U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
[X] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from ____________ to ____________.
COMMISSION FILE NUMBER: 1-11386
INTERNATIONAL FAST FOOD CORPORATION
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(Exact Name of Small Business Issuer as Specified in Its Charter)
FLORIDA 65-0302338
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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1000 LINCOLN ROAD, SUITE 200
MIAMI BEACH, FLORIDA 33139
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(Address of Principal Executive Office)
(305) 531-5800
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.01
per share as of November 10, 2000 was 458,633.
Traditional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31,
1999........................................................... 2
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 2000 and 1999
(unaudited).................................................... 3-4
Consolidated Statements of Shareholders' (Deficit)
for the Nine Months Ended September 30, 2000
(unaudited).................................................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999
(unaudited).................................................... 6
Notes to Consolidated Financial Statements..................... 7-18
ITEM 2. Management's Discussion and Analysis or Plan of
Operation...................................................... 19-27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................... 28
ITEM 4. Submission of Matters to a Vote of Security Holders... 28
ITEM 6. Exhibits and Reports on Form 8-K....................... 29
SIGNATURES...................................................... 30
1
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
CURRENT ASSETS: (unaudited)
<S> <C> <C>
Cash ..................................................................... $ 165,733 $ 383,531
Restricted cash and certificates of deposit .............................. -- 999,990
Receivables .............................................................. 262,411 246,077
Inventories .............................................................. 554,490 795,906
Prepaid expenses and other ............................................... 184,855 147,009
------------ ------------
Total Current Assets ................................................ 1,167,489 2,572,513
Furniture, Equipment, Buildings and Leasehold Improvements,
net of accumulated depreciation and amortization of
$9,581,215 and $7,786,191 ................................................... 15,714,498 18,957,883
Deferred Debt Issuance Costs, net of accumulated amortization
of $500,186 and $511,723, respectively ...................................... 918,174 2,931,015
Other Assets, net of accumulated amortization of $564,856 and $443,033,
respectively ............................................................... 1,135,612 1,132,548
Burger King Development Rights, net of accumulated amortization
of $206,081 and $74,324, respectively ........................................ 43,919 175,676
Domino's Development Rights, net of accumulated amortization of
$101,023 and $77,710, respectively .......................................... 88,080 111,393
------------ ------------
Total Assets ........................................................ $ 19,067,772 $ 25,881,028
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 1,723,085 $ 2,658,055
Accrued interest payable ................................................. 107,670 56,137
Other accrued expenses ................................................... 2,073,346 1,960,956
Current portion of bank credit facilities ................................ 580,621 1,615,685
Shareholder loans ........................................................ 1,158,000 --
Other current liabilities ................................................ 250,000 --
------------ ------------
Total Current Liabilities ........................................... 5,892,722 6,290,833
11% Convertible Senior Subordinated Discount Notes due October 31, 2007 ........ 9,551,085 8,818,532
Bank Credit Facilities ......................................................... 916,669 8,176,950
9% Subordinated Convertible Debentures, due December 15, 2007 .................. 2,756,000 2,756,000
------------ ------------
Total Liabilities ................................................... 19,116,476 26,042,315
------------ ------------
Other Liabilities .............................................................. -- 250,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT):
Series A Convertible Preferred Stock, $.01 par value, 2,000,000 shares
authorized; 32,985 shares issued and outstanding (liquidation preference
of
$3,298,500) ............................................................ 330 330
Series B Convertible Preferred Stock, $.01 par value, 400,000 shares
authorized; 158,134 shares issued and outstanding (liquidation
preference
of $15,813,400) ........................................................ 1,581 1,581
Common Stock, $.01 par value, 2,000,000 shares authorized; 458,633 and
454,977 shares issued and outstanding, respectively .................... 4,586 4,550
Additional paid-in capital ............................................... 35,105,445 34,956,526
Accumulated deficit ...................................................... (35,160,646) (35,374,274)
------------ ------------
Total Shareholders' (Deficit) ....................................... (48,704) (411,287)
------------ ------------
Total Liabilities and Shareholders' (Deficit) ....................... $ 19,067,772 $ 25,881,028
============ ============
</TABLE>
See Accompanying Notes
2
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30,
------------ -------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Sales ...................................................................... $ 2,517,869 $ 3,747,425 $ 8,371,558 $ 11,589,343
FOOD AND PACKAGING COSTS ................................................... 819,221 1,384,910 2,777,465 4,413,430
----------- ------------ ----------- ------------
GROSS PROFIT ............................................................... 1,698,648 2,362,515 5,594,093 7,175,913
----------- ------------ ----------- ------------
OPERATING EXPENSES:
Payroll and related costs .............................................. 615,549 821,219 1,960,226 2,339,070
Occupancy and other operating expenses ................................. 1,152,191 1,486,404 3,342,487 4,219,257
Preopening expenses .................................................... -- 35,567 -- 774,159
Depreciation and amortization .......................................... 577,602 699,672 2,019,997 1,984,639
Provision for loss on sale and asset impairment charges ................ 603,110 -- 603,110 --
----------- ------------ ----------- ------------
Total operating expenses ........................................ 2,948,452 3,042,862 7,925,820 9,317,125
----------- ------------ ----------- ------------
Loss from operations before general and administrative expenses ............ (1,249,804) (680,347) (2,331,727) (2,141,212)
GENERAL AND ADMINISTRATIVE EXPENSES ........................................ 586,852 959,430 2,102,334 3,218,144
----------- ------------ ----------- ------------
Loss from operations ....................................................... (1,836,656) (1,639,777) (4,434,061) (5,359,356)
----------- ------------ ----------- ------------
OTHER INCOME (EXPENSES):
Interest and other income, net ......................................... 19,386 847,353 236,988 1,098,782
Interest expense, including amortization of Issuance costs ............. (412,446) (706,562) (1,846,762) (2,218,214)
Gain on settlement ..................................................... 491,400 -- 6,321,816 --
Foreign currency exchange gain/(loss) .................................. (83,660) 117,989 34,602 ( 26,925)
----------- ------------ ----------- ------------
Total other income (expenses) ................................... 14,680 258,780 4,746,644 (1,146,357)
----------- ------------ ----------- ------------
Income (loss) before provision for income taxes and cumulative effect of
accounting change........................................................... (1,821,976) (1,380,997) 312,583 (6,505,713)
Provision for income taxes ........................................... -- -- -- --
----------- ------------ ----------- ------------
Income (loss) before cumulative effect of accounting change .......... (1,821,976) (1,380,997) 312,583 (6,505,713)
Cumulative effect of accounting change ..................................... -- -- -- (620,000)
----------- ------------ ----------- ------------
NET INCOME (LOSS) .......................................................... $(1,821,976) $(1,380,997) $ 312,583 $ (7,125,713)
=========== =========== =========== ============
BASIC NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) before cumulative effect of accounting change .......... $ (3.97) $ (3.05) $ .47 $ (14.62)
Cumulative effect of accounting change ............................... -- -- -- (1.37)
----------- ------------ ----------- ------------
Net income (loss) .................................................... $ (3.97) $ (3.05) $ .47 $ (15.99)
=========== =========== =========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ....................... 458,633 453,241 456,839 451,466
=========== =========== =========== ============
</TABLE>
See Accompanying Notes
3
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30,
------------ -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
DILUTED NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) before cumulative effect of accounting change........... $(3.97) $(3.05) $ .44 $(14.62)
Cumulative effect of accounting change ............................... - - - $(1.37)
------= ------ ------- ======
Net income (loss)..................................................... $(3.97) $(3.05) $ .44 $(15.99)
====== ======= ======= ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...................... 458,633 453,241 709,014 451,466
======= ======= ======= ========
</TABLE>
See Accompanying Notes
4
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1999 ............ 191,119 $1,911 454,977 $4,550 $34,956,526 $(35,374,274) $(411,287)
Issuance of common stock upon
exercise of stock options ........... -- -- 921 9 49,991 -- 50,000
Issuance of common stock for 6%
Series A Preferred Stock dividends .. -- -- 2,735 27 98,928 (98,955) --
Net income for the period ........... -- -- -- -- -- 312,583
---------------------------------------- ------- ------ ------- ------ ----------- ------------ ---------
312,583
Balances, September 30, 2000 (unaudited) 191,119 $1,911 458,633 $4,586 $35,105,445 $(35,160,646) $ (48,704)
======= ====== ======= ====== =========== ============ =========
</TABLE>
See Accompanying Notes
5
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ........................................................ $ 312,583 $(7,125,713)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities
Amortization, depreciation and other non cash items ................... 6,264,006 4,932,786
Changes in operating assets and liabilities:
Receivables ........................................................... (16,334) 1,323,253
Inventories ........................................................... 241,416 24,435
Prepaid expenses and other ............................................ (37,846) (1,058,276)
Accounts payable and accrued expenses ................................. ( 732,494) (145,279)
----------- ----------
Net cash provided by (used in) operating activities ...................... 6,031,331 (2,048,794)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Liquidation of certificates of deposit ................................... 999,990 --
Payments for furniture, equipment, buildings and leasehold improvements .. (58,982) (5,489,851)
Payments for other assets ................................................ ( 65,908) (367,374)
----------- ----------
Net cash provided by (used in) investing activities ...................... 875,100 (5,857,225)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank credit facilities ..................................... ( 9,418,332) (391,907)
Borrowings under bank credit facilities .................................. 1,122,987 5,016,414
Borrowings from shareholder .............................................. 1,158,000 --
Issuance of common stock ................................................. 50,000 --
----------- ------------
Net cash (used in ) provided by financing activities ..................... ( 7,087,345) 4,624,507
----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ................ ( 36,884) (123,808)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS ....................................... (217,798) (3,405,320)
BEGINNING CASH AND CASH EQUIVALENTS ......................................... 383,531 4,013,371
----------- ------------
ENDING CASH AND CASH EQUIVALENTS ............................................ $ 165,733 $ 608,051
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense ...................................................... $ 674,665 $ 336,069
=========== ===========
Interest capitalized .................................................. $ -- $ 177,100
=========== ===========
Supplemental Schedule of Non Cash Investing and Financing activities:
Nine Months Ended September 30, 2000:
Issuance of 2,735 shares of common stock in payment of $98,955 of dividends
on the 6% Series A Preferred Stock.
Nine months ended September 30, 1999:
Issuance of 2,046 shares of common stock with a face value of $114,568 to
holders of 11% Senior Subordinated Discount Notes in exchange for a
waiver on bank debt
Issuance of 2,180 shares of common stock in payment of $96,775 of dividends
on the 6% Series A Preferred Stock
</TABLE>
See Accompanying Notes
6
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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").
On September 29, 2000, the Board of Directors authorized a one for
one hundred reverse stock split effective for shareholders of record on October
2, 2000. All references in the accompanying consolidated financial statements
and footnotes thereto as to number of shares, per share amounts and market
prices of the Company's common stock have been restated to reflect the decreased
number of shares outstanding. The par value of the common stock was maintained
at the pre-split amount of $.01 per share. The number of authorized shares was
reduced to 2,000,000 from 200,000,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION -- The accompanying unaudited consolidated
financial statements, which are for interim periods, have been prepared in
conformity with the instructions to Form 10-QSB and Item 310 of Regulation S-B
and therefore do not include all of the information and footnotes required by
generally accepted accounting principles for complete 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, 1999 of
International Fast Food Corporation and Subsidiaries, as filed with the
Securities and Exchange Commission. The December 31, 1999 consolidated balance
sheet contained herein was derived from audited consolidated financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
The accompanying unaudited consolidated financial statements include
the accounts of the Company and its Polish subsidiaries, International Fast Food
Polska, Sp. z.o.o. ("IFFP"), Krolewska Pizza, Sp. z.o.o. ("KP") and Pizza King
Polska, Sp. z.o.o. ("PKP"). IFFP currently operates 22 Burger King restaurants
and 16 Domino's Pizza stores and a Domino's-approved commissary in Poland. All
significant intercompany transactions and balances have been eliminated in
consolidation. In the opinion of management, the interim consolidated financial
statements reflect all adjustments (which include normal recurring adjustments)
necessary for a fair presentation of the information contained therein. The
interim results of operations are not necessarily indicative of the results
which may be expected for the full year.
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 recent years, the rates of inflation and devaluation improved. For
the years ended December 31, 1995, 1996, 1997, 1998 and 1999 the annual
inflation rate in Poland was 21.6%, 19.5%, 13.0%, 8.6% and 7.3%, 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 ("Burger King") and Domino's Pizza, Inc. ("Domino's")
for each restaurant and store opened are in United States currency.
Additionally, the Company is dependent on certain sources of supply, which
require payment in European or United States currencies. Because IFFC's revenues
from operations are in zlotys, the official currency of Poland, 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 Euro's. 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.
7
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
The value of the zloty is pegged pursuant to a system based on a
basket of currencies, as well as all other economic and political factors that
effect the value of currencies generally. At September 30, 2000 and December 31,
1999, the exchange rate was 4.54 and 4.15 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.
GOING CONCERN -- The report of the Company's independent certified
public accountants on their audit of the Company's December 31, 1999, financial
statements contained uncertainties relating to the Company's ability to continue
as a going concern. As shown in the accompanying financial statements, the
Company reported net income of $312,583 (which includes a non recurring gain of
$6,321,816), for the nine months ended September 30, 2000, and had a working
capital deficiency and an accumulated deficit of $4,725,233 and $35,160,646
respectively, at September 30, 2000. These factors among others raise
substantial doubt about the Company's ability to continue as a going concern for
a reasonable period of time. The accompanying financial statements do not
include any adjustments relating to the outcome of this uncertainty.
LIQUIDITY AND PLAN OF OPERATIONS -- As of September 30, 2000, IFFC
had negative working capital of approximately $4,725,233 and cash of $165,733.
IFFC has significant commitments to develop restaurants in accordance with the
Burger King Development Agreement and the New Master Franchise Agreement with
Domino's. The Company does not presently have sufficient financial resources to
meet its development obligations under the terms of the Burger King and Domino's
agreements. The Company has sustained losses from operations since its
incorporation in December 1991. For the nine months ended September 30, 2000 and
1999, the Company reported net income of $312,583 (which includes a non
recurring gain of $6,321,816), and a net loss of $7,125,713, respectively. At
September 30, 2000, the Company had an accumulated deficit of $35,160,646. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management believes that cash flows from currently existing stores
together with existing financial resources will not be sufficient to fund
operations. Management is seeking to obtain additional equity and or debt
financing to fund future development. No assurance can be given that such
financing will be obtained or that it can be obtained on favorable terms. If the
Company is unable to obtain additional equity or debt financing it may be forced
to curtail or cease operations with respect to its Burger King and Domino's
operations.
NET INCOME (LOSS) PER COMMON SHARE -- The basic net income (loss) per
common share in the accompanying Statements of Operations is based upon the net
income (loss) after preferred dividend requirements of $98,955 and $96,775 in
2000 and 1999, respectively, divided by the weighted average number of shares
outstanding during each period. Diluted per share data for the three months
ended September 30, 2000, and the three months and nine months ended September
30, 1999 is the same as basic per share data since the inclusion of all
potential 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.
8
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
Diluted per share data for the nine months ended September 30, 2000
assumes that all dilutive convertible preferred shares outstanding at the
beginning of the period were converted at those dates, with related preferred
stock dividend requirements added to income available to common shareholders and
weighted average outstanding shares increased to reflect the assumed
conversions. It also assumes that outstanding common shares were increased by
shares issuable upon exercise of those options for which the market price of the
common stock exceeds the exercise price of the options, less shares which could
have been purchased by the Company with proceeds received from such exercises.
Shares issuable upon the conversion of convertible debt have been excluded from
the computation since they would be anti-dilutive.
The computation of the adjusted numerator and denominator used in the
computation of diluted per share data for the nine months ended September 30,
2000 is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
2000
-------------------------
(unaudited)
<S> <C>
Net income.............................................................. $ 312,583
Less preferred stock dividends.......................................... ( 98,955)
-------------
Income available to common shareholders, basic.......................... 213,628
Add preferred dividend requirements..................................... 98,955
-------------
Income available to common shareholders, diluted........................ $ 312,583
=============
Weighted average number of common shares outstanding, basic.............
456,839
Assumed shares issuable upon conversion of preferred shares 250,568
Dilutive effect of stock options......................................... 1,607
-------------
Weighted average number of common shares outstanding,
diluted............................................................ 709,014
=============
</TABLE>
STORE PREOPENING EXPENSES -- Prior to January 1, 1999, the Company
capitalized preopening costs associated with opening new restaurants. Upon
commencement of revenue producing activities at a restaurant location, these
capitalized preopening costs were amortized over one year. In April 1998, the
Accounting Standards Executive Committee of the American Institute of Public
Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-Up Activities." SOP 98-5 requires costs of start-up activities to be
expensed as incurred. The Company adopted SOP 98-5 on January 1, 1999. Upon
adoption, the Company expensed previously capitalized start-up costs totaling
$620,000 at January 1, 1999.
9
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
In accordance with SOP 98-5, the adoption has been reported as a
cumulative effect of change in accounting principle on the accompanying
Statement of Operations for the nine months ended September 30, 1999. Preopening
costs incurred subsequent to December 31, 1998 have been charged directly to
expense.
ADVERTISING EXPENSE -- The Company accounts for advertising expense
in accordance with SOP 93-7, "Accounting for Advertising Costs" which generally
requires that advertising costs be expensed either as incurred or the first time
the advertising takes place. It is the Company's policy to expense advertising
costs the first time the advertising takes place. However, Accounting Principles
Board Opinion ("APB") No. 28, "Interim Financial Reporting" allows advertising
costs to be deferred within a fiscal year if the benefits of an advertising
expenditure clearly extend beyond the interim period in which the expenditure is
made. Pursuant to APB 28, it is the Company's policy to defer advertising
expenses at the end of interim periods to the extent that such costs will
clearly benefit future interim periods. During the nine months ended September
30, 2000, the Company incurred advertising expense of $698,612, all of which was
charged to expense during the period. During the nine months ended September 30,
1999, the Company incurred advertising expense of approximately $2,012,962, of
which approximately $640,008 was deferred at September 30, 1999 and was included
in prepaid expenses. Pursuant to SOP 93-7, the Company is required to expense
all advertising incurred at the end of the fiscal year.
INCOME TAXES -- The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based upon the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company has incurred losses since its
inception. Due to the uncertainty of the realization of the tax loss
carryforward, the Company has established a 100% valuation allowance against the
carryforward benefit.
For the nine months ended September 30, 2000, the Company reported
income of $312,583. No provision for income taxes has been provided since the
Company expects to incur a loss for the full year ended December 31, 2000, and
accordingly, no provision for income taxes is expected.
For the nine months ended September 30, 1999, the deferred tax asset
associated with tax benefit of the losses incurred for such periods has been
completely offset by a 100% valuation allowance due to the uncertainty of
realization of the applicable tax loss carryforward.
RECLASSIFICATION -- Certain amounts in the 1999 financial statements
have been reclassified to conform with the 2000 presentation.
10
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
3. BANK CREDIT FACILITIES:
Bank credit facilities at September 30, 2000 and December 31, 1999 consists of the following:
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
Amerbank, S.A, PKP overdraft credit line, variable rate approximately
equal to prime, expires May 31, 2001...................................... $ 17,222 $ 689
Amerbank, S.A.,IFFP overdraft credit line, variable rate approximately
equal to prime, expires September 30, 2000................................ 7,037 ---
Amerbank, PKP line of credit of $300,000 payable in 10 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.....
56,363 146,363
Amerbank, IFFP line of credit of $950,000 payable in 29 monthly installments of
$32,000 commencing on March 12, 1998, interest payable monthly at .50%
above LIBOR, due at maturity on August 12,
2000...................................................................... - 246,000
Amerbank, IFFP revolving credit facility of $1,500,000, interest is
payable monthly at 2.50% above LIBOR, payable in 35 monthly installments
of $41,666 with final payment of $41,690 due at
maturity on May 18, 2003.................................................. 1,416,668 1,500,000
Totalbank, IFFC line of credit of $999,000 payable in full on August 19,
2000, interest at 6.5% payable quarterly collateralized by
certificates of deposit in the amount of $999,990.........................
-- 999,000
Citibank, IFFP line of credit of $10,000,000 payable at maturity on December
30, 2002, interest at LIBOR plus .95%, interest payable
quarterly, unsecured...................................................... -- 6,900,583
---------- -----------
Total Debt..................................................................... 1,497,290 9,792,635
Less: Current Maturities....................................................... ( 580,621) (1,615,685)
---------- -----------
Long Term Debt................................................................. $ 916,669 $ 8,176,950
========== ===========
</TABLE>
11
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
As of September 30, 2000, the Company, by agreement with the lender,
has deferred payment of $ 83,332 of principal payments on the IFFP revolving
credit facility.
4. 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. At September 30, 2000 and December
31, 1999, there are $2,756,000 in principal amount of Debentures outstanding.
5. 11% CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES:
On November 5, 1997, the Company sold $27,536,000 of 11% Convertible
Senior Subordinated Discount Notes Due October 31, 2007 ( the "Notes") in a
private offering. At September 30, 2000 and December 31, 1999, the notes are
comprised as follows:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Face amount of notes at maturity................................. $9,636,000 $9,636,000
Unamortized discount to be accreted as interest expense
and added to the original principal balance of the notes
over a period of three years..................................... ( 84,915) ( 817,468)
---------- ----------
Carrying value................................................... $9,551,085 $8,818,532
========== ==========
</TABLE>
The Notes became convertible, at the option of the holder, into
Common Stock on November 5, 1998. On August 31, 1999, $17,900,000 of the Notes
were exchanged for an aggregate of 158,134 shares of Series B Convertible
Preferred Stock. Additionally, in October 1999, the remaining holders of the
Notes agreed to amend the Notes to provide that interest earned on the Notes
from October 31, 2000 to October 31, 2003 will be paid in Notes, rather than
cash. Interest payable thereafter will be payable in cash. As of September 30,
2000, no additional portion of the Notes had been converted into Common Stock or
Preferred Stock.
On November 6, 2000, the Notes automatically converted based upon
certain provisions of the Indenture pursuant to which they were issued. The
Company had $9,636,000 of principal amount at maturity of the Notes outstanding
before conversion. Each holder received that number of shares of the Company's
common stock equal to the amount of the aggregate stated principal amount at
maturity of the Notes held by such holder, divided by the applicable conversion
price of $70.00 per share. The Company estimates that it will issue
approximately 137,908 shares of common stock in connection with conversion of
the Notes, including shares issued for accrued interest thereon.
The Indenture Trustee has received a letter from one holder
indicating that they dispute the effectiveness of the conversion.
12
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
6. SHAREHOLDERS' EQUITY:
The Company's stock option plan provides for the granting of options
to qualified employees and directors of the Company. Stock option activity is
shown below for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Options Weighted Average
Outstanding Share Price
----------- -----------
<S> <C> <C>
Outstanding at beginning of period................................ 16,700 $ 45.00
Granted........................................................... 2,000
Expired........................................................... (12,829) $ 61.00
Exercised......................................................... (921) $ 54.00
----------
Outstanding at end of period...................................... 4,950 $ 41.00
==========
Exercisable at end of period...................................... 4,950 $ 41.00
Price range of options outstanding at end of period............... $40.00 - $61.00
Available for grant at end of period.............................. 35,050
</TABLE>
At September 30, 2000, IFFC had reserved the following shares of
Common Stock for issuance:
<TABLE>
<CAPTION>
<S> <C>
Stock option plans............................................................................. 40,000
Convertible Debentures convertible into Common Stock at a conversion price of $850.00
per share on or before December 15, 2007.................................................. 3,242
Series A Preferred Stock convertible into Common Stock at a conversion rate of .3333
Common Shares per preferred share......................................................... 10,995
Series B Preferred Stock convertible into Common Stock at a conversion rate of 1.515
Common Shares per preferred share......................................................... 239,573
Convertible Senior Subordinated Discount Notes convertible into Common Stock, after
November 5, 1998, at a conversion price of $70.00 per share............................... 137,657
-------
Total reserved shares.......................................................................... 431,467
=======
</TABLE>
13
P
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
7. RELATED PARTY TRANSACTIONS:
During the nine months ended September 30, 2000, the Company borrowed
an aggregate of $1,158,000 from Mitchell Rubinson, the Chairman of the Board and
Chief Executive Officer of the Company and principal shareholder, pursuant to
the terms of a $1.9 million line of credit bearing interest at 10% per annum.
The loans are due on demand. As of November 10, 2000, the balance of such loans
was $1,233,000.
As of September 30, 2000, the Company owed Mr. Rubinson $193,942 of
salary and benefits, $29,026 of accrued interest and a guarantee fee of
$240,000. The aggregate balance of such amounts at November 10, 2000, was
$496,316.
8. COMMITMENTS AND CONTINGENCIES:
On February 24, 1999, IFFP entered into a line of credit agreement
with Citibank (Poland) S.A. under which Citibank granted IFFP a loan in the
amount of $5,000,000. The purpose of the line of credit was to finance the
construction of nine Burger King restaurants. The line of credit was priced at
0.8% above LIBOR (7.3% at December 31, 1999) and was originally scheduled to
mature on January 15, 2000. In order for IFFP to enter into the credit agreement
with Citibank, holders of our outstanding 11% convertible notes were required to
waive applicable provisions of the note indenture. As compensation for the
waiver, the note holders were issued an aggregate of 2,046 shares of our common
stock, with a fair value of $56.00 per share.
The line of credit was guaranteed by Burger King and the Company
granted Burger King a security interest in the outstanding shares of IFFP. As a
condition to the guarantee, Burger King required that the Company, IFFP and
Mitchell Rubinson, the Chairman of the Board and Chief Executive Officer of the
Company and a principal shareholder, enter into a general release in favor of
Burger King for any and all matters occurring before the date of the guarantee.
Additionally, the Company and IFFP entered into a reimbursement agreement (the
"Reimbursement Agreement") under which the Company agreed to reimburse Burger
King for any and all amounts paid out by Burger King under the guaranty and all
costs and expenses incurred by Burger King in connection with the enforcement of
its rights under the Reimbursement Agreement. Burger King also required that the
Company, IFFP and Rubinson execute a general release of Burger King relating to
any matters that occurred before the execution of the Credit Agreement.
Additionally, Mr. Rubinson entered into a purchase agreement with
Burger King which provides that if IFFP and the Company default on their
obligations under the Reimbursement Agreement and Burger King takes possession
of the IFFP shares, Mr. Rubinson is required to purchase the IFFP shares from
Burger King for an amount equal to all amounts paid out by Burger King under the
guaranty and all costs and expenses incurred by Burger King in connection with
the enforcement of its rights under the Reimbursement Agreement. Mr. Rubinson
received a fee of $150,000 from the Company in connection with the Purchase
Agreement.
In October 1999, IFFP increased the amount of the line of credit to
$8,000,000. IFFP could increase the line of credit in increments of $500,000 to
an aggregate of $10,000,000 if it met specified criteria. The maturity date of
the line of credit was extended to December 2002. Drawings on the line in excess
of the original $5,000,000 bore interest at 0.95% above LIBOR. The guarantee
would automatically terminate in October 2002. In addition, Burger King could
withdraw its guarantee if certain criterion set forth in the Guarantee of Future
14
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
Advances Agreement were not met. In connection with the increase of the line of
credit, all of the prior transaction documents were re-executed, including the
purchase agreement and the release and the Company, Mr.Rubinson, IFFP and Burger
King entered into the Guarantee of Future Advances Agreement pursuant to which
Burger King would guarantee the repayment of future funds advanced under the
line of credit. Additionally, as security for the line of credit, Burger King
required that Mr. Rubinson enter into a personal guaranty with Burger King and
pledge 5,000,000 shares of the Company's common stock owned by him. In
connection with these matters, the Company entered into a reimbursement and fee
agreement whereby the Company agreed to reimburse Mr. Rubinson for all amounts
paid by him under his personal guaranty and to pay him a fee equal to 3%
annually of the amount being guaranteed. In order for IFFP to increase the line
of credit, holders of the outstanding 11% convertible notes were required to
waive applicable provisions of the note indenture.
On June 16, 2000, the Company entered into an agreement (the
"Agreement") with Burger King Corporation ("Burger King"), pursuant to which
Burger King agreed, among other things, to discharge $8 million (plus interest)
due to Citibank under IFFP credit facility and was freed of the obligation to
guarantee any future borrowings by IFFP. In addition, Burger King, on the one
hand, and the Company, IFFP and Mr. Rubinson, the Company's Chairman and Chief
Executive Officer, on the other hand, granted mutual general releases with
respect to any claims that may have arisen prior to the date of the Agreement,
subject to certain exceptions. The Agreement also permits the Company, in its
discretion, to close Burger King stores that are unprofitable, and thereafter to
dispose of them as it deems fit. The Company recognized a gain on this
transaction, which is comprised as follows:
<TABLE>
<CAPTION>
<S> <C>
Repayment of IFFP line of credit by Burger King, including accrued
interest of $109,898...... ........................................... $ 8,109,898
Write-off of unamortized debt issuance costs.............................. (1,624,830)
Legal and professional fees............................................... (163,252)
-----------
Gain on settlement........................................................ $6,321,816
===========
</TABLE>
In connection with the settlement agreement, the warrant held by
Burger King to purchase 40,000 shares of common stock of the Company at a
price of $200.00 per share was cancelled.
During the three months ended September 30, 2000, the gain on
settlement was increased by $491,400, due to a change in estimate of the legal
and professional fees associated with the settlement.
9. LITIGATION:
DISPUTE WITH POLISH FISCAL AUTHORITIES. As of July 1995, IFFC may
have become subject to penalties for failure to comply with an 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. As
a penalty for noncompliance, Polish tax authorities may disallow certain value
added tax deductions for July and August 1995.
15
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
Additionally, penalties and interest may be imposed on these disallowed
deductions. Although IFFP's NCR Cash Register System was a modern system, it
could not be modified. In 1998, IFFP replaced the system with a new system which
complies with Polish regulations. In December 1999, the Polish Tax Court ruled
against IFFP but reduced the fine and related penalties to 440,000 Polish zlotys
or approximately US$96,908 at September 30, 2000 exchange rates.
REGENESIS MATTER. The Company is a party to the following legal
proceeding: ELPOINT COMPANY, LLC AND GENNADY YAKOVLEV, VS. MITCHELL RUBINSON,
MARILYN RUBINSON, EDDA RUBINSON, NIGEL NORTON, JAMES F. MARTIN, LEON BLUMENTHAL,
LAWRENCE RUTSTEIN, SHULMAN & ASSOCIATES, INC., MANNY SCHULMAN, FRANKLYN
WEICHSELBAUM, JAMES MIRANTI, INTERNATIONAL FAST FOOD CORPORATION, DOMINO'S PIZZA
INTERNATIONAL, INC., REGENESIS HOLDINGS CORPORATION, United States District
Court, Northern District of California (Case No. 99-1107 CRB). On March 10,
1999, certain shareholders of Regenesis Holdings Corporation (f/k/a QPQ
Corporation) ("Regenesis") filed a complaint against IFFC and certain of its
senior management and principal shareholders, including Mitchell Rubinson,
IFFC's Chairman of the Board and Chief Executive Officer, and James Martin,
IFFC's former Vice President and Chief Financial Officer. Regenesis formerly
held the right to develop Domino's Pizza stores in Poland. Certain former
officers and principal stockholders of Regenesis are officers and principal
shareholders of IFFC. The complaint alleges, among other things, that the
defendants fraudulently transferred the Domino's development rights to IFFC,
thereby causing Regenesis to lose value. Additionally, the complaint alleges
that IFFC engaged in the misappropriation of corporate opportunities of
Regenesis. The Company reached a settlement in this matter and pursuant to such
settlement, the Company must pay $300,000. An accrual for this amount has been
provided for in the 1999 consolidated financial statements.
OTHER LITIGATION. The Company is not a party to any litigation or
governmental proceedings that management believes would result in any other
judgments or penalties that would have a material adverse effect on the Company.
10. SEGMENT INFORMATION:
The Company operates subsidiaries in the fast food industry in the
Republic of Poland. The Company, through its two wholly owned subsidiaries,
International Fast Food Polska, Sp. z o.o. ("IFFP") and Pizza King Polska Sp. z
o.o. ("PKP"), operates franchised Burger King restaurants and Domino's Pizza
stores, respectively, in the Republic of Poland. The Company's reportable
segments are strategic business units that offer different products. The Company
evaluates the performance of its segments based on revenue and operating income.
The Company's Burger King restaurants offer dine-in and take out hamburgers,
cheeseburgers, chicken sandwiches, fish sandwiches, french fries, soft drinks
including milk shakes and ice cream. The Company Domino's Pizza stores offer
take out and delivery service for its pizzas, salads, sandwiches, chicken wings,
breadsticks, soft drinks and ice cream. There is no material intersegment
revenue. Interest expense related to working capital and development activity is
included in the Company's Consolidated Statements of Operations.
16
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
The following table presents financial information regarding the
Company's different industry segments as of and for the nine month periods ended
September 30, 2000 and 1999 (in thousands).
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
------------------------------------------------
IFFP PKP Total Corporate Consolidated
---- --- ----- --------- ------------
<S> <C> <C> <C> <C> <C>
Restaurant/store sales................. $ 5,818 $ 2,554 $ 8,372 $ - $ 8,372
Food and packaging costs............... 1,971 807 2,778 - 2,778
Restaurant operating costs............. 3,567 1,736 5,303 - 5,303
Depreciation and amortization.......... 1,576 444 2,020 - 2,020
Provision for loss on sale and asset
impairment charge........ 502 101 603 - 603
General and administrative expenses.... 901 383 1,284 818 2,102
---------- ------------ -------------- -------------- --------------
Loss from operations................... $ ( 2,699) $ ( 917) $ (3,616) $ ( 818) $ ( 4,434)
========== ============ ============== =============== ==============
THREE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
------------------------------------------------
IFFP PKP Total Corporate Consolidated
---- --- ----- --------- ------------
Revenue................................ $ 1,796 $ 722 $ 2,518 $ - $ 2,518
Food and packaging costs............... 604 215 819 - 819
Restaurant operating costs............. 1,140 628 1,768 - 1,768
Depreciation and amortization.......... 435 143 578 - 578
Provision for loss on sale and asset
impairment charge........ 502 101 603 - 603
General and administrative expenses.... 293 101 394 193 587
---------- ----------- -------------- -------------- --------------
Loss from operations................... $ (1,178) $ ( 466) $ (1,644) $ (193) $ (1,837)
========== =========== ============== ============== ==============
NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
------------------------------------------------
IFFP PKP Total Corporate Consolidated
---- --- ----- --------- ------------
Restaurant/store sales................. $ 8,401 $ 3,188 $ 11,589 $ -- $ 11,589
Food and packaging costs............... 3,325 1,088 4,413 -- 4,413
Restaurant operating costs............. 4,774 1,785 6,559 -- 6,559
Preopening expenses.................. 599 176 775 -- 775
Depreciation and amortization.......... 1,586 398 1,984 -- 1,984
General and administrative expenses.... 967 354 1,321 1,897 3,218
---------- ----------- -------------- -------------- --------------
Loss from operations................... $ (2,850) $ ( 613) $ (3,463) $ (1,897) $ ( 5,360)
========== =========== ============== ============== ==============
</TABLE>
17
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 (unaudited)
-------------------------------------------------
IFFP PKP Total Corporate Consolidated
---- --- ----- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue................................ $ 2,746 $ 1,001 $ 3,747 $ - $ 3,747
Food and packaging costs............... 1,041 344 1,385 - 1,385
Restaurant operating costs............. 1,669 638 2,307 - 2,307
Preopening expenses.................... - 35 35 - 35
Depreciation and amortization.......... 556 144 700 - 700
General and administrative expenses.... 295 121 416 543 959
-------------- --------------- -------------- --------------- -------------
Loss from operations................... $ ( 815) $ (281) $ (1,096) $ (543) $ (1,639)
============== =============== ============== =============== =============
Total assets:
December 31, 1999................... $ 18,332 $ 3,261 $ 21,593 $ 4,288 $ 25,881
============== =============== ============== =============== =============
September 30, 2000.................. $ 15,353 $ 2,624 $ 17,977 $ 1,091 $ 19,068
============== =============== ============== =============== =============
</TABLE>
11. PROVISION FOR LOSS ON SALE AND ASSET IMPAIRMENT CHARGES:
As of September 30, 2000, the Company Recorded a provision of
$431,685 in connection with the estimated loss to be incurred on the sale of a
Burger King restaurant, which was sold subsequent to September 30, 2000. In
addition, during the nine months ended September 30, 2000, the Company recorded
a charge of $171,425 to reduce the carrying value of certain buildings and
equipment to estimated net realizable value.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Information contained in this Quarterly Report on Form 10-QSB
contains "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "could," "intends," "estimates," "projected," "contemplated" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology. No assurances can be given that the future results covered by the
forward-looking statements will be achieved. These statements, by their nature,
involve substantial risks and uncertainties, certain of which are beyond IFFC's
control. The following factors and other factors described elsewhere in this
annual report could cause actual experience to vary materially from the future
results covered in such forward-looking statements:
- the future growth of our business and our ability to comply with
the restaurant development agreement with Burger King and the master franchise
agreement with Domino's;
- our ability to improve levels of profitability; the sufficiency of
cash flow provided by our operating, investing and financing
activities;
- changes in the economic, business and political conditions in Poland;
- the demand for our products and the ability of our third-party
suppliers to meet our quantity and quality requirements;
- the ability to consummate joint ventures or other strategic
associations with third parties or lessors;
- the ability to obtain suitable restaurant sites;
- changes in the level of operating expenses and revenues;
- changes in the present and future level of competition; and
- our future liquidity and capital resource needs.
Other factors, could also cause actual experience to vary materially from the
matters covered in such forward-looking statements.
GENERAL
IFFC currently operates 22 Burger King restaurants and 16 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. IFFC may never achieve profitability
or be able to successfully establish a sufficient number of restaurants to
achieve profitability.
19
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS NINE MONTHS ENDED SEPTEMBER 30, 1999
RESULTS OF OPERATIONS
For the nine months ended September 30, 2000 and September 30, 1999,
IFFC generated sales of $8,371,558 and $11,589,343, respectively, which includes
sales of $5,817,662 and $8,400,855 for the Burger King restaurants and
$2,553,896 and $3,188,488 for the Domino's Pizza stores, respectively. In U.S.
dollar and Polish zloty terms IFFC's Burger King restaurant sales decreased by
approximately 30.8% and 23.7%, respectively, for the nine months ended September
30, 2000 as compared to the nine months ended September 30, 1999. In U.S. dollar
and Polish zloty terms IFFC's Burger King same restaurant sales decreased by
approximately 27.4% and 20.0%, respectively, for the nine months ended September
30, 2000 as compared to the nine months ended September 30, 1999. The decrease
in same restaurant sales was primarily attributable to the initial start up of
television advertising in February 1999 compared to limited local store
marketing promotions during the nine months ended September 30, 2000. In U.S.
dollar terms, IFFC's Domino's store sales decreased by approximately 19.9% for
the nine months ended September 30, 2000 as compared to the nine months ended
September 30, 1999. In Polish zloty terms, IFFC's Domino's store sales decreased
by approximately 11.7% for the nine months ended September 30, 2000 as compared
to the nine months ended September 30, 1999. The decrease in Domino's store
sales was attributed to increased competition in the Warsaw market, as well as
the effect of less advertising during the nine months ended September 30, 2000,
as compared to the nine months ended September 30, 1999. Total advertising
expenditures for the nine months ended September 30, 2000, were $1,314,350 or
65% below expenditures for the nine months ended September 30, 1999. The
decrease was primarily attributable to budget reductions associated with the
availability of working capital for the Company's advertising programs.
Food and packaging costs applicable to Burger King restaurants for
the nine months ended September 30, 2000 and 1999 were 33.9% and 39.6% of
restaurant sales, respectively. The 5.7% decrease as a percentage of restaurant
sales was primarily attributable to increased menu prices coupled with lower
food costs obtained from key suppliers. Food and packaging costs applicable to
Domino's stores for the nine months ended September 30, 2000 and 1999 were 31.6%
and 34.1% of store sales, respectively. The 2.5% decrease as a percentage of
store sales was primarily attributable to increased menu prices and a reduction
in the cost of key food items from its major vendors.
Payroll and related costs applicable to Burger King restaurants for
the nine months ended September 30, 2000 and 1999 were 23.9% and 19.5% of
restaurant sales, respectively. The 4.4% increase as a percentage of restaurant
sales was primarily the result of fixed labor costs at low volume drive thru
restaurants. Payroll and related costs applicable to Domino's stores for the
nine months ended September 30, 2000 and 1999 were 22.4% and 22.0% of store
sales, respectively.
Occupancy and other operating expenses applicable to Burger King
restaurants for the nine months ended September 30, 2000 and 1999 were 37.5% and
37.3% of restaurant sales, respectively. Occupancy and other operating expenses
applicable to Domino's stores for the nine months ended September 30, 2000 and
1999 were 45.6% and 33.9% of store sales, respectively. The 11.7% increase as a
percentage of store sales is primarily attributable to higher delivery vehicle
costs coupled with higher fixed costs at the new Domino's commissary and lower
sales.
Depreciation and amortization expense applicable to Burger King
restaurants was $1,576,086 as compared to $1,585,855 for the nine months ended
September 30, 2000 and 1999, respectively. Depreciation and amortization expense
applicable to Domino's stores was $443,911 as compared to $398,784 for the nine
months ended September 30, 2000 and 1999, respectively. General and
administrative expenses for the nine months ended September 30, 2000 and 1999
were 24.3% and 27.8% of sales, respectively. The 3.5% decrease as a percentage
of sales was primarily attributable to lower salaries, legal and professional
fees and consulting fees incurred at the corporate level. For the nine months
ended September 30, 2000, general and administrative expenses consisted of
executive and office staff salaries and benefits ("Salary Expenses") of
$772,751; legal and professional fees, office rent, travel, telephone and other
corporate expenses ("Corporate Overhead Expenses") of $1,173,784, and
depreciation and amortization of $155,799. For the nine months ended September
30, 1999, general and administrative expense included Salary Expenses of
$1,056,336; Corporate Overhead Expenses of $1,581,833, debt issuance costs of
$391,092 and depreciation and amortization of $188,883. The $1,187,913 decrease
20
<PAGE>
is primarily attributable to a reduction of salaries and benefits expenses at
the corporate level; and a reduction in legal and professional and consulting
fees primarily incurred in 1999 as the result of the Citibank loan.
AS OF SEPTEMBER 30, 2000, THE COMPANY RECORDED A PROVISION OF
$431,685 IN CONNECTION WITH THE ESTIMATED LOSS TO BE INCURRED ON THE SALE OF A
BURGER KING RESTAURANT, WHICH WAS SOLD SUBSEQUENT TO SEPTEMBER 30, 2000. IN
ADDITION, DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2000,THE COMPANY RECORDED A
CHARGE OF $171,425 TO REDUCE THE CARRYING VALUE OF CERTAIN BUILDINGS AND
EQUIPMENT TO ESTIMATED NET REALIZABLE VALUE.
For the nine months ended September 30, 2000 and 1999 Interest and
Other Income consisted of the following:
<TABLE>
<CAPTION>
Nine Months Ended Sept 30,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Forgiveness of Burger King fees $ - $ 750,000
Interest income................................................................ 28,796 86,893
All other, net................................................................. 208,192 261,889
----------- -----------
Total.......................................................................... $ 236,988 $1,098,782
=========== ==========
Interest expense consisted of the following:
Nine Months Ended Sept. 30,
---------------------------
2000 1999
---- ----
Interest Expense on 9% Subordinated Convertible Debentures..................... $ 186,030 $ 186,030
Amortization of Debt Issuance Costs............................................ 388,011 95,886
Accretion of discount on 11% Convertible Senior Subordinated Discount Notes....
732,553 1,753,801
Interest Expense on Bank Facilities............................................ 511,142 359,597
Shareholder loans.............................................................. 29,026 -
Capitalized interest........................................................... -- ( 177,100)
----------- ------------
Total.......................................................................... $ 1,846,762 $ 2,218,214
=========== ============
</TABLE>
Interest expense exceeded interest and other income by $1,609,774 and
$1,119,432 for the nine months ended September 30, 2000 and 1999, respectively.
The primary reasons for the decrease for the nine month period ended September
30, 2000 was higher interest and amortization of debt issuance costs, an
increase in borrowings under bank facilities, a decrease in capitalized
interest, all of which were offset by lower accretion of discount on the 11%
Convertible Senior Subordinated Discount Notes.
IFFC's interest expense on bank facilities was $511,142 and $359,597
for the nine months ended September 30, 2000 and 1999, respectively. The
$151,545 increase was attributable to IFFC's increase of borrowings under bank
credit facilities.
See Liquidity and Capital Resources for details relating to the
$6,321,816 gain recognized on the settlement of disputes with Burger King.
As a result of the foregoing, for the nine months ended September 30,
2000, IFFC reported net income of $312,583 (which includes a non recurring gain
of $6,321,816) or $.47 per share of IFFC's Common Stock compared to a net loss
of $7,125,713, or $(15.99) per share of IFFC's Common Stock for the nine months
ended September 30,1999.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 settlement of certain
litigation and disputes with Burger King, and loans from shareholders.
Net cash provided by operating activities for the nine months ended
September 30, 2000 was $6,031,331 as compared to net cash used in operating
activities for the nine months ended September 30, 1999 of $2,048,974. The
increase was primarily attributable to the gain on settlement of disputes with
Burger King before write-off of non cash expenses related thereto.
Net cash flows provided by (used in) investing activities increased
from $(5,857,222) to $875,100 for the nine months ended September 30, 1999 and
2000, respectively. The increase was primarily attributable to the lack of
development of Burger King restaurants and Domino's stores in 2000, which was
partially offset by the proceeds received from liquidation of $999,990 of
certificates of deposit which were used to liquidate a bank loan of $999,000.
Net cash (used in) provided by financing activities decreased by
$11,711,852 for the nine months ended September 30, 2000, compared to the nine
months ended September 30, 1999. The decrease was primarily attributable to
fewer advances under the Citibank Loan in 2000, as well as substantial loan
repayments during the period.
As of September 30, 2000, IFFC had negative working capital of
approximately $4,725,233 and cash of $165,733. IFFC has significant commitments
to develop restaurants in accordance with the Burger King Agreement and the
Domino's Agreement. The Company does not presently have sufficient financial
resources to meet its development obligations under the terms of the Burger King
and Domino's agreements. The Company has sustained losses from operations since
its incorporation in December 1991. For the nine months ended September 30, 2000
and 1999, the Company reported net income of $312,583 (which includes a non
recurring gain of $6,321,816 and a net loss of $(7,125,713), respectively. At
September 30, 2000 the Company had an accumulated deficit of $35,160,646. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management believes that cash flows from existing stores when
combined with existing financial resources will not be sufficient to fund
operations. Management is seeking to obtain additional equity financing to fund
future development. No assurance can be given that such financing will be
obtained or that it can be obtained on favorable terms.
BURGER KING AGREEMENT AND DOMINO'S AGREEMENT -- IFFC's material
commitments for capital expenditures in its restaurant and store business relate
to the provisions of the BKC Agreement and the Domino's Agreement.
CONVERTIBLE NOTES -- In November 1997, the Company sold $27,536,000
of its 11% Convertible Senior Subordinated Discount Notes Due October 31, 2007
(the "Notes") in a private offering. Interest was payable semi-annually, in
cash, on April 30 and October 31 of each year, commencing April 30, 2001. The
Notes are comprised as follows at September 30, 2000 and December 31, 1999:
22
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Face amount of notes at maturity................................... $9,636,000 $ 9,636,000
Unamortized discount to be accreted as interest expense and
added to the original principal balance of the notes over a
period of three years........................................... (84,915) (817,468)
---------- ----------
Carrying value..................................................... $ 9,551,085 $ 8,818,532
========== ==========
</TABLE>
The Notes became convertible, at the option of the holder, into
Common Stock on November 5, 1998. On August 31, 1999, $17,900,000 of the Notes
were exchanged for an aggregate of 158,134 shares of Series B Convertible
Preferred Stock. Additionally, in October 1999, the remaining holders of the
Notes agreed to amend the Notes to provide that interest earned on the Notes
from October 31, 2000 to October 31, 2003 will be paid in Notes, rather than
cash. Interest payable thereafter will be payable in cash. As of September 30,
2000, no additional portion of the Notes had been converted into Common Stock or
Preferred Stock.
On November 6, 2000, the Notes automatically converted based upon
certain provisions of the Indenture pursuant to which they were issued. The
Company had $9,636,000 of principal amount at maturity of the Notes outstanding
before conversion. Each holder received that number of shares of the Company's
common stock equal to the amount of the aggregate stated principal amount at
maturity of the Notes held by such holder, divided by the applicable conversion
price of $70.00 per share. The Company estimates that it will issue
approximately 137,908 shares of common stock in connection with conversion of
the Notes, including shares issued for accrued interest thereon.
The Indenture Trustee has received a letter from one holder
indicating that they dispute the effectiveness of the conversion.
DISPUTE WITH POLISH FISCAL AUTHORITIES -- IFFC anticipates that it
will continue to incur certain expenses in connection with its disputes with the
Polish Fiscal Authorities. See "Legal Proceedings -- Dispute with Polish Fiscal
Authority" for a description of such matters and IFFC's best estimates of the
expenses IFFC anticipates incurring and the timing of such expenses.
POLISH BANK ACCOUNTS-- As of September 30, 2000 and December 31,
1999, the Company had approximately $136,850 and $334,009, 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 is held
in U.S. dollar accounts in U.S. Banks.
CREDIT FACILITIES - We have also financed our operations through the
use of credit facilities.
In January 1993, IFFP entered into a revolving credit facility with
American Bank of Poland S.A. ("AmerBank") totaling 300,000 zlotys (approximately
$72,319 at December 31, 1999 exchange rates). Borrowings under the AmerBank
credit facility were secured by a guarantee of our company and bore interest at
a monthly adjusted variable rate approximately equal to AmerBank's prime rate.
In April 1996, the credit available was decreased to 200,000 zlotys
(approximately $48,215 at December 31, 1999 exchange rates) and in March 1997,
the credit facility was further decreased to 100,000 zlotys (approximately
$22,024 at September 30, 2000 exchange rates). The credit facility expired on
September 30, 2000 and the outstanding balance was paid in full.
In September 1996, PKP entered into a revolving credit facility with
AmerBank totaling 100,000 zlotys (approximately $22,731 at September 30, 2000
exchange rates). The note is secured by our guarantee. The credit facility
expires on May 31, 2001. The balance on this note as of September 30, 2000 and
November 30, 2000 was $7,037 and $11,466 respectively.
23
<PAGE>
In May 1997, we entered into a $999,000 credit facility with
Totalbank that is secured by $999,000 of certificates of deposit. The credit
facility bears interest at 6.5% per annum and was originally scheduled to mature
in August 1998. The credit facility was renewed in February 2000 for nine months
under the same terms and is scheduled to mature in August 2000. The company paid
off and terminated this facility on June 2, 2000.
In August 1997, we executed a credit agreement with AmerBank in the
amount of $950,000. Interest is payable monthly at the prevailing one month
LIBOR rate plus 2.75% (9.25% at December 31, 1999). Commencing in March 1998,
the loan is being repaid in monthly installments of $32,000 for 29 months with a
balloon payment of $22,000 due on August 12, 2000. The final payment on this
loan was made on August 12, 2000.
In April 1998, PKP entered into a $300,000 development loan with
AmerBank for the development of its Domino's stores. Borrowings under this
credit facility are secured by: (a) fixed assets of each new restaurant
financed; and (b) our guarantee. The loan is being repaid in ten equal quarterly
installments of $30,000 starting in December 1998, with a final payment due at
maturity (March 26, 2001). Interest is paid monthly at the prevailing one month
LIBOR rate plus 31/8% (9.63% at December 31, 1999). As of September 30, 2000 and
November 10, 2000, approximately $56,363 was outstanding on the facility.
In June 1998, IFFP entered into a development loan in the principal
amount of $1.3 million with AmerBank. Borrowings under this credit facility are
to be made until June 18, 2000 and are secured by: (a) fixed assets of each new
restaurant financed; and (b) our guarantee. The loan is scheduled to be repaid
in thirty-five equal monthly installments of $36,111, starting in June 2000,
with a final payment of $36,115 due at maturity, which is May 18, 2003. Interest
is to be paid monthly at the prevailing one month LIBOR rate plus 2.5% (9.0% at
December 31, 1999). According to the terms of the agreement, the proceeds of the
loan are to be used to finance up to half of the costs of furnishing and
commencing operation of Burger King restaurants operated by IFFP. In October
1998, we executed an amendment to this facility with AmerBank, increasing the
borrowing limit to $1.5 million. The scheduled loan payments are as follows:
thirty-five equal monthly installments of $41,666 starting in June 2000 with a
final payment of $41,690 due at maturity on May 18, 2003. As of September 30,
2000 and November 10, 2000, $1,416,668 and $1,375,002, respectively was
outstanding on this credit facility. As of September 30, 2000, IFFP, by
agreement with the lender has deferred $83,332 of principal payments on this
credit facility.
On February 24, 1999, IFFP entered into a line of credit agreement
with Citibank (Poland) S.A. under which Citibank granted IFFP a loan in the
amount of $5,000,000. The purpose of the line of credit was to finance the
construction of nine Burger King restaurants. The line of credit was priced at
0.8% above LIBOR (7.3% at December 31, 1999) and was originally scheduled to
mature on January 15, 2000. In order for IFFP to enter into the credit agreement
with Citibank, holders of our outstanding 11% convertible notes were required to
waive applicable provisions of the note indenture. As compensation for the
waiver, the noteholders were issued an aggregate of 2,046 shares of our common
stock, with a fair value of $56.00 per share.
The line of credit was guaranteed by Burger King and the Company
granted Burger King a security interest in the outstanding shares of IFFP. As a
condition to the guarantee, Burger King required that the Company, IFFP and Mr.
Rubinson, the Chairman of the Board and Chief Executive Officer of the Company
and a principal shareholder, enter into a general release in favor of Burger
King for any and all matters occurring before the date of the guarantee.
Additionally, the Company and IFFP entered into a reimbursement agreement (the
"Reimbursement Agreement") under which the Company agreed to reimburse Burger
King for any and all amounts paid out by Burger King under the guaranty and all
costs and expenses incurred by Burger King in connection with the enforcement of
its rights under the Reimbursement Agreement. Burger King also required that the
Company, IFFP and Mr. Rubinson execute a general release of Burger King relating
to any matters that occurred before the execution of the Credit Agreement.
Additionally, Mr. Rubinson entered into a purchase agreement with
Burger King which provides that if IFFP and the Company default on their
obligations under the Reimbursement Agreement and Burger King takes possession
of the IFFP shares, Mr. Rubinson is required to purchase the IFFP shares from
Burger King for an amount equal to all amounts paid out by Burger King under the
guaranty and all costs and expenses incurred by Burger King in connection with
the enforcement of its rights under the Reimbursement Agreement. Mr. Rubinson
received a fee of $150,000 from the Company in connection with the Purchase
Agreement.
24
<PAGE>
In October 1999, IFFP increased the amount of the line of credit to
$8,000,000. IFFP could increase the line of credit in increments of $500,000 to
an aggregate of $10,000,000 if it met specified criteria. The maturity date of
the line of credit was extended to December 2002. Drawings on the line in excess
of the original $5,000,000 bore interest at 0.95% above LIBOR. The guarantee
would automatically terminate in October 2002. In addition, Burger King could
withdraw its guarantee if certain criterion set forth in the Guarantee of Future
Advances Agreement were not met. In connection with the increase of the line of
credit, all of the prior transaction documents were re-executed, including the
purchase agreement and the release and the Company, Mr. Rubinson, IFFP and BKC
entered into the Guarantee of Future Advances Agreement pursuant to which BKC
would guarantee the repayment of future funds advanced under the line of credit.
Additionally, as security for the line of credit, Burger King required that Mr.
Rubinson enter into a personal guaranty with Burger King and pledge 5,000,000
shares of the Company's common stock owned by him. In connection with these
matters, the Company entered into a reimbursement and fee agreement whereby the
Company agreed to reimburse Mr. Rubinson for all amounts paid by him under his
personal guaranty and to pay him a fee equal to 3% annually of the amount being
guaranteed. In order for IFFP to increase the line of credit, holders of the
outstanding 11% convertible notes were required to waive applicable provisions
of the note indenture.
On June 16, 2000, the Company entered into an agreement (the
"Agreement") with Burger King Corporation ("Burger King"), pursuant to which
Burger King agreed, among other things, to discharge $8 million (plus interest)
due to Citibank under IFFP credit facility and was freed of the obligation to
guarantee any future borrowings by IFFP. In addition, Burger King, on the one
hand, and the Company, IFFP and Mr. Rubinson, the Company's Chairman and Chief
Executive Officer, on the other hand, granted mutual general releases with
respect to any claims that may have arisen prior to the date of the Agreement,
subject to certain exceptions. The Agreement also permits the Company, in its
discretion, to close Burger King stores that are unprofitable, and thereafter to
dispose of them as it deems fit. The Company recognized a gain on this
transaction, which is comprised as follows:
<TABLE>
<CAPTION>
Repayment of IFFP line of credit by Burger King, including accrued
<S> <C>
interest of $109,898......
$ 8,109,898
Write-off of unamortized debt issuance costs.................. (1,624,830)
Legal and professional fees................................... (163,252)
-----------
Gain on settlement............................................ $6,321,816
===========
</TABLE>
In connection with the settlement agreement the warrant held by BKC
to purchase 40,000 shares of common stock of the Company at a price of $200.00
per share was cancelled.
SHAREHOLDER LOANS -- During the nine months ended September 30, 2000,
the Company borrowed an aggregate of $1,158,000 from Mitchell Rubinson, the
Chairman of the Board and Chief Executive Officer of the Company and principal
shareholder, pursuant to the terms of a $1.9 million line of credit bearing
interest at 10% per annum. The loans are due on demand. As of November 10, 2000,
the balance of such loans was $1,233,000.
As of September 30, 2000, the Company owed Mr. Rubinson $193,942 of
salary and benefits, $29,026 of accrued interest and a guarantee fee of
$240,000. The aggregate balance of such amounts at November 10, 2000 was
$496,316.
During the three months ended September 30, 2000, the gain on
settlement was increased by $491,400, due to a change in estimate of the legal
and professional fees associated with the settlement.
ACCOUNTING POLICIES -- The following is a summary of certain
accounting policies that are new or have become material to the Company's
operations during the first and second quarters of 1999 and 2000. For a
discussion of all of the Company's material accounting policies, reference is
made to the Company's Annual Report on Form 10-KSB for the year ended December
31, 1999.
Prior to January 1, 1999, the Company capitalized preopening costs
associated with opening new restaurants. Upon commencement of revenue producing
activities at a restaurant location, these capitalized preopening costs were
amortized over one year. In April 1998, the Accounting Standards Executive
Committee of the American Institute of Public Accountants issued Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires costs of start-up activities to be expensed as incurred. The Company
adopted SOP 98-5 on January 1, 1999. Upon adoption, the Company expensed
previously capitalized start-up costs totaling $620,000 at January 1, 1999. In
accordance with SOP 98-5, adoption has been reported as a cumulative effect of
change in accounting principle on the accompanying statement of operations for
the three months ended March 31, 1999. Preopening costs incurred subsequent to
December 31, 1998 have been charged directly to expense.
The Company accounts for advertising expense in accordance with SOP
93-7, "Accounting for Advertising Costs" which generally requires that
advertising costs be expensed either as incurred or the first time the
advertising takes place. It is the Company's policy to expense advertising costs
the first time the advertising takes place. However, Accounting Principles Board
Opinion ("APB") No. 28, "Interim Financial Reporting" allows advertising costs
to be deferred within a fiscal year if the benefits of an advertising
expenditure clearly extend beyond the interim period in which the expenditure is
made. Pursuant to APB 28, it is the Company's policy to defer advertising
expenses at the end of interim periods to the extent that such costs will
clearly benefit future interim periods. During the nine months ended September
30, 2000, the Company incurred advertising expense of $698,612, all of which was
charged to expense during the period. During the nine months ended September 30,
1999, the Company incurred advertising expense of approximately $2,012,962, of
which approximately $640,008 was deferred at September 30, 1999 and was included
in prepaid expenses. Pursuant to SOP 93-7, the Company is required to expense
all advertising incurred at the end of the fiscal year.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The official currency in Poland is the zloty. The value of the zloty
is pegged pursuant to a system based on a basket of currencies, as well as all
other economic and political factors that effect the value of currencies
generally. At September 30, 2000, the exchange rate was 4.54 zlotys per dollar.
The accounts of IFFC's Polish subsidiaries are maintained using the Polish
zloty.
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, 1997 and 1998, the rates of inflation
and devaluation improved. For the years ended December 31, 1995, 1996, 1997,
1998 and 1999 the annual inflation rate in Poland was 21.6%, 19.5%, 13.0%, 8.6%
and 7.3%, respectively, and as of December 31, 1995, 1996, 1997, 1998 and 1999
the exchange rate was 2.468, 2.872, 3.514, 3.494 and 4.1483 Polish zlotys per
the U.S. 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 Burger King and Domino's 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.
26
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DISPUTE WITH POLISH FISCAL AUTHORITY. In 1995, IFFP became subject to
penalties for failure to comply with an amended tax law requiring the use of
cash registers with calculating and recording capabilities and which are
approved for use by the Polish Fiscal Authorities. As a penalty for
noncompliance, Polish tax authorities had the right to disallow some value added
tax deductions for July and August 1995. Additionally, penalties and interest
could have been imposed on these disallowed deductions. Although IFFP's NCR Cash
Register System was a modern system, it could not be modified. IFFP replaced the
system with a new Siemen's system which complies with Polish regulations. In
December 1999, the Polish Tax Court ruled against IFFP but reduced the fine and
related penalties to 440,000 Polish zloty or approximately $96,908 using
September 30, 2000 exchange rates.
REGENESIS MATTER. We are a party to the following legal proceeding:
ELPOINT COMPANY, LLC AND GENNADY YAKOVLEV, VS. MITCHELL RUBINSON, MARILYN
RUBINSON, EDDA RUBINSON, NIGEL NORTON, JAMES F. MARTIN, LEON BLUMENTHAL, C.
LAWRENCE RUTSTEIN, SHULMAN & ASSOCIATES, INC., MANNY SCHULMAN, FRANKLYN
WEICHSELBAUM, JAMES MIRANTI, INTERNATIONAL FAST FOOD CORPORATION, DOMINO'S PIZZA
INTERNATIONAL, INC., REGENESIS HOLDINGS CORPORATION, United States District
Court, Northern District of California (Case No. 99-1107 CRB). In March 1999,
some of the shareholders of Regenesis Holdings Corporation (f/k/a QPQ
Corporation) ("Regenesis") filed a complaint against us and some of our senior
management and principal shareholders, including Mitchell Rubinson, our Chairman
of the Board and Chief Executive Officer, and James Martin, our President and
Chief Financial Officer. Regenesis formerly held the right to develop Domino's
Pizza stores in Poland. Certain former officers and principal stockholders of
Regenesis are officers and principal shareholders of our company. The complaint
alleges, among other things, that the defendants fraudulently transferred the
Domino's development rights to us, thereby causing Regenesis to lose value.
Additionally, the complaint alleges that we engaged in the misappropriation of
corporate opportunities of Regenesis. We reached a settlement in this matter and
pursuant to such settlement, we must pay $300,000. An accrual for this amount
has been provided for in the 1999 consolidated financial statements.
We are not a party to any other litigation or governmental
proceedings that management believes would result in any judgments or fines that
would have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders (the "Meeting") of the
Company was held on October 25, 2000.
(b) Not applicable because:
(i) Proxies for the Meeting were solicited
pursuant to Regulation 14
under the Securities Exchange Act of 1934.
(ii) There were no solitation in opposition
to management's nominees as listed in
the Company's proxy statement dated
October 3, 2000.
(iii) All such nominees were elected.
(c) The matter voted on at the Meeting consisted of
the following:
27
<PAGE>
(i) The election of two members to the
Company's Board of Directors. The name
of each nominee for election and the
number of shares voted for and against
such nominee, as well as the number of
abstentions and broker non-votes with
respect to such nominee, as set forth
below:
NAME FOR ABSTENTIONS NON-VOTES
---- --- ----------- ---------
MITCHELL RUBIN 32,346,128 16,316 0
-----------------------------------------------------------
LARRY SCHATZ 32,346,128 16,316 0
-----------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 - Financial Data Schedule (filed electronically only).
(b) The following reports on Form 8-K were filed during the
quarter ended on September 30, 2000:
(i) On July 5, 2000, the Registrant
reported that it had entered into a
settlement agreement with Burger King
Corporation regarding settlement of
varios disputes between the parties.
(ii) On July 20, 2000, the registrant reported
that it had engaged Moore Stephens Lovelace,
P.A. as independent accountants as of July 17, 2000.
28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange
Act of 1934, International Fast Food has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL FAST FOOD CORPORATION
DATE: November 17, 2000 By: /S/ MITCHELL RUBINSON
----------------------
Mitchell Rubinson, Chairman of the Board,
Chief Executive Officer (Principal Executive
Officer), Chief Financial Officer
(Principal Financial and Accounting Officer)
29
