10KSB 1 e14859_10ksb.txt FORM 10KSB FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended January 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____________ to ____________ Commission File No. 33-4460-NY ------------------------------ TASTY FRIES, INC. (FORMERLY ADELAIDE HOLDINGS, INC.) ---------------------------------------------------- (Exact name of registrant as specified in its charter) NEVADA 65-0259052 ------------------------------ ------------------ State or other jurisdiction (I.R.S. Employer incorporation or organization Identification No.) 650 SENTRY PARKWAY, SUITE ONE BLUE BELL, PA 19422 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 941-2109 ----------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X] State issuer's revenues for its most recent fiscal year: None The aggregate market value of the common voting stock held by non-affiliates as of January 2003: Not Determinable. Shares outstanding of the registrant's common stock as of January 31, 2003: 80,460,991 shares. PART I ITEM 1. DESCRIPTION OF BUSINESS. (A) GENERAL BUSINESS DEVELOPMENT Tasty Fries, Inc. (the "Company") was incorporated under the laws of the State of Nevada on October 18, 1985, under the name Y.O. Systems, Ltd. The Company was organized to raise capital and then seek out, investigate and acquire any suitable assets, property or other business potential. No specific business or industry was originally contemplated. The Company was formed as a "blank check" company for the purpose of seeking a business acquisition without regard to any specific industry or business. The Company was unsuccessful in certain business proposals and began actively looking for a business acquisition during 1990. Effective July 29, 1991, the Company issued 13,500,000 shares of restricted common stock (after giving effect to a 1 for 50 reverse stock split) to the stockholders of Adelaide Holdings, Inc., a private Delaware corporation incorporated in April, 1990 (hereafter referred to as "AHI"). The 13,500,000 shares represented approximately 80% of the 16,845,370 shares of common stock of the Company outstanding after the acquisition. The Company also amended its Articles of Incorporation to include a provision that officers and directors of the Company are not liable for damages as a result of a breach of fiduciary duty except in certain specified instances under Nevada law. In September 1993, the Company amended its Articles of Incorporation changing its name to Tasty Fries, Inc. (B) BUSINESS OF THE COMPANY GENERAL The Company has developed a patented French fry vending machine (the "Machine"). The Company intends to manufacture and market the machine in both domestic and international markets through traditional sales to established vending companies. The Company may also own and operate machines itself. The Machines are expected to be located in high-traffic locations that have historically been successful for vending operators, such as universities, airports, bus and train stations, high schools, military bases, industrial locations and recreational venues. The Company has also developed a related proprietary potato product for the production of French fries in the Machine (the "Potato Product"). Although the Company has developed its own potato product, the Company presently intends to purchase a comparable potato product, for use in the machine, from a third party. This strategic determination is driven by the high costs associated with establishing a production line to produce its own, proprietary Potato Product. At such time as the economics of the business and the success of the machine warrant the capital 1 investment of a production line, the Company may manufacture its own, proprietary Potato Product or license the product to a contract manufacturer. The Company's basic business strategy is to market the machines and the ancillary products that are required to prepare each serving of French fries. These ancillary products include the potato product, cooking oil, serving cups and condiments. The Company's long-term profitability and success will be driven primarily by the revenue and accompanying profit to the Company associated with each and every vended portion sold from its installed base of Machines. The Company had previously received a federally registered trademark for its former name and logo, "Adelaide." The Company has subsequently federally registered its name and logo, "Tasty Fries," as a federal trademark on the Supplemental Register and has been marketing the Machine and its products under that name. DESIGN AND MANUFACTURING HISTORY In 1992, persons then associated with the Company filed a U.S. patent application with respect to a device for the vending of fresh French fried potatoes (the original machine), which was assigned to the Company on October 9, 1992. In January 1993, the Company entered into a manufacturing agreement with Premier Design, Ltd. ("Premier") for the production of its vending machine (the "Premier Agreement"). The Premier Agreement provided that Premier would refine and manufacture the original machine. The Agreement called for the Company and Premier to share the development costs of the project; such costs were to include design, engineering and initial manufacturing costs projected over the initial quantity of production machines. The Agreement also provided for Premier to manufacture any additional or similar machines for the Company. The Premier Agreement could not be terminated by either party so long as Premier provided the Machines as required by the Company. Pursuant to the terms of the Premier Agreement, the first initial production of machines was to be delivered by June 15, 1993. As one element of the process undertaken by Premier, an engineering review of the machine was to be performed. Mr. Harry Schmidt, president of Premier, retained the services of Mr. Edward C. Kelly to perform said evaluation. In February 1993, Mr. Kelly submitted the findings of his evaluation. Mr. Kelly's study found the device failing to perform as anticipated and his review identified significant and numerous mechanical and design problems. Mr. Kelly and Premier's recommendation to prior management was that the existing machine should be abandoned completely. Prior management, none of whom are presently connected with the Company, believed they had developed a viable production model French fry vending machine. They decided to abandon the original device. The Company retained Premier Design to design and develop a machine based on new and different technology. Kelly and Premier began the process of designing a new machine in March 1993. Premier is a private company owned by Mr. Schmidt. Mr. Schmidt was subsequently appointed to the Company's Board of Directors in May 1993, but did not stand for reelection to the Board in September 1995. At the time of the original Premier Agreement, neither Mr. Schmidt nor Mr. Kelly had any affiliation with the Company. Edward C. Kelly joined the 2 Company as Executive Vice President in January 1994 and was subsequently appointed to the Company's Board of Directors in February 1994. In June of 1994, he was named President of the Company. In December 1994, having completed much of the design and development of the new Machine, the parties amended the original manufacturing contract (the "Premier Amendment"). The Premier Amendment described the terms under which Premier would manufacture the 10 prototype models of the new machine and begin manufacture of the production units. In July 1996, a U.S. patent was issued in Mr. Kelly's name for the Machine. Mr. Kelly assigned the patent rights for the Machine to Premier based upon the terms of the Premier Amendment and the express understanding between Premier, the Company and Mr. Kelly (individually) that: (i) upon issuance, the patent would be assigned 100% to Premier as consideration for the significant funds expended by Premier in the development of the machine; (ii) Premier would immediately assign the Company a 50% interest in the patent upon payment to Premier by the Company of one-half of the total development costs. The Company's 50% share of the development costs were later determined to be $650,000. The Company agreed to pay $50,000 in interest raising the total debt to $700,000. The Company has paid $450,000 to Premier towards its 50% share of the development costs. Premier will also receive $250 per machine manufactured by the third party. In the spring of 1996, the Company and Premier agreed that Premier would be unable to manufacture the Machines under the terms of the Premier Amendment. On June 17, 1996, the Company announced its intention to award the manufacturing contract for the Machine to S&H Electronics of Robesonia, Pennsylvania ("S&H"), an unaffiliated third party, and subsequently entered into a non-exclusive manufacturing agreement with S&H for such purpose. S&H is a contract-manufacturer, which specializes in the assembly and testing of electro-mechanical assemblies and equipment. Subsequently the contract was cancelled. In January 2000, the Company opened an assembly facility in Portsmouth, New Hampshire and hired sub-contractors to produce the first twenty-five units. However, in November 2001 the Company ceased all business dealings in New Hampshire, pulled its machines from the field and transported them along with the Company's manufacturing equipment to ACE Metal Products, Inc. in Turlock, California for the first run production. PRE-PRODUCTION TOOLING The pre-production tooling stage for the machine is a critical element of the process of getting the machine into commercial production. The Tasty Fries device is comprised of many individual parts. A portion of these parts are basic, "off-the-shelf" manufacturing components such as hardware, lighting and electrical components. However, approximately 75% of the components are customized parts that require a subcontract supplier to manufacture specifically for Tasty Fries. Because of the costs associated with manufacturing these custom-designed parts, the most critical components have been designed to be tooled, molded or cast by the various suppliers. While very costly and time-consuming in the front-end of a project, the tooling of various component parts will: (a) ensure the consistency and quality of the machine's critical parts and (b) greatly reduce the unit costs of both the individual parts and the overall machine, as production volume increases. As with the overall business plan, the tooling process itself has 3 been delayed due to the lack of capital available, however, the pre-production tooling stage is now complete. The Company will also produce a tabletop model of the machine. Customized parts will be marketed to operators of the machine, be they owners or lessees. No third parties will have any interest in the sale of the parts. The Company is unable to estimate when sale of the parts might commence but when they do, revenues are not expected to be significant. THE MACHINE The Machine is designed to produce quality, freshly-made French fries utilizing a unique method that automatically converts a dehydrated potato product into rehydrated potato mix, delivers this mix into a proprietary forming and cooking cycle, and finally into complete, high-quality, freshly-made French fries. The potato product can be stored at room temperature, has a shelf-life of between 12 and 24 months (depending on storage conditions), requires no refrigeration or freezing, and occupies less storage space than frozen fries, thereby offering greater storage capacity than competing technologies which use frozen French fries. The French fries are delivered to the consumer in a 4-ounce serving of 32 French fries. From the time currency is deposited, the total vend time for an order of fries from the final production model Machine is estimated to be approximately one and one-half minutes. The utilization of a state-of-the-art combination of computer driven mechanics makes this possible. The design of the Machine involves the use of a vegetable oil enabling the process to deliver a cholesterol-free product. Each vend contains French fries which are crisp and golden brown. The quality of the product is consistently uniform in each vend. The Machine has the capacity to produce 500 vends before any refill of potato product or other ingredient is required. The Machine is computer-controlled and communicates with the consumer from the time the money is deposited into it until the time the vended cup of fresh French fries is delivered. The Machine can accept dollar bills, coins or any combination thereof, depending on the vend charge, which can be changed at anytime by simply reprogramming the currency mechanism. The Machine requires a 110-volt connection and is equipped with modern computer technology using microprocessors and sensors. If the machine operator desires, the Machine can communicate with a central database, via modem, to make available immediate information on product levels, service issues or currency levels. The machine's cash management program enables it to monitor the cash position at any time and the amount of vends, which allows for spontaneous and immediate cash reporting to the vending operator. The Machine has been designed to be repaired on-site without the necessity of being returned to the manufacturer. It is anticipated that ongoing maintenance will be limited, and the majority of an operator's labor expenditures will involve the replenishment of products into the Machines. At such time, oil and water will be replaced, additional cups and condiments will be restocked. Water will also be changed at such time unless the Machine is directly attached to a plumbing supply, which is not necessary for the Machine's operation. The frequency with which the Machine must be restocked depends completely upon the number of vends dispensed daily. 4 The Machine has received Underwriter's Laboratory ("UL") approval for the United States and Canada. The Company is committed to placing in the market, a reliable vending machine which will dispense our French fry product. We plan for improvements to the machine at costs which are not material. These improvements to the machine will require re-certification by UL, which may cause delay in installation of the improved machine. The machine also received certification from the National Automatic Merchandising Association ("NAMA") and from the Federal Communications Commission ("FCC"). THE POTATO PRODUCT The Company's proprietary Potato Product for use in the Machine was developed jointly by Tasty Fries, Inc. and Nestle Netherlands BV. Management estimates that the cost to establish its own manufacturing line to produce the Potato Product is significant. Due to the considerable costs involved and the current availability of another potato product, the Company does not currently intend to establish a manufacturing line for the production of its own product. SEE "AVAILABILITY OF RAW MATERIALS." MARKETING The Company has historically marketed the Machines and the products exclusively through territorial distributorships. The Company currently intends to market its products in both domestic and international markets through traditional sales to established companies in the vending industry. The Company may also own and operate machines itself. The existing distributorship agreements essentially require an up-front payment and minimum annual payments usually over the life of the contract. Distributors must also pay a specified sum per Machine purchased as a credit toward the minimum annual payments. Most distributorship agreements require a minimum number of Machines to be purchased per year. The Company has sold or granted an aggregate of 15 territorial distributorships. In the course of normal business, some of these distributorships have been reacquired by the Company and others have been terminated due to default on behalf of the distributor or by the distributor themselves. There is currently 1 distributorship, which has not been terminated or reacquired. The distributor's obligation to make further payments, after tendering the initial deposit required upon execution of the distributorship agreement, is conditioned on the Company's ability to ship its Machines and related products. Management believes that once commercial production of Machines is commenced and the distributor is notified and required to place orders for Machines, it may be financially unable to do so or may simply elect not to purchase Machines and effectuate its respective agreement. The Company appointed Ahmad Zohbi, as a Regional Representative for Tasty Fries, Inc. for the Middle East and Northern Africa, excluding Israel, Moracco and Turkey. In February, 2002 the Company entered into a Master Sales and Marketing Agreement with SilverLeaf, LLC. The Agreement granted SilverLeaf the exclusive distribution rights for the sale and marketing of the Tasty Fries vending machine excluding certain existing territories. The Agreement was subsequently cancelled by the Company. See LEGAL PROCEDINGS. 5 The Company hired IC Ads, Inc. to develop and maintain the Company's web site (www.tastyfries.com). COMPETITION The technology in Tasty Fries' machine has been awarded U.S. patent #5,537,916 issued June 23, 1996. Other attempts to bring a French fry vending machine to market have not utilized the Company's patented technology. Tasty Fries process of using dehydrated potato distinguishes it from the competition. Most attempts use either a frozen or pre-cooked potato and are heated by microwave or convection oven. Tasty Fries' patented process is unique and management believes produces the best tasting product. The Company faces competition from other suppliers of French fries, including fast food outlets. The Company is aware of other companies, which have test marketed French fry vending machines or are in the process of developing such machines. Certain of the companies may be viewed as competitors or may become competitors in the future. Management believes, although no assurances are given, that due to current demand for French fried potatoes, that there may be additional competition in the future in the area of French fry vending. AVAILABILITY OF RAW MATERIALS The raw materials or inputs used by the machine in the production of each serving of fries are: potato product, cooking oil, water, serving cups and condiments. Management believes that the oil, condiments and serving cups used in the dispensing of French fries are readily available from its current suppliers. In the event that one or more of these materials were to be unavailable from a current supplier, the Company is confident that comparable substitute products would be available from other suppliers. The Company presently purchases potato product from Nestle Netherlands BV and has entered into a contract with them for the purchase of the product. At such time in the future as may be warranted by the success of the business, the Company may elect to enter into the production of its own proprietary potato. SEE "POTATO PRODUCT." PATENTS AND PROPRIETARY RIGHTS The Machine's inventor, Edward C. Kelly, is Tasty Fries' President and Chief Executive Officer and was issued a patent by the U.S. Patent and Trademark office in July 1996. In addition, the Company is seeking, but has not yet received, patent protection in Canada, Japan, and the European Patent office (which currently represents 17 European countries). The Company has applied and has received patent protection in Canada, Israel and Brazil; the Company is awaiting examinations of the European and Japanese applications. The Company intends to seek patent, trademark and related legal protection in the future where it deems the same to be beneficial. However, legal protections and precautions do not prevent third party development of competitive products or technologies. There can be no 6 assurance that the legal precautions and other measures taken by the Company will be adequate to prevent misappropriation of our proprietary technology. Notwithstanding the foregoing, the Company does not intend to be solely dependent upon patent protection for any competitive advantage. The Company expects to rely on its technological expertise and the early entry into the marketplace of its products to further enhance its position as a leader in the field and protect its technologies. GOVERNMENTAL APPROVALS AND REGULATIONS The Machine was designed and developed in consideration of applicable governmental and industry rules and regulations. Management believes that the Machine's design complies with National Sanitation Foundation ("NSF") guidelines as well as Underwriter's Laboratory ("UL") standards. The Machine has received UL (Underwriter's Laboratory), NAMA ( National Automated Merchandising Association) approval and will receive NSF approval prior to sale and installation. The Company has requested that the Machine be inspected and expects to have the Machine inspected by various regulatory agencies during the production process but prior to sale and installation. Management believes, although no assurance is given, that the required approvals from various regulatory agencies are obtainable and are not currently aware of anything that will delay the necessary approvals. The machine has also received F.C.C. ( Federal Communications Certification) approval. Management is not aware of and does not believe that there are any specifically applicable compliance requirements under state or federal environmental or related laws relating to the manufacture and operation of the machine. RESEARCH AND DEVELOPMENT COSTS For the fiscal years ended January 31, 2003 and 2002, the Company incurred $586,611 and $1,759,899, respectively, in costs and expenses relating to the research and development of its machine. The Company could incur additional research and development costs over the next year should a counter top model of our French fry vending machine be introduced. Projected costs to design and develop this model should not exceed $300,000 as much of the technology can be transferred from the standard vending machine. PERSONNEL As of January 31, 2003, the Company had a total of four full-time employees. Additional employees are expected to be hired during the next 12 months if the Company's proposed plan of operation is successful and there is sufficient cash flow from operations to support such additional expense. If hired, such additional employees may include a director of marketing, a chief financial officer, and sales and marketing personnel. At the present time, management is unable to estimate how many employees will be needed during the next 12 months. 7 ITEM 2. PROPERTIES. The Company owns no properties. In December 2002, the Company leased executive office space at the premises located at 650 Sentry Parkway, Suite One, Blue Bell, Pennsylvania 19422. The Company's current lease commitments total approximately $5,582.92 per month until December 1 2003. In November 2002, the Company leased 1,000 square feet of warehouse space located at Ambler Warehouse, North Maple Street, Ambler, PA. The current lease commitment on the warehouse space is $450 per month until November 30, 2003. ITEM 3. LEGAL PROCEEDINGS. SilverLeaf, LLC v. Tasty Fries, Inc.: United States District Court for the District of New Jersey On February 1, 2002 the Company entered into an exclusive Master Sales and Marketing Agreement with SilverLeaf LLC. The Agreement granted SilverLeaf the exclusive distribution rights for the sale and marketing of the Tasty Fries vending machine excluding certain existing territories. The Agreement was subsequently cancelled by the Company. In May 2002, SilverLeaf LLC ("SilverLeaf") sued the Company in New Jersey State Court requesting an injunction preventing the termination of the February 1, 2002 Master Sales and Marketing Agreement (" Agreement"). Without the Company's knowledge, the State Court Judge entered an "Order to Show Cause With Temporary Restraints" (the "OSC"), which purported to prevent the Company from terminating the Agreement until a hearing on SilverLeaf's motion for Preliminary Injunction. The Company removed the case to the United States District Court for the District of New Jersey, and the case was assigned to the Chief Judge, the Honorable John W. Bissell. Judge Bissell denied SilverLeaf's Motion for a Preliminary Injunction and dissolved the OSC. Judge Bissell found that SilverLeaf would not be irreparably injured if the Company terminated the Agreement. Judge Bissell's ruling allowed the Company's termination of the Agreement to stand. SilverLeaf thereafter filed an emergency appeal to the United States Third Circuit District Court of Appeal (the "Third Circuit"). On October 20, 2002, the Third Circuit unanimously affirmed Judge Bissell's Order denying SilverLeaf's application for a preliminary injunction, finding no abuse of discretion in Judge Bissell's conclusion that "SilverLeaf failed to demonstrate a reasonable probability of success on the merits." The case was remanded to Judge Bissell. SilverLeaf amended its complaint to allege causes of action for breach of contract, infringement of exclusive license, fraud, tortious interference with prospective business advantage and breach of implied covenant of good faith and fair dealing. The Company moved to dismiss the Complaint. On December 5, 2002, Judge Bissell dismissed all claims against the Company, except for SilverLeaf's claims for breach of contract and tortious interference with prospective business advantage. The Company has initiated a Motion for Summary Judgement as to these two remaining claims, which the Company expects to be heard in the next sixty to ninety days. If successful, the granting of the Summary Judgement will completely dispose of the SilverLeaf 8 litigation. The Company believes that the SilverLeaf action has no merits and will continue to vigorously defend the case. Tasty Fries, Inc. v. Syndi Romanoff, SilverLeaf, LLC, Silver-Shadow Enterprises, LLC and Leon Pirak : United States District Court for the District of New Jersey On October 18, 2002, the Company filed a lawsuit against Syndi Romanoff, SilverLeaf, LLC, Silver-Shadow Enterprises, LLC ("Silver Shadow") and Leon Pirak ("Pirak") for declaratory relief on whether the Company can legally issue a restricted stock certificate for 3,000,000 shares of the Company's stock (the "Restricted Stock") and a Warrant for 2,225,000 shares of the Company's stock exercisable at $1.00/share (the "Warrant") in the name of Silver Shadow or Pirak. Pirak filed a Motion for Summary Judgement, which is scheduled to be heard on May 15, 2003, requesting the Court to enter an order compelling the Company to issue the Restricted Stock and Warrant in his name and awarding him attorneys' fees. The Company has opposed the Motion on the grounds that the Company does not believe Pirak has demonstrated that he is entitled, under the securities laws, to the ownership of the Restricted Stock and Warrants. The Company intends to proceed with the case until it can determine if Pirak is legally entitled to the Restricted Stock and Warrants. California Food and Vending, Inc. v. Tasty Fries, Inc. et al.: United States District Court for the Central District of California As of January 21, 2002, the Company and California Food and Vending, Inc. ("CFV") entered into an Agreement to Settle Liability Under Modified Judgement ("Agreement") under which CFV sold to Tasty Fries for One Million Five Hundred Thousand Dollars ($1,500,000), payable on an installment basis, all of the Machine and Potato Royalty Rights awarded to it under the Modified Judgement Pursuant to Stipulation For Entry Of Modified Judgement ("Modified Judgement"*). The $1,500,000 with interest at Eight Percent (8%) per annum, was payable in eight installments over a twenty four (24) month period. The Company timely made the first five principal payments, for a total of Seven Hundred and Fifty Thousand Dollars ($750,000), plus accrued interest. The payment of the principal amount of $750,000, plus accrued interest resulted in the extinguishment of all of CFV's Machine Royalty Rights, and on February 13, 2003, CFV filed with the federal court a partial satisfaction of judgement. The remaining $750,000, was due in three equal installments of Two Hundred and Fifty Thousand Dollars ($250,000), plus accrued interest, from April 21, 2003 to January 21, 2004. On April 24, 2003, the Company and CFV entered into a letter agreement which modified the Agreement and reduced the remaining $750,000 owed, plus accrued interest of $16, 602.38, for a one time discounted payment of $696,602.38 on April 28, 2003. The Company made the payment, and all of CFV's remaining rights under the Modified Judgement and Agreement were extinguished and satisfied in full. On May 2, 2003 CFV filed with the federal court an Acknowledgement of Full Satisfaction of Judgement. *The Modified Judgement provided, interalia, (1) that the Company pay to CFV royalties on the manufacture, sale, use and distribution of french fry vending machines (the "Machine Royalty Rights"), and (2) the Company pay to CFV a flat Twenty Five Cents ($0.25) per pound of potato product, sold, commercially used or distributed, in connection with Tasty Fries french fry vending machines, in perpetuity (the "Potato Product Royalty Rights"). 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders through solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this Report. PART II. ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS. The common stock of the Company is quoted on the OTC Bulletin Board, under the symbol "TFRY." The following table sets forth the highest and lowest bid prices for the common stock for each calendar quarter during the last two years and subsequent interim periods as reported by the National Quotation Bureau. The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions. High Bid Low Bid -------- ------- FISCAL 2001 ----------- First Quarter $ .73 $ .38 Second Quarter ` .54 .35 Third Quarter .57 .32 Fourth Quarter .44 .20 FISCAL 2002 ----------- First Quarter .47 .24 Second Quarter .37 .14 Third Quarter .27 .10 Fourth Quarter .58 .09 FISCAL 2003 ----------- First Quarter .60 .12 Second Quarter .39 .10 Third Quarter .18 .08 Fourth Quarter .38 .09 10 (B) HOLDERS. The approximate number of record holders of the Company's common stock as of January 31, 2003 is 1,311. (C) DIVIDENDS. The Company has not paid any cash dividends to date and does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of the Company's business. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. PLAN OF OPERATION The Company's basic business model is to market the Machines and the ancillary products that are required to prepare each serving of French fries. These ancillary products include the potato product, cooking oil, serving cups and condiments. The Company's long-term profitability and success will be driven to a significant degree by the revenue and accompanying profit to the Company associated with each and every vended portion sold from its installed base of Machines. With that business model in mind, the Company's current plan of operation is to market its products in both domestic and international markets through a combination traditional leases and/or sales to established companies in the vending industry and through Company owned machines. Management believes that, once in full production, the business cycle of the Company will allow it to operate in a cash positive fashion. That is, with receipt of each order the Company will require an advance payment from its customers for the machine itself and the ancillary products associated with each vend. therefore providing a good portion of the capital necessary to fund the procurement of essential component parts for machine production. If management is incorrect in this assumption, the Company's capital needs for manufacturing may be greater than currently anticipated. In this event, the Company will be required to raise additional funds. There can be no assurances given that any funding, including that which may be required to be advanced, will be available or if available, on terms satisfactory to the Company. In February, 2002 the Company entered into a Master Sales and Marketing Agreement with SilverLeaf, LLC. The Agreement granted SilverLeaf the exclusive distribution rights for the sale and marketing of the Tasty Fries vending machine excluding certain existing territories. The Agreement was subsequently cancelled by the Company. See LEGAL PROCEDINGS. 11 Liquidity and Capital Resources At January 31, 2003, the Company had approximately $56,609 in cash. The Company will need to raise additional capital to enter into full-scale production. If the Company is unable to obtain the desired funding from any source, it is highly unlikely that it will be able to generate a sufficient amount of cash to support its operations during the 12 months following the date hereof, unless it is able to obtain the necessary funds from the sale of debt and/or equity during such period. Based upon its past history, management believes that it may be able to obtain funding in such manner but is unable to predict with any certainty the amount and terms thereof. Subsequent to January 31, 2003, the Company has issued additional shares and warrants to purchase common stock to various parties as payment for services rendered. The Company intends to continue this practice. Results of Operations Fiscal Year Ended January 31, 2003 and 2002 The company is still in the development stage and, as a result, has not realized any revenues, which would include the fiscal years ended January 31, 2003 and 2002. As a result of the company's financial condition, it frequently issues common stock to acquire various services. When the issue price is below the current market price, the company incurs stock purchase expense. In the years ended January 31, 2003 and 2002, stock purchase discount expense was $1,446,302 and $503,500. The company maintains a staff of several personnel. Salary and related payroll tax expense for the years ended January 31, 2003 and 2002 were $742,519, $525,000, respectively. The company is dependent upon outside consultants to provide research and development, financial, and marketing expertise. As a result, expenses can fluctuate from year to year. Consulting expenses for the years ended January 31, 2003 and 2002 were $586,611 and $1,760,000, respectively. The company incurs legal fees in connection with business negotiations and contract preparation, as well as certain instances of litigation. Legal expenses for the years ended January 31, 2003 and 2002 were $289,604 and $118,000, respectively. The loss from operations for the years ended January 31, 2003 and 2002 was ($3,947,644) and ($3,833,000), respectively. 12 Consultants & Advisors The Company has in the past, and will in the future, retain consultants with significant experience in areas such as marketing, advertising and financing. The Company has in the past and continues to engage the services of Lancaster Ventures Corporation to provide business consulting services. The Company has in the past and continues to engage the services of USIS International Capital Corporation ("USIS") to provide business consulting services and to assist the Company with the introduction of its machine to the marketplace. The Company has in the past and continues to engage the services of IC Ads, Inc. to develop and maintain the Company's web site (www.tastyfries.com). ITEM 7. FINANCIAL STATEMENTS. Audited balance sheets as of January 31, 2003 and 2002, and the related statements of operations, of stockholders' equity deficiency and of cash flows for the years ended January 31, 2003 and 2002 and for the period from October 18, 1985 (inception) to January 31, 2003 are included after Item 12 herein. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 20, 2002 , Goldenberg Rosenthal, LLP resigned as the independent accountant of the Company. Goldenberg Rosenthal, LLP advised the Company that it made a corporate decision to discontinue the practice of providing accounting and auditing services to publicly traded companies. On September 5, 2002 the Company engaged Baratz and Associates, PA, as its new independent accountants. PART III. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. (A) IDENTIFICATION OF DIRECTORS & EXECUTIVE OFFICERS 13 The current directors of the Company will serve until the next meeting of shareholders at which directors are elected and qualified. Names, age, period served and positions held with the Company are as follows: Positions with Name Age Company ---- --- -------------- Edward C. Kelly 67 President, Chief Executive Officer, Treasurer and Chairman of the Board* Leonard J. Klarich 69 Secretary and Director* Jurgen A. Wolf 69 Director* Kurt R. Ziemer 48 Director *Member of the Executive Committee of the Board of Directors. Mr. Klarich was also appointed Secretary by the Board of Directors on June 3, 1996. EDWARD C. KELLY - Mr. Kelly has been President of the Company since June 10, 1994, and a director since April 1994. He was appointed a member of the Executive Committee on September 18, 1995, and Chairman of the Board of Directors after the removal of Mr. Arzt (by a 2/3 majority vote of shareholders) in June 1996. From January 1994 until June 10, 1994 he was Executive Vice President of the Company. Mr. Kelly has been involved in the engineering and design of the machine since 1993 and was awarded a U.S. patent in July 1996. Mr. Kelly owned and operated Mega Products Corporation, a subcontract manufacturing company, from 1970 through 1994. Mega serviced companies including IBM, GE, Dupont, Gulf & Western and Kulick & Soffa. LEONARD J. KLARICH - Since September 1995, Mr. Klarich has been a director of the Company and also was a consultant to management from March through May 1996. Mr. Klarich was retained as Executive Vice President of the Company in June 1996 to assist in the day-to-day operations of the Company, with specific emphasis on distribution networks, distributors and marketing. In June 1997, his title was changed to Vice President. He was also appointed Secretary in June 1996. Mr. Klarich was Chairman of the Board of K&D, a high-tech graphic design company located in Woodland Hills, California until early 1996. From 1976 to 1989 he owned and operated Avecor, Inc., a plastics manufacturing company with revenue in excess of $40 million upon his sale of the company. Prior thereto, he spent a number of years as a chief operating officer of companies in need of turnaround due to financial concerns. JURGEN A. WOLF - Mr. Wolf has been a director of the Company and a member of the Executive Committee of the Board of Directors since September 18, 1995. Since 1983, he has been President of J.A. Wolf Projects, Ltd., a private Vancouver company engaged in commercial and industrial contracting. From August 1992 to March 1993, Mr. Wolf was a director of Yukon Spirit Mines Ltd. (currently known as Gainey Resources Ltd.). Mr. Wolf is also a director of four Canadian public companies, which include: Consolidated Gulfside Industries, Ltd., Shoreham Resources, Ltd., U.S. Oil Inc. and Key Capital Group, Inc. KURT R. ZIEMER - Mr. Ziemer was appointed to the Board of Directors on October 4, 1996 as the board designee of Whetstone Ventures Corporation, Inc. pursuant to the April 30, 1996 Stock Purchase Agreement with the Company. Since 1989 he has owned and operated Ziemer Buick-Pontiac-GMC Truck, Inc. located in New Holland, Pennsylvania. From 1977 until 1989, he served in several capacities for the auto dealership. (B) DIRECTORSHIPS. The current directors hold no other directorships in any Company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any 14 Company registered as an investment Company under the Investment Company Act of 1940, except as disclosed herein. (C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES. None. (D) FAMILY RELATIONSHIPS. Louis M. Kelly, Esquire was hired by the company as Operations Manager. Mr. Kelly has served as outside counsel to the Company and has a working knowledge of the business. Mr. Kelly is the son of Edward C. Kelly, President and CEO of the Company. ITEM 10. EXECUTIVE COMPENSATION (A) GENERAL (B) SUMMARY COMPENSATION TABLE ANNUAL COMPENSATON (1) ---------------------- Fiscal Year Name & Ended Restricted Principal Position January 31, Salary Bonus Stock Edward C. Kelly 2003 $240,000 $0 $81,708 (3) President, CEO 2002 $240,000 $0 & Chairman (2) 2001 $240,000 $0 (1) There were no long-term incentive payments made in the year-ended January 31, 2003. (2) Mr. Kelly has served as President and Treasurer of the Company since June 10, 1994, a director since April 1994, Chairman of the Board since June 3, 1996, and was Executive Vice President from January 1994 to June 10, 1994. This table does not include: (i) an option granted for 1,000,000 post-split shares of common stock exercisable for two years at .50 per share (iv) options granted pursuant to Mr. Kelly's employment contract (vi) option granted for 3,500,000 post-split shares of common stock exercisable at .50 per share. (3) 544,720 shares of restricted stock @ .15 were issued in lieu of salary increase for the proceeding three years pursuant to Employment Contract. (C) OPTIONS/S.A.R. GRANTS TABLE OPTION GRANTS IN THE FISCAL YEAR ENDED JANUARY 31, 2003 15 Each Director of the Company received a seven year option to purchase 50,000 shares of our common stock at an exercise price of $.45. Each Director of the Company received a two year option to purchase 200,000 shares of our common stock at an exercise price of $.45. Edward C. Kelly received a seven year option to purchase 1,000,000 shares of our common stock at an exercise price of $ .17 per share pursuant to employment contract. (D) AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR VALUE TABLE. (E) LONG TERM INCENTIVE PLAN (`LTIP") AWARDS TABLE. None. (F) COMPENSATON OF DIRECTORS. Directors are compensated by payment of an annual fee and grant of stock options. Each director receives an annual fee of $10,000. Each director also receives an option exercisable for seven years to acquire 50,000 shares of Tasty Fries common stock for each year of service commencing June 10, 1994. The exercise price is equal to the closing bid price of our stock on June 9th proceeding each year of service. Exercise prices range from $.45 to $1.25 per share. Each of our Director's received a two year option to purchase 200,000 shares of our common stock at an exercise price of $.45. (G) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS In July, 2001, the Board of Directors approved the terms of an Employment Agreement for the Company's Chief Executive Officer. The Employment Agreement is for a period of ten years from its date of execution. The Employment Agreement provides for an annual salary, to be increased by 10% each year. In addition, the Chief Executive Officer is granted the right to acquire up to 1,000,000 shares of the Company's restricted Common Stock for each full year of his employment with the Company, commencing with the year beginning June 10, 1994. The acquisition price for such stock shall be the closing price of the stock on June 9 (or the closest business day thereto) of each such full year. He has the right to exercise this option at any time up to seven years from the date his right to acquire stock vests. The agreement also provides for compensation arrangement in the case of temporary disability, death and permanent disability. (H) REPORT ON REPRICING OF OPTIONS/SARS None 16 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table sets forth, as of January 31, 2003, the ownership of common stock by persons known to the Company who own beneficially more than 5% of the outstanding shares of common stock: Name & Address of Amount & Nature of Percent Beneficial Owner Beneficial Ownership of Class ---------------- -------------------- -------- Edward C. Kelly 2,528,000 3% 650 Sentry Parkway, Suite One Blue Bell, PA 19422 (1) L. Eric Whetstone 3,535,357 4% 11 Waterfront Estates, Estates Drive Lancaster, PA 19601 L. Eric & Ilona Whetstone & Charles Whetstone Jt Ten 2,500,000 3% 11 Waterfront Estates, Estates Drive Lancaster, PA 19601 L. Eric & Ilona Whetstone Ten Com 2,422,727 3% 11 Waterfront Estates, Estates Drive Lancaster, PA 19601 L. Eric & Ilona Whetstone Jt Ten 734,392 -- 11 Waterfront Estates, Estates Drive Lancaster, PA 19601 David Rights 1095 Rydal Road Rydal, PA 19046 9,200,000 11% Ahmad Zhobi U.A.E. 4,300,000 5% Zekra Zhobi 2,680,000 3% (1) Does not include an option for 3,500,000 shares of common stock at .50 per share expiring 4/5/04; an option for 200,000 shares of common stock at .50 per share expiring 11/1/04; options for 400,000 shares expiring ratably between June 10, 2003 and June 10, 2009 at exercise prices ranging from $.12 to $1.25 per 17 share. Options for 8,000,000 shares expiring ratably between June 10, 2003 and June 10, 2009 at exercise prices ranging from $.12 per share to $1.25 per share pursuant to Employment Contract. SEE "EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS (B) SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of April 30, 2003, the beneficial common stock ownership of all directors, executive officers, and of all directors and officers as group: Name & Address of Amount & Nature of Percent Beneficial Owner Beneficial Ownership of Class ---------------- -------------------- -------- Edward C. Kelly 2,528,000 3% 650 Sentry Parkway, Suite One Blue Bell, PA 19422 (1) Leonard J. Klarich 180,000 0 839 Claybrook Court Knoxville, TN 37923 (2) Jurgen A. Wolf 50,000 0 #103 15325 17 Ave Surrey, B.C. Canada V4A1T8 (3) Kurt R. Ziemer 850,000 1% 599 Valley View Drive New Holland, PA 17557 (4) All Officers and Directors 3,608,000 5% as a group (4 persons) * less than 1% (1) Does not include an option for 3,500,000 shares of common stock at .50 per share expiring 4/5/04; an option for 200,000 shares of common stock at .50 per share expiring 11/1/04; options for 400,000 shares expiring ratably between June 10, 2003 and June 10, 2009 at exercise prices ranging from $.12 to $1.25 per share. Options for 8,000,000 shares expiring ratably between June 10, 2003 and June 10, 2009 at exercise prices ranging from $.12 per share to $1.25 per share pursuant to Employment Contract. SEE "EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS (2) Does not include: (i) options for 350,000 shares expiring ratably between June 10, 2003 and June 10, 2009 at exercise prices ranging from $.12 to $1.25 per share (ii) option for 200,000 shares of common stock at .50 per share expiring 11/1/04. 18 (3) Does not include: (i) options for 350,000 shares expiring ratably between June 10, 2003 and June 10, 2009 at exercise prices ranging from $.12 to $1.25 per share (ii) option for 200,000 shares of common stock at .50 per share expiring 11/1/04. (4) Does not include: (i) options for 300,000 shares expiring ratably between June 10, 2003 and June 10, 2009 at exercise prices ranging from $.12 to $1.25 per share (ii) option for 200,000 shares of common stock at .50 per share expiring 11/1/04. Mr. Ziemer's option has been prorated to reflect the date he was appointed to the Board of Directors on October 4, 1996. (C) CHANGES IN CONTROL. Except as described in this Report, there are no arrangements, known to the Company, including any pledge by any person of securities of the Company or of any of its parents, the operation of which may at a subsequent date result in a change in control of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. SUBSEQUENT EVENTS At April 28, 2003 the Company settled the $750,000 balance of the note payable to California Food and Vending, Inc. ("CFV") and acquired clear title to the royalty rights that had been previously held by CFV as discussed in Note 8. CFV accepted a discounted amount of $696,602 as full payment of the $750,000 principal balance and accrued interest of $16,602. The note was due in installments through January 2004. The Company acquired the funds to finance this settlement from a stockholder. The terms of this funding include future payments to the stockholder of $0.20 per pound of potato product sold by the Company for a term consisting of the greater of 10 years, commencing when 250 french fry vending machines are placed into commercial use; or payment in full of the $696,602 amount financed plus accrued interest at 9% per annum, compounded. REPORTS ON FORM 8-K. Forms 8-K dated May 19, 1999, June 17, 1999, July 20, 1999, August 11, 1999, October 14, 1999 November 20, 1999, March 20, 2001, July 11, 2002 and September 9, 2002 are hereby incorporated by reference. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 19 TASTY FRIES, INC. Date as of filing By: /s/ Edward C. Kelly ----------------------------- Edward C. Kelly President and Principal Financial Officer In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated. /s/ Edward C. Kelly April 30, 2002 ------------------------------------ Edward C. Kelly, Chairman, CEO President, Treasurer & Director /s/ Leonard J. Klarich April 30, 2002 ------------------------------------ Leonard J. Klarich, Vice President, Secretary & Director /s/ Jurgen A. Wolf April 30, 2002 ------------------------------------ Jurgen A. Wolf, Director /s/ Kurt N. Ziemer April 30, 2002 ------------------------------------ Kurt N. Ziemer, Director 20 CERTIFICATION ------------- I, Edward C. Kelly, certify that: 1. I have reviewed this annual report on Form 10-KSB of Tasty Fries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 16, 2003 Edward C. Kelly CEO/CFO To the Board of Directors and Stockholders Tasty Fries, Inc. Blue Bell, Pennsylvania We have audited the accompanying balance sheet of Tasty Fries, Inc. (A Development Stage Company) as of January 31, 2003, and the related statements of operations, changes in stockholders' deficiency, and cash flows for the year then ended and for the period October 18, 1985 (inception) to January 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements for Tasty Fries, Inc. as of January 31, 2002, were audited by other auditors whose report dated April 12, 2002, expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet as of January 31, 2003 and the related statements of operations, changes in stockholders' deficiency, and cash flows for the year then ended and, based on our audit and the reports of other auditors, the statements of operations, changes in stockholders' deficiency, and cash flows for the period from October 18, 1985 (inception) to January 31, 2003, present fairly, in all material respects, the financial position of Tasty Fries, Inc. (A Development Stage Company) as of January 31, 2003, and the results of its operations and its cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has not generated any revenues, has incurred net losses since its inception, and has a working capital and stockholders' deficiency as of January 31, 2003. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Baratz & Associates, P.A. Marlton, New Jersey April 28, 2003 TASTY FRIES, INC. (A Development Stage Company) BALANCE SHEETS -------------------------------------------------------------------------------- January 31 January 31, ASSETS 2003 2002 ------------ ------------ Current assets Cash $ 56,609 $ 120,566 Prepaid expenses 9,682 24,598 ------------ ------------ Total current assets 66,291 145,164 Furniture and office equipment, net of accumulated depreciation of $77,539, January 31, 2003 and $74,062, January 31, 2002 2,585 3,633 Other assets Royalty rights 1,500,000 1,500,000 ------------ ------------ Total Assets $ 1,568,876 $ 1,648,797 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities Accounts payable and accrued expenses $ 953,480 $ 739,783 Current maturities of long-term debt 750,000 600,000 Stockholder loans payable 60,349 312,566 ------------ ------------ Total current liabilities 1,763,829 1,652,349 ------------ ------------ Long term liabilities Long-term debt, net of current maturities -- 750,000 Unearned revenue 320,000 320,000 ------------ ------------ Total long term liabilities 320,000 1,070,000 ------------ ------------ Total Liabilities 2,083,829 2,722,349 ------------ ------------ Commitments and contingencies Stockholders' deficiency Common stock, $.001 par value Authorized 100,000,000 shares; issued and outstanding 80,460,991 shares, January 31, 2003; issued and outstanding 59,171,758 shares, January 31, 2002 80,461 59,171 Additional paid-in capital 32,784,028 28,261,075 Deficit accumulated in the development stage (33,279,442) (29,331,798) ------------ ------------ (414,953) (1,011,552) Less: Subscription receivable (100,000) (62,000) ------------ ------------ Total stockholders' deficiency (514,953) (1,073,552) ------------ ------------ Total Liabilities and Stockholders' Deficiency $ 1,568,876 $ 1,648,797 ============ ============ See notes to financial statements 3 TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 31, 2003 AND 2002 AND OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2003 --------------------------------------------------------------------------------
Cumulative Years Ended January 31, Since ---------------------------- Inception 2003 2002 ------------ ------------ ------------ Revenues $ -- $ -- $ -- ------------ ------------ ------------ Costs and expenses Research, machine and product development 6,114,912 586,611 1,759,899 Selling, general and administrative 21,330,893 1,758,742 1,529,532 ------------ ------------ ------------ Total costs and expenses 27,445,805 2,345,353 3,289,431 ------------ ------------ ------------ Loss before other income (expense) (27,445,805) (2,345,353) (3,289,431) ------------ ------------ ------------ Other income (expense) Interest income 21,274 -- -- Forfeited distributor deposits 15,000 -- -- Stock purchase discount (3,723,854) (1,446,302) (503,500) Interest expense (2,146,057) (155,989) (40,017) ------------ ------------ ------------ Total other income (expense) (5,833,637) (1,602,291) (543,517) ------------ ------------ ------------ Net loss $(33,279,442) $ (3,947,644) $ (3,832,948) ============ ============ ============ Net loss per share of common stock ($0.06) ($0.08) ============ ============ Weighted average shares outstanding 68,533,451 46,957,387 ============ ============
See notes to financial statements 4 TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2003 --------------------------------------------------------------------------------
Deficit Accumulated Additional in the Total Common Paid-in Development Stockholders' Stock Capital Stage (Deficiency) ----------- ----------- ----------- -------------- Balance, February 1, 1991 $ 157,307 $ (156,307) $ -- $ 1,000 Issued 1,114,679 shares for note conversion 11,147 113,853 -- 125,000 Net loss for the year ended January 31, 1992 -- -- (198,425) (198,425) ----------- ----------- ----------- ----------- Balance, January 31, 1992 168,454 (42,454) (198,425) (72,425) Issued 4,275,000 shares 42,750 457,250 -- 500,000 Issued 150,000 shares for services 1,500 36,000 -- 37,500 Net loss for the year ended January 31, 1993 -- -- (773,304) (773,304) ----------- ----------- ----------- ----------- Balance, January 31, 1993 212,704 450,796 (971,729) (308,229) Issued 7,600,000 shares 76,000 464,000 -- 540,000 Issued 220,000 shares for services 2,200 -- -- 2,200 Redeemed 3,145,000 shares (31,450) 31,450 -- -- Net loss for the year ended January 31, 1994 -- -- (658,820) (658,820) ----------- ----------- ----------- ----------- Balance, January 31, 1994 259,454 946,246 (1,630,549) (424,849) Issued 3,129,999 shares 31,300 547,950 -- 579,250 Issued 2,151,622 shares for services 21,516 121,294 -- 142,810 Issued 1,000,000 shares for litigation settlement 10,000 460,000 -- 470,000 Net loss for the year ended January 31, 1995 -- -- (2,148,933) (2,148,933) ----------- ----------- ----------- ----------- Balance, January 31, 1995 (carried forward) 322,270 2,075,490 (3,779,482) (1,381,722) (continued)
See notes to financial statements 5 TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2003 -------------------------------------------------------------------------------- (continued)
Deficit Accumulated Additional in the Total Common Paid-in Development Stockholders' Stock Capital Stage (Deficiency) ----------- ----------- ----------- -------------- Balance, January 31, 1995 (brought forward) 322,270 2,075,490 (3,779,482) (1,381,722) Issued 21,815,000 shares 218,150 1,054,350 -- 1,272,500 Issued 6,733,502 shares for services 67,335 381,880 -- 449,215 Issued 625,000 shares for loan conversion 6,250 43,750 -- 50,000 Issued 1,000,000 shares for repurchase of distributorship 10,000 90,000 -- 100,000 Reverse stock split (620,885) 620,885 -- -- Net loss for the year ended January 31, 1996 -- -- (1,384,488) (1,384,488) ----------- ----------- ----------- ----------- Balance, January 31, 1996 3,120 4,266,355 (5,163,970) (894,495) Issued 1,455,000 shares 1,455 1,506,045 -- 1,507,500 Issued 125,000 shares for services 125 324,875 -- 325,000 Net loss for the year ended January 31, 1997 -- -- (2,172,260) (2,172,260) ----------- ----------- ----------- ----------- Balance, January 31, 1997 (carried forward) 4,700 6,097,275 (7,336,230) (1,234,255) (continued)
See notes to financial statements 6 TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2003 -------------------------------------------------------------------------------- (continued)
Deficit Accumulated Additional in the Total Common Paid-in Development Stockholders' Stock Capital Stage (Deficiency) ----------- ----------- ----------- -------------- Balance, January 31, 1997 (brought forward) 4,700 6,097,275 (7,336,230) (1,234,255) Issued 1,500,000 shares for non-recurring compensation 1,500 1,029,750 -- 1,031,250 Issued 167,083 shares 167 80,650 -- 80,817 Issued 955,000 shares for services 955 1,317,545 -- 1,318,500 Issued 43,750 shares for litigation settlement 44 54,644 -- 54,688 Issued 700,000 shares for convertible notes 700 566,979 -- 567,679 Issued 452,772 shares for repayment of notes payable 452 523,587 -- 524,039 Issued 120,000 shares for repayment of notes payable, officer/director 120 175,830 -- 175,950 Net loss for the year ended January 31, 1998 -- -- (5,074,155) (5,074,155) ----------- ----------- ----------- ----------- Balance, January 31, 1998 8,638 9,846,260 (12,410,385) (2,555,487) Issued 2,251,307 shares 2,252 1,299,526 -- 1,301,778 Issued 5,586,150 shares for convertible notes 5,586 3,129,504 -- 3,135,090 Issued 42,704 shares for interest on convertible notes 43 26,385 -- 26,428 Issued 1,226,815 shares for services 1,227 490,652 -- 491,879 Issued 250,000 shares for repurchase of distributorship 250 124,750 -- 125,000 Net loss for the year ended January 31, 1999 -- -- (3,512,124) (3,512,124) ----------- ----------- ----------- ----------- Balance, January 31, 1999 (carried forward) 17,996 14,917,077 (15,922,509) (987,436) (continued)
See notes to financial statements 7 TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2003 -------------------------------------------------------------------------------- (continued)
Deficit Accumulated Additional in the Total Common Paid-in Development Stockholders' Stock Capital Stage (Deficiency) ----------- ----------- ----------- -------------- Balance, January 31, 1999 (as restated) (brought forward) 17,996 14,917,077 (15,922,509) (987,436) Issued 3,789,000 shares 3,789 1,624,291 -- 1,628,080 Issued 250,000 shares for litigation settlement 250 124,750 -- 125,000 Issued 6,184,405 shares for services 6,184 2,799,214 -- 2,805,398 Issued 500,000 shares for repurchase of distributorship 500 249,500 -- 250,000 Net loss for the year ended January 31, 2000 -- -- (5,783,657) (5,783,657) ----------- ----------- ----------- ----------- Balance, January 31, 2000 28,719 19,714,832 (21,706,166) (1,962,615) Issued 3,660,000 shares 3,660 1,228,140 -- 1,231,800 Issued 3,155,000 shares for services 3,155 1,312,312 -- 1,315,467 Issued 4,000,000 shares for repayment of note payable 4,000 1,596,000 -- 1,600,000 Issued 1,200,000 shares for payment of accrued expenses 1,200 548,800 -- 550,000 Net loss for the year ended January 31, 2001 -- -- (3,792,684) (3,792,684) ----------- ----------- ----------- ----------- Balance, January 31, 2001 40,734 24,400,084 (25,498,850) (1,058,032) Issued 6,200,000 shares 6,200 835,800 -- 842,000 Issued 747,500 shares for litigation settlement 747 113,928 -- 114,675 Issued 10,010,247 shares for services 10,010 2,542,743 -- 2,552,753 Issued 1,480,000 shares for repayment of note payable 1,480 368,520 -- 370,000 Net loss for the year ended January 31, 2002 -- -- (3,832,948) (3,832,948) ----------- ----------- ----------- ----------- Balance, January 31, 2002 (carried forward) 59,171 28,261,075 (29,331,798) (1,011,552) (continued)
See notes to financial statements 8 TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2003 -------------------------------------------------------------------------------- (continued)
Deficit Accumulated Additional in the Total Common Paid-in Development Stockholders' Stock Capital Stage (Deficiency) ----------- ----------- ----------- -------------- Balance, January 31, 2002 (brought forward) 59,171 28,261,075 (29,331,798) (1,011,552) Issued 14,650,003 shares in private placements 14,650 3,032,035 -- 3,046,685 Issued 3,694,516 shares for services 3,695 820,339 -- 824,034 Issued 1,750,000 shares for repayment of notes payable 1,750 244,066 -- 245,816 Issued 1,194,720 shares for compensation 1,195 216,513 -- 217,708 Proceeds from issuance of stock warrants -- 210,000 -- 210,000 Net loss for the year ended January 31, 2003 -- -- (3,947,644) (3,947,644) ----------- ----------- ----------- ----------- Balance, January 31, 2003 $ 80,461 $32,784,028 $(33,279,442) $ (414,953) =========== =========== =========== ===========
See notes to financial statements 9 TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS FOR THE TWELVE MONTHS ENDED JANUARY 31, 2003 AND 2002 AND OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 --------------------------------------------------------------------------------
Cumulative Twelve Months Ended January 31 Since ------------------------------ Inception 2003 2002 ------------ ------------ -------------- Cash flows from operating activities $(33,279,442) $ (3,947,644) $ (3,832,948) Net loss Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 314,395 3,477 6,421 Common stock issued for services 10,945,208 741,373 2,049,254 Common stock issued for litigation settlement 764,364 -- 114,675 Stock purchase discount 3,723,854 1,446,302 503,500 Common stock issued for interest on convertible notes 1,129,196 -- -- Common stock issued for repurchase of distributorships 250,000 -- -- Accrued interest on notes and convertible notes payable 438,594 -- 40,017 (Increase) decrease in assets Prepaid expenses (9,682) 14,916 (24,598) Other assets -- -- -- Increase (decrease) in liabilities Accounts payable and accrued expenses 1,463,463 213,697 134,702 Unearned revenue 320,000 -- -- ------------ ------------ ------------ Net cash used in operating activities (13,940,050) (1,527,879) (1,008,977) ------------ ------------ ------------ Cash flows from investing activities Purchase of furniture and office equipment (80,124) (2,429) -- Loan costs (236,856) -- -- ------------ ------------ ------------ Net cash used in investing activities (316,980) (2,429) -- ------------ ------------ ------------ Cash flows from financing activities Proceeds from convertible notes payable 2,600,000 -- -- Issuance of common stock 10,867,174 1,907,001 780,000 Issuance of stock warrants 210,000 210,000 Costs of raising capital (318,700) -- -- Note payable, net 875,165 (650,651) 262,566 Officer/director note 80,000 -- ------------ ------------ ------------ Net cash provided by financing activities 14,313,639 1,466,350 1,042,566 ------------ ------------ ------------ (Decrease) increase in cash (carried forward) 56,609 (63,958) 33,589 (continued)
See notes to financial statements 10 TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS FOR THE TWELVE MONTHS ENDED JANUARY 31, 2003 AND 2002 AND OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 -------------------------------------------------------------------------------- (continued)
Cumulative Twelve Months Ended January 31 Since ------------------------------ Inception 2003 2002 ------------ ------------ -------------- (Decrease) increase in cash (brought forward) 56,608 (63,958) 33,589 Cash, beginning of period -- 120,567 86,978 ------------ ------------ ------------ Cash, end of period $ 56,608 $ 56,609 $ 120,567 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest $ 143,120 $ 88,317 $ -- ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES Issuance of common stock for services $ 10,945,208 $ 741,373 $ 2,049,254 Issuance of common stock for conversion of note payable 2,675,000 -- -- Issuance of common stock for repurchase of distributorship 475,000 -- -- Issuance of common stock for litigation settlement 764,364 -- 114,675 Accrued interest on notes payable 438,594 -- 40,017 Issuance of common stock to pay accrued expenses 550,000 -- -- Issuance of common stock to pay note payable 1,471,566 201,566 370,000 Acquisition of royalty rights (1,500,000) -- (1,500,000) Note payable, royalty rights 1,500,000 -- 1,500,000 Issuance of common stock for subscription receivable 162,000 100,000 62,000
See notes to financial statements 11 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations The Company is a development stage company since it has not completed designing, testing, and manufacturing its sole product, a vending machine that will cook and dispense french fries. Over the past several years the Company has field tested the machine and upgraded certain features to enhance its performance. The overall time frame to bring the product to the market place has been extended due to a lack of working capital. The costs associated with the production of the machines has been charged to research, machine and product development costs. From the corporation's date of inception, October 18, 1985, to date it has engaged in various business activities that were unprofitable. The Company had no revenues from the sale of its french fry vending machine. The ability to continue as a going concern is dependent on the continuation of financing to fund the expenses relating to successfully manufacturing and marketing the vending machine. Management is currently in negotiations with several funding sources to provide the working capital necessary to: (i) begin commercial production of the machines, and (ii) bring them to market, at which time the Company believes that sufficient cash will be generated to support its operations. Management cannot assure the ultimate success of the above plan. Use of estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Issuances Stock issuances are accounted for as increases to common stock and additional paid-in capital based upon the quoted trading price of our stock on the date of issuance. In instances where stock is issued for either cash or services at a price per share less than the quoted trading price on the date of issuance, stock purchase discount expense is charged for the difference between the quoted trading price and the issuance price. Commissions paid to brokers who assist in private placements are expensed as incurred. Research, machine and product development Research and development costs consist of expenditures incurred by the Company during the course of planned search and investigation aimed at the discovery of new knowledge, which will be used to develop and test a vending machine and potato product for the formation of french fries. Research and development costs also include costs for significant enhancements or improvements to the machine and/or potato product. The Company expenses all such research and development costs as they are incurred. (1) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 Unearned revenue Unearned revenue represents amounts received for distribution rights of the vending machines, which the Company is still in the process of developing and testing. The Company records these amounts as unearned revenue upon receipt. These deferrals will be recognized as income over the life of the machine upon commercial production of machines or upon forfeiture by distributors as a result of breach of contract. Since commercial production of the machine has not commenced, the unearned revenue is classified as a non-current liability. Impairment of intangible assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", an intangible asset, such as acquired royalty rights, with an indefinite useful life is not amortized. Instead, this intangible asset is tested for impairment annually, or more frequently if events of changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the estimated fair vale of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to the excess. Furniture and office equipment and depreciation Furniture and office equipment are stated at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the equipment, ranging from 3 to 7 years. Depreciation expense for the years ended January 31, 2003 and 2002 amounted to $3,477, $6,421, respectively. Income taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the bases of balance sheet items for financial and income tax reporting. The Company determines the deferred tax asset generated by net operating loss carryforwards. All deferred tax assets are evaluated and a valuation allowance, if necessary, is established. Concentration of credit risk The Company occasionally maintains deposits in banks in excess of federally insured limits. The risk is managed by maintaining all deposits in high quality financial institutions. (2) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 Loss per share In March, 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share". The statement requires the Company to disclose both basic earnings per share and diluted earnings per share for annual and interim periods ending after December 15, 1997. Basic earnings per share is based on the weighted average number of common shares outstanding, while diluted earnings per share is based on the weighted average number of common shares and common share equivalents that would arise from the exercise of options and warrants or conversion of convertible securities. The Company incurred losses from operations in 2003 and 2002; therefore, basic and diluted earnings per share have been computed in the same manner since the exercise of warrants and the conversion of the convertible notes payable would be antidilutive. Recent accounting pronouncements There are no recently issued accounting pronouncements that are expected to have a significant impact on the Company's financial statements. NOTE 2 VENDING MACHINES Vending machines are carried at the lower of market or net realizable value. Net realizable value is defined as estimated selling price of the machines less predictable costs of completion and disposal. Since the predictable cost of completion exceeds the estimated selling price the vending machines are stated at zero. NOTE 3 SUBSCRIPTIONS RECEIVABLE As of January 31, 2003 and 2002, the Company had demand notes receivable resulting from the sale of common stock. These notes total $100,000 and $62,000, respectively and are non-interest bearing. The notes have been presented in the accompanying balance sheet as subscriptions receivable reducing stockholders' equity. NOTE 4 UNEARNED REVENUE During the year ended January 31, 2000, the Company issued 500,000 shares of common stock to reacquire an existing distributorship valued at $41,000. The Company also received $100,000 as a deposit on the machines in production. As of January 31, 2003 and 2002, unearned amounts related to distribution rights were $210,000 and deposits on machines totaled $110,000. NOTE 5 ROYALTY RIGHTS At January 31, 2002, the Company acquired for $1.5 million the perpetual royalty rights to the french fry vending machine ($450 per machine) and potato product ($0.25 per pound) from California Food & Vending, Inc. as discussed in Note 8. These rights were subject to the repayment of the $1.5 million note issued in connection with the transaction (see note 6). (3) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 The Company entered into an Agreement with David J. Rights, in consideration for him paying off the balance of the Company's obligation to California Food and Vending, Inc. regarding their Potato Royalty Right, wherein the Company will pay Mr. Rights a royalty of Twenty Cents ($0.20) per pound of potato product sold for a term consisting of the greater of: 1. ten years, commencing when two hundred fifty (250) Tasty Fries vending machines are placed into commercial use; or 2. payment in full of the $696,602.38 plus accrued interest on the unpaid balance, calculated at nine (9%) percent per annum, compounded, commencing April 24, 2003. (see Note 8 Litigation and Note17 Subsequent Events). NOTE 6 NOTES PAYABLE On April 24, 2003, the Company and California Food & Vending, Inc. ("CFV") entered into a letter agreement which modified the Agreement and reduced the remaining $750,000 owed, plus accrued interest of $16, 602.38, for a one time discounted payment of $696,602.38 on April 28, 2003. The Company made the payment, and all of CFV's remaining rights under the Modified Judgement and Agreement were extinguished and satisfied in full. (see Note 8 Litigation and Note17 Subsequent Events). As of January 31, 2003, the following loan was outstanding: Officer, interest at 7.5%, without established repayment terms $60,349 ======= NOTE 7 COMMITMENTS During the years ended January 31, 2003 and 2002, the Company incurred $51,745 and $29,096, respectively, in rent expense. The Company's current lease commitment for rental of office space is $5,582.92 per month until October 31, 2003. The Company's current lease commitment for warehouse space is $450 per month until November 23, 2003. The Company has committed to engage a consultant through May 31, 2006 at a $10,000 monthly fee payable in either cash or Tasty Fries stock along with additional equity compensation of 350,000 shares of stock over the term of the agreement. The Company has committed to pay Premier Design, Ltd. A $250 royalty per french fry vending machine manufactured and placed into commercial use. (4) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 NOTE 8 LITIGATION SilverLeaf, LLC v. Tasty Fries, Inc.: United States District Court for the District of New Jersey On February 1, 2002 the Company entered into an exclusive Master Sales and Marketing Agreement with SilverLeaf LLC. The Agreement granted SilverLeaf the exclusive distribution rights for the sale and marketing of the Tasty Fries vending machine excluding certain existing territories. The Agreement was subsequently cancelled by the Company. In May 2002, SilverLeaf LLC ("SilverLeaf") sued the Company in New Jersey State Court requesting an injunction preventing the termination of the February 1, 2002 Master Sales and Marketing Agreement (" Agreement"). Without the Company's knowledge, the State Court Judge entered an "Order to Show Cause With Temporary Restraints" (the "OSC"), which purported to prevent the Company from terminating the Agreement until a hearing on SilverLeaf's motion for Preliminary Injunction. The Company removed the case to the United States District Court for the District of New Jersey, and the case was assigned to the Chief Judge, the Honorable John W. Bissell. Judge Bissell denied SilverLeaf's" Motion for a Preliminary Injunction and dissolved the OSC. Judge Bissell found that SilverLeaf would not be irreparably injured if the Company terminated the Agreement. Judge Bissell's ruling allowed the Company's termination of the Agreement to stand. SilverLeaf thereafter filed an emergency appeal to the United States Third Circuit District Court of Appeal (the "Third Circuit"). On October 20, 2002, the Third Circuit unanimously affirmed Judge Bissell's Order denying SilverLeaf's application for a preliminary injunction, finding no abuse of discretion in Judge Bissell's conclusion that "SilverLeaf failed to demonstrate a reasonable probability of success on the merits." The case was remanded to Judge Bissell. SilverLeaf amended its complaint to allege causes of action for breach of contract, infringement of exclusive license, fraud, tortious interference with prospective business advantage and breach of implied covenant of good faith and fair dealing. The Company moved to dismiss the Complaint. On December 5, 2002, Judge Bissell dismissed all claims against the Company, except for SilverLeaf's claims for breach of contract and tortious interference with prospective business advantage. The Company has initiated a Motion for Summary Judgement as to these two remaining claims, which the Company expects to be heard in the next sixty to ninety days. If successful, the granting of the Summary Judgement will completely dispose of the SilverLeaf litigation. The Company believes that the SilverLeaf action has no merits and will continue to vigorously defend the case. Tasty Fries, Inc. v. Syndi Romanoff, SilverLeaf, LLC, Silver-Shadow Enterprises, LLC and Leon Pirak : United States District Court for the District of New Jersey On October 18, 2002, the Company filed a lawsuit against Syndi Romanoff, SilverLeaf, LLC, Silver-Shadow Enterprises, LLC ("Silver Shadow") and Leon Pirak ("Pirak") for declaratory relief on whether the Company can legally issue a restricted stock certificate for 3,000,000 shares of the Company's stock (the "Restricted Stock") and a Warrant for 2,225,000 shares of the Company's stock exercisable at $1.00/share (the "Warrant") in the name of Silver Shadow or Pirak. Pirak filed a Motion for Summary Judgement, which is scheduled to be heard on May 15, 2003, requesting the Court to enter an order compelling the Company to issue the Restricted Stock and Warrant in his name and awarding him attorneys' fees. The Company has opposed the Motion on the grounds that the Company does not believe Pirak has demonstrated that he is entitled, under the securities laws, to the ownership of the Restricted Stock and Warrants. The Company intends to proceed with the case until it can determine if Pirak is legally entitled to the Restricted Stock and Warrants. (5) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 California Food and Vending, Inc. v. Tasty Fries, Inc. et al.: United States District Court for the Central District of California As of January 21, 2002, the Company and California Food and Vending, Inc. ("CFV") entered into an Agreement to Settle Liability Under Modified Judgement ("Agreement") under which CFV sold to Tasty Fries for One Million Five Hundred Thousand Dollars ($1,500,000), payable on an installment basis, all of the Machine and Potato Royalty Rights awarded to it under the Modified Judgement Pursuant to Stipulation For Entry Of Modified Judgement ("Modified Judgement"*). The $1,500,000 with interest at Eight Percent (8%) per annum, was payable in eight installments over a twenty four (24) month period. The Company timely made the first five principal payments, for a total of Seven Hundred and Fifty Thousand Dollars ($750,000), plus accrued interest. The payment of the principal amount of $750,000, plus accrued interest resulted in the extinguishment of all of CFV's Machine Royalty Rights, and on February 13, 2003, CFV filed with the federal court a partial satisfaction of judgement. The remaining $750,000, was due in three equal installments of Two Hundred and Fifty Thousand Dollars ($250,000), plus accrued interest, from April 21, 2003 to January 21, 2004. On April 24, 2003, the Company and CFV entered into a letter agreement which modified the Agreement and reduced the remaining $750,000 owed, plus accrued interest of $16, 602.38, for a one time discounted payment of $696,602.38 on April 28, 2003. The Company made the payment, and all of CFV's remaining rights under the Modified Judgement and Agreement were extinguished and satisfied in full. On May 2, 2003 CFV filed with the federal court an Acknowledgement of Full Satisfaction of Judgement. *The Modified Judgement provided, interalia, (1) that the Company pay to CFV royalties on the manufacture, sale, use and distribution of french fry vending machines (the "Machine Royalty Rights"), and (2) the Company pay to CFV a flat Twenty Five Cents ($0.25) per pound of potato product, sold, commercially used or distributed, in connection with Tasty Fries french fry vending machines, in perpetuity (the "Potato Product Royalty Rights"). The settlement of the debt at April 28, 2003 has fully extinguished the royalty rights provided to CFV by the Modified Judgement. (6) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 NOTE 9 STOCK OPTION PLAN Transactions in the Plan are as follows: Shares Avg Exercise Granted Exercise Price & Vested Range per share Balance, January 31, 2002 13,030,000 $0.10-$1.25 $0.51 Fiscal 2003 Activity: Options granted 2,580,000 $0.17-$0.50 $0.32 Options expired (1,200,000) $0.12 $0.12 Options exercised -- ---------- Balance, January 31, 2003 14,410,000 $0.10-$1.25 $0.51 ========== Stock Options expire at various dates through June 2009. The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which permits the use of the intrinsic value method described in Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and requires the Company to disclose the proforma effects of accounting for stock-based compensation using the fair value method as described in the optional accounting requirements of SFAS No. 123. As permitted by SFAS No. 123, the Company will continue to account for the stock-based compensation under APB Opinion No. 25, under which the Company has recognized no compensation expense. (7) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 NOTE 9 STOCK OPTION PLAN Had compensation cost for the Company's stock option plan been determined based on the fair value of the Company's common stock at the dates of awards using the Black-Scholes value method of SFAS No. 123, the Company's net loss and net loss per common share would have been adjusted to the pro forma amounts as follows: Year Ending January 31, 2003 2002 Net Loss: As reported $(3,947,644) $(3,832,948) Proforma $(4,170,034) (3,878,948) Net loss per common share: As reported (0.06) (0.08) Proforma (0.06) (0.08) Significant assumptions used to calculate the fair value of the awards are as follows: Year Ending January 31, 2003 2003 Risk free interest rates of return 5.00% 5.00% Expected option life 84 months 84 months Volatility 50% 50% Expected dividends -- -- NOTE 10 PREFERRED STOCK On July 29, 1991, the Board of Directors authorized 5,000,000 shares of preferred stock at a par value of $.001 per share. No shares of preferred stock have been issued. NOTE 11 STOCK WARRANTS ISSUED AND OUTSTANDING As of January 31, 2003, the Company had 26,892,500 warrants to purchase common stock outstanding. The warrants are exercisable at share prices between $.50 and $3.00 and expire at various dates through December, 2007. (8) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 NOTE 12 INCOME TAXES The Company has approximately $20,270,000 in net operating loss carryforwards, which can be used to offset future taxable income. The net operating loss carryforwards expire through 2022. The components of the Company's deferred tax assets as of January 31, 2002 and 2001 are as follows: 2003 2002 Net operating loss carryforwards $8,600,000 $7,400,000 Valuation allowance (8,600,000) (7,400,000) Deferred tax asset -- -- ---------- ---------- The valuation allowance increased by $1,200,000 and $600,000 in the years ended January 31, 2003 and 2002, respectively. There are no significant differences between taxes computed at the federal statutory rate and the provision for income taxes for the years ended January 31, 2003 and 2002. NOTE 13 DIRECTORS' FEES The Company accrued Board of Directors' fees for the years ended January 31, 1997 through January 31, 2003 in the amount of $350,000. Interest has not been accrued on the unpaid balance. The following shares of stock were issued to retire $350,000 of this liability: January 2001 500,000 shares at $ .40 each $200,000 November 2001 909,890 shares at $ .11 each 100,000 November 2002 250,000 shares at $ .20 each 50,000 -------- $350,000 ======== (9) TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2003 AND 2002 NOTE 14 EMPLOYMENT AGREEMENT In July, 2000, the Board of Directors approved the terms of an Employment Agreement for the Company's Chief Executive Officer. The Employment Agreement is for a period of ten years from its date of execution. The Employment Agreement provides for an annual salary, to be increased by 10% each year. In addition, the Chief Executive Officer is granted the right to acquire up to 1,000,000 shares of the Company's restricted Common Stock for each full year of his employment with the Company, commencing with the year beginning June 10, 1994. The acquisition price for such stock shall be the closing price of the stock on June 9 (or the closest business day thereto) of each such full year. He has the right to exercise this option at any time up to seven years from the date his right to acquire stock vests. The chief executive officer can earn additional compensation in the form of commissions at a rate of $250 per french fry vending machine manufactured and placed into commercial use. The agreement also provides for compensation arrangement in the case of temporary disability, death and permanent disability. NOTE 15 RELATED PARTY TRANSACTIONS At January 31, 2003, the Company holds a $60,349 demand note payable to the chief executive officer as discussed in Note 6. The company incurred commission expense to individuals related to the chief executive officer in the aggregate amount of $137,000 for the year ended January 31, 2003. NOTE 16 ADVERTISING EXPENSE The Company conducts nondirect response advertising and utilizes a website to market its product. These costs are expensed as incurred. Advertising costs for the years ended January 31, 2003 and 2002 were $58,223 and $105,717, respectively. NOTE 17 SUBSEQUENT EVENTS At April 28, 2003 the Company settled the $750,000 balance of the note payable to California Food and Vending, Inc. ("CFV") and acquired the royalty rights that had been previously held by CFV as discussed in Note 8. CFV accepted a discounted amount of $696,602 as full payment of the $750,000 principal balance and accrued interest of $16,602. The note was due in installments through January 2004. The Company acquired the funds to finance this settlement from a stockholder. The terms of this funding include future payments to the stockholder of $0.20 per pound of potato product sold by the Company for a term consisting of the greater of 10 years, commencing when 250 french fry vending machines are placed into commercial use; or payment in full of the $696,602 amount financed plus accrued interest at 9% per annum, compounded. (10)