AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 2000
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INTERNATIONAL FAST FOOD CORPORATION
(Exact Name of Registrant as Specified in its Charter)
----------------
FLORIDA 5812 65-0302338
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
-------------------
MITCHELL RUBINSON
CHAIRMAN OF THE BOARD AND CEO
1000 LINCOLN ROAD, SUITE 200 INTERNATIONAL FAST FOOD CORPORATION
MIAMI BEACH, FLORIDA 33139 1000 LINCOLN ROAD, SUITE 200
(305) 531-5800 MIAMI BEACH, FLORIDA 33139
(Address and telephone number (305) 531-5800
of principal executive offices (Name, address and telephone number
and principal place of business) of agent for service)
----------------
COPIES OF COMMUNICATIONS TO:
PAUL BERKOWITZ, ESQ.
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
TELEPHONE: (305) 579-0500
FACSIMILE: (305) 579-0717
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
----------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================ ============== ================= ======================== ================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY AGGREGATE OFFERING PRICE REGISTRATION FEE
-------------------------------- -------------- ----------------- ------------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value(1). 46,145,038 $0.24(2) $11,144,508(3) $2,942.15
-------------------------------- -------------- ----------------- ------------------------ ----------------
Series B Convertible Preferred
Stock, $.01 par value......... 158,134 $100(4) $15,813,400 $4,174.74
================================ ============== ================= ======================== ================
<FN>
(1) Reflects shares of common stock issuable upon conversion of 158,134 shares
of Series B Convertible Preferred Stock, common stock issuable on
conversion of our 11% Convertible Senior Subordinated Discount Notes and
shares being sold by selling shareholders.
(2) Estimated solely for purposes of calculating the registration fee under
Rule 457(c) based on the last reported trade as published by the NASD OTC
Bulletin Board (the "OTC BB") on August 25, 2000, which was $0.24.
(3) Pursuant to Rule 457(i), does not include the shares of common stock which
would be acquired upon the conversion of shares of Series B Convertible
Preferred Stock being registered hereunder.
(4) Estimated solely for purposes of calculating the registration fee under
Rule 457 based on the liquidation value per share of Series B Convertible
Preferred Stock.
</FN>
</TABLE>
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST __, 2000
INTERNATIONAL FAST FOOD CORPORATION
46,145,038 SHARES OF COMMON STOCK
158,134 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK
--------------------
We have the exclusive right to develop franchised Burger King
restaurants and Domino's Pizza stores in the Republic of Poland. We currently
operate 22 Burger King restaurants and 16 Domino's Pizza stores.
The selling shareholders are offering up to 46,145,038 shares of our
common stock and 158,134 shares of our Series B Convertible Preferred Stock. The
shares of common stock are offered by existing shareholders or will be
acquired by selling shareholders upon the conversion of shares of our
Series B Convertible Preferred Stock or the conversion of our 11% Convertible
Senior Subordinated Discount Notes.
Our common stock is listed on the Nasdaq OTC Bulletin Board under the
symbol "IFFC." On August 25, 2000, the last reported sales price of our common
stock on the Nasdaq OTC Bulletin Board was $0.24 per share. Prior to this
offering, there has been no public market for the Series B Convertible Stock.
The selling shareholders may offer shares through public or private
transactions, at prevailing prices or at privately negotiated prices. The
selling shareholders may make sales directly to purchasers or through agents,
dealers or underwriters.
--------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT THE FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON OR PREFERRED STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------------
THE DATE OF THIS PROSPECTUS IS __________ __, 2000
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. THE SELLING SHAREHOLDERS ARE OFFERING TO
SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK AND PREFERRED STOCK ONLY
IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS,
REGARDLESS OF THE TIME OF DELIVERY OF THE PROSPECTUS OR OF ANY SALE OF THE
COMMON STOCK OR PREFERRED STOCK.
TABLE OF CONTENTS
PAGE
Prospectus Summary...........................................................3
Risk Factors.................................................................8
Note Regarding Forward-Looking Statements...................................17
Use of Proceeds.............................................................17
Dividend Policy.............................................................17
Price Range of Common Stock.................................................18
Management's Discussion and Analysis or Plan of Operation...................19
Business....................................................................31
Description of Property.....................................................42
Legal Proceedings...........................................................43
Management..................................................................44
Certain Relationships and Related Transactions..............................45
Principal Shareholders......................................................47
Selling Shareholders........................................................49
Description of Securities...................................................50
Shares Eligible for Future Sale.............................................56
Plan of Distribution........................................................57
Legal Matters...............................................................58
Experts.....................................................................58
Change in Accountants.......................................................58
Where You Can Find Additional Information...................................59
Index to Consolidated Financial Statements.................................F-1
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION
THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS OFFERING FULLY, YOU SHOULD READ THE
ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND THE FINANCIAL
STATEMENTS.
IFFC
OUR BUSINESS.....
We have the exclusive right to develop franchised Burger
King restaurants and Domino's Pizza stores in the Republic
of Poland. We currently operate 22 Burger King restaurants
and 16 Domino's Pizza stores.
BURGER KING We operate our Burger King division through our wholly owned
DIVISION......... Polish subsidiary, International Fast Food Polska Sp.zo.o.,
which we refer to as IFFP, and IFFP's wholly-owned Polish
limited liability corporations. IFFP receives operational
support from Burger King Corporation through its
London-based office in areas including site selection and
construction review, operating systems and controls,
marketing, sourcing of food and equipment, distribution and
training and other operational matters.
Our Burger King restaurants are traditional free standing
restaurants or attached drive-through restaurants with
dine-in seating capacity ranging from 60 to 120 people. The
typical restaurant is approximately 2,800 square feet and is
located near and in metropolitan areas or adjacent to a
service station site. Our Burger King restaurants offer
flame-broiled hamburgers and cheeseburgers, french fries and
soft drinks. Other menu items may include salads, pastries,
chicken sandwiches, fish sandwiches, ice cream sundaes and
shakes. We anticipate that our future Burger King
restaurants will also offer other food items. We typically
offer a Burger King meal for the zloty equivalent of
approximately $1.50 to $3.30, depending on the menu items
selected. We believe, to the extent a comparison is
possible, that the prices we charge for meals are comparable
to the prices charged by our American-style fast food
competitors in Poland.
BURGER KING AGREEMENT. Under our development agreement with
Burger King, we are required to open 73 restaurants before
December 31, 2007. Each restaurant operates under an
individual franchise agreement. For each restaurant opened,
we are obligated to pay Burger King an initial fee of up to
$40,000 for franchise agreements with a term of 20 years and
$25,000 for franchise agreements with a term of ten years.
Each restaurant must also pay 5% of the restaurant's gross
sales to Burger King as a royalty for the use of the Burger
King trademarks and system. As long as we are in compliance
with the development agreement , Burger King has agreed to
reduce the royalty fee to 3% through September 30, 2000 and
4% thereafter. It is unlikely that we will fulfill the
obligation to open 9 restaurants by December 31, 2000, but
we intend to seek a waiver, modification or extension of
such provision of the agreement, but Burger King may not
grant such waiver, modification or extension. Additionally,
under the agreement with Burger King, if we exceed our
obligations under the restaurant development schedule,
Burger King will further reduce the royalty fee. The
restaurants must also contribute a monthly advertising and
promotion fee of 6% of gross sales to be used for
advertising, sales promotion, and public relations.
DOMINO'S
DIVISION.........
We operate our Domino's Pizza division through Krolewska
Pizza Sp.zo.o., which we refer to as KP, and its wholly
owned subsidiary, Pizza King Polska, Sp.zo.o., which we
refer to as PKP. KP controls the exclusive development
rights and PKP controls the franchises for Domino's Pizza
stores in Poland under a master franchise agreement with
Domino's Pizza International, Inc., a wholly-owned
subsidiary of Domino's Pizza, Inc. KP has also entered into
a commissary agreement with Domino's under which KP has been
granted the exclusive right to open and operate one or more
commissaries for all Domino's Pizza stores in Poland for the
term of our agreement with Domino's.
3
<PAGE>
Through PKP, we operate 16 Domino's Pizza Stores. Our
Domino's Pizza stores, which operate under individual
franchise agreements, feature carry-out services and
delivery services to any customer who can be reached in
approximately 30 minutes. The stores also provide limited
customer seating. The typical Domino's store size is
approximately 1,000 square feet and located in a residential
area with a high base of telephone installations. One
Domino's store shares space with an existing Burger King
restaurant.
Our Domino's Pizza stores offer various types of pizza,
chicken wings, soft drinks and breadsticks, and we
anticipate that our future Domino's Pizza stores will also
offer other food items. Our stores typically offer pizza for
the zloty equivalent of approximately $4.50 to $9.00,
depending upon the size of the pizza and the number of
toppings selected. We believe, to the extent a comparison is
possible, that the prices we charge for meals is comparable
to the prices charged by our American-style fast food
competitors in Poland.
THE DOMINO'S AGREEMENT. Our relationship with Domino's is
governed principally by the Domino's Master Franchise
Agreement and the individual Domino's store franchise
agreements. Pursuant to our agreement with Domino's, we are
required to open 46 Domino's Pizza stores before December
31, 2003 including 19 before December 31, 2000. We have
opened 12 Domino's Pizza stores under the Domino's
agreement, but we do not expect to open any additional
stores before December 31, 2000. We intend to seek a waiver,
modification or extension of such provision of the
agreement. Domino's may not grant such waiver, modification
or extension; and may terminate rights granted under the
Domino's Agreement for a variety of defaults, including
among others, failure to open Domino's Pizza stores in
compliance with the development schedule.
Each Domino's store operates under an individual franchise
agreement. Pursuant to our agreement with Domino's, we may
enter into individual franchise agreements with
non-affiliated franchisees. However, each non-affiliated
franchisee is subject to the approval of Domino's. PKP is
currently the only Domino's franchisee in Poland.
Before the opening of each store, we are required to pay
Domino's a franchise fee of up to $5,000. The standard
franchise agreement for a Domino's store has a ten-year term
with a ten-year renewal option. All Domino's stores are
required to pay a monthly royalty fee of 3% of its store's
gross sales, net of taxes.
DOMINO'S COMMISSARY. Pursuant to our agreement with
Domino's, we have the exclusive right to develop and operate
the commissaries from which all Domino's franchisees in
Poland are required to purchase food and supplies. In 1999,
we opened a new commissary in approximately 7,300 square
feet of space, which has the capacity to serve up to 60
Domino's stores.
DOING BUSINESS
IN POLAND........
Since the fall of the Communist government in 1989, Poland
has embarked on a program of economic reforms, based on a
transition to a market economy and private ownership. Poland
is one of the fastest growing economies in Europe. Although
inflation has generally declined since prices were
liberalized in the beginning of 1990, the rate of inflation
in Poland is still high compared to Western Europe or the
United States.
The only legal currency in Poland is the zloty. The value of
the zloty is determined under a system based on a basket of
currencies, as well as all other economic and political
factors that effect the value of currencies generally. As of
June 30, 2000, the exchange rate was 4.40 zlotys per dollar
and as of August 15, 2000, the exchange rate was 4.36 zlotys
per dollar.
CORPORATE
INFORMATION......
Our principal executive office is located at 1000 Lincoln
Road, Suite 200, Miami Beach, Florida 33139, and our
telephone number is (305) 531-5800.
4
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities offered(1)............................. 158,134 shares of Series B Convertible Preferred Stock
46,145,038 shares of common stock
Common stock outstanding after the offering (2)... 89,008,247 shares
Trading symbol of common stock.................... "IFFC"
Plan of distribution.............................. All of the shares offered hereby may be sold from time to
time by the selling shareholders. We will not receive any of
the proceeds from the sale of the shares. We are paying all
of the expenses in connection with the preparation of this
prospectus and the related registration statement, estimated
at $75,000.
Risk factors...................................... This offering involves a high degree of risk. See "Risk
Factors."
<FN>
-------------------------
(1) Because the selling shareholders may sell all, some or none of their
shares, no actual estimate can be made of the aggregate number of shares
that are offered hereby.
(2) Based on the number of shares of common stock outstanding as of August 15,
2000 and assumes conversion of all outstanding shares of our Series A
Convertible Preferred Stock, our Series B Convertible Preferred Stock, the
conversion of our 9% Convertible Subordinated Debentures and the conversion
of our 11% Convertible Senior Subordinated Discount Notes which are being
registered hereunder.
</FN>
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table summarizes our statement of operations and balance
sheet. The summary financial information for the six months ended June 30, 2000
has been derived from our unaudited financial statements which are included
elsewhere in this prospectus and which include, in our opinion, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of our financial position and results of operations during that
period. The only currency that may be used in Poland is the zloty. As of
December 31, 1999 and June 30, 2000, the exchange rates were 4.15 zlotys and
4.40 zlotys per U.S. dollar, respectively. For purposes of the financial
information provided below, monetary assets and liabilities are translated from
the zloty to U.S. dollars at the period end exchange rate. Non-monetary assets,
liabilities, and related expenses, primarily furniture, equipment, leasehold
improvements and related depreciation and amortization, are translated using
historical exchange rates. Income and expense accounts, excluding depreciation
and amortization and all other references except as otherwise stated, are
translated at an annual weighted average exchange rate.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------- --------------------------------
1999 1998 2000 1999
-------------------------------- --------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net revenues ....................................... $ 15,098,313 $ 8,426,104 $ 5,853,689 $ 7,841,918
Food and packaging costs ........................... 5,560,064 3,347,477 1,958,244 3,028,520
Gross profit ....................................... 9,538,249 5,078,627 3,895,445 4,813,398
Operating expenses ................................. 15,575,926 6,080,065 4,977,368 6,274,263
General and administrative expenses ................ 4,833,854 3,326,997 1,515,482 2,258,714
Other income (expenses)(1) ......................... (2,857,775) (1,543,701) 4,731,964 (2,025,137)
Net (loss) income .................................. (13,729,306) (5,872,136) 2,134,559 (5,744,716)
Basic net (loss) income per share .................. (.31) (.14) .04 (.13)
Diluted net (loss) income per share ................ (.31) (.14) .03 (.13)
Weighted average number of common shares
outstanding:
Basic ........................................... 45,198,921 44,727,685 45,593,049 45,056,418
Diluted ......................................... 45,198,921 44,727,685 84,988,700 45,056,418
</TABLE>
The following table is a summary of our balance sheet as of June 30,
2000 on an actual basis.
JUNE 30, 2000
ACTUAL
-----------------
BALANCE SHEET DATA:
Working capital (deficiency)......................... $ (4,644,590)
Total assets......................................... 21,186,289
Total liabilities.................................... 19,413,017
Shareholders' equity................................. 1,773,272
-----------------
(1) Includes a charge for the cumulative effect of accounting change in the
amount of $620,000 for the year ended December 31, 1999 and the six months
ended June 30, 1999; a credit of $115,478 for minority interest in losses
of consolidated subsidiary for the year ended December 31, 1998; and a
non-recurring gain of $5,830,416 for the six months ended June 30, 2000.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks, together with the
other information contained in this prospectus, before making an investment
decision. We may also face some non-material risks which we have not discussed
in the following description of our risk factors. If any of the following risks
occur, our business, financial condition or results of operations could be
materially adversely affected and the trading price of our common stock could
decline.
OUR OPERATING FUTURE
IS UNCERTAIN
Management believes that cash flows from current existing
stores together with existing financial resources will not
be sufficient to fund operations and meet our commitments to
develop new Burger King restaurants and Domino's Pizza
stores. Management is seeking to obtain additional equity
and or debt financing to fund operations and future
development. No assurance can be given that such financing
will be obtained or that it can be obtained on favorable
terms. If we are unable to obtain additional equity or debt
financing we may be forced to curtail or cease operations
with respect to Burger King and Domino's operations.
We may sell our Polish subsidiaries to third parties, or
sell some or all of our Burger King restaurants or Domino's
Pizza stores to third parties, or to a joint venture between
us and a third party. We also may decide to close some or
all of our Burger King restaurants or Domino's Pizza stores.
WE HAVE LIMITED
REVENUES AND
HISTORICAL LOSSES.
Except for our fiscal quarter ended March 31, 1997, in which
we recognized a one-time gain attributable to the settlement
of our litigation with Burger King, and our fiscal quarter
ended June 30, 2000, in which we recognized a gain on a
settlement, our revenues from operations have not been
sufficient to offset our operating expenses and corporate
overhead. As a result, we have incurred losses. We incurred
net losses of $13,729,306, or $0.31 per share of common
stock for the year ended December 31, 1999 and, excluding
the gain on the settlement of $5,830,416, a net loss of
$3,698,857, or $.08 per share of common stock for the six
months ended June 30, 2000. We anticipate that we will
continue to incur losses until we establish a number of
restaurants and stores which generate sufficient revenues to
offset our operating costs and the costs of our proposed
expansion. We cannot assure you that we will be able to
successfully establish a sufficient number of restaurants
and stores to generate meaningful revenues or achieve
profitable operations. We have taken steps to reduce our
food costs and general and administrative expenses; however,
we cannot assure you that we will be able to do so
effectively or that the reductions will be sufficient to
achieve profitable operations.
WE ARE REQUIRED TO
COMPLY WITH THE
BURGER KING AGREEMENT.
Our material commitments for capital expenditures relate to
the restaurants and stores that we must open and operate to
comply with the provisions of the Burger King agreement .
Pursuant to our agreement with Burger King, we are required
to develop and be franchised to operate nine new Burger King
restaurants by December 31, 2000, and a total of 73 Burger
King restaurants in Poland by December 31, 2007.
We cannot assure you that we will not be in default under
the agreement with Burger King or that a default will not
adversely affect us. We cannot assure you that we will be
able to open and operate Burger King restaurants in
compliance with the specified schedule. If we are unable to
open restaurants in compliance with the provisions of the
agreement, we are likely to seek a modification or extension
of the agreement. We cannot assure you, however, that Burger
King will agree to any modification or extension.
7
<PAGE>
WE MAY LOSE OUR
EXCLUSIVE RIGHTS TO
DEVELOP BURGER KING
RESTAURANTS IN
POLAND.
Pursuant to our agreement with Burger King, if we do not
develop an additional nine Burger King restaurants by
December 31, 2000, our development rights will become
non-exclusive. To develop the restaurants, we will require
additional financing. We estimate the cost of opening a
Burger King restaurant to be approximately $450,000 to $1.0
million. If the restaurants are not opened, Burger King may
license other parties to open Burger King restaurants in
Poland from with we would not be entitled to any fees. The
loss of our exclusive development rights could have a
material adverse effect upon our financial condition.
WE ARE REQUIRED TO
COMPLY WITH THE
DOMINO'S AGREEMENT.
Pursuant to the agreement with Domino's, we are required to
develop and be franchised to operate 46 Domino's Pizza
stores in Poland by December 31, 2003. As of June 30, 2000,
we had opened 12 Domino's Pizza stores under the agreement.
Domino's may terminate our rights under the Domino's
agreement, including franchise approvals for stores not yet
opened, for a variety of possible defaults, including, among
others, failure to open Domino's Pizza stores in compliance
with the schedule shown in the agreement; failure to obtain
Domino's site approval before the commencement of each
Domino's store's construction; failure to obtain Domino's
approval of any non-affiliated franchisee; failure to pay
royalty payments in United States currency and failure to
meet various operational, financial, and legal requirements
shown in the Domino's agreement and the standard franchise
agreements.
Upon termination of the Domino's agreement, whether
resulting from default or expiration of its terms, Domino's
has the right to license others to develop and operate
Domino's Pizza stores in Poland, or to do so itself. If we
fail to meet the development schedule during the initial
term of agreement or any successor development term, we will
lose our right to develop and franchise additional Domino's
Pizza stores, but would be entitled to continue to act as a
master franchiser and a franchisee with respect to all
franchise agreements theretofore granted and executed. Under
other specified circumstances of default, Domino's has the
right to terminate the agreement and force the sale of, at
the then current market value, all of our rights and
interests as a master franchiser of Domino's Pizza stores
and all of the assets of each Domino's store controlled by
us.
We cannot assure you that we will not be in default under
the agreement with Domino's or that a default will not
adversely affect us. We cannot assure you that we will be
able to open and operate Domino's Pizza stores in compliance
with the specified schedules. If we are unable to open
stores in compliance with the provisions of the agreement,
we are likely to seek a modification or extension of the
agreement. We cannot assure you, however, that Domino's will
agree to any modification or extension.
WE MAY NOT BE ABLE
TO CONTINUE AS A
GOING CONCERN.
Our independent auditors have issued their report which
includes an explanatory paragraph expressing substantial
doubt about our ability to continue as a going concern. We
have sustained losses from operations since our
incorporation in December 1991. For the year ended December
31, 1999, we reported net losses of $13,729,306. At December
31, 1999, we had an accumulated deficit of $35,374,274 and a
shareholders' deficit of $411,287. These factors raise
substantial doubt about our ability to continue as a going
concern.
8
<PAGE>
WE HAVE LIMITED
EXPERIENCE IN
OPERATING A
LARGE BUSINESS.
We have limited experience in developing and operating a
business of the magnitude required by the Burger King and
Domino's agreements, and we may encounter numerous risks,
expenses, problems, and difficulties in expanding our
operations. We cannot assure you that the proposed expansion
contemplated under the agreements will not have an adverse
effect on our financial condition or operations. In
addition, our plan of operation and prospects are dependent
upon, among other things, on the following:
-- achieving higher market acceptance in Poland for the
Burger King restaurant and the Domino's Pizza store
concepts,
-- the availability of suitable restaurant sites, timely
development and construction of restaurants,
-- the hiring and retention of skilled management and
personnel,
-- our ability to successfully manage growth (including
monitoring restaurants, controlling costs, and
maintaining effective quality controls), and
-- the availability of adequate financing.
The lack of success or closing of any of our restaurants or
stores (and in the case of the closing of a restaurant or
store, any continuing lease obligations or the resulting
loss of our construction and development costs) may have a
very adverse effect upon our financial condition. We cannot
assure you that we will be able to successfully implement
our proposed expansion and plan of operation or that
unanticipated expenses, problems or difficulties will not
result in material delays in its implementation.
WE WILL NEED
ADDITIONAL FINANCING.
We estimate the cost of opening a Burger King restaurant to
be approximately $450,000 to $1.0 million and a Domino's
store to be approximately $125,000 to $200,000, which
includes costs due to leasehold improvements, furniture,
fixtures, equipment and opening inventories. Our
implementation of the expansion plans as required by the
Burger King and Domino's agreements will require resources
substantially greater than those currently available to us.
The development of additional restaurants and stores is
contingent upon our ability to generate cash from operations
or to secure additional debt or equity financing. We intend
to pursue the proposed development by using various credit
facilities and cash flow from operations. We may also
acquire additional funds through public or private offerings
of debt and equity securities. If we do not secure adequate
financing through additional debt or equity financing, or
generate significant amounts of cash from operations, we may
be required to curtail or cease our activities. We cannot
assure you that any additional financing will be available
to us on acceptable terms, or at all.
9
<PAGE>
WE MAY EXPERIENCE
ADVERSE CONSEQUENCES
OF FINANCIAL LEVERAGE
AND RESTRICTIONS ON
INDEBTEDNESS.
As of June 30, 2000, we had approximately $19.4 million of
total liabilities outstanding. Our ability to incur
additional indebtedness is restricted by an indenture dated
November 5, 1997, between us and HSBC Bank USA, as Trustee,
regarding our 11% Convertible Senior Subordinated Discount
Notes due 2007. The indenture also contains restrictions
which limit our operating and financial flexibility,
including our ability to incur liens, dispose of assets,
engage in mergers, make restricted payments or engage in
transactions with affiliates. Our ability to make scheduled
payments under our present and future indebtedness will
depend on, among other things, our future operating
performance and our ability to refinance our indebtedness
when necessary. Each of these factors is to a large extent
subject to economic, competitive, regulatory and other
factors beyond our control, in particular, those prevailing
in Poland. In addition, any future borrowings are also
likely to be subject to covenants which limit our operating
and financial flexibility.
THERE ARE LIMITATIONS
ON OUR ACCESS
TO CASH FLOW FROM
OUR OPERATING
COMPANIES.
We operate as a holding company with no business operations
of our own. All of our operations are conducted through our
subsidiaries, which are separate and distinct legal entities
and have no obligation, contingent or otherwise, to make
investments in, or meet our working capital needs or other
liabilities. In addition, the operating companies have
generated negative cash flow, and we expect that they will
continue to generate negative cash flow from operations in
the foreseeable future. As a result, we do not expect that
we will be able to generate any significant cash flow from
our operating companies at any time in the foreseeable
future.
OUR COMMON STOCK HAS
A LIMITED TRADING
MARKET AND EXPERIENCES
VOLATILITY OF AND
DECLINES IN PRICE.
Our common stock is traded on the NASD OTC Bulletin Board.
As a result, you may find it difficult to dispose of, or to
obtain accurate quotations as to the market value of, the
common stock. Consequently, a limited trading market may
have an adverse effect on the marketability of the common
stock, and, in turn, negatively affect the value of the
common stock. In addition, the trading price of the common
stock could be subject to wide fluctuations in response to
variations in our operating results, announcements by us or
others, developments affecting us, and other events or
factors. The stock market has experienced extreme price and
volume fluctuations in recent years. These fluctuations have
had a substantial effect on the market prices for many
companies, often unrelated to their operating performance,
and may adversely affect the market prices of the common
stock. The common stock traded between $1.53 and $0.28 per
share during the 52-week period ended June 30, 2000. The
closing price for the common stock, as last reported on the
OTC BB on August 25, 2000 was $0.24 per share.
If shares of common stock are traded, they may trade at a
discount from the price you paid for them, depending upon
prevailing interest rates, the market for similar securities
and other factors. We cannot assure you that you will be
able to sell the common stock in the future or that the sale
will be at a price equal to or higher than the price you
paid for it. We cannot assure you that the trading market
for the common stock will be liquid. The liquidity of any
market for the common stock will depend upon the number of
holders of common stock, the interest of securities dealers
in making a market in the common stock, if any, and other
factors.
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<PAGE>
OUR COMMON STOCK IS
SUBJECT TO PENNY
STOCK REGULATIONS.
Sales of our common stock must conform to the rules
promulgated by the Securities and Exchange Commission
relating to sales of penny stocks. The SEC has adopted
regulations which define a "penny stock" to be any equity
security that has a market price of less than $5.00 per
share, subject to specified exceptions. For any transaction
involving a penny stock, unless exempt, the rules require
the delivery to you, before the transaction, of a disclosure
schedule prepared by the SEC relating to the penny stock
market. Your broker-dealer also must disclose the
compensation payable to both the broker-dealer and the
registered representative, current quotations for the
securities, and information on the limited market in penny
stocks. In addition, your broker-dealer must obtain a
written acknowledgment from you that the disclosure
information was provided and must retain the acknowledgment
for at least three years. Further, your broker must send
monthly statements to you disclosing current price
information for the penny stock held in your account. The
foregoing rules may materially adversely affect the
liquidity for the market of our securities. The rules may
also affect the ability of broker-dealers to sell our
securities and may impede your ability to sell our
securities in the secondary market.
THERE IS NO TRADING
MARKET FOR THE
SERIES B CONVERTIBLE
PREFERRED STOCK.
There is currently no public trading market for shares of
our Series B Convertible Preferred Stock and we do not
intend to list the Series B Convertible Preferred Stock for
trading on an exchange or in the Nasdaq system. As a result,
you will find it difficult to dispose of, or to obtain
accurate quotations as to the market value of, the preferred
stock. This limited trading market may have an adverse
effect on the marketability of the preferred stock, and, in
turn, negatively affect its value.
MITCHELL RUBINSON
HAS VOTING CONTROL
OF OUR COMPANY.
Mitchell Rubinson, our Chairman of the Board and Chief
Executive Officer, and his wife beneficially own
approximately 60.5% of the outstanding common stock
(assuming that outstanding convertible securities,
and options held by others are not converted or exercised)
and, thus, effectively may have the ability to elect the
majority of our Board of Directors and control our affairs.
Upon the conversion of the shares of Series B Convertible
Preferred Stock and exercise of the options to acquire
shares of common stock being registered hereunder, Mr.
Rubinson will own approximately 31.2% of the outstanding
common stock.
WE MUST COMPLY WITH
RESTRICTION ON
PAYMENT OF DIVIDENDS
UNDER FLORIDA LAW.
Florida law provides that no distribution may be made to our
shareholders if, after giving effect to the distribution,
-- we would be unable to pay our debts as they become due
in the usual course of business, or
-- our total assets would be less than the sum of our
total liabilities plus the amount that would be needed
in a dissolution to satisfy the preferential rights of
shareholders whose preferential rights are senior to
those receiving the distribution.
Our Board of Directors is empowered to base its evaluation
of whether a distribution is permitted under the statute
either on
-- financial statements that are prepared on a basis of
accounting principles and practices that are reasonable
under the circumstances or
-- fair valuation or other method that is reasonable in
the circumstances.
11
<PAGE>
Accordingly, the payment of dividends on the common stock
will be subject to the statutory insolvency test. We have
only once paid cash dividends on the common stock and
anticipate that, for the foreseeable future, we will not pay
any cash dividends. In addition, we have in the past failed
to pay the dividends on our outstanding Series A Convertible
Preferred Stock. The payment of the dividends, in arrears,
owing to the holders of the preferred stock is a condition
to the payment of dividends on the common stock. We cannot
assure you that we will be able to pay any future dividends
on either the preferred stock or the common stock.
THERE MAY BE FUTURE
SALES OF OUR STOCK
BY SHAREHOLDERS.
The possibility that substantial amounts of our common stock
may be issued or freely resold in the public market may
adversely affect prevailing market prices for our common
stock, even if our business is doing well. Based on the
number of our outstanding shares of common stock at August
15, 2000, we will have 45,863,209 shares of common stock
outstanding upon the completion of this offering, not
including the common stock issuable upon conversion or
exercise of outstanding convertible securities or options.
We have an additional 44,859,188 shares reserved for
issuance upon the conversion or exercise of our outstanding
convertible securities or options. The market price of our
common stock could drop significantly if the holders of
these securities sell the underlying shares of common stock
or if the market perceives that they are intending to sell
them. For a more detailed description, see "Shares Eligible
for Future Sale."
WE HAVE A SUBSTANTIAL
NUMBER OF SHARES OF
COMMON STOCK ELIGIBLE
FOR FUTURE SALES.
The exercise and conversion of these options and convertible
securities, and the issuances of common stock, will have a
dilutive effect on our stockholders by decreasing their
percentage ownership in the company. Moreover, the holders
of these securities would be most likely to exercise or
convert the securities at a time when we could obtain
capital by a new offering of securities on terms more
favorable than those provided by these securities.
Consequently, the terms on which we could obtain additional
capital may be adversely affected.
WE DEPEND ON THIRD
PARTY SUPPLIERS.
We are substantially dependent upon third parties for our
equipment, food products and other supplies. Although we are
not required to purchase supplies from any particular
suppliers under the Burger King and Domino's agreements, all
supplies must be of a quality and conform to specifications
acceptable to them. We believe that there are adequate
sources of supply in Poland, Western Europe and the United
States. We currently obtain substantially all of our
supplies and food products from Polish sources. We currently
obtain our equipment and paper products primarily from
approved sources in the United States and Europe. Although
we believe, based upon our current arrangements with
suppliers, that we will be able to continue to obtain
equipment and inventories of food products and other
supplies in sufficient quantities and of satisfactory
quality, the unavailability of equipment or supplies from
third-party manufacturers and suppliers would have a very
adverse effect on our operations. Moreover, we are subject
to the risks inherent in dependence on foreign sources of
supply, shipping delays, fluctuations in foreign currency
exchange rates, Value Added Tax and excise tax, custom
duties and other trade restrictions, any of which could
adversely affect our ability to obtain equipment and
supplies on a satisfactory basis. Failure to obtain
restaurant equipment, food products and other supplies on a
timely basis may have a very adverse effect on our
operations.
THE RESTAURANT
BUSINESS EXPERIENCES
SUBSTANTIAL COMPETITION.
We face competition from a number of other major American
fast food companies, including but not limited to
McDonald's, Pizza Hut and Kentucky Fried Chicken, that have
substantial restaurant operations or others that are
evaluating the possible development of restaurants in
Poland.
12
<PAGE>
We also encounter competition from a broad range of existing
Polish restaurants and food service establishments,
including local quick-service restaurants and restaurants
offering American-style fast food, including hamburgers.
These restaurants offer products that are familiar to Polish
consumers and have achieved broad market acceptance.
Additionally, many of our competitors and potential
competitors, particularly the major United States fast-food
companies, possess significantly greater financial,
marketing, personnel and other resources than we do. We
cannot assure you that we will be able to compete
successfully.
Under our agreement with Burger King, Burger King reserved
the right to open restaurants on United States military
establishments and in some hotel chains with which Burger
King has, or may in the future have, a multi-territory
agreement encompassing Poland. However, we have the right of
first refusal with respect to potential Burger King sites in
airports, train stations, hospitals and other hotels.
WE RELY ON THE
BURGER KING AND
DOMINO'S TRADEMARKS.
We are authorized to use the Burger King and Domino's
trademarks and service marks. Burger King has received
trademark approval in Poland for specified Burger King
marks, including the "Burger King" logo, the words "Burger
King" and the word "Whopper." Domino's has received
trademark approval in Poland for specified marks, including
the "Domino's" logo and the words "Domino's Pizza". If other
important trademarks are not approved or if another entity
appropriates one or more of the marks, we could be adversely
affected. Neither Burger King nor Domino's has made any
warranty or representation that the Burger King marks or the
Domino's marks will be available to us on an exclusive basis
or at all. Any events or conditions that affect the marks
may have an adverse effect on our business.
WE DEPEND ON OUR
MANAGEMENT.
Our business is largely dependent on the efforts of Mitchell
Rubinson, our Chairman of the Board and Chief Executive
Officer, President and Chief Financial Officer. The loss of
the services of Mr. Rubinson may have a material adverse
effect on our business and prospects. Additionally, to
satisfy the terms of the Burger King and Domino's agreements
and to implement our plan of operation, we are dependent
upon Joanna Makowska, the President of PKP and the General
Manager of IFFP, and on our ability to hire and retain other
qualified financial, marketing, and restaurant and store
management personnel and our ability to hire and train
restaurant and store managers and hourly employees from the
local labor pool who will be able to operate our restaurants
and stores in conformity with the required standards of
service and efficiency. We cannot assure you that we will be
able to continue to meet the needs of our business with
respect to hiring and employing qualified employees in the
future.
WE EXPERIENCE
SEVERAL RISKS RELATED
TO OPERATIONS IN POLAND.
We are subject to numerous factors relating to conducting
business in a foreign country, any of which, particularly in
light of the fundamental political and economic changes
occurring in Poland, could have a significant impact on our
operations and exacerbate the risks inherent in the
expansion of our business. We cannot assure you that
developments in Poland will not have an adverse effect on
our company.
13
<PAGE>
POTENTIAL POLITICAL AND ECONOMIC INSTABILITY IN POLAND.
Poland, which until 1989 had a communist form of government,
has been undergoing fundamental political and economic
change. Capitalism and free enterprise have only recently
been introduced in Poland and, consequently, Poland lacks a
well-established framework for dealing with private
enterprise. Laws and regulations are sometimes adopted
without widespread notification, which can delay full
knowledge of their scope and impact, and the enforcement and
administration of these laws and regulations are often
inconsistent and without precedents. Any political or
economic instability, including popular unrest, or any
governmental policies that make Poland less hospitable to
privately owned or foreign companies, including
expropriation, confiscatory taxation, foreign exchange
restrictions or nationalization, could have a negative
effect on our company.
Poland is generally considered by international investors to
be an emerging market. In general, investing in the
securities of issuers with substantial operations in markets
like Poland involves a higher degree of risk than investing
in the securities of issuers with substantial operations in
the United States, the countries of the European Economic
Union or other similar jurisdictions. There can be no
assurance that political, economic, social or other
developments in other emerging markets will not have an
adverse effect on the market value and liquidity of our
common stock.
POLISH TAXATION. Our Polish subsidiaries are subject to
Polish corporate income tax, which is currently 32%.
Dividends paid to us by our Polish subsidiaries are subject
to Polish withholding tax, which is currently limited to 5%
under a bilateral tax treaty between Poland and the United
States. Although we expect to receive a credit against our
United States federal income tax liability for any Polish
corporate tax or dividend withholding tax, there can be no
assurance that the credit will be respected by United States
taxing authorities. Additionally, all employers must pay
payroll taxes for social security and unemployment funds,
presently aggregating 48% of the wages paid to employees,
before withholding for personal income tax. All goods and
services, including imported goods and services, are subject
to a VAT and excise tax, based on the value of the items.
With respect to imports, the imputed value of the items is
equal to the customs' value plus any customs duties. The VAT
basic rate is 22%, but in the case of some products, it is
reduced to 7% or entirely. Under the VAT system, credit is
given for VAT paid against VAT collected. Any increase in
levels of Polish taxation could have a very adverse effect
on IFFC.
CUSTOMS DUTIES AND TRADE RESTRICTIONS. Our equipment import
operations are subject to customs duties on goods imported
into Poland currently ranging from 15% to 20% for furniture,
fixtures and equipment. Customs duties, however, are not
levied on non-monetary, in-kind contributions to capital,
provided that the contributions constitute "fixed assets"
and are not disposed of during the three-year period
following customs clearance. Although we have and intend to
contribute as capital substantially all of our Polish
subsidiaries' furniture, fixtures and equipment, there can
be no assurance that the equipment will ultimately qualify
as "fixed assets" for purposes of this exclusion. At times,
temporary restrictions, including import license
requirements and import quotas, have been placed on the
importation into Poland of some categories of food products.
We believe that we will be able to continue to secure local
supplies of food, satisfy license requirements, and/or
obtain products with respect to which quotas exist so that
it will be able to operate its business; however, the
unavailability of some food products or the imposition of
more severe import restrictions could adversely affect us.
Any imposition or significant increases in the level of
customs duties, import quotas or other trade restrictions
could have a material adverse effect on us.
14
<PAGE>
GOVERNMENT REGULATION. Our restaurant operations are subject
to Polish laws and regulations primarily relating to foreign
investment and numerous national and local laws and
regulations. In particular, we are subject to laws and
regulations primarily relating to sanitary requirements for
imported meat and other food products. Restaurant operations
are also subject to health, sanitation, employment and
safety standards imposed by local authorities and local
zoning, building code and land-use regulations. There can be
no assurance that we will be able to comply with any the
laws or regulations or that amendments to existing laws and
regulations or new laws and regulations will not be enacted
in the future that could require us to alter methods of
operations at costs that could be substantial. Failure to
comply with the laws or regulations could have a material
adverse effect on us.
FOREIGN CURRENCY AND FOREIGN EXCHANGE REGULATION. The Polish
economy has been characterized by high rates of inflation
and a gradual devaluation of the Polish currency against the
dollar and European currencies. The Polish government has
adopted policies that slowed the annual rate of inflation
from approximately 250% in 1990 to approximately 13.2% in
1997. The only legal currency in Poland is the zloty and the
year-end exchange rate for the zloty for 1997 was 3.514
zlotys per dollar, for 1998 was 3.494 zlotys per dollar and
for 1999 was 4.15 zlotys per dollar. As of June 30, 2000 and
August 15, 2000, the exchange rates were 4.40 and 4.36
zlotys per dollar, respectively. There can be no assurance
that further devaluation of the zloty will not have a
material adverse effect on our operations in Poland. We will
require substantial amounts of United States dollars and/or
other European currencies. We are required to pay Burger
King royalty fees in United States dollars.
Additionally, we are dependent on sources of supply outside
of Poland, which will require payment in European or United
States currencies. Because our subsidiaries' revenues from
operations are or will be in zlotys, our subsidiaries' are
subject to the risk that the value of the zloty will decline
against these currencies. In addition, our results of
operation as reported in United States dollars may be
significantly affected by fluctuation in the value of the
zloty in relation to the United States dollar. We maintain
substantially all of our funds in United States dollar
denominated accounts and securities, in part, to protect
those funds from declines in the value of the Polish zloty,
and to ensure the accessibility to United States or European
currencies.
We do not currently engage or intend to engage in hedging.
However, if circumstances change, we may seek to limit our
exposure to the risk of currency fluctuations by engaging in
hedging or other transactions, which transactions could
expose us to substantial risk of loss. We have yet to
formulate a strategy to protect us against currency
fluctuations. There can be no assurance that we will
successfully manage our exposure to currency fluctuations or
that these fluctuations will not have a material adverse
effect on us.
RISKS ASSOCIATED WITH INVESTMENTS IN POLAND AND EMERGING
MARKETS. Political, economic, social and other developments
in Poland may in the future have a significant negative
effect on our business. In particular, changes in laws or
regulations, or in the interpretation of existing laws or
regulations, whether caused by change in the government of
Poland or otherwise, could materially adversely affect our
operations and business. Currently, there are no foreign
exchange controls on the repatriation of capital and
dividends from Poland that would be applicable to the
payment of dividends on the common stock, but there can be
no assurance that foreign exchange control restrictions,
taxes or limitations will not be imposed or increased in the
future with regard to these payments. Due to the many
formalities required for compliance with laws in Poland and
the rapid changes that Polish laws have undergone in the
1990s, we may from time to time have violated, may be
violating and may in the future violate, some legal
requirements, including provisions of labor, foreign
exchange, customs, tax and corporate laws. We believe that
these violations have not had an adverse effect upon our
business, results of operation or financial condition, but
there can be no assurance that this will continue to be the
case.
15
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. These statements are indicated by words or phrases such as
"believe," "anticipate," "expect," "intend," "plan," "will," "may" and other
similar expressions. These forward-looking statements are based on our current
expectations, assumptions, estimates and projections about our company and our
industry and involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of factors more fully described in "Risk Factors" and elsewhere in this
prospectus. All subsequent written and oral forward-looking statements
attributable to our company or persons action on our behalf are expressly
qualified in their entirely by the cautionary statements in this paragraph. The
forward-looking statements made in this prospectus relate only to events as of
the date on which the statements are made. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
USE OF PROCEEDS
We will not receive any of the proceeds for the sale of any of the
securities being offered by the selling shareholders under this prospectus.
We expect to incur expenses of approximately $75,000 in connection with
this offering.
DIVIDEND POLICY
We have not paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future.
We pay dividends on our Series A Convertible Preferred Stock at an
annual rate of 6% ($6.00 per share). The dividends are payable semi-annually on
December 15 and June 15 of each year, whether or not declared by the Board. The
dividends may, at our option, be paid through the issuance of shares of our
common stock, cash or any combination of cash and common stock.
We will pay dividends on our Series B Convertible Preferred Stock at an
annual rate of 3% of its liquidation value, or $3.00 per share. These dividends
will accrue beginning on December 31, 2001 and will be paid annually beginning
on December 31, 2002. The dividends may, at our option, be paid in cash or
through the issuance of additional shares of Series B Convertible Preferred
Stock or a combination of cash and shares of Series B Convertible Preferred
Stock.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq OTC Bulletin Board under the
symbol "IFFC". The table below lists, for the periods indicated, the high and
low sales prices for the common stock as reported by the Nasdaq OTC BB.
SALES PRICE
------------------
HIGH LOW
------------------
FISCAL YEAR ENDED DECEMBER 31, 1998:
First Quarter.................................. $ .55 $ .31
Second Quarter................................. .85 .43
Third Quarter.................................. .90 .70
Fourth Quarter................................. 1.03 .72
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter.................................. $ .90 $ .53
Second Quarter................................. .51 .35
Third Quarter.................................. 1.53 .44
Fourth Quarter................................. .90 .53
FISCAL YEAR ENDED DECEMBER 31, 2000:
First Quarter.................................. $1.20 $0.65
Second Quarter................................. .75 .27
Third Quarter (through August 25, 2000)........ .47 .20
--------------------------------------------------------------------------------
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. On August 25,
2000, the last sale price of the common stock as reported on the Nasdaq OTC BB
was $0.24. At July 31, 2000, there were approximately 98 holders of record
of our common stock, although we believe that the number of beneficial holders
is substantially greater.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Information contained in this prospectus contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such statements 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 our
control. The following factors and other factors described elsewhere in this
prospectus 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 our
agreements with Burger King and Domino's;
-- our ability to improve levels of profitability; the sufficiency of
cash flow provided by our operations, investing and financing
activities;
-- 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;
-- our future liquidity and capital resource needs; and
-- changes in our financial condition, and the economic, business and
political conditions in Poland.
Other factors, such as the general state of the economy, could also
cause actual experience to vary materially from the matters covered in such
forward-looking statements.
GENERAL
We currently operate 22 Burger King restaurants and 16 Domino's Pizza
stores in Poland. We have incurred losses and anticipate that we will continue
to incur losses until, at the earliest, we establish a number of restaurants and
stores generating sufficient revenues to offset our operating costs and the
costs of our proposed continuing expansion. We may never achieve profitability
or be able to successfully establish a sufficient number of restaurants to
achieve profitability.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 VS SIX MONTHS ENDED JUNE 30, 1999
For the six months ended June 30, 2000 and June 30, 1999, we generated
sales of $5,853,689 and $7,841,918, respectively, which includes sales of
$4,022,338 and $5,654,843 for the Burger King restaurants and $1,831,351 and
$2,187,075 for the Domino's Pizza stores, respectively. In U.S. dollar and
18
<PAGE>
Polish zloty terms our Burger King restaurant sales decreased by approximately
28.9% and 21.8%, respectively, for the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999. In U.S. dollar and Polish zloty
terms our Burger King same restaurant sales decreased by approximately 25.2% and
17.7%, respectively, for the six months ended June 30, 2000 as compared to the
six months ended June 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
six months ended June 30, 2000. In U.S. dollar terms, our Domino's store sales
decreased by approximately 16.3% for the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999. In Polish zloty terms, our
Domino's store sales decreased by approximately 7.9% for the six months ended
June 30, 2000 as compared to the six months ended June 30, 1999. In U.S. dollar
and Polish zloty terms our Domino's same store sales decreased by approximately
23.6% and 15.9%, respectively, for the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999. The decrease in same store sales
was attributed to increased competition in the Warsaw market, as well as the
effect of less advertising during the six months ended June 30, 2000, as
compared to the six months ended June 30, 1999.
Food and packaging costs applicable to Burger King restaurants for the
six months ended June 30, 2000 and 1999 were 34% and 40.4% of restaurant sales,
respectively. The 6.4% 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 six months ended June 30, 2000 and 1999 were 32.3% and 34% of
store sales, respectively. The 1.7% decrease as a percentage of store sales was
primarily attributable to a reduction in the cost of key food items from our
major vendors.
Payroll and related costs applicable to Burger King restaurants for the
six months ended June 30, 2000 and 1999 were 23.8% and 18.6% of restaurant
sales, respectively. The 5.2% 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 were 21.8% of store
sales for both the six months ended June 30, 2000 and 1999.
Occupancy and other operating expenses applicable to Burger King
restaurants for the six months ended June 30, 2000 and 1999 were 36.6% and 26.3%
of restaurant sales, respectively. The 10.3% increase as a percentage of
restaurant sales was primarily attributable to fixed costs incurred at low
volume drive thru restaurants. Occupancy and other operating expenses applicable
to Domino's stores for the six months ended June 30, 2000 and 1999 were 39.2%
and 31.2% of store sales, respectively. The 8.0% 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.
Depreciation and amortization expense applicable to Burger King
restaurants was $1,140,871 as compared to $1,029,942 for the six months ended
June 30, 2000 and 1999, respectively. Depreciation and amortization expense
applicable to Domino's stores was $301,524 as compared to $255,025 for the six
months ended June 30, 2000 and 1999, respectively.
General and administrative expenses for the six months ended June 30,
2000 and 1999 were 25.9% and 28.8% of sales, respectively. The 2.9% 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
six months ended June 30, 2000, general and administrative expenses consisted of
executive and office staff salaries and benefits of $517,725; legal and
professional fees, office rent, travel, telephone and other corporate expenses
of $893,248, and depreciation and amortization of $104,509. For the six months
ended June 30, 1999, general and administrative expense included salary expenses
of $711,951; corporate overhead expenses of $1,459,455, and depreciation and
amortization of $87,308. The $743,232 decrease 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 our loan from Citibank.
19
<PAGE>
For the six months ended June 30, 2000 and 1999 Interest and Other
Income consisted of the following:
Six Months Ended June 30,
------------------------------
2000 1999
------------------------------
Interest income............................... $ 41,653 $ 66,423
All other, net................................ 175,949 185,006
------------------------------
Total......................................... $ 217,602 $ 251,429
==============================
Interest Expense consisted of the following:
Six Months Ended June 30,
------------------------------
2000 1999
------------------------------
Interest Expense on 9% Subordinated
Convertible Debentures.......... $ 124,020 $ 124,020
Amortization of Debt Issuance Costs............. 366,861 65,056
Accretion of discount on 11% Convertible
Senior Subordinated Discount Notes...... 474,040 1,251,242
Interest Expense on Bank Facilities............. 469,395 226,434
Capitalized interest............................ -- (155,100)
------------------------------
Total........................................... $ 1,434,316 $ 1,511,652
==============================
Interest expense exceeded interest and other income by $1,216,714 and
$1,260,223 for the six months ended June 30, 2000 and 1999, respectively. The
primary reasons for the decrease for the six month period ended June 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.
Interest expense on bank facilities was $469,395 and $226,434 for the
six months ended June 30, 2000 and 1999, respectively. The $242,961 increase was
attributable to an increase in borrowings under bank credit facilities.
Included in the 2000 period results is a $5,830,416 gain recognized on
the settlement of certain disputes with Burger King Corporation. See "Liquidity
and Capital Resources."
As a result of the foregoing, for the six months ended June 30, 2000,
we reported net income of $2,134,559 (which includes a non recurring gain of
$5,830,416) or $.04 per share compared to a net loss of $5,744,716, or $(.13)
per share for the six months ended June 30, 1999.
YEAR-ENDED DECEMBER 31, 1999 VS. YEAR-ENDED DECEMBER 31, 1998
RESULTS OF OPERATIONS. For the year ended December 31, 1999, we
generated sales of $15,098,313 and for the year ended December 31, 1998, we
generated sales of $8,426,104. Such amounts included sales of $10,886,141 in
1999 and $6,321,644 in 1998 for the Burger King restaurants and sales of
$4,212,172 in 1999 and $2,104,460 in 1998 for the Domino's Pizza stores. Burger
King restaurant sales increased by 72.2% in U.S. dollar terms and 95.4% in
Polish zloty terms for the year ended December 31, 1999 as compared to the year
ended December 31, 1998. The increase is primarily attributable to new
restaurants opened in 1999. The Domino's store sales increased by 100.2% in U.S.
dollar terms and 127.2% in Polish zloty terms for the year ended December 31,
1999 as compared to 1998. This increase is primarily attributable to new stores
opened coupled with same store sales growth of 20.3% in Polish zloty terms.
20
<PAGE>
For the year ended December 31, 1999, our Burger King same restaurant
sales (further defined as restaurants opened for entire years of 1998 and 1999)
increased by approximately 2.8% in Polish zloty terms as compared to the year
ended December 31, 1998. Due to the devaluation of the zloty of approximately
12.2%, the Burger King same restaurant sales, in U.S. dollar terms, decreased
approximately 9.4% for the year ended December 31, 1999 as compared to the year
ended December 31, 1998. The zloty increase in same restaurant sales was
primarily attributable to television advertising commencing in March and ending
in June 1999. In U.S. dollar and Polish zloty terms, our Domino's same store
sales increased by approximately 20.3% and 6.0%, respectively, for the year
ended December 31, 1999 as compared to the year ended December 31, 1998. The
increase in same store sales was attributed to increased brand awareness in
Warsaw, Poland.
During the year ended December 31, 1999, we incurred food and packaging
costs of $5,560,064, payroll and related costs of $3,181,693, occupancy and
other operating expenses of $6,161,870 and depreciation and amortization
expenses of $3,115,531. During the year ended December 31, 1998, we incurred
food and packaging costs of $3,347,477, payroll and related costs of $1,608,283,
occupancy and other operating expenses of $2,963,262 and depreciation and
amortization expenses of $1,508,520.
Food and packaging costs applicable to Burger King restaurants were
38.5% of restaurant sales for the year ended December 31, 1999 and 41.3% of
restaurant sales for the year ended December 31, 1998. The 2.8% decrease as a
percentage of restaurant sales is primarily attributable to improved product
sourcing. Food and packaging costs applicable to Domino's Pizza stores for the
year ended December 31, 1999 were 32.4% of store sales and for the year ended
December 31, 1998 were 35.1% of store sales. The 2.7% decrease as percentage of
store sales was primarily attributable to greater purchasing power due to
increased sales in 1999.
Payroll and related costs applicable to Burger King restaurants for the
year ended December 31, 1999 were 20.5% of restaurant sales, and for the year
ended December 31, 1998 were 17.9% of restaurant sales. The 2.6% increase as a
percentage of restaurant sales was primarily as a result of higher payroll in
new restaurants during initial openings of each. Payroll and related costs
applicable to Domino's Pizza stores, which remained relatively stable, were
22.6% of store sales for the 1999 fiscal year, and were 22.8% of store sales for
the 1998 fiscal year.
Occupancy and other operating expenses applicable to Burger King
restaurants for the year ended December 31, 1999 were 42.6% of restaurant sales,
and for the year ended December 31, 1998 were 31.9% of restaurant sales. The
10.7% increase as a percentage of restaurant sales is primarily attributable to
increases in advertising expense, utilities and repairs and maintenance.
Occupancy and other operating expenses applicable to Domino's Pizza stores for
the 1999 fiscal year were 36.2% of store sales, and for the 1998 fiscal year
were 45.1% of store sales. The 8.9% decrease as a percentage of store sales was
primarily attributable to higher sales and stable costs.
Depreciation and amortization expense applicable to Burger King
restaurants as a percentage of restaurant sales was 22.0% in the year ended
December 31, 1999 and 17.5% in the year ended December 31, 1998. The 4.5%
increase as a percentage of restaurant sales is primarily attributable to the
increase in the number of Burger King restaurants. Depreciation and amortization
expense applicable to Domino's Pizza stores as a percentage of store sales was
17.1% for the 1999 fiscal year and 19.3% for the 1998 fiscal year. The 2.2%
decrease was primarily due to increased sales.
General and administrative expenses for the year ended December 31,
1999 were 32.0% of sales and for the year ended December 31, 1998 were 39.5% of
sales. These percentages include $1,705,675 for fiscal 1999 and $1,410,458 for
fiscal 1998 applicable to the Burger King division and $553,406 for fiscal 1999
and $297,223 for fiscal 1998 applicable to the Domino's division. The 7.5%
decrease as a percentage of sales is primarily attributable to the increase in
sales in 1999. For the year ended December 31, 1999, general and administrative
expense included salary expenses of $1,306,742; corporate overhead expenses of
$3,498,241, and depreciation and amortization of $28,871. For the year ended
December 31, 1998, general and administrative expenses include salary expenses
of $1,149,363; corporate overhead expenses of $1,980,599, and depreciation and
amortization of $197,035. The $1,517,642 increase in corporate overhead expenses
is primarily attributable to costs incurred to secure and modify our new credit
facility, legal fees and settlement costs associated with the Regenesis
litigation matter, and investor relations fees.
21
<PAGE>
In the fourth quarter of 1999, we recorded asset impairment charges
totaling $2,511,310 related to the write-off of costs in excess of the carrying
value of assets acquired and asset write-offs related to three store closings.
As described in Note 2 to the Consolidated Financial Statements, we have a
history of net losses and have accumulated deficit of $35,374,274 as of December
31, 1999. As a result, we determined that the carrying value of cost in excess
of net assets acquired would not be recoverable and have recorded a $1,448,033
impairment charge to write off the asset.
During 1999, we committed to a plan to close three Burger King
locations, of which two were closed in early 2000 and one is scheduled to close
in the first half of 2000. In connection with these store closings, we have
recorded asset impairment charges totaling $1,063,277. These charges primarily
represent the carrying value of abandoned buildings, fixtures and leasehold
improvements for the closed locations. Because our buildings are located on
leased properties, we will not be able to market and sell the properties.
For the year ended December 31, 1999, we generated a net loss of
$13,729,306 or $.31 per share of our common stock compared to a net loss of
$5,872,136 or $.14 per share of our common stock for the year ended December 31,
1998.
For the years ended December 31, 1999 and 1998, interest and other
income were comprised as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
--------------------------
Interest income........................ $ 128,846 $ 822,029
Reduction in VAT penalty............... 426,139 --
All other, net......................... 131,271 66,203
--------------------------
Total.................................. $ 686,256 $ 888,232
==========================
All other, net includes various non-recurring charges and credits not
specifically related to operating activity.
Interest expense is comprised as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Interest expense on subordinated convertible debentures ...$ 248,040 $ 258,375
Amortization of debt issuance costs ....................... 220,230 93,034
Accretion of discount on 11% convertible
senior subordinated discount notes ................. 456,782 2,290,522
Write-off of deferred financing costs ..................... 1,532,338 --
Interest expense on bank facilities ....................... 518,869 173,041
Less: capitalized interest ............................... (94,038) (142,658)
--------------------------
Total ................................................$ 2,882,221 $ 2,672,314
==========================
</TABLE>
Our interest expense on bank facilities was $518,869 for the year ended
December 31, 1999 and $173,041 for the year ended December 31, 1998. The
$345,828 increase is attributable to new bank borrowings under the Citibank
credit facility during the 1999 fiscal year.
In 1999, we exchanged $17,900,000 principal amount of our 11%
Convertible Senior Subordinated Discount Notes for 158,134 shares of Series B
Convertible Preferred Stock. Accordingly, deferred costs related to the
exchanged notes were written off.
22
<PAGE>
YEAR-ENDED DECEMBER 31, 1998 VS. YEAR-ENDED DECEMBER 31, 1997.
Results of operations for the year ended December 31, 1997 include the
results of KP and PKP, which were acquired in July 1997 in a transaction
accounted for as a purchase. During the period from their acquisition in July
through December 31, 1997, KP and PKP generated $612,757 of store sales from
their four Domino's pizza stores and incurred food and packaging costs of
$220,328, payroll and related costs of $155,135, occupancy and other operating
expenses of $259,150 and depreciation and amortization of $107,171. As a
percentage of sales, food and packaging costs were 36.0%, payroll and related
costs were 25.3%, occupancy and other operating expenses were 42.3% and
depreciation and amortization were 17.5%.
For the year ended December 31, 1998, we generated sales of $8,426,104
and for the year ended December 31, 1997, we generated sales of $6,083,011. Such
sales included sales of $6,384,691 in 1998 and $5,470,254 in 1997 for the Burger
King restaurants and sales of $2,104,460 in 1998 and $612,757 in 1997 for the
Domino's Pizza stores. Excluding miscellaneous revenue, Burger King restaurant
sales increased by 17.4% in U.S. dollar terms and 25.2% in Polish zloty terms
for the year ended December 31, 1998 as compared to the year ended December 31,
1997. The increase is primarily attributable to new restaurants opened in 1998.
The Domino's store sales increased by 243% in U.S. dollar terms and 266% in
Polish zloty terms for the year ended December 31, 1998 as compared to 1997.
This increase is primarily attributable to our full year of reporting for
Domino's in 1998 coupled with new stores opening.
During the year ended December 31, 1998, we incurred food and packaging
costs of $3,347,477, payroll and related costs of $1,608,283, occupancy and
other operating expenses of $2,963,262 and depreciation and amortization
expenses of $1,508,520.
Food and packaging costs applicable to Burger King restaurants were
41.3% of restaurant sales (exclusive of miscellaneous revenue) for the year
ended December 31, 1998 and 41.9% of restaurant sales (exclusive of
miscellaneous revenue) for the year ended December 31, 1997. The 0.6% decrease
is primarily attributable to improved product sourcing. Food and packaging costs
applicable to Domino's Pizza stores for the year ended December 31, 1998 were
35.1% of store sales (exclusive of miscellaneous revenue)and for the years ended
December 31, 1997 were 36.0% of store sales (exclusive of miscellaneous
revenue). The 0.9% decrease was primarily attributable to greater purchasing
power due to increased stores in 1998.
Payroll and related costs applicable to Burger King restaurants for the
year ended December 31, 1998 were 17.9% of restaurant sales (exclusive of
miscellaneous revenue), and for the year ended December 31, 1997 were 16.9% of
restaurant sales (exclusive of miscellaneous revenue). The 1.0% increase was
primarily as a result of higher payroll in new restaurants during initial
openings of each. Payroll and related costs applicable to Domino's Pizza stores
for the 1998 fiscal year were 22.8% of store sales (exclusive of miscellaneous
revenue), and for the 1997 fiscal year were 25.3% of store sales (exclusive of
miscellaneous revenue). The 2.5% decrease was primarily attributable to more
efficient staffing resulting from the implementation of a new store labor matrix
system.
Occupancy and other operating expenses applicable to Burger King
restaurants for the year ended December 31, 1998 were 31.9% of restaurant sales
(exclusive of miscellaneous revenue), and for the year ended December 31, 1997
were 29.2% of restaurant sales (exclusive of miscellaneous revenue). The 2.7%
increase as a percentage of restaurant sales is primarily attributable to an
increase in advertising expense, utilities and repairs and maintenance.
Occupancy and other operating expenses applicable to Domino's Pizza stores for
the 1998 fiscal year were 45.1% of store sales (exclusive of miscellaneous
revenue ), and for the 1997 fiscal year were 42.3% of store sales (exclusive of
miscellaneous revenue). The 2.8% increase was primarily attributable to
increased advertising expenditures.
Depreciation and amortization expense applicable to Burger King
restaurants as a percentage of restaurant sales (exclusive of miscellaneous
revenue) was 17.5% in the year ended December 31, 1998 and 14.5% in the year
ended December 31, 1997. The 3% increase as a percentage of restaurant sales is
primarily attributable to the amortization of pre-opening costs. Depreciation
and amortization expense applicable to Domino's Pizza stores as a percentage of
store sales was 19.3% for the 1998 fiscal year and 17.5% for the 1997 fiscal
year (exclusive of miscellaneous revenue). The 1.8% increase was primarily due
to amortization of pre-opening costs.
23
<PAGE>
General and administrative expenses for the year ended December 31,
1998 were 39.2% of sales and for the year ended December 31, were 32.3% of
sales. These percentages include $297,223 for fiscal 1998 and $96,384 for fiscal
1997 applicable to KP and PKP. The 6.9% increase as a percentage of sales is
primarily attributable to increased office rent, salaries and benefits, increase
in the provision for disputes with Polish Fiscal Authorities (see "Legal
Proceedings - Polish Fiscal Authority Disputes"), and costs associated with a
planned private placement of our securities. Excluding the general and
administrative expenses applicable to KP and PKP, general and administrative
expenses applicable to Burger King restaurants was 22.1% for the years ended
December 31, 1998 and 1997. For the year ended December 31, 1998, general and
administrative expenses include executive and office staff salaries and benefits
of $1,149,363; legal and professional fees, office rent, travel, telephone and
other corporate expenses of $1,980,599, and depreciation and amortization of
$197,035. For the year ended December 31, 1997, general and administrative
expense included salary expenses of $612,225; corporate overhead expenses of
$1,250,151, and depreciation and amortization of $100,857.
For the year ended December 31, 1998, we generated a net loss of
$5,872,136 or $.14 per share of our common stock compared to a net loss of
$1,252,850, or $.05 per share of our common stock for the year ended December
31, 1997. During the year ended December 31, 1997, we recognized a non-recurring
gain of $1,327,070 or $.05 per share of our common stock in connection with the
settlement of the litigation with Burger King (the "Burger King Litigation").
For the years ended December 31, 1998 and 1997, interest and other
income was comprised as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
-----------------------
Interest income................ $ 822,029 $ 263,714
Management fee................. -- 18,190
Forgiveness of indebtedness.... -- 329,465
All other, net................. 66,203 (134,316)
-----------------------
Total.......................... $ 888,232 $ 477,053
=======================
All other, net includes various non-recurring charges and credits not
specifically related to operating activity.
Interest expense is comprised as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
------------------------
<S> <C> <C>
Interest expense on subordinated convertible debentures ...$ 258,375 $248,040
Interest expense on note payable to Litigation Funding ......... -- 73,767
Interest expense on 8% convertible promissory notes ............ -- 16,178
Amortization of debt issuance costs ....................... 93,034 74,304
Accretion of discount on 11% convertible senior subordinated
discount notes ....................................... 2,290,522 354,588
Interest expense on bank facilities ....................... 173,041 178,721
Less: capitalized interest ............................... (142,658) --
------------------------
Total ................................................$ 2,672,314 $945,598
========================
</TABLE>
Our interest expense on bank facilities was $173,041 for the year ended
December 31, 1998 and $178,721 for the year ended December 31, 1997. The $5,680
decrease is attributable to lower average outstanding borrowings under back
credit facilities during the 1998 fiscal year.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
To date, our business operations have been principally financed by
proceeds from public offerings of equity and debt securities, private offerings
of equity and debt securities, proceeds from various bank credit facilities,
proceeds from the sale of certain equity securities, the settlement of certain
litigation and disputes with Burger King Corporation, loans from shareholders
and proceeds from the private sale of the notes.
Net cash provided by operating activities for the six months ended June
30, 2000 was $6,531,982 as compared to net cash used in operating activities for
the six months ended June 30, 1999 of $1,803,986. The increase was primarily
attributable to the gain on settlement of disputes with Burger King before
write-off of expenses related thereto.
Net cash flows (used in) provided by investing activities increased
from $(5,104,954) to $931,616 for the six months ended June 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.
Net cash (used in) provided by financing activities decreased by
$11,381,529 for the six months ended June 30, 2000, compared to the six months
ended June 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 June 30, 2000, we had negative working capital of approximately
$4,644,590 and cash of $229,641. We have significant commitments to develop
restaurants in accordance with our agreements with Burger King and Dominos. We
do not presently have sufficient financial resources to meet our development
obligations under the terms of these agreements. We have sustained losses from
operations since our incorporation in December 1991. For the six months ended
June 30, 2000, we reported net income of $2,134,559 (which includes a non
recurring gain of $5,830,416). At June 30, 2000, we had an accumulated deficit
of $33,338,670. These factors raise substantial doubt about our 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 we be unable to continue as a going concern.
BURGER KING AGREEMENT AND DOMINO'S AGREEMENTS. We have material
commitments for capital expenditures in our restaurant and store businesses.
See "Risk Factors" and "Business."
We do not believe that cash flows from existing stores, when combined
with existing financial resources, will 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.
CONVERTIBLE NOTES. In November 1997, we sold $27,536,000 of our 11%
Convertible Senior Subordinated Discount Notes Due October 31, 2007 in a private
offering. Interest is 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
June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
JUNE 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 ........... (343,428) (817,468)
-----------------------------
Carrying value ........................................ $ 9,292,572 $ 8,818,532
=============================
</TABLE>
25
<PAGE>
The notes became convertible, at the option of the holder, into our
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 June 30, 2000,
no additional portion of the notes had been converted into common stock or
preferred stock.
POLISH BANK ACCOUNTS. As of June 30, 2000, we had approximately
$229,641 in Polish bank accounts with substantially all of such funds held as
U.S. dollar denominated deposits. Substantially all of our 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, we entered into a revolving credit facility with
American Bank of Poland S.A. ("AmerBank") totaling 300,000 zlotys (approximately
$68,194 at June 30, 2000 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
$45,463 at June 30, 2000 exchange rates) and in March 1997, the credit facility
was further decreased to 100,000 zlotys (approximately $22,731 at June 30, 2000
exchange rates). The credit facility expires on September 30, 2000. On July 31,
2000, there were no amounts outstanding under this facility.
In September 1996, PKP, the wholly-owned subsidiary of our Polish
subsidiary KP, entered into a revolving credit facility with AmerBank totaling
100,000 zlotys (approximately $22,731 at June 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 July 31, 2000 was $0.
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 six months
under the same terms and is scheduled to mature in August 2000. We 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). We repaid this loan 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. In December 1998 we started repaying the loan
in ten equal quarterly installments of $30,000, 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 August 15, 2000,
approximately $86,363 was outstanding on the facility.
In June 1998, we entered into a development loan in the principal
amount of $1.3 million with AmerBank. Advances are secured by: (a) fixed assets
of each new restaurant financed; and (b) our guarantee. 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. Interest is to be paid monthly at
the prevailing one month LIBOR rate plus 2.5% (9.25% at June 30, 2000). 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 us.
As of August 15, 2000, $1,416,667 was outstanding on this credit facility.
On February 24, 1999, we 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 to finance the construction of nine Burger King restaurants. The line
of credit was priced at 0.8% above LIBOR and was originally scheduled to mature
on January 15, 2000. In order for us to enter into the credit agreement with
Citibank, holders of our outstanding 11% Convertible Senior Subordinated
Discount Notes were required to waive applicable provisions of the note
indenture. As compensation for the waiver, the noteholders were issued an
aggregate of 204,585 shares of our common stock, with a fair value of $.56 per
share.
26
<PAGE>
The line of credit is guaranteed by both Burger King and us. As a
condition to the guarantee, Burger King required that we, IFFP and Mr. Rubinson,
our Chairman of the Board and Chief Executive Officer 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, we and
IFFP entered into a reimbursement agreement under which we agreed to reimburse
Burger King for any 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 we,
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 we and IFFP default on our and their
obligations under the reimbursement agreement and Burger King takes possession
of the IFFP shares pledged to them, Mr. Rubinson would be 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. Mr. Rubinson received a
fee of $150,000 from us in connection with the Purchase Agreement.
In October 1999, IFFP increased the amount of the line of credit to
$8,000,000. 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 our common stock owned by him. In connection with these matters, we
entered into a reimbursement and fee agreement whereby we 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
Senior Subordinated Discount Notes were required to waive applicable provisions
of the note indenture.
On June 16, 2000, we entered into an agreement with Burger King
Corporation pursuant to which Burger King agreed, among other things, to
discharge $8 million (plus interest) due to Citibank under IFFP credit facility
and will be freed of the obligation to guarantee any future borrowings by IFFP.
In addition, Burger King, on the one hand, and we, IFFP and Mr. Rubinson, 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 us, in our discretion, to close Burger King stores
that are unprofitable, and thereafter to dispose of them as we deem fit. We
recognized a gain on this transaction which is comprised as follows:
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 ............................ (654,652)
-----------
Gain on settlement .....................................$ 5,830,416
===========
In connection with the agreement the warrant held by Burger King to
purchase 4,000,000 shares of common stock at a price of $2.00 per share was
cancelled, and the 5,000,000 shares of common stock pledged to Burger King by
Mr. Rubinson were released.
SHAREHOLDER LOANS -- During the six months ended June 30, 2000, we
borrowed an aggregate of $540,000 from Mitchell Rubinson, pursuant to the terms
of a $1 million line of credit bearing interest at 10% per annum. The loans are
due on demand. As of August 15, 2000, the balance of such loans was $951,000.
As of June 30, 2000, we owed Mr. Rubinson $132,500 of salary and
benefits applicable to the six months ended June 30, 2000. The balance of such
amounts at August 15, 2000 was $143,365. As of June 30, 2000 and August 15,
2000, we also owed Mr. Rubinson a total of $109,000 for certain guarantee
payments.
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DISPUTE WITH POLISH FISCAL AUTHORITIES. We anticipate that we will
continue to incur certain expenses in connection with our disputes with the
Polish Fiscal Authorities. See "Legal Proceedings -- Dispute with Polish Fiscal
Authority."
ACCOUNTING POLICIES
Prior to January 1, 1999, we 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. We adopted SOP 98-5 on
January 1, 1999. Upon adoption, we 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.
We account 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 our 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 our 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 six months ended June 30, 2000, we incurred advertising
expense of $446,010, all of which was charged to expense during the period.
During the six months ended June 30, 1999, the we incurred advertising expense
of approximately $1,490,056, of which approximately $576,651 was deferred at
June 30, 1999 and was included in prepaid expenses. Pursuant to SOP 93-7, we are
required to expense all advertising incurred at the end of the fiscal year.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement
No. 133". SFAS No. 137 defers for one year the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
will now apply to all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS No. 133 will require us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. We will adopt SFAS No. 133 as required for our first
quarterly filing of fiscal year 2001. We believe the adoption of this Statement
will not have a material effect on our results of operations and financial
position.
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 December 31, 1999 and June 30, 2000, the exchange rates were 4.15
and 4.40 zlotys per dollar, respectively. The accounts of IFFC's Polish
subsidiaries are maintained using the Polish zloty.
Our 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 and the six months ended
June 30, 2000, the rates of inflation and devaluation improved. For the years
ended December 31, 1995, 1996, 1997, 1998 and 1999 and the six months ended June
30, 2000, the annual inflation rate in Poland was 21.6%, 19.5%, 13.0%, 8.6%,
7.3% and 10.2%, respectively, and as of December 31, 1995, 1996, 1997, 1998 and
1999 and June 30, 2000, the exchange rate was 2.468, 2.872, 3.514, 3.494, 4.1483
and 4.40 Polish zlotys per the U.S. dollar, 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
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and Domino's for each restaurant and store opened are in United States currency.
Additionally, we are dependent on certain sources of supply which require
payment in European or United States currencies. Since our revenues from
operations are in zlotys, we are subject to the risk of currency fluctuations.
We have and intend to maintain substantially all of our unutilized funds in
United States or Western European currency denominated securities and/or
European Currency Units. There can be no assurance that we will successfully
manage its exposure to currency fluctuations or that such fluctuations will not
have a material adverse effect on us.
Thus far, our revenues have been used to fund restaurant operations and
our 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 us in the future.
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BUSINESS
GENERAL
Our company was incorporated in December 1991 as a Florida corporation
to develop franchised Burger King restaurants in the Republic of Poland. We have
the exclusive right to develop franchised Burger King restaurants and Domino's
Pizza stores in the Republic of Poland and we currently operate 22 Burger King
restaurants and 16 Domino's Pizza stores. The Burger King restaurants and the
majority of the Domino's Pizza stores are similar to their respective U.S.
versions and are developed to the strict corporate standards set out in the
respective development agreements and franchise agreements.
RECENT DEVELOPMENTS
Management believes that cash flows from current existing stores
together with existing financial resources will not be sufficient to fund
operations and meet our commitments to develop new Burger King restaurants and
Domino's Pizza stores. Management is seeking to obtain additional equity and or
debt financing to fund operations and future development. No assurance can be
given that such financing will be obtained or that it can be obtained on
favorable terms. If we are unable to obtain additional equity or debt financing
we may be forced to curtail or cease operations with respect to Burger King and
Domino's operations.
We may sell our Polish subsidiaries to third parties, or sell some or
all of our Burger King restaurants or Domino's Pizza stores to third parties, or
to a joint venture between us and a third party. We also may decide to close
some or all of our Burger King restaurants or Domino's Pizza stores.
BURGER KING DIVISION
We operate our Burger King division through our subsidiary, IFFP and
IFFP's wholly owned Polish limited liability corporations, IFF Polska-Kolmer and
IFF-DX Management. IFFP receives operational support from Burger King
Corporation through Burger King's London-based office in areas including site
selection and construction review, operating systems and controls, marketing,
sourcing of food and equipment, distribution and training, and other operational
matters.
Through IFFP, we currently operate 22 Burger King restaurants. We
closed two Burger King restaurant in early 2000 and anticipate that we will
close one more during the year. The restaurants, which operate under individual
franchise agreements, are traditional free standing and/or attached
drive-through restaurants with dine-in seating capacity ranging from 60 to 120
people. The typical store size is approximately 2,800 square feet and is located
near and in metropolitan areas and/or adjacent to service station sites.
Currently all Burger King restaurants in Poland are operated by IFFP.
Our Burger King restaurants offer flame-broiled hamburgers and
cheeseburgers, french fries and soft drinks. Other menu items may include
salads, pastries, chicken sandwiches, fish sandwiches, ice cream sundaes and
shakes. We anticipate that our future Burger King restaurants will expand their
menus by offering additional food items. We typically offer a Burger King meal
for the zloty equivalent of approximately $1.50 to $3.30, depending upon the
menu items selected. We believe, to the extent a comparison is possible, that
the prices we charge for meals are comparable to the prices charged by our
American-style fast food competitors in Poland.
By October 1994, we had opened eight Burger King restaurants in urban
locations, including five in Warsaw, and had created an organizational
infrastructure to manage future growth. During 1994, however, a dispute emerged
between our company and Burger King regarding Burger King's logistical
development support and other matters, which resulted in litigation between the
parties commencing in March 1995. During the period from the beginning of the
dispute with Burger King in 1994 until its settlement, we curtailed our Burger
King restaurant expansion. In March 1997, we settled the litigation and, under
the settlement, entered into a new ten year development agreement with Burger
King.
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BURGER KING AGREEMENT AND STANDARD FRANCHISE AGREEMENTS. In October
1999, we entered into an amendment to our development agreement with Burger
King. Under the amended agreement, IFFP is required to open 73 "Development
Units" before December 31, 2007. Each traditional restaurant or drive-through
restaurant constitutes one Development Unit and each kiosk constitutes a quarter
of a Development Unit. Pursuant to the amended agreement, four of the
Development Units in each year must be in-line or free-standing restaurants
within city centers or shopping mall locations. The schedule for our required
opening of Development Units is as follows:
MINIMUM NUMBER OF
DEVELOPMENT UNITS
OPEN AND TRADING
--------------------
December 31, 2000 31 Development Units
December 31, 2001 37 Development Units
December 31, 2002 43 Development Units
December 31, 2003 49 Development Units
December 31, 2004 55 Development Units
December 31, 2005 61 Development Units
December 31, 2006 67 Development Units
December 31, 2007 73 Development Units
We do not expect to satisfy our development requirements through
December 31, 2000, but we will seek a waiver, modification or extension from
Burger King under the Burger King agreement. Burger King may not grant such
waiver, modification or extension.
For each restaurant opened, IFFP is obligated to pay Burger King an
initial fee of up to $40,000 for franchise agreements with a term of 20 years
and $25,000 for franchise agreements with a term of ten years. Each fee is
payable not later than 20 days before the restaurant's opening. Pursuant to the
amendment to the Burger King agreement, Burger King agreed to defer payment of
$280,000 in accrued franchise fees until January 15, 2001. Each franchised
restaurant must also pay a percentage of the restaurant's gross sales,
irrespective of profitability, as a royalty for the use of the Burger King
system and Burger King trademarks. The annual royalty fee is 5% of gross sales.
As long as we are in compliance with the development agreement, Burger King
agreed to reduce the royalty fee to 2% through September 30, 1998 and 3% through
December 31, 2002. Thereafter, the annual royalty fee will be 5%. The
restaurants must also contribute a monthly advertising and promotion fee of 6%
of gross sales to be used for advertising, sales promotion, and public
relations. Payment of all amounts due from IFFP to Burger King under the
franchise agreements is guaranteed by our company.
Burger King may terminate rights granted to IFFP under the Burger King
agreement, including franchise approvals for restaurants not yet opened, for a
variety of possible defaults by IFFP, including, among others, failure to open
restaurants in compliance with the development schedule; failure to obtain
Burger King site approval before the commencement of each restaurant's
construction; and failure to meet various operational, financial, and legal
requirements, including the maintenance of IFFP's net worth at $7.5 million. As
of June 30, 2000, IFFP [met] such net worth requirement. However, IFFP does not
currently have a net worth of $7.5 million. Burger King has agreed to suspend
the net worth requirement through December 30, 2000. Upon termination of the
Burger King agreement, whether resulting from default or expiration of its term,
Burger King has the right to license third parties to develop and operate Burger
King restaurants in Poland, or to do so itself.
Specifically excluded from the scope of the Burger King agreement are
restaurants on U.S. military establishments. Burger King has also reserved the
right to open restaurants in hotel chains with which it has, or may in the
future have, a multi-territory agreement encompassing Poland. With respect to
restaurants in airports, train stations, hospitals and other hotels, IFFP has
the right of first refusal for of these sites. If IFFP is unable to reach a
mutually acceptable agreement with the owners of the sites, Burger King or its
affiliates or designated third parties may initiate negotiations for these
sites. IFFP and the Rubinson Group are restricted from engaging in the fast food
hamburger restaurant business, without the prior written consent of Burger King,
which consent may not be withheld so long as our company and the franchises
operating Burger King restaurants are adequately funded.
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Subject to some exceptions, as long as we are a principal of IFFP,
Burger King has the right to review and consent to our equity issuances. This
consent is not to be unreasonably withheld, provided that we have complied with
all reasonable conditions established by Burger King in connection with the
proposed sale or issuance by us of applicable equity securities.
We have obtained all required Burger King, government and regulatory
approvals and permits for our 22 Burger King restaurants.
CO-DEVELOPMENT AGREEMENTS. We intend to develop a majority of the new
Burger King restaurants in conjunction with oil companies which are presently
expanding throughout Poland. In July 1997, IFFP executed letters of intent with
Conoco Poland Sp.zo.o ("Conoco") and BP Poland Sp.zo.o, an affiliate of British
Petroleum ("BP"), for the co-development of Burger King restaurants and service
stations throughout Poland. In connection with the execution of these letters of
intent, Conoco and BP agreed to cooperate with IFFP to achieve the rapid and
coordinated growth of the respective networks and operations in Poland. The
letters, although not binding, state that Conoco and BP agree to make sites
available to IFFP to lease for a specific term plus option periods at IFFP's
discretion, subject to Burger King approval. Rental terms will be based on a
minimum monthly rental fee and/or a percentage of sales. Currently, IFFP has
open six Burger King restaurants adjacent to BP stations and one Burger King
restaurant adjacent to a Conoco station.
In September 1997, IFFP entered into an agreement with Statoil to
develop up to 19 Burger King restaurants on Statoil service station properties
in Poland. Pursuant to the agreement, the rental terms for each site consists of
a 20-year term with a ten-year option. The annual lease payments are 4% of sales
or $36,000, whichever is higher. Currently, IFFP has opened nine restaurants
adjacent to Statoil stations. In January 2000, IFFP and Statoil agreed to
terminate the agreement; with no further obligation to either party.
In October 1998, IFFP and the Polish subsidiary of Shell Oil ("Shell")
entered into a joint venture and became equal partners in the newly incorporated
polish limited liability company, CRSB Sp.zo.o. IFFP and Shell intend to
co-develop a limited number of Burger King restaurants and Shell service
stations throughout Poland. We have not currently executed any leases under our
joint venture with Shell.
AGREEMENT WITH MARRIOTT. In March 1999, we entered into a letter
agreement whereby we granted Host Marriott Service Corporation the non-exclusive
rights to develop and operate Burger King restaurants within enclosed shopping
centers located in Poland where Host Marriott has leased substantially all of
the food and beverage facilities, each location to be subject to the approval of
Burger King. Pursuant to this agreement, which was amended in May 1999, Host
Marriott will pay us an initial fee of US $25,000 per location in exchange for
our pre-opening support and assistance, including furnishing design and
construction advice, hiring and training management staff, and advising on the
selection of information and accounting systems for each Burger King restaurant
developed by Host Marriott, and an on-going annual fee equal to the greater of
U.S. $7,000 per location, or 1.5% of Host Marriott's gross receipts from the
operation of each Burger King restaurant, in exchange for our on-going technical
assistance and services, including maintaining quality standards, procurement
and supply services, and on-going staff training. The annual fee is payable
monthly, with an annual reconciliation, and will continue for the duration of
Host Marriott's operation of the location as a Burger King restaurant.
Currently, Host Marriott operates three Burger King restaurants in Poland.
Further, we have the option to acquire up to 50% interest in the net
income of any Burger King restaurants developed by Host Marriott under the
agreement. We may exercise the option by giving Host Marriott written notice, at
any time before the opening of each Burger King restaurant, specifying the
percentage interest that we intend to acquire. If we exercise the option, we
will be responsible for a pro rata portion of the total costs incurred by Host
Marriott in building, equipping and opening the restaurant, together with a pro
rata portion of the cost of any common facilities (e.g., seating areas, tray
wash areas, office and storage space, point of sale and telecommunications
systems, etc.). The letter agreement terminates simultaneously with the Burger
King agreement. Additionally, Host Marriott will be responsible for all amounts
payable to Burger King (e.g., franchise fees, advertising contributions, and
royalty fees) for the franchise rights for each location developed by it under
the agreement.
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BURGER KING RESTAURANT SYSTEM. The Burger King restaurant system is one
of the world's largest restaurant systems, with approximately 10,000 restaurants
currently located in the United States and 53 foreign countries and territories
around the world, including extensive company-owned and franchised operations in
Europe. Burger King has developed a restaurant format and operating system,
which includes a recognized design, decor and color scheme for restaurant
buildings; kitchen and dining room equipment and layout; service format; quality
and uniformity of products and services offered; procedures for inventory and
management control; and the Burger King marks, which include the trademarks,
services marks and other marks as Burger King may authorize from time to time
for use in connection with Burger King restaurants.
All Burger King restaurants are required to be operated in compliance
with Burger King standards. Most Burger King restaurants offer a substantially
similar core menu, featuring flame-broiled hamburgers, cheeseburgers, french
fries, and soft drinks. Other menu items may include salads, pastries, chicken
sandwiches, fish sandwiches, ice cream sundaes, shakes and breakfast menu items.
Our current menu does not include breakfast items. Sandwich menu items account
for the most significant amount of system-wide sales. Prices for the menu items
are determined by us and, accordingly, may vary from other Burger King
restaurants in other countries.
The standard restaurant floor plan consists of a kitchen/preparation
area and ordering counter and customer seating area. The design must comply with
specified Burger King standards, which are relatively flexible, and can be
located in an existing building or a specially constructed free-standing
building with varying floor plans and configurations. We currently estimate that
once space has been leased and made available to us, approximately 120 days are
required to complete construction, obtain necessary licenses and approvals and
open a restaurant. We currently estimate the cost of opening a Burger King
restaurant to be approximately $450,000 to $1,000,000, including the
construction of the restaurant, road and leasehold improvements, the initial
franchise fee, furniture, fixtures, and equipment, opening inventories and staff
training (but excluding the cost of land). These estimates, however, vary
depending on the size and condition of a proposed restaurant and the extent of
leasehold improvements required.
BURGER KING RESTAURANT DEVELOPMENT. Our restaurant development strategy
is to lease prominent sites in major Polish metropolitan areas and adjacent to
service stations on major thoroughfares. All sites are subject to the approval
of Burger King. We consider restaurant location to be critical to our success
and devote significant efforts to locating and evaluating potential sites. The
site selection process involves an evaluation of a variety of factors, including
demographics (such as population density); specific site characteristics (such
as visibility, accessibility and traffic volume); proximity to activity centers
(such as office or retail shopping districts and hotel and office complexes);
and potential competition in the area. Our personnel inspect and approve a
proposed site for each restaurant and a detailed site package is prepared for
Burger King review and approval before the execution of a lease. The opening of
restaurants is contingent upon, among other things, locating satisfactory sites,
negotiating acceptable leases or similar rights to a site, completing any
necessary construction, and securing required government permits and approvals.
ADVERTISING AND PROMOTION. IFFP's franchise agreements with Burger King
provide that each franchised restaurant must spend 6% of its gross sales on
advertising, sales promotion, and public relations. We contribute these funds
into a self-administered marketing fund. All expenditures are based on a
marketing plan created jointly by us and Burger King, except for local store
marketing programs. In addition, the fund reimburses us up to a specified amount
for our marketing manager.
SOURCES OF SUPPLY. IFFP is dependent upon Burger King-approved
suppliers for its food products and other supplies. Pursuant to the Burger King
agreement and the standard franchise agreements, all of these supplies must be
of a quality and conform to specifications acceptable to Burger King.
Additionally, IFFP currently obtains its restaurant furniture and fixtures,
prefabricated kitchen equipment and point of sale equipment in Poland and
obtains other equipment and paper products from Burger King-approved sources in
the United States and Europe.
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IFFP has established Burger King-approved lines of supply for all major
ingredients used in its menu with substantially all of its inventory needs
sourced in Poland from third-party vendors. We believe local sourcing is
important because it avoids expensive import duties and taxes. IFFP has entered
into multi-year contracts with its major suppliers of soft drinks, buns, meat
patties and condiment supplies, and for the distribution of its supplies to each
of its restaurants throughout Poland. The distributor has been our comprehensive
logistics and distribution coordinator since 1994, providing state of the art
inventory and cost controls to complement IFFP's point of sale system, which
electronically disseminates information on a daily basis, controls inventory
levels and maintains promotional, marketing and food preference information.
Shipments of food and supplies are delivered directly to the Burger King
restaurants. IFFP maintains approximately a seven to 30-day inventory of food
products and supplies for its Burger King restaurants.
RESTAURANT OPERATIONS AND PERSONNEL. We operate our restaurants under
uniform standards shown in Burger King's operating manual, including
specifications relating to food quality and preparation, design and day-to-day
operations. IFFP uses Burger King training techniques and manuals and solicits
the assistance and counsel of Burger King personnel . IFFP is responsible, at
its expense, for the translation of Burger King manuals into Polish and pays
Burger King for specified support services relating to employee training in
Burger King facilities in Europe and the U.S. In addition, IFFP operates two
Burger King-approved training facilities in Poland. IFFP maintains financial,
accounting and management controls for its restaurants through the use of
centralized accounting systems, detailed budgets and computerized management
information systems.
Our Burger King operations are managed by Joanna Makowska, the
President of PKP and the General Manager of IFFP, who began her career with us
in 1992. Pursuant to the requirements of the Burger King agreement, Ms. Makowska
has been approved by Burger King as the Director of Operations of the Burger
King restaurants. As of June 30, 2000, IFFP employed approximately 197 full-time
and 426 part-time employees. IFFP's restaurant managers are responsible for
supervising the day-to-day operations of the restaurants, including food
preparation, customer relations, restaurant maintenance, inventory and cost
control and personnel relations. In addition, restaurant managers are
responsible for selecting and training new crew personnel, who undergo
on-the-job training.
TRADEMARKS. We are authorized to use the trademarks, service marks and
other marks as Burger King may authorize from time to time for use in connection
with Burger King restaurants (collectively, the "Burger King Marks"). Burger
King has applied for and received trademark registrations in Poland for the
Burger King logo, the words "Burger King" and the word "Whopper." Under the
terms of the Burger King agreement and the individual franchise agreements, we
are required to assist in the defense of any action relating to the right to use
or the validity of the Burger King Marks and to cooperate in the prosecution of
any action to prevent the infringement, imitation, illegal use or misuse of the
Burger King Marks or the Burger King system. Burger King is obligated to bear
the legal expenses and costs incidental to our participation in these actions.
Burger King has made no warranty or representation that the Burger King Marks
will be available to us on an exclusive basis or at all.
DOMINO'S DIVISION
KP controls the exclusive development rights, and PKP controls the
franchises, for Domino's Pizza stores in Poland under a master franchise
agreement with Domino's Pizza International, Inc., a wholly-owned subsidiary of
Domino's Pizza, Inc. ("Domino's"), which was executed in August 1997. KP has
also entered into a commissary agreement with Domino's under which KP has been
granted the exclusive right to open and operate one or more commissaries for all
Domino's Pizza stores in Poland for the term of the Domino's agreement and any
renewal term.
Through PKP, we operate 16 Domino's Pizza stores. These stores, which
operate under individual franchise agreements, feature carry-out services and
delivery services to all customers who can be reached in approximately 30
minutes. The stores also provide limited customer seating. The typical Domino's
Pizza store size is approximately 1,000 square feet and is located in a
residential area with a high base of telephone installations. One Domino's store
shares space with an existing Burger King restaurant.
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Our Domino's Pizza stores offer various types of pizza, soft drinks,
salads, sandwiches, breadsticks and ice cream, and we anticipate that our future
Domino's Pizza stores will offer other food items. We typically offer pizzas for
the zloty equivalent of approximately $4.50 to $9.00, depending upon the size of
the pizza and the number of toppings selected. We believe, to the extent a
comparison is possible, that the prices we charge for meals is comparable to the
prices charged by our American-style fast food competitors in Poland.
DOMINO'S AGREEMENT AND STANDARD FRANCHISE AGREEMENT. Our relationship
with Domino's is governed principally by the Domino's agreement and the
individual Domino's store franchise agreements. Pursuant to the Domino's
agreement, we have the exclusive right to develop, operate and franchise
Domino's Pizza stores in Poland. The schedule for our required opening of
Domino's stores is as follows:
NUMBER OF STORES
TO BE OPENED
TIME PERIOD DURING TIME PERIOD
------------------------------------------- --------------------
August 1, 1997 through December 31, 1997 1
January 1, 1998 through December 31, 1998 5
January 1, 1999 through December 31, 1999 6
January 1, 2000 through December 31, 2000 7
January 1, 2001 through December 31, 2001 8
January 1, 2002 through December 31, 2002 9
January 1, 2003 through December 31, 2003 10
----
Total stores to be opened by December 31, 2003 46
We have opened 12 Domino's Pizza stores under the Domino's agreement
and satisfied our development requirements through 1999. We do not expect to
satisfy our development requirements through December 31, 2000, but we will seek
a waiver, modification or extension from Domino's under the Domino's agreement.
Domino's may not grant such waiver, modification or extension.
As a condition to the Domino's agreement, we contributed $2,000,000 to
KP. We also agreed that any additional capital required above this amount will
also be dedicated to KP as needed to permit KP to meet its development quotas.
Pursuant to the Domino's agreement, Domino's received $300,000 as a
non-refundable development fee. The term of the Domino's agreement will expire
on December 31, 2003, and if KP is in compliance with all material provisions of
the agreement, it may be extended for an additional 10 years in compliance with
specified minimum development quotas which KP and Domino's may agree upon by
execution of an amendment to the Domino's agreement.
With respect to each operating Domino's store, KP is required to pay an
initial franchise fee of up to $5,000 and a monthly royalty fee equal to 3% of
each store's gross sales, net of taxes, irrespective of profitability. KP's
royalty payments to Domino's are payable in U.S. currency, or at Domino's
option, in local currency. Although Domino's may elect to accept payment in
alternative currencies if payment in U.S. currency is prohibited by applicable
law, it may terminate the Domino's agreement if KP is unable to pay in U.S.
currency for a period of one year.
Under the terms of the Domino's agreement, Domino's is required to
provide, on an ongoing basis, all information and materials necessary to make KP
familiar with the Domino's system and the methods used to operate and manage
Domino's Pizza stores and commissaries, including, without limitation, plans and
specifications for Domino's Pizza stores and commissaries, site selection
criteria, advertising and marketing plans, methods and procedures for the
preparation, serving and delivery of food and beverages and management control
systems. This information is to be provided by Domino's to us in the form of the
Domino's Operations Manual, memoranda or through consultations with Domino's
experienced staff members.
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Domino's has reserved the right to review and audit some of KP's
operations, financial and tax accounting reports, statements and returns.
Domino's may terminate rights granted to KP under the Domino's agreement,
including franchise approvals for stores not yet opened, for a variety of
possible defaults by KP, including, among others, failure to open Domino's Pizza
stores in compliance with the development schedule; failure to obtain Domino's
site approval before the commencement of each Domino's store's construction;
failure to obtain Domino's approval of any non-affiliated franchisee; and
failure to meet various operational, financial, and legal requirements shown in
the Domino's agreement and the standard franchise agreements. Upon termination
of the Domino's agreement, whether resulting from default or expiration of its
terms, Domino's has the right to license others to develop and operate Domino's
Pizza stores in Poland, or to do so itself. If KP fails to meet its development
schedule during the initial term of the agreement or any successor development
term, KP would lose its rights to develop and franchise additional Domino's
Pizza stores, but would be entitled to continue to act as a master franchiser
and a franchisee with respect to all franchise agreements theretofore granted
and executed. Under other specified circumstances of default, Domino's has the
right to terminate the Domino's agreement and force the sale of, at the then
current market value, all of KP's rights and interests as a master franchiser of
Domino's Pizza stores and all of the assets of each Domino's store controlled by
KP.
Upon termination of the Domino's agreement under some circumstances,
Domino's also has the right to purchase KP's outstanding rights and interests as
master franchisor at a fair market value.
Before the opening of each Domino's store, KP is required to pay
Domino's a franchise fee and, as master franchisor, is required to enter into a
standard franchise agreement with the store franchisee (whether or not
affiliated with us). Each franchisee and each Domino's store location is subject
to the approval of Domino's, which approval may not be unreasonably withheld.
The standard franchise agreement for a Domino's store has a ten-year term with a
ten-year renewal option. During these periods the franchisee is permitted to use
the Domino's system in an exclusive area, free of competition from other
franchisees. With respect to each of its operating Domino's Pizza stores, a
franchisee is required to pay KP an initial franchise fee and a monthly royalty
fee, as well as an advertising fee based on a percentage of the gross sales of
each Domino's store, net of taxes, irrespective of profitability. The financial
terms of the standard franchise agreement may be renewed at the expiration of
the term. A franchisee's rights under a standard franchise agreement may not be
transferred without the consent of KP and Domino's. PKP is currently the only
Domino's franchisee in Poland. There are no non-affiliated franchisees.
Each franchisee must comply strictly with the Domino's system, and the
standards, specifications and procedures comprising the system may be changed
from time to time. Each Domino's store must be constructed, equipped, furnished
and operated at the cost and expense of the franchisee in compliance with
Domino's specifications. Each Domino's store is required to offer for sale only
those pizza and beverage products authorized by Domino's. In addition, each
Domino's store is obligated to offer delivery services to all customers within a
prescribed delivery area, which delivery area is restricted to allow a delivery
order to be satisfied within approximately 30 minutes. All of the food products
and other supplies used in Domino's Pizza stores must be of a quality that
conforms to Domino's specifications. Compliance with requirements as to signage,
equipment, menu, service, hygiene, hours of operation and data and voice
communications is similarly prescribed. Domino's and KP each reserve the right
to enter each Domino's store, conduct inspection activities, and require prompt
correction of any features that deviate from the requirements of the relevant
standard franchise agreement. Similarly, KP has the right to review and audit
each franchisee's operations, financial and tax accounting statements, reports
and returns. KP is obligated to use its best efforts to ensure that each
non-affiliated franchisee complies with its franchise agreement and local laws
and regulations.
The standard franchise agreement provides that a franchisee may not
have any interest in, be employed by, advise or assist any other business that
is the same as or similar to a Domino's store during the term of the agreement
and, for a period of one year after termination or expiration of the franchise
agreement, may not have any interest in, be employed by, advise or assist any
other business that is the same as or similar to a Domino's store within ten
miles of the Domino's store it had operated. KP may terminate the franchise
agreement for any Domino's store for, among other things, failure to pay amounts
due with respect to that Domino's store, failure to operate the Domino's store
in compliance with prescribed operating standards, and persistent breaches. Upon
termination, the franchisee's rights to use the Domino's trademarks and Domino's
store system terminate, and KP becomes entitled to assume the franchisee's
leasehold interest and purchase the Domino's store at its fair market value.
36
<PAGE>
During the term of the Domino's agreement, KP and its controlling
shareholders, including the controlling shareholder of our company, cannot 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 this business which is located in
Poland. The latter restriction shall apply for a period of one year following
the effective date of termination of the Domino's agreement.
DOMINO'S COMMISSARY. In conjunction with its exclusive right to develop
and franchise Domino's Pizza stores in Poland, the Domino's agreement grants KP
the exclusive right to develop and operate the commissaries from which all
franchisees in Poland purchase food and supplies. Because KP is the owner of the
Domino's commissary, additional mark-up costs on supplies provided by the
commissary are eliminated for the Domino's stores operated by PKP. Domino's has
agreed to provide us, on an ongoing basis, all information and materials
necessary to make us familiar with the methods used to operate and manage a
Domino's commissary.
In January 1995, KP commenced operations of a full-service commissary
in approximately 1,500 square feet of the Jana Pawla Domino's store. In 1999,
PKP entered into a new ten year lease for approximately 7,300 square feet of
warehouse space to be used for a new Domino's commissary. The initial annual
lease payment was approximately $32,724, excluding the cost of electricity.
Monthly lease payments commenced on June 1, 1999 at approximately $2,700 per
month; which increased by 2% on January 1, 2000 and will increase by 2% each
subsequent year. The site has been approved for its intended use by Domino's. We
expect to service up to 60 Domino's Pizza stores from this facility. KP has the
right to develop additional commissaries as needed. We intend to conduct all of
our purchasing, distribution and main food supply operations from the new
commissary.
DOMINO'S STORE SYSTEM. All Domino's Pizza stores are required to be
operated in compliance with Domino's standards. Domino's Pizza stores feature
carry-out services and delivery services to all customers located within
prescribed service areas and offer a substantially similar core menu including
various types of pizza and soft drinks. Other menu items include salads,
sandwiches and breadsticks. Pizza accounts for the most significant amount of
system-wide sales. Prices for Domino's menu items are determined by the various
operators of Domino's Pizza stores and, accordingly, may vary throughout the
Domino's store system.
Our initial Domino's Pizza stores are in existing buildings and range
from 1,000 square feet to 2,500 square feet, depending upon whether only
delivery and pick-up services are offered or counter service with limited
seating for customers is also available. In the future, we intend to focus our
efforts on the development of traditional Domino's Pizza stores which provide
primarily delivery and pick-up services and Domino's Pizza stores developed by
us should range in size from 900 to 1,200 square feet. We estimate that once the
space has been leased and made available to us, approximately 30 to 90 days are
required to renovate, equip, furnish and obtain necessary licenses and approvals
to open a Domino's store. We estimate the cost of opening a Domino's store to be
between $125,000 and $200,000, including leasehold improvements, furniture,
fixtures, equipment, the initial franchise fee and opening inventories (but
excluding the cost of land). These estimates may vary depending on the size and
condition of a proposed Domino's store and the extent of leasehold improvements
required.
DOMINO'S STORE DEVELOPMENT. To date, we have opened 14 Domino's Pizza
stores in Warsaw, Poland. We have also opened one Domino's store in each of the
cities of Lublin and Lodz, and we intend to focus most of our future Domino's
store development efforts on other Polish cities. All sites are subject to the
approval of Domino's. We believe that the Domino's store concept may be
successful in a wide variety of areas within a city. Accordingly, the site
selection process involves an evaluation of a variety of factors, including
demographics (such as population density); specific site characteristics (such
as visibility, accessibility and traffic volume); proximity to activity centers
(such as office or retail shopping districts and apartment, hotel and office
complexes); potential competition in the area; construction or renovation costs;
and lease terms and conditions. Because traditional Domino's Pizza stores
provide delivery and pick-up services only, we have sought and seek to place
Domino's Pizza stores in metropolitan areas with adequate levels of telephone
ownership. Our personnel inspect and approve a proposed site for each Domino's
store before the execution of a standard franchise agreement and store lease.
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<PAGE>
ADVERTISING AND PROMOTION. The Domino's standard franchise agreement
provides that each franchisee will contribute a monthly advertising and
promotion fee equal to 4% of its gross sales to a fund self-administered by each
Franchisee to be used for advertising, sales promotion and public relations.
Each Franchisee is responsible for using the proceeds of the advertising fund to
develop and implement advertising and promotional plans, materials and
activities on behalf of the Domino's Pizza stores in Poland, which plans,
materials and activities are subject to Domino's approval. Non-affiliated
franchisees will be permitted to conduct their own advertising and promotion
subject to our and Domino's approval. Domino's is required to provide
advertising and promotional assistance to us.
SOURCES OF SUPPLY. We are substantially dependent upon third parties
for all of our capital equipment (including furniture, fixtures and equipment),
food products, and other supplies. Pursuant to the Domino's agreement and the
standard franchise agreements, all of these supplies must be of a quality and
conform to specifications acceptable to Domino's. We currently obtain
substantially all of our supplies and food products, including cheese, soft
drinks, cold cuts and paper products from Polish sources and maintain
approximately a seven to 30 day inventory of food products and supplies for our
Domino's Pizza stores. We currently obtain our store furniture and fixtures from
sources in Poland and obtain our restaurant equipment, flour and tomato sauce
primarily from Domino's approved sources in the United States and Europe. We
currently have no written, long-term supply agreements. Shipments of food and
supplies are delivered directly to the commissary or Domino's Pizza stores.
STORE OPERATIONS AND PERSONNEL. We operate our Domino's Pizza stores
under uniform standards shown in Domino's Operating Manuals, including
specifications relating to food quality and preparation, design and decor and
day-to-day operations. Our operations are similar to those of other Domino's
Pizza stores. We hire Domino's store managers who are responsible for
supervising the day-to-day operations of the Domino's Pizza stores, including
food preparation, customer relations, store maintenance, cost control and
personnel relations. In addition, Domino's store managers are responsible for
selecting and training new employees, who undergo on-the-job training.
To date, we believe that we have successfully attracted and trained
local managers and other employees. We operate our own Domino's approved
training facility in Poland, with assistance from Domino's. We maintain
financial, accounting and management controls for our Domino's Pizza stores
through the use of centralized accounting systems, detailed budgets and
computerized management information systems.
Our Domino's operations are managed by Joanna Makowska, the President
of PKP and the General Manager of IFFP. Ms. Makowska was supported by
approximately 64 full-time and 286 part-time employees as of June 30, 2000.
TRADEMARKS. We are authorized to use the trademarks, service marks and
other marks as Domino's may authorize from time to time for use in connection
with Domino's Pizza stores. Domino's has received trademark approval in Poland
for specified marks, including the Domino's logo and the words "Domino's Pizza."
DOING BUSINESS IN POLAND
THE INFORMATION PRESENTED IN THIS SECTION HAS BEEN EXTRACTED FROM
PUBLICLY AVAILABLE DOCUMENTS AND IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF
ALL INFORMATION ABOUT THE REPUBLIC OF POLAND THAT MAY BE MATERIAL TO OUR
COMPANY.
AREA AND POPULATION. Poland is one of the largest countries in Europe
with a total land area of approximately 312,000 square kilometers. It shares
land borders with Germany, the Czech Republic, Slovakia, Ukraine, Belarus,
Lithuania and the Russian Federation. Its population, which was estimated at
approximately 39 million (as of December 31, 1999), makes it one of the most
populous countries in Europe, with approximately 62% of the population living in
urban areas. Poland has an extensive network of roads, railways and canals, and
has four major ports on the Baltic sea.
GOVERNMENT AND POLITICAL SYSTEM. Poland is a democratic republic based
on the three-party system. The President is elected in general elections. The
President nominates the Prime Minister and the remaining Ministers who
constitute the executive branch of the government. The Parliament, which is also
elected in general elections, consists of a lower house (the Sejm) and an upper
house (the Senate). Judicial power is vested in independent courts, which answer
to the Supreme Court.
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<PAGE>
ECONOMIC OVERVIEW. Since the fall of the Communist government in 1989,
Poland has embarked on a program of economic reforms, based on a transition to a
market economy and private ownership. Poland has become the first former
centrally planned economy in Central and Eastern Europe to end its recession and
return to growth. After a significant decline in GDP in real terms, a sharp rise
in unemployment and an acceleration in inflation, Poland returned to growth,
with positive rates of GDP growth for the years 1992 to 1998.
The economic recovery in Poland since 1992 has benefited most sectors
of the economy. Unemployment which peaked in 1994 at 16% dropped to 13.5% in
June 2000. Real wages have grown during the last four years, increasing 4.8% in
1998. Domestic demand has been driven by an increase in investment and private
consumption and exports have increased. In addition, Poland also benefits from
increasing productivity. A significant portion of the growing domestic demand,
however, has been met through imports, resulting in a growing trade deficit.
Poland's government has run a budget deficit throughout the 1990's,
although since 1993 the deficit has remained below the annually set target and
was 1.5% of GDP in 1998. In recent years, the financing of the budget deficit
has been secured mainly through the issuance of treasury securities on the
domestic market with very limited recourse to external sources, and has been
characterized by increasingly longer average maturities. Budgetary discipline
has been maintained by cuts in areas including defense, health care and
education.
Poland is a member of the International Monetary Fund, the World Bank,
the United Nations Organization and the Organization for Economic Cooperation
and Development, and is an associate member of the EU. Additionally, in 1999
Poland became a formal member of the North Atlantic Treaty Organization
("NATO").
GROSS DOMESTIC TOTAL. Poland is one of the fastest growing economies in
Europe. In 1998, unofficial preliminary estimates indicated that Poland's GDP
grew by 4.8% in real terms, following increasing real growth rates based on IMF
estimates in 1995 of 7.0%, in 1996 of 6.1%, in 1997 of 6.9%, in 1998 of 4.8% and
in 1999 of 4.1%.
INFLATION. Although inflation has generally declined since prices were
liberalized in the beginning of 1990, the rate of inflation in Poland is still
high compared to Western Europe or the United States. The annual increase in the
consumer price index ("CPI") has been continuously but gradually declining from
a rate of almost 250% in 1990 to 7.3% in 1999. This decline has occurred
together with increases in real GDP and decreasing unemployment. Similarly, the
annual increase in the producer price index ("PPI") decreased from approximately
293% in 1990 to 4.9% in 1998.
EMPLOYMENT AND WAGES. Before 1989, unemployment was not officially
recognized in Poland and over-employment was evident in many enterprises. By the
end of the first quarter of 1994, registered unemployment had reached over 16.0%
of the labor force but by the end of that year it had decreased for the first
time since 1990 to 16.0% of the labor force. At June 30, 2000, registered
unemployment was 13.5% of the labor force.
All employees, Polish and foreign, must be paid in zlotys. Foreign
employees require work permits from local authorities, which are typically not
difficult to obtain for executive or managerial employees, and are typically
obtained in due course. Employers are required to pay a minimum wage. All wages
are subject to payroll taxes payable by the employer, and income tax payable by
the employee.
POLISH CURRENCY. The only currency that may be used in Poland is the
zloty. The value of the zloty is determined under a system based on a basket of
currencies (whose weights in the basket reflect their relative importance in
Poland's foreign trading transactions), as well as all other economic and
political factors that effect the value of currencies generally. At December 31,
1999 and June 30, 2000, the exchange rates were 4.15 and 4.40 zlotys per dollar.
FOREIGN DIRECT INVESTMENT IN POLAND. In general, foreign investors are
not required to obtain any special permits to invest in Polish companies. A
foreign investor may establish a limited liability company (roughly analogous to
a closely held corporation in the United States), in which it will hold 100% of
the shares; establish a limited liability company, with the equity jointly
contributed by it and other foreign and/or Polish parties; or enter business in
Poland through acquisition of stock of an existing Polish limited liability
company. A foreign investor may also invest in "joint stock companies," which
are roughly analogous to publicly held corporations in the United States.
Subject to specified restrictions, the Polish foreign investment law generally
allows for full repatriation of capital dividends and profits by foreign
investors.
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<PAGE>
Other than the provisions of the Polish Commercial Code generally
applicable to all limited liability companies, there is no minimum level of
investment required of a foreign person investing in a Polish limited liability
company. The minimum capital required for establishment of any limited liability
company is 4,000 zlotys (approximately $909 at June 30, 2000 exchange rates),
which must be made in Polish currency obtained from the sale of convertible
currency (including United States or Western European funds) to a foreign
exchange bank, or, to the extent designated in the company's incorporation
documents, through in-kind, nonmonetary contributions that are transferred from
abroad or purchased with Polish currency obtained from the sale of convertible
currency to a foreign exchange bank. To the extent designated in the company's
incorporation documents, fixed assets may constitute in-kind, non-monetary
contributions to equity.
GOVERNMENTAL REGULATION OF RESTAURANT OPERATIONS. Restaurant operations
are subject to a number of national and local laws and regulations, primarily
related to sanitation. All imported food products are subject to specific
sanitary requirements. Restaurants are subject to national regulations relating
to health and sanitation standards, generally implemented, administered and
enforced at the local level. All properties are subject to local zoning,
building code and land-use regulations. In general, necessary approvals and
permits for restaurant operations are granted without undue delay.
TAXATION. A limited liability company with foreign investors is subject
to the same taxes, and general tax reductions, as domestic Polish companies
without foreign participation. A limited liability company is subject to
corporate income tax, VAT, which is known in Poland as the "Tax on Goods and
Services," and excise tax and, depending on the nature of its business
activities, may also be subject to real estate tax, local tax, and stamp duty.
The corporate income tax rate is currently 34%. The rate is generally calculated
by the extent to which revenues exceed expenses, including operating losses,
which may be carried forward for three years. The shareholder of a limited
liability company is liable for any income taxes not paid by the company.
Goods and services, including imported goods and services, are subject
to a VAT tax. Certain commodities like liquors and automobiles are subject to
excise tax, based on the value of the items. With respect to imports, the value
of the items is equal to the customs' value plus any customs' duties. The VAT
basic rate is 22%, but in the case of some products (including food products),
it is reduced to 7% or eliminated entirely. Under the VAT system, credit is
given for VAT paid against VAT collected.
Currently, dividends are taxed at the rate of 20%. However, Poland has
executed a bilateral tax agreement with the United States, under which the tax
on dividends of corporations in which at least 10% of the voting stock is held
by a United States corporation may not exceed 5%. Thus, though current
regulations would otherwise provide for a 20% tax on dividends, taxes on
dividends paid by a limited liability company which is a subsidiary of our
company will be at the rate of 5%.
CUSTOMS DUTIES AND IMPORT RESTRICTIONS. Our operations may be subject
to various levels of customs duties on some types of items imported into Poland.
Customs duties and other similar fees, however, are not levied on non-monetary,
in-kind contributions to capital, provided that the contributions constitute
"fixed assets" and are not disposed of during the three-year period following
customs clearance. Although we have contributed as capital substantially all of
our subsidiaries' furniture, fixtures and equipment, there can be no assurance
that this equipment will ultimately qualify as "fixed assets" for purposes of
this exclusion.
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<PAGE>
DESCRIPTION OF PROPERTY
OUR OFFICES. We maintain our executive offices in approximately 2,500
square feet of leased office space at 1000 Lincoln Road, Suite 200, Miami Beach,
Florida 33139. Annual lease payments under the lease are approximately $38,000.
We currently sublease approximately 1,400 square feet for an annual fee of
$30,700. We have exercised our third of three two-year renewal options under the
lease, which expires in December 2000.
In April 1998, IFFP executed a lease for its corporate headquarters for
approximately 4,680 square feet of space located at 16 Jagiellonska St., Warsaw,
Poland. The annual rental payment is approximately $110,000, including common
area charges. The agreement is for a five-year term and we have the right of
first refusal in leasing the premises for subsequent annual periods, provided
that the lessor is notified of our intention to continue leasing the premises no
later than six months before the expiration of the initial term.
Management believes that all of our properties are adequately covered
by insurance. We have not incurred nor do we anticipate incurring any material
costs or expenses associated with compliance with the environmental laws of the
United States or Poland.
BURGER KING STORES. The following table sets forth, as of June 30,
2000, the location, opening date, lease or sublease expiration date (including
all renewal options), square meters and minimum annual lease payments (in U.S.
dollars) for each of our Burger King restaurants:
<TABLE>
<CAPTION>
LEASE SQUARE MINIMUM ANNUAL
LOCATION OPENING DATE EXPIRATION DATE METERS(2) LEASE PAYMENTS
-------- ------------ --------------- --------- --------------
<S> <C> <C> <C> <C>
Warsaw, Poland December 1992 January 2004 522 $28,942
Warsaw, Poland April 1993 (1) 720 $43,766
Warsaw, Poland May 1993 (1) 851 $52,758
Warsaw, Poland July 1993 January 2009 476 $33,282
Lublin, Poland March 1994 January 2014 824 $54,000
Warsaw, Poland March 1994 January 2009 276 $76,200
Katowice, Poland October 1994 November 2003 550 $119,040(3)
Mikolow, Poland July 1998 November 2017 600 $12,000
Torun, Poland August 1998 January 2018 1,135 $30,000
Plonsk, Poland September 1998 April 2018 3,610 $30,000
Pabianice, Poland November 1998 June 2018 560 $24,000
Raciborz, Poland November 1998 July 2018 360 $24,000(3)
Olsztyn, Poland November 1998 July 2018 800 $24,000
Gorzow, Poland November 1998 October 2018 850 $24,000
Wroclaw, Poland December 1998 September 2018 2,200 $30,000
Szczecin, Poland January 1999 November 2018 1,650 $24,000
Walbrzych, Poland January 1999 December 2018 1,600 $24,000
Opole, Poland February 1999 September 2018 1,600 $30,000
Czestochowa, Poland February 1999 November 2018 1,180 $24,000
Czechowice, Poland March 1999 November 2038 3,733 $21,000
Krakow, Poland April 1999 August 2018 1,500 $24,000
Tychy, Poland June 1999 January 2018 2,078 $30,000
Warsaw, Poland April 1999 October 2018 1,250 $24,000
Warsaw, Poland April 1999 November 2018 1,360 $30,000
<FN>
-----------------------
(1) Indicates lease is for an unlimited period of time, but may be terminated
upon three months notice by the lessor, subject to specified conditions.
(2) Includes basement, second floor and land area.
(3) We have closed the Burger King restaurants in Katowice and Raciborz, but
continue to be obligated under the leases.
</FN>
</TABLE>
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<PAGE>
DOMINO'S STORES. The following table sets forth, as of June 30, 2000,
the name, location, opening date, lease or sublease expiration date (including
all renewal options), square meters and minimum annual lease payments (in U.S.
dollars) for each of our Domino's Pizza stores:
<TABLE>
<CAPTION>
LEASE SQUARE MINIMUM ANNUAL LEASE
LOCATION OPENING DATE EXPIRATION DATE METERS PAYMENTS
-------- ------------ --------------- ------ --------
<S> <C> <C> <C> <C>
Warsaw, Poland March 1994 January 2009 480 $76,200
Warsaw, Poland May 1994 (1) 130 $7,970
Warsaw, Poland August 1994 March 2004 482 $35,000
Warsaw, Poland July 1997 (1) 100 $5,415
Warsaw, Poland December 1997 (1) 97 $12,422
Warsaw, Poland March 1998 (1)(2)(3) 190 $6,900
Warsaw, Poland March 1998 January 2008 93 $14,400
Warsaw, Poland April 1998 February 2008 100 $14,315
Warsaw, Poland June 1998 (1) 137 $8,422
Warsaw, Poland July 1998 (1) 83 $4,740
Lublin, Poland December 1998 September 2008 125 $13,700
Lomianki, Poland December 1998 October 2008 116 $8,054
Lodz, Poland December 1998 October 2008 211 $7,485
Warsaw, Poland January 1999 June 2007 120 $12,000
Legionowo, Poland January 1999 October 2008 120 $9,480
Piaseczno, Poland July 1999 October 2008 92 $7,800
<FN>
-----------------------
(1) Indicates lease is for an unlimited period of time, but may be terminated
upon three months notice by the lessor, subject to specified conditions and
payments to lessee.
(2) Includes commissary.
(3) Includes training facility
</FN>
</TABLE>
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 $100,018 at the June
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) 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 former 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 QPQ Corporation. 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 our financial statements.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mitchell Rubinson(1)(2)(3)............... 53 Chairman of the Board, Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer
Larry H. Schatz(1)(2)(3)................. 54 Vice Chairman of the Board
<FN>
--------------------------
(1) Member of the Audit Committee.
(2) Member of the Stock Option Committee.
(3) Member of the Nomination Committee.
</FN>
</TABLE>
Mitchell Rubinson has served as our Chairman of the Board and Chief
Executive Officer since our incorporation in December 1991, served as President
from December 1991 to June 1998 and served as Chief Operating Officer and Chief
Financial Officer since May, 2000. Mr. Rubinson has served as the Chairman of
the Board, Chief Executive Officer and President of Capital Brands from March
1988 to April 1996, and was the Treasurer of Capital Brands from March 1992 to
April 1993. Mr. Rubinson served as the Chairman of the Board, Chief Executive
Officer and President of QPQ Corporation (now known as Regenesis Holdings, Inc.)
from July 1993 to May 1997.
Larry H. Schatz has served as our Vice Chairman of the Board since July
1997. Mr. Schatz has served as "of counsel" for the law firm of Grubman Indursky
& Schindler P.C. since January 1996. From 1991 through December 1995 Mr. Schatz
worked as an attorney in private practice.
KEY EMPLOYEES
Joanna Makowska has been employed by our Polish subsidiaries since 1992
and has served as President of PKP since June, 2000 and as General Manager of
IFFP since November, 1999.
Jolanta Ciupinska has served as the finance director of IFFP since
March 1999. From 1993 to 1999, she was employed as a senior accountant at
PricewaterhouseCoopers Sp.Z.o.o. (formerly Coopers and Lybrand Sp.Z.o.o.).
COMPENSATION OF DIRECTORS
We generally do not pay directors' fees, but reimburse all directors
for their expenses in connection with their activities as directors. Directors
who are also our employees do not receive additional compensation for their
services as directors. Mr. Schatz receives $25,000 per annum for serving as Vice
Chairman of the Board.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1999, IFFP entered into a credit agreement with Citibank
(Poland) S.A. under which Citibank granted IFFP a line of credit in the amount
of $5,000,000. The line of credit is guaranteed by Burger King and we granted
Burger King a security interest in the outstanding shares of IFFP. As a
condition to the guarantee, Burger King required that we and Mitchell Rubinson
enter into a general release in favor of Burger King for any and all matters
occurring before the date of the guarantee. In order for IFFP to enter into the
line of credit, holders of the outstanding 11% Convertible Senior Subordinated
Discount Notes were required to waive applicable provisions of the note
indenture. As compensation for the waiver, the noteholders were issued an
aggregate of 204,585 shares of our common stock at a value of $.56 per share.
Additionally, in connection with this transaction, Mitchell Rubinson
entered into a purchase agreement with Burger King which provided that if we
default on the line of credit and Burger King takes possession of the IFFP
shares and we are unable to repurchase the shares of IFFP from Burger King, Mr.
Rubinson is required to purchase the IFFP shares from Burger King for an amount
equal to all amounts paid out by Burger King plus costs and expenses incurred by
Burger King in connection with the enforcement of its rights under a
reimbursement agreement with us. In connection with the purchase agreement, we
paid Mitchell Rubinson a fee of $150,000.
In October 1999, IFFP increased the amount of the line of credit to
$8,000,000. As security of the line of credit, Burger King required that
Mitchell Rubinson enter into a personal guaranty with Burger King and pledge
5,000,000 shares of our common stock owned by him. In connection with these
matters, we entered into a reimbursement and fee agreement whereby we 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 Senior Subordinated Discount Notes were required to waive applicable
provisions of the note indenture.
On June 16, 2000, we entered into an agreement with Burger King
Corporation pursuant to which Burger King agreed, among other things, to
discharge $8 million (plus interest) due to Citibank under IFFP credit facility
and will be freed of the obligation to guarantee any future borrowings by IFFP.
In addition, Burger King, on the one hand, and we, IFFP and Mr. Rubinson, 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 us, in our discretion, to close Burger King stores
that are unprofitable, and thereafter to dispose of them as we deem fit. We
recognized a gain on this transaction which is comprised as follows:
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........................... (654,652)
--------------
Gain on settlement.................................... $ 5,830,416
=============
In connection with the agreement, the warrant held by Burger King
Corporation to purchase 4,000,000 shares of our Common Stock at a price of $2.00
per share was cancelled, and 5,000,000 shares of common stock pledged by to
Burger King Mr. Rubinson were released.
In August 1999, $17,900,000 in stated principal amount at maturity of
our 11% Convertible Senior Subordinated Discount Notes held by the Pilgrim
Balance Sheet Opportunities Fund, Pilgrim High Total Return Fund and Pilgrim
High Total Return Fund II were exchanged for an aggregate of 158,134 newly
issued shares of our Series B Convertible Preferred Stock.
44
<PAGE>
During the six months ended June 30, 2000, we borrowed an aggregate of
$540,000 from Mitchell Rubinson, our Chairman of the Board and Chief Executive
Officer and principal shareholder, pursuant to the terms of a $1 million line of
credit bearing interest at 10% per annum. The loans are due on demand. As of
August 15, 2000, the balance of such loans was $951,000.
As of June 30, 2000, we owed Mr. Rubinson $132,500 of salary and
benefits applicable to the six months ended June 30, 2000. The balance of such
amounts at August 15, 2000 was $143,365. As of June 30,2000 and August 15, 2000,
we also owed Mr. Rubinson a total of $109,000 for certain guarantee payments.
All of the foregoing transactions were authorized by the disinterested
directors of IFFC.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of August 15, 2000, the number of
shares of our common stock which were owned beneficially by:
(a) each person who is known by us to own beneficially more than 5% of our
common stock,
(b) each director,
(c) the Named Executive Officers, and
(d) all directors and executive officers as a group.
Unless otherwise indicated, the address of each of the listed
beneficial owners identified is c/o 1000 Lincoln Road, Suite 200, Miami Beach,
Florida 33139. Under Rule 13d-3 of the Exchange Act, certain shares may be
deemed to be beneficially owned by more than one person. In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount of
shares outstanding is deemed to include the amount of shares beneficially owned
by such person by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does not
necessarily reflect the person's actual ownership or voting power with respect
to the number of shares of common stock actually outstanding as of August 15,
2000.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF AMOUNT AND NATURE OF OUTSTANDING SHARES
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OWNED
---------------- -------------------- -----
DIRECTORS AND EXECUTIVE OFFICERS:
<S> <C> <C>
Mitchell Rubinson.............................. 27,759,211(1) 60.5%
Larry H. Schatz................................ 250,000(2) *
All directors and executive officers as a
group (two persons)......................... 28,009,211 61.1%
OTHER 5% OWNERS:
Edda Rubinson.................................. 23,409,211(3) 51.0%
Joel Hirschhorn................................ 2,343,000(4) 5.1%
Nigel Norton................................... 4,010,000(5) 8.7%
24 Avenue Princess Grace
Monte Carlo, Monaco
Pilgrim Investments, Inc....................... 24,092,697(6) 34.4%
40 N. Central, Suite 1200
Phoenix, Arizona 85004
Bank of America Corporation.................... 5,441,279(7) 10.6%
100 North Tryon Street
Charlotte, North Carolina 28255
Legg Mason High Yield Portfolio................ 13,611,058(8) 22.9%
117 E. Colorado Blvd.
Pasadena, California 91105
46
<PAGE>
<FN>
-----------------------
* Less than 1%
(1) Includes 22,409,211 shares held jointly with his wife, Edda Rubinson and
5,000,000 of common stock owned by Mr. Rubinson, individually, and options
to purchase 150,000 shares of common stock granted to Mr. Rubinson that are
immediately exercisable at an exercise price of $.40 per share.
(2) Reflects options to purchase 50,000 shares of common stock granted to Mr.
Schatz that are exercisable at any time prior to July 2001 at an exercise
price of $.40 per share and options to purchase 200,000 shares of common
stock granted to Mr. Schatz that are immediately exercisable at an exercise
price of $.75 per share.
(3) Includes 22,409,211 shares held jointly with Mitchell Rubinson, Edda
Rubinson's husband.
(4) Includes 353,000 shares held by Mr. Hirschhorn as trustee of the Hirschhorn
and Beber 401k Profit Sharing Trust.
(5) Nigel Norton is Mitchell Rubinson's brother-in-law.
(6) Includes shares of common stock which would be acquired upon the conversion
of an aggregate of 158,134 shares of Series B Preferred Stock held by
Pilgrim Balance Sheet Opportunities Fund, Pilgrim High Total Return Fund
and Pilgrim High Total Return Fund II. Pilgrim Investments, Inc. is the
parent company of such funds.
(7) As reported in the shareholder's Schedule 13G filed with the Securities and
Exchange Commission on March 21, 2000. Reflects (i) 20,438 shares of common
stock beneficially owned by NB Holdings Corporation, NationsBanc Montgomery
Holdings Corporation and Banc of America Securities LLC and (ii) 5,420,841
shares a common stock which would be acquired by the conversion of 11%
Convertible Series Subordinated Discount Notes held by such entity based on
the principal amount at maturity of such notes and shares issuable for
accrued interest thereon.
(8) Includes (i) 51,146 shares of common stock and (ii) 13,559,912 shares of
common stock which would be acquired upon the conversion of 11% Convertible
Senior Subordinated Discount Notes held by such entity based on the
principal amount at maturity of such notes, and shares issuable for accrued
interest thereon.
</FN>
</TABLE>
47
<PAGE>
SELLING SHAREHOLDERS
The shares of common stock, Series B Preferred Stock and 11%
Convertible Senior Subordinated Discount Notes covered by this prospectus are
offered by the selling shareholders identified in the table below. We have been
advised by the selling shareholders that none of them have ever held a position
or office, or had any material relationship with, our company, except as
otherwise indicated below. It is unknown if, when, or in what amounts a selling
shareholder may offer the shares for sale. There is no assurance that the
selling shareholders will sell any or all of the shares offered hereby. Because
the selling shareholders may offer all or some of the shares in the offering,
and because there are currently no agreements, arrangements or understandings
with respect to the sale of any of the shares that will be held by the selling
shareholders after completion of the offering, no estimate can be given as to
the amount of the shares that will be held by the selling shareholders after
completion of the offering.
<TABLE>
<CAPTION>
OWNERSHIP OF SHARES NUMBER OF OWNERSHIP OF SHARES
OF COMMON STOCK SHARES OFFERED OF COMMON STOCK
BEFORE OFFERING(1) HEREBY(2) AFTER OFFERING(3)
--------------- --------- -----------------
SERIES B
NAME AND ADDRESS PREFERRED COMMON
OF SELLING SHAREHOLDER SHARES PERCENTAGE STOCK STOCK SHARES PERCENTAGE
---------------------- ------ ---------- ----- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Pilgrim High Total Return Fund 108,839 * 129,423 19,009,454 -- *
Pilgrim High Total Return Fund II 13,012 * 15,460 2,342,424 -- *
Pilgrim Balance Sheet Opportunities Fund 11,150 * 13,251 2,007,727 -- *
Legg Mason High Yield Portfolio 13,611,058 22.9% -- 13,611,058 -- *
Bank America 5,441,279 10.6% -- 5,441,279 -- *
Nigel Norton 4,010,000 8.7% -- 3,000,000 1,010,000 1.1%
<FN>
-------------------------
* Less than 1%.
(1) Assumes all shares of Series B Convertible Preferred Stock and 11%
Convertible Senior Subordinated Discount Notes (including Notes to be
issued for future interest payments) have been converted into common stock.
(2) Because the selling shareholders may sell all, some or none of their
shares, no actual estimate can be made of the aggregate number of shares
that are to be offered hereby or the number or percentage of shares that
the selling shareholders will own after completion of the offering to which
this prospectus relates.
(3) Assumes all shares of Series B Convertible Preferred Stock and 11%
Convertible Senior Subordinated Discount Notes (including Notes to be
issued for future interest payments) have been converted into common stock
and all shares registered hereunder have been sold.
</FN>
</TABLE>
48
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock is 202,000,000 shares, consisting of
200,000,000 shares of common stock, par value $.01 per share, and 2,000,000
shares of preferred stock, par value $.01 per share. As of August 15, 2000, we
had 45,863,209 shares of common stock issued and outstanding and had 48,364,188
shares of common stock reserved for issuance consisting of:
-- 1,099,500 shares of common stock reserved for issuance upon conversion
of shares of our Series A Preferred Stock (conversion price of $3.00
per share);
-- 23,959,696 of common stock reserved for issuance upon conversion of
shares of our Series B Preferred Stock at a conversion price $.66 per
share, based on the liquidation value of each Series B Preferred
Share;
-- 495,000 shares of common stock reserved for issuance upon the exercise
of outstanding options under our stock option plans at exercise prices
ranging from $.40 to $.75 per share;
-- 3,505,000 shares of common stock reserved for the grant of options
under the stock option plans;
-- 324,235 shares of common stock reserved for issuance upon conversion
of $2,756,000 in principal amount of the 9% Convertible Subordinated
Debentures (conversion price of $8.50 per share); and
-- 18,980,757 shares of common stock reserved for issuance upon
conversion of $13,286,530 in aggregate stated principal amount of
maturity of the 11% Convertible Senior Subordinated Discount Notes
(conversion price of $.70 per share), which includes shares issuable
in lieu of interest payments made by issuance of additional notes.
We may issue additional convertible securities, options, warrants and
shares of common stock in the future.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record on all matters to be voted on by shareholders. There is no
cumulative voting with respect to the election of directors and, as a result,
the holders of more than 50% of the shares voted for the election of directors
can elect all of the directors. The holders of common stock are entitled to
receive dividends when, as and if declared by the Board out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
our company, the holders of common stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of liabilities
and after provision has been made for each class of preferred stock, including
the Series A Convertible Preferred Stock. Holders of shares of common stock have
no conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to the common stock. All of the outstanding
shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Our Articles of Incorporation authorize the issuance of 2,000,000
shares of "blank check" preferred stock with the designation, rights and
preferences as may be determined from time to time by the Board. Accordingly,
the Board is authorized, without action by the stockholders, to issue preferred
stock from time to time with the dividend, liquidation, conversion, voting and
any other rights and restrictions as they may determine.
SERIES A CONVERTIBLE PREFERRED STOCK. In October 1994, in connection
with an exchange offer, our Board of Directors approved the issuance of 83,920
shares of the Series A Preferred Stock, par value of $.01 per share, with a
liquidation preference value of $100 per share, plus all accrued but unpaid
dividends. Holders of shares of Series A Preferred Stock are entitled to receive
cumulative dividends at the annual rate of 6% ($6.00 per share) from the
issuance date. These dividends are payable semi-annually on December 15 and June
15 of each year, whether or not declared by the Board. All dividends payable by
us may, at our option, be paid through the issuance of shares of our common
stock, cash or any combination of cash and common stock. For the purpose of
paying dividends in common stock, the common stock will be valued at the average
closing price of the common stock during the thirty consecutive full business
days preceding our announcement of the dividends. Dividends payable for a
portion of a dividend payment period will be computed on a pro rata basis.
Accrued and unpaid dividends will not bear interest. Holders of the Series A
Preferred Stock have no preemptive rights.
49
<PAGE>
Upon any liquidation, dissolution or winding up of our company, no
distribution will be permitted to be made to either holders of stock ranking
junior (either as to dividends or upon liquidation, dissolution or windup) to
the Series A Preferred Stock unless, prior thereto, the holders of the Series A
Preferred Stock have received $100 per share, plus an amount equal to unpaid
dividends thereon if any, including accrued dividends, whether or not declared,
to the date of the payment, or the holders of stock ranking in parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all other parity stock in proportion to the total amounts to which the
holders of all these shares are entitled upon the liquidation, dissolution or
winding up.
The holders of the Series A Preferred Stock have no voting rights
except as may be shown in our Articles of Incorporation and under applicable
Florida law. Each share of Series A Preferred Stock is convertible at any time
into shares of common stock at a conversion price of $3.00 per share, subject to
adjustment in specified circumstances; provided, however, that if shares of
Series A Preferred Stock are called for redemption, conversion rights with
respect to these shares will expire at the close of business on the date fixed
for redemption, unless we default in making the payment due upon redemption.
The number of shares of common stock issuable upon the conversion of
shares of Series A Preferred Stock is subject to adjustment under specified
circumstances.
The holders of Series A Preferred Stock will not be protected from
dilution resulting from issuances of common stock at less than the conversion
price or issuances of additional shares of preferred stock.
Shares of the Series A Preferred Stock may, at our option, be redeemed
by us at any time, provided that the closing market price for the common stock
exceeds 150% of the then-effective conversion price of the Series A Preferred
Stock for a period of ten consecutive trading days before the announcement of
the redemption. If we determine to redeem shares of the Series A Preferred
Stock, these shares are redeemable at our election in whole or in part at any
time or from time to time, out of funds legally available for redemption, at a
redemption price of $100 per share, plus accrued but unpaid dividends through
the redemption date.
SERIES B CONVERTIBLE PREFERRED STOCK. In August 1999, we issued 158,134
shares of our Series B Convertible Preferred Stock, par value of $.01 per share,
with a liquidation preference value of $100 per share, plus all accrued but
unpaid dividends. Holders of shares of Series B Preferred Stock are entitled to
receive cumulative dividends at the annual rate of 3% ($3.00 per share) which
accrue from December 31, 2001 and will be paid annually beginning on December
31, 2002. All dividends payable by us may, at our option, be paid through the
issuance of shares of Series B Preferred Stock, cash or any combination of cash
and Series B Preferred Stock. For the purpose of paying dividends in shares of
Series B Preferred Stock, they will be valued at the liquidation price. Accrued
and unpaid dividends will not bear interest. If at any time after January 1,
2003, our common stock has a market price of $1.28 or higher for ten consecutive
trading days, the dividend rights of the Series B Preferred Stock will be
cancelled.
Holders of the Series B Preferred Stock have no preemptive rights.
Upon any liquidation, dissolution or winding up of our company, no
distribution will be permitted to be made to either holders of stock ranking
junior (either as to dividends or upon liquidation, dissolution or windup) to
the Series B Preferred Stock unless, prior thereto, the holders of the Series B
Preferred Stock shall have received $100 per share, plus an amount equal to
unpaid dividends thereon if any, including accrued dividends, whether or not
declared, to the date of payment, or the holders of stock ranking in parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series B Preferred Stock, except distributions made ratably on the Series B
Preferred Stock and all other parity stock in proportion to the total amounts to
which the holders of all these shares are entitled upon the liquidation,
dissolution or winding up.
50
<PAGE>
The holders of the Series B Preferred Stock have no voting rights
except as may be shown in our Articles of Incorporation and under applicable
Florida law. Each share of Series B Preferred Stock is convertible at any time
into shares of common stock at a conversion price of $.66 per share, based upon
the liquidation value of each Series B Preferred Share.
The number of shares of common stock issuable upon the conversion of
shares of Series B Preferred Stock is subject to adjustment under specified
circumstances.
The holders of Series B Preferred Stock will not be protected from
dilution resulting from issuances of common stock at less than the conversion
price or issuances of additional shares of preferred stock. Shares of the Series
A Preferred Stock may, at our option, be redeemed by us at any time, provided
that the closing market price for the common stock exceeds 150% of the
then-effective conversion price of the Series A Preferred Stock for a period of
ten consecutive trading days before the announcement of the redemption. If we
determine to redeem shares of the Series A Preferred Stock, these shares are
redeemable at our election in whole or in part at any time or from time to time,
out of funds legally available for redemption, at a redemption price of $100 per
share, plus accrued but unpaid dividends through the redemption date.
9% CONVERTIBLE SUBORDINATED DEBENTURES
In December 1992 and January 1993, we received net proceeds of
approximately $9.7 million from the sale of approximately $11.4 million
principal amount of 9% convertible subordinated debentures. Thereafter, in
January 1994, we offered to exchange for each $1,000 in principal amount of the
9% Convertible Subordinated Debentures validity tendered, one unit consisting of
160 newly issued shares of common stock and warrants to purchase 100 shares of
common stock at an exercise price of $7.00 per share. See "Exchange Warrants"
below for additional information on the warrants. As a result, only
approximately $2.8 million in principal amount of the 9% Convertible
Subordinated Debentures remain outstanding.
Interest on the debentures has accrued from the date of issuance and is
payable semi-annually on June 15 and December 15 of each year at a rate of 9%
per annum. Payment of the full amount of principal is due on December 15, 2007,
unless the 9% Convertible Subordinated Debentures are redeemed or converted
earlier in compliance with the provisions of the indenture.
To the extent provided in the indenture, the indebtedness, including
interest and any premiums payable upon redemption, evidenced by the 9%
Convertible Subordinated Debentures, is subordinate and subject in right of
payment to the prior payment when due in full of all senior indebtedness.
"Senior Indebtedness" is defined by the indenture to include, unless the terms
respecting the particular indebtedness or obligation otherwise provide, any
indebtedness of our company, thereafter existing for borrowed money or incurred
by us or any of our subsidiaries in connection with the acquisition of any
business, properties, or assets (including any properties or assets acquired in
the ordinary course of business) and some types of lease obligations. The
indenture contains no provision restricting the incurrence of additional debt or
the issuance of additional securities.
The 9% Convertible Subordinated Debentures are convertible at their
principal amount into our common stock, at the conversion price of $8.50 per
share. The conversion price is subject to adjustment upon the occurrence of
specified events. The holders will not be protected from dilution resulting from
issuances of common stock at less than the conversion price. The 9% Convertible
Subordinated Debentures may be redeemed at our option, in whole or in part, at
any time upon at least 30 days notice. The debentures are redeemable through the
operation of a sinking fund which began on December 15, 1998, and on December
15th in each year thereafter to and including December 15, 2006, at a sinking
fund redemption price equal to 100% of the principal amount of the debentures
plus accrued interest to the date fixed for redemption.
The indenture provides that if an event of default specified therein
shall have happened and be continuing either the trustee or the holders of 25%
in aggregate principal amount of the debentures then outstanding may declare the
principal of all the 9% Convertible Subordinated Debentures to be due and
payable. Events of default are defined in the indenture as being:
51
<PAGE>
-- default for ten days in payment of any interest installment;
-- default in payment of principal and premium, if any, when due and
payable;
-- default in the deposit of any sinking fund payment when and as due;
-- default for 60 days after written notice to us by the Trustee or to us
and the Trustee by the holders of 25% in principal amount of the
outstanding debentures, in the performance of any other covenant or
agreement in the indenture;
-- a default under any bond, debenture, note or other evidence of
indebtedness for money borrowed by us which constitutes a failure to
pay interest or principal when due or results in the indebtedness
becoming or being declared due and payable without the default being
cured; and
-- specified events of bankruptcy, insolvency and reorganization.
Under the indenture, we may not be consolidated with or merge into, or
transfer all or substantially all of our assets to, another corporation unless
the successor corporation assumes all our obligations.
11% CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES
In November 1997, we raised an aggregate of approximately $17.7 million
(before placement costs) from the sale of approximately $27.5 million stated
principal amount at maturity of 11% Convertible Senior Subordinated Discount
Notes issued under the terms of an indenture between us and HSBC Bank USA, as
trustee. As of August 15, 2000, there was $9,636,000 in aggregate stated
principal amount at maturity of the 11% Convertible Senior Subordinated Discount
Notes outstanding. The notes are general, unsecured obligations, and will mature
on October 31, 2007. From and after October 31, 2000, each note will pay
interest at a rate of 11%, payable semi-annually on April 30 and October 31 of
each year, commencing April 30, 2001. In 1999, the noteholders agreed that the
interest will be payable in notes through October 31, 2003. Thereafter, the
interest will be payable in cash.
The 11% Convertible Senior Subordinated Discount Notes are redeemable,
at our option, in whole or in part, at any time or from time to time, on or
after October 31, 2002.
In the case of any partial redemption, selection of the 11% Convertible
Senior Subordinated Discount Notes for redemption will be made by us in
compliance with the requirements of the principal national securities exchange,
if any, on which the notes are listed or, if the notes are not listed on a
national securities exchange, on a pro rata basis, by lot or any other method as
we, in our sole discretion, shall deem fair and appropriate, PROVIDED, HOWEVER,
that no 11% convertible note of $1,000 in principal amount or less shall be
redeemed in part.
The 11% Convertible Senior Subordinated Discount Notes are convertible
(in denominations of $1,000 principal amount at maturity or integral multiples
of $1,000), at the option of the holder, into our common stock at any time. The
number of shares of common stock issuable upon conversion of the 11% Convertible
Senior Subordinated Discount Notes is equal to the accreted value of the notes
being converted (on the date of conversion) divided by $.70, subject to
adjustment in specified events. We are not required to issue fractional shares
upon conversion of the notes.
In addition, if the best bid offered price on the OTC BB on days when
transactions in the common stock are not effected, or, on the days as
transactions are effected on the OTC BB, the highest price at which a trade was
executed as reported to the National Association of Securities Dealers, Inc.
through the Automated Confirmation Transaction Service, during any period
described below has exceeded the price for the period referred to below for at
least 20 consecutive trading days, and the registration statement with respect
to the 11% Convertible Senior Subordinated Discount Notes is effective and
available, all of the notes will be automatically converted into that number of
shares of common stock derived by application of the conversion ratio described
above.
12 MONTHS BEGINNING CLOSING PRICE
------------------- -------------
October 31, 1999 $2.80
October 31, 2000 $3.23
52
<PAGE>
The denominator of the conversion ratio is subject to adjustment (under
formula shown in the indenture) in specified events, including:
(1) the issuance of common stock as a dividend or distribution on common
stock;
(2) subdivisions and combinations of the common stock;
(3) the issuance to all holders of common stock of rights or warrants to
purchase additional shares of common stock;
(4) the distribution to all holders of common stock of shares of our
capital stock (other than common stock) or evidences of our
indebtedness or assets (including securities, but excluding those
rights, warrants, dividends and distributions referred to above and
dividends and distributions in connection with the liquidation,
dissolution or winding up of our company or paid in cash);
(5) distributions consisting of cash, excluding any quarterly,
semi-annual, annual or other regularly scheduled cash dividend paid on
the common stock; and
(6) payment in respect of a tender or exchange offer by us or any of our
subsidiaries for the common stock to the extent that the cash and
value of any other consideration included in the payment per share of
common stock exceeds the current market price per share of common
stock on the trading day next succeeding the last day on which tenders
or exchanges may be made under the tender or exchange.
No adjustment to the denominator of the conversion ratio will be
required unless the adjustment would require a change of at least 1.0% in the
denominator of the conversion ratio then in effect; PROVIDED that any adjustment
that would otherwise be required to be made shall be carried forward and taken
into account in any subsequent adjustment. Except as stated above, the
denominator of the conversion ratio will not be adjusted for the issuance of
common stock or any securities convertible into or exchangeable for common stock
or carrying the right to purchase any of the foregoing.
If holders of our common stock are entitled to receive stock or assets
as a result of any reclassification or change of the common stock, a
consolidation, merger or combination involving our company or a sale or
conveyance to another corporation of our property and assets as an entirety or
substantially as an entirety, the holders of the 11% Convertible Senior
Subordinated Discount Notes will be entitled thereafter to convert the notes
into the kind and amount of shares of stock, other securities or other property
or assets which they would have owned or been entitled to receive upon the
reclassification, change, consolidation, merger, combination, sale or conveyance
had the notes been converted into common stock immediately before the
reclassification, change, consolidation, merger, combination, sale or
conveyance.
We from time to time may, to the extent permitted by law, reduce the
denominator of the conversion ratio by any amount for any period of at least 20
days, in which case we shall give at least 15 days' notice of the reduction, if
the Board has made a determination that the reduction would be in our best
interests, which determination shall be conclusive. We may, at our option, make
the reductions in the denominator of the conversion ratio, in addition to those
shown above, as the Board deems advisable to avoid or diminish any income tax to
holders of common stock resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as a dividend or distribution
for income tax purposes.
The holders of 11% Convertible Senior Subordinated Discount Notes are
not entitled to receive dividends or other distributions, receive notice of any
meeting of the stockholders, consent to any action of the stockholders, receive
notice of any other stockholder proceedings, or to any other rights as
stockholders of our company.
At the date of conversion, the rights of the holders of 11% Convertible
Senior Subordinated Discount Notes being converted will terminate, except the
right to receive accrued and unpaid interest, if any, and the notes to be
converted will no longer be deemed outstanding and will represent only the right
to receive shares of common stock and a right to receive cash for fractional
shares, as described above.
53
<PAGE>
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of our Articles of Incorporation could have the
effect of deterring takeovers. Our Articles of Incorporation provide that a
special meeting of shareholders may only be called by the Board of Directors,
the Chief Executive Officer or by the written demand of the holders of not less
than 50% of all the votes entitled to be cast on the issue proposed to be
considered and do not provide for cumulative voting. In addition, the State of
Florida has enacted legislation that may deter or frustrate takeovers of Florida
corporations. The Florida Control Share Act generally provides that shares
acquired in excess of specified thresholds will not possess any voting rights
unless the voting rights are approved by a majority of a corporation's
disinterested shareholders. The Florida Affiliated Transactions Act generally
requires supermajority approval by disinterested shareholders of specified
transactions between a public corporation and holders of more than 10% of the
outstanding voting shares of the corporation (or their affiliates).
INDEMNIFICATION
We have authority under Section 607.0850 of the Florida Business
Corporation Act to indemnify our directors and officers to the extent provided
for in the statute. Our Amended and Restated Articles of Incorporation provide
that we shall indemnify our officers and directors to the fullest extent not
prohibited by law, including indemnification against liability under the
Securities Act. We have also entered into an agreement with some directors and
executive officers wherein we have agreed to indemnify them to the fullest
extent permitted by law.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies, including injunctive or other
forms of nonmonetary relief, will remain available under Florida law. In
addition, each director will continue to be subject to liability for (a)
violations of criminal laws, unless the director had reasonable cause to believe
his conduct was lawful or had no reasonable cause to believe his conduct was
unlawful, (b) deriving an improper personal benefit from a transaction, (c)
voting for or assenting to an unlawful distribution and (d) willful misconduct
or conscious disregard for our best interests in a proceeding by or in the right
of our company to procure a judgment in its favor or in a proceeding by or in
the right of a shareholder. The statute does not affect a director's
responsibilities under any other law, including the federal securities laws.
The effect of the foregoing is to require us to indemnify our officers
and directors for any claim arising against these persons in their official
capacities if the person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers or persons controlling
our company under the foregoing provisions, we have been informed that in the
opinion of the SEC, this indemnification is against public policy as expressed
in the Act and is therefore unenforceable.
TRANSFER AGENT
The transfer agent and registrar for the common stock, Series A
Preferred Stock and the 9% Convertible Subordinated Debentures is Continental
Stock Transfer & Trust Company, New York, New York. The transfer agent and
registrar for the Series B Preferred Stock and the 11% Convertible Senior
Subordinated Discount Notes is HSBC Securities, New York, New York.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market,
or the possibility of the sales occurring, could adversely affect prevailing
market prices of our common stock and our ability to raise equity capital.
After completion of this offering and assuming the conversion of all of
the shares of Series B Preferred Stock and conversion of the 11% Convertible
Subordinated Discount Notes, we will have outstanding 88,803,662 shares of our
common stock, assuming no exercise of outstanding options or conversion of 9%
Subordinated Convertible Debentures or conversions of Series A Preferred Stock.
Of these shares, those freely tradable without restriction include:
-- 46,145,038 shares offered in this offering, unless sold to our
affiliates, as that term is defined in Rule 144;
-- approximately 14,657,314 registered shares of common stock, unless
held by our affiliates. Our affiliates are people or entities that
directly or indirectly control our company, are controlled by our
company or are under common control with our company. For instance,
our directors, executive officers and principal stockholders are
deemed to control our company, and are thus affiliates.
The remaining 28,001,310 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144,
all of which are held by our affiliates. Restricted securities may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rule 144, which rules are summarized below.
RULE 144
In general, under Rule 144 as currently in effect, a person, including
an affiliate, who has beneficially owned shares of our common stock for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
(1) 1% of the number of shares of common stock then outstanding, which
will equal approximately 888,037 shares immediately after this
offering; or
(2) the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale.
Sales under Rule 144 also must be sold through brokers or :market
makers" and there must be current public information about our company
available. Shares properly sold in reliance on Rule 144 to persons who are not
affiliates become freely tradable without restriction or registration under the
securities laws.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately.
55
<PAGE>
PLAN OF DISTRIBUTION
GENERAL
TRANSACTIONS. The selling shareholders may offer and sell their shares
of common stock or Series B Preferred Stock in one or more of the following
transactions:
-- in the over-the-counter market,
-- in negotiated transactions, or
-- in a combination of any of these transactions.
PRICES. The selling shareholders may sell their shares of common stock
or Series B Preferred Stock at any of the following prices:
-- fixed prices which may be changed,
-- market prices prevailing at the time of sale,
-- prices related to prevailing market prices, or
-- negotiated prices.
DIRECT SALES; AGENTS, DEALERS AND UNDERWRITERS. The selling
shareholders may effect transactions by selling the shares of common stock or
Series B Preferred Stock in any of the following ways:
-- directly to purchasers, or
-- to or through agents, dealers or underwriters designated from time to
time.
Agents, dealers or underwriters may receive compensation in the form of
underwriting discounts, concessions or commissions from the selling shareholders
and/or the purchasers of shares for whom they act as agent or to whom they sell
as principals, or both. The selling shareholders and any agents, dealers or
underwriters that act in connection with the sale of shares might be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act, and
any discount or commission received by them and any profit on the resale of
shares as principal might be deemed to be underwriting discounts or commission
under the Securities Act.
SUPPLEMENTS. To the extent required, we will show in a supplement to
this prospectus filed with the SEC the number of shares to be sold, the purchase
price and public offering price, the name or names of any agent, dealer or
underwriter, and any applicable commissions or discounts with respect to a
particular offering.
STATE SECURITIES LAW. Under the securities laws of some states, the
selling shareholders may only sell the shares in those states through registered
or licensed brokers or dealers. In addition, in some states the selling
shareholders may not sell the shares unless they have been registered or
qualified for sale in that state or an exemption from registration or
qualification is available and is satisfied.
EXPENSES; INDEMNIFICATION. We will not receive any of the proceeds from
the sale of the shares of common stock or Series B Preferred Stock sold by the
selling shareholders and will bear all expenses related to the registration of
this offering but will not pay for any underwriting commissions, fees or
discounts, if any. We will indemnify the selling shareholders against some civil
liabilities, including some liabilities which may arise under the Securities
Act.
56
<PAGE>
LEGAL MATTERS
The legality of the securities offered by this prospectus will be
passed upon for us by Greenberg Traurig, P.A., Miami, Florida.
EXPERTS
Our financial statements for the year ended December 31, 1999 and 1998
included in this prospectus have been audited by Arthur Andersen LLP,
independent certified public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm given as experts in accounting and auditing in giving said report.
Reference is made to such report, which includes an explanatory paragraph with
respect to the uncertainty regarding the Company's ability to continue as a
going concern.
CHANGE IN ACCOUNTANTS
On June 15, 2000, Arthur Andersen LLP resigned as our independent
auditors. Because Arthur Andersen resigned, rather than being dismissed by us,
neither our Audit Committee nor Board of Directors recommended or approved a
change in our independent auditors.
The reports of Arthur Andersen on our financial statements for the past
two fiscal years contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principle, except for modified opinions for the past two fiscal years relating
to our ability to continue as a "going concern."
In connection with Arthur Andersen's audits of our financial statements
for the two most recent fiscal years, there have been no disagreements with
Arthur Andersen on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Arthur Andersen would have caused them to make
reference thereto in their report.
Our Board of Directors intends to authorize the former accountant to
respond fully to the inquiries of any successor accountant regarding the
foregoing.
None of the other reportable events listed in Item 304(a)(1)(v) of
Regulation S-K occurred with respect to us during our two most recent fiscal
years and the subsequent interim period preceding Arthur Andersen's resignation.
We engaged Moore Stephens Lovelace, P.A. as our new independent
accountants as of July 17, 2000. During the two most recent fiscal years and
through July 17, 2000, the we have not consulted Moore Stephens Lovelace, P.A.
regarding;
-- the application of accounting principles to a specified transaction,
either completed or proposed;
-- the type of audit opinion that might be rendered on the Registrant's
financial statements, and in no case was a written report provided to
the Registrant nor was oral advice provided that the Registrant
concluded was an important factor in reaching a decision as to an
accounting, auditing or financial reporting issue; or
-- any matter concerning a disagreement, as that term is defined in
304(a)(1)(iv) of Regulation S-K and the related instructions to item
304 of Regulation S-K, or a reportable event with the former
independent accountant ( as defined in Regulation S-K Item
304(a)(1)(v)).
Moore Stephens Lovelace, P.A. was the Registrant's independent
accountants for the fiscal year ended December 31, 1996.
57
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are required to file reports, proxy statements and other information
with the SEC. You may inspect reports, proxy statements and other information
filed by us with the SEC without charge and may copy this information at
prescribed rates at
-- the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street N.W., Washington, D.C. 20549;
-- the SEC's regional office located at Seven World Trade Center, Suite
1300, New York, New York 10048;
-- the SEC's regional office located at Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661.
The SEC maintains a world wide web site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the SEC. The address of this site is http://www.sec.gov.
We have filed with the SEC a Registration Statement on Form SB-2 under
the Securities Act with respect to the securities offered by this prospectus.
This prospectus does not contain all of the information in the registration
statement. For further information with respect to our company and the
securities offered by this prospectus, refer to the registration statement,
including the exhibits and schedules thereto. You may inspect a copy of the
registration statement and the exhibits, without charge, at the SEC's principal
office in Washington, D.C. and obtain copies of all or any part of the
registration statement at prescribed rates from the Public Reference Section of
the SEC at the address shown above.
58
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL FAST FOOD CORPORATION
<S> <C>
Six Months Ended June 30, 2000 and 1999 (Unaudited):
Consolidated Condensed Balance Sheet as of June 30, 2000 (unaudited) .............. F-2
Consolidated Condensed Statements of Operations for the Six Months Ended June 30,
2000 and 1999 (unaudited) ......................................................... F-3 - F-4
Consolidated Condensed Statements of Shareholders' Equity for the Six Months Ended
June 30, 2000 (unaudited) ......................................................... F-5
Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30,
2000 and 1999 (unaudited) ......................................................... F-6
Notes to Condensed Consolidated Financial Statements .............................. F-7 - F-15
Years Ended December 31, 1999 and 1998:
Report of Independent Certified Public Accountants ............................... F-16
Consolidated Balance Sheets as of December 31, 1999 and 1998 ..................... F-17
Consolidated Statements of Operations for the years ended December 31, 1999
and 1998 ......................................................................... F-18
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1999 and 1998 ....................................................... F-19
Consolidated Statements of Cash Flows for the years ended December 31, 1999
and 1998 ......................................................................... F-20 - F-21
Notes to Consolidated Financial Statements ....................................... F-22 - F-38
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C>
Cash ................................................................... $ 229,641
Receivables ............................................................ 275,849
Inventories ............................................................ 623,690
Prepaid expenses and other ............................................. 382,333
------------
Total Current Assets ............................................... 1,511,513
Furniture, Equipment, Buildings and Leasehold Improvements, net of
accumulated depreciation and amortization of $8,915,955 .................. 17,448,313
Deferred Debt Issuance Costs, net of accumulated amortization of $462,408 ... 939,325
Other Assets, net of accumulated amortization of $519,013 ................... 1,103,449
Burger King Development Rights, net of accumulated amortization of $162,162 . 87,838
Domino's Development Rights, net of accumulated amortization of $93,252 ..... 95,851
------------
Total Assets ....................................................... $ 21,186,289
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................................... $ 2,068,183
Accrued interest payable ............................................... 10,339
Other accrued expenses ................................................. 2,894,643
Current portion of bank credit facilities .............................. 642,938
Shareholder Loans ...................................................... 540,000
------------
Total Current Liabilities .......................................... 6,156,103
11% Convertible Senior Subordinated Discount Notes due October 31, 2007 ..... 9,292,572
Bank Credit Facilities ...................................................... 958,342
9% Subordinated Convertible Debentures, due December 15, 2007 ............... 2,756,000
------------
Total Liabilities .................................................. 19,163,017
------------
Other Liabilities ........................................................... 250,000
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.01 par value, 2,000,000 shares
authorized; 32,985 shares issued and outstanding (liquidation ........ 330
preference of $3,298,500)
Series B Convertible Preferred Stock, $.01 par value, 400,000 shares
authorized; 158,134 shares issued and outstanding (liquidation ....... 1,581
preference of $15,813,400)
Common Stock, $.01 par value, 200,000,000 shares authorized; ........... 45,863,209
shares issued and outstanding ........................................ 458,633
Additional paid-in capital ............................................. 34,651,398
Accumulated deficit .................................................... (33,338,670)
------------
Total Shareholders'Equity .......................................... 1,773,272
------------
Total Liabilities and Shareholders' Equity ......................... $ 21,186,289
============
SEE ACCOMPANYING NOTES
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------ ------------
REVENUES:
<S> <C> <C>
Sales ...................................................................... $ 5,853,689 $ 7,841,918
FOOD AND PACKAGING COSTS ................................................... 1,958,244 3,028,520
------------ ------------
GROSS PROFIT ............................................................... 3,895,445 4,813,398
------------ ------------
OPERATING EXPENSES:
Payroll and related costs .............................................. 1,344,677 1,517,851
Occupancy and other operating expenses ................................. 2,190,296 2,732,853
Preopening expenses .................................................... -- 738,592
Depreciation and amortization .......................................... 1,442,395 1,284,967
------------ ------------
Total operating expenses .......................................... 4,977,368 6,274,263
------------ ------------
Loss from operations before general and administrative expenses ............ (1,081,923) (1,460,865)
GENERAL AND ADMINISTRATIVE EXPENSES ........................................ 1,515,482 2,258,714
------------ ------------
Loss from operations ....................................................... (2,597,405) (3,719,579)
------------ ------------
OTHER INCOME (EXPENSES):
Interest and other income, net ......................................... 217,602 251,429
Interest expense, including amortization of issuance costs ............. (1,434,316) (1,511,652)
Gain on settlement ..................................................... 5,830,416 --
Foreign currency exchange gain/(loss) .................................. 118,262 (144,914)
------------ ------------
Total other income (expenses) ..................................... 4,731,964 (1,405,137)
------------ ------------
Income (loss) before provision for income taxes and cumulative effect of
accounting change .......................................................... -- (5,124,716)
Provision for income taxes ........................................... -- --
------------ ------------
Income (loss) before cumulative effect of accounting change .......... 2,134,559 (5,124,716)
Cumulative effect of accounting change ..................................... -- (620,000)
------------ ------------
NET INCOME (LOSS) .......................................................... $ 2,134,559 $ (5,744,716)
============ ============
BASIC NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) before cumulative effect of accounting change .......... $ .04 $ (.11)
Cumulative effect of accounting change ............................... -- (.02)
------------ ------------
Net income (loss) .................................................... $ 04 $ (.13)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ....................... 45,593,049 45,056,418
============ ============
SEE ACCOMPANYING NOTES
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS,
CONTINUED
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
--------- ------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE:
<S> <C> <C>
Income (loss) before cumulative effect of accounting change....... $ .03 $(.11)
Cumulative effect of accounting change ........................... -- $(.02)
---------- -------------
Net income (loss)................................................. $ .03 $(.13)
========== =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.................. 84,988,700 45,056,418
========== =============
</TABLE>
SEE ACCOMPANYING NOTES
F-4
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 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 45,497,655 $454,977 $34,506,099 $(35,374,274) $ (411,287)
Issuance of common stock upon
exercise of stock options...... - - 92,099 921 49,079 - 50,000
Issuance of common stock for 6%
Series A Preferred Stock dividends - - 273,455 2,735 96,220 (98,955) -
Net income for the period...... - - - - - 2,134,559 2,134,559
------- ------- ---------- -------- ----------- ------------- ------------
Balances, June 30, 2000 (unaudited) 191,119 $1,911 45,863,209 $458,633 $34,651,398 $ (33,338,670) $ 1,773,272
======= ======= ========== ======== =========== ============= ============
SEE ACCOMPANYING NOTES
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ................................................ $ 2,134,559 $(5,744,716)
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities: .......................... --
Cumulative effect of accounting change ......................... -- 620,000
Amortization and depreciation of furniture, equipment,
buildings,leasehold improvements and development rights ...... 1,546,504 1,410,889
Amortization and write-off of debt discount and issuance ....... 2,465,730 1,316,298
costs
Other operating items .......................................... 180,051 100,402
Changes in operating assets and liabilities:
Receivables .................................................... (29,772) 1,150,107
Inventories .................................................... 172,216 6,563
Prepaid expenses and other ..................................... (235,324) (269,972)
Accounts payable and accrued expenses .......................... 298,018 (508,123)
----------- ------------
Net cash provided by (used in) operating activities .............. 6,531,982 (1,918,552)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Liquidation of certificates of deposit ........................... 990,990 --
Payments for furniture, equipment, buildings and leasehold ....... (12,493) (4,773,799)
improvements
Payments for franchise fees and other assets ..................... (46,881) (216,589)
----------- ------------
Net cash provided by (used in) investing activities .............. 931,616 (4,990,388)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank credit facilities ............................. (9,292,666) (277,673)
Borrowings under bank credit facilities .......................... 1,101,311 4,057,847
Borrowings from shareholder ...................................... 540,000 --
Issuance of common stock ......................................... 50,000 --
----------- ------------
Net cash (used in ) provided by financing activities ............. (7,601,355) 3,780,174
----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ........ (16,133) (100,402)
----------- ------------
INCREASE / DECREASE IN CASH AND CASH EQUIVALENTS .................... (153,890) (3,229,168)
BEGINNING CASH AND CASH EQUIVALENTS ................................. 383,531 4,013,371
----------- ------------
ENDING CASH AND CASH EQUIVALENTS .................................... $ 229,641 $ 784,203
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ....................................................... $ 639,213 $ 376,133
=========== ============
Interest capitalized ........................................... $ -- $ 155,100
=========== ============
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
SIX MONTHS ENDED JUNE 30, 2000:
ISSUANCE OF 273,455 SHARES OF COMMON STOCK IN PAYMENT OF $98,955 OF
DIVIDENDS ON THE 6% SERIES A PREFERRED STOCK.
SIX MONTHS ENDED JUNE 30, 1999:
ISSUANCE OF 204,585 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 217,959 SHARES OF COMMON STOCK IN PAYMENT OF $96,775 OF
DIVIDENDS ON THE 6% SERIES A PREFERRED STOCK
SEE ACCOMPANYING NOTES
</TABLE>
F-6
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 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").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION -- The accompanying unaudited consolidated
condensed financial statements, which are for interim periods, have been
prepared in conformity with the instructions to Form 10-QSB and Article 10 of
Regulation S-X 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
for the years ended December 31, 1999 and 1998, which are included on pages F-17
to F-38.
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 only 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 ("BKC") 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 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 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, 2000 and December 31, 1999, the
exchange rate was 4.40 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.
F-7
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 an explanatory paragraph 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 $2,134,559 (which includes a non
recurring gain of $5,830,416) for the six months ended June 30, 2000, and had a
working capital deficiency and an accumulated deficit of $4,644,590 and
$33,338,670 respectively, at June 30, 2000. These factors among others raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the outcome of this uncertainty.
LIQUIDITY AND PLAN OF OPERATIONS -- As of June 30, 2000, IFFC had
negative working capital of approximately $4,644,590 and cash of $229,641. IFFC
has significant commitments to develop restaurants in accordance with the BKC
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 BKC and Domino's agreements. The
Company has sustained losses from operations since its incorporation in December
1991. For the six months ended June 30, 2000 and 1999, the Company reported net
income of $2,134,559 (which includes a non recurring gain of $5,830,416) and a
net loss of $5,744,716, respectively. At June 30, 2000 the Company had an
accumulated deficit of $33,338,670. 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 net income (loss) per common
share in the accompanying statements of operations has been computed based upon
the provisions of SFAS No. 128, Earnings Per Share, which became effective for
reporting periods ending after December 15, 1997. 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 six months ended
June 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.
Diluted per share data for the six months ended June 30, 2000 assumes
that all dilutive convertible debt and convertible preferred shares outstanding
at the beginning of each period were converted at those dates, with related
interest and 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.
F-8
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The computation of the adjusted numerator and denominator used in the
computation of diluted per share data for the six months ended June 30, 2000 is
as follows:
Net income ..................................................... $ 2,134,559
Less preferred stock dividends ................................. (98,955)
------------
Income available to common shareholders, basic ................. 2,035,604
Add interest expense on convertible debt ....................... 671,919
Add preferred dividend requirements ............................ 98,955
------------
Income available to common shareholders, diluted ............... $ 2,806,478
============
Weighted average number of common shares outstanding, basic .... 45,593,049
Assumed shares issuable upon conversion of convertible debt ... 14,089,949
Assumed shares issuable upon conversion of preferred shares .... 25,059,196
Dilutive effect of stock options ............................... 246,506
------------
Weighted average number of common shares outstanding, diluted .. 84,988,700
============
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. 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 six months ended June 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 six months ended June 30,
2000, the Company incurred advertising expense of $446,010, all of which was
charged to expense during the period. During the six months ended June 30, 1999,
the Company incurred advertising expense of approximately $1,490,056, of which
approximately $576,651 was deferred at June 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.
F-9
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the six months ended June 30, 2000, the Company reported net income
of $2,134,559. 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 six months ended June 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.
3. RESTRICTED CASH:
At December 31 1999, the Company had a $999,990 certificate of deposit
hypothecated to an outstanding line of credit with Totalbank. During June 2000,
proceeds from the liquidation of the certificate of deposit were used to repay
the outstanding line of credit.
4. BANK CREDIT FACILITIES:
Bank credit facilities at June 30, 2000 consists of the following:
<TABLE>
<S> <C>
Amerbank, S.A, PKP overdraft credit line, variable rate
approximately equal to prime, expires May 31, 2001............ $ 2,583
Amerbank, S.A., IFFP overdraft credit line, variable rate
approximately equal to prime, expires September 30, 2000......
--
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................................ 86,363
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................................ 54,000
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.................... 1,458,334
---------
Total Debt......................................................... 1,601,280
Less: Current Maturities........................................... 642,938
---------
Long Term Debt..................................................... $ 958,342
=========
</TABLE>
F-10
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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. At June 30, 2000, there were $2,756,000
of Debentures outstanding.
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, 2000, the notes are comprised as follows:
Face amount of notes at maturity....................... $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.............. (343,428)
----------
Carrying value......................................... $9,292,572
==========
The Notes are convertible, at the option of the holder, into Common
Stock at any time after 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 June 30, 2000,
no additional portion of the Notes had been converted into Common Stock or
Preferred Stock.
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 is shown
below for the six months ended June 30, 2000:
WEIGHTED AVERAGE
2000 SHARE PRICE
---- -----------
Outstanding at beginning of period................... 1,670,000 $ .45
Granted.............................................. 200,000 $.75
Expired.............................................. (1,282,901) $ .61
Exercised............................................ (92,099) $ .54
----------
Outstanding at end of period......................... 495,000 $ .54
==========
Exercisable at end of period......................... 495,000 $ .54
Price range of options outstanding at end of period.. $.40 - $.75
Available for grant at end of period................. 3,505,000
At June 30, 2000, IFFC had reserved the following shares of Common
Stock for issuance:
F-11
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Stock option plans........................................................... 4,000,000
Convertible Debentures convertible into Common Stock at a conversion price
of $8.50 per share on or before December 15, 2007....................... 324,235
Series A Preferred Stock convertible into Common Stock at a conversion rate
of 33 1/3 Common Shares per share....................................... 1,099,500
Series B Preferred Stock convertible into Common Stock at a conversion
rate of 151 1/2 Common Shares per share................................. 23,959,696
Convertible Senior Subordinated Discount Notes convertible into Common
Stock, after November 5, 1998, at a conversion price of $.70 per share.. 13,765,714
-----------
Total reserved shares........................................................ 43,149,145
===========
</TABLE>
8. RELATED PARTY TRANSACTIONS:
During the six months ended June 30, 2000, the Company borrowed an
aggregate of $540,000 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 million line of credit bearing interest at 10% per annum. The
loans are due on demand. As of August 15, 2000, the balance of such loans was
$951,000.
As of June 30, 2000, the Company owed Mr. Rubinson $132,500 of salary
and benefits applicable to the six months ended June 30, 2000. The balance of
such amounts at August 15, 2000 was $143,365.
9. 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 is 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 Senior Subordinated Discount Notes
were required to waive applicable provisions of the note indenture. As
compensation for the waiver, the note holders were issued an aggregate of
204,585 shares of our common stock, with a fair value of $.56 per share.
The line of credit is 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.
F-12
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 Senior Subordinated Discount 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 ("BKC"), pursuant to which BKC agreed,
among other things, to discharge $8 million (plus interest) due to Citibank
under IFFP credit facility and will be freed of the obligation to guarantee any
future borrowings by IFFP. In addition, BKC, 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:
Repayment of IFFP line of credit by BKC, including accrued interest of
$109,898..............................................$ 8,109,898
Write-off of unamortized debt issuance costs............... (1,624,830)
Legal and professional fees................................ (654,652)
===========
Gain on settlement......................................... $5,830,416
===========
In connection with the settlement agreement, the warrant held by BKC to
purchase 4,000,000 shares of common stock of the Company at a price of $2.00 per
share was cancelled.
10. 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. 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 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 zlotys or approximately
US$100,018 at June 30, 2000 exchange rates.
F-13
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 judgments
or penalties that would have a material adverse effect on the Company.
11. 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 its
customers 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.
The following table presents financial information regarding the
Company's different industry segments as of and for the six month periods ended
June 30, 2000 and 1999 (in thousands).
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
-----------------------------------------------------------
IFFP PKP TOTAL CORPORATE CONSOLIDATED
---- --- ----- --------- ------------
<S> <C> <C> <C> <C> <C>
Restaurant/store sales........... $ 4,022 $ 1,832 $ 5,854 $ - $ 5,854
Food and packaging costs......... 1,367 592 1,959 - 1,959
Restaurant operating costs....... 2,427 1,108 3,535 - 3,535
Depreciation and amortization.... 1,141 301 1,442 - 1,442
General and administrative expenses 608 282 890 625 1,515
------- ------- -------- ------ --------
Loss from operations............. $(1,521) $ (451) $ (1,972) $ (625) $(2,597)
======= ======= ======== ====== =======
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
IFFP PKP TOTAL CORPORATE CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Restaurant/store sales ............ $ 5,655 $ 2,187 $ 7,842 $ -- $ 7,842
Food and packaging costs .......... 2,285 744 3,029 -- 3,029
Restaurant operating costs ........ 3,104 1,146 4,250 -- 4,250
Preopening ........................ 599 140 739 -- 739
expenses
Depreciation and amortization ..... 1,030 255 1,285 -- 1,285
General and administrative expenses 672 233 905 1,354 2,259
------- ------- ------- ------- -------
Loss from operations .............. $(2,035) $ ( 331) $(2,366) $(1,354) $(3,720)
======= ======= ======= ======= =======
Total assets:
June 30, 2000 .................. $17,015 $ 3,048 $20,063 $ 1,123 $21,186
======= ======= ======= ======= =======
</TABLE>
F-15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
International Fast Food Corporation:
We have audited the accompanying consolidated balance sheets of International
Fast Food Corporation (a Florida Corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International Fast
Food Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated 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 result should the Company be unable to continue as a
going concern.
/S/ ARTHUR ANDERSEN LLP
-----------------------
Miami, Florida,
March 29, 2000.
F-16
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
1999 1998
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ............................................ $ 383,531 $ 4,013,371
Restricted cash and certificates of deposit .......................... 999,990 999,990
Receivables .......................................................... 246,077 1,573,480
Inventories .......................................................... 795,906 842,867
Prepaid expenses and other ........................................... 147,009 1,150,700
------------ ------------
Total Current Assets ............................................. 2,572,513 8,580,408
Furniture, Equipment, Buildings and Leasehold
Improvements, net ...................................................... 18,957,883 17,137,181
Deferred Debt Issuance Costs, net ......................................... 2,931,015 2,659,205
Other Assets, net of accumulated amortization of $443,033
and $284,532, respectively ............................................. 1,132,548 991,461
Burger King Development Rights, net of accumulated
amortization of $74,324 and $189,189, respectively ..................... 175,676 810,811
Domino's Development Rights, net of accumulated
amortization of $77,710 and $46,626, respectively ...................... 111,393 142,477
Costs in excess of net assets acquired, net of
accumulated amortization of $19,307 in 1998 ............................ -- 1,525,260
------------ ------------
Total Assets ..................................................... $ 25,881,028 $ 31,846,803
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 2,658,055 $ 3,889,528
Accrued interest payable ............................................. 56,137 87,077
Other accrued expenses ............................................... 1,960,956 1,176,019
Current portion of bank credit facilities ............................ 1,615,685 1,512,260
------------ ------------
Total Current Liabilities ........................................ 6,290,833 6,664,884
11% Convertible Senior Subordinated Discount Notes due
October 31, 2007 ....................................................... 8,818,532 22,645,202
Bank Credit Facilities .................................................... 8,176,950 1,892,362
9% Subordinated Convertible Debentures, due December 15,
2007 ................................................................... 2,756,000 2,756,000
------------ ------------
Total Liabilities ................................................ 26,042,315 33,958,448
------------ ------------
Other Liabilities ......................................................... 250,000 1,000,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 2, 13 AND 14) SHAREHOLDERS' DEFICIT:
Series A Convertible Preferred Stock, $.01 par value, 2,000,000 shares
authorized; 32,985 shares
issued and outstanding (liquidation preference of ................ 330 330
$3,298,500)
Series B Convertible Preferred Stock, $.01 par value, 400,000 shares
authorized; 158,134 shares and no shares issued and outstanding,
respectively
(liquidation preference of $15,813,400) ............................ 1,581 --
Common Stock, $.01 par value, 200,000,000 shares
authorized; 45,497,655 and 44,901,587 shares
issued and outstanding, respectively ............................... 454,977 449,016
Additional paid-in capital ........................................... 34,506,099 17,888,248
Accumulated deficit .................................................. (35,374,274) (21,449,239)
------------ ------------
Total Shareholders' Deficit ...................................... (411,287) (3,111,645)
------------ ------------
Total Liabilities and Shareholders' Deficit ...................... $ 25,881,028 $ 31,846,803
============ ============
SEE ACCOMPANYING NOTES
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUE ................................................ $ 15,098,313 $ 8,426,104
FOOD AND PACKAGING COSTS ............................... 5,560,064 3,347,477
------------ ------------
GROSS PROFIT ........................................... 9,538,249 5,078,627
------------ ------------
OPERATING EXPENSES:
Payroll and related costs .......................... 3,181,693 1,608,283
Occupancy and other operating expenses ............. 6,161,870 2,963,262
Pre-opening expenses ............................... 605,522 --
Depreciation and amortization ...................... 3,115,531 1,508,520
Asset impairment charges ........................... 2,511,310 --
------------ ------------
Total operating expenses ...................... 15,575,926 6,080,065
------------ ------------
Loss from operations before general and administrative
expenses ........................................... (6,037,677) (1,001,438)
GENERAL AND ADMINISTRATIVE EXPENSES .................... 4,833,854 3,326,997
------------ ------------
Loss from operations ................................... (10,871,531) (4,328,435)
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income, net ..................... 686,256 888,232
Interest expense, including amortization of debt
issuance costs ................................... -- (2,672,314)
(2,882,221)
Foreign currency exchange gain/(loss) .............. (41,810) 124,903
------------ ------------
Total other expense ........................... (2,237,775) (1,659,179)
------------ ------------
Loss before minority interest .......................... (13,109,306) (5,987,614)
------------ ------------
Minority interest in losses of consolidated subsidiary . -- 115,478
------------ ------------
Loss before cumulative effect of accounting change ..... (13,109,306) (5,872,136)
------------ ------------
Cumulative effect of accounting change (Note 2) ........ (620,000) --
------------ ------------
NET LOSS ............................................... $(13,729,306) $ (5,872,136)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss before cumulative effect of accounting change . $ (.30) $ (.14)
============ ============
Cumulative effect of accounting change ............. (.01) --
============ ============
Net loss ........................................... $ (.31) $ (.14)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 45,198,921 44,727,685
============ ============
SEE ACCOMPANYING NOTES
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
TOTAL
ADDITIONAL SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997..... 33,450 $334 44,641,247 $446,413 $17,691,542 $(15,377,798) $2,760,491
Conversion of preferred stock.. (465) (4) 15,500 155 (151) -- --
Issuance of common stock in
payment of dividends on
Series A Convertible -- -- 244,840 2,448 196,857 (199,305) --
Preferred Stock..............
Net loss....................... -- -- -- -- -- (5,872,136) (5,872,136)
BALANCE, DECEMBER 31, 1998..... 32,985 330 44,901,587 449,016 17,888,248 (21,449,239) (3,111,645)
Issuance of common stock to
11% Noteholders.............. -- -- 204,585 2,046 112,522 -- 114,568
Issuance of common stock in
payment of dividends on
Series A Convertible -- -- 365,650 3,657 192,072 (195,729) --
Preferred Stock..............
Issuance of Series B
Convertible Preferred Stock
in exchange for $17,900,000
face amount of 11% notes..... 158,134 1,581 -- -- 14,281,871 -- 14,283,452
Issuance of warrants........... -- -- -- -- 2,024,378 -- 2,024,378
Exercise of warrants........... -- -- 25,833 258 7,008 -- 7,266
Net loss....................... -- -- -- -- -- (13,729,306) (13,729,306)
------- ------ ---------- -------- ----------- ------------ ---------
BALANCE, DECEMBER 31, 1999..... 191,119 $1,911 45,497,655 $454,977 $34,506,099 $(35,374,274) $(411,287)
======= ====== ========== ======== =========== ============= ==========
SEE ACCOMPANYING NOTES
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss................................................. $(13,729,306) $ (5,872,136)
Adjustments to reconcile net loss to net cash used
in operating activities:
Cumulative effect of change in accounting 620,000 --
principle............................................
Amortization and depreciation of furniture,
equipment, buildings, leasehold improvements
and development rights............................... 3,144,401 1,702,444
Accretion of debt discount and amortization of
issuance costs....................................... 677,012 2,383,556
Write off of deferred issuance costs of 11%
Convertible Senior Subordinated Discount Notes....... 1,532,338 --
Minority interest in losses of subsidiary.............. -- (115,478)
Other operating items.................................. 118,794 (24,620)
Asset impairment charges............................... 2,511,310 --
Changes in operating assets and liabilities,
net of acquisition of business:
Receivables............................................ 1,327,403 (1,471,952)
Inventories............................................ 46,961 (470,268)
Prepaid expenses and other............................. 383,691 (1,019,989)
Accounts payable and accrued expenses.................. (477,476) 3,695,580
----------- -----------
Net cash used in operating activities.................... (3,844,872) (1,192,863)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for furniture, equipment, buildings and
leasehold (5,679,378) (12,875,611)
improvements...........................................
Payments for franchise fees and other assets............. (382,075) (415,754)
Purchase of minority interest in subsidiary.............. -- (1,544,385)
----------- -----------
Net cash used in investing activities.................... (6,061,453) (14,835,750)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank credit facilities..................... (528,984) (384,889)
Borrowings under bank credit facilities.................. 6,916,997 1,809,516
Proceeds from exercise of warrants....................... 7,266 --
Payment of registration costs............................ -- (30,455)
----------- -----------
Net cash provided by financing activities................ 6,395,279 1,394,172
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................ (118,794) 5,477
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS.................... (3,629,840) (14,628,964)
BEGINNING CASH AND CASH EQUIVALENTS...................... 4,013,371 18,642,335
----------- -----------
ENDING CASH AND CASH EQUIVALENTS......................... $ 383,531 $4,013,371
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:.......
Cash paid during the year for:
Interest (net of capitalized interest of $94,038
and $142,658 in 1999 and 1998, respectively)......... $739,688 $ 405,258
=========== ===========
(CONTINUED)
</TABLE>
F-20
<PAGE>
INTERNATIONAL FAST FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
YEAR ENDED DECEMBER 31, 1999:
Issuance of 204,585 shares of common stock with a face value of
$114,568 to holders of 11% Convertible Senior Subordinated Discount Notes in
exchange for waiver on bank debt.
Issuance of 365,650 shares of common stock in payment of $195,729 of
dividends on Series A Convertible Preferred Stock.
Issuance of 158,134 shares of Series B Convertible Preferred Stock in
exchange for $14,283,452 in 11% Convertible Senior Subordinated Discount Notes.
Issuance of 4,000,000 warrants with a fair value of $2,024,378 in
exchange for Burger King Corporation guarantee of the Citibank (Poland) S.A.
line of credit.
YEAR ENDED DECEMBER 31, 1998:
Issuance of 15,500 shares of common stock upon the exchange of 465
shares of Preferred Stock.
Issuance of 244,840 shares of common stock in payment of $199,305 of
dividends on Preferred Stock.
SEE ACCOMPANYING NOTES
F-21
<PAGE>
1. ORGANIZATION:
International Fast Food Corporation (the "Company" or "IFFC") was
organized for the purpose of developing and operating franchised Burger King
restaurants in the Republic of Poland. IFFC was incorporated in the State of
Florida in 1991.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION -- The accompanying consolidated financial
statements include the accounts of the Company and its Polish subsidiary,
International Fast Food Polska, Sp.zo.o. ("IFFP"), a limited liability
corporation, and IFFP's three wholly-owned Polish limited liability
corporations. Additionally, the consolidated financial statements include the
accounts of the Company's two wholly-owned Polish limited liability
corporations, Krolewska Pizza, Sp.zo.o. ("KP") and Pizza King Polska, Sp.zo.o.
("PKP"). All significant intercompany transactions and balances have been
eliminated in consolidation.
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.
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% Subordinated Convertible Debentures,
11% Convertible Senior Subordinated Discount Notes and payment of franchise fees
to Burger King Corporation ("BKC") and Domino's Pizza International ("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. Because IFFC's operating
revenues 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.
LIQUIDITY AND PLAN OF OPERATIONS -- As of December 31, 1999, IFFC had
negative working capital of $3,718,320 and cash and cash equivalents of
$383,531. As described in Note 13, the Company has significant commitments to
develop restaurants in accordance with the BKC Development Agreement and the New
Master Franchise Agreement with Domino's. The Company has sustained losses from
operations since its incorporation in December 1991. For the years ended
December 31, 1999 and 1998, the Company reported net losses of $13,729,306 and
$5,872,136, respectively. At December 31, 1999, the Company had an accumulated
deficit of $35,374,274 and shareholders' deficit of $411,287. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The following paragraph sets forth management's plans with respect to
addressing the foregoing factors:
Management believes that cash flows from currently existing stores,
when combined with existing financial resources and drawings on the Company's
$10,000,000 line of credit secured by BKC (see Note 6), on which the Company has
$2,000,000 of borrowing availability as of March 24, 2000, will be sufficient to
fund operations through at least April 30, 2000. However, no assurance can be
given that management's plans will be achieved. Further, no assurance can be
given that the cash flows from existing and new stores will be sufficient to
fund operations through April 30, 2000. Management is seeking to obtain
additional equity or debt financing to fund operating losses and its commitment
to develop new Burger King restaurants and Domino's Pizza stores. No assurance
can be given that such financing will be obtained or that it can be obtained on
favorable terms. The consolidated 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.
F-22
<PAGE>
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments purchased with a maturity of three months or less at the time of
acquisition to be cash equivalents. The Company maintains its U.S. cash in bank
deposit accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on cash and cash equivalents.
INVENTORIES -- Inventories are stated at the lower of cost (first in,
first out) or market and consist primarily of restaurant food items.
FURNITURE, EQUIPMENT, BUILDINGS AND LEASEHOLD IMPROVEMENTS --
Furniture, equipment, buildings and leasehold improvements are stated at cost.
Maintenance and repairs are charged to expense, when incurred. Leasehold
improvements, additions, major renewals and betterments are capitalized.
Furniture and equipment is being depreciated over periods ranging from three to
five years on a straight-line basis. Buildings and leasehold improvements are
amortized over the shorter of their expected useful lives or the respective
lease term. When items are sold, or otherwise disposed of, the related costs and
accumulated amortization or depreciation are removed from the accounts and any
resulting gains or losses are recognized. In connection with the development of
new restaurants, the Company has capitalized certain development costs. These
costs include direct and indirect costs of the projects that are incremental to
normal operations and specifically identifiable to the related projects. The
amount of such costs included in the accompanying consolidated balance sheets
are approximately $283,000 and $434,000 as of December 31, 1999 and 1998,
respectively. In addition, the Company capitalizes interest incurred to finance
construction of the Company's stores. Capitalized interest was $94,038 and
$142,658 in 1999 and 1998, respectively.
ACQUISITION COSTS OF DEVELOPMENT RIGHTS -- All costs associated with
the acquisition of Burger King and Domino's Development Rights were capitalized.
The cost of these rights is being amortized over the term of the respective
agreements.
DEFERRED CHARGES AND OTHER ASSETS -- Software costs are amortized on a
straight-line basis over five years. Franchise fees are amortized over the
primary term of each agreement ranging from five to twenty years. Debt issuance
costs related to the issuance of the 9% Subordinated Convertible Debentures due
December 15, 2007 and the 11% Convertible Senior Subordinated Discount Notes due
October 31, 2007, have been capitalized and are amortized using the effective
interest method over the life of the related debt.
COST IN EXCESS OF NET ASSETS ACQUIRED - Cost in excess of net assets
acquired principally represents the excess of cost over the fair value of the
net assets of IFFP, which were acquired for approximately $1.5 million, with the
purchase of the remaining interest of IFFP's minority shareholder, Agros
Investments, S.A., in September 1998. These costs were written off in 1999. See
Note 16 for discussion of asset impairment charges.
LONG-LIVED ASSETS -- The Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of any
asset to undiscounted future cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. See Note 16 for discussion
of asset impairment charges.
TRANSLATION OF FOREIGN CURRENCIES -- The official currency of Poland is
the Zloty. The value of the Zloty is pegged pursuant to a system based on a
basket of currencies, as well as all other economic and political factors that
effect the value of currencies generally. At December 31, 1999 and 1998, the
exchange rate was 4.1483 and 3.494 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, buildings and 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.
F-23
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, receivables, accounts payable, and bank credit facilities
payable approximate fair value because of the short-term nature of these items.
The fair value of the Company's 9% Subordinated Convertible Debentures and 11%
Convertible Senior Subordinated Discount Notes are not readily determinable at
December 31, 1999, due to the lack of trading activity. However, management
believes that the carrying value approximates fair value using valuation
assumptions that would apply to similar debt instruments issued by companies
with similar risks.
INCOME TAXES - Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts. Deferred tax assets are also
established for the future tax benefits of loss and credit carryforwards.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized.
REVENUE RECOGNITION - Restaurant sales are recognized at time of sale
with delivery of product to the customer.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is defined as
the change in equity during the financial reporting period of a business
enterprise resulting from non-owner sources. The Company had no items of other
comprehensive income for the years ended December 31, 1999 and 1998. Therefore,
comprehensive income is equal to net income for the periods presented.
NET LOSS PER COMMON SHARE -- The net loss per common share in the
accompanying consolidated Statements of Operations has been computed based upon
the provisions of SFAS No. 128, "Earnings per Share". The basic and diluted net
loss per common share in the accompanying consolidated statements of operations
is based upon the net loss after preferred dividend requirements of $195,729 and
$199,305 in 1999 and 1998, respectively, divided by the weighted average number
of shares outstanding during each period. Diluted per share data is the same as
basic per share data since the inclusion of all potentially dilutive common
shares that would be issuable upon the exercise of options and warrants and the
assumed conversion of convertible debt and preferred stock would be
anti-dilutive.
The following options to purchase shares of common stock were
outstanding at the end of each year, but were not included in the computation of
diluted loss per share because the effect would be anti-dilutive:
1999 1998
---- ----
Options outstanding....................... 1,670,000 1,020,000
Weighted average exercise prices.......... $ 0.58 $ 0.52
Additionally, the effect of approximately 43,149,000 shares of common
stock issuable upon the exercise of warrants, the conversion of the 11% Senior
Subordinated Discount Notes and 9% Subordinated Convertible Debentures, and the
conversion of the Series A and B Convertible Preferred Stock have been excluded
from the calculation of diluted loss per share because the effect would be
antidilutive.
ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
F-24
<PAGE>
ADVERTISING AND PROMOTION EXPENSES -- Production costs of future media
advertising are deferred until the advertising occurs. All other advertising and
promotion costs are expensed when incurred. Advertising expense for the years
ended December 31, 1999 and 1998 was approximately $2,277,000 and $719,000,
respectively. As of December 31, 1999 and 1998, the Company had no deferred
advertising costs.
STORE PRE-OPENING EXPENSES - Prior to January 1, 1999, the Company
capitalized pre-opening costs associated with opening new restaurants. Upon
commencement of revenue producing activities at a restaurant location, these
capitalized pre-opening 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 in the
accompanying consolidated statement of operations for the year ended December
31, 1999. Pre-opening costs of $605,522 incurred subsequent to December 31, 1998
have been charged directly to expense.
ACCOUNTING FOR STOCK-BASED COMPENSATION - As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company continues to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and has made the pro forma disclosures required by SFAS No. 123 for
each of the two years ended December 31, 1999.
RECENTLY ISSUED ACCOUNTING STANDARD-- In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133". SFAS No. 137
defers for one year the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 will now apply to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133 will require the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 as required for its first
quarterly filing of fiscal year 2001. The Company believes the adoption of this
Statement will not have a material effect on its results of operations and
financial position.
RECLASSIFICATION OF PRIOR YEAR AMOUNTS -- Certain amounts in the
December 31, 1998 financial statements have been reclassified to conform to the
current year presentation.
3. RESTRICTED CASH:
At December 31, 1999, the Company had $999,990 in certificates of
deposit which represents collateral for an outstanding line of credit.
F-25
<PAGE>
4. FURNITURE, EQUIPMENT, BUILDINGS AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment, buildings and leasehold improvements are
comprised of the following at December 31, 1999 and 1998:
1999 1998
---- ----
Vehicles............................................$ 699,065 $ 614,119
Office furniture and equipment...................... 711,963 604,841
Restaurant equipment................................ 11,754,410 12,469,826
Buildings and leasehold improvements................ 13,341,940 8,346,745
Add: capitalized interest........................... 236,696 142,658
------------ ------------
26,744,074 22,178,189
Less: accumulated depreciation and amortization..... (7,786,191) (5,041,008)
------------ ------------
Total............................................. $18,957,883 $17,137,181
============ ============
Depreciation expense................................$ 2,871,205 $ 1,430,340
============ ============
5. DEFERRED DEBT COSTS AND OTHER ASSETS:
Deferred debt costs are comprised of the following at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred issuance costs on 11% Convertible Senior Subordinated
Discount Notes ............................................. $ 986,035 $ 2,518,373
Deferred Debenture Issuance Costs on 9% Subordinated
Convertible Debenture ...................................... 432,325 432,325
Deferred costs related to Citibank (Poland) S.A. $10 million
line of credit ............................................. 2,024,378 --
----------- -----------
3,442,738 2,950,698
Less: accumulated amortization ............................... (511,723) (291,493)
----------- -----------
Total ...................................................... $ 2,931,015 $ 2,659,205
=========== ===========
Amortization included in Interest Expense .................... $ 220,230 $ 93,034
=========== ===========
</TABLE>
Other assets are comprised of the following at December 31, 1999 and
1998 :
1999 1998
---- ----
Franchise fees.......................................$ 915,761 $ 662,714
Deferred lease costs................................. 433,775 459,664
Software and other intangibles....................... 226,045 153,615
---------- ---------
1,575,581 1,275,993
Less: accumulated amortization....................... (443,033) (284,532)
---------- ----------
Total..............................................$1,132,548 $ 991,461
========== ==========
Amortization expense.................................$ 279,750 $ 113,603
========== ==========
F-26
<PAGE>
6. BANK CREDIT FACILITIES:
Bank credit facilities are comprised of the following at December 31,
1999 and 1998,:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C>
AmerBank in Poland, S.A., PKP overdraft credit line, variable
rate approximately equal to prime, expires June 1, 2000 ..................... $ 689 $ 25,288
AmerBank in Poland, S.A., IFFP overdraft credit line, variable
rate approximately equal to prime, expires April 1, 2000
-- 386
AmerBank, IFFP line of credit of $950,000 payable in twenty-nine installments
of $32,000 commencing on March 31, 1998 interest payable monthly at 2.75%
above LIBOR, $22,000
due at maturity on August 12, 2000 .......................................... 246,000 630,000
AmerBank IFFP revolving credit facility of $1,500,000,
interest is payable monthly at 2.50% above LIBOR, and principal is payable in
thirty-five monthly installments of $41,666 starting in June 2000 with a
final payment of
$41,690 due at maturity on May 18, 2003 ..................................... 1,500,000 1,500,000
Totalbank IFFC line of credit of $999,000, interest at 6.5%
payable quarterly, collateralized by certificates of deposit
in the amount of $999,990 maturing in August 2000 ........................... 999,000 982,586
Citibank (Poland) S.A. line of credit of $10,000,000 payable
in December 2002 ............................................................ 6,900,583 --
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 on March 26, 2001 .................................................. 146,363 266,362
----------- -----------
Total bank credit facilities .................................................. 9,792,635 3,404,622
Less: current maturities ...................................................... (1,615,685) (1,512,260)
----------- -----------
Long term bank credit facilities .............................................. $ 8,176,950 $ 1,892,362
=========== ===========
</TABLE>
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 is priced at 0.8% above LIBOR
and was originally scheduled to mature on January 15, 2000 but was extended to
December 2002. In order for IFFP to enter into the credit agreement with
Citibank, holders of our outstanding 11% Convertible Senior Subordinated
Discount Notes (the "Notes") were required to waive applicable provisions of the
note indenture. As compensation for the waiver, the noteholders were issued an
aggregate of 204,585 shares of common stock, with a fair value of $.56 per
share.
The line of credit is guaranteed by Burger King Corporation ("BKC") and
IFFC granted BKC a security interest in the outstanding shares of IFFP. As a
condition to the guarantee, BKC required that IFFC, IFFP and Mitchell Rubinson,
the Chairman, Chief Executive Officer and a principal shareholder of the Company
("Rubinson"), enter into a general release in favor of BKC for any and all
matters occurring before the date of the guarantee. Additionally, IFFC and IFFP
entered into a reimbursement agreement (the "Reimbursement Agreement") under
which IFFC agreed to reimburse BKC for any and all amounts paid out by BKC under
the guaranty and all costs and expenses incurred by BKC in connection with the
enforcement of its rights under the Reimbursement Agreement. BKC also required
that IFFC, IFFP and Rubinson execute a general release of BKC relating to any
matters that occurred before the execution of the Credit Agreement.
F-27
<PAGE>
Additionally, Rubinson entered into a purchase agreement (the "Purchase
Agreement") with BKC which provides that if IFFP and IFFC default on the
obligations under the Reimbursement Agreement and BKC takes possession of the
IFFP shares, Rubinson is required to purchase the IFFP shares from BKC for an
amount equal to all amounts paid out by BKC under the guaranty and all costs and
expenses incurred by BKC in connection with the enforcement of its rights under
the Reimbursement Agreement. Rubinson received a fee of $150,000 from IFFC in
connection with the Purchase Agreement. This amount is included in the December
31, 1999 consolidated statement of operations as a component of general and
administrative expense.
In October 1999, IFFP increased the amount of the line of credit to
$8,000,000. IFFP may increase the line of credit in increments of $500,000 to an
aggregate of $10,000,000 if it meets specified criteria, including monthly debt
reduction, as defined in the credit agreement. As of December 31, 1999, IFFP met
such criteria. The maturity date of the line of credit was extended to December
2002. As of December 31, 1999 and March 24, 2000, $6,900,583 and $8,000,000 was
outstanding on this facility. Drawings on the line in excess of the original
$5,000,000 bear interest at 0.95% above LIBOR. The guarantee automatically
terminates in October 2002 and BKC may withdraw its guarantee if the net debt
movement, as defined in the Credit Agreement, of IFFP during the 12-month period
ending October 2001 is more than 10% less than required. BKC may also withdraw
its guarantee of incremental amounts over $8,000,000 if the net debt movement is
more than 30% less than required. 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. Additionally, as security for the line of
credit, BKC required that Rubinson enter into a personal guaranty with BKC and
pledge 5,000,000 shares of IFFC common stock owned by him. In connection with
these matters, IFFC entered into a reimbursement and fee agreement whereby it
agreed to reimburse 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. As of the date hereof, Rubinson has not been paid under this
agreement. In order for IFFP to increase the line of credit, holders of the
outstanding Notes were required to waive applicable provisions of the note
indenture. The Company granted BKC warrants to purchase 4,000,000 common shares
at a price of $2.00 per share in connection with its guarantee of the increase
in the line of credit from $5 million to $10 million. The fair market value of
the warrants of $2,024,378 has been capitalized as deferred debt costs and is
being amortized to interest expense over the term of the credit facility.
7. 9% SUBORDINATED CONVERTIBLE DEBENTURES:
The Convertible Subordinated Debentures (the "Debentures") mature on
December 15, 2007 and provide for the payment of interest at 9% semi-annually
until maturity.
The Debentures are subordinated and subject in right of payment to the
prior payment of all Senior Indebtedness. The indenture contains no provision
restricting the incurrence of additional debt or the issuance of additional
securities. The Debentures may be redeemed together with accrued interest at the
option of the Company in whole or in part, at any time on at least 30 days
notice to Debenture holders 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. Sinking fund payments are reduced for Debentures previously
converted or redeemed by the Company. In January 1994, the Company offered to
exchange units of Common Stock and warrants to purchase common stock for its
outstanding Debentures. The Company exchanged approximately $7.0 million of the
Debentures pursuant to such offer and, as a result, is not required to fund the
Debenture sinking fund until 2004.
F-28
<PAGE>
8. 11% CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES:
On November 5, 1997, the Company sold $27,536,000 of 11% Convertible
Senior Subordinated Discount Notes Due October 31, 2007 (the "Notes") in a
private offering. The carrying value of the Notes is as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Face amount of notes at maturity.................................. $9,636,000 $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........................................... (817,468) (4,890,798)
----------- -----------
Carrying value.................................................... $8,818,532 $22,645,202
=========== ===========
</TABLE>
The Company received net proceeds of $17,662,174 after reduction of the
face of the notes for unamortized discount of $7,535,908 and placement costs in
the amount of $2,337,918. In addition to the placement costs incurred, the
Company also issued to the placement agent 500,000 shares of Common Stock which
were valued at $150,000. The value of the shares was included in deferred
issuance costs on the accompanying consolidated balance sheets and is being
amortized using the effective interest method over the life of the Notes.
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.
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.
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. As of December 31, 1999, none of the
Notes had been converted into Common Stock. 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:
F-29
<PAGE>
12 MONTHS BEGINNING CLOSING PRICE
------------------- -------------
October 31, 1999........... $2.80
October 31, 2000........... $3.25
The Company was obligated to cause a registration statement to be
declared effective registering the resale of the shares of Common Stock to be
issued upon conversion of the Notes. The registration statement was declared
effective on September 10, 1998. If such registration statement, subject to
certain exceptions, ceases to be effective, then IFFC is obligated to pay
certain liquidated damages to the holders of the Notes ranging from 1/2% to a
maximum of 5.0% of the principal balance of such Notes, depending upon the
length of the period of time the registration statement is not effective.
In the event of a change of control, as defined in the Convertible
Senior Subordinated Discount Notes Indenture (the "Indenture"), the holders of
the Notes will have the right to require the Company to purchase the Notes at a
purchase price of 101% of their accreted value on the date of such purchase,
plus accrued interest.
The Indenture contains certain covenants which among other things,
restrict the ability of IFFC and its Restricted Subsidiaries (as defined in the
Indenture) to: incur additional indebtedness; create liens, pay dividends or
make distributions in respect to their capital stock; make investments; or make
certain other restricted payments; sell assets, issue or sell stock of
Restricted Subsidiaries; enter into transactions with stockholders or
affiliates; engage in unrelated lines of business; or consolidate, merge, or
sell all or substantially all of IFFC's assets. In addition, Rubinson must
remain the Company's Chief Executive Officer.
The Indenture specifically requires that any temporary cash investments
can only be placed in banks that have total capital in excess of $100 million.
9. FUTURE MATURITIES OF DEBT:
Future maturities of Bank credit facilities, Debentures and Notes at
December 31, 1999 are as follows:
YEARS ENDING
DECEMBER 31,
------------
2000.......... $1,615,685
2001.......... 526,355
2002.......... 7,400,575
2003.......... 250,020
2004.......... --
Thereafter.... 12,392,000
-----------
$22,184,635
===========
F-30
<PAGE>
10. SHAREHOLDERS' EQUITY:
In August 1999, IFFC issued 158,134 shares of its Series B Convertible
Preferred Stock in connection with the exchange of $14,283,452 ($17,900,000 in
stated principal amount at maturity) of the Notes. The following is a summary of
the terms of the Series B Convertible Preferred Stock:
<TABLE>
<S> <C>
Liquidation Value........................... $100.00 per share upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company.
Dividend.................................... 3.0% of the liquidation value per annum beginning on
December 31, 2001, to be paid in shares of Series B
Preferred Stock; provided, however, if at any time after
January 1, 2003, the Common Stock has a Current Market
Price of $1.28 or higher, the dividend rights of the
Preferred Stock shall be cancelled.
Conversion.................................. The Preferred Stock shall be immediately convertible at a
conversion price of $.66.
Registration Requirements................... The Company will be required to file a registration
statement for the Preferred Stock and the shares of Common
Stock underlying the Preferred Stock within 180 days after
the Exchange Date; provided, however, that if the Company
fails to file the registration statement prior to such
time, the dividend rate shall be increased by one-quarter
of one percent for each subsequent 30-day period that the
registration statement is not filed. The Company shall
use its reasonable business efforts to cause such
registration statement to be declared effective.
</TABLE>
On November 4, 1999, the Company increased in the number of common
shares that may be granted under its 1993 Stock Option Plan (the "Plan") from
2,000,000 to 4,000,000. The Plan provides for the granting of options to
qualified employees and directors of the Company. Stock option activity is shown
below at December 31:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE SHARE
1999 SHARE PRICE 1998 PRICE
---- ----------- ---- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year.. 1,020,000 .52 570,000 $.40
Granted........................... 1,000,000 .66 450,000 .66
Exercised......................... -- -- -- --
Expired........................... (350,000) (.62) -- --
--------- ----- ---------- -----
Outstanding at end of year........ 1,670,000 .58 1,020,000 .52
========= ==========
Exercisable at end of year........ 497,500 .45 350,500 .42
========= ==========
Price range of options outstanding
at end of year................. $.40-- $.61 $.40 - $.81
Available for grant at end of year 2,330,000 980,000
</TABLE>
As permitted by SFAS No. 123, the Company accounts for options issued
to employees under Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees." Consequently, no compensation cost has been
recognized on options issued to employees because the exercise price of such
options was not less than the market value of the Common Stock on the date of
grant. Had compensation cost for the Company's stock option plans been
determined based upon the fair value methodology prescribed under SFAS No. 123
for options granted in 1999 and 1998, the Company's net loss for those years
would have increased by approximately $127,000 and $85,000, respectively. Basic
and diluted loss per share would have increased by less than $.01 in each of the
years. The fair value of the options granted during 1999 and 1998 are estimated
at $599,000 and $271,000, respectively, on the dates of grant using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility of 107%, expected dividend yield of 0%, risk-free interest rate of
5%, and terms of 8.7 years.
F-31
<PAGE>
The Company issued 365,650 shares of Common Stock and 244,840 shares of
Common Stock in 1999 and 1998, respectively, in payment of dividends on Series A
Convertible Preferred Stock. During the year ended December 31, 1998, 15,500
shares of Common Stock were issued upon conversion of 465 shares of Series A
Convertible Preferred Stock.
At June 30, 2000, IFFC had reserved the following shares of Common
Stock for issuance:
<TABLE>
<S> <C>
Stock option plans.......................................................................... 4,000,000
Convertible Debentures convertible into Common Stock at a conversion price of $8.50
per share on or before December 15, 2007.................................................. 324,235
Series A Preferred Stock convertible into Common Stock at a conversion rate of 33 1/3
Common Shares per share................................................................... 1,099,500
Series B Preferred Stock convertible into Common Stock at a conversion rate of 151 1/2
Common Shares per share................................................................... 23,957,301
Convertible Senior Subordinated Discount Notes convertible into Common Stock, after
November 5, 1998, at a conversion price of $.70 per share................................. 13,765,714
Warrants exercisable at $2.00 per share..................................................... 4,000,000
----------
Total reserved shares....................................................................... 47,146,750
==========
</TABLE>
11. INCOME TAXES:
The Company follows SFAS No. 109, "Accounting for Income Taxes," which
requires, among other things, recognition of future tax benefits measured at
enacted rates attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and to tax net
operating loss carryforwards to the extent that realization of said benefits is
more likely than not. As of December 31, 1999 and 1998, the Company had net
operating loss carryforwards of approximately $11,858,000 and $9,245,000
respectively, for U.S. tax purposes which expire in various years beginning in
2007 through 2019. As of December 31, 1999 and 1998, the Company's Poland
subsidiaries had net operating loss carry-forwards of approximately $5,300,000
and $2,340,000 respectively, which expire in various years through 2004.
The Company had deferred tax assets of approximately $6,130,000 and
$4,412,000 at December 31, 1999 and 1998, respectively, related primarily to net
operating loss carryforwards. These deferred tax assets were subject to and
presented net of a 100% valuation allowance.
12. RELATED PARTY TRANSACTIONS:
In February 1999, IFFP entered into a credit agreement with Citibank
(Poland) S.A. under which Citibank granted IFFP a line of credit in the amount
of $5,000,000. The line of credit is guaranteed by BKC and the Company granted
BKC a security interest in the outstanding shares of IFFP. As a condition to the
guarantee, BKC required that IFFC, IFFP and Rubinson enter into a general
release in favor of BKC for any and all matters occurring before the date of the
guarantee. In order for IFFP to enter into the line of credit, holders of the
outstanding Notes were required to waive applicable provisions of the note
indenture. As compensation for the waiver, the noteholders were issued an
aggregate of 204,585 shares of our common stock at a value of $.56 per share.
F-32
<PAGE>
Additionally, in connection with this transaction, Rubinson entered
into a purchase agreement with BKC which provides that (1) if IFFC defaults on
the line of credit and BKC takes possession of the IFFP shares and (2) IFFC is
unable to repurchase the shares of IFFP from BKC, Rubinson is required to
purchase the IFFP shares from BKC for an amount equal to all amounts paid out by
BKC plus costs and expenses incurred by BKC in connection with the enforcement
of its rights under a reimbursement agreement with IFFC. In connection with the
purchase agreement, the Company agreed to pay Rubinson a fee of $150,000.
In October 1999, IFFP increased the amount of the line of credit to
$8,000,000. Additionally, the line of credit may be increased to a maximum to
$10,000,000 if IFFP meets specified criteria, including monthly debt reduction.
As of December 31, 1999, IFFP met such criteria. All of the prior transaction
documents were re-executed, including the purchase agreement and the release.
Additionally, as security of the line of credit, BKC required that Rubinson
enter into a personal guaranty with BKC and pledge 5,000,000 shares of the
Company's common stock owned by him. In connection with these matters, IFFC
entered into a reimbursement and fee agreement whereby it agreed to reimburse
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. As of the date
hereof, Rubinson has not been paid under this agreement. The Company has accrued
approximately $207,000 representing amounts due Rubinson in connection with the
Purchase Agreement and guarantee fees. This amount is included in general and
administrative expenses in the accompanying 1999 Statement of Operations.
In order for IFFP to increase the line of credit, holders of the
outstanding Notes were required to waive applicable provisions of the note
indenture. In addition, the note holders agreed that the Notes would be amended
to provide that interest earned on the notes from October 31, 2000 to October
31, 2003 will be paid in additional Notes. Interest payable thereafter will be
payable in cash.
13. COMMITMENTS AND CONTINGENCIES:
On March 14, 1997, IFFC and BKC entered into a new Development
Agreement (the "BKC Development Agreement"), which was then assigned by IFFC to
IFFP; IFFC continues to remain liable for the obligations contained in the BKC
Development Agreement. The BKC Development Agreement was amended in February
1999 and again in October 1999. Pursuant to the BKC Development Agreement, IFFP
has been granted the exclusive right until December 31, 2007 to develop and be
franchised to operate Burger King restaurants in Poland with certain exceptions
discussed below. Pursuant to the BKC Development Agreement, as amended, IFFC is
required to open 73 restaurants during the term of the Agreement. Each
traditional Burger King restaurant, in-line Burger King restaurant, or
drive-thru Burger King restaurant shall constitute one restaurant. A Burger King
kiosk restaurant shall, for purposes of the BKC Development Agreement, be
considered one quarter of a restaurant. Beginning January 1, 2000, four of the
Development Units opened in each year must be in-line or free-standing
restaurants within city centers or shopping mall locations.
Pursuant to the BKC Development Agreement, IFFC was required to pay BKC
a $1 million development fee if gross sales of Burger King restaurants for the
twelve months ending September 30, 1999 was less than $9 million. If sales for
the period exceeded $9 million but were less than $11 million, IFFC was required
to pay a development fee of $250,000. Upon execution of the BKC Development
Agreement, IFFC capitalized the $1 million development fee and recorded an
offsetting deferred credit, in anticipation of having to pay the amount. The
capitalized development fee was included in Burger King Development Rights in
the accompanying 1998 consolidated balance sheet, and was being amortized over
the life of the agreement.
Sales for the twelve months ending September 30, 1999 exceeded $9
million but were less than $11 million. As a result, the Company is required to
pay BKC a development fee of $250,000 which is reflected in other debt on the
accompanying 1999 consolidated balance sheet. The excess $750,000 capitalized
upon execution of the BKC Development Agreement was offset against the related
deferred credit. Accumulated amortization related to the $750,000 totaling
approximately $223,000 has been reversed and is included as a reduction of
general and administrative expenses in the accompanying 1999 consolidated
statement of operations.
F-33
<PAGE>
The development fee was deferred until January 15, 2001 under a
deferred payment agreement with BKC executed in October 1999. In January 2001,
the Company may, at its option, either pay the development fee or provide BKC
with the written and binding undertaking of Rubinson that the Rubinson Group
will completely divest itself of any interest in IFFP and the Burger King
restaurants opened or operated by IFFP in Poland within six months of the date
that the development fee payment is due. Pursuant to the BKC agreement, the
"Rubinson Group" has been defined to include any entity of which Rubinson
directly or indirectly owns an aggregate interest of 10% or more of the legal or
beneficial equity interest and any parent, subsidiary or affiliate of the parent
or subsidiary. Divestiture by the Rubinson Group or Rubinson could result in a
change in control of the Company under the indenture governing the terms of our
currently outstanding Notes. If so, the Company would be required to commence an
offer to repurchase the Notes within 30 days of the change in control at a
purchase price equal to 101% of the accreted value of the Notes. Rubinson has
personally guaranteed payment of the development fee.
For each restaurant opened, IFFP is obligated to pay BKC an initial fee
of up to $40,000 for franchise agreements with a term of 20 years and $25,000
for franchise agreements with a term of ten years. Each such fee is payable not
later than 20 days prior to the restaurant's opening. Pursuant to the amendment
to the BKC Development Agreement, BKC agreed to defer $280,000 of accrued
franchise fees until January 15, 2001. 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 BKC system and BKC trademarks. The annual royalty
fee is 5% of gross sales. However, BKC has agreed to reduce the royalty fee to
2% through September 30, 1998 and 3% through December 31, 2002. Thereafter, the
annual royalty fee will be 5%. The restaurants must also contribute a monthly
advertising and promotion fee of 6% of gross sales to be used for advertising,
sales promotion, and public relations. Payment of all amounts due from IFFP to
BKC pursuant to the franchise agreements is guaranteed by IFFC.
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. As of
December 31, 1999, IFFP did not have a net worth of $7.5 million. BKC has agreed
to suspend the net worth requirement through December 30, 2000. 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.
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 which granted 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, as a condition to the New Master Franchise Agreement,
contributed $2,000,000 to KP in 1997. 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 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 is obligated to open 5, 6, 7, 8, 9, and 10 stores, respectively,
beginning in 1998 and ending in the year 2003 for a total of 45 new stores. Of
such stores, third party franchise stores shall not exceed 25% of the number of
open and operating stores and all stores located in Warsaw, Poland shall be
corporate stores. IFFC has opened 11 Domino's stores pursuant to the New Master
Franchise Agreement and has satisfied its development requirements for 1999.
F-34
<PAGE>
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 year following
the effective date of termination of the New Master Franchise Agreement.
The Company maintains its executive offices in approximately 2,500
square feet of leased office space. Annual lease payments are approximately
$32,200. IFFC has exercised its second of three, two year renewal options.
IFFP maintains principal offices in Warsaw, Poland in approximately
4,680 square feet of office space. Annual lease payments are $110,000. The term
of the lease is for an unlimited period; however, either party may terminate the
lease after the first year with six month written notice. IFFP has the right of
first refusal to the purchase of the building and will be reimbursed for the net
book value of its improvements to the space upon termination of the lease
agreement by the landlord.
On January 1, 2000, IFFC entered into a new employment agreement with
the Chairman of the Board and Chief Executive Officer, extending his employment
term until December 31, 2002. The minimum annual salary during the first year is
$250,000 subject to a 10% annual increase for each of the remaining two years.
The agreement provides for an annual incentive bonus in an amount to be
determined by the Board of Directors. The agreement also provides for various
fringe benefits, certain payments if employment is terminated by reason of death
or disability and a severance payment of twice the minimum annual salary then in
effect, plus the incentive bonus paid in the prior year, in the event employment
is terminated by the Company without cause.
On November 1, 1999, the Company entered into a new employment
agreement with its President and Chief Financial Officer for an initial term of
three years, which may be extended by the Company for up to two additional
years. Minimum annual salary for the first year is $160,000. The agreement
provides for various fringe benefits, a payment of $50,000 in the event
employment is terminated by reason of death or disability and a maximum payment
of $50,000 if employment is terminated without cause by the Company.
In connection with the procurement of restaurant sites, IFFP and PKP
have entered into various long-term arrangements for restaurant space. The terms
of the various agreements range from approximately two to ten years, plus
extensions based upon agreement between the parties. The following is a schedule
by years of minimum future rentals on noncancellable operating leases as of
December 31, 1999, based on the year end exchange rate:
YEARS ENDING DECEMBER 31,
-------------------------
2000............... $1,151,176
2001............... 1,148,094
2002............... 1,202,094
2003............... 1,124,094
2004............... 921,375
Thereafter......... 8,357,859
$13,904,692
Rent expense for 1999 and 1998 was $1,727,347 and $805,110,
respectively.
IFFP has entered into long-term purchase agreements with its suppliers
for its major menu items, which are sourced in Poland. The range of prices and
volume of purchases under the agreements vary according to IFFP's demand for the
products and fluctuations in market rates.
F-35
<PAGE>
14. LITIGATION:
DISPUTE WITH POLISH FISCAL AUTHORITIES. 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 474,776 Polish zloty or approximately $114,000. The Company
reversed the accrual of approximately $426,000 and reflected this amount as a
component of interest and other income (net) in the December 31, 1999
consolidated statement of operations.
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 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 QPQ Corporation.
The plaintiffs were seeking unspecified monetary damages, including treble and
punitive damages, and reasonable costs and attorney's fees. The parties reached
a settlement in this matter and IFFC agreed to pay $300,000. Such amount has
been accrued in the 1999 consolidated financial statements.
15. 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. zo.o. ("IFFP") and Pizza King Polska Sp.
zo.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's Domino's Pizza stores offer
its customers take out and delivery service for its pizzas, salads, chicken
wings, breadsticks and soft drinks. 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.
F-36
<PAGE>
The following table presents financial information regarding the
Company's different industry segments as of and for the years ended December 31,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------
IFFP PKP TOTAL CORPORATE CONSOLIDATED
---- --- ----- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue.............................. $10,886,141 $4,212,172 $15,098,313 - $15,098,313
Food and packaging costs............. 4,195,501 1,364,563 5,560,064 - 5,560,064
Restaurant operating expenses........ 6,864,959 2,478,604 9,343,563 - 9,343,563
Pre-opening costs.................... 466,369 139,153 605,522 - 605,522
Depreciation and amortization........ 2,395,050 720,481 3,115,531 3,115,531
Asset impairment charges............. 1,063,277 - 1,063,277 1,448,033 2,511,310
----------- ---------- ----------- ----------- -----------
Loss from operations before
general and administrative (4,099,015) (490,629) (4,589,644) (1,448,033) (6,037,677)
expenses..........................
General and administrative expenses.. 1,705,675 553,406 2,259,081 2,574,773 4,833,854
=========== =========== =========== =========== ============
Loss from operations.............. $(5,804,690) $(1,044,035) $(6,848,725) $(4,022,806) $(10,871,531)
=========== =========== =========== =========== ============
Capital Expenditures $ 5,175,426 $ 886,027 $ 6,061,453 $ $ 6,061,453
-
Total Assets $18,381,704 $ 3,261,300 $21,593,004 $ 4,288,024 $ 25,881,028
YEAR ENDED DECEMBER 31, 1998
----------------------------
IFFP PKP TOTAL CORPORATE CONSOLIDATED
---- --- ----- --------- ------------
Revenue............................. $6,321,644 $2,104,460 $8,426,104 - $8,426,104
Food and packaging costs............ 2,609,902 737,575 3,347,477 - 3,347,477
Restaurant operating expenses....... 3,144,372 1,427,173 4,571,545 - 4,571,545
Depreciation and amortization....... 1,103,031 405,489 1,508,520 - 1,508,520
------------ ---------- ---------- ---------- -----------
Loss from operations before
general and administrative (535,661) (465,777) (1,001,438) - (1,001,438)
expenses..........................
General and administrative expenses. 1,410,458 297,223 1,707,681 1,619,316 3,326,997
------------ ---------- ---------- ---------- -----------
Loss from operations............. $(1,946,119) $(763,000) $(2,709,119) (1,619,316) $(4,328,435)
=========== =========== =========== =========== ============
Capital Expenditures $11,247,000 $2,034,000 $13,281,000 $ 10,365 $ 13,291,365
Total Assets $18,536,000 $3,406,000 $21,942,000 $9,904,803 $ 31,846,803
</TABLE>
F-37
<PAGE>
16. ASSET IMPAIRMENT CHARGES
In the fourth quarter of 1999, the Company recorded asset impairment
charges totaling $2,511,310 related to the write-off of costs in excess of the
carrying value of assets acquired and asset write-offs related to three store
closings.
As described in Note 2, the Company has a history of net losses and has
an accumulated deficit of $35,374,274 as of December 31, 1999. As a result, the
Company determined that the carrying value of cost in excess of net assets
acquired would not be recoverable and has recorded a $1,448,033 impairment
charge to write off the asset.
During 1999, the Company committed to a plan to close three Burger King
locations, of which two were closed in early 2000 and one is scheduled to close
in the first half of 2000. In connection with these store closings, the Company
recorded asset impairment charges totaling $1,063,277. These charges primarily
represent the carrying value of abandoned buildings, fixtures and leasehold
improvements for the closed locations totaling $987,471, and the carrying value
of franchise fees and other intangibles totaling $75,806. Because the Company's
buildings are located on leased properties, the Company will not be able to
market and sell the properties.
F-38
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
INTERNATIONAL FAST FOOD CORPORATION
46,145,038 SHARES OF COMMON STOCK
158,134 SHARE OF SERIES B CONVERTIBLE PREFERRED STOCK
----------
PROSPECTUS
----------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has authority under Section 607.0850 of the Florida
Business Corporation Act to indemnify its directors and officers to the extent
provided for in such statute. The Company's Amended and Restated Articles of
Incorporation provide that the Company shall indemnify its officers and
directors to the fullest extent not prohibited by law, including indemnification
against liability under the Securities Act. The Company has also entered into
indemnification agreements with some directors and executive officers wherein it
has agreed to indemnify them to the fullest extent permitted by law.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for (a) violations of criminal
laws, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful, (b) deriving an
improper personal benefit from a transaction, (c) voting for or assenting to an
unlawful distribution and (d) willful misconduct or conscious disregard for the
best interests of the Company in a proceeding by or in the right of the Company
to procure a judgment in its favor or in a proceeding by or in the right of a
shareholder. The statute does not affect a director's responsibilities under any
other law, such as the federal securities laws.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company under the foregoing provisions, the Company has been informed that in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution
of the securities being registered will be borne by the Company, other than
underwriting commissions and discounts, and are as follows:
Securities and Exchange Commission registration fee...... $ 7,117
Legal fees and expenses.................................. $ 35,000
Accounting fees and expenses............................. $ 20,000
Printing................................................. $ 10,000
Miscellaneous............................................ $ 2,883
Total.................................................... $ 75,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In June, 2000, the Company issued 273,455 shares of common stock in
payment of $98,955 of dividends on the Series A Preferred Stock. Such sales was
exempt from the registration requirement under the Act.
II-1
<PAGE>
ITEM 27. EXHIBITS.
(a) Exhibits:
EXHIBIT DESCRIPTION
------- -----------
3.1 Articles of Incorporation, as amended (Incorporated by reference to the
Exhibit 3.1 filed with the Form 10-KSB for the year December 31, 1994)
3.2 Bylaws (Incorporated by reference to the Exhibit 3.2 filed with the
Registration Statement on Form S-1 (File No. 33-46784))
3.3 Amendment to Amended and Restated Articles of Incorporation
4.1 Specimen Common Stock Certificate (Incorporated by reference to the
Exhibit 3.3 filed with the Registration Satement on Form S-1 (File No.
33-46784))
4.3 Form of Indenture relating to 9% Convertible Subordinated Debentures
Due 2007 (including form of Debenture) (Incorporated by reference to
the Exhibit 4.3 filed with our Registration Statement on Form S-1 (File
No. 33-55284))
4.5 Warrant Agreement, dated January 14, 1994, between IFFC and Continental
Stock Transfer & Trust Company, including form of Warrants
(Incorporated by reference to Exhibit 4.5 of the same number filed with
the Form 10-KSB for the year ended December 31, 1993)
4.6 Unit Certificate (Incorporated by reference to Exhibit 4.6 of the same
number filed with the Form 10-KSB for the year ended December 31, 1993)
4.7 Series A 6% Convertible Preferred Stock Certificates (Incorporated by
reference to Exhibit 4.7 filed with the Form 10-KSB for the year ended
December 31, 1994)
10.1* 1993 Stock Option Plan (Incorporated by reference to the Exhibit 10.4
filed with our Registration Statement on Form S-1 (File No. 33-46784))
10.2* 1993 Directors Stock Option Plan (Incorporated by reference to the
Exhibit 10.5 filed with our Registration Statement on Form S-1 (File
No. 33-46784))
10.3 Product Distribution Agreement, dated September 21, 1994, between IFFC
and Logistic and Distribution Systems Sp.zo.o (Incorporated by
reference to the Exhibit 10.2 filed with the Form 10-QSB for the
quarter ended March 31, 1995)
10.4* Form of Indemnification Agreement between IFFC and each of IFFC's
Directors and Executive Officers (Incorporated by reference to the
Exhibit 10.9 filed with our Registration Statementon Form S-1 (File No.
33-46784))
10.5 Agreement to Assign Litigation Proceeds, dates as of January 25, 1996,
among IFFC, IFFP and Funding, with exhibirs including the Escrow
Indemnity Agreement among IFFC, IFFP, Funding and Escrow Agent
(Incorporated by reference to the Exhibit 10.1 filed the Form 8-K dated
January 30, 1996)
10.6 Amendment, dated August 31, 1995, to credit facility, dated January 28,
1993, between IFFP and AmerBank (Incorporated by reference the Exhibit
10.11 filed with the Form 10-KSB for the year ended December 31, 1995)
10.7 Credit Facility, dated February 1, 1996, between IFFP and AmerBank
(Incorporated by reference the Exhibit 10.20 fild with the Form 10-KSB
for the year ended December 31, 1995)
10.8 Credit Facility, dated February 12, 1993, between IFFC and AmeriBank in
Poland S.A. (Incorporated by reference to Exhibit 10.23 filed with the
Form 10-KSB for the fiscal year ended December 31, 1992)
10.9 Credit Facility, dated January 28, 1993, between IFFC and AmerBank in
Poland S.A. (Incorporated by reference to Exhibit 10.24 filed with the
Form 10-KSB for the fiscal year ended December 31, 1992)
10.10* Stock Option Agreement, dated as of May 21, 1992, between IFFC and
Mitchell Rubinson (Incorporated by reference to Exhibit 10.39 of the
same number filed with the Form 10-KSB for the year ended December 31,
1993)
10.11* Stock Option Agreement, dated as of February 1, 1993, between IFFC and
Mitchell Rubinson (Incorporated by reference to Exhibit 10.41 of the
same number filed with the Form 10-KSB for the year ended December 31,
1993)
10.12 Management Agreement, dated January 1, 1995, between IFFC and IFFP
(Incorporated by reference to Exhibit 10.46 filed with the Form 10-KSB
for the year ended December 31, 1994)
10.13 Credit Facility, dated February 23, 1994, between IFFC and American
Bank in Poland, S.A. (Incorporated by reference to Exhibit 10.49 filed
with the Form 10-KSB for the year ended December 31, 1994)
10.14 Restaurant Development Agreement dated March 14, 1997 between IFFC and
BKS (Incorporated by reference to Exhibit 99.1 filed with the Form 8-K
dated March 14, 1997)
10.15 Franchise Agreement dated March 14, 1997 between IFFC and BKC
(Incorporated by reference to Exhibit 99.2 filed with the Form 8-K
dated March 14, 1997)
10.16 Amendment to Agreement to Assign Litigation Proceeds, dated as of July
3, 1996, among IFFC, IFFP and Litigation Funding (Incorporated by
reference to Exhibit 10.1 filed with the Form 8-K dated July 3, 1996)
10.17 Agreement to Assign Litigation Proceeds, dated as of September 11,
1996, among IFFC and IFFP (14)
10.18 Promissory Note dated March 11, 1997 by International Fast Food
Corporation to Litigation Funding, Inc. (Incorporated by reference to
Exhibit 10.1 filed with the Form 10-QSB for the quarter ended dated
March 31, 1997)
10.19 Second Amendment to Agreement to Assign Litigation Proceeds dated March
13, 1997 between International Fast Food Corporation, International
Fast Food Polska Sp.zo.o and Litigation Funding, Inc. (Incorporated by
reference to Exhibit 10.2 filed with the Form 10-QSB for the quarter
ended dated March 31, 1997)
10.20 Agreement dated May 9, 1997, between Litigation Funding, Inc.,
International Fast Food Corporation and International Fast Food Polska
Sp.zo.o. (Incorporated by reference to Exhibit 10.3 filed with the Form
10-QSB for the quarter ended March 31, 1997)
10.21 Indenture dated November 5, 1997 (Incorporated by reference to Exhibit
10.01 filed with the Form 10-QSB for the quarter ended September 30,
1997)
10.22 Securities Purchase Agreement dated November 5,1997 (Incorporated by
reference to Exhibit 10.02 filed with the Form 10-QSB for the quarter
ended September 30, 1997)
10.23 Registration Rights Agreement dated November 5, 1997 (Incorporated by
reference to Exhibit 10.03 filed with the Form 10-QSB for the quarter
ended September 30, 1997)
10.24 Voting and Disposition Agreement dated November 5, 1997 (Incorporated
by reference to Exhibit 10.04 filed with the Form 10-QSB for the
quarter ended September 30, 1997)
10.25 Amendment to Restaurant Development Agreement dated as of February 24,
1999 by and among Burger King Corporation and IFFC (Incorporated by
reference to Exhibit 10.75 filed with the Form 10-KSB for the year
ended December 31, 1998)
10.26 Reimbursement Agreement dated as of February 24, 1999 by and among
IFFC, IFFP and Burger King Corporation (Incorporated by reference to
Exhibit 10.76 filed with the Form 10-KSB for the year ended December
31, 1998)
10.27 Agreement for the Transfer of Title to Shares By Way of Security dated
as of February 24, 1999 by and between IFFC, IFFP and Burger King
Corporation (Incorporated by reference to Exhibit 10.77 filed with the
Form 10-KSB for the year ended December 31, 1998)
10.28 General Release dated as of February 24, 1999 by and among Burger King
Corporation, IFFC, IFFP and Mitchell Rubinson (Incorporated by
reference to Exhibit 10.78 filed with the Form 10-KSB for the year
ended December 31, 1998)
10.29 Purchase Agreement dated as of February 24, 1999 by and among IFFC,
IFFP, Mitchell Rubinson and Burger King Corporation (Incorporated by
reference to Exhibit 10.79 filed with the Form 10-KSB for the year
ended December 31, 1998)
10.30 Credit Agreement dated February 24, 1999, as amended, between IFFP and
Citibank (Poland) S.A. (Incorporated by reference to Exhibit 10.80
filed with the Form 10-KSB for the year ended December 31, 1998)
10.31 Addendum dated March 17, 1999, by and among Burger King Corporation,
IFFC, IFFP and Mitchell Rubinson (Incorporated by reference to Exhibit
10.81 filed with the Form 10-KSB for the year ended December 31, 1998)
10.32 Letter Agreement dated March 18, 1999 between IFFC and Host Marriott
Services Corporation (Incorporated by reference to Exhibit 10.82 filed
with the Form 10-KSB for the year ended December 31, 1998)
10.33* Employment Agreement dated October 4, 1999 between IFFC and James F.
Martin (Incorporated by reference to Exhibit 10.1 filed with the Form
10-QSB for the quarter ended September 30, 1999)
10.34 Amendment to Restaurant Development Agreement dated as of October 21,
1999 by and among Burger King Corporation, IFFC and IFFP (Incorporated
by reference to Exhibit 10.2 filed with the Form 10-QSB for the quarter
ended September 30, 1999)
10.35 Amended and Restated Reimbursement Agreement dated as of October 21,
1999 by and among IFFC, IFFP and Burger King (Incorporated by reference
to Exhibit 10.3 filed with the Form 10-QSB for the quarter ended
September 30, 1999)
10.36 Amended and Restated Agreement for the Transfer of Title to Shares by
way of security dated as of October 21, 1999 by and between IFFC, IFFP
and Burger King Corporation (Incorporated by reference to Exhibit 10.4
filed with the Form 10-QSB for the quarter ended September 30, 1999)
10.37 General Release dated as of October 21, 1999 by and among Burger King
Corporation, IFFC, IFFP and Mitchell Rubinson (Incorporated by
reference to Exhibit 10.5 filed with the Form 10-QSB for the quarter
ended September 30, 1999)
10.38 Amended and Restated Purchase Agreement dated as of October 21, 1999 by
and among IFFC, Mitchell Rubinson, IFFP and Burger King Corporation
(Incorporated by reference to Exhibit 10.6 filed with the Form 10-QSB
for the quarter ended September 30, 1999)
10.39 Guarantee of Future Advances Agreement dated as of October 21, 1999 by
and among IFFC, Mitchell Rubinson, IFFP and Burger King Corporation
(Incorporated by reference to Exhibit 10.7 filed with the Form 10-QSB
for the quarter ended September 30, 1999)
10.40 Deferred Payment Agreement dated as of October 21, 1999 by and among
IFFC, IFFP and Burger King Corporation (Incorporated by reference to
Exhibit 10.8 filed with the Form 10-QSB for the quarter ended September
30, 1999)
10.41 Warrant to Subscribe for and purchase 4,000,000 shares of Common Stock
issued to Burger King Corporation (Incorporated by reference to Exhibit
10.9 filed with the Form 10-QSB for the quarter ended September 30,
1999)
10.42 Guaranty dated as of October 21, 1999 by and between Mitchell Rubinson
and Burger King Corporation (Incorporated by reference to Exhibit 10.10
filed with the Form 10-QSB for the quarter ended September 30, 1999)
10.43 Security and Pledge Agreement dated as of October 21, 1999 by and
between Mitchell Rubinson and Burger King Corporation (Incorporated by
reference to Exhibit 10.11 filed with the Form 10-QSB for the quarter
ended September 30, 1999)
10.44 Reimbursement and Fee Agreement dated as of October 14, 1999 by and
among IFFC and Mitchell Rubinson (Incorporated by reference to Exhibit
10.12 filed with the Form 10-QSB for the quarter ended September 30,
1999)
10.45* Employment Agreement dated January 1, 2000 between IFFC and Mitchell
Rubinson
14.1 Trademark Protection Certificate No. 74441; Trademark [logo] Burger
King; Owner: BKC (Incorporated by reference to Exhibit 14.1 filed with
the Form 10-KSB for the year ended December 31, 1994)
14.2 Trademark Protection Certificate No. 74442; Trademark [word] Whopper;
Owner: BKC (Incorporated by reference to Exhibit 14.2 filed with the
Form 10-KSB for the year ended December 31, 1994)
14.3 Trademark Protection Certificate No. 74443; Trademark [words] Burger
King; Owner: KC (Incorporated by reference to Exhibit 14.3 filed with
the Form 10-KSB for the year ended December 31, 1994)
21.1 Subsidiaries of IFFC
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities
Act.
(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) include any additional or changed material information on the plan of
distribution;
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities
offered, and the offering of such securities at that time to be
initial bona fide offering; and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. If a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Miami,
State of Florida on August 31, 2000.
INTERNATIONAL FAST FOOD CORPORATION
By: /S/ MITCHELL RUBINSON
---------------------------------------
Mitchell Rubinson,
Chairman of the Board, Chief Executive
Officer, President, Chief
Operating Officer and Chief Financial
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mitchell Rubinson and Larry H. Schatz,
and each of them, his true and lawful attorney-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, including a
Registration Statement filed pursuant to Rule 462 under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURES TITLE(S) DATE
/S/ MITCHELL RUBINSON Chairman of the Board, August 31, 2000
----------------------- Chief Executive
Mitchell Rubinson Officer, President, Chief Operating
Officer and Chief Financial Officer
/S/ LARRY H. SCHATZ Director August 31, 2000
-----------------------
Larry H. Schatz
II-3
