilizes local employees to staff its
restaurants. Such employees are not represented by labor unions. Substantially
all of the Company's management and employees reside in Poland and speak Polish.
Substantially all of the Company's senior management team in Poland is also able
to communicate in English. Messrs. Rubinson, Martin and Blumenthal are not
fluent in Polish. All members of the Company's senior management team have
obtained the requisite Polish work permits, when necessary.
ECONOMIC AND BUSINESS CONDITIONS IN POLAND
Area and Population
Poland is one of the largest countries in Central Europe with a total
land area of approximately 312,000 square kilometers. It shares land borders
with Germany, the Czech Republic, Slovakia, Ukraine, Belarus, Lithuania and the
Russian Federation. Its population, which was estimated at 38 million (as of
December 31, 1997), makes
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it one of the most populous countries in Central Europe. Poland's population
density was approximately 123 persons per square kilometers in 1996, with
approximately 61.9% of the population living in urban areas. Poland has an
extensive network of roads, railways and canals, and has four major ports on the
Baltic sea.
Economic Overview
Since the fall of the Communist government in 1989, Poland has embarked
on a program of economic reforms, based on a transition to a market economy and
private ownership. Eight (8) years into its transition to a market economy,
Poland has become the first former centrally planned economy in Central and
Eastern Europe to end its recession and return to growth. Poland's
transition-induced recession bottomed out in the second quarter of 1991, and for
the last seven (7) years the Polish economy has enjoyed an accelerated growth.
In the late 1980s, the Polish economy was dominated by the state sector
and exhibited high inflation, administratively controlled prices, recession,
increasing levels of external debt and multiple reschedulings of official and
commercial debt, a large State budget deficit, a restrictive foreign exchange
regime and a significant proportion of trade denominated in non-convertible
currencies.
On January 1, 1990, the first post-communist government introduced the
"Economic Transformation Program" (also known as the "Balcerowicz Plan" after
the first post-communist Minister of Finance). The radical economic reform
program was designed to stabilize the economy and promote structural reforms.
Key elements included the ending of state subsidies to state enterprises and
eliminating administrative controls of most prices. After a significant decline
in gross domestic product ("GDP") in real terms, a sharp rise in unemployment in
1990 and 1991 and an acceleration in inflation in 1990, Poland returned to
growth, with positive and increasing rates of GDP growth for the years 1992 to
1996.
Currently, the private sector accounts for approximately 50% of GDP and
more than 60% of employment and the Polish economy is generally characterized by
lower rates of inflation than previously, almost complete freedom of prices from
administrative control, sustained growth, liberalized rules on foreign exchange
transactions and a rising level of foreign exchange reserves.
The economic recovery in Poland since 1992 has benefited most sectors
of the economy. Unemployment which peaked in 1994 at 16% dropped to 10.5% by
December 31, 1997. Real wages have grown during the last three years increasing
21% in 1997. Domestic demand has been driven by an increase in investment and
private consumption and exports have increased, particularly since 1994. In
addition, Poland also benefits from increasing productivity. A significant
portion of the growing domestic demand, however, has been met through imports,
resulting in a growing trade deficit.
The composition of Poland's trade has changed dramatically since the
1980's, when trade with other countries belonging to the Council of Mutual
Economic Assistance, an economic and trade organization sponsored by the former
Soviet Union and including most of the former communist block ("COMECON"),
accounted for nearly 50% of Poland's total trade. By 1997, the EU accounted for
approximately 70% of Poland's total trade, with Germany having become Poland's
dominant trading partner. Although the composition of Poland's exports by
category has remained broadly unchanged, there has been a major shift in the
quality of exported manufactured goods to meet the expected standard of more
competitive western markets.
Poland's government has run a budget deficit throughout the 1990's,
although since 1993 the deficit has remained both below the annually set target,
as well as below 3% of GDP. In recent years, the financing of the State budget
deficit has been secured mainly through the issuance of treasury securities on
the domestic market with very limited recourse to external sources, and has been
characterized by increasingly longer average maturities.
In zloty terms, total public indebtedness at the end of 1997 grew to
185.4 billion; however; treated as a percentage of GDP, total public
indebtedness declined from 87% at the end of 1993 to 51% at the end of 1997. In
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1996, Poland settled its outstanding reciprocal obligations with Russia. In
addition, since the early 1980's to date, Poland concluded a number of
rescheduling agreements with the Paris Club and the London Club. In May 1997,
Poland repurchased $1.69 billion of Brady Bonds issued in connection with its
London Club debt rescheduling, reducing the outstanding amount of such
indebtedness by over 20%.
During this period of reform, successive governments have supported
structural transformation of the economy directed at reforming state-owned
enterprises, selling certain state-owned assets, modernizing the banking system
and creating a modern capital market. The process of structural reform is
ongoing and not all stated government goals have been achieved, In particular,
the goal of selling state-owned assets through privatization began slowly and is
only partially complete. Major privatizations conducted in 1997 include Bank
Handlowy w Warszawie S.A., one of Poland's largest banks, and KGHM Polska Miedz
S.A., which is Poland's largest mining company.
In June 1994, the Council of Ministers and Parliament approved Poland's
first medium-term economic program for the years 1994 to 1997. The program is
embodied in a document prepared by the former Minister of Finance, Grzegorz
Kolodko, called the "Strategy for Poland." The Strategy for Poland constitutes
official government policy although it does not have the force of law.
The Strategy for Poland identifies several key systemic challenges
facing the Polish economy in the medium term, including reform of the social
security system, reform of laws governing wage negotiations and labor relations
especially with respect to employees of state-owned enterprises, acceleration of
the privatization process, further reform of the financial sector with
particular attention to the recapitalization of certain banks, reduction of
unemployment and further reductions in inflation.
In 1995, Poland formally acceded to the obligations under Article VIII
of the IMF Articles of Agreement providing for full current account
convertibility of the zloty. In 1996, Poland was accepted for full membership in
the OECD.
In December 1991, Poland was accepted as an associate member of the
European Union ("EU"). In 1994, Poland also submitted a formal application for
full membership in the EU. Given the country's relative political and economic
stability, it is expected that Poland will be among the first Central or Eastern
European countries to be admitted in the next phase of EU expansion.
As a result of the economic reforms carried out during the 1990's,
Poland currency meets certain (but not all) of the fiscal criteria applicable
for participation in European Monetary Union ("EMU").
Poland is also a member of the Partnership for Peace initiative of the
North Atlantic Treaty Organization ("NATO") and Poland received in July 1997 an
invitation to become a full member of NATO (subject to satisfaction of certain
conditions).
Recent Economic Performance
Gross Domestic Total
In 1997, unofficial preliminary estimates of the Central Statistical
Office indicated that GDP grew by 6.9% in real terms, following increasing real
growth rates based on International Monetary Fund estimates in 1993, 1994, 1995
and 1996 of 2.6%, 3.8%, 5.2% and 7.0%, respectively. A period in deep recession
from 1989 to 1991, during which real GDP fell by almost 19%, was primarily the
result of the Economic Transformation Program implemented in 1990, which
resulted in a fall in real household income and a reduction in private
consumption and domestic investment. During 1990 and 1991, the transition to
world prices in trade settlements with the COMECON countries
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and the recession in some western countries also contributed to the fall in real
GDP.
Inflation
Although inflation has generally declined since prices were liberalized
in the beginning of 1990, the rate of inflation in Poland is still high compared
to Western Europe or the United States. The 1998 State budget includes an
assumed rate of inflation for 1998 of 8.6%. The annual increase in the consumer
price index ("CPI") has been continuously but gradually declining from a rate of
almost 250% in 1990 to 13.2% in 1997. This decline has occurred together with
increases in real GDP and decreasing unemployment. Similarly, the annual
increase in the producer price index ("PPI") decreased from approximately 293%
in 1990 to 10.8% in 1997. The following table sets forth the annual rates of
consumer price inflation and producer price inflation as measured by percentage
changes on an end-of-year to end-of-year basis for the years 1993 to 1997.
Inflation: Annual Consumer and Producer Prices
1993(1) 1994 1995 1996 1997
------- ---- ---- ---- ----
Consumer Prices(CPI)(2) 37.6 29.5 21.6 18.5 13.2
Producer Prices(PPI)(2) 35.9 27.9 18.9 10.5 10.8
- --------------
(1) 1993 figures include VAT with a maximum rate of 22%.
(2) In percent.
Source: Central Statistical Office.
Employment and Wages
Before 1989, unemployment was not officially recognized in Poland and
over-employment was evident in many enterprises. By the end of the first quarter
of 1994, registered unemployment had reached 16.7% of the labor force but by the
end of that year it had decreased for the first time since 1990 to 16.0% of the
labor force. At December 31, 1996 and 1997, registered unemployment was 13.6% of
the labor force and 10.5% of the labor force, respectively.
All employees, Polish and foreign, must be paid in zlotys. Foreign
employees require work permits from local authorities, which are typically not
difficult to obtain for executive or managerial employees, and are typically
obtained in due course. Employers are required to pay a minimum wage. As set
forth above, all wages are subject to payroll taxes payable by the employer, and
income tax payable by the employee.
Foreign Direct Investment
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Subject to certain restrictions, the Polish Foreign Investment Law
generally allows for full repatriation of capital dividends and profits by
foreign investors. In general, foreign investors are not required to obtain any
special permits to invest in Polish companies.
Foreign Exchange Controls
The convertibility of the zloty is regulated by the Foreign Exchange
Law of December 2, 1994 (the "Foreign Exchange Law"). The Foreign Exchange Law
consolidates all existing foreign exchange rules and regulations, extends full
convertibility of the zloty to all types of current account transactions,
clarifies the status of foreign exchange banks, provides for use of the zloty in
foreign trade transactions and includes the special drawing rights at the IMF
("SDRs") and the European Currency Unit ("ECU") within its definition of foreign
currency.
FOREIGN INVESTMENT LAW AND GOVERNMENT REGULATION
General
The Polish Law of June 14, 1991 on companies with foreign participation
(the "Foreign Investment Law") sets forth the legal requirements governing
foreign investment in Poland. The Foreign Investment Law states that, unless
provided otherwise, the Polish Commercial Code of 1934 (the "Commercial Code")
is the commercial law generally applicable to domestic business. The Commercial
Code governs corporate and partnership formation, governance and activity, and
is generally similar to corresponding regulations of countries in the EEC.
Under the relevant portions of the Foreign Investment Law, a foreign
investor may establish a limited liability company (roughly analogous to a
closely held corporation in the United States), in which it will hold 100% of
the shares; establish a limited liability company, with the equity jointly
contributed by it and other foreign and/or Polish parties; or enter business in
Poland through acquisition of stock of an existing Polish limited liability
company. The Foreign Investment Law also governs foreign investment in "joint
stock companies," which are roughly analogous to publicly held corporations in
the United States. Since IFFC anticipates that its business in Poland will be
conducted solely through one or more of its wholly owned limited liability
companies for the foreseeable future, the following discussion addresses only
limited liability companies.
The Foreign Investment Law defines the range of economic activities in
which a limited liability company with foreign participation (a "CFP") may
engage to include "participation in revenues from the operation of enterprises
in the territory of the Republic of Poland." The Foreign Investment Law does not
restrict the scope of economic activities of a CFP, which is thus permitted to
engage in any business in which a domestic Polish limited liability company
without foreign participation may engage. IFFC's development and operation of
restaurants is not included in one of those enumerated sectors, and do not
require special licensing. Moreover, access to raw materials and supplies in the
domestic market is afforded without distinction as to cooperatives and state
enterprises on the one hand, and private business entities, including a CFP, on
the other. All private business entities have equal access to raw materials and
labor and are treated equally for tax purposes. A CFP is free to set prices for
its products and services.
A CFP must comply with certain formal requirements preceding the
commencement of revenue producing activities, which formal requirements have
been complied with by IFFC's subsidiaries. The Founding Act of a CFP
(essentially equivalent to articles of incorporation and bylaws in the case of a
CFP that is a 100% owned subsidiary) must be prepared and executed before a
notary public (who is a lawyer and who reviews the Founding Act as to its
compliance with applicable law) in the form of a Notarial Deed. The CFP must
then be registered by the District Court responsible for the conduct of the
Commercial Register. The registration process for a newly formed CFP generally
takes from one to three months. The CFP commences its legal existence upon
registration. The CFP must then register with the Local Statistical Office to
obtain a National Economy Code Number ("REGON") and register
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with the Treasury Office to obtain a Tax Indemnification Number ("NIP"). Without
a REGON and a NIP, a CFP may not complete mandatory registration with the local
Fiscal Office and Social Security Office, and may not open bank accounts or
proceed with customs clearance. These formal requirements are identical to those
required for a domestic Polish limited liability company without foreign
participation.
Contribution to Capital
Other than pursuant to provisions of the Commercial Code generally
applicable to all limited liability companies, there is no minimum level of
investment required of a CFP. The minimum capital required for establishment of
any limited liability company is 4,000 zlotys (about $1,138 as published by the
National Bank of Poland on December 31, 1997), which must be made in Polish
currency obtained from the sale of convertible currency (including United States
or West European funds) to a foreign exchange bank, or, to the extent designated
in the CFP's Founding Act, through in-kind, nonmonetary contributions that are
transferred from abroad or purchased with Polish currency obtained from the sale
of convertible currency to a foreign exchange bank. To the extent designated in
the CFP's Founding Act, fixed assets may constitute in-kind, non-monetary
contributions to equity.
Taxation
A CFP is subject to the same taxes, and general tax reductions, as
domestic Polish companies without foreign participation. Tax exemptions
specifically reserved for foreign investors or companies with foreign
participation are no longer available after January 1, 1994 and such tax
exemptions can only be utilized if the right to such exemptions was acquired
prior to January 1, 1994. A CFP is subject to corporate income tax, VAT, which
is known in Poland as the "Tax on Goods and Services," and excise tax and,
depending on the nature of its business activities, may also be subject to real
estate tax, local tax, and stamp duty. The corporate income tax rate was 38
percent of taxable income until December 31, 1997 and is currently 36 percent.
The rate is generally calculated by the extent to which revenues exceed
expenses, including operating losses, which may be carried forward for three
years. The shareholder of a limited liability company is liable for any income
taxes not paid by the company.
Goods and services (with certain exceptions not relating to CFP)
including imported goods and services are subject to a VAT tax. Certain
commodities like liquors and automobiles are subject to excise tax, based on the
value of such items. With respect to imports, the value of such items is equal
to the customs' value plus any customs' duties. The VAT basic rate is 22%, but
in the case of certain products, it is reduced to 7% or entirely. Under the VAT
system, credit is given for VAT paid against VAT collected.
A CFP's employees are subject to a personal income tax, and a CFP is
required to make contributions for employees' health and pension insurance,
commonly referred to as the social security fund. Currently, an employer must
remit to the social security fund, the unemployment fund and the Fund of
Guaranteed Employees' Payments 45%, 3% and .2%, respectively, of the amount of
wages paid to an employee before withholding for personal income tax. Both
Polish and foreign employees are governed by the same social security, health,
pension, and unemployment insurance provisions.
Currently, dividends are taxed at the rate of 20%. However, Poland has
executed a bilateral tax agreement with the United States, pursuant to which the
tax on dividends of corporations in which at least 10% of the voting stock is
held by a United States corporation may not exceed 5%. Thus, though current
regulations would otherwise provide for a 20% tax on dividends, taxes on
dividends paid by a CFP which is a subsidiary of IFFC will be at the rate of 5%.
Customs Duties and Import Restrictions
Customs duties on imported goods are regulated by the Customs Law of
1989 (as amended). The tariff is coordinated and integrated with international
regulations and the provisions of the General Agreement on Tariffs and
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<PAGE>
Trade. IFFC's operations may be subject to various levels of customs duties on
certain types of items imported into Poland. Customs duties and other similar
fees, however, are not levied on non-monetary, in-kind contributions to capital,
provided that such contributions constitute "fixed assets" and are not disposed
of during the three-year period following customs clearance. Although IFFC has
contributed as capital substantially all of its subsidiaries' furniture,
fixtures and equipment, there can be no assurance that such equipment will
ultimately qualify as "fixed assets" for purposes of this exclusion.
On February 4, 1994 the Parliament passed a law imposing countervailing
duties on certain agricultural and food products imported from abroad, which law
became effective as of April 14, 1994. The law is intended to protect local
producers by increasing the cost of importation of certain agricultural and food
products, such as meat, milk, wheat flour, processed tomatoes, vegetable oil,
pork, poultry and dairy products, through the imposition of countervailing
duties up to a level comparable to the local prices of such products as
determined by the Minister of Agriculture. In January of 1997, a new custom law
was enacted with the initial plan to make it effective on July 1, 1997. This
effective date, however, was postponed by the Polish Parliament to January 1,
1998. The new customs law is consistent with the European Economic Union's
customs regulations. IFFC currently purchases most of its products in Poland and
accordingly these duties presently have minimal impact on IFFC's costs.
Central European Free Trade Association
The Central European Free Trade Association ("CEFTA") was established
on December 21, 1992, effective on March 1, 1993. The purpose of the Association
was to increase trade between Eastern and Central European countries including
Poland, Czech Republic, Slovakia, and Hungary.
Originally the CEFTA agreement called for a free-trade zone by the year
2001. However, in August of 1995, the foreign ministers met and agreed to amend
the original agreement. The amendment shortened the time period for reducing
customs duties and taxes on certain categories. As of January 1996, customs
duties on approximately one third of all agricultural products traded between
the Association have been eliminated. Included in this category for 1996 were
citrus fruits, coffee, tea, rice, bread, flour, fish and corn. As of January
1st, 1998, customs duties and taxes on all agricultural products traded between
the Association will be eliminated.
Polish Currency and Foreign Exchange
The only currency that may be used in Poland is the zloty. The value of
the zloty is pegged pursuant to a system based on a basket of currencies, as
well as all other economic and political factors that effect the value of
currencies generally. As of January 1, 1995, the National Bank of Poland
introduced a new denomination of its currency unit which is named a "zloty" (a
"zloty"). New zlotys are equivalent to 10,000 old zlotys ("old zlotys"). Old
zlotys remained legal tender until December 31, 1996, after which date they have
been exchangeable at certain banks. Domestic persons and CFPs are entitled to
hold foreign currency acquired through the conduct of an economic activity in
their own accounts. Foreign currency may only be converted into zlotys by
selling the foreign currency to a foreign exchange bank. Proceeds from economic
activities in Poland must be maintained in zloty denominated accounts, but may
be converted into hard currencies for certain purposes as discussed below.
Typically, the transfer of foreign currency abroad requires a foreign exchange
permit, but no permit is required for the repatriation to foreign investors in
hard currency of up to 100% of the profits of a CFP. On January 1, 1995, a new
Polish Foreign Exchange Law became effective. The expressed objectives of the
new law are (i) to apply uniform standards to all Foreign Exchange Banks
operating in Poland, (ii) to create a legal framework for market valuation of
the Polish currency, and (iii) to move toward full convertibility of the zloty.
The new law is also designed to permit greater freedom (less restrictions) on
certain foreign trade transactions accounted for in Polish currency. Similarly,
foreign investors may repatriate in foreign currency all proceeds of the sale or
liquidation of equity interests in the CFP, all proceeds of the liquidation of a
CFP, and compensation resulting from expropriation or similar government acts.
The zloty is also tradable and exchangeable into foreign currency for the
purpose of purchasing goods and services abroad. On December 31, 1997, the
exchange rate was 3.51 zlotys per dollar as
20
<PAGE>
published in The Wall Street Journal. Foreign exchange banks are required to
sell foreign currency to domestic persons, including a CFP, when such currency
is needed for repatriation as set forth above, and to satisfy foreign currency
obligations to foreign persons resulting from the purchase of goods and certain
services. Foreign employees may repatriate their after-tax earnings in hard
currencies without having to obtain an individual foreign exchange permit.
Reporting and Audit
The balance sheet and profit and loss statements of a CFP must be
prepared in accordance with Polish accounting principles and in compliance with
the requirements of the Commercial Code. As Poland becomes more integrated with
the EEC, it is anticipated that its financial reporting requirements will become
substantially similar to generally accepted accounting principles in the EEC
which are generally similar to those in the United States. For financial
reporting purposes in the United States, IFFC prepares their financial
statements in accordance with generally accepted accounting principles.
Leases and Purchase of Land
A CFP may lease real property from private parties without substantial
restrictions. The acquisition of real property is regulated by the Acquisition
of Real Property Estate by Foreign Persons Act of 24 March 1920. Since IFFC does
not presently intend to acquire real property in Poland, these statutes are not
described herein.
Governmental Regulation of Restaurant Operations
Restaurant operations are subject to a number of national and local
laws and regulations, primarily related to sanitation. All imported meat and
other food products are subject to specific sanitary requirements. Restaurants
are subject to national regulations relating to health and sanitation standards,
generally implemented, administered and enforced at the local level. All
properties are subject to local zoning, building code and land-use regulations.
In general, necessary approvals and permits for restaurant operations are
granted without undue delay, and are typically granted within 14 days of
application therefor.
Trademark Protection
Under Polish law, the registrant of a trademark in Poland acquires the
exclusive right to use the trademark in commerce for goods and services covered
by the registration. If the trademark is infringed, the registrant is entitled
to demand injunctive relief, monetary damages, and seizure of infringing items.
In general, the first applicant is entitled to the registration of a trademark
from the date the application is filed with the Patent Office. Foreign nationals
generally have the same rights as Polish citizens with regard to trademarks.
United States-Poland Treaty
On March 21, 1990, the President of the United States and the Prime
Minister of Poland signed a treaty concerning business and economic relations,
which was ratified by both countries. The ratification instruments were
exchanged in Warsaw on July 7, 1994 and the treaty became effective as of August
6, 1994. The aim of the treaty is to encourage and facilitate United States
investments in Poland by providing internationally recognized protections and
standards. The treaty sets certain minimum standards; in some cases, Polish
legislation more favorable than that required by the treaty has been enacted.
Some of the key elements of the treaty include the following:
o Poland agreed to treat United States investors in Poland the same
as Polish nationals or investors from other countries, whichever
is more favorable.
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o The United States and Poland agreed to internationally recognized
standards for expropriation; expropriation will be permitted only
for a public purpose, and must include prompt payment at fair
market value.
o The United States and Poland agreed to abide by internationally
recognized standards for arbitration that ensure that an investor
has the right to resort to international arbitration.
o Poland guaranteed that United States firms will have the right to
market goods and services both at the wholesale and retail level;
obtain access to public utilities and financial institutions;
obtain commercial rental space and raw materials on a
non-discriminatory basis; conduct market studies and distribute
commercial information of all kinds; and obtain registrations,
licenses, permits and other approvals on an expeditious basis.
o Poland agreed to adopt major new intellectual property standards,
including adherence to the Paris Act of the Berne Convention;
copyright protection for computer software; and protection of
proprietary information.
o Poland agreed to permit immediate and complete repatriation of
export earnings and capital from Poland to the United States. In
addition, Poland agreed to progressively eliminate restrictions on
repatriation of United States investor zloty profits. All such
restrictions on the repatriation of profits have been eliminated.
See "Polish Currency and Foreign Exchange."
Item 2. Description of Property.
Offices of the Company. The Company maintains its executive offices in
approximately 2,500 square feet of leased office space at 1000 Lincoln Road,
Suite 200, Miami Beach, Florida 33139. Annual lease payments under the lease are
approximately $32,200. IFFC currently subleases approximately 800 square feet
for an annual fee of $14,697. IFFC has exercised its second of three (expiring
December 6, 1998), two-year renewal options under the lease.
On May 16, 1997, IFFP executed a lease with Dong Fang International Co.
Ltd., a Polish partnership, for 4,000 square feet of office space located at UL.
Wazchocka 1/3, Seg M.F., 03-934, Warsaw, Poland. The annual rental payment is
$54,000. The term of the agreement is for an unlimited period; however, either
party may terminate the lease after the first year with a six month written
notice. The Company has the right of first refusal to purchase the building and
will be reimbursed for the net book value of its improvements to the space upon
termination of the agreement by the lessor.
Thus far, the Company has not incurred nor does it anticipate incurring
any material costs or expenses associated with compliance with the environmental
laws of the United States or Poland.
The following table sets forth, as of December 31, 1997, the name,
location, opening date and lease or sublease expiration date (including all
renewal options), square meters and minimum annual lease payments for each of
the Company's Burger King restaurants:
<TABLE>
<CAPTION>
Opening Lease Square Minimum Annual
Name Location Date Expiration Meters Lease Payments
- ---- -------- ------- ---------- ------ --------------
<S> <C> <C> <C> <C> <C>
Salus Warsaw, Poland December 1993 January 2009 522 $28,778
Galaxy Warsaw, Poland April 1993 (1) 799 $43,106
Kolmer Warsaw, Poland May 1993 (1) 868 $41,063
Dantex Warsaw, Poland July 1993 (1) 355 $26,003
Kielce Kielce, Poland May 1994 May 2013 390 $21,038
22
<PAGE>
Lublin Lublin, Poland March 1994 January 2014 600 $54,000
Parnas Warsaw, Poland March 1994 January 2009 245(2) $76,750
Katowice Katowice, Poland October 1994 November 2003 550 $114,000
Mikolow Mikolow, Poland August 1998(3) November 2017 600 2.25% of sales
Czechowice Czechowice, Poland August 1998(3) November 2038 3,773 $43,750
</TABLE>
- ----------------
(1) Indicates lease is for an unlimited period of time, but may be terminated
upon three months notice by the lessor, subject to certain conditions.
(2) Of the 245 square meters under lease, 20 square meters are under lease
only until January 1999.
(3) Expected opening.
Domino's Stores
The following table sets forth, as of December 31, 1997, the name,
location, opening date and lease or sublease expiration date (including all
renewal options), square meters and minimum annual lease payments for each of
the Company's Domino's Stores:
<TABLE>
<CAPTION>
Square Minimum Annual
Name Location Opening Date Lease Expiration Meters Lease Payments
- ---- -------- ------------ ---------------- ------ --------------
<S> <C> <C> <C> <C> <C>
Parnas Warsaw March 1994 January 2009 480 $76,750
Grojecka Warsaw May 1994 (1) 130 $5,900
Jana Paula Warsaw August 1994 March 2004 482 $34,797(2)(3)
Bona Warsaw July 1997 (1) 100 $4,000
Wolska Warsaw December 1997 (1) 97 $13,300
Iganska Warsaw March 1998 (1) 203 $6,700(4)
Bemowo Warsaw March 1998 January 2008 93 $14,400
</TABLE>
- ----------------
(1) Indicates lease is for an unlimited period of time, but may be terminated
upon three months notice by the lessor, subject to certain conditions.
(2) Includes corporate office space.
(3) Includes commissary.
(4) Includes training facility.
Thus far, IFFC has not incurred nor does it anticipate incurring any
material costs or expenses associated with compliance with the environmental
laws of the United States or Poland.
Item 3. Legal Proceedings.
BKC Litigation
On March 17, 1995, IFFC and IFFP filed suit against BKC, alleging,
among other things, that BKC failed to support IFFC and IFFP in their efforts to
develop additional Burger King franchises in Poland as required by the former
franchise agreement. On March 11, 1997, BKC, IFFC, IFFP and Mitchell Rubinson,
individually and on behalf of Litigation Funding, Inc. ("Funding") entered into
a settlement agreement which provided for the execution of the New BKC
Development Agreement and eight new franchise agreements, as well as the payment
by BKC to the Company of the sum of $5,000,000 (less $21,865 of royalties owned
by IFFP to BKC for February 1997) for a net amount of $4,978,135. In addition,
BKC forgave $499,768 representing all monies owed BKC by the Company through
January 31, 1997, and provided certain other consideration which was included in
the New BKC Development Agreement. See "Business--New BKC Development
Agreement." Thereafter, IFFC, which was required to pay to Funding a certain
portion of the proceeds derived from the litigation with BKC in exchange for
Funding's financing of the BKC litigation on behalf of IFFC and IFFP, merged
with Funding and issued to Mitchell and Edda Rubinson, the sole shareholders of
Funding, 25,909,211 shares of its Common Stock in connection therewith. The
disinterested Directors of IFFC determined the merger price with Funding based
on a valuation of the amounts owing to Funding
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<PAGE>
by IFFC and IFFP under their prior litigation financing agreements with Funding
and the value of Funding's rights to proceeds of the settlement with BKC. The
Company believes that it currently has a satisfactory relationship with BKC. See
"Management's Discussion and Analysis".
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 has been 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. 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.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
IFFC's Common Stock was quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") SmallCap Market under
the symbol "FOOD" until May 29, 1996 and was listed on the Pacific Stock
Exchange (the "Exchange") under the symbol "FOD" until December 4, 1996. The
Common Stock is now listed on the OTC Electronic Bulletin Board under the symbol
"FOOD." The following table sets forth, for the period since January 1, 1996,
the high and low closing bid quotations for the Common Stock as reported by
NASDAQ and the OTC Electronic Bulletin Board.
24
<PAGE>
High Low
--------- --------
1996
First Quarter.................... .8125 .1875
Second Quarter................... .21875 .1875
Third Quarter.................... .43 .06
Fourth Quarter................... .24 .15
1997
First Quarter.................... .57 .15
Second Quarter................... .42 .27
Third Quarter.................... .55 .37
Fourth Quarter................... .905 .42
As of March 24, 1998, there were 79 record holders of IFFC's Common
Stock. The Company believes that there are over 400 beneficial holders of IFFC's
Common Stock.
IFFC has not paid any cash dividends on its Common Stock and does not
currently intend to declare or pay cash dividends in the foreseeable future.
IFFC intends to retain any earnings that may be generated to provide funds for
the operation and expansion of IFFC's business.
Item 6. 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; the company's continued
ability to open restaurants and stores; 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.
The Securities and Exchange Commission has issued Staff Legal Bulletin
No. 5 (CF/IM) stating that public operating companies should consider whether
there will be any anticipated costs, problems and uncertainties associated with
the Year 2000 issue, which affects many existing computer programs that use only
two digits to identify a year in the date field. The Company anticipates that
its business operations will electronically interact with third parties very
minimally, if at all, and the issues raised by Staff Legal Bulletin No. 5 are
not applicable in any material way to the Company's business or operations.
Additionally, the Company intends that any computer systems that the Company may
purchase or lease that are incident to the Company's business will have already
addressed the Year 2000 issue.
As of December 31, 1997, the Company had working capital of
approximately $17,509,290 and Cash and Cash Equivalents of $18,642,335. The
Company's working capital and cash position were significantly improved by the
settlement of the BKC Litigation in March 1997 coupled with recent debt
consolidation, The Company's merger with
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<PAGE>
Litigation Funding, Inc. and the placement of the 11% Convertible
Senior Subordinated Discount Notes, Due 2007 (See Notes 8, 13 and 14). 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 Domino's 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 Domino's, IFFC will require resources
substantially greater than the amounts it presently has or amounts that can be
generated from its restaurant and store operations. Except as discussed below,
IFFC has no current arrangements with respect to, or sources of additional
financing and there can be no assurance that IFFC will be able to obtain
additional financing or that additional financing will be available on
acceptable terms to fund future commitments for capital expenditures.
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 December 31, 1997, 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 (7,181,320)
------------
Balance at December 31, 1997 $ 20,354,680
============
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.
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. See "Liquidity and Capital Resources" for a more comprehensive
description of the terms of the Notes.
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 Sp.zo.o, IFF-DX
Management Sp.zo.o and IFF Polska i Spolka Komandytowa Sp.zo.o. IFFC operates
its Domino's Pizza business in Poland through its two wholly-owned Polish
subsidiaries, Krolewska Pizza, Sp.zo.o. ("KP") and Pizza King Polska, Sp.zo.o.
("PKP"). Unless the context indicates otherwise, references herein to IFFC
include all of its operating subsidiaries.
IFFC currently operates eight Traditional Burger King Restaurants and
seven 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 ever achieve profitability or be able to successfully
establish a sufficient number of restaurants to achieve profitability.
On March 17, 1995, IFFC and IFFP (collectively, the "IFFC Affiliates"),
filed suit against BKC in the Eleventh Judicial Circuit Court of the State of
Florida. In their amended complaint, the IFFC Affiliates alleged, among other
things, that BKC breached certain of its express and implied obligations under
the old BKC Development Agreement and the eight existing franchise agreements
(the "Franchise Agreements") pertaining to IFFP's eight Burger King restaurants.
The IFFC Affiliates further alleged that in connection with BKC's sale of
certain of its
26
<PAGE>
rights pursuant to the old BKC Development Agreement and the Franchise
Agreements, BKC failed to timely deliver to the IFFC Affiliates a complete and
accurate franchise offering circular in accordance with rules promulgated by the
Federal Trade Commission (the "FTC Count"). The IFFC affiliates also alleged
that BKC committed certain acts which constitute fraud and/or deceptive and
unfair business practices. The IFFC Affiliates asked the court to, among other
things, award them compensatory damages of not less than $15,000,000, punitive
damages and certain costs and expenses.
On March 11, 1997, BKC, IFFC, IFFP and Rubinson, individually and on
behalf of Litigation Funding, Inc. entered into a Settlement Agreement. In
connection with the execution of the Settlement Agreement, IFFC and BKC entered
into the New BKC Development Agreement and eight (8) new franchise agreements.
BKC paid to IFFC the sum of $5,000,000 (less $21,865 of royalties owed by IFFP
to BKC for February 1997) for a net amount of $4,978,135. In addition, BKC
forgave $499,768 representing all monies owed BKC by IFFP and IFFC through
January 31, 1997. Under the terms of the Settlement Agreement, a portion of such
proceeds, not to exceed $2,000,000 may be used to immediately satisfy the actual
legal fees and costs of IFFC and IFFP incurred in connection with the BKC
litigation, including IFFC's and IFFP's obligation under the agreement between
IFFC, IFFP and Litigation Funding, Inc. The remaining $3,000,000 is to be used
by IFFC and IFFP for the development of additional BKC restaurants in Poland or
working capital for IFFP pursuant to the New BKC Development Agreement. All
parties to the litigation stipulated to dismissal of the litigation and executed
mutual releases.
In order to secure additional funds to finance the BKC Litigation, IFFC
has entered into two agreements specifically designed to assist it in financing
the BKC Litigation. First, as of January 25, 1996, the IFFC Affiliates entered
into an Agreement to Assign Litigation Proceeds (the "Funding Agreement") with
Litigation Funding, Inc., a Florida corporation ("Funding"). This agreement was
later amended in July 1996. Mitchell Rubinson, the Chairman of the Board, Chief
Executive Officer and President of IFFC is also the Chairman of the Board, Chief
Executive Officer and President and the principal shareholder of Funding.
Pursuant to the amended Funding Agreement, Funding agreed to pay on
behalf of IFFC and/or IFFP up to $750,001 (the "Amount") for all expenses
(including attorneys' fees, court costs and other related expenses, but not
judgments or amounts paid in settlement) actually incurred by or on behalf of
IFFC and/or IFFP in connection with investigating, defending, prosecuting,
settling or appealing the BKC Litigation and any and all claims or counterclaims
of BKC against IFFC and/or IFFP (collectively, the "BKC Matter"). Funding has
paid all amounts it has been requested to pay pursuant to the Funding Agreement.
In consideration of the Amount, IFFC and IFFP each assigned to Funding
a portion of any and all benefits and gross sums, amounts and proceeds that each
of them may receive, collect, realize, otherwise obtain or benefit from in
connection with, resulting from or arising in connection with the BKC Matter or
any related claim, demand, appeal, right and/or cause of action of the IFFC
Affiliates, including, but not limited to, amounts received or entitled to be
received by the IFFC Affiliates in respect to (i) the gross proceeds of any
court ordered decision or judgement (a "Judgement") entered in favor of IFFC
and/or IFFP, (ii) the Sale Proceeds (as such term is defined in the agreement,
the "Sales Proceeds") of any sale of the assets of IFFC and/or IFFP to BKC, any
of BKC's affiliates and/or any entity which is introduced to the IFFC Affiliates
by BKC (collectively, the "BKC Entities") in connection with a settlement of the
BKC Matter, (iii) any amounts paid in compromise or settlement (a "Settlement")
of the BKC Matter in whole or in part, (iv) any liabilities or indebtedness of
IFFC or IFFP assumed or satisfied by the BKC Entities (the "Debt Relief
Proceeds") and (v) the monetary value to the IFFC Affiliates of any concessions
made by BKC with respect to its rights under (a) the Development Agreement
and/or (b) the Franchise Agreements and any future franchise agreements between
BKC and IFFP and/or IFFC (the "Contract Modification Proceeds"). All of the IFFC
Affiliates' rights, titles and interests, legal and equitable, in and to such
aforementioned benefits and gross sums, amounts and proceeds are collectively
referred to herein as the "Proceeds".
Specifically, IFFC and IFFP each individually assigned, set over,
transferred and conveyed to Funding all of its right, title and interest in and
to the sum of the following (the "Assigned Proceeds"); (i) seventy five percent
27
<PAGE>
(75%) of the Proceeds to the extent that such amount does not exceed Funding's
Expenses ("Funding's Expenses") which are defined as the sum of the aggregate
amount of money paid by Funding and the amount of money expended
by Funding if it assumes the prosecution of the BKC Matter; (ii) seventy five
percent (75%) of any Proceeds, excluding any Sales Proceeds, in excess of the
sum of Funding's Expenses and the IFFC Affiliates' Expenses (as such term is
defined below, the "IFFC Affiliates' Expenses"); and (iii) seventy five percent
(75%) of any Sales Proceeds in excess of the sum of Funding's Expenses and the
IFFC Affiliates' Expenses.
Subject to Funding's recovery of Funding's Expenses, IFFC and IFFP have
retained the right in and shall be entitled to recover from the Proceeds the sum
of (i) $303,731, and (ii) all of the amounts they may expend in the future in
connection with the BKC Matter, before Funding shall be entitled to receive any
other Proceeds.
On July 14, 1997, IFFC (the"Company") and IFFC Acquisition, Inc., a
wholly-owned subsidiary of the Company ("Acquisition Sub") entered into a Merger
Agreement with Litigation Funding, Inc. ("Funding") and Mitchell and Edda
Rubinson, the sole shareholders of Funding. Under the terms of the Agreement,
Funding was merged with and into Acquisition Sub. The 25,909,211 shares of
common stock of the Company 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.
On July 14, 1997, the date of the Merger Agreement with Litigation
Funding, Inc., the Company's Common Stock was trading at approximately $.34 per
share. However, due to the lack of an established trading market for the
Company's Common Stock, the disinterested Directors of the Company did not
utilize the quoted price per share to determine the number of shares to issue in
connection with the Merger Agreement. Instead the June 30, 1997 book value of
the Company ($.1166 per share) was utilized to measure the Company's fair value.
In the opinion of the disinterested Directors of the Company, the value assigned
to the Common Stock issued was approximately equlvalent to its fair value on the
date such shares were issued.
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 Development Agreement between Burger King Corporation ("BKC"
and IFFC and its affiliates which was executed on March 14, 1997 in connection
with the Company's settlement of its litigation against BKC. Funding was
entitled to receive seventy-five percent (75%) of the litigation proceeds, as
defined, under its prior agreements with the Company.
In July 1997, the Company purchased KP and PKP, two Polish limited
liability companies, for nominal consideration and assumption of all
liabilities, including the liabilities of KP to the Company under a $500,000
promissory note. KP currently owns the exclusive master franchise rights and
commissary rights; and PKP owns the individual store franchises for Dominos
pizza stores in Poland.
The acquisition was accounted for under the purchase method of
accounting, and the net assets acquired are included in the Company's
consolidated balance sheet based upon their estimated fair values at the date of
acquisition. Results of operations of KP will 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 is 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.
Year Ended December 31,
-----------------------
1997 1996
Total Revenues $ 6,673,191 $ 6,376,534
Net loss $(1,384,323) $(2,564,233)
Basic and diluted net loss
per share $ (.05) $ (.43)
28
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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 had agreed that as a
condition to the New Master Franchise Agreement it 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 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.
YEAR-ENDED DECEMBER 31, 1997 VS YEAR-ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
Results of operations for the year ended December 31, 1997, include the
results of KP and PKP, which were acquired in July 1997 in a transaction
accounted for as a purchase. 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.
During the period from acquisition in July through December 31, 1997,
KP and PKP generated $612,757 of store sales from their four Domino's pizza
stores and incurred Food and Packaging Costs of $220,328, Payroll and Related
Costs of $155,135, Occupancy and Other Operating Expenses of $259,150 and
Depreciation and Amortization of $107,171. As a percentage of sales, Food and
Packaging Costs were 36.0%, Payroll and Related Costs were 25.3%, Occupancy and
Other Operating Expenses were 42.3% and Depreciation and Amortization were
17.5%. Since the acquisition was accounted for as a purchase, no amounts are
included in the accompanying financial statements for the year ended December
31, 1996.
For the year ended December 31, 1997 and December 31, 1996, IFFC
generated Sales of $6,083,011 and $5,486,178, respectively which includes sales
of $612,757 for the Domino's Pizza stores in 1997. Excluding the sales from
Domino's Pizza stores in 1997 and miscellaneous revenue from both years,
Burger King restaurant sales increased by .6% in U.S. dollar terms and 22.3% in
Polish zloty terms, for the year ended December 31, 1997 as compared to the year
ended December 31, 1996. The increase is primarily attributable to improved
marketing and general improvements in the Polish economy.
29
<PAGE>
During the year ended December 31, 1997, IFFC incurred Food and
Packaging Costs of $2,256,447, Payroll and Related Costs of $912,147, Occupancy
and Other Operating Expenses of $1,569,744 and Depreciation and Amortization
Expense of $781,367.
Food and Packaging Costs applicable to Burger King restaurants for the
year ended December 31, 1997 and 1996 were 41.9% and 42.7% of Restaurant Sales
(exclusive of miscellaneous revenue), respectively. The .8% decrease as a
percentage of Restaurant Sales is primarily attributable to improved product
sourcing, the implementation of tighter cost controls, a decrease in custom
duties and import tax on paper goods coupled with an increase in Restaurant
Sales.
Payroll and Related Costs applicable to Burger King restaurants for the
year ended December 31, 1997 and 1996 were 16.9% and 15.2% of Restaurant Sales
(exclusive of miscellaneous revenue), respectively. The 1.7% increase as a
percentage of Restaurant Sales increased primarily as a result of an increase in
the minimum wage rate and related benefits in Poland effective January 1, 1997,
coupled with increased wages for managers and assistant managers.
Occupancy and Other Operating Expenses applicable to Burger King
restaurants for the year ended December 31, 1997 and 1996 were 29.2% and 28.7%
of Restaurant Sales (exclusive of miscellaneous revenue), respectively. The .5%
increase as a percentage of Restaurant Sales is primarily attributable to an
increase in advertising expense, and repairs and maintenance.
Depreciation and Amortization Expense applicable to Burger King
restaurants as a percentage of Restaurant Sales (exclusive of miscellaneous
revenue was 14.5% and 18.4% in the year ended December 31, 1997 and 1996,
respectively. The 3.9% decrease as a percentage of restaurant sales is primarily
attributable to the fully depreciated status of certain assets still in use.
General and Administrative Expenses for the year ended December 31,
1997 (which include $96,384 applicable to KP and PKP) and 1996 were 32.3% and
28.3% of Sales, respectively. The 4.0% increase as a percentage of Sales is
primarily attributable to increased office rent, legal and accounting services,
and an approximate $250,000 increase in the provision for disputes with Polish
Fiscal Authorities, see "Item 3. Legal Proceedings - Polish Fiscal Authority
Disputes." Excluding the $96,384 of General and Administrative expenses
applicable to KP and PKP and the non-recurring provision of $250,000, General
and Administrative expenses applicable to Burger King restaurants were 30.0% and
29.0% for the year ended December 31, 1997. General and Administrative Expenses
were comprised of executive and office staff salaries and benefits ("Salary
Expense") $612,225; legal and professional fees, office rent, travel, telephone
and other corporate expenses (including 250,000 non-recurring provision)
("Corporate Overhead Expense") $1,250,151, and depreciation and amortization
$100,857. For the year ended December 31, 1996, General and Administrative
Expense included Salary Expenses of $709,188; Corporate overhead expenses of
$685,067, and depreciation and amortization of $156,874.
For the year ended December 31, 1997, IFFC generated a net loss of
$(1,252,850) or $(.05) per share of IFFC's Common Stock compared to a net loss
of $(1,996,112), or $(.37) per share of IFFC's Common Stock for the year ended
December 31, 1996. During the year ended December 31, 1997, IFFC recognized a
non-recurring gain of $1,327,070 or $.05 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 3.
Legal Proceedings - Polish Fiscal Authority Disputes" for a description of such
matters.
For the year ended December 31, 1997 and 1996 Interest and Other Income was
comprised as follows:
30
<PAGE>
Year Ended December 31,
1997 1996
---------- ---------
Interest income $ 263,714 $ 51,949
Management fee 18,190 21,173
Forgiveness of indebtedness 329,465 -
All other, net (134,316) 25,014
------------ ---------
$ 477,053 $ 98,136
============ =========
All other, net includes various non-recurring charges and credits not
specifically related to operating activity.
Interest Expense is comprised as follows:
Year Ended December 31,
-----------------------
1997 1996
Interest Expense on Subordinated
Convertible Debentures $ 248,040 $ 248,040
Interest Expense on Note Payable
to Litigation Funding 73,767 -
Interest Expense on 8% Convertible
Promissory Notes 16,178 -
Amortization of Debt
Issuance Costs 74,304 33,256
Accretion of discount on 11%
Convertible Senior Subordinated
Discount Notes 354,588 -
Interest Expense on Bank
Facilities 178,721 165,265
--------- ---------
Total $ 945,598 $ 446,561
========= =========
Interest Expense exceeded Interest and Other Income by $468,545 and
$348,425 for the year ended December 31, 1997 and 1996, respectively.
IFFC's interest expense on bank facilities was $178,721 and $165,625
for the year ended December 31, 1997 and 1996, respectively. The $13,456
increase is attributable to higher borrowings under bank credit facilities
during the current year.
LIQUIDITY AND CAPITAL RESOURCES
IFFC's material commitments for capital expenditures in its restaurant
and store business relate to the provisions of the BKC Development Agreement and
the New Master Franchise Agreement with Domino's.
31
<PAGE>
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.
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
32
<PAGE>
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 December 31, 1997, 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 (7,181,320)
-------------
Balance at December 31, 1997 $ 20,354,680
=============
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.
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;
33
<PAGE>
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.
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.
On May 17, 1996, IFFC's Common Stock was deleted from the NASDAQ
SmallCap Market and has traded on the over the counter market (Electronic
bulletin board) since that date.
To date, IFFC's business operations have been principally financed by
proceeds from public offerings of IFFC's equity and debt securities, private
offerings of equity and debt securities, proceeds from various bank credit
facilities, proceeds from the sale of certain equity securities, the BKC
Settlement Agreement, and proceeds from the private sale of the 11% Convertible
Senior Subordinated Discount Notes.
The June 15, 1996, December 15, 1996, and June 15, 1997 dividend
payments with respect to the series A 6% Convertible Preferred Stock were not
declared or made on their respective due dates. As of December 31, 1996,
$229,440 of preferred dividends were in arrears. On December 15, 1997, the
Company issued 549,865 shares of Common Stock valued at $401,401 in payment of
the December 15, 1997 dividend and all dividends in arrears as of that date. At
December 31, 1997, no dividends were in arrears.
In June 1996, after considering various alternatives, including the
market price for the Company's Common Stock, its trading volume and various time
constraints, the Board of Directors authorized the issuance of 2,200,000 shares
of the Company's Common Stock for a total purchase price of $110,000 to Mitchell
Rubinson and his wife Edda. The Company used the proceeds from the sale of the
shares for payment of interest on the Company's 9% Convertible Subordinated
Debentures.
34
<PAGE>
In September 1996, the Company had working capital needs, and had
incurred additional expenses in connection with the BKC Litigation. The Board of
Directors of IFFC authorized the sale of 2,500,000 shares of common stock at
$.10 per share. Marilyn Rubinson, Jaime Rubinson and Kim Rubinson , the mother
and daughters of Mitchell Rubinson, the Company's President purchased 250,000
shares each or a total of 750,000 shares of the offering.
In November 1996, the Company had additional working capital needs. The
Board of Directors of IFFC authorized the sale of 500,000 shares of common stock
at $.10 per share. Jaime Rubinson purchased 250,000 shares and Kim Rubinson
purchased 250,000 shares.
In December 1996, IFFC had outstanding an interest payment of
approximately $125,000 in connection with its 9% Convertible Subordinated
Debentures and additional working capital needs. After considering various
alternatives and factors, the Board of Directors of IFFC authorized the sale of
1,500,000 shares of common stock of IFFC to Marilyn Rubinson, at $.10 per share.
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 December 31, 1997 and March 23, 1998, the Company had $643,889
and $228,390, 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.
IFFC has also financed its operations through the use of credit
facilities, which credit facilities are described below.
On September 30, 1996, PKP entered into a revolving credit facility
with Amerbank totaling 100,000 zlotys (approximately $28,460 at December 31,
1997 exchange rates). The credit facility matures on March 30, 1998 and bears
interest at a monthly adjusted rate. The note is secured by the guarantee of
IFFC. As of December 31, 1997
35
<PAGE>
and March 23, 1998, the outstanding balance on the credit facility was $15,772
and $28,682, respectively. The balance of the credit facility was paid in full
on March 30, 1998.
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 $56,915 at December 31,
1997 exchange rates), and (ii) in March 1997, the credit facility was further
amended to 100,000 zlotys (approximately $28,458 at December 31, 1997 exchange
rates). The credit facility matures on March 31, 1998. As of December 31, 1997
and March 23, 1998, the outstanding balance on the credit facility was $15,223
and $13,679, respectively. The balance of the credit facility was paid in full
on March 30, 1998.
As of February 23, 1994, IFFC terminated a credit facility created on
February 12, 1993 and entered into a new $1,000,000 credit facility with
AmerBank. The new credit facility was structured as a revolving credit facility
through May 31, 1994. During this initial period, draws could be made in minimum
increments of $40,000 to purchase, and were secured by, furniture, equipment and
related items for restaurants. During the initial period, interest accrued on
the outstanding balance at a rate of 12% per annum and was due and payable
quarterly. As of July 31, 1994, the outstanding balance under the credit
facility became due and payable at a rate of $90,000 plus interest every three
months with any principal outstanding as of April 30, 1996 immediately due and
payable. On November 7, 1996 AmerBank agreed to amend the credit facility so
that the outstanding principal balance becomes due and payable at a rate of
$100,000 on March 31, 1997, $100,000 on June 30, 1997 and $110,000 on September
30, 1997 plus interest every three months. The balance of the credit facility
was paid in full on September 30, 1997.
On February 16, 1996, IFFP entered into a $300,000 line of credit with
AmerBank, the proceeds of which may be used to finance IFFP's business
operations. Pursuant to the line of credit, IFFC could make draws on the line of
credit until June 30, 1996. IFFP is required to make interest payments on
the outstanding principal amount of the credit facility at AmerBank's prime
rate. IFFP is also obligated to pay AmerBank a 1% per annum commission on the
daily average unutilized principal balance of the credit facility. Interest and
commission expenses are payable monthly. The outstanding principal balance of
the loan is payable in three quarterly installments of $100,000 commencing on
March 31, 1998. The credit facility is secured by: (i) a promissory note of IFFP
and (ii) a guarantee of IFFC. The balance of the credit facility was paid in
full on September 9, 1997.
On May 30, 1994, IFFC's subsidiary, IFFP, entered into a credit
facility with Bank Handlowy Warszawie, S.A. ("Bank Handlowy") in the principal
amount of $10,000,000. Borrowings under the Bank Handlowy credit facility could
be made until May 31, 1997 and were secured by: (i) amounts on deposit with Bank
Handlowy; (ii) an unconditional guarantee of IFFC; (iii) the fixed assets of
IFFP; and (iv) a letter of credit (described below). Borrowings under the Bank
Handlowy credit facility were required be repaid in fourteen equal semi-annual
installments with the first installment due on November 30, 1997. Interest
accrued on the amount outstanding under the credit facility at the London
Interbank Offered Rate (LIBOR) for nine month deposits plus 3.875% per annum.
The proceeds could be used to finance up to forty percent (40%) of the costs of
furnishing and commencing operation of fast food restaurants operated by IFFP.
On December 13, 1995, the credit facility with Bank Handlowy was amended. The
principal amount of the credit facility was reduced to $1,000,000 and borrowings
under the credit facility were required to be repaid on December 16, 1996. The
maturity date and payment terms of the facility were further amended and
principal payments of $100,000 and $50,000 were made in December 1996 and
January 1997, respectively. The balance of the credit facility was paid in full
on September 9, 1997.
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.
36
<PAGE>
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%. 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 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 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.
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 December 31, 1997, the exchange rate was 3.514 zlotys per dollar.
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>
Item 7. Financial Statements.
See "Index to Financial Statements" for a description of the financial
statements included in this Form 10- KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 5, 1998, the Company advised Moore Stephens Lovelace, Roby,
P.L. ("Moore Stephens") that it would not be appointed as the Company's auditors
for the year ended December 31, 1997. During the most recent fiscal year and
subsequent interim period through January 5, 1998, there have been no
disagreements with Moore Stephens on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, or
any reportable events. The Company has received from Moore Stephens a letter
addressed to the Securities and Exchange Commission stating that it agrees with
the statements made by the Company. On January 8, 1998, the Board of Directors
of the Company appointed Arthur Andersen LLP as independent auditors of the
Company for the fiscal year ended December 31, 1997.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mitchell Rubinson(1)(2)(3)................ 50 Chairman of the Board, Chief Executive
Officer and President
Leon Blumenthal........................... 56 Senior Vice President, Chief Operating Officer
and General Manager
James F. Martin, CPA...................... 37 Chief Financial Officer, Treasurer and Director
Mark Rabinowitz, M.D.(1)(2)(3)............ 49 Director
Larry H. Schatz, Esq.(1)(2)(3)............ 52 Vice Chairman of the Board
</TABLE>
- ----------------
(1) Member of the Audit Committee
(2) Member of the Stock Option Committee
(3) Member of the Nomination Committee
Mitchell Rubinson has served as the Chairman of the Board, Chief
Executive Officer and President of the Company since its incorporation in
December 1991. Mr. Rubinson served as the Chairman of the Board, Chief Executive
Officer and President of Capital Brands, Inc. ("Capital Brands") from March 1988
to April 26, 1996 and
38
<PAGE>
served as the Treasurer of Capital Brands from March 1992 to April 1993. Mr.
Rubinson served as the Chairman of the Board, Chief Executive Officer and
President of QPQ Corporation, from July 1993 to May 1997.
Leon Blumenthal has served as the Senior Vice President and Chief
Operating Officer of IFFC and Managing Director of IFFP and President of the
Polish subsidiaries since March 1995. Mr. Blumenthal served as General Manager
of Hanna Holding Fast Foods from January 1991 to March 1994. As General Manager,
Mr. Blumenthal was responsible for the operation of 20 Burger King restaurants
within Denmark, Sweden and Norway. From 1986 to 1990, Mr. Blumenthal owned and
operated two franchised restaurants of C&M Foods, Inc., d/b/a Bojangles Chicken
& Biscuits in Lilburn, Georgia. From 1966 to 1982, Mr. Blumenthal held various
positions with Burger King Corporation and its franchisees.
James F. Martin, CPA, Vice President, Chief Financial Officer,
Treasurer and Director of the Company since May 1997 and, Director of Finance
for IFFP and PKP from November 1993 through February 1995. Mr. Martin served as
Chief Financial Officer of QPQ Corporation from October 1996 to May 1997. From
May 1995 through September 1996, Mr. Martin was a 50% owner in an information
systems and software consulting company located in South Florida. Additionally,
Mr. Martin has nine years of commercial banking experience.
Mark Rabinowitz, M.D. has served as a director of the Company since
January 1996. Since 1983, Dr. Rabinowitz' principal occupations have been
serving as a medical doctor for and the Vice President of Jose E. Gilbert and
Mark Rabinowitz MDS, P.A. and serving as a medical doctor for the President of
Women's Centre for Health, Inc. Dr. Rabinowitz served as a director of QPQ
Corporation from January 1996 to May 1997.
Larry H. Schatz, Esq. has served as Vice Chairman of the Board of the
Company since July 1997. Mr. Schatz has served as "of counsel" for the law firm
of Grubman Indursky & Schindler P.C. from January 1996. From 1991 through 1995
Mr. Schatz worked as an attorney in private practice. Mr. Schatz has a J.D. from
Brooklyn Law School and a B.A. from The City University of New York.
The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board. The Company directors hold office
until the next annual meeting of shareholders or until their successors have
been duly elected and qualified. The Company reimburses all directors for their
expenses in connection with their activities as directors of the Company. It is
anticipated that the directors will make themselves available to consult with
the Company's management. Directors of the Company who are also employees of the
Company will not receive additional compensation for their services as
directors. Mr. Schatz receives $25,000 per annum for serving as Vice Chairman of
the Board. In connection with the issuance of the Company's 11% Convertible
Senior Subordinated Discount Notes (the "CSS Notes"), the Company obtained and
is the beneficiary of a $22,000,000 key man life insurance policy on the life of
Mr. Rubinson. Under the terms of the Company's CSS Notes, the Company shall
nominate one individual designated by the holders of the CSS Notes to serve as a
director of the Company. In addition, under the terms of the CSS Notes, Mr.
Rubinson has agreed to vote his shares in favor of such nominee. As of such
date, the CSS Note holders have not nominated someone to serve as a director.
Meetings and Committees of the Board of Directors
During the Company's fiscal year ended December 31, 1997, the Company
Board of Directors took action thirteen (13) times by unanimous written consent
and had 2 meetings.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's outstanding Common Stock, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock. Such persons are required by SEC
regulation to furnish the Company with copies of all such reports they file.
39
<PAGE>
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representation that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners have been
complied with.
Item 10. Executive Compensation.
Summary Compensation Table
The following table sets forth the aggregate compensation paid to the
Named Executive Officer (as defined below). None of the company's other
executive officers total annual salary and bonus for the year ended December 31,
1997 was $100,000 or more.
<TABLE>
<CAPTION>
Long Term
Annual Compensation(1) Compensation
--------------------- ------------
Number of
Name and Fiscal Other Annual Options All Other
Principal Position Year Salary Compensation Granted(2) Compensation
- ------------------ ------ ------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Mitchell Rubinson, 1997 $192,163 $14,216(6) (4)
Chief Executive Officer 1996 $181,093 $12,993(5)
1995 $159,976 $15,223(3)
</TABLE>
- ----------------------
(1) The columns for "Bonus," "Restricted Stock Awards" and "LTIP Payouts"
have been omitted because there is no compensation required to be
reported in such columns.
(2) See "Aggregated Fiscal Year-End Options Value Table" for additional
information concerning options granted.
(3) Represents an automobile allowance of $12,000 and medical insurance
premiums of $3,223.
(4) As of July 1, 1997 each of the options held by Mr. Rubinson was
amended to reduce the stated exercise price therein to the fair market
value of the Common Stock on such date ($.40).
(5) Represents an automobile allowance of $12,000 and medical insurance
premiums of $993.
(6) Represents an automobile allowance of $12,000 and medical insurance
reimbursement of $2,216.
Employment Agreements
On November 7, 1996, IFFC amended its employment agreement with Mr.
Rubinson, extending his employment term until December 31, 1999. The amended
agreement also provides for a minimum annual salary of $183,012.50 during the
first year, subject to a 10% annual increase for each of the remaining two
years. The agreement further provides that Mr. Rubinson will serve as Chairman
of the Board, Chief Executive Officer and President during the term of the
agreement. Additionally, Mr. Rubinson is entitled to receive an annual incentive
bonus in the amount of 2.5% of IFFC's net income, after tax. Pursuant to his
employment agreement, Mr. Rubinson is required to devote such portion of his
business time to IFFC as may be reasonably required by IFFC's Board of
Directors. Mr. Rubinson is entitled to four weeks of paid vacation during the
first year of the initial term and six weeks of paid vacation during any
subsequent year of his employment with IFFC. For each day of vacation that Mr.
Rubinson elects not to take, under the employment agreement, IFFC will pay him
an amount of money equal to the quotient of his then annual salary divided by
260. Mr. Rubinson's employment agreement requires that he not compete or engage
in any business competitive with IFFC's business for the term of the agreement
and for one
40
<PAGE>
year thereafter. Mr. Rubinson is, in addition to salary, entitled to certain
fringe benefits including an automobile allowance. Mr. Rubinson's employment
agreement provides for certain payments in the event his employment is
terminated by reason of his death or disability and a severance payment of twice
the minimum annual salary then in effect plus the incentive bonus paid in the
prior year, in the event his employment is terminated by IFFC without cause. Mr.
Rubinson's employment agreement does not provide for a severance payment in the
event his employment is terminated for cause.
IFFC's employment agreement with James F. Martin, effective July 1,
1997, provides that he will serve as Chief Financial Officer of IFFC and/or that
of its subsidiaries or affiliates, for an initial term of three years, which
IFFC may extend for up to two additional years. His annual salary for the first
year is $85,000. Pursuant to his employment agreement, Mr. Martin is required to
devote his full business time, attention and best efforts to the performance of
his duties under the employment agreement. Mr. Martin is entitled to three weeks
of paid vacation during any year of employment. Mr. Martin is also entitled to
an automobile allowance of $400 per month. However, Mr. Martin shall be
responsible for all associated expenses relating to such automobile, including,
without limitation, insurance, gas and repairs. Mr. Martin is eligible to
receive stock option grants under IFFC's Stock Option Plans in the discretion of
IFFC's Board of Directors or Option Committee. IFFC has granted Mr. Martin stock
options to acquire 100,000 shares of IFFC's Common Stock at an exercise price of
$.40 per share, such options to be exercisable in whole or in part and
cumulatively as follows, provided in each case that Mr. Martin is an employee of
IFFC on the date of exercise: (i) twenty percent (20%) one year after the
effective date of the employment agreement; (ii) sixty percent (60%) two years
after the effective date of the employment agreement; and (iii) one hundred
percent (100%) three years after the effective date of the employment agreement.
In the event Mr. Martin is required to move to Poland, IFFC shall provide Mr.
Martin an appropriate housing allowance, to be determined at that time. Mr.
Martin's employment agreement provides for a payment of $20,000 in the event his
employment is terminated by reason of his death or disability and a severance
payment in the event Mr. Martin's employment is terminated without cause, such
severance to be calculated as follows: (i) July 1, 1997 through June 30, 1998, a
$20,000 severance amount; (ii) July 1, 1998 through June 30, 1999, a $15,000
severance amount; and (iii) July 1, 1999 through June 30, 2000, a $10,000
severance amount. Mr. Martin's employment agreement does not provide for a
severance payment in the event his employment is terminated for cause. Mr.
Martin's employment agreement requires that he not compete or engage in any
business competitive with IFFC's business for the term of the agreement and for
a period of two years thereafter.
IFFC and IFFP executed an employment agreement with Leon Blumenthal,
effective July 1, 1997, which provides that he will serve as IFFC's Senior Vice
President, Chief Operating Officer and General Manager, and shall serve as the
President of IFFP and KP for an initial term of three years, which IFFC may
extend for up to an additional two years. His annual salary for the first year
is $100,000. Additionally, under the terms of the employment agreement, Mr.
Blumenthal shall be eligible to receive stock option grants under IFFC's Stock
Option Plans in the discretion of IFFC's Board of Directors or Option Committee.
IFFC granted Mr. Blumenthal stock options to acquire 100,000 shares of IFFC's
Common Stock at an exercise price of $.40 per share, such options to be
exercisable in whole or in part and cumulatively according to the following
schedule: (i) twenty percent (20%) one year after the effective date of the
employment agreement; (ii) sixty percent (60%) two years after the effective
date of the employment agreement; and (iii) one hundred percent (100%) three
years after the effective date of the employment agreement. Mr. Blumenthal is,
in addition to salary, entitled to certain fringe benefits including an
automobile to use in connection with the performance of his duties under the
agreement. Mr. Blumenthal shall be entitled to three weeks of paid vacation
during his employment. Mr. Blumenthal's employment agreement provides for a
payment of $25,000 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. Blumenthal is entitled to a severance payment as follows: if the
termination occurs (i) on or prior to July 1, 1998, the severance amount will be
$25,000; (ii) after July 1, 1998 but on or prior to July 1, 1999, the severance
amount will be $20,000; and (iii) after July 1, 1999, the severance amount will
be $15,000. Mr. Blumenthal's employment agreement does not provide for a
severance payment in the event his employment is terminated for cause. Mr.
Blumenthal's employment agreement requires that he not compete
41
<PAGE>
or engage in any business competitive with IFFC's business for the term of the
agreement and for two years thereafter.
Aggregated Fiscal Year-Ended Options Value Table
The following table sets forth certain information concerning
unexercised stock options held by the Named Executive Officer as of December 31,
1997. No stock options were exercised by the Named Executive Officers during the
year ended December 31, 1997. No stock appreciation rights were granted or are
outstanding.
<TABLE>
<CAPTION>
Number of Unexercised Options Held Value of Unexercised In-the-Money Options
at December 31, 1997(1) at December 31, 1997
---------------------------------------- -----------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mitchell Rubinson 150,000 0 $ 3,000 $ 0
</TABLE>
(1) The closing bid quotation for the Company's Common Stock as reported by the
National Association of Securities Dealers on December 31, 1997 was $.42
and $.51 on March 24, 1998.
OPTION REPRICINGS
Since the Company's inception, the Company has issued, pursuant to the
terms of the 1993 Stock Option Plan and 1993 Directors Stock Option Plan, a
number of stock options to directors, executive officers and key employees. See
"SECURITY OWNERSHIP" for more information regarding the options granted to
Mitchell Rubinson. As of July 1, 1997 the exercise price of each of the stock
options granted by the Company was above the fair market value of the Common
Stock underlying the stock options. In an effort to provide the holders of the
stock options additional incentive to use their best efforts on behalf of the
Company, as of July 1, 1997 the stock option agreements between the Company and
Mitchell Rubinson were amended to reduce the exercise stated therein to the fair
market value of the underlying Common Stock on such date ($.40).
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 20, 1998, the number of
shares of Common Stock of the company which were owned beneficially by (i) each
person who is known by the Company to own beneficially more than 5% of its
Common Stock, (ii) each director and nominee for director, (iii) the Chief
Executive Officer and the Chief Financial Officer of the Company (collectively,
the "Named Executed Officer") and (iv) all directors and executive officers of
the Company as a group:
<TABLE>
<CAPTION>
Percentage of
Amount and Nature of Outstanding
Name and Address of Beneficial Owner(1) Beneficial Ownership Shares Owned(2)
--------------------------------------- -------------------- ---------------
<S> <C> <C>
Mitchell Rubinson and Edda Rubinson..................... 30,559,211(3) 68.2%
Marilyn Rubinson......................................... 4,750,000 10.6%
Joel Hirschhorn.......................................... 2,370,000 5.3%
Dr. Mark Rabinowitz...................................... 136,197(4) *
James F. Martin.......................................... 106,000(5) *
Larry H. Schatz.......................................... 50,000(6) *
Leon Blumenthal.......................................... 100,000(7) *
All directors and executive officers as a group
(five persons)........................................... 30,951,408(8) 69.3%
</TABLE>
- ------------------------------
* Less than 1%.
42
<PAGE>
(1) The address of each of the listed beneficial owners identified is c/o
1000 Lincoln Road, Suite 200, Miami Beach, Florida 33139. Unless
otherwise noted, the Company believes that all persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Proxy
Statement upon the exercise of options. Each beneficial owner's
percentage ownership is determined by assuming that options that are held
by such person (but not those held by any other person) and that are
exercisable within 60 days from the date hereof have been exercised. As
of March 24, 1998 there were 44,641,247 shares of Common Stock
outstanding.
(3) Such figure includes options to purchase 150,000 shares of Common Stock
granted to Mr. Rubinson pursuant to the Company's 1993 Stock Option Plan
that are immediately exercisable at an exercise price of $.40. Such
figure includes 80,000 outstanding shares of Common Stock presently owned
by Mitchell and Edda Rubinson which are subject to an option granted to
Whale Securities Co., L.P. ("Whale") to purchase at any time until August
30, 1998 at a purchase price of $5.50 per share (the "Rubinson/Whale
Option").
(4) Such figure includes options to purchase 50,000 shares of Common Stock
granted to Dr. Rabinowitz that are immediately exercisable at an exercise
price of $.40.
(5) Such figure includes options to purchase 100,000 shares of Common Stock
granted to Mr. Martin pursuant to an employment agreement that vest over
a three (3) year period beginning in July 1998 at an exercise price of
$.40.
(6) Such figure includes options to purchase 50,000 shares of Common Stock
granted to Mr. Schatz that are immediately exercisable at an exercise
price of $.40.
(7) Such figure includes options to purchase 100,000 shares of Common Stock
granted to Mr. Blumenthal pursuant to an employment agreement that vest
over a three (3) year period beginning in July 1998 at an exercise price
of $.40.
(8) See Notes (3)-(7) above.
Item 12. Certain Relationships and Related Transactions.
In January 1997, after considering various alternatives, including the
market price for IFFC's Common Stock, its trading volume, various time
constraints, and the unavailability of funds from other sources, the
disinterested Directors of IFFC authorized the sale of $100,000, $300,000,
$50,000 and $50,000 aggregate principal amount of convertible promissory notes
to Mitchell Rubinson and his wife Edda, Marilyn Rubinson, Jaime Rubinson and Kim
Rubinson, respectively. The notes bore interest at 8% per annum and were to
mature on January 13, 1999. The notes are convertible into shares of IFFC'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 Funding as partial payment of amounts due to
Funding in connection with the settlement of the BKC litigation. The note bore
interest at prime plus 1%, was payable in full on December 31, 1998, and was
prepayable in whole or in part at anytime, without penalty. 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
this Agreement, Funding was merged with and into Acquisition Sub, and 25,909,211
shares of IFFC's Common Stock
43
<PAGE>
were issued to such shareholders of Funding. The exchange ratio was based on a
valuation by the disinterested Directors of the amount owed to Funding under the
prior litigation financing agreements between IFFC, IFFP and Funding and the
value of Funding's rights to proceeds of the settlement with BKC. The promissory
note previously issued to Funding was assumed by IFFC by virtue of the merger
with Funding.
All of the foregoing transactions were authorized by the disinterested
directors of IFFC. Under the terms of the Indenture, subject to certain
exceptions, IFFC will not, and will not permit any Restricted Subsidiary to,
enter into, renew or extend any transaction with any holder of 5% or more of any
class of capital stock of IFFC or with any Affiliate of IFFC or any Restricted
Subsidiary, except upon fair and reasonable terms no less favorable than could
be obtained in an arm's length transaction.
44
<PAGE>
PART IV
Item 13. Exhibits, Lists and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Exhibits:
(i) General
Exhibit Description
------- -----------
<S> <C>
3.1 IFFC's Articles of Incorporation(1), as amended(12,20)
3.2 IFFC's Bylaws(1)
4.1 Specimen Common Stock Certificate(1)
4.2 Warrant Agreement, dated May 21, 1992, between IFFC and Whale Securities
Co., L.P. ("Whale")(1)
4.3 Form of Indenture relating to 9% Convertible Subordinated Debentures Due 2007
(including form of Debenture)(2)(4.3)(3)
4.4 Form of Warrant Agreement, dated December 28, 1992, between IFFC and
Whale(4.4)(2)
4.5 Warrant Agreement, dated January 14, 1994,
between IFFC and Continental Stock Transfer &
Trust Company, including form of Warrants(8)
4.6 Unit Certificate(8)
4.7 Series A 6% Convertible Preferred Stock Certificates(12)
10.1 Development Agreement, dated as of September 24, 1991, between Capital
Brands, Mitchell Rubinson and BKC (including form of Burger King Franchise
Agreement) (the "Development Agreement")(1)
10.2 Modification of Development Agreement, dated as of March 26, 1992, between
BKC, Capital Brands, Mitchell Rubinson and IFFC(1)
10.3 Assignment and Assumption Agreement, dated as of March 26, 1992, between
BKC, Capital Brands and IFFC assigning the Development Agreement to
IFFC(1)
10.4 IFFC's 1992 Stock Option Plan(1)
10.5 IFFC's 1992 Directors Stock Option Plan(1)
10.6 Employment Agreement, dated February 1, 1993, between IFFC and Stephen R.
Goth(4)
10.7 Amendment, dated December 12, 1995, to credit facility, dated May 20, 1994,
between IFFC and Bank Handlowy (15)
10.8 Product Distribution Agreement, dated September 21, 1994, between IFFC and Logistic
and Distribution Systems Sp.zo.o(10.2)(13)
10.9 Form of Indemnification Agreement between IFFC and each of IFFC's Directors
and Executive Officers(1)
10.10 Agreement to Assign Litigation Proceeds, dated as of January 25, 1996, among IFFC,
IFFP and Funding, with exhibits including the Escrow Indemnity Agreement among IFFC, IFFP,
Funding and Escrow Agent(10.1)(16)
10.11 Amendment, dated August 31, 1995, to credit facility, dated January 28, 1993, between
IFFP and AmerBank (15)
10.12 Restaurant Site Lease, dated October 26, 1992, between IFFC and the Municipal Houses
Administration(2)
45
<PAGE>
10.13 Restaurant Site Lease, dated September 24, 1991, between Kolmer and the Warsaw District
Authorities-Scrodmicscie, including appendix to the lease agreement, dated September 7,
1992, between IFFC and the District Authorities Warzawa-Scrodmicscie(2)
10.14 Franchise Agreement, dated September 17, 1992, between IFFC and BKC(2)
10.15 Franchise Agreement, dated September 17, 1992, between IFFC and BKC(2
10.16 Franchise Agreement, dated December __, 1992, between IFFC and BKC(4)
10.17 Schedule of Franchise Agreements(12)
10.18 Litigation Fee Agreement, dated April 7, 1996, among Joel Hirschhorn, P.A., IFFC and IFFP (15)
10.19 Amendment, dated October 30, 1995, to credit facility, dated January 28, 1993, between
IFFP and AmerBank (15)
10.20 Credit Facility, dated February 1, 1996, between IFFP and AmerBank (15)
10.21 Intentionally Omitted
10.22 Credit Facility, dated February 11, 1993, between IFFC and Credit Suisse(4)
10.23 Credit Facility, dated February 12, 1993, between IFFC and AmerBank in Poland S.A.(4)
10.24 Credit Facility, dated January 28, 1993, between IFFC and AmerBank in Poland
S.A.(4)
10.25 Employment Agreement, dated as of January 28, 1992, between IFFC and
Mitchell Rubinson, as amended(19.1)(5)
10.26 Restaurant Site Sublease, dated December 21, 1992, between IFFC and Dantex, amending that
restaurant site sublease, dated August 5, 1992, between IFFC and Dantex(19.2)(5)
10.27 Franchise Agreement, dated June 28, 1993, between IFFC and BKC(10.1)(6)
10.28 Consulting Agreement, effective as of July 25, 1993, between IFFC and IPC(10.2)(6)
10.29 Stock Option Agreement, effective as of July 25, 1993, between IFFC and
IPC(10.3)(6)
10.30 Key Man Life Insurance Policy, dated August 7, 1993, insuring life of Mitchell Rubinson
with IFFC as beneficiary(10.1)(7)
10.31 Agreement dated June 8, 1995, to purchase the sublease rights relating to
Dantex(10.1)(14)
10.32 Restaurant Site Lease and Lease Option Agreement, dated January 17, 1994, between
PTTK, IFFC and IPC(8)
10.33 Restaurant Site Sublease, dated January 17, 1994, between Ambrozja, IFFC and IPC(8)
10.34 Restaurant Site Sublease, dated January 17, 1994, between Hofmokl, IFFC and IPC(8)
10.35 Restaurant Site Master Lease Agreement, dated May 21, 1993, between IFFC and Centrum(8)
10.36 Restaurant Site Lease, dated December 24, 1993, between IFFC and Centrum(8)
10.37 Restaurant Site Lease, dated November 16, 1993, between IFFC and Jan Kosmowski, Justine
Irene Kosmowski and Krysztof Kosmowski(8)
10.38 Restaurant Site Lease, dated January 10, 1994, between IFFC and Multico(8)
10.39 Stock Option Agreement, dated as of May 21, 1992, between IFFC and Mitchell Rubinson(8)
10.40 Stock Option Agreement, dated as of February 1, 1993, between IFFC and Steven R. Groth(8)
10.41 Stock Option Agreement, dated as of February 1, 1993, between IFFC and Mitchell Rubinson(8)
46
<PAGE>
10.42 Registration Rights Agreement, dated as of August 31, 1993, between IFFC and
Whale(8)
10.43 Restaurant Site Lease, dated January 19, 1994, between IFFC and Garrison Flats
Administration(8)
10.44 First Amendment to Consulting Agreement, dated July 27, 1994, between IFFC and IPC(10)
10.45 Second Amendment to Consulting Agreement, effective as of January 1, 1995, between IFFC
and IPC(12)
10.46 Management Agreement, dated January 1, 1995, between IFFC and IFFP(12)
10.47 Consulting Agreement, dated as of July 27, 1994, between IFFC and Capital Brands(10)
10.48 Amendment No. 2 to Employment Agreement, dated March 31, 1995, between
IFFC and Mitchell Rubinson(12)
10.49 Credit Facility, dated February 23, 1994, between IFFC and American Bank in Poland,
S.A.(12)
10.50 Credit Facility, dated May 30, 1994, between IFFC and Bank
Handlowy(10.1)(10)
10.51 Office Site Lease, dated November 25, 1993, between IPC and Cogik and Amendment to Office
Site Lease, dated September 9, 1994, between IPC and Cogik(12)
10.52 Restaurant Site Lease, between IFFC and Centrum [Katowicz 2](10.1)(11)
10.53 First Amendment to Restaurant Site Lease, dated February 24, 1994, between
IFFC and Jan Kosmowski, Justine Kosmowski and Krysztof Kosmowski(12)
10.54 Second and Third Amendment to Restaurant Site Lease, dated May 9, 1994,
between IFFC and Jan Kosmowski, Justine Kosmowski and Krysztof Kosmowski(12)
10.55 Hamburger Bun Supply Agreement, dated February 1994, between IFFC and
Danish Food Products, Poland(12)
10.56 Commitment Letter, dated April 12, 1996 from AmerBank to IFFC regarding two
credit facility amendments.
10.57 Amendment No. 3 to Employment Agreement, dated November 7, 1996 between
Mitchell Rubinson and IFFC.(20)
10.58 Restaurant Development Agreement dated March 14, 1997 between IFFC and BKC.(19)
10.59 Franchise Agreement dated March 14, 1997 between IFFC and BKC.(19)
10.60 Amendment to Agreement to Assign Litigation Proceeds, dated as of July 3,
1996, among IFFC, IFFP and Litigation Funding.(10.1)(17)
10.61 Agreement to Assign Litigation Proceeds, dated as of September 11, 1996,
among IFFC and IFFP(20)
10.62 Promissory Note dated March 11, 1997 by International Fast Food Corporation
to Litigation Funding, Inc.(10.1)(21)
10.63 Second Amendment to Agreement to Assign Litigation Proceeds dated March 13,
1997 between International Fast Food Corporation, International Fast Food Polska
Sp.Zo.o and Litigation Funding, Inc.(10.2)(21)
10.64 Agreement dated May 9, 1997, between Litigation Funding, Inc., International
Fast Food Corporation and International Fast Food Polska Sp.Zo.o. (10.2)(21)
10.65 Pizza King Polska Sp.Zo.o.(10.1)(22)
10.66 Agreement on Transfer of Shares as Collateral, dated May 23, 1997 by and among
QPQ Corporation and International Fast Food Corporation(10.2)(22)
10.67 Indenture dated November 5, 1997(10.01)(23)
47
<PAGE>
10.68 Securities Purchase Agreement dated November 5,1997(10.02)(23)
10.69 Registration Rights Agreement dated November 5, 1997(10.03)(23)
10.70 Voting and Disposition Agreement dated November 5, 1997(10.04)(23)
10.71 Employment Agreement, dated as of July 1, 1997, between IFFC and James F. Martin(24)
10.72 Employment Agreement, dated as of July 1, 1997, between IFFC and Leon Blumenthal(24)
10.73 Employment Agreement, dated as of March 1, 1998, between IFFC and Ian Scattergood(24)
14.1 Trademark Protection Certificate No. 74441; Trademark [logo] Burger King;
Owner: BKC(12)
14.2 Trademark Protection Certificate No. 74442; Trademark [word] Whopper;
Owner: BKC(12)
14.3 Trademark Protection Certificate No. 74443; Trademark [words] Burger King;
Owner: BKC(12)
21.1 Subsidiaries of IFFC(24)
22.1 Press Release(22)(23)
(ii) Executive Compensation Plans
Exhibit Description
------- ------------
10.4 IFFC's 1992 Stock Option Plan(1)
10.5 IFFC's 1992 Directors Stock Option Plan(1)
10.6 Intentionally Omitted
10.7 Intentionally Omitted
10.8 Intentionally Omitted
10.9 Form of Indemnification Agreement between IFFC and each of IFFC's Directors
and Executive Officers(1)
10.10 Employment Agreement, dated as of January 28, 1992, between IFFC and
Mitchell Rubinson, as amended(19.1)(5)
10.39 Stock Option Agreement, dated as of May 21, 1992, between IFFC and Mitchell
Rubinson(8)
10.40 Stock Option Agreement, dated as of February 1, 1993, between IFFC and
Steven R. Groth(8)
10.41 Stock Option Agreement, dated as of February 1, 1993, between IFFC and
Mitchell Rubinson(8)
10.48 Amendment No. 2 to Employment Agreement, dated March 31, 1995, between
IFFC and Mitchell Rubinson(12)
10.57 Amendment No. 3 to Employment Agreement, dated November 7, 1996 between
Mitchell Rubinson and IFFC.(20)
10.71 Employment Agreement, dated as of July 1, 1997, between IFFC and James F. Martin(24)
10.72 Employment Agreement, dated as of July 1, 1997, between IFFC and Leon Blumenthal(24)
------------------
</TABLE>
(1) Incorporated by reference to the exhibit of the same number
filed with IFFC's Registration Statement on Form S-1
(File No. 33-46784)
48
<PAGE>
(2) Incorporated by reference to the exhibit of the same number
filed with IFFC's Registration Statement on Form S-1 (File No.
33-55284)
(3) Incorporated by reference to the exhibit number indicated
filed with IFFC's Registration Statement on Form S-1 (File No.
33-55284)
(4) Incorporated by reference to the exhibit of the same number
filed with the Company's Form 10-KSB for the fiscal year ended
December 31, 1992.
(5) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-KSB for the fiscal year ended
December 31, 1992.
(6) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarterly period ended
June 30, 1993.
(7) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarterly period ended
September 30, 1993.
(8) Incorporated by reference to the exhibit of the same number
filed with IFFC's Form 10-KSB for the year ended December 31,
1993.
(9) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarterly period ended
March 31, 1994.
(10) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarterly period ended
June 30, 1994.
(11) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarterly period ended
September 31, 1994.
(12) Incorporated by reference to the exhibit of the same number
filed with IFFC's From 10-KSB for the year ended December 31,
1994.
(13) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarter ended March 31,
1995.
(14) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarter ended June 30,
1995.
(15) Incorporated by reference the exhibit number indicated filed
with IFFC's Form 10-K for the year ended December 31, 1995.
(16) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 8-K dated January 30, 1996.
(17) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 8-K dated July 3, 1996.
(18) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 8-K dated December 3, 1996.
(19) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 8-K dated March 14, 1997.
(20) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-KSB for the year ended December 31,
1996.
(21) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarter ended March 31,
1997.
(22) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarter ended June 30,
1997.
(23) Incorporated by reference to the exhibit number indicated
filed with IFFC's Form 10-QSB for the quarter ended September
30, 1997.
(24) Filed herewith.
(b) Reports on Form 8-K:
(i) On January 9, 1998, the Company filed on Form 8-K, amended
on a Form 8-K/A dated January 13, 1998, in connection with the
removal of Moore Stephens-Lovelace, Roby, P.L. as auditors for
the Company.
49
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, IFFC has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
INTERNATIONAL FAST FOOD CORPORATION
<S> <C>
DATE: March 31, 1998 By: /s/ Mitchell Rubinson
---------------------
Mitchell Rubinson, Chairman of the Board, Chief Executive
Officer and President [Principal Executive Officer]
DATE: March 31, 1998 By: /s/ James F. Martin
-------------------
James F. Martin, Vice President, Chief Financial Officer and
Treasurer [Principal Financial Officer and Principal
Accounting Officer]
</TABLE>
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of IFFC and in the
capacities and on the dates indicated:
DATE: March 31, 1998 /s/ Mitchell Rubinson
---------------------
Mitchell Rubinson, Director
DATE: March 31, 1998 /s/ James F. Martin
-------------------
James F. Martin, Director
DATE: March 31, 1998 /s/ Dr. Mark Rabinowitz
-----------------------
Dr. Mark Rabinowitz, Director
DATE: March 31, 1998 /s/ Larry H. Schatz
-------------------
Larry H. Schatz, Director
50
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
-----
Reports of Independent Certified Public Accountants F-2 - F-3
Consolidated Balance Sheets as of December 31, 1997
and 1996 F-4 - F-5
Consolidated Statements of Operations for the Years
Ended December 1997 and 1996 F-6
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1997 and 1996 F-7
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997 and 1996 F-8 - F-10
Notes to Consolidated Financial Statements F-11 - F-29
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
International Fast Food Corporation
We have audited the accompanying consolidated balance sheet of
International Fast Food Corporation (a Florida Corporation) and subsidiaries as
of December 31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
International Fast Food Corporation and subsidiaries as of December 31, 1997,
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 6, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
International Fast Food Corporation
Miami Beach, Florida
We have audited the accompanying consolidated balance sheet of
International Fast Food Corporation and subsidiaries as
of December 31, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
International Fast Food Corporation and subsidiaries as of December 31, 1996,
and the consolidated results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
Moore Stephens Lovelace, P.L.
Certified Public Accountants
Orlando, Florida,
March 27, 1997
F-3
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1997 1996
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 18,642,335 $ 194,269
Restricted cash and
certificates of deposit 999,990 500,000
Receivables 101,528 42,348
Inventories 372,599 300,217
Advances to affiliate - 228,984
Prepaid expenses and other 130,711 53,794
---------- ---------
Total Current Assets 20,247,163 1,319,612
FURNITURE, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, net 5,959,378 5,865,417
DEFERRED DEBENTURE ISSUANCE COSTS,
NET OF ACCUMULATED AMORTIZATION
OF $157,410 AND $124,155,
RESPECTIVELY 274,915 308,170
DEFERRED ISSUANCE COSTS, OF 11%
CONVERTIBLE SENIOR SUBORDINATED
DISCOUNT NOTES, NET OF ACCUMULATED
AMORTIZATION OF $41,049 2,446,869 -
OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION OF $199,484 and
$137,192, RESPECTIVELY 333,533 340,405
BURGER KING DEVELOPMENT
RIGHTS, NET OF ACCUMULATED
AMORTIZATION OF $81,081 918,919 -
DOMINOS DEVELOPMENT RIGHTS,
NET OF ACCUMULATED AMORTIZATION
OF $15,542 173,561 -
---------- ----------
Total Assets $ 30,354,338 $ 7,833,604
========== ==========
(Continued)
See Accompanying Notes
F-4
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 581,555 $ 454,697
Accrued interest payable 17,911 10,335
Other accrued expenses 788,412 1,009,606
Current portion of bank credit facilities 1,349,995 1,220,495
Other notes payable - 69,307
Payable to affiliate - 149,382
Non-interest bearing obligation payable
to minority shareholder of IFF Polska - 500,000
----------- ---------
Total Current Liabilities 2,737,873 3,413,822
11% CONVERTIBLE SENIOR SUBORDINATED
DISCOUNT NOTES DUE OCTOBER 31, 2007 20,354,680 -
BANK CREDIT FACILITIES 630,000 300,000
9% SUBORDINATED CONVERTIBLE
DEBENTURES, DUE DECEMBER 15, 2007 2,756,000 2,756,000
---------- ---------
Total Liabilities 26,478,553 6,469,822
---------- ---------
DEFERRED CREDIT 1,000,000 -
---------- ---------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED SUBSIDIARY 115,294 460,361
---------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 1,000,000 shares
authorized; 33,450 and 38,240 shares issued and
outstanding, respectively (liquidation preference
of $3,345,000) 334 382
Common Stock, $.01 par value, 100,000,000 shares
authorized; 44,641,247 and 10,322,521 shares
issued and outstanding, respectively 446,413 103,225
Additional paid-in capital 17,691,542 14,523,361
Accumulated deficit (15,377,798) (13,723,547)
---------- ----------
Total Shareholders' Equity 2,760,491 903,421
---------- ----------
Total Liabilities and
Shareholders' Equity $ 30,354,338 $ 7,833,604
========== ==========
</TABLE>
See Accompanying Notes
F-5
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------
1997 1996
---- ----
REVENUES:
Sales $ 6,083,011 $ 5,486,178
FOOD AND PACKAGING COSTS 2,476,775 2,286,261
------------ ------------
GROSS PROFIT 3,606,236 3,199,917
OPERATING EXPENSES:
Payroll and related costs 1,067,282 816,048
Occupancy and other operating
expenses 1,828,894 1,535,378
Depreciation and amortization 888,538 984,707
------------ ------------
Total operating expenses 3,784,714 3,336,133
------------ ------------
(178,478) (136,216)
GENERAL AND ADMINISTRATIVE
EXPENSES 1,963,233 1,551,129
OTHER INCOME (EXPENSES):
Interest and other income, net 477,053 98,136
Interest expense, including
amortization of issuance costs (945,598) (446,561)
Foreign currency exchange loss (314,731) (189,662)
Gain on settlement of litigation,
net of applicable costs 1,327,070 -
------------ ------------
Total other income
(expenses) 543,794 (538,087)
------------ ------------
LOSS BEFORE MINORITY
INTEREST (1,597,917) (2,225,432)
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED SUBSIDIARY 345,067 229,320
------------ ------------
NET LOSS $ (1,252,850) $( 1,996,112)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON
SHARE $ (.05) $ (.37)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 26,246,885 5,967,325
============ ============
See Accompanying Notes
F-6
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997 and 1996
<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, 1995 3,759,564 $ 37,595 50,030 $ 500 $ 14,046,571 $(11,727,435) $ 2,357,231
Conversion of
Preferred Stock 392,957 3,930 (11,790) (118) (3,812) - -
Common Stock Issued
in exchange for
professional services 620,000 6,200 - - 81,102 - 87,302
Private placement of
Common Stock for
cash 5,550,000 55,500 - - 389,500 - 445,000
Payment received for
termination of stock
option - - - - 10,000 - 10,000
Net loss for the year - - - - - (1,996,112) (1,996,112)
---------- -------- ------- ------ ------------ ------------- -----------
Balances,
December 31, 1996 10,322,521 103,225 38,240 382 14,523,361 (13,723,547) 903,421
Conversion of
Preferred Stock 159,650 1,597 (4,790) (48) (1,549) - -
Common Stock issued in
exchange for professional
services 2,000,000 20,000 - - 180,000 - 200,000
Common Stock issued in
exchange for Underwriter
and debenture warrants 200,000 2,000 - - (2,000) - -
Conversion of 8% Convertible
Promissory Notes 5,000,000 50,000 - - 450,000 - 500,000
Conversion of Litigation
Funding Promissory Note 25,909,211 259,092 - - 2,000,828 - 2,259,920
Issuance of Common Stock
in payment of dividends
on Preferred Stock 549,865 5,499 - - 395,902 (401,401) -
Issuance of Common Stock
in payment of costs
associated with issuance
of debt securities 500,000 5,000 - - 145,000 - 150,000
Net loss for the year - - - - - (1,252,850) (1,252,850)
---------- -------- ------- ------ ------------ ------------- -----------
Balances,
December 31, 1997 44,641,247 $446,413 33,450 $334 $ 17,691,542 $(15,377,798) $ 2,760,491
========== ======== ======= ====== ============ ============= ===========
</TABLE>
See Accompanying Notes
F-7
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (1,252,850) $(1,996,112)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Amortization and depreciation
of furniture, equipment and
leasehold improvements 989,395 1,008,106
Amortization of debt discount
and issuance costs 428,892 180,992
Minority interest in losses of
subsidiary (345,067) (229,320)
Other operating items 287,261 115,099
Gain on forgiveness of indebtedness (329,465) -
Changes in operating assets and
liabilities, net of acquisition
of business:
Receivables (10,890) 8,518
Inventories (15,507) 84,217
Prepaid expenses and other (64,873) (14,805)
Accounts payable and
accrued expenses (363,663) 465,108
----------- ----------
Net cash used in operating
activities (676,767) (378,197)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of business, net of
cash acquired (209,357) -
Increase in restricted cash and
certificates of deposit (499,990) -
Payments for furniture, equipment
and leasehold improvements (368,797) -
Payments for other assets (57,635) (192,399)
Disposition of furniture & equipment - 129,113
Refund of franchise fees 30,000 -
---------- -----------
Net cash used in
investing activities (1,105,779) (63,286)
---------- -----------
(Continued)
See Accompanying Notes
F-8
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended December 31,
-------------------------------------
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Sale of common stock for cash - 445,000
Payment received for termination of stock option - 10,000
Advances from (to) Affiliate 19,941 38,792
Repayments of bank credit facilities (1,510,000) (383,753)
Net proceeds from issuance of 11%
Convertible Senior Subordinated
Discount Notes 17,662,174
Net proceeds from settlement of litigation 3,227,015 -
Payment to Litigation Funding (1,028,521) -
Payment of other notes payable (69,307) -
Payment of non-interest bearing obligation
to minority shareholder of IFF Polska (500,000) -
Borrowings under bank credit facilities 1,955,146 300,000
Net Proceeds from issuance of
convertible promissory notes 500,000 -
------------ -----------
Net cash provided by financing activities 20,256,448 410,039
------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (25,836) (27,797)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 18,448,066 (59,241)
BEGINNING CASH AND CASH EQUIVALENTS 194,269 253,510
------------ -----------
ENDING CASH AND CASH EQUIVALENTS $ 18,642,335 $ 194,269
============ ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 447,705 $ 424,550
============ ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING ACTIVITIES:
Year Ended December 31, 1997:
Issuance of 159,650 shares of Common Stock upon the exchange of 4,790
shares of Preferred Stock.
Issuance of 2,000,000 shares of Common Stock in payment of $200,000 of
legal fees.
Issuance of 5,000,000 shares of Common Stock upon conversion of
$500,000 principal amount of 8% Convertible Promissory Notes.
Issuance of 200,000 shares of Common Stock in exchange for the
cancellation of 130,000 Underwriter Common Stock warrants and
Underwriter $1,000,000 debenture warrants.
Issuance of 25,909,211 shares of Common Stock in payment of $2,198,424
principal amount of a promissory note payable to Litigation Funding
plus $61,425 of accrued interest
Issuance of 549,865 shares of Common Stock in payment of $401,401 of
dividends on Preferred Stock.
Issuance of 500,000 shares of Common Stock in payment of a portion of
the placement fee in connection with the issuance of the 11%
Convertible Senior Subordinated Discount Notes Due 2007.
Year Ended December 31, 1996:
Issuance of 392,957 shares of Common Stock upon the exchange of 11,790
shares of Preferred Stock. Issuance of 620,000 shares of Common Stock
in payment of $87,302 professional fees.
See Accompanying Notes
F-9
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
International Fast Food Corporation (the "Company" or "IFFC") was
organized for the purpose of developing and operating franchised Burger King
restaurants in the Republic of Poland ("Poland").
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 corporation, and IFFP's three wholly-owned Polish limited liability
corporations. Additionally, the consolidated financial statements include the
accounts of the Company's two wholly-owned Polish limited liability
corporations, Krolewska Pizza, Sp. zo.o.("KP") and Pizza King Polska, Sp. zo.o.
("PKP") for the period from their acquisition in July 1997 through December 31,
1997. KP and PKP presently operate seven 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.
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
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.
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 December 31, 1997 and 1996, the exchange rate was 3.514 and 2.873
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 December 31, 1997, IFFC had
working capital of approximately $17,509,290 and Cash and Cash Equivalents of
$18,642,335. 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 (See Notes 8, 13 and 14).
Although IFFC believes that
F-10
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 (See Note
6), IFFC has no current arrangements with respect to, or sources of additional
financing and there can be no assurance that IFFC will be able to obtain
additional financing or that additional financing will be available on
acceptable terms to fund future commitments for capital expenditures.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less at the time of
acquisition to be cash equivalents. The Company maintains its U.S. cash in bank
deposit accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on cash and cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (first in,
first out) or market and consist primarily of restaurant food items.
NET (LOSS) PER COMMON SHARE - The net loss per common share in the
accompanying statements of operations has been computed based upon the
provisions of SFAS No. 128, Earnings per Share, which became effective for
reporting periods ending after December 15, 1997, and requires restatement of
previously reported per share amounts. The adoption of SFAS No. 128 did not
require a change in the net loss per common share amount reported for the year
ended December 31, 1996. The basic and diluted net loss per common share in the
accompanying statements of operations is based upon the net loss after preferred
dividend requirements of $171,961 and $229,440 in 1997 and 1996, respectively,
divided by the weighted average number of shares outstanding during each period.
Diluted per share data 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.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Furniture,
equipment and leasehold improvements are stated at cost. Maintenance and repairs
are charged to expense, when incurred. Leasehold improvements, additions, major
renewals and betterments are capitalized. Furniture and equipment is being
depreciated over periods ranging from three to five years on a straight-line
basis and leasehold improvements are amortized over the life of the respective
lease. When items are sold, or otherwise disposed of, the related costs and
accumulated amortization or depreciation are removed from the accounts and any
resulting gains or losses are recognized.
F-11
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ACQUISITION COSTS OF BURGER KING DEVELOPMENT RIGHTS - All costs
associated with the acquisition of Burger King Development Rights were
capitalized. The cost of these rights is being amortized over the period from
April 1, 1997, through the expiration date of the agreement on September 30,
2007.
DEFERRED CHARGES AND OTHER ASSETS - All costs incurred in connection
with the organization of the Company were deferred and amortized on a
straight-line basis over the five year period ended December 31, 1996. Software
costs are amortized on a straight line basis over five years. Franchise fees are
amortized over the primary term of each agreement ranging from five to twenty
years. Debt issuance costs related to the issuance of the 9% Convertible
Subordinated Debentures due December 15, 2007 and the 11% Convertible Senior
Subordinated Discount Notes due October 31, 2007, have been capitalized and are
amortized using the straight-line method over the term of the related debt,
which does not differ materially from the effective interest method.
INCOME TAXES - Deferred Income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts. Deferred tax assets are also
established for the future tax benefits of loss and credit carryforwards.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized.
ADVERTISING AND PROMOTION EXPENSES - Production costs of future media
advertising are deferred until the advertising occurs. All other advertising and
promotion costs are expensed when incurred. At December 31, 1997 and 1996, the
Company had no significant deferred advertising costs.
RECLASSIFICATIONS - Certain amounts in the 1996 financial statements
have been reclassified to conform with the 1997 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS - IFFC is required is adopt SFAS
No. 130, Reporting Comprehensive Income, in the first quarter of 1998. SFAS No.
130 establises standards for reporting and display of comprehensive income and
its components in a full set of financial statements. The objective of SFAS No.
130 is to report comprehensive income, a measure of all changes in equity of an
enterprise that result from transactions and other economic events in a period,
other than transactions with owners. Management believes that the adoption of
SFAS No. 130 will not have a material impact on IFFC's consolidated financial
statements and IFFC has elected to disclose comprehensive income in the
consolidated statement of shareholders' equity upon adoption.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises
report information about operating segments and for related disclosures about
products and services, geographic area and major customers. IFFC will implement
the disclosure provisions of SFAS No. 131 effective December 31, 1998.
3. RESTRICTED CASH:
At December 31, 1997 and 1996, the Company had $999,990 and $500,000 of
restricted cash and certificates of deposit which represents collateral for an
outstanding line of credit and a letter of credit, respectively.
F-12
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment, and leasehold improvements at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Vehicles $ 92,470 $ 79,581
Office furniture and equipment 405,205 183,851
Restaurant equipment 3,730,027 3,238,242
Leasehold improvements 6,044,228 5,123,660
----------- -----------
10,271,930 8,625,334
Less: accumulated depreciation and
amortization (4,312,552) (2,759,917)
----------- -----------
$ 5,959,378 $ 5,865,417
=========== ============
Depreciation and amortization
expense $ 848,838 $ 965,668
=========== ============
5. OTHER ASSETS:
Other assets at December 31, 1997 and 1996 are as follows:
1997 1996
----------- ------------
Franchise fees $ 339,386 $ 337,512
Deferred lease costs 91,350 72,987
Software and other intangibles 102,281 67,098
----------- -----------
533,017 477,597
Less: accumulated amortization (199,484) (137,192)
----------- -----------
$ 333,533 $ 340,405
=========== ===========
Amortization Expense $ 43,934 $ 42,438
=========== ===========
6. BANK CREDIT FACILITIES:
Bank credit facilities at December 31, 1997 and 1996 consists of the
following:
1997 1996
----------- ------------
Amerbank in Poland, S.A., PKP overdraft
credit line, variable rate approximately
equal to prime, expires March 31, 1998 $ 15,772 $ -
</TABLE>
F-13
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amerbank in Poland, S.A., IFFP overdraft
credit line, variable rate approximately
equal to prime, expires March, 30, 1998 15,223 10,495
Amerbank, IFFP line of credit of $950,000
payable in twenty nine 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. 950,000 -
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
maturity on August 12, 2002.* - -
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 -
Amerbank, IFFP line of credit of $300,000
payable in three quarterly installments
of $100,000 commencing on March 31,
1998, interest payable monthly at Amerbank
prime, guaranteed by IFFC: paid in full on
August 12, 1997 - 300,000
Amerbank revolving credit facility
12% interest, $100,000 plus interest payable
on March 31, 1997 and June 30,1997,
remaining principal and all accrued interest
was paid in full on September 30, 1997 - 310,000
Bank Handlowy Warszawie, S.A., IFFP credit
facility of $2,000,000 payable $50,000 on
January 31, 1997, $100,000 quarterly commencing
on March 31, 1997 through September 30, 1997,
and the remaining balance payable in full on or
before December 16, 1997, interest at LIBOR plus
3.875% collateralized by amounts on deposit with
Bank Handlowy, unconditional guarantee of IFFC,
fixed assets of IFFP of $1,250,000 and a letter
of credit in the amount of $500,000, paid in full
on August 12, 1997 - 900,000
------- -------
F-14
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total bank credit facilties 1,979,995 1,520,495
Less: Current Maturities 1,349,995 1,220,495
----------- -----------
Long bank credit facilities $ 630,000 $ 300,000
=========== ===========
- -----------------
*The Amerbank revolving facility for $1,500,000 had not been drawn upon as of
December 31, 1997.
7. 9% SUBORDINATED CONVERTIBLE DEBENTURES:
The Convertible Subordinated Debentures (the "Debentures") mature on
December 15, 2007 and provide for the payment of interest at 9% semi-annually
until maturity.
The Debentures are subordinated and subject in right of payment to the
prior payment of all Senior Indebtedness. The indenture contains no provision
restricting the incurrence of additional debt or the issuance of additional
securities. The Debentures may be redeemed together with accrued interest at the
option of the Company in whole or in part, at any time on at least 30 days
notice to Debentureholders at decreasing redemption prices from 109% in 1993 to
100% in 2002 and thereafter. The Debentures are redeemable through the operation
of a sinking fund beginning 1998 through 2006. Sinking fund payments will be
reduced for Debentures previously converted or redeemed by the Company.
8. 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 December 31, 1997, 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 (7,181,320)
------------
Balance at December 31, 1997 $ 20,354,680
============
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.
F-15
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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;
F-16
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
9. FINANCIAL INSTRUMENTS:
Fair Value of Financial Instruments - The carrying amounts of cash,
cash equivalents, receivables, accounts payable, accrued expenses and bank
credit facilities payable approximate fair value because of the short maturity
of these items. The fair value of the Company's 9% Subordinated Convertible
Debentures is not readily determinable at December 31, 1997, due to the lack of
trading activity. The fair value of the 11% Convertible Senior Subordinated
Discount Notes is estimated to be approximately equivalent to their carrying
value due to the recent issuance of such debt.
10. SHAREHOLDERS' EQUITY:
The Company's stock option plan provides for the granting of options to
qualified employees and directors of the Company. Stock option activity is shown
below at December 31:
1997 1996
-------- -------
Outstanding at beginning of year 210,000 292,000
Granted 410,000 -
Exercised - -
Expired (50,000) (82,000)
--------- --------
Outstanding at end of year 570,000 210,000
========= ========
Exercisable at end of year 256,000 190,000
========= ========
Price range of options outstanding
at end of year $ .40 $ 1.375
Available for grant at end of year 1,430,000 440,000
In January 1995, and July 1997, all options outstanding were repriced
to $1.375 and $.40, respectively, which was equivalent to the market price of
the Common Stock on such dates.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
was issued during 1995 and was effective for the year ended December 31, 1996.
This pronouncement establishes financial accounting and disclosure standards for
stock-based employee compensation
F-17
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
plans. It encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options and other equity instruments to
employees based on new fair value accounting rules. Companies that choose not to
adopt the new fair value accounting rules are required to disclose proforma net
income and earnings per share under the new method. The Company has adopted only
the disclosure provisions of SFAS 123. Had compensation costs for the Company's
stock option plans been determined based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed under
SFAS 123 for options granted in 1997 and 1996, the Company's net loss and basic
and diluted net loss per share for those years would have increased by
approximately $170,000 and $5,000 or $.006 and $.001 per share respectively. The
fair value of the options granted during 1997 is estimated at $49,000 on the
dates of grant using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 107%, expected dividend yield of 0%,
risk-free interest rate of 5%, and terms of 8.7 years.
The June 15, 1996, December 15, 1996, and June 15, 1997 dividend
payments with respect to the series A 6% Convertible Preferred Stock were not
declared or made on their respective due dates. As of December 31, 1996,
$229,440 of preferred dividends were in arrears. On December 15, 1997, the
Company issued 549,865 shares of Common Stock valued at $401,401 in payment of
the December 15, 1997 dividend and all dividends in arrears as of that date. At
December 31, 1997, no dividends were in arrears.
During the years ended December 31, 1997 and 1996, the Company has
issued shares of Common Stock in satisfaction of outstanding liabilities,
payment of expenses and acquisition of working capital. In the opinion of
management, the value assigned to the Common Stock issued was approximately
equivalent to its fair market value on the date such shares were issued.
During the years ended December 31, 1997 and 1996, 159,650 and 392,957
shares of Common Stock were issued upon exchange of 4,790 and 11,790 shares of
Preferred Stock.
At December 31, 1997, 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
F-18
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Convertible Senior Subordinated Discount
Notes convertible into Common Stock, after
November 5, 1998, at a conversion price
of $.70 per share 29,078,114
----------
Total reserved shares 32,858,149
==========
11. INCOME TAXES:
As of December 31, 1997 and 1996, the Company had net operating loss
carryforwards of approximately $4,417,000 and $4,927,000 respectively, for U.S.
tax purposes which expire in various years through 2012. Deferred tax assets as
of December 31, 1997 and 1996 of approximately $1,661,000 and $1,853,000
respectively, were subject to and presented net of a 100% valuation allowance.
At December 31, 1997 and 1996, the Company has capital loss
carryforwards of approximately $1,338,000, which expire in 1999.
As of December 31, 1997 and 1996, the Company's Poland subsidiaries had
net operating loss carry forwards of approximately $6,952,000 and $5,998,000
respectively, which expire in various years through 2000. Deferred tax assets,
which primarily result from the net operating loss carry forwards, which
primarily result from the net operating loss carryforwarded as of December 31,
1997 and 1996 of approximately $2,781,000 and $2,339,000 respectively, were
subject to and presented net of a 100% valuation allowance.
12. RELATED PARTY TRANSACTIONS:
During 1996, the Company sold an aggregate of 4,950,000 shares of
Common Stock to members of the family of the Company's Chairman of the Board,
Chief Executive Officer and President and received aggregate proceeds of
$385,000 in connection with such sales.
In January 1997, Mitchell Rubinson and his wife, Marilyn Rubinson, the
mother of Mitchell Rubinson, Jaime Rubinson and Kim Rubinson, Mr. Rubinson's
daughters, 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 convertible into shares of the Company's
Common Stock at $.10 per share. The proceeds from the sale of the notes were
used to fund the cost and expenses in connection with the Company's litigation
against BKC and for general working capital purposes. In June 1997 the $500,000
aggregate principal amount of the convertible promissory notes were converted
into 5,000,000 shares of Common Stock.
See Note 14 for a description of transactions with Litigation Funding,
Inc.
See Note 15 for a description of the Company's purchase of KP and PKP,
two Polish limited liability companies. Prior to KP's purchase of PKP, PKP was
wholly-owned by QPQ Corporation, a former affiliate of the Company.
F-19
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. COMMITMENTS AND CONTINGENCIES:
On March 14, 1997, IFFC and 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
of a 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.
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 BKC Development Agreement and additional sums based on an incentive
arrangement when earned to be retained by IFFC out of BKC's future royalties.
F-20
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the New BKC Development Agreement, IFFP must develop a minimum of
45 Burger King restaurants by September 30, 2007. Subject to negotiation of
definitive agreements, the Company intends to develop a majority of the new
Burger King restaurants in conjunction with oil companies which are presently
expanding throughout Poland. The Company has executed a development agreement
with Statoil, and letters of intent with BP and Dupont-Conoco, to co-locate the
Burger King restaurants on selected service station properties. This agreement
and the letters of intent provide for the initial development of over 40 Burger
King restaurant locations, plus additional locations in the future. There can be
no assurance that the transactions contemplated by such agreement and letters of
intent will be consummated. The Company anticipates that the majority of the new
restaurants will be traditional free standing and attached type of drive-thru
restaurants with a seating capacity of up to 85 people. The Company is in
various stages of evaluating and/or receiving BKC approval for over 40 sites.
Presently, the Company has executed five leases, four leases with the oil
companies and one lease with a non oil company. The Company continues to explore
opportunities with other fuel companies for the development of Burger King
restaurants throughout Poland.
BKC may terminate rights granted to IFFC under the BKC Development
Agreement, including franchise approvals for restaurants not yet opened, for a
variety of possible defaults by IFFC, including, among others, failure to open
restaurants in accordance with the schedule set forth in the BKC Development
Agreement; failure to obtain BKC site approval prior to the commencement of each
restaurant's construction; failure to meet various operational, financial, and
legal requirements set forth in the BKC Development Agreement, including
maintaining of IFFP's net worth of $7,500,000 beginning on June 1, 1999. Upon
termination of the BKC Development Agreement, whether resulting from default or
expiration of its terms, BKC has the right to license others to develop and
operate Burger King restaurants in Poland, or to do so itself.
The BKC Development Agreement requires IFFC to designate a full-time
Managing Director to be responsible for the restaurants to be developed. Such
General Manager must be acceptable to BKC. Leon Blumenthal, who has served as
IFFP's President, Chief Operating Officer, and Managing Director since 1995, has
been approved by BKC.
Specifically excluded from the scope of the BKC Development Agreement
are restaurants on United States military establishments. BKC has also reserved
the right to open restaurants in hotel chains with which BKC has, or may in the
future have, a multi-territory agreement encompassing Poland. With respect to
restaurants in airports, train stations, hospitals and other hotels, IFFC has
the right of first refusal with the owners of such sites. If IFFC is unable or
unwilling to reach a mutually acceptable agreement, BKC or its affiliates or
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.
F-21
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Subject to certain exceptions, as long as IFFC is a principal of IFFP,
BKC has the right to review and consent to certain types of new stock issuances
of IFFC for which the consent will not be unreasonably withheld, provided that
IFFC has complied with all reasonable conditions then established by BKC in
connection with the proposed sale or issuance of applicable equity securities by
IFFC.
On August 28, 1997, KP entered into a New Master Franchise Agreement
with Domino's Pizza International, Inc. ("Domino's"), granting KP the exclusive
right to develop and operate and to sub-license Domino's Pizza stores and to
operate a commissary for the Domino's system and the use of the Domino's and
related marks in the operation of stores in Poland. IFFC has agreed that as a
condition to the New Master Franchise Agreement it 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 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.
The Company maintains its executive offices in approximately 2,500
square feet of leased office space. Annual lease payments are approximately
$32,200. IFFC has exercised its second of three, two year renewal options.
IFFP maintains principal offices in Warsaw, Poland in approximately
4,000 square feet of office space. Annual lease payments are $54,000. The term
of the lease is for an unlimited period; however, either party may terminate the
lease after the first year with six month written notice. IFFP has the right of
first refusal to the purchase of the building and will be reimbursed for the net
book value of its improvements to the space upon termination of the lease
agreement by the landlord.
On November 7, 1996, IFFC amended its employment agreement with the
Chairman of the Board, Chief Executive Officer and President, extending his
employment term until December 31, 1999. The minimum annual salary during the
first year is $183,013 subject to a
F-22
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10% annual increase for each of the remaining two years. The agreement provides
for an annual incentive bonus of 2.5% of the Company's net income. The agreement
also provides for various fringe benefits, certain payments if employment is
terminated by reason of death or disability and a severance payment of twice the
minimum annual salary then in effect, plus the incentive bonus paid in the prior
year, in the event employment is terminated by the Company without cause.
On July 1, 1997, the Company entered into an employment agreement with
its Chief Financial Officer for an initial term of three years, which may be
extended by the Company for up to two additional years. Minimum annual salary
for the first year is $85,000. The agreement provides for various fringe
benefits, a payment of $20,000 in the event employment is terminated by reason
of death or disability and a maximum payment of $20,000 if employment is
terminated without cause by the Company. In the event of a required move to
Poland, the Company will be required to pay an appropriate housing allowance to
be determined at the time of the move.
On July 1, 1997, the Company entered into an employment agreement with
its Senior Vice President, Chief Operating Officer and General Manager for an
initial term of three years, which may be extended by the Company for up to an
additional two years. Minimum annual salary for the first year is $100,000. The
agreement provides for various fringe benefits, a payment of $25,000 in the
event employment is terminated by reason of death or disability and a maximum
payment of $25,000, if employment is terminated without cause by the Company.
In connection with the procurement of restaurant sites, IFFP and PKP
have entered into various long-term arrangements for restaurant space. The terms
of the various agreements range from approximately two to ten years, plus
extensions based upon agreement between the parties. The following is a schedule
by years of minimum future rentals on noncancelable operating leases as of
December 31, 1997, based on the year end exchange rate:
Year Ending December 31:
------------------------ POLAND U.S.A.
------ ------
1998 $ 589,869 $ 32,200
1999 549,831 32,200
2000 544,700 32,200
2001 544,700 -
2002 544,700 -
Thereafter 3,360,692 -
------------- ---------
$ 6,134,492 $ 96,600
============= =========
Rent expense for 1997 and 1996 was $560,933 and $450,572, respectively.
IFFP has entered into long-term purchase agreements with its suppliers
for its major menu items, which are sourced in Poland. The range of prices and
volume of purchases under the agreements vary according to IFFP's demand for the
products and fluctuations in market rates.
F-23
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. LITIGATION:
BKC Litigation - On March 17, 1995, IFFC and IFFP (collectively, the
"IFFC Affiliates"), filed suit against BKC in the Eleventh Judicial Circuit
Court of the State of Florida. In their amended complaint, the IFFC Affiliates
alleged, among other things, that BKC breached certain of its express and
implied obligations under the old BKC Development Agreement and the eight
existing franchise agreements (the "Franchise Agreements") pertaining to IFFP's
eight Burger King restaurants. The IFFC Affiliates further alleged that in
connection with BKC's sale of certain of its rights pursuant to the old BKC
Development Agreement and the Franchise Agreements, BKC failed to timely deliver
to the IFFC Affiliates a complete and accurate franchise offering circular in
accordance with rules promulgated by the Federal Trade Commission (the "FTC
Count"). The IFFC affiliates also alleged that BKC committed certain acts which
constitute fraud and/or deceptive and unfair business practices. The IFFC
Affiliates asked the court to, among other things, award them compensatory
damages of not less than $15,000,000, punitive damages and certain costs and
expenses.
On March 11, 1997, BKC, IFFC, IFFP and Rubinson, individually and on
behalf of Litigation Funding, Inc. entered into a Settlement Agreement. In
connection with the execution of the Settlement Agreement, IFFC and BKC entered
into the New BKC Development Agreement and eight (8) new franchise agreements.
BKC paid to IFFC the sum of $5,000,000 (less $21,865 of royalties owned by IFFP
to BKC for February 1997) for a net amount of $4,978,135. In addition, BKC
forgave $499,768 representing all monies owed BKC by IFFP and IFFC through
January 31, 1997. Under the terms of the Settlement Agreement, a portion of such
proceeds, not to exceed $2,000,000, could be used to immediately satisfy the
actual legal fees and costs of IFFC and IFFP incurred in connection with the BKC
litigation, including IFFC's and IFFP's obligation under the agreement between
IFFC, IFFP and Litigation Funding, Inc. The remaining $3,000,000 is to be used
by IFFC and IFFP for the development of additional BKC restaurants in Poland or
working capital for IFFP pursuant to the New BKC Development Agreement. All
parties to the litigation stipulated to dismissal of the litigation and executed
mutual releases.
Litigation Financing Agreements. IFFC entered into two agreements
specifically designed to assist it in financing the BKC Litigation. First, as of
January 25, 1996, the IFFC Affiliates entered into an Agreement to Assign
Litigation Proceeds (the "Funding Agreement") with Litigation Funding, Inc., a
Florida corporation ("Funding"). This agreement was later amended in July 1996.
Mitchell Rubinson, the chairman of the board, chief executive officer and
president of IFFC is also the chairman of the board, chief executive officer and
president and the principal shareholder of Funding.
Pursuant to the amended Funding Agreement, Funding agreed to pay on
behalf of IFFC and/or IFFP up to $750,001 (the "Amount") for all expenses
(including attorneys' fees, court costs and other related expenses, but not
judgments or amounts paid in settlement) actually incurred by or on behalf of
IFFC and/or IFFP in connection with investigating, defending, prosecuting,
settling or appealing the BKC Litigation and any and all claims or counterclaims
of BKC against IFFC and/or IFFP (collectively, the "BKC Matter"). Funding paid
all amounts it was requested to pay pursuant to the Funding Agreement.
F-24
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In consideration of the Amount, IFFC and IFFP each assigned to Funding
a portion of any and all benefits and gross sums, amounts and proceeds that each
of them may receive, collect, realize, otherwise obtain or benefit from in
connection with, resulting from or arising in connection with the BKC Matter or
any related claim, demand, appeal, right and/or cause of action of the IFFC
Affiliates, including, but not limited to, amounts received or entitled to be
received by the IFFC Affiliates in respect to (i) the gross proceeds of any
court ordered decision or judgement (a "Judgement") entered in favor of IFFC
and/or IFFP, (ii) the Sale Proceeds (as such term is defined in the agreement,
the "Sales Proceeds") of any sale of the assets of IFFC and/or IFFP to BKC, any
of BKC's affiliates and/or any entity which is introduced to the IFFC Affiliates
by BKC (collectively, the "BKC Entities") in connection with a settlement of the
BKC Matter, (iii) any amounts paid in compromise or settlement (a "Settlement")
of the BKC Matter in whole or in part, (iv) any liabilities or indebtedness of
IFFC or IFFP assumed or satisfied by the BKC Entities (the "Debt Relief
Proceeds") and (v) the monetary value to the IFFC Affiliates of any concessions
made by BKC with respect to its rights under (a) the Development Agreement
and/or (b) the Franchise Agreements and any future franchise agreements between
BKC and IFFP and/or IFFC (the "Contract Modification Proceeds"). All of the IFFC
Affiliates' rights, titles and interests, legal and equitable, in and to such
aforementioned benefits and gross sums, amounts and proceeds are collectively
referred to herein as the "Proceeds".
Specifically, IFFC and IFFP each individually assigned, set over,
transferred and conveyed to Funding all of its right, title and interest in and
to the sum of the following (the "Assigned Proceeds"); (i) seventy five percent
(75%) of the Proceeds to the extent that such amount does not exceed Funding's
Expenses (Funding's Expenses") which are defined as the sum of the aggregate
amount of money paid by Funding and the amount of money expended by Funding if
it assumes the prosecution of the BKC Matter; (ii) seventy five percent (75%) of
any Proceeds, excluding any Sales Proceeds, in excess of the sum of Funding's
Expenses and the IFFC Affiliates' Expenses (as such term is defined below, the
"IFFC Affiliates' Expenses"); and (iii) seventy five percent (75%) of any Sales
Proceeds in excess of the sum of Funding's Expenses and the IFFC Affiliates'
Expenses.
Subject to Funding's recovery of Funding's Expenses, IFFC and IFFP have
retained the right in and shall be entitled to recover from the Proceeds the sum
of (i) $303,731, and (ii) all of the amounts they may expend in the future in
connection with the BKC Matter, before Funding shall be entitled to receive any
other Proceeds.
In connection with the execution and delivery of the Funding Agreement,
IFFC, IFFP, Funding and a law firm (the "Escrow Agent") entered into an Escrow
Agreement. Pursuant to the Funding Agreement and the Escrow Agreement, except
for Proceeds which the Escrow Agent cannot reduce to physical possession, all
Proceeds, if any, resulting from the BKC Matter are to be delivered to the
Escrow Agent before they are delivered to the IFFC Affiliates and/or Funding.
The Escrow Agent is required to dispose of Proceeds only in accordance with (1)
the joint written instructions of the Company, IFFP and Funding, or (2) the
instructions of a court of competent jurisdiction. The Funding Agreement
provides that the Escrow Agent shall first apply all Readily Available Cash
Proceeds {as such term is defined below, the "Readily Available Cash Proceeds")
to satisfy Funding's rights to Proceeds (assigned to
F-25
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Funding by IFFC or IFFP) before any non-Readily Available Cash Proceeds are
delivered to Funding by the Escrow Agent on behalf of such company. Readily
Available Cash Proceeds are defined to be all cash proceeds payable to IFFC,
IFFP or Funding within one (1) year of a Judgement or Settlement. In the event
that the Readily Available Cash Proceeds are not sufficient to satisfy Funding's
rights in Proceeds (assigned to Funding by such company), then IFFC and IFFP
have each agreed to pay out of its individually available "cash and cash
equivalents" (the "Cash Resources") an amount of Cash Resources to satisfy the
deficiency. In the event that the Readily Available Cash Resources of a company
are insufficient to cover the deficiency, such company, subject to Funding's
agreement, will have the right to elect which assets it will deliver to Funding
in satisfaction of Funding's rights to receive Proceeds. In the event that
Funding is unable to agree with a company with respect to which assets such
company will deliver to Funding, then the matter shall be submitted to a court
of competent jurisdiction.
In consideration of the Amount, IFFC also assigned to Funding a
security interest (the "Security Interest") in its entire equity interest in
IFFP (the "IFFP Stock"). The Security Interest secures the delivery to Funding
of all the Assigned Proceeds. In order to perfect the Security Interest, IFFC
has agreed to take all such actions as are necessary under the laws of the
Republic of Poland ("Poland") and the State of Florida to transfer title to the
IFFP Stock to the Escrow Agent; provided, however, that IFFC has retained
beneficial ownership of the IFFP Stock, including the right to vote the IFFP
Stock, unless Funding does not receive the Assigned Proceeds in accordance with
the terms of the Funding Agreement and such nonreceipt is not rectified within
45 days (an "Event of Default"). IFFC has further agreed to deliver to the
Escrow Agent such documents as are necessary to file with the appropriate
authorities in Poland to, if an Event of Default occurs, officially transfer
legal and beneficial title to the IFFP Stock to Funding. IFFC and Funding have
agreed that record title to the IFFP Stock is being transferred to the Escrow
Agent to provide Funding a perfected security interest in the IFFP Stock without
being forced to rely on Poland's system of recording and perfecting security
interest. If (1) Funding receives the Assigned Proceeds in accordance with the
terms of the Funding Agreement or (2) it becomes apparent that Funding shall not
ever be entitled to receive any Proceeds, then Funding is required to
immediately issue a notice to the Escrow Agent with respect to the IFFP Stock
and the Security Interest is to be satisfied and extinguished.
The IFFC Affiliates also entered a second agreement to assist in the
financing of the BKC Litigation. On April 7, 1996, the IFFC Affiliates entered
into a letter agreement (the "Fee Agreement") with the law firm (the "Litigation
Counsel") representing the IFFC Affiliates in the BKC Litigation. Pursuant to
the Fee Agreement, IFFC and IFFP have agreed to pay Litigation Counsel the
greater of (a) Litigation Counsel's accrued hourly fees for legal services
provided in connection with the BKC Litigation; and (b) a certain percentage of
any final monetary recovery obtained by the IFFC Affiliates in the BKC
Litigation, in exchange for Litigation Counsel's services. The Company's legal
fees and related costs in connection with the BKC litigation, exclusive of the
$750,001 paid by Funding, were approximately $1,447,082, of which $200,000 was
paid by issuance of 2,000,000 shares of Common Stock to Litigation Counsel, in
April 1997.
F-26
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The gain on settlement of the BKC Litigation is comprised as follows:
Settlement Proceeds:
Cash received from BKC $ 5,000,000
Forgiveness of liabilities due
to BKC 499,768
Value attributable to Development
Agreement 1,000,000
-----------
Total proceeds 6,499,768
Less Settlement Costs and Deferred Credits:
Legal fees and costs paid by
IFFC (1,447,082)
Legal fees and costs paid by
Funding (750,001)
Deferred Credit (1,000,000)
-----------
Net settlement proceeds 3,302,685
Portion of net settlement proceeds
due to Funding (2,477,014)
Legal fees and costs paid by IFFC
in prior to 1997 and charged
against operations 501,399
-----------
IFFC gain on settlement $ 1,327,070
===========
IFFC has valued the New Development Agreement at $1,000,000 which is
its best estimate of the cost that it would incur in obtaining such agreement
from BKC exclusive of all other matters associated with the BKC settlement. Due
to the uncertainty relating to IFFC's ability to meet the performance
requirements specified in the New Development Agreement, which must be achieved
by September 30, 1999, coupled with the $1,000,000 amount that will be payable
to BKC if the minimum performance requirements are not met, IFFC has recorded a
Deferred Credit of $1,000,000 in connection with recognition of gain on
settlement of the BKC Litigation. If the minimum performance objectives required
by the New Development Agreement are achieved by September 30, 1999, $750,000
will be recognized by IFFC as additional gain on the BKC Litigation settlement
and $250,000 will become payable to BKC. If the maximum performance objectives
required by the New Development Agreement are achieved by September 30, 1999,
$1,000,000 will be recognized by IFFC as additional gain on the BKC Litigation
settlement. If the minimum performance objectives are not met the $1,000,000
Deferred Credit will become payable to BKC.
The payable to Funding was calculated as follows:
F-27
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Portion of net settlement proceeds
due to Funding $ 2,477,014
Reimbursement of legal fees and
costs paid by Funding 750,001
-----------
Balance due to Funding 3,227,015
Payment made in May, 1997 1,028,521
-----------
Promissory note payable
to Funding $ 2,198,494
===========
The promissory note provided for interest at prime plus 1%, and matures
on December 31, 1998. The note was collateralized by the Company's equity
interest in IFFP.
On July 14, 1997, IFFC and IFFC Acquisition, Inc., a wholly-owned
subsidiary of the Company ("Acquisition Sub") entered into a Merger Agreement
with Litigation Funding, Inc. ("Funding") and Mitchell and Edda Rubinson, the
sole shareholders of Funding. Under the terms of the Agreement, Funding was
merged with and into Acquisition Sub. The 25,909,211 shares of common stock of
the Company to be received by the Funding shareholders 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.
On July 14, 1997, the date of the Merger Agreement with Litigation
Funding, Inc., the Company's Common Stock was trading at approximately $.34 per
share. However, due to the lack of an established trading market for the
Company's Common Stock, the disinterested Directors of the Company did not
utilize the quoted price per share to determine the number of shares to issue in
connection with the Merger Agreement. Instead the June 30, 1997 book value of
the Company ($.1166 per share) was utilized to measure the Company's fair value.
In the opinion of the disinterested Directors of the Company, the value assigned
to the Common Stock issued was approximately equlvalent to its fair value on the
date such shares were issued.
The value assigned to Funding represents (i) the $2,198,494 plus
accrued interest owed to Funding by the Company pursuant to a promissory note
and (ii) $750,000 which represents seventy-five percent (75%) of the value
attributable to the New Development Agreement between Burger King Corporation
("BKC") and IFFC and its affiliates which was executed on March 14, 1997 in
connection with the Company's settlement of its litigation against BKC.
As of July 1995, IFFC 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 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 has been accounted for in the accompanying consolidated financial
statements as of December 31, 1997. 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 is a
modern system, the system cannot be modified. IFFP is currently in the process
of replacing the system with a new system which complies with Polish
regulations. IFFP estimates the new system will cost approximately $200,000 for
its existing eight restaurants.
F-28
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. 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 Dominos 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.
Year Ended December 31,
-----------------------
1997 1996
---- ----
Total Revenues $ 6,673,191 $ 6,376,534
Net loss $(1,384,323) $(2,564,233)
Basic and diluted net loss
per share $ (.05) $ (.43)
F-29
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
10.71 Employment Agreement, dated as of July 1, 1997, between
IFFC and James F. Martin
10.72 Employment Agreement, dated as of July 1, 1997, between
IFFC and Leon Blumenthal
10.73 Employment Agreement, dated as of March 1, 1998, between
IFFC and Ian Scattergood
21.1 Subsidiaries of IFFC
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
effective July 1, 1997, by and between International Fast Food Corporation,
Inc., a Florida corporation (the "Company"), and James F. Martin (the
"Executive").
W I T N E S S E T H:
--------------------
WHEREAS, the Company desires to employ the Executive for the term
provided herein, and the Executive desires to be employed by the Company for
such term, all in accordance with the terms and provisions herein contained;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Employment.
(a) The Company hereby employs the Executive to render
full-time services to the Company as its Chief Financial Officer, and/or that of
its subsidiaries or affiliates that may be founded, the Executive hereby accepts
such employment, on the terms and conditions contained in this Agreement.
(b) The Executive shall perform such duties for the Company as
may be determined and assigned to him from time to time by the Company's
President (the "President") or the Company's Board of Directors (the "Board"),
which assigned duties shall be consistent with those normally associated with
such position and in which he is currently performing; provided that
<PAGE>
the Board may delegate certain of the tasks, objectives or responsibilities set
forth in the Description to other officers or employees of the Company or its
subsidiaries and affiliates.
(c) The Executive hereby agrees to devote his full business time,
attention and his best efforts to the performance of his duties hereunder.
(d) The Executive's place of employment during the term of his
employment hereunder shall be at such place as is reasonably designated by the
Board. The Executive acknowledges that he may be required to change his
residence in order to perform his obligations hereunder, and further
acknowledges that he may be required to take up residence in the Republic of
Poland in connection with the performance of his duties hereunder.
(e) The Executive agrees to accept election and to serve during all or
any part of the Term, as hereinafter defined, as an officer or director of the
Company and any subsidiary or affiliate of the Company, without any compensation
therefor other than that specified herein, if elected to such position by the
shareholders or by the Board of the Company or of any subsidiary or affiliate,
as the case may be.
2. Term. The initial term of this Agreement, and the employment of the
Executive hereunder, shall be for a period commencing on July 1, 1997 and
expiring on June 30, 2000 (the "Initial Term"). By notice given not more than
one hundred eighty (180) and not less than one hundred twenty (120) days before
the expiration
2
<PAGE>
of the Initial Term, the Company may extend the term hereof for an additional
one (1) year (the "First Extension" ). By notice given not more than one hundred
eighty (180) and not less than one hundred twenty (120) days before the
expiration of the First Extension, the Company may extend the term hereof for an
additional one (1) year (the "Second Extension") (the Initial Term, together
with the First Extension, if any, and the Second Extension, if any, is herein
referred to as the "Term").
3. Compensation Package.
(a) The Executive's annual salary during the Initial Term
shall be as hereinafter set forth below:
July 1, 1997 through June 30, 1998 $ 85,000.00
July 1, 1998 through June 30, 1999 $ 92,500.00
July 1, 1999 through June 30, 2000 $100,000.00
payable by check in equal bi-weekly installments or in such other periodic
installments as may be in accordance with the regular payroll policies of the
Company as from time to time in effect, less such deductions or amounts to be
withheld as shall be required by applicable law and regulations. During the
First Extension, if any, The Executive's annual salary shall be $110,000.00;
during the Second Extension, if any, the Executive's annual salary shall be
$120,000.00.
(b) The Executive shall be entitled to participate in Company
provided family medical/dental insurance plans, provided that the policy may
have standard co-
3
<PAGE>
insurance and deductible provisions, and that 25% of the cost of the policy
shall be paid by the Executive.
(c) The Executive shall be entitled to three (3) weeks of paid
vacation during any year of the Term.
(d) The Executive shall be eligible for an annual bonus in
accordance with the Company's policy as in effect from time to time.
(e) The Company shall provide the Executive with an automobile
allowance of $400.00 per month. The Executive shall be responsible for all
associated expenses relating to such automobile, including, without limitation,
insurance, gas and repairs.
(f) The Company shall pay or reimburse the Executive for all
reasonable expenses actually incurred or paid by him in the performance of his
duties hereunder, in accordance with Company policy and upon the presentation by
the Executive of an itemized account of such expenditures.
(g) The Executive 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 under such plans. The Company will
recommend to the Board or such committees a grant of a stock option to acquire
100,000 shares of the IFFC's common stock, par value $.01 per share (the "Common
Stock"), at an exercise price 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
4
<PAGE>
according to the following schedule, provided in each case that the Executive is
an employee of the Company on the date of reference:
(i) 20 percent 1 year after the effective date
(ii) 60 percent 2 years after the effective date
(iii) 100 percent 3 years after the effective date
In no event shall this Option be exercised 10 years after this Option first
becomes exercisable.
4. Termination.
(a) Notwithstanding anything contained in this Agreement to
the contrary, the Company by written notice to the Executive shall at all times
have the right to terminate this Agreement, and the Executive's employment
hereunder, with or without "Cause", as hereinafter defined. For the purposes
hereof, "Cause" shall be defined to mean any act of the Executive or any failure
to act on the part of the Executive which constitutes:
(i) fraud or embezzlement; or
(ii) conviction of a felony; or
(iii) commission of a crime involving dishonesty; or
(iv) a breach of any of the terms, provisions or
obligations of this Agreement.
(b) Notwithstanding anything contained in this Agreement to
the contrary, this Agreement and the Executive's employment hereunder shall be
terminated automatically (i) immediately upon the death of the Executive, and
(ii) if the Executive shall, as the result of mental or physical incapacity,
illness or disability,
5
<PAGE>
be unable and fail to perform reasonably his duties and responsibilities
provided for herein for any continuous period of 60 days during the term of this
Agreement, provided that the obligations of the Company to make payments
hereunder shall be suspended during the pendency of any disability which has
persisted for a continuous period of 30 days during the term of this Agreement.
(c) If, during the Term, this Agreement is terminated pursuant
to Paragraph 4(b) hereof, the Company shall pay to the Executive or the personal
representative of his estate Twenty Thousand Dollars ($20,000) in a lump sum
within thirty (30) days of such termination.
(d) If, during the Term, the Company terminates the
Executive's employment hereunder without Cause, the Company shall pay to the
Executive a lump sum termination amount (the "Termination Amount") within thirty
days of such termination and neither party shall have any further obligations
hereunder, except pursuant to Paragraphs 5 and 6 hereof. The Termination Amount
shall be calculated as follows:
July 1, 1997 through June 30, 1998 $20,000.00
July 1, 1998 through June 30, 1999 $15,000.00
July 1, 1999 through June 30, 2000 $10,000.00
(e) If the Company terminates the Executive's employment
hereunder for Cause, neither party shall have any further obligations hereunder
except pursuant to Paragraphs 5 and 6 hereof.
6
<PAGE>
5. Nondisclosure. The Executive understands that, solely as a result of
his employment with the Company, he will have knowledge of and access to certain
confidential information relating to the financial and planning aspects of the
Company's business and other aspects of the Company's business. The Executive
agrees that, during or following his employment by the Company, he will not
disclose to others (except in the course of his employment with the Company and
solely in furtherance of the interest of the Company) any such confidential
information. The provisions of this paragraph shall not preclude the Executive
from using, after the termination of his employment with the Company, his
general professional knowledge and skills including those developed while
employed by the Company. The Executive further agrees to comply with any
provision of any agreement between the Company and any other party relating to
the confidentiality of information relating to that party or its operations.
6. Restrictive Covenants. The Executive shall not at any time during
the term of his employment hereunder and for a period of two (2) years after the
date this Agreement expires or is terminated for any reason, directly or
indirectly, for himself or for any other person, firm, corporation, partnership,
association or other entity, except on behalf of the Company:
(a) engage or be involved in any restaurant operations in
Poland the same or similar to those conducted by the Company;
7
<PAGE>
(b) interfere with business relationships between the Company
and its suppliers, franchisors, or customers;
(c) without the Company's prior written consent, become
employed by an entity with which the Company has a business relationship; or
(d) without the Company's prior written consent, hire or
solicit the employment of any person or associate in the employ of the Company
or its subsidiaries or affiliates.
The Executive acknowledges that (i) the foregoing covenants are
reasonable in scope and duration and (ii) he will be able to earn a living and
provide for his family without violating the foregoing covenants.
7. No Delegation. Neither the Company nor the Executive shall delegate
its or his obligations pursuant to this Agreement to any other person, except as
provided in Paragraph 8 hereof.
8. No Assignment. Neither the Company nor the Executive shall assign
any of its or his rights under this Agreement to any other person, except that
the Company may assign its rights under this Agreement to any successor entity
in a merger with the Company or any entity that purchases all or substantially
all of the Company's assets, and except that the Company may assign its rights
and obligations hereunder to a subsidiary or affiliate, after which assignment
the Company will have no obligations hereunder
8
<PAGE>
9. Damages. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other damages
sustained by either or both of them as a result of its or his breach of any term
or provision of this Agreement. In the event that either party hereto brings
suit for the collection of any damages resulting from, or the injunction of any
action constituting, a breach of any of the terms or provisions of this
Agreement, then the party found to be at fault shall pay all reasonable court
costs and attorneys' fees of the other.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
11. Notices. Any notices, requests, demands and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given (a) when delivered by hand or facsimile,
or (b) 3 days after deposit in the United States mail, by registered or
certified mail, return receipt requested, postage prepaid, as follows:
If to the Company: International Fast Food Corporation
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
With a copy to: Atlas, Pearlman, Trop & Borkson
New River Center, Suite 1900
200 East Las Olas Boulevard
Fort Lauderdale, Florida 33301
If to the Executive: James F. Martin
1199 Northeast 92nd Street
Miami Shores, Florida 33138
9
<PAGE>
or to such other addresses as either party hereto may from time to time give
notice of to the other.
12. Benefits: Binding Effect. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns.
13. Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses, or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity shall be caused by the length of any
period of time or the size of any area set forth in any part hereof, such period
of time or such area, or both, shall be considered to be reduced to a period or
area to the extent and only to the extent that such reduction would cure such
invalidity.
14. Waivers. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate or be construed as
a waiver of any subsequent breach or violation.
10
<PAGE>
15. Section Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Specific Performance. The Executive agrees that a violation by him
of any of the covenants contained in Paragraphs 5 or 6 of this Agreement will
cause irreparable damage to the Company the amount of which will be virtually
impossible to ascertain, and with respect to which the Company may not have an
adequate remedy at law, and for those reasons the Executive agrees that the
Company shall be entitled to an injunction or a restraining order (both
temporary or permanent) from any court of competent jurisdiction restraining any
violation of any or all of said covenants by the Executive, all persons he
controls, and all persons acting for or with him, either directly or indirectly,
in addition to any other form of relief, at law or equity, to which the Company
may be entitled. When used in Paragraphs 5, 6 and 16 hereof, the term "Company"
shall include all its directly and indirectly owned subsidiaries and its
affiliates involved in the restaurant business in Poland.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
18. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements, understandings and arrangements, both oral and
written,
11
<PAGE>
between the parties hereto with respect to such subject matter. No amendment or
modification of this Agreement shall be valid or binding upon the Company unless
made in writing and signed by a duly authorized officer of the Company other
than the Executive, or upon the Executive unless made in writing and signed by
him.
19. No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
other than the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and permitted assigns, any
rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the parties have set their hands and seals as of
the day and year first above written.
COMPANY:
INTERNATIONAL FAST FOOD CORPORATION
By: /s/ Mitchell Rubinson
------------------------------------------
Mitchell Rubinson
Chairman of the Board, President and
Chief Executive Officer
EXECUTIVE:
By: /s/ James F. Martin
------------------------------------------
James F. Martin
12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
effective July 1, 1997, by and between International Fast Food Corporation,
Inc., a Florida corporation (the "Company"), International Fast Food Polska, a
Polish limited liability corporation ("IFFP", and Leon Blumenthal (the
"Executive").
W I T N E S S E T H:
--------------------
WHEREAS, the Company and IFFP desire to employ the Executive for the
term provided herein, and the Executive desires to be employed by the Company
and IFFP for such term, all in accordance with the terms and provisions herein
contained;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Employment.
(a) The Company hereby employs the Executive to render his
full-time services to: (i) the Company as its Senior Vice President, Chief
Operating Officer and General Manager; and (ii) IFFP as its President; and the
Executive hereby accepts such employment, on the terms and conditions contained
in this Agreement.
(b) The Executive shall perform such duties for the Company as
may be determined and assigned to him from time to time by the Company's
President (the "President") or the Company's Board of Directors (the "Board"),
which assigned duties shall be consistent with those normally associated with
such position and in which he is currently performing; provided that the Board
may delegate certain of the tasks,
<PAGE>
objectives or responsibilities set forth in the Description to other officers or
employees of the Company or its subsidiaries and affiliates.
(c) The Executive hereby agrees to devote his full business time,
attention and his best efforts to the performance of his duties hereunder.
(d) The Executive's place of employment during the term of his
employment hereunder shall be the Republic of Poland, or at such place
designated by the Board.
(e) The Executive agrees to accept election and to serve during all or
any part of the Term, as hereinafter defined, as an officer or director of the
Company, and IFFP, and/or any other subsidiary or affiliate of the Company,
without any compensation therefor other than that specified herein, if elected
to such position by the shareholders or by the Board of the Company or of any
subsidiary or affiliate, as the case may be.
2. Term. The initial term of this Agreement, and the employment of the
Executive hereunder, shall be for a period commencing on July 1, 1997 and
expiring on June 30, 2000 (the "Initial Term"). By notice given not more than
one hundred eighty (180) and not less than ninety (90) days before the
expiration of the Initial Term, the Company may extend the term hereof for an
additional one (1) year (the "First Extension" ). By notice given not more than
one hundred eighty (180) and not less than ninety (90) days before the
expiration of the First Extension, the Company may extend the term hereof for an
additional one (1) year (the "Second Extension")
2
<PAGE>
(the Initial Term, together with the First Extension, if any, and the Second
Extension, if any, is herein referred to as the "Term" ).
3. Compensation Package.
(a) The Executive's annual salary during the Initial Term
shall be as hereinafter set forth, payable by check in equal bi-weekly
installments or in such other periodic installments as may be in accordance with
the regular payroll policies of IFFP, as from time to time in effect, less such
deductions or amounts to be withheld as shall be required by applicable law and
regulations:
July 1, 1997 through June 30, 1998 $100,000.00
July 1, 1998 through June 30, 1999 $110,000.00
July 1, 1999 through June 30, 2000 $120,000.00
During the First Extension, if any, The Executive's annual salary shall be zloty
equivalent of $130,000.00; during the Second Extension, if any, the Executive's
annual salary shall be $140,000.00. In the event that and to the extent that
IFFP fails to make payments due to the Executive under this Section 3(a), the
Company covenants and agrees that it will make payments due to the Executive
under this Section 3(a).
(b) The Executive shall be entitled to participate in Company
provided family medical/dental insurance plans, provided that the policy may
have standard co-insurance and deductible provisions, and that 25% of the cost
of the policy shall be paid by the Executive.
3
<PAGE>
(c) The Executive shall be entitled to three (3) weeks of paid
vacation during any year of the Term.
(d) The Executive shall be eligible for an annual bonus in
accordance with the Company's and IFFP's policies as in effect from time to
time.
(e) IFFP shall provide the Executive with an automobile to use
in connection with the performance of his duties hereunder.
(f) IFFP shall pay or reimburse the Executive for all
reasonable expenses actually incurred or paid by him in the performance of his
duties hereunder, in accordance with Company policy and upon the presentation by
the Executive of an itemized account of such expenditures.
(g) The Executive 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 under such plans. The Company will
recommend to the Board or such committees a grant of a stock option to acquire
100,000 shares of the IFFC's common stock, par value $.01 per share (the "Common
Stock"), at an exercise price 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, provided in each case
that the Executive is an employee of the Company on the date of reference:
(i) 20 percent 1 year after the effective date
(ii) 60 percent 2 years after the effective date
(iii) 100 percent 3 years after the effective date
4
<PAGE>
In no event shall this Option be exercised 10 years after this Option first
becomes exercisable.
4. Termination.
(a) Notwithstanding anything contained in this Agreement to
the contrary, the Company by written notice to the Executive shall at all times
have the right to terminate this Agreement, and the Executive's employment
hereunder, with or without "Cause", as hereinafter defined. For the purposes
hereof, "Cause" shall be defined. For the purposes hereof, "Cause" shall be
defined to mean any act of the Executive or any failure to act on the part of
the Executive or any failure to act on the part of the Executive which
constitutes:
(i) fraud or embezzlement;
(ii) conviction of a felony; or
(iii) lewd and lascivious behavior;
(iv) commission of a crime involving dishonesty; or
(v) a breach of any of the terms, provisions or obligations of
this Agreement.
(b) Notwithstanding anything contained in this Agreement to
the contrary, this Agreement and the Executive's employment hereunder shall be
terminated automatically (i) immediately upon the death of the Executive, and
(ii) if the Executive shall, as the result of mental or physical incapacity,
illness or disability, be unable and fail to perform reasonably his duties and
responsibilities provided for herein for any continuous period of sixty (60)
days during the term of this Agreement, provided that the obligations of the
Company to make payments hereunder shall be
5
<PAGE>
suspended during the pendency of any disability which has persisted for a
continuous period of thirty (30) days during the term of this Agreement.
(c) If, during the Term, this Agreement is terminated pursuant
to Paragraph 4(b) hereof, the Company shall pay to the Executive or the personal
representative of his estate Twenty five Thousand Dollars ($25,000.00) in a lump
sum within thirty (30) days of such termination.
(d) If, during the Term, the Company terminates the
Executive's employment hereunder without Cause, the Company shall pay to the
Executive a lump sum termination amount (the "Termination Amount") within thirty
(30) days of such termination and neither party shall have any further
obligations hereunder, except pursuant to Paragraphs 5 and 6 hereof. The
Termination Amount shall be calculated as follows: if the termination occurs on
or (1) prior to July 1, 1998, the Termination Amount will be $25,000.00; (ii)
after July 1, 1998 but on or prior to July 1, 1999, the Termination Amount will
be $20,000.00; and after July 1, 1999, the Termination Amount will be $15,000.00
(e) If the Company terminates the Executive's employment
hereunder for Cause, neither party shall have any further obligations hereunder
except pursuant to Paragraphs 5 and 6 hereof.
5. Nondisclosure. The Executive understands that, solely as a result of
his employment with the Company, he will have knowledge of and access to certain
confidential information relating to the financial and planning aspects of the
6
<PAGE>
Company's business and other aspects of the Company's business. The Executive
agrees that, during or following his employment by the Company, he will not
disclose to others (except in the course of his employment with the Company and
solely in furtherance of the interest of the Company) any such confidential
information. The provisions of this paragraph shall not preclude the Executive
from using, after the termination of his employment with the Company, his
general professional knowledge and skills including those developed while
employed by the Company. The Executive further agrees to comply with any
provision of any agreement between the Company and any other party relating to
the confidentiality of information relating to that party or its operations.
6. Restrictive Covenants. The Executive shall not at any time during
the term of his employment hereunder and for a period of two (2) years after the
date this Agreement expires or is terminated for any reason, directly or
indirectly, for himself or for any other person, firm, corporation, partnership,
association or other entity, except on behalf of the Company:
(a) engage or be involved in any restaurant operations in
Poland, or with any restaurant operations of any entity that directly or
indirectly maintains a presence in Poland;
(b) interfere with business relationships between the Company
or IFFP and its suppliers, franchisors, or customers;
7
<PAGE>
(c) without the Company's prior written consent, become
employed by an entity with which the Company has a business relationship; or
(d) without the Company's prior written consent, hire or
solicit the employment of any person or associate in the employ of the Company,
IFFP or any other of the Company's subsidiaries or affiliates.
The Executive acknowledges that (i) the foregoing covenants are
reasonable in scope and duration and (ii) he will be able to earn a living and
provide for his family without violating the foregoing covenants.
7. No Delegation. Neither the Company nor the Executive shall delegate
its or his obligations pursuant to this Agreement to any other person, except as
provided in Paragraph 8 hereof.
8. No Assignment. Neither the Company nor the Executive shall assign
any of its or his rights under this Agreement to any other person, except that
the Company may assign its rights under this Agreement to any successor entity
in a merger with the Company or any entity that purchases all or substantially
all of the Company's assets, and except that the Company may assign its rights
and obligations hereunder to a subsidiary or affiliate, after which assignment
the Company will have no obligations hereunder.
9. Damages. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other damages
sustained by either or both of them as a result of its or his breach of any term
or
8
<PAGE>
provision of this Agreement. In the event that either party hereto brings suit
for the collection of any damages resulting from, or the injunction of any
action constituting, a breach of any of the terms or provisions of this
Agreement, then the party found to be at fault shall pay all reasonable court
costs and attorneys' fees of the other.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
11. Notices. Any notices, requests, demands and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given (a) when delivered by hand or facsimile,
or (b) three (3) days after deposit in the United States mail, by registered or
certified mail, return receipt requested, postage prepaid, as follows:
If to the Company: International Fast Food Corporation
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
With a copy to: Atlas, Pearlman, Trop & Borkson
New River Center, Suite 1900
200 East Las Olas Boulevard
Fort Lauderdale, Florida 33301
If to IFFP: International Fast Food Polska
1/3 Wachocka Street (section 7)
03-934 Warsaw, Poland
If to the Executive: Leon Blumenthal
International Fast Food Polska
1/3 Wachocka Street (section 7)
03-934 Warsaw, Poland
or to such other addresses as either party hereto may from time to time give
notice of to the other.
9
<PAGE>
12. Benefits: Binding Effect. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns.
13. Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses, or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity shall be caused by the length of any
period of time or the size of any area set forth in any part hereof, such period
of time or such area, or both, shall be considered to be reduced to a period or
area to the extent and only to the extent that such reduction would cure such
invalidity.
14. Waivers. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate or be construed as
a waiver of any subsequent breach or violation.
15. Section Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10
<PAGE>
16. Specific Performance. The Executive agrees that a violation by him
of any of the covenants contained in Paragraphs 5 or 6 of this Agreement will
cause irreparable damage to the Company the amount of which will be virtually
impossible to ascertain, and with respect to which the Company may not have an
adequate remedy at law, and for those reasons the Executive agrees that the
Company shall be entitled to an injunction or a restraining order (both
temporary or permanent) from any court of competent jurisdiction restraining any
violation of any or all of said covenants by the Executive, all persons he
controls, and all persons acting for or with him, either directly or indirectly,
in addition to any other form of relief, at law or equity, to which the Company
may be entitled. When used in Paragraphs 5, 6 and 16 hereof, the term "Company"
shall include all its directly and indirectly owned subsidiaries, employees and
its affiliates.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
18. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements, understandings and arrangements, both oral and
written, between the parties hereto with respect to such subject matter. No
amendment or modification of this Agreement shall be valid or binding upon the
Company unless
11
<PAGE>
made in writing and signed by a duly authorized officer of the Company other
than the Executive, or upon the Executive unless made in writing and signed by
him.
19. No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
other than the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and permitted assigns, any
rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the parties have set their hands and seals as of
the day and year first above written.
INTERNATIONAL FAST FOOD CORPORATION
By: /s/ Mitchell Rubinson
-------------------------------------
Mitchell Rubinson Chairman of the Board,
President and Chief Executive Officer
INTERNATIONAL FAST FOOD POLSKA
By:
-------------------------------------
EXECUTIVE:
By: /s/ Leon Blumenthal
-------------------------------------
Leon Blumenthal
12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
effective March 1, 1998, by and between International Fast Food Corporation,
Inc., a Florida corporation (the "Company"), and Ian Scattergood (the
"Executive").
W I T N E S E T H:
-------------------
WHEREAS, the Company desires to employ the Executive for the term provided
herein, and the Executive desires to be employed by the Company for such term,
all in accordance with the terms and provisions herein contained;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
1. Employment.
(a) The Company hereby employs the Executive to render full-time
services to the Company as its Director of Development for its
subsidiary International Fast Food Polska, Sp. zo.o., and/or
that of its subsidiaries or affiliates that may be founded,
the Executive hereby accepts such employment, on the terms and
conditions contained in this Agreement.
(b) The Executive shall perform such duties for the Company as may
be determined and assigned to him from time to time by the
Company's President (the "President") or the Company's Board
of Directors (the "Board"), which assigned duties shall be
consistent with those normally associated with such position
and in which he is currently performing; provided that the
Board may delegate certain of the tasks, objectives or
responsibilities set forth in the Description to other
officers or employees of the Company or its subsidiaries and
affiliates.
(c) The Executive hereby agrees to devote his full business time,
attention and his best efforts to the performance of his
duties hereunder.
(d) The Executive's place of employment during the term of his
employment hereunder shall be at such place as is reasonably
designated by the Board. The Executive hereby acknowledges
that he will be required to change his residence in order to
perform his obligations hereunder, and further acknowledges
that he is required to take up residence in the Republic of
Poland in connection with the performance of his duties
hereunder.
(e) The Executive agrees to accept election and to serve during
all or any part of the Term, as hereinafter defined, as an
officer or director of the Company and any subsidiary or
affiliate of the Company, without any compensation therefor
other
<PAGE>
than that specified herein, if elected to such position by the
shareholders or by the Board of the Company or of any
subsidiary or affiliate, as the case may be.
2. Term. The initial term of this Agreement, and the employment of the
Executive hereunder, shall be for a period commencing on March 1, 1998
and expiring on February 28, 1999 (the "Initial Term"). By notice given
not more than sixty (60) and not less than thirty (30) days before the
expiration of the Initial Term, the Company may extend the term hereof
for an additional one (1) year (the "First Extension" ). By notice
given not more than sixty (60) and not less thirty (30) days before the
expiration of the First Extension, the Company may extend the term
hereof for an additional one (1) year (the "Second Extension") (the
Initial Term, together with the First Extension, if any, and the Second
Extension, if any, is herein referred to as the "Term").
3. Compensation Package.
(a) The Executive's annual salary during the Initial Term shall be as
hereinafter set forth below:
March 1, 1998 through February 28. 1999 $105,000.00
payable by wire transfer in equal monthly installments or in
such other periodic installments as may be in accordance with
the regular payroll policies of the Company as from time to
time in effect, less such deductions or amounts to be withheld
as shall be required by applicable laws and regulations.
During the First Extension, if any, The Executive's annual
salary shall be $115,000.00; during the Second Extension, if
any, the Executive's annual salary shall be $125,000.00.
(b) The Executive shall be entitled to participate in Company
provided family medical/dental insurance plans, provided that
the policy may have standard co-insurance and deductible
provisions, and that 25% of the cost of the policy shall be
paid by the Executive.
(c) The Executive shall be entitled to three (3) weeks of paid
vacation during any year of the Term.
(d) The Executive shall be eligible to receive a performance bonus
("Bonus") payable thirty (30) days after the calendar year
ending, December 31, 1998 equivalent to thirty percent (301/o)
of his 1998 Base Salary. Said Bonus will be paid if the
Executive is in the employ of the Company for the entire year
and the Company opens sixteen (16) new Burger King restaurants
over the year ended December 31, 1998, and during the first
option period (24) Burger King restaurants and during the
second option period (30)Burger King restaurants.
Specifically excluded from these restaurants are restaurants
opened within a joint venture with Shell Poland. in addition
to the 30% performance bonus, the Executive shall be entitled
2
<PAGE>
to receive an additional ten percent (10%) of his then annual
Base Salary as an incentive bonus if the Company opens twenty
(20) restaurants in 1998; thirty (30) restaurants in 1999; and
forty (40) restaurants in 2000. Specifically excluded from
these restaurants are restaurants opened within a joint
venture with Shell Poland.
(e) The Company shall provide the Executive with an automobile
allowance of $500.00 per month. The Executive shall be
responsible for all associated expenses relating to such
automobile, including, without limitation, insurance, gas and
repairs.
(f) The Company shall provide the Executive with a housing
allowance of $1,500.00 per month. The Executive shall be
responsible for all associated expenses relating to such
housing, including, without limitation, telephone,
electricity, gas, water and repairs.
(g) The Company shall pay or reimburse the Executive for all
reasonable expenses actually incurred or paid by him in the
performance of his duties hereunder, in accordance with
Company policy and upon the presentation by the Executive of
an itemized account of such expenditures.
(h) The Company shall provide the Executive with an annual travel
allowance of $5,000.
(i) The Executive 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 under
such plans. The Company will recommend to the Board or such
committees a grant of a stock option to acquire 100,000 shares
of the IFFC's common stock par value $.0l per share (the
"Common Stock"), at an exercise price 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 vesting schedule,
provided in each case that the Executive is an employee of the
Company on the date of reference:
(i) 35 percent 364 days after the effective date
(ii) 35 percent 729 days after the effective date
(iii) 30 percent 1,095 days after the effective date
In no event shall this Option be exercised 10 years after this Option
first becomes exercisable.
4. Termination.
(a) Notwithstanding anything contained in this Agreement to the
contrary, the Company by written notice to the Executive shall
at all times have the right to
3
<PAGE>
terminate this Agreement, and the Executive's employment
hereunder, with or without "Cause", as hereinafter defined.
For the purposes hereof, "Cause" shall be defined to mean any
act of the Executive or any failure to act on the part of the
Executive that constitutes:
(i) fraud or embezzlement; or
(ii) conviction of a felony; or
(iii) commission of a crime involving dishonesty; or
(iv) a breach of any of the terms, provisions or obligations
of this Agreement.
(b) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement and the Executive's employment
hereunder shall be terminated automatically (i) immediately
upon the death of the Executive, and (ii) if the Executive
shall, as the result of mental or physical incapacity, illness
or disability, be unable and fail to perform reasonably his
duties and responsibilities provided for herein for any
continuous period of 60 days during the term of this
Agreement, provided that the obligations of the Company to
make payments hereunder shall be suspended during the pendency
of any disability which has persisted for a continuous period
of 30 days during the term of this Agreement.
(c) If, during the Term, this Agreement is terminated pursuant to
Paragraph 4(b) hereof, the Company shall pay to the Executive
or the personal representative of his estate Twenty Thousand
Dollars ($20,000) in a lump sum within thirty (30) days of
such termination. If, during the Term, the Company terminates
the Executive's employment hereunder without Cause, the
Company shall pay to the Executive a lump sum termination
amount (the "Termination Amount") of Twenty Thousand Dollars
($20,000) within thirty days of such termination and neither
party shall have any further obligations hereunder, except
pursuant to Paragraphs 5 and 6 hereof.
(d) If the Company terminates the Executive's employment hereunder
for Cause, neither party shall have any further obligations
hereunder except pursuant to Paragraphs 5 and 6 hereof.
5. Nondisclosure. The Executive understands that, solely as a result of
his employment with the Company, he will have knowledge of and access
to certain confidential information relating to the financial and
planning aspects of the Company's business and other aspects of the
Company's business. The Executive agrees that, during or following his
employment by the Company, he will not disclose to others (except in
the course of his employment with the Company and solely in furtherance
of the interest of the Company) any such confidential information. The
provisions of this paragraph shall not preclude the Executive from
using, after the termination of his employment with the Company, his
general professional knowledge and skills including those developed
while employed by the Company. The Executive further agrees to comply
with any provision of any
4
<PAGE>
agreement between the Company and any other party relating to the
confidentiality of information relating to that party or its
operations.
6. Restrictive Covenants. The Executive shall not at any time during the
term of his employment hereunder and for a period of two (2) years
after the date this Agreement expires or is terminated for any reason,
directly or indirectly, for himself or for any other person, firm,
corporation, partnership, association or other entity, except on behalf
of the Company:
(a) engage or be involved in any restaurant operations in Poland
the same or similar to those conducted by the Company;
(b) interfere with business relationships between the Company and
its suppliers, franchisors, or customers;
(c) without the Company's prior written consent, become employed
by an entity with which the Company has a business
relationship; or
(d) without the Company's prior written consent, hire or solicit
the employment of any person or associate in the employ of the
Company or its subsidiaries or affiliates.
The Executive acknowledges that (i) the foregoing covenants are reasonable in
scope and duration and (ii) he will be able to earn a living and provide for his
family without violating the foregoing covenants.
7. No Delegation. Neither the Company nor the Executive shall delegate its
or his obligations pursuant to this Agreement to any other person,
except as provided in Paragraph 8 hereof.
8. No Assignment. Neither the Company nor the Executive shall assign any of
its or his rights under this Agreement to any other person, except that
the Company may assign its rights under this Agreement to any successor
entity in a merger with the Company or any entity that purchases all or
substantially all of the Company's assets, and except that the Company
may assign its rights and obligations hereunder to a subsidiary or
affiliate, after which assignment the Company will have no obligations
hereunder
9. Damages. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other
damages sustained by either or both of them as a result of its or his
breach of any term or provision of this Agreement. In the event that
either party hereto brings suit for the collection of any damages
resulting from, or the injunction of any action constituting, a breach
of any of the terms or provisions of this Agreement, then the party
found to be at fault shall pay all reasonable court costs and attorneys'
fees of the other.
5
<PAGE>
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
11. Notices. Any notices, requests, demands and other communications
required or permitted to be given under this Agreement shall be in
writing and shall be deemed to have been duly given (a) when delivered
by hand or facsimile, or (b) 3 days after deposit in the United States
mail, by registered or certified mail, return receipt requested postage
prepaid. as follows:
If to the Company: International Fast Food Corporation
1000 Lincoln Road, Suite 200
Miami Beach. Florida 33139
With a copy to: Atlas, Pearlman, Trop & Borkson
New River Center Suite 1900
200 East Las Olas Boulevard
Fort Lauderdale, Florida 33301
If to the Executive: Ian Scattergood
I Orchard Way
Berry Lane, Worplesdon
Guildford, Surrey
GU33QG
or to such other addresses as either party hereto may from time to time give
notice of to the other.
12. Benefits: Binding Effect. This Agreement shall be for the benefit of
and binding upon the parties hereto and their respective heirs,
personal representatives, legal representatives, successors and, where
applicable, assigns.
13. Severability. The invalidity of any one or more of the words, phrases,
sentences, clauses, or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement
or any part thereof, all of which are inserted conditionally on their
being valid in law, and, in the event that any one or more of the
words, phrases, sentences, clauses or sections contained in this
Agreement shall be declared invalid, this Agreement shall be construed
as if such invalid word or words, phrase or phrases, sentence or
sentences, clause or clauses, or section or sections had not been
inserted. If such invalidity shall be caused by the length of any
period of time or the size of any area set forth in any part hereof,
such period of time or such area, or both, shall be considered to be
reduced to a period or area to the extent and only to the extent that
such reduction would cure such invalidity.
14. Waivers. The waiver by either party hereto of a breach or violation of
any term or
6
<PAGE>
provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach or violation.
15. Section Headings. The section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement.
16. Specific Performance. The Executive agrees that a violation by him of
any of the covenants contained in Paragraphs 5 or 6 of this Agreement
will cause irreparable damage to the Company the amount of which will
be virtually impossible to ascertain, and with respect to which the
Company may not have an adequate remedy at law, and for those reasons
the Executive agrees that the Company shall be entitled to an
injunction or a restraining order (both temporary or permanent) from
any court of competent jurisdiction restraining any violation of any or
all of said covenants by the Executive, all persons he controls, and
all persons acting for or with him, either directly or indirectly, in
addition to any other form of relief, at law or equity, to which the
Company may be entitled. When used in Paragraphs 5, 6 and 16 hereof,
the term "Company" shall include all its directly and indirectly owned
subsidiaries and its affiliates involved in the restaurant business in
Poland.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
18. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, understandings and arrangements,
both oral and written, between the parties hereto with respect to such
subject matter. No amendment or modification of this Agreement shall be
valid or binding upon the Company unless made in writing and signed by
a duly authorized officer of the Company other than the Executive, or
upon the Executive unless made in writing and signed by him.
19. No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended. or shall be construed, to confer upon or give
any person other than the parties hereto and their respective heirs,
personal representatives, legal representatives, successors and
permitted assigns, any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, the parties have set their hands and seals as of the day and
year first above written.
COMPANY:
INTERNATIONAL FAST FOOD CORPORATION
7
<PAGE>
By: /s/ Mitchell Rubinson
--------------------------------
Mitchell Rubinson
Chairman of the Board, President and
Chief Executive Officer
EXECUTIVE:
By: /s/ Ian Scattergood
--------------------------------
Ian Scattergood
8
Exhibit 21.1
Subsidiaries of IFFC
-----------------------------------
1. International Fast Food Polska, Sp.Zo.o.
2. IFF - DX Management Sp.Zo.o.
3. IFF Polska-Kolmer, Sp.Zo.o.
4. IFF Polska i Spolka Komandytowa Sp.Zo.o.
5. Pizza King Polska, Sp.Zo.o.
6. Kroseska Pizza, Sp.Zo.o.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,642,325
<SECURITIES> 0
<RECEIVABLES> 101,528
<ALLOWANCES> 0
<INVENTORY> 372,599
<CURRENT-ASSETS> 20,247,163
<PP&E> 10,271,930
<DEPRECIATION> (4,312,552)
<TOTAL-ASSETS> 30,354,338
<CURRENT-LIABILITIES> 2,737,873
<BONDS> 23,110,680
0
334
<COMMON> 446,413
<OTHER-SE> 2,313,744
<TOTAL-LIABILITY-AND-EQUITY> 30,354,338
<SALES> 6,083,011
<TOTAL-REVENUES> 6,083,011
<CGS> 2,476,775
<TOTAL-COSTS> 5,747,947
<OTHER-EXPENSES> 314,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 945,598
<INCOME-PRETAX> (1,252,850)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,252,850)
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<NET-INCOME> (1,252,850)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
