U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
[ ] Transition Report Under Section 13 or 15(d) of
the Exchange Act
For the transition period from ____________ to ____________.
Commission file number 0-20203 and 1-11386
INTERNATIONAL FAST FOOD CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 65-0302338
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Lincoln Road, Suite 200
Miami Beach, Florida 33139
------------------------------------------------
(Address of Principal Executive Office)
(305) 531-5800
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.01
per share as of August 11, 1998 was 44,776,143.
Traditional Small Business Disclosure Format: Yes [x] No [ ]
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM. 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 2 - 3
Consolidated Statements of Operations
for the Three and Six Months Ended
June 30, 1998 and 1997 4
Consolidated Statements of
Shareholders' Equity for the Six
Months Ended June 30, 1998 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30,
1998 and 1997 6 - 7
Notes to Consolidated Financial
Statements 8 - 23
ITEM. 2 Management's Discussion and Analysis
or Plan of Operation 24 - 37
PART II. OTHER INFORMATION
- ---------------------------
ITEM 2 Legal Proceedings 38
ITEM 6 Exhibits and Reports on Form 8K 39
SIGNATURES 40
1
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $11,018,674 $18,642,335
Restricted cash 999,990 999,990
Marketable securities 5,000,000 -
Receivables 375,687 101,528
Inventories 457,040 372,599
Prepaid expenses 466,634 130,711
------------- --------------
Total Current Assets 18,318,025 20,247,163
FURNITURE, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, NET 7,664,639 5,959,378
DEFERRED DEBENTURE ISSUANCE COSTS,
NET OF ACCUMULATED AMORTIZATION
OF $174,038 AND $157,410,
RESPECTIVELY 258,287 274,915
DEFERRED ISSUANCE COSTS OF 11% CONVERTIBLE
SENIOR SUBORDINATED DISCOUNT NOTES
NET OF ACCUMULATED AMORTIZATION
OF $166,421 AND $41,049,
RESPECTIVELY 2,323,219 2,446,869
OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION OF $199,539 AND $199,484;
RESPECTIVELY 475,547 333,533
BURGER DEVELOPMENT RIGHTS,
NET OF ACCUMULATED AMORTIZATION
OF $135,135 AND $81,081,
RESPECTIVELY 864,865 918,919
DOMINO'S DEVELOPMENT RIGHTS,
NET OF ACCUMULATED AMORTIZATION
OF $31,084 AND $15,542,
RESPECTIVELY 158,019 173,561
------------- --------------
Total Assets $30,062,601 $30,354,338
============= ==============
</TABLE>
See Accompanying Notes
2
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,165,407 $ 581,555
Accrued interest payable 82,574 17,911
Other accrued expenses 663,003 788,412
Current portion of bank credit
facilities payable 1,475,113 1,349,995
------------ -----------
Total Current Liabilities 3,386,097 2,737,873
11% CONVERTIBLE SENIOR SUBORDINATED
DISCOUNT NOTES DUE OCTOBER 31, 2007 21,455,816 20,354,680
LONG TERM BANK CREDIT FACILITIES 617,867 630,000
9% SUBORDINATED CONVERTIBLE
DEBENTURES, DUE DECEMBER 15, 2007 2,756,000 2,756,000
------------ -----------
Total Liabilities 28,215,780 26,478,553
------------ -----------
DEFERRED CREDIT 1,000,000 1,000,000
------------ -----------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED SUBSIDIARY 47,816 115,294
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value,
1,000,000 shares authorized;
33,450 and 33,450 shares issued
and outstanding, respectively (liquidation
preference of $3,345,000) 334 334
Common Stock, $.01 par value,
100,000,000 shares authorized;
44,776,143 and 44,641,247 shares
issued and outstanding, respectively 447,762 446,413
Additional paid-in capital 17,790,543 17,691,542
Accumulated deficit (17,439,634) (15,377,798)
------------ -----------
Total Shareholders' Equity 799,005 2,760,491
------------ -----------
Total Liabilities and
Shareholders' Equity $30,062,601 $30,354,338
============ ===========
</TABLE>
See Accompanying Notes
3
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $ 1,902,902 $ 1,393,949 $ 3,689,022 $ 2,752,559
Other operating 16,093 22,614 34,774 51,478
------------ ------------ ------------ ------------
Total Revenue 1,918,995 1,416,563 3,723,796 2,804,037
FOOD AND PACKAGING 754,842 550,079 1,451,366 1,119,022
------------ ------------ ------------ ------------
GROSS PROFIT 1,164,153 866,484 2,272,430 1,685,015
RESTAURANT OPERATING EXPENSES:
Payroll and Related Costs 345,981 223,218 671,347 440,070
Occupancy and Other Operating
Expenses 559,188 399,649 1,065,085 764,717
Depreciation and Amortization 313,639 213,388 520,379 436,875
------------ ------------ ------------ ------------
Total Restaurant Operating
Expenses 1,218,808 836,255 2,256,811 1,641,662
------------ ------------ ------------ ------------
(54,655) 30,229 15,619 43,353
------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE
EXPENSES 607,995 222,376 1,142,406 714,886
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest and other, net 239,221 ( 116,654) 516,966 ( 76,983)
Interest expense, including
amortization of debenture
issuance costs ( 708,591) ( 167,624) ( 1,414,542) ( 273,171)
Gain on settlement of
litigation, net of applicable
costs - - - 1,327,070
Foreign currency exchange gain
(loss) 15,462 ( 2,628) ( 4,601) ( 25,862)
------------ ------------ ------------ ------------
Total other income (expenses) ( 453,908) ( 286,906) ( 902,177) 951,054
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY
INTEREST ( 1,116,558) ( 479,053) ( 2,028,964) 279,521
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED SUBSIDIARY 41,656 51,247 67,478 122,499
------------ ------------ ------------ ------------
NET INCOME (LOSS) $( 1,074,902) $( 427,806) $( 1,961,486) $ 402,020
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Primary $( .03) $( .04) $( .05) $ .02
============ ============ ============ ============
Fully diluted $( .03) $( .04) $( .05) $ .03
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic 44,664,989 13,115,361 44,653,118 13,007,129
============ ============ ============ ============
Diluted 44,664,989 13,115,361 44,653,118 17,453,364
============ ============ ============ ============
</TABLE>
See Accompanying Notes
4
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Stock Paid In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1997 44,641,247 $446,413 33,450 $334 $17,691,542 $(15,377,798) $2,760,491
Issuance of common
stock in payment
of dividends on
preferred stock 134,896 1,349 - - 99,001 (100,350) -
Net loss for the period - - - - - (1,961,486) (1,961,486)
Balances, ----------- --------- -------- ------- ------------ ------------ -----------
June 30, 1998 44,776,143 $447,762 33,450 $334 $17,790,543 $(17,439,634) $ 799,005
=========== ========= ======== ======= ============ ============ ===========
</TABLE>
See Accompanying Notes
5
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income $( 1,961,486) $ 402,020
Adjustment to reconcile net income
(loss) to net cash provided by
(used in)operating activities:
Amortization and depreciation of
furniture, equipment, leasehold
improvements and other assets 589,975 468,136
Amortization of debt discount
and issuance costs 1,241,414 16,628
Minority interest in losses of
subsidiary ( 67,478) ( 122,499)
Other operating items ( 819) 57,758
Changes in operating assets and
liabilities:
Receivables ( 274,159) ( 1,887)
Inventories ( 84,441) 37,191
Prepaid expenses ( 335,923) 12,694
Accounts payable and
accrued expenses 523,106 ( 363,990)
------------ ------------
Net cash (used in)provided by
operating activities ( 369,811) 506,051
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Note receivable - ( 500,000)
Increase in restricted cash - ( 946,291)
Payments for furniture, equipment
and leasehold improvements, net ( 2,214,640) ( 162,864)
Refund of franchise fees - 30,000
Payments for other assets ( 153,014) ( 4,209)
Payment for marketable securities ( 5,000,000) -
------------ ------------
Net cash (used in)
investing activities ( 7,367,654) ( 1,583,364)
------------ ------------
</TABLE>
See Accompanying Notes
6
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from (to) Affiliate, net - ( 26,545)
Repayments of bank credit
facilities ( 156,882) ( 440,794)
Increase in Payable to Litigation
Funding - 3,227,015
Payment to Litigation Funding - ( 1,028,521)
Payment of other notes payable - ( 69,307)
Payment of non-interest bearing
obligation to minority share-
holder of IFF Polska - ( 500,000)
Borrowings under bank credit
facilities 269,867 999,000
Net Proceeds from issuance of
convertible promissory notes - 500,000
------------ ------------
Net cash provided by financing
activities 112,985 2,660,848
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 819 ( 15,574)
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ( 7,623,661) 1,567,961
BEGINNING CASH AND CASH EQUIVALENTS 18,642,335 194,269
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 11,018,674 $ 1,762,230
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 208,209 $ 214,291
============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON
CASH INVESTING & FINANCING
ACTIVITIES:
SIX MONTHS ENDED JUNE 30, 1998:
Issuance of 134,896 shares of common stock in payment of $100,350 of
dividends on preferred stock.
SIX MONTHS ENDED JUNE 30, 1997:
Issuance of 42,995 shares of Common Stock upon the exchange of 1,290
shares of Preferred Stock.
Issuance of 2,000,000 shares of Common Stock in payment of $200,000 of
legal fees.
Issuance of 5,000,000 shares of Common Stock upon conversion of $500,000
principal amount of 8% Convertible Promissory Notes.
Issuance of 200,000 shares of Common Stock in exchange for the
cancellation of 130,000 Underwriter Common Stock warrants and Underwriter
$1,000,000 debenture warrants.
See Accompanying Notes
7
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION:
International Fast Food Corporation ("IFFC" or the "Company"), was
incorporated in December 1991 as a Florida corporation. The Company, has,
subject to certain exceptions, the exclusive right to develop franchised Burger
King restaurants and Domino's Pizza stores ("Domino's Stores") in the Republic
of Poland ("Poland").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned (85%)
Polish subsidiary, International Fast Food Polska, Sp. zo.o. ("IFFP"), a limited
liability company, and IFFP's two wholly-owned Polish limited liability
companies. IFFP currently operates nine Burger King restaurants in Poland.
Additionally, the consolidated financial statements include the accounts of the
Company's two wholly owned Polish limited liability companies, Krolewska Pizza,
Sp. z o.o.("KP") and Pizza King Polska, Sp. z o.o. ("PKP") for the period from
their acquisition in July 1997. KP and PKP presently operate ten Domino's Pizza
stores and a Domino's approved commissary. All significant intercompany
transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the annual
consolidated financial statements. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the footnotes thereto contained in the Annual Report on Form
10-KSB for the year ended December 31, 1997 of International Fast Food
Corporation and Subsidiaries (the "Company"), as filed with the Securities and
Exchange Commission. The December 31, 1997 consolidated balance sheet contained
herein was derived from audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of the financial statements. The
results of operations for the six months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
8
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
IFFC's restaurant and store operations are conducted in Poland. The
Polish economy has historically been characterized by high rates of inflation
and devaluation of the Polish zloty against the dollar and European currencies.
However, in the years ended December 31, 1996 and 1997, the rates of inflation
and devaluation improved. For the years ended December 31, 1993, 1994, 1995,
1996, and 1997 the annual inflation rate in Poland was 35%, 32%, 21.6%, 19.5%,
and 13.0% respectively. Payment of interest and principal on the 9% Convertible
Subordinated Debentures, 11% Convertible Senior Subordinated Discount Notes and
payment of franchise fees to Burger King Corporation ("BKC") and Domino's Pizza,
Inc. ("DPI") for each restaurant and store opened are in United States currency.
Additionally, IFFC is dependent on certain sources of supply which require
payment in European or United States currencies. Since IFFC's revenues from
operations are in zlotys, IFFC is subject to the risk of currency fluctuations.
IFFC has and intends to maintain substantially all of its unutilized funds in
United States or Western European currency denominated securities and/or
European Currency Units. There can be no assurance that IFFC will successfully
manage its exposure to currency fluctuations or that such fluctuations will not
have a material adverse effect on IFFC.
The official currency of Poland is the Zloty, The value of the Zloty is
pegged pursuant to a system based on a basket of currencies, as well as all
other economic and political factors that effect the value of currencies
generally. At June 30, 1998 and 1997, the exchange rate was 3.5095 and 3.264
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 June 30, 1998, IFFC had
working capital of approximately $14,931,928, Cash and Cash Equivalents of
$11,018,674 and U.S. Agency Securities of $5,000,000. IFFC's working capital and
cash position were significantly improved since March 1997 by the settlement of
its litigation with Burger King Corporation ("BKC") in March 1997, the
restructuring of bank debt, the merger with Litigation Funding, Inc., conversion
of 8% convertible promissory notes and the placement of the 11% Convertible
Senior Subordinated Discount Notes, Due October 31, 2007.
9
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Although IFFC believes that it has sufficient funds to finance its
present plan of operations through 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, marketable securities and cash generated from restaurant
and store operations. In order to satisfy the capital requirements of the BKC
Development Agreement and the New Master Franchise Agreement with Dominos, IFFC
will require resources substantially greater than the amounts it presently has
or amounts that can be generated from restaurant and store operations. Other
than its existing Bank Credit Facilities, IFFC has no current arrangements with
respect to, or sources of additional financing and there can be no assurance
that IFFC will be able to obtain additional financing or that additional
financing will be available on acceptable terms to fund future commitments for
capital expenditures.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less at the time of
acquisition to be cash equivalents. The Company maintains its U.S. cash in bank
deposit accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on cash and cash equivalents.
MARKETABLE SECURITIES - As of June 30, 1998, marketable securities
consisted of U.S. agency securities for which fair values approximate
unamortized cost. The contractual maturities of these securities are less than
one year.
Fair values are based on quoted market prices obtained from an independent
broker.
NET (LOSS) INCOME PER COMMON SHARE - The net (loss) income per common
share in the accompanying statements of operations has been computed based upon
the provisions of SFAS No. 128, Earnings per Share, which became effective for
reporting periods ending after December 15, 1997, and requires restatement of
previously reported per share amounts. The adoption of SFAS No. 128 did not
require a change in the net income per common share amount reported for the six
months ended June 30, 1997. The basic net (loss) income per common share in the
accompanying statements of operations is based upon the net (loss) income after
preferred dividend requirements of $100,350 and $110,850 in 1998 and 1997,
respectively, divided by the weighted average number of shares outstanding
during each period. Diluted per share data for the six months ended June 30,
1998 is the same as basic per share data since the inclusion of all potentially
dilutive common shares that would be issuable upon the exercise of options and
warrants and the assumed conversion of convertible debt and preferred stock
would be anti-dilutive. Diluted net income per share for the six months ended
June 30, 1997 is based on net income for the period adjusted for the interest
expense on the 9% Subordinated Convertible Debentures and the 8% Convertible
Promissory Notes divided by the weighted average number of Common shares
outstanding after giving effect to dilutive warrants, the shares that would be
issuable on the assumed conversion of preferred stock as well as the shares that
would be issuable on the assumed conversion of the 9% Subordinated Convertible
Debentures and the 8% Convertible Promissory Notes.
10
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Reclassification - Certain amounts in the 1997 financial statements
have been reclassified to conform with the 1998 presentation.
3. RESTRICTED CASH:
At June 30, 1998, the Company had a $999,990 certificate of deposit
hypothecated to an outstanding line of credit with Totalbank.
4. BANK CREDIT FACILITIES:
Bank credit facilities at June 30, 1998 consists of the following:
Amerbank, S.A, IFFP overdraft
credit line, variable rate approximately
equal to prime, expires March 1, 1999 $ -0-
Amerbank, S.A., PKP overdraft
credit line, variable rate approximately
equal to prime, expires June 1, 1999 2,113
Amerbank, PKP line of credit of $300,000
payable in ten quarterly installments
of $30,000 commencing on December 26, 1998,
interest payable monthly at 3-1/8% above
LIBOR, due at maturity March 26, 2001 167,769
Amerbank, IFFP line of credit of $950,000
payable in twenty nine monthly installments
of $32,000 commencing on March 12, 1998,
interest payable monthly at 2.50% above
LIBOR, due at maturity on August 12, 2000. 822,000
Amerbank, IFFP revolving credit facility, interest
is payable monthly at 2.50% above LIBOR, $1,300,000
maximum credit until June 2000, payable in thirty
five monthly installments thereafter of $36,111
with final payment of $36,115 due at maturity
on May 18, 2003. 102,098
Totalbank, IFFC line of credit of $999,000
payable in full on August 19, 1998,
interest at 6.5% payable quarterly
collateralized by certificates of deposit
in the amount of $999,990 999,000
----------
Total Debt 2,092,980
Less: Current Maturities 1,475,113
----------
Long Term Debt $ 617,867
==========
11
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. 9% CONVERTIBLE SUBORDINATED DEBENTURES:
The 9% Convertible Subordinated Debentures (the "Debentures") mature on
December 15, 2007 and provide for the payment of cash interest, semi-annually on
June 15 and December 15, until maturity.
The Debentures are subordinated and subject in right of payment to the
prior payment of all Senior Indebtedness as defined in the Debentures. The
indenture contains no provision restricting the incurrence of additional debt or
the issuance of additional securities. The Debentures may be redeemed together
with accrued interest at the option of the Company in whole or in part, at any
time on at least 30 days notice to Debentureholders at decreasing redemption
prices from 109% in 1993 to 100% in 2002 and thereafter. The Debentures are
redeemable through the operation of a sinking fund beginning 1998 through 2006.
Sinking fund payments will be reduced for Debentures previously converted or
redeemed by the Company.
6. 11% CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES:
On November 5, 1997, the Company sold $27,536,000 of 11% Convertible
Senior Subordinated Discount Notes Due October 31, 2007 ( the "Notes") in a
private offering. At June 30, 1998, the notes are comprised as follows:
Face amount of notes at maturity $27,536,000
Unamortized discount to be accreted as
interest expense and added to the
original principal balance of the
notes over a period of three years ( 6,080,184)
------------
Balance at June 30, 1998 $21,455,816
============
The Company received net proceeds of $17,662,174 after reduction of the
face of the notes for unamortized discount of $7,535,908 and placement costs in
the amount of $2,337,918. In addition to the placement costs incurred, the
Company also issued to the placement agent 500,000 shares of Common Stock which
were valued at $150,000.
The Notes mature on October 31, 2007, and interest is payable
semi-annually, in cash, on April 30 and October 31 of each year, commencing
April 30, 2001.
The Notes are redeemable at the option of the Company, in whole or in
part, at any time or from time to time on and after October 31, 2002; initially
at 105.5% of their accreted value on the date of redemption, plus accrued
interest, declining ratably to 100% of their principal amount, plus accrued
interest, on and after October 31, 2006.
12
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Notes are convertible, at the option of the holder, into Common
Stock at any time after November 5, 1998. The number of shares of Common Stock
issuable upon conversion of the Notes is equal to the Accreted Value of the
Notes being converted, on the date of conversion, divided by $.70 (the
"Conversion Ratio"), subject to adjustment in certain events. Accordingly, the
number of shares of Common Stock available for issue upon conversion of the
Notes will increase as the accreted value of the Notes increases. In addition,
(a)if the closing sale price (the "closing price") of the Common Stock on the
Nasdaq National Market or other securities exchange or system on which the
Common Stock is then traded or (b) if not so traded, then the best bid offered
price on the OTC Bulletin Board Service (the "BBS") on the days when
transactions in the Common Stock are not effected, or on such days as
transactions are effected on the BBS, the highest price at which a trade was
executed, during any period described below has exceeded the price for such
period for at least 20 consecutive trading days (the "Market Criteria Period"),
and a registration statement with respect to the resale of Common Stock to be
issued upon conversion of the Notes is effective, all of the Notes will be
automatically converted into Common Stock at the close of business on the last
day of the Market Criteria Period; provided, however, that if the Market
Criteria is satisfied during the third year after the closing date of the
offering, the conversion will occur only if the Closing Price or OTC Price, as
applicable, of the Common Stock is at least $2.80 on such date :
12 Months Beginning Closing Price
------------------- -------------
October 31, 1999 $2.80
October 31, 2000 $3.25
The Company is obligated to cause to be declared effective, before
November 5, 1998, a registration statement registering the resale of the shares
of Common Stock to be issued upon conversion of the Notes. In the event a
registration statement is not declared effective by such date, the denominator
of the Conversion Ratio will be decreased by $.15 from $.70. If such
registration statement is declared effective but, subject to certain exceptions,
thereafter ceases to be effective, then IFFC is obligated to pay certain
liquidated damages to the holders of the Notes ranging from 1/2% to a maximum of
5.0% of the principal balance of such Notes, depending upon the length of the
period of time the registration statement is not effective.
In the event of a change of control, as defined in the Convertible
Senior Subordinated Discount Notes Indenture (the "Indenture"), the holders of
the Notes will have the right to require the Company to purchase the Notes at a
purchase price of 101% of their Accreted Value on the date of such purchase,
plus accrued interest.
The Indenture contains certain covenants which among other things,
restrict the ability of IFFC and its Restricted Subsidiaries (as defined in the
Indenture) to: incur additional indebtedness; create liens, pay dividends or
make distributions in respect to their capital stock;
13
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
make investments; or make certain other restricted payments; sell assets, issue
or sell stock of Restricted Subsidiaries; enter into transactions with
stockholders or affiliates; engage in unrelated lines of business; or
consolidate, merge, or sell all or substantially all of their assets. In
addition, Mitchell Rubinson must remain the Company's Chief Executive Officer.
The Indenture specifically requires that any temporary cash investments
can only be placed in banks that have total capital in excess of $100 million.
7. SHAREHOLDERS' EQUITY:
The Company's stock option plan provides for the granting of options to
qualified employees and directors of the Company. Stock option activity for the
six months ended June 30, 1998 is as follows:
Outstanding at beginning of period 670,000
Granted 250,000
Exercised -
Expired -
------------
Outstanding at end of period 920,000
============
Exercisable at end of period 258,000
============
Price range of options outstanding
at end of period $.71 to $.40
============
Available for grant at end of period 1,080,000
============
In July 1997, all options outstanding were repriced to $.40,
respectively, which was equivalent to the market price of the Common Stock on
such date.
14
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At June 30, 1998, IFFC had reserved the following shares of Common
Stock for issuance:
Stock option plan 2,000,000
Warrants issued in connection with
1994 exchange offer, exercisable at
$7.00 per share through August 1, 1999 290,800
Convertible Debentures convertible
into Common Stock at a conversion price
of $8.50 per share on or before
December 15, 2007 324,235
Preferred Stock convertible into Common
Stock at a conversion price of $3.00
per share 1,115,000
Warrants to purchase 50,000 shares of
Common Stock at an exercise price of
$.2831 per share on or before January 5, 2004 50,000
Convertible Senior Subordinated Discount
Notes convertible into Common Stock, after
November 5, 1998, at a conversion price
of $.70 per share 39,337,143
----------
Total reserved shares 43,117,178
==========
15
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. COMMITMENTS AND CONTINGENCIES:
On March 14, 1997, IFFC and Burger King Corporation ("BKC") entered
into a new Development Agreement (the "BKC Development Agreement"), which was
then assigned by IFFC to IFFP; IFFC continues to remain liable for the
obligations contained in the BKC Development Agreement. Pursuant to the BKC
Development Agreement, IFFP has been granted the exclusive right until September
30, 2007 to develop and be franchised to operate Burger King restaurants in
Poland with certain exceptions discussed below. Pursuant to the BKC Development
Agreement, IFFC is required to open 45 restaurants during the term of the
Agreement. Each traditional Burger King restaurant, in-line Burger King
restaurant, or drive-thru Burger King restaurant shall constitute one
restaurant. A Burger King kiosk restaurant shall, for purposes of the BKC
Development Agreement, be considered one quarter restaurant.
Pursuant to the BKC Development Agreement, IFFC is to open three
restaurants through September 30, 1998 of which one was opened in July 1998,
four restaurants in each year beginning October 1, 1998 and ending September 30,
2001 and five restaurants in each year beginning October 1, 2001 and ending
September 30, 2007. As of the date hereof, construction has commenced on three
new restuarants.
Pursuant to the BKC Development Agreement, IFFC shall pay BKC
$1,000,000 as a development fee. IFFC shall not be obligated to pay the
development fee if IFFC is in compliance with the development schedule by
September 30, 1999, and has achieved gross sales of $11,000,000 for 12 months
preceding the September 30, 1999 target date. If the development schedule has
been achieved but gross sales were less than $11,000,000, but greater than
$9,000,000, the development fee shall be reduced to $250,000. If the development
fee is payable due to failure to achieve the performance targets set forth
above, IFFC, at its option, may either pay the development fee or provide BKC
with the written and binding undertaking of Mr. Mitchell Rubinson, IFFC's
Chairman, that the Rubinson Group(as defined below) will completely divest
themselves of any interest in IFFC and the Burger King restaurants opened or
operated by IFFC in Poland within six (6) months of the date the development fee
payment is due. The Rubinson Group shall be defined to include any entity that
Mr. Rubinson directly or indirectly owns an aggregate interest of ten percent
(10%) or more of the legal or beneficial equity interest and any parent,
subsidiary or affiliate of a Rubinson entity. Mr. Rubinson has personally
guaranteed payment of the development fee.
For each restaurant opened, IFFC is obligated to pay BKC an initial fee
of up to $40,000 for franchise agreements with a term of 20 years and $25,000
for franchise agreements with a term of ten years payable not later than twenty
days prior to the restaurant's opening. Each franchised restaurant must also pay
a percentage of the restaurant's gross sales, irrespective of profitability, as
a royalty for the use of the Burger King System and the Burger King Marks. The
annual royalty fee is five percent (5%) of gross sales. The franchises must also
contribute a monthly advertising and promotion fee of 6% of the restaurant's
gross sales, to be used for advertising, sales promotion, and public relations.
Payment of all amounts due to BKC is guaranteed by IFFC. The BKC Development
Agreement calls for certain cash contributions from BKC to IFFC over the term of
the Development Agreement and additional sums based on an incentive arrangement
when earned, to be retained by IFFC out of BKC's future royalties.
16
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
BKC may terminate rights granted to IFFC under the BKC Development
Agreement, including franchise approvals for restaurants not yet opened, for a
variety of possible defaults by IFFC, including, among others, failure to open
restaurants in accordance with the schedule set forth in the BKC Development
Agreement; failure to obtain BKC site approval prior to the commencement of each
restaurant's construction; failure to meet various operational, financial, and
legal requirements set forth in the BKC Development Agreement, including
maintaining of IFFP's net worth of $7,500,000 beginning on June 1, 1999. Upon
termination of the BKC Development Agreement, whether resulting from default or
expiration of its terms, BKC has the right to license others to develop and
operate Burger King restaurants in Poland, or to do so itself.
Specifically excluded from the scope of the BKC Development Agreement
are restaurants on United States military establishments. BKC has also reserved
the right to open restaurants in hotel chains with which BKC has, or may in the
future have, a multi-territory agreement encompassing Poland. With respect to
restaurants in airports, train stations, hospitals and other hotels, IFFC has
the right of first refusal with the owners of such sites. If IFFC is unable or
unwilling to reach a mutually acceptable agreement, BKC or its affiliates or
designated third parties may do so. IFFC is restricted from engaging in the fast
food hamburger restaurant business without the prior written consent of BKC,
which consent may not be withheld so long as IFFC and the franchisees operating
Burger King restaurants by designation of IFFC are adequately funded.
Subject to certain exceptions, as long as IFFC is a principal of IFFP,
BKC has the right to review and consent to certain types of new stock issuances
of IFFC for which the consent will not be unreasonably withheld, provided that
IFFC has complied with all reasonable conditions then established by BKC in
connection with the proposed sale or issuance of applicable equity securities by
IFFC.
On August 28, 1997, KP entered into a New Master Franchise Agreement
with Domino's Pizza International, Inc. ("Domino's"), granting KP the exclusive
right to develop and operate and to sub-license Domino's Pizza stores and to
operate a commissary for the Domino's system and the use of the Domino's and
related marks in the operation of stores in Poland. IFFC also agreed that
additional capital as may be required above such amount will also be dedicated
to KP as needed to permit KP to meet its development quotas. The term of the New
Master Franchise Agreement will expire on December 31, 2003, and if KP is in
compliance with all material provisions of the New Master Franchise Agreement,
it may be extended for an addition ten (10) years in accordance with certain
minimum development quotas which KP and Domino's may agree upon by execution of
an amendment to the New Master Franchise Agreement. Under the terms of the New
Master Franchise Agreement, KP shall be obligated to open 5, 6, 7, 8, 9, and 10
stores, respectively, beginning in 1998 and ending in the year 2003 for a total
of fifty (50) stores. Of such stores, third party franchise stores shall not
exceed 25% of the number of open and operating stores and all stores located in
Warsaw, Poland shall be corporate stores.
During the term of the New Master Franchise Agreement, KP and its
controlling shareholders, including the controlling shareholder of IFFC, will
not have any interest as an owner, investor, partner, licensee or in any other
capacity in any business engaged in sit-down, delivery or carry-out pizza or in
any business or entity which franchises or licenses or otherwise grants to
others the right to operate a business engaged in such business which is located
in Poland. The latter restriction shall apply for a period of one (1) year
following the effective date of termination of the New Master Franchise
Agreement.
17
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On April 2, 1998, PKP entered into a $300,000 development loan with the
American Bank in Poland ("Amerbank") for the development of its Domino's stores.
Borrowings under this credit facility may be made until December 26, 1998 and
are secured by: (i) fixed assets of each new store financed; and (ii) the
guarantee of IFFC. The loan shall be paid in ten equal quarterly installments of
$30,000 commencing December 26, 1998 with a final payment due at maturity (March
26, 2001). Interest is paid monthly at the prevailing one month LIBOR rate plus
3-1/8%. This rate approximates 8.75% as of August 12, 1998. According to the
terms of the agreement, the proceeds of the loan could be used to finance up to
fifty percent (50%) of the development costs of Domino's Pizza stores operated
by PKP. As of June 30, 1998, $167,769 was outstanding on the facility.
On April 10, 1998, PKP entered into a lease for an unlimited period of
time with the Municipality of Ursynow, Warsaw for its tenth Domino's store site
consisting of approximately 94 square meters. The lease may be terminated by PKP
at any time upon three months' notice. The Municipality may terminate the lease
at any time upon three months' notice. In the event the Municipality terminates
the lease, PKP is entitled to recover its costs, including leasehold
improvements, net of depreciation. Annual lease payments, excluding utility
charges are approximately 15,000 zlotys (approximately $4,300 at June 30, 1998
exchange rates). The store was opened in July (See "Subsequent Events" below).
On April 29, 1998, IFFP entered into a five year lease agreement with
Praga Centrum Department Store, Sp. z o.o. ("Praga") for approximately 468
square meters of office space for its corporate offices in Warsaw. The minimum
annual lease payments under the lease agreement are approximately $112,000. The
lease commencement date is June 1, 1998; rent payments will commence in July
1998, and IFFP received a one time rental rebate of $4,500. In addition, Praga
is required to build out all IFFP leasehold improvements at its expense. The
company moved into these new offices on July 20, 1998.
On April 30, 1998, IFFP entered into a twenty (20) year sublease
agreement with BP Poland, Sp. z o.o. ("BP") for purposes of constructing a
Burger King restaurant in Plonsk, Poland. The site will be built adjacent to a
BP gas station. Under the terms of the sublease agreement, the Company's annual
rental payments for the lease is $30,000 ("minimum rent") or 5.0% of its net
sales, whichever is greater. The minimum rent payment is adjusted each year to
represent 75% of the previous year's total rent paid. The lease contains two
(2), ten (10) year options, exercisable by IFFP at its sole and absolute
discretion, to renew under the same terms and conditions. Each lease grants IFFP
right of first refusal on the right to purchase the property from BP.
On May 8, 1998, the Company's symbol on the electronic bulletin board
was changed from FOOD to IFFC.
In June 1998, PKP opened its ninth Domino's store at a cost of
approximately $152,000 which costs include leasehold improvements, equipment,
furniture and fixtures, franchise fees and other pre-opening costs. The store
consists of approximately 200 square meters including a 70 square meter training
facility. Annual lease payments, excluding electricity, are approximately 23,574
zlotys (approximately $6,700 at June 30, 1998 exchange rates). The lease was
executed in November 1997 between PKP and the Municipality of Warsaw. The lease
is for a ten year term.
18
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On June 15, 1998, IFFC executed an employment agreement with Michael
Welch, which provides that he will serve as IFFC's President and Chief Operating
Officer 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 $165,000.
Additionally, under the terms of the employment agreement, Mr. Welch 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.
Welch stock options to acquire 250,000 shares of IFFC's Common Stock at an
exercise price of $.71 per share, which are exercisable in whole or in part and
cumulatively according to the following schedule: (i) 20% one year after the
effective date of the employment agreement; (ii) 60% two years after the
employment agreement; and (iii) 100% three years after the effective date of the
employment agreement. Mr. Welch 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; and a housing allowance of $2,500
per month which terminates when Mr. Welch's family relocates to Poland. Mr.
Welch's employment agreement provides for a payment of $50,000 in the event that
his employment is terminated by reason of death or disability and, in the event
his employment is terminated without cause, Mr. Welch is entitled to a severance
payment as follows (i) on or prior to December 14, 1998, the severance amount
will be $25,000; (ii) after December 14, 1998 but on or prior to June 14, 1999,
the severance amount will be $50,000; and (iii) after June 15, 1999, the
severance amount will be $75,000. Mr. Welch's employment agreement does not
provide for a severance payment in the event his employment is terminated for
cause. Additionally, the employment agreement requires that Mr. Welch not
compete or engage in any business competitive with IFFC's business for the term
of the agreement and for period of two years thereafter.
On June 19, 1998, a development loan in the principal amount of
$1,300,000 was executed with Amerbank for IFFP. The purpose of this loan is to
provide partial credit for the development of new Burger King restaurants.
Borrowings under this credit facility are to be made until June 18, 2000 and are
secured by: (i) fixed assets of each new restaurant financed; and (ii) a
guarantee of IFFC. The loan is scheduled to be repaid in thirty five equal
installments of $36,111 starting in June 2000 with a final payment of $36,115
due at maturity on May 18, 2003. Interest is to be paid monthly at the
prevailing one month LIBOR rate plus 2.5%. According to the terms of the
agreement, the proceeds of the loan are be used to finance up to fifty percent
(50%) of the costs of furnishing and commencing operation of Burger King
restaurants operated by IFFP. As of June 30, 1998, $102,098 was outstanding on
this credit facility.
19
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. GAIN ON SETTLEMENT OF BURGER KING LITIGATION:
On March 11, 1997, the Company and all other parties to the BKC
Litigation settled the litigation and the Company realized a gain on the
settlement which is comprised as follows:
<TABLE>
<CAPTION>
<S> <C>
Settlement Proceeds
Cash received from BKC $5,000,000
Forgiveness of liabilities due to BKC 499,768
Value attributable to Development Agreement 1,000,000
----------
Total proceeds 6,499,768
Less Settlement Costs and Deferred Credits:
Legal fees and costs paid by IFFC (1,447,082)
Legal fees and costs paid by Litigation
Funding pursuant to the litigation
financing agreements (750,001)
Deferred Credit (1,000,000)
----------
Net settlement proceeds 3,302,685
Portion of net settlement proceeds due to
Litigation Funding pursuant to the
litigation financing agreements (2,477,014)
Legal fees and costs paid by IFFC
in years prior to 1997 and charged
against operations 501,399
----------
IFFC gain on settlement $1,327,070
==========
</TABLE>
20
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
At June 30, 1997, the payable to Litigation Funding was comprised as
follows:
Portion of net settlement proceeds due to
Litigation Funding $2,477,014
Reimbursement of legal fees and costs paid
by Litigation funding 750,001
------------
Original principal balance payable to Litigation Funding 3,227,015
Principal payment (1,028,521)
------------
Balance due at June 30, 1997 $2,198,494
============
11. OTHER TRANSACTIONS
In July 1997, the Company purchased 100% of KP and PKP, two Polish
limited liability companies, for a nominal consideration and assumption of all
liabilities, including the liabilities of KP to the Company under a $500,000
promissory note. KP owns the exclusive master franchise rights and a Domino's
approved commissary. PKP owns the individual store franchises for Domino's Pizza
stores in Poland.
The acquisition was accounted for under the purchase method of
accounting, and the net assets acquired are included in the Company's
consolidated balance sheet based upon their estimated fair values at the date of
acquisition. Results of operations of KP are included in the Company's
consolidated statement of operations subsequent to the date of acquisition. The
excess of the net assets acquired over the purchase price are accounted for as a
reduction of furniture, equipment and leasehold improvements.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition had occurred at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisition actually been made as of such date or of results
which may occur in the future.
<TABLE>
<CAPTION>
Three Months Ended, Six Months Ended,
--------------------------------------- ------------------------------------
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total Revenues $ 1,902,902 $1,719,006 $ 3,689,022 $3,392,476
Net income (loss) $(1,074,902) $( 513,390) $(1,961,486) $ 105,690
Basic and diluted
net income (loss) per share $( .03) $( .04) $( .05) $ .01
</TABLE>
21
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. LITIGATION:
Polish Fiscal Authority Disputes
As of July 1995, IFFP likely became subject to penalties for failure to
comply with a recently amended tax law requiring the use of cash registers with
certain calculating and recording capabilities and which are approved for use by
the Polish Fiscal Authorities. IFFP is now in compliance with the tax law using
a parallel cash register system but was unable to modify and/or replace its Cash
Register System before July 1995. As a penalty for noncompliance, Polish tax
authorities may disallow certain value added tax deductions for July and August
1995. Additionally, penalties and interest may be imposed on these disallowed
deductions. IFFP believes that its potential exposure is approximately $400,000,
which amount was accounted for in its 1997 financial statements. IFFP has
requested a final determination by the Polish Minister of Finance. The Company
is unable to predict the timing and nature of the Minister's ruling. Although
IFFP's NCR Cash Register System (the "Cash Register System") was a modern
system, the Cash Register System could not be modified. IFFP has replaced the
system with a new Siemen's system which complies with Polish regulations.
Other Litigation
The Company is not a party to any litigation or governmental
proceedings that management believes would result in any judgements or penalties
that would have a material adverse effect on the Company
22
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
13. SUBSEQUENT EVENTS:
On July 1, 1998, IFFP entered into a new twenty year lease with Statoil
Polska, Sp. z o.o. ("Statoil") for purposes of constructing a Burger King
restaurant in Pabianice, Poland. The site will be built adjacent to a Statoil
gas station. Under the terms of the lease agreement, IFFP's annual rental
payments for the lease is $36,000 ("minimum rent") or 4.0% of its net sales,
whichever is greater. The minimum rent payment is adjusted quarterly to Polish
inflation index. The lease contains a 10 year option, exercisable by IFFP at its
sole and absolute discretion, to renew under the same terms and conditions as
the underlying lease. The Company expects to open this Burger King restaurant in
the fourth quarter of 1998.
On July 10, 1998, IFFP opened its ninth Burger King restaurant in
Mikolow. Poland. The restaurant is attached to a Conoco-Jet petrol station. The
restaurant cost approximately $840,000 which costs include road improvements,
leasehold improvements, equipment, furniture and decor, franchise fees and
pre-opening costs. The restaurant has 60 interior seats and an outdoor
playground with 20 additional seats. Annual lease payments for the restaurant
are 2.25% of net sales with no minimum lease payments required. The lease was
executed in November 1997 between IFFP and Dupont-Conoco for a twenty year term.
The lease contains two (2) ten (10) year renewal options.
On July 20, 1998, PKP opened its tenth Domino's store in Warsaw at a
cost of approximately $132,000 which costs include leasehold improvements,
equipment, furniture and fixtures, franchise fees and other pre-opening costs.
The store consists of approximately 94 square meters. Annual lease payments,
excluding electricity, are approximately 15,000 zlotys (approximately $4,300 at
June 30, 1998 exchange rates). The lease was executed in April 1998 between PKP
and the Municipality of Ursynow. The lease is for an unlimited term.
On July 21, 1998, IFFP entered into two (2) twenty year lease
agreements with Statoil Polska, Sp. z o.o. ("Statoil") for purposes of
constructing a Burger King restaurant in Olsztyn and Raciborz, Poland. The sites
will be built adjacent to Statoil gas stations. Under the terms of the lease
agreements, the Company's annual rental payments for each lease is $36,000
("minimum rent") or 4.0% of its net sales, whichever is greater. The minimum
rent payment is adjusted quarterly to the Polish inflation index. Both leases
contain a ten (10) year option, exercisable by IFFP at its sole and absolute
discretion, to renew under the same terms and conditions as the underlying
leases. The Company expects to open these Burger King restaurants in the fourth
quarter of 1998.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Management's Discussion and Analysis or Plan of Operation contains
various "forward looking statements" within the meaning of the Securities Act of
1933 and the Securities and Exchange Act of 1934, which represents the Company's
expectations or beliefs concerning future events including without limitation
the following; fluctuations in the Polish economy; ability of the Company to
obtain financing on terms and conditions that are favorable; ability of the
Company to improve levels of profitability and sufficiency of cash provided by
operations, investing and financing activities.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those contained in the forward looking statements, including without
limitations, general economic and political conditions in Poland, the demand for
the Company's products and services, changes in the level of operating expense
and the present and future level of competition. Results actually achieved may
differ materially from expected results included in these statements.
As of June 30, 1998, IFFC had working capital of approximately
$14,931,928, Cash and Cash Equivalents of $11,018,674 and marketable securities
consisting of short term U.S. agency securities of $5,000,000. IFFC's working
capital and cash position were significantly improved beginning in March 1997 by
the settlement of its litigation with Burger King Corporation ("BKC") coupled
with recent debt consolidation, merger with Litigation Funding, Inc. and
placement of the 11% Convertible Senior Subordinated Discount Notes, Due October
31, 2007. Although IFFC believes that it has sufficient funds to finance its
present plan of operations through 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, marketable securities and cash generated from restaurant
and store operations. In order to satisfy the capital requirements of the BKC
Development Agreement and the New Master Franchise Agreement with Dominos, IFFC
will require resources substantially greater than the amounts it presently has
or amounts that can be generated from restaurant and store operations. Other
than its existing Bank Credit Facilities, IFFC has no current arrangements with
respect to, or sources of additional financing and there can be no assurance
that IFFC will be able to obtain additional financing or that additional
financing will be available on acceptable terms to fund future commitments for
capital expenditures.
IFFC currently operates its Burger King restaurant business in Poland
through its majority owned (85%) Polish subsidiary, IFFP, and its wholly-owned
Polish limited liability corporations, IFF Polska-Kolmer and IFF-DX Management.
IFFC operates its Domino's Pizza business in Poland through its two wholly-owned
Polish subsidiaries, Krolewska Pizza, Sp. z o.o. and Pizza King Polska, Sp. z
o.o. Unless the context indicates otherwise, references herein to IFFC include
all of its operating subsidiaries.
IFFC currently operates nine Traditional Burger King Restaurants and
ten Domino's Pizza stores. IFFC has incurred losses and anticipates that it will
continue to incur losses until, at the earliest, it establishes a number of
restaurants and stores generating sufficient revenues to offset its operating
costs and the costs of its proposed continuing expansion. There can be no
assurance that IFFC will be able to successfully establish a sufficient number
of restaurants to achieve profitable operations.
On April 2, 1998, PKP entered into a $300,000 development loan with the
American Bank in Poland ("Amerbank") for the development of its Domino's stores.
Borrowings under this credit facility may be made until December 26, 1998 and
are secured by: (i) fixed assets of each new store financed; and (ii) the
guarantee of IFFC. The loan shall be paid in ten equal quarterly installments of
$30,000 commencing December 26, 1998 with a final payment due at maturity (March
26, 2001). Interest is paid monthly at the prevailing one month LIBOR rate plus
3-1/8%. This rate approximates 8.75% as of August 12, 1998. According to the
terms of the agreement, the proceeds of the loan could be used to finance up to
fifty percent (50%) of the development costs of Domino's Pizza stores operated
by PKP. As of June 30, 1998 and August 10, 1998, approximately $167,769 and
$220,276, respectively was outstanding on the facility.
24
<PAGE>
On April 10, 1998, PKP entered into a lease for an unlimited period of
time with the Municipality of Ursynow, Warsaw for its tenth Domino's store site
consisting of approximately 94 square meters. The lease may be terminated by PKP
at any time upon three months' notice. The Municipality may terminate the lease
at any time upon three months' notice. In the event the Municipality terminates
the lease, PKP is entitled to recover its costs, including leasehold
improvements, net of depreciation. Annual lease payments, excluding utility
charges are approximately 15,000 zlotys (approximately $4,300 at June 30, 1998
exchange rates). The store was opened in July (See "Subsequent Events" below).
On April 29, 1998, IFFP entered into a five year lease agreement with
Praga Centrum Department Store, Sp. z o.o. ("Praga") for approximately 468
square meters of office space for its corporate offices in Warsaw. The minimum
annual lease payments under the lease agreement are approximately $112,000. The
lease commencement date is June 1, 1998; the rent payments commence in July
1998, and IFFP will receive a one time rental rebate of $4,500 in July. In
addition, Praga is required to build out all IFFP leasehold improvements at its
expense. The company moved into these new offices on July 20, 1998.
On April 30, 1998, IFFP entered into a twenty (20) year sublease
agreement with BP Poland, Sp. z o.o. ("BP") for purposes of constructing a
Burger King restaurant in Plonsk, Poland. The site will be built adjacent to a
BP gas station. Under the terms of the sublease agreement, the Company's annual
rental payments for the lease is $30,000 ("minimum rent") or 5.0% of its net
sales, whichever is greater. The minimum rent payment is adjusted each year to
represent 75% of the previous year's total rent paid. The lease contains two
(2), ten (10) year options, exercisable by IFFP at its sole and absolute
discretion, to renew under the same terms and conditions. Each lease grants IFFP
right of first refusal on the right to purchase the property from BP.
On May 8, 1998, the Company's symbol on the electronic bulletin board
was changed from FOOD to IFFC.
In June 1998, PKP opened its ninth Domino's store at a cost of
approximately $152,000 which costs include leasehold improvements, equipment,
furniture and fixtures, franchise fees and other pre-opening costs. The store
consists of approximately 200 square meters including a 70 square meter training
facility. Annual lease payments, excluding electricity, are approximately 23,574
zlotys (approximately $6,700 at June 30, 1998 exchange rates). The lease was
executed in November 1997 between PKP and the Municipality of Warsaw. The lease
is for a ten year term.
25
<PAGE>
On June 15, 1998, IFFC executed an employment agreement with Michael
Welch, which provides that he will serve as IFFC's President and Chief Operating
Officer 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 $165,000.
Additionally, under the terms of the employment agreement, Mr. Welch 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.
Welch stock options to acquire 250,000 shares of IFFC's Common Stock at an
exercise price of $.71 per share, which are exercisable in whole or in part and
cumulatively according to the following schedule: (i) 20% one year after the
effective date of the employment agreement; (ii) 60% two years after the
employment agreement; and (iii) 100% three years after the effective date of the
employment agreement. Mr. Welch 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; and a housing allowance of $2,500
per month which terminates when Mr. Welch's family relocates to Poland. Mr.
Welch's employment agreement provides for a payment of $50,000 in the event that
his employment is terminated by reason of death or disability and, in the event
his employment is terminated without cause, Mr. Welch is entitled to a severance
payment as follows (i) on or prior to December 14, 1998, the severance amount
will be $25,000; (ii) after December 14, 1998 but on or prior to June 14, 1999,
the severance amount will be $50,000; and (iii) after June 15, 1999, the
severance amount will be $75,000. Mr. Welch's employment agreement does not
provide for a severance payment in the event his employment is terminated for
cause. Additionally, the employment agreement requires that Mr. Welch not
compete or engage in any business competitive with IFFC's business for the term
of the agreement and for period of two years thereafter.
On June 19, 1998, a development loan in the principal amount of
$1,300,000 was executed with Amerbank for IFFP. The purpose of this loan is to
provide partial credit for the development of new Burger King restaurants.
Borrowings under this credit facility are to be made until June 18, 2000 and are
secured by: (i) fixed assets of each new restaurant financed; and (ii) a
guarantee of IFFC. The loan is scheduled to be repaid in thirty five equal
installments of $36,111 starting in June 2000 with a final payment of $36,115
due at maturity on May 18, 2003. Interest is to be paid monthly at the
prevailing one month LIBOR rate plus 2.5%. According to the terms of the
agreement, the proceeds of the loan are be used to finance up to fifty percent
(50%) of the costs of furnishing and commencing operation of Burger King
restaurants operated by IFFP. As of June 30, 1998 and August 10, 1998, $102,098
and $440,534 was outstanding on this credit facility, respectively.
26
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 VS SIX MONTHS ENDED JUNE 30, 1997
RESULTS OF OPERATIONS
Results of operations for the six months ended June 30, 1998, include
the results of Krolewska Pizza Sp. z o.o. ("KP"), and Pizza King Polska, Sp. z
o.o. ("PKP") which were acquired in July 1997 in a transaction accounted for as
a purchase. KP owns the exclusive development rights and PKP owns the franchises
for Domino's pizza stores and commissary in Poland.
During the six months ended June 30, 1998, KP and PKP generated
$933,824 of store sales from their nine Domino's pizza stores and incurred Food
and Packaging Costs of $331,099, Payroll and Related Costs of $203,650,
occupancy and Other Operating Expenses of $339,212 and Depreciation and
Amortization of $98,179. As a percentage of sales, Food and Packaging Costs were
35.5%, Payroll and Related Costs were 21.8%, Occupancy and Other Operating
Expenses were 36.3% and Depreciation and Amortization were 10.5%. Since the
acquisition of KP and PKP were accounted for as a purchase, no amounts are
included in the accompanying financial statements for the six months ended June
30, 1997.
For the six months ended June 30, 1998 and June 30, 1997, IFFC
generated Restaurant Sales of $3,689,022 and $2,752,559, respectively which
includes sales of $933,824 for the Domino's Pizza stores in 1998. In U.S. dollar
and Polish zloty terms IFFC's Burger King Restaurant Sales increased by
approximately .10% and 12.5%, respectively, for the six months ended June 30,
1998 as compared to the six months ended June 30, 1997. The increase is
primarily attributable to the increase in the average check price per
transaction resulting from the Company's menu price increase implemented in
January 1998.
During the six months ended June 30, 1998, IFFC incurred Food and
Packaging Costs of $1,451,366, Payroll and Related Costs of $671,347, Occupancy
and Other Operating Expenses of $1,065,085 and Depreciation and Amortization
Expense of $520,379.
Food and Packaging Costs applicable to Burger King restaurants for the
six months ended June 30, 1998 and 1997 were 40.6% and 40.7% of Restaurant
Sales, respectively. The .01% decrease as a percentage of Restaurant Sales is
primarily attributable to improved product sourcing, coupled with an increase in
Restaurant Sales.
Payroll and Related Costs applicable to Burger King restaurants for the
six months ended June 30, 1998 and 1997 were 17.0% and 16.0% of Restaurant
Sales, respectively. The 1.0% increase as a percentage of Restaurant Sales is
primarily the result of an increase in managerial salaries at the restaurant
level in order to keep pace with the labor market.
27
<PAGE>
Occupancy and Other Operating Expenses applicable to Burger King
restaurants for the six months ended June 30, 1998 and 1997 were 26.4% and 27.8%
of Restaurant Sales, respectively. The 1.4% decrease as a percentage of
Restaurant Sales is primarily attributable to the decrease in royalties payable
to Burger King Corporation in accordance with the New BKC Development Agreement.
Depreciation and Amortization Expense applicable to Burger King
restaurants as a percentage of Restaurant Sales was 15.3% and 15.9% in the six
months ended June 30, 1998 and 1997, respectively. The .6% decrease as a
percentage of restaurant sales is primarily attributable to an increase in
Restaurant Sales coupled with the fully depreciated status of certain assets
still in use.
General and Administrative Expenses for the six months ended June 30,
1998 (which includes $123,582 applicable to KP and PKP) and 1997 were 30.1% and
26.0% of Restaurant Sales, respectively. The 5.1% increase as a percentage of
Sales is primarily attributable to the addition of PKP, new hires and increased
salaries and related benefits. For the six months ended June 30, 1998, General
and Administrative Expenses were comprised of executive and office staff
salaries and benefits ("Salary Expense") $466,766; legal and professional fees,
office rent, travel, telephone and other corporate expenses ("Corporate Overhead
Expense") $600,411, and depreciation and amortization $75,230. For the six
months ended June 30, 1997, General and Administrative Expense included Salary
Expenses of $248,681; Corporate Overhead Expenses of $418,226, and depreciation
and amortization of $47,979.
For the six months ended June 30, 1998 and 1997 Interest and Other
Income was comprised as follows:
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
Interest income $539,969 $ 70,193
Management fee - 9,580
All other, net (23,003) (156,756)
--------- ----------
$ 516,966 $(76,983)
========= ==========
All other, net includes various non-recurring charges and credits not
specifically related to operating activity.
28
<PAGE>
Interest Expense is comprised as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Interest Expense on 9% Subordinated
Convertible Debentures $124,020 $124,020
Interest Expense on 8% Convertible
Promissory Notes - 16,178
Interest Expense on Note Payable
to Litigation Funding - 43,671
Amortization of Debt
Issuance Costs 140,278 16,628
Accretion of discount on 11%
Convertible Senior Subordinated
Discount Notes 1,101,136 -
Interest Expense on Bank
Facilities 49,108 72,674
------------ -----------
Total $1,414,542 $273,171
============ ===========
</TABLE>
Interest Expense exceeded Interest and Other Income by $897,576 and
$350,154 for the six months ended June 30, 1998 and 1997, respectively. The
primary reason for the increase for the six month period ended June 30, 1998, is
due to the accretion of the 11% Convertible Senior Subordinated Discount Notes
and the related amortization of debt issuance costs.
IFFC's interest expense on bank facilities was $49,108 and $72,674 for
the six months ended June 30, 1998 and 1997, respectively. The $23,566 decrease
is attributable to IFFC's lower average level of borrowings under bank credit
facilities during the six month period ended June 30, 1998, coupled with lower
interest rates.
During the six months ended June 30, 1997, IFFC recorded a
non-recurring gain of $1,327,070, or $.11 per share of IFFC's Common Stock in
connection with the settlement of the BKC Litigation. See Note 10 of Notes To
Consolidated Financial Statements for the components included in the calculation
of the gain.
As a result of the foregoing, the six months ended June 30, 1998, IFFC
generated a net loss of $(1,961,486) or $(.05) per share of IFFC's Common Stock
compared to net income of $402,020, or $.02 per share of IFFC's Common Stock for
the six months ended June 30, 1997. During the six months ended June 30, 1997,
IFFC recognized a non-recurring gain of $1,327,070 or $.10 per share of IFFC's
Common Stock in connection with the settlement of the BKC Litigation.
IFFC anticipates that it will continue to incur certain expenses in
connection with its disputes with the Polish Fiscal Authorities. See "Item 2.
Legal Proceedings - Polish Fiscal Authority Disputes" for a description of such
matters.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
IFFC's material commitments for capital expenditures in its restaurant
and store business relate to the provisions of the BKC Development Agreement and
the New Master Franchise Agreement with Domino's.
On March 14, 1997, a new Development Agreement (the "BKC Development
Agreement") was entered into between BKC and IFFC, which was then assigned by
IFFC to IFFP on March 14, 1997; IFFC continues to remain liable for the
obligations contained in the BKC Development Agreement. Pursuant to the BKC
Development Agreement, IFFC has been granted the exclusive right until September
30, 2007 to develop and be franchised to operate Burger King restaurants in
Poland with certain exceptions discussed below. Pursuant to the BKC Development
Agreement, IFFC is required to open 45 Development Units during the term of the
Agreement. Each traditional Burger King restaurant, in-line Burger King
restaurant, or drive-thru Burger King restaurant shall constitute one unit. A
Burger King kiosk restaurant shall, for purposes of the BKC Development
Agreement, be considered one quarter of a unit. Pursuant to the BKC Development
Agreement, IFFC is to open three Development Units through September 30, 1998 of
which one was opened in July 1998, four units in each year beginning October 1,
1998 and ending September 30, 2001 and five units in each year beginning October
1, 2001 and ending September 30, 2007.
Pursuant to the BKC Development Agreement, IFFC shall pay BKC
$1,000,000 as a development fee. IFFC shall not be obligated to pay the
development fee if IFFC is in compliance with the development schedule by
September 30, 1999, and has achieved gross sales of $11,000,000 for the 12
months preceding the September 30, 1999, target date. If the development
schedule has been achieved but gross sales were less than $11,000,000, but
greater than $9,000,000, the development fee shall be reduced to $250,000. If
the development fee is payable due to the failure of IFFC to achieve the
performance targets set forth above, IFFC, at its option, may either pay the
development fee or provide BKC with the written and binding undertaking of Mr.
Mitchell Rubinson, IFFC's Chairman, that the Rubinson Group (as defined below)
will completely divest themselves of any interest in IFFC and the Burger King
restaurants opened or operated by IFFC in Poland within six (6) months of the
date the development fee payment is due. The Rubinson Group shall be defined to
include any entity that Mr. Rubinson directly or indirectly owns an aggregate
interest of ten percent (10%) or more of the legal or beneficial equity interest
and any parent, subsidiary or affiliate of a Rubinson entity. Mr. Rubinson has
personally guaranteed payment of the development fee.
BKC may terminate rights granted to IFFC under the BKC Development
Agreement, including franchise approvals for restaurants not yet opened, for a
variety of possible defaults by IFFC, including, among others, failure to open
restaurants in accordance with the schedule set forth in the BKC Development
Agreement; failure to obtain BKC site approval prior to the commencement of each
restaurant's construction; failure to meet various operational, financial, and
legal requirements set forth in the BKC Development Agreement, including
maintaining of IFFP's net worth of $7,500,000 beginning on June 1, 1999. Upon
termination of the BKC Development Agreement, whether resulting from default or
expiration of its terms, BKC has the right to license others to develop and
operate Burger King restaurants in Poland, or to do so itself.
30
<PAGE>
IFFC currently estimates the cost of opening a traditional restaurant
to be approximately $450,000 to $1,000,000, including leasehold improvements,
furniture, fixtures, equipment, and opening inventories. Such estimates vary
depending primarily on the size of a proposed restaurant and the extent of the
improvements required. The development of additional restaurants is contingent
upon, among other things, IFFC's ability to generate cash from operations and/or
securing additional debt or equity financing. If cash is unavailable from those
sources, IFFC will have to curtail any additional development until additional
cash resources are secured.
On August 28, 1997, KP entered into a New Master Franchise Agreement
with Domino's Pizza International, Inc. ("Domino's"), granting KP the exclusive
right to develop and operate and to sub-license Domino's Pizza stores and to
operate a commissary for the Domino's system and the use of the Domino's and
related marks in the operation of stores in Poland. As a condition to the New
Master Franchise Agreement, IFFC shall contribute or cause other entities to
contribute to KP a minimum amount of $2,000,000 by December 31, 1997. As of
December 31, 1997, IFFC had contributed $2,000,000 to KP. IFFC also agreed that
any additional capital required above such amount will also be dedicated to KP
as needed to permit KP to meet its development quotas. The term of the New
Master Franchise Agreement will expire on December 31, 2003, and if KP is in
compliance with all material provisions of the New Master Franchise Agreement,
it may be extended for an additional ten (10) years in accordance with certain
minimum development quotas which KP and Domino's may agree upon by execution of
an amendment to the New Master Franchise Agreement.
Under the terms of the New Master Franchise Agreement, KP shall be
obligated to open 5, 6, 7, 8, 9, and 10 stores, respectively, beginning in 1998
and ending in the year 2003 for a total of 45 new stores. Of such stores, third
party franchise stores shall not exceed 25% of the number of open and operating
stores and all stores located in Warsaw, Poland shall be company owned stores.
The Company has met its obligation for 1998.
During the term of the New Master Franchise Agreement, KP and its
controlling shareholders, including the controlling shareholder of IFFC, will
not have any interest as an owner, investor, partner, licensee or in any other
capacity in any business engaged in sit-down, delivery or carry-out pizza or in
any business or entity which franchises or licenses or otherwise grants to
others the right to operate a business engaged in such business which is located
in Poland. The latter restriction shall apply for a period of one (1) year
following the effective date of termination of the New Master Franchise
Agreement.
On November 5, 1997, the Company sold $27,536,000 11% Convertible
Senior Subordinated Discount Notes Due October 31, 2007 (the "Notes") in a
private offering. At March 31, 1998, the notes are comprised as follows:
Face amount of notes at maturity $27,536,000
Unamortized discount to be accreted as
interest expense and added to the
original principal balance of the
notes over a period of three years (6,080,184)
-----------
Balance at June 30, 1998 $21,455,816
===========
31
<PAGE>
The Company received net proceeds of $17,662,174 after reduction of the
face of the notes for unamortized discount of $7,535,908 and placement costs in
the amount of $2,337,918. In addition to the placement costs incurred, the
Company also issued to the placement agent 500,000 shares of Common Stock which
were valued at $150,000. The Notes mature on October 31, 2007, and interest is
payable semi-annually, in cash, on April 30 and October 31 of each year,
commencing April 30, 2001. The Notes are redeemable at the option of the
Company, in whole or in part, at any time or from time to time on and after
October 31, 2002 ; initially at 105.5% of their Accreted Value on the date of
redemption, plus accrued interest, declining ratably to 100% of their principal
amount, plus accrued interest, on and after October 31, 2006.
The Notes are convertible, at the option of the holder, into Common
Stock at any time after November 5, 1998. The number of shares of Common Stock
issuable upon conversion of the Notes is equal to the accreted value of the
Notes being converted, on the date of conversion, divided by $.70 (the
"Conversion Ratio"), subject to adjustment in certain events. Accordingly, the
number of shares of Common Stock issuable upon conversion of the Notes will
increase as the Accreted Value of the Notes increases. In addition, (a) if the
closing sale price (the "closing price") of the Common Stock on the Nasdaq
National Market or other securities exchange or system on which the Common Stock
is the traded or (b) if not so traded, then the best bid offered price on the
OTC Bulletin Board Service (the "BBS") on the days when transactions in the
Common Stock are not effected, or on such days as transactions are effected on
the BBS, the highest price at which a trade was executed, during any period
described below has exceeded the price for such period for at least 20
consecutive trading days (the "Market Criteria Period"), and a registration
statement with respect to the resale of Common Stock to be issued upon
conversion of the Notes is effective, all of the Notes will be automatically
converted into Common Stock at the close of business on the last day of the
Market Criteria Period; provided, however, that if the Market Criteria is
satisfied during the third year after the closing date of the offering, the
conversion will occur only if the Closing Price or OTC Price, as applicable, of
the Common Stock is at least $2.80 on such date :
12 Months Beginning Closing Sale Price
------------------- ------------------
October 31, 1999 $2.80
October 31, 2000 $3.25
The Company is obligated to cause to be declared effective, before
November 5, 1998, a registration statement registering the resale of the shares
of Common Stock to be issued upon conversion of the Notes. In the event a
registration statement is not declared effective by such date, the denominator
of the Conversion Ratio will be decreased by $.15 from $.70. If such
registration statement is declared effective but, subject to certain exceptions,
thereafter ceases to be effective, then IFFC is obligated to pay certain
liquidated damages to the holders of the Notes ranging from 1/2% to a maximum of
5.0% of the principal balance of such Notes, depending upon the length of the
period of time the registration statement is not effective.
32
<PAGE>
In the event of a change of control, as defined in the Convertible
Senior Subordinated Discount Notes Indenture (the "Indenture"), the holders of
the Notes will have the right to require the Company to purchase the Notes at a
purchase price of 101% of their accreted value on the date of such purchase,
plus accrued interest.
The Indenture contains certain covenants which among other things,
restrict the ability of IFFC and its Restricted Subsidiaries (as defined in the
Indenture) to: incur additional indebtedness; create liens, pay dividends or
make distributions in respect to their capital stock; make investments; or make
certain other restricted payments; sell assets, issue or sell stock of
Restricted Subsidiaries; enter into transactions with stockholders or
affiliates; engage in unrelated lines of business; or consolidate, merge, or
sell all or substantially all of their assets. In addition, Mitchell Rubinson
must remain the Company's Chief Executive Officer.
IFFC anticipates that it will continue to incur certain expenses in
connection with its disputes with the Polish Fiscal Authorities. See "Item 2.
Legal Proceedings - Polish Fiscal Authority Disputes" for a description of such
matters and IFFC's best estimates of the expenses IFFC anticipates incurring and
the timing of such expenses.
To date, IFFC's business operations have been principally financed by
proceeds from public and private offerings of IFFC's equity and debt securities,
proceeds from various bank credit facilities, the BKC Settlement Agreement, and
proceeds from the private sale of the 11% Convertible Senior Subordinated
Discount Notes.
33
<PAGE>
In January 1997, Mr. Rubinson and his wife, Marilyn Rubinson, Jaime
Rubinson and Kim Rubinson, purchased $100,000, $300,000, $50,000 and $50,000
aggregate principal amount of convertible promissory notes, respectively. The
notes bore interest at 8% per annum and were to mature on January 13, 1999. The
notes were converted into shares of the Company's Common Stock at $.10 per
share. The proceeds from the sale of the notes were used to fund the cost and
expenses in connection with the Company's litigation against BKC and general
working capital. In June, 1997 the $500,000 principal amount of the convertible
promissory notes was converted into 5,000,000 shares of Common Stock.
On March 14, 1997, IFFC issued a promissory note in the original
principal amount of $2,198,494 to Litigation Funding, Inc. ("Funding") as
partial payment of amounts due to Funding in connection with the settlement of
the BKC Litigation.
On July 14, 1997, IFFC and Acquisition Sub entered into a Merger
Agreement with Funding and Mitchell and Edda Rubinson, the sole shareholders of
Funding. Under the terms of the Agreement, Funding was merged with and into
Acquisition Sub. The 25,909,211 shares of common stock of the Company received
by the Funding shareholders was determined by dividing the $3,021,014 value
assigned to Funding by the book value per share ($.1166) of the Company's common
stock as of June 30, 1997, before reduction for the liquidation preference
applicable to the outstanding shares of Preferred Stock.
The value assigned to Funding represents (i) the $2,198,494 plus
accrued interest owed to Funding by the Company pursuant to a promissory note
and (ii) $750,000 which represents seventy-five percent (75%) of the value
attributable to the BKC Development Agreement. Funding was entitled to receive
seventy-five percent (75%) of the litigation proceeds, as defined, under its
prior agreements with the Company.
As of June 30, 1998 and August 11, 1998, the Company had $1,609,673 and
$1,106,398, respectively, in Polish bank accounts with substantially all of such
funds held as U.S. dollar denominated deposits. Substantially all of the
Company's remaining cash including the net proceeds of the private placement is
held in U.S. dollar accounts in U.S.
Banks.
34
<PAGE>
IFFC has also financed its operations through the use of credit
facilities, which credit facilities are described below.
On September 30, 1996, PKP entered into a revolving credit facility
with Amerbank totaling 100,000 zlotys (approximately $28,490 at June 30, 1998
exchange rates). The credit facility was renewed on May 27, 1998 and matures on
June 1, 1999. The credit facility bears interest at a floating rate. The note is
secured by the guarantee of IFFC. As of June 30, 1998 and August 11, 1998 the
balance of the credit facility was approximately $2,113 and $12,288,
respectively.
As of January 28, 1993, IFFP entered into a revolving credit facility
with American Bank of Poland S.A. ("AmerBank") totaling 300,000 zlotys.
Borrowings under the January 28,1993 AmerBank credit facility are secured by a
guarantee of IFFC and bear interest at a monthly adjusted variable rate
approximately equal to AmerBank's prime rate. Borrowings under the January 28,
1993 AmerBank credit facility were repayable as of January 28, 1996. On April
12, 1996, the credit facility was amended as follows: (i) credit available was
decreased to 200,000 zlotys (approximately $56,980 at June 30, 1998 exchange
rates), and (ii) in March 1997, the credit facility was further amended to
100,000 zlotys (approximately $28,490 at June 30, 1998 exchange rates). The
credit facility matured on March 31, 1998. In April 1998, the credit facility
was renewed under the same terms and conditions for an additional year. As of
June 30, 1998 and August 11, 1998, there was $0 outstanding on the credit
facility.
35
<PAGE>
On May 19, 1997, IFFC entered into a $999,000 credit facility with
Totalbank which is collateralized by $999,990 of certificates of deposit. The
credit facility bears interest at 6.5% per annum and matured on May 19, 1998. On
May 18, 1998, the credit facility was renewed for three months under the same
terms and conditions.
On August 12, 1997, the Company executed two credit agreements with the
American Bank in Poland ("Amerbank"). The first credit facility was in the
amount of $950,000. The purpose of this facility was to consolidate existing
debt owed to Amerbank totaling $300,000 with existing debt owed to Bank Handlowy
of $650,000. Pursuant to the terms of the new loan, interest is payable monthly
at the prevailing one month LIBOR rate plus 2.75%. This rate approximates 8.5%
as of May 12, 1998. Commencing in March 1998, the loan is to be repaid in
monthly installments of $32,000 for twenty nine months with a balloon payment of
$22,000 due at maturity (August 12, 2000). The loan is secured by all existing
restaurant assets and the guarantee of IFFC. The balance of this credit facility
as of June 30, 1998 and August 14, 1998 was $822,000 and $790,000, respectively.
The second credit agreement was a development loan in the principal
amount of $1,500,000. The purpose of this loan was to provide partial credit for
the development of new Burger King restaurants. Borrowings under this credit
facility were to be made until August 1999 and were to be secured by: (i) fixed
assets of each new restaurant financed; and (ii) a guarantee of IFFC. The loan
was scheduled to be repaid in thirty five equal installments of $42,000 starting
in September 1999 with a balloon payment of $30,000 due at maturity (August 12,
2002). Interest was to be paid monthly at the prevailing one month LIBOR rate
plus 2.5%. According to the terms of the agreement, the proceeds of the loan
could be used to finance up to fifty percent (50%) of the costs of furnishing
and commencing operation of Burger King restaurants operated by IFFP. No
advances were made on this facility and it was cancelled in favor of a new
credit facility as described below.
On April 2, 1998, PKP entered into a $300,000 development loan with The
American Bank in Poland ("Amerbank") for the development of its Domino's stores.
Borrowings under this credit facility may be made until December 26, 1998 and
are secured by: (i) fixed assets of each new restaurant financed; and (ii) a
guarantee of IFFC. The loan is required to be repaid in ten equal quarterly
installments of $30,000 starting on December 26, 1998 with a final payment due
at maturity (March 26, 2001). Interest is paid monthly at the prevailing one
month LIBOR rate plus 3-1/8%. This rate approximates 8.75% as of August 12,
1998. According to the terms of the agreement, the proceeds of the loan could be
used to finance up to fifty percent (50%) of the costs of furnishing and
commencing operation of Domino's stores operated by PKP. As of June 30, 1998 and
August 10, 1998, approximately $167,769 and $202,276 was outstanding on the
facility.
On June 19, 1998, a development loan in the principal amount of
$1,300,000 was executed with Amerbank for IFFP. The purpose of this loan is to
provide partial credit for the development of new Burger King restaurants.
Borrowings under this credit facility are to be made until June 18, 2000 and are
secured by: (i) fixed assets of each new restaurant financed; and (ii) a
guarantee of IFFC. The loan is scheduled to be repaid in thirty five equal
installments of $36,111 starting in June 2000 with a final payment of $36,115
due at maturity (May 18, 2003). Interest is to be paid monthly at the prevailing
one month LIBOR rate plus 2.5%. According to the terms of the agreement, the
proceeds of the loan are be used to finance up to fifty percent (50%) of the
costs of furnishing and commencing operation of Burger King restaurants operated
by IFFP. As of June 30, 1998 and August 10, 1998, $102,098 and $440,534 was
outstanding on this credit facility.
On December 28, 1995, IFFC increased its equity interest in IFFP from
80% to 85% by purchasing from the minority shareholder 5% (25% of the minority
holdings) of the outstanding capital stock of IFFP in exchange for a $500,000
non-interest bearing obligation was paid in full in June 1997.
36
<PAGE>
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The accounts of IFFC's Polish subsidiaries are maintained using the
Polish zloty.
The official currency in Poland is the zloty. The value of the zloty is
pegged pursuant to a system based on a basket of currencies, as well as all
other economic and political factors that effect the value of currencies
generally. At June 30, 1998 and August 11, 1998, the exchange rate was 3.51 and
3.45 zlotys per dollar, respectively.
IFFC's restaurant and store operations are conducted in Poland. The
Polish economy has historically been characterized by high rates of inflation
and devaluation of the Polish zloty against the dollar and European currencies.
However, in the years ended December 31, 1996 and 1997, the rates of inflation
and devaluation improved. For the years ended December 31, 1993, 1994, 1995,
1996, and 1997 the annual inflation rate in Poland was 35%, 32%, 21.6%, 19.5%,
and 13.0% respectively, and as of December 31, 1993, 1994, 1995, 1996, and 1997
the exchange rate was 2.134, 2.437, 2.468, 2.872, and 3.514 zlotys per dollar,
respectively. Payment of interest and principal on the 9% Convertible
Subordinate Debentures, 11% Convertible Senior Subordinated Discount Notes and
payment of franchise fees to BKC and DPI for each restaurant and store opened
are in United States currency. Additionally, IFFC is dependent on certain
sources of supply which require payment in European or United States currencies.
Since IFFC's revenues from operations will be in zlotys, IFFC is subject to the
risk of currency fluctuations. IFFC has and intends to maintain substantially
all of its unutilized funds in United States or Western European currency
denominated securities and/or European Currency Units. There can be no assurance
that IFFC will successfully manage its exposure to currency fluctuations or that
such fluctuations will not have a material adverse effect on IFFC.
Thus far, IFFC's revenues have been used to fund restaurant operations
and IFFC's expansion. As a result, such revenues have been relatively insulated
from inflationary conditions in Poland. There can be no assurance that
inflationary conditions in Poland will not have an adverse effect on IFFC in the
future.
YEAR 2000 COMPUTER ISSUE
The SEC has issued Staff Legal Bulletin No. 5 (CF/IM) stating that
public operating companies should consider whether there will be any anticipated
costs, problems and uncertainties associated with the Year 2000 issue, which
affects many existing computer programs that use only two digits to identify a
year in the date field. The Company anticipates that its business operations
will electronically interact with third parties very minimally, if at all, and
the issues raised by Staff Legal Bulletin No. 5 are not applicable in any
material way to the Company's business or operations. 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.
37
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
Polish Fiscal Authority Disputes
As of July 1995, IFFP likely became subject to penalties for failure to
comply with a recently amended tax law requiring the use of cash registers with
certain calculating and recording capabilities and which are approved for use by
the Polish Fiscal Authorities. IFFP is now in compliance with the tax law using
a parallel cash register system but was unable to modify and/or replace its Cash
Register System before July 1995. As a penalty for noncompliance, Polish tax
authorities may disallow certain value added tax deductions for July and August
1995. Additionally, penalties and interest may be imposed on these disallowed
deductions. IFFP believes that its potential exposure is approximately $400,000,
which amount was accounted for in its 1997 financial statements. IFFP has
requested a final determination by the Polish Minister of Finance. The Company
is unable to predict the timing and nature of the Minister's ruling. Although
IFFP's NCR Cash Register System (the "Cash Register System") was a modern
system, the Cash Register System could not be modified. IFFP has replaced the
system with a new Siemen's system which complies with Polish regulations.
Other Litigation
The Company is not a party to any litigation or governmental
proceedings that management believes would result in any judgments or fines that
would have a material adverse effect on the Company.
38
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
------- -----------
10.74 Michael T. Welch Employment Agreement
27.1 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter
ended on June 30, 1998:
None
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act
of 1934, International Fast Food has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL FAST FOOD CORPORATION
DATE: August 12, 1998 By: /s/ Mitchell Rubinson
-------------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer
(Principal Executive Officer)
DATE: August 12, 1998 By: /s/ James Martin
--------------------
James Martin, Chief Financial Officer
(Principal Financial and Accounting Officer)
40
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
effective June 15, 1998, by and between International Fast Food Corporation,
Inc., a Florida corporation (the "Company"), and Michael T. Welch (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 President and Chief Operating Officer
and that of its subsidiaries or affiliates that exist and/or to 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
Chairman of the Board (the "Chairman") or the Company's Board of Directors (the
"Board"), which assigned duties shall be consistent with those normally
associated with such position; 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.
<PAGE>
(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 will be required to change his
residence in order to perform his obligations hereunder, and further
acknowledges that he will 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 June 15, 1998 and
expiring on June 14, 2001 (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 of the Initial Term, the Company may extend the term hereof for an
additional one (1) year (the "First Extension").
- 2 -
<PAGE>
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:
June 15, 1998 - June 14, 1999 $165,000.00
June 15, 1999 - June 14, 2000 $175,000.00
June 15, 2000 - June 14, 2001 $185,000.00
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 $195,000.00;
during the Second Extension, if any, the Executive's annual salary shall be
$205,000.00.
(b) The Executive shall be entitled to family medical/dental
insurance, provided that the policy has standard co-insurance and deductible
provisions, and that 25% of the cost of the policy shall be paid by the
Executive, such costs to the Company shall not exceed $5,000.00 per year.
(c) The Executive shall be entitled to term life and
disability insurance provided that 25% of the costs be paid by the
- 3 -
<PAGE>
Executive and the total premiums paid by the Company does not exceed $5,000.00
per year.
(d) The Company shall pay, during the Executives first year of
employment, for three (3) airfare tickets for Executive to visit his family in
the United States (Tourist Class), and three (3) family trips to Poland of
Executives immediate family (Tourist Class).
(e) The Executive shall be entitled to three (3) weeks of paid
vacation during the first year of the Initial Term and four (4) weeks of paid
vacation during any subsequent year of the Term.
(f) The Executive shall be elegible for an annual bonus in
accordance with the Company's policy as in effect from time to time.
(g) The Company shall provide the Executive with an
automobile. The Company shall be responsible for all associated expenses
relating to such automobile, including insurance, gas and repairs.
(h) The Company shall supply Executive with a portable
telephone. The Company shall be responsible for all charges related to its use.
(i) The Company shall pay Executive a housing allowance of Two
Thousand Five Hundred Dollars ($2500.00) per month, up to the time of relocation
of Executive's family to Poland. The housing allowance shall not exceed the
Executive's first year of employment. The Executive will be responsible for all
expenses including telephone, electric, gas and taxes.
- 4 -
(j) The Company shall pay for the relocation of Executive's
immediate family and household goods to Poland upon Executive's request. Upon
termination of the Executive's employment, and at his request, the Company shall
pay for the relocation of Executive's immediate family and household goods back
to the United States.
(k) 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. The Company shall
provide Executive with a Company credit card to be used by the Executive for
Company purposes.
(l) 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 250,000 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 market price of the Common Stock $.71, such
options to be exerciseable 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:
- 5 -
<PAGE>
(i) twenty (20%) percent June 14, 1999
(ii) forty (40%) percent June 14, 2000
(iii) forty (40%) percent June 14, 2001 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;
(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 90 days during
the term of this Agreement, provided that the
- 6 -
<PAGE>
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 60
days during the term of this Agreement.
(c) If, during the Term, and upon 30 days written notice, this
Agreement is terminated pursuant to Paragraph 4(b) hereof, the Company shall pay
to the Executive or the personal representative of his estate Fifty Thousand
Dollars ($50,000.00) 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
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 an calculated as follows:
June 15, 1998 to December 14, 1998 $25,000.00
December 15, 1998 to June 14, 1999 $50,000.00
June 15, 1999 to June 14, 2001 $75,000.00
(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 Company's business and
- 7 -
<PAGE>
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;
(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
- 8 -
<PAGE>
(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 Assiqnment. 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
- 9 -
<PAGE>
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: Michael T. Welch
8931 Veranda Way, #421
Sarasota, Florida 34238
or to such other addresses as either party hereto may from time to time give
notice of to the other.
12. Benefits: Bindinq 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
- 10 -
<PAGE>
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.
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
- 11 -
<PAGE>
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.
- 12 -
<PAGE>
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
& Chief Executive Officer
EXECUTIVE:
/s/ Michael T. Welch
-----------------------------
Michael T. Welch
- 13 -
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<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,018,664
<SECURITIES> 5,000,000
<RECEIVABLES> 375,687
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<CURRENT-ASSETS> 18,318,025
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