-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N0GSQYZS9jJWKhC0ui6SAkn1Fh0L/HdN9jTiqLorwwl+m76iNktWdIhFJT0DQBwG XPzEB7ZfB2s1XxaIcZUxxw== 0000950110-02-000243.txt : 20020430 0000950110-02-000243.hdr.sgml : 20020430 ACCESSION NUMBER: 0000950110-02-000243 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020131 FILED AS OF DATE: 20020430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TASTY FRIES INC CENTRAL INDEX KEY: 0000791885 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 650159052 STATE OF INCORPORATION: NV FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-04460-NY FILM NUMBER: 02626629 BUSINESS ADDRESS: STREET 1: 650 SENTRY PKWY STE ONE CITY: BLUE BELL STATE: PA ZIP: 19422 BUSINESS PHONE: 6109412109 MAIL ADDRESS: STREET 1: 650 SENTRY PARKWAY STREET 2: SUITE ONE CITY: BLUE BELL STATE: PA ZIP: 19422 FORMER COMPANY: FORMER CONFORMED NAME: YO SYSTEMS LTD DATE OF NAME CHANGE: 19870417 FORMER COMPANY: FORMER CONFORMED NAME: METRO SYSTEMS INC DATE OF NAME CHANGE: 19910805 FORMER COMPANY: FORMER CONFORMED NAME: ADELAIDE HOLDINGS INC DATE OF NAME CHANGE: 19930929 10KSB/A 1 e88626.txt ANNUAL REPORT FORM 10-KSB/A 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, 2002 [ ] 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 2002: Not Determinable. ----------------- Shares outstanding of the registrant's common stock as of January 31, 2002: 59,171,758 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 a combination of exclusive, territorial distributorships and traditional sales to established companies in the vending industry. 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 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, vegetable 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. 1 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 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 has paid $350,000 to Premiere towards its 50% share of the development costs. Premiere 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. In November 2001 the Company contracted with ACE Metal Products, Inc. an unaffiliated third party to produce the first run production models of its machines. ACE Metal Products, Inc. is a UL certified manufacturing company located in Turlock, California. 2 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 approximately 3,100 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 been delayed over the past 18-24 months due to the lack of capital available to complete the process. The pre-production tooling stage is complete. The Company will produce a tabletop model of the machine. Modifying the existing machine for tabletop use and ordering tooling will cost approximately $200,000 to $300,000. Customized parts will be marketed to operators of the machine, be they owners or leasees. 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 220-volt electrical connection (although the Company plans for the production models of the machine to require 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. 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 3 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 a combination of exclusive, territorial distributorships and 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. There are currently 3 distributorships, which have not been terminated or reacquired. The distributors' obligations 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 distributors' are notified and required to place orders for Machines, some distributors' may be financially unable to do so or may simply elect not to purchase Machines and effectuate their respective agreement. The Company retained the services of Claridge Capital Corporation to assist with Marketing, Sales and web site development and maintenance. Claridge's services were effectively terminated in November 2001. The Company hired IC Ads, Inc. to develop and maintain the Company's new web site (www.tastyfries.com). CALIFORNIA FOOD & VENDING, INC. In May 1991, the Company entered into a joint venture agreement with California Food & Vending ("CFV"), another vending and food service company with a high interest in the research and development of a French fry vending machine. The companies planned to work together in the manufacturing and marketing of a French fry machine. Disputes arose between the parties, litigation was instituted by CFV and in July 1999 the disputes were settled and the litigation dismissed. Pursuant to the settlement agreement, the Company regained distributorship rights for the State of California; agreed to pay CFV the sum of $1,000,000 which has been paid; issue 250,000 shares of our common stock to CFV; and CFV will receive $350 for each of the first 500 machines produced and $450 per machine indefinitely thereafter and $.25 for each pound of potato product sold by Tasty Fries. On January 21, 2002, the Company and CFV entered into a settlement agreement extinguishing any and all CFV's future royalties, including but not limited to payments for machines produced and potato product. The Company is obligated to pay CFV a total of $1,500,000 payable in quarterly installments over a two year term. 4 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 Israel and Brazil; the Company is awaiting examinations of the European application; the Canadian and Japanese applications have been deferred, the Company can not estimate when these patents will be granted. 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 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. 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. 5 RESEARCH AND DEVELOPMENT COSTS For the fiscal years ended January 31, 2002 and 2001, the Company incurred $1,760,000 and $1,094,000, 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. No decision has been made regarding introduction of such a model. 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, 2002, the Company had a total of three 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. ITEM 2. PROPERTIES. The Company owns no properties. Since June 1994, it has 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 $2,085 per month until May 31, 2002. At the present time, management believes that this office space is sufficient; however, the Company may require additional space during the next 12 months. The Company also rented 2,500 square feet of space in an industrial park in Portsmouth, NH on a month to month lease at $850 per month, in November 2001 the Company ceased all business activities in New Hampshire and no longer leases any property within the State. ITEM 3. LEGAL PROCEEDINGS. On August 28, 1996, the Company, Edward C. Kelly and Premier Design, Ltd. were added as defendants to a civil law suit in the Riverside County Branch of the Superior Court of the State of California brought by Prize Frize, Inc., William Bartfield and Larry Wirth. The suit also named as defendants approximately 25 other parties, all allegedly involved, in some manner, in the pursuit of the French fry machine concept and/or business. The case was removed to Federal Court. The Company successfully moved for dismissal of the claim on behalf of itself and Mr. Kelly; the case was dismissed on June 2, 1997. The Federal Court reversed the dismissal on appeal and the case was remanded to State Court. The plaintiffs' claim against Tasty Fries was severed. The claims against Edward C. Kelly and Premier Design, Ltd. were dismissed. The claim brought by Prize Frize asserted that the Company usurped its trade secrets by developing a French fry vending machine, which utilized the Basic American Food potato product. The Company denied the allegations and vigorously defended the litigation. It was the opinion of the Company's counsel that Prize Frizes' lawsuit lacked merit and that the Company would prevail. As of October 1, 2001, a Settlement and Mutual General Release "Settlement Agreement") was entered into by and between the Company and Prize Frize, Inc. Under the Settlement Agreement, Prize Frize agreed to dismiss the litigation and release all claims, known and unknown, against the Company and its officers and directors. The Company paid no monies to Prize Frize in consideration for the Settlement Agreement or the dismissal of the action. The Company, however, granted Prize Frize a right of first refusal to supply all the Company's requirements for a Basic American Food ("BAF") potato product known as "Russet Fries" in the quantities requested by the Company and at its best possible and commercially reasonable price offered by any BAF distributor. If, however, Prize Frize is unable or unwilling to provide the Company with necessary quantities of the Russet Frize at said prices, the Company may purchase the Russet Fries from another source. Pursuant to the Settlement Agreement the litigation was subsequently dismissed with prejudice. 6 California Food & Vending In May 1991, the Company entered into a joint venture agreement with California Food & Vending ("CFV"), another vending and food service company with a high interest in the research and development of a French fry vending machine. The companies planned to work together in the manufacturing and marketing of a French fry machine. Disputes arose between the parties, litigation was instituted by CFV and in July 1999 the disputes were settled and the litigation dismissed. Pursuant to the settlement agreement, the Company regained distributorship rights for the State of California; agreed to pay CFV the sum of $1,000,000 which has been paid; issue 250,000 shares of our common stock to CFV; and CFV will receive $350 for each of the first 500 machines produced and $450 per machine indefinitely thereafter and $.25 for each pound of potato product sold by Tasty Fries. On January 21, 2002, the Company and CFV entered into a settlement agreement extinguishing any and all CFV's future royalties, including but not limited to payments for machines produced and potato product. The Company is obligated to pay CFV a total of $1,500,000 payable in quarterly installments over a two year term. 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 2000 ----------- First Quarter $ .87 $ .25 Second Quarter $ .78 $ .42 Third Quarter $ .84 $ .35 Fourth Quarter $ .73 $ .34 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 (B) HOLDERS. The approximate number of record holders of the Company's common stock as of January 31, 2002 is 1,311. 7 (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 of exclusive, territorial distributorships and traditional sales to established companies in the vending industry. The Company may also own and operate machines itself. Five machines were installed and operated in and around Portsmouth New Hampshire. The five machines were in operation for approximately 11 months. An additional 20 machines were assembled and ready for field testing. 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. 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, the Company will require a significant advance payment from its customers with receipt of each order; 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. Liquidity and Capital Resources At January 31, 2002, the Company had approximately $121,000 in cash. In June 1997, the Company received $1,000,000 from three non-"U.S. Persons," as defined in Regulation S, in exchange for notes convertible into the Company's common stock. The financing was completed pursuant to Section 903(c)(2) of Regulation S under the Securities Act of 1933. Pursuant to the terms of the financing, the Company issued 1,142,857 shares of common stock to be held in escrow, pending the potential conversion of notes. The notes bear interest at 7% annually and had a maturity date of May 14, 2000. In connection with the financing, the Company also issued 250,000 common stock purchase warrants. In September 1997, the note holders converted an aggregate of $397,679 of principal into 700,000 shares of common stock. In November 1997, the Company issued an additional 380,000 shares of common stock to be held in escrow for potential conversion of notes. As of January 31, 1998, the aggregate outstanding principal balance of the convertible notes was $602,321. The remaining 822,857 shares of common stock in escrow were not deemed to be outstanding as of January 31, 1998. In February 1998, an additional 444,000 shares of common stock were issued into escrow, pending conversion of the notes. During the year ended January 31, 1999 the Company issued 1,480,280 shares of common stock in satisfaction of the remaining $602,321 of convertible notes. In November 1997, in a separate transaction, the Company received $1,600,000 from six non-"U.S. persons," as defined in Regulation S, in exchange for notes convertible into the Company's common stock. The financing was completed pursuant to Section 930(c)(2) of Regulation S under the Securities Act of 1933. Pursuant to the terms of the financing, the Company issued 2,400,000 shares of common stock to be held in escrow, pending the potential conversion of notes. The notes bear interest at 6% annually and had a maturity date of November 5, 2000. 8 In connection with the financing, the Company also issued 720,000 common stock purchase warrants. As of January 31, 1998, the aggregate outstanding principal balance of the convertible note was $1,600,000. The 2,400,000 shares of common stock in escrow were not deemed to be outstanding as of January 31, 1998. In February 1998, an additional 960,000 shares of common stock were issued into escrow pending the conversion of the notes. During the year ended January 31, 1999 the Company issued 4,105,870 shares of common stock in satisfaction of these convertible notes. In January 1998, the Company and a private investment corporation, a former investor in the Company from April 1996, terminated the stock purchase agreement that had been the basis for the original investment in 1996, due to lack of performance on the investor's part. SEE "CONSULTANTS & ADVISORS." In April 1998, the Company entered into an agreement to receive $1,500,000 in proceeds from the sale of restricted stock to a U.S. corporation. The Company issued 3,000,000 post-split shares of common stock as consideration. The Company also issued warrants to purchase 1,500,000 post-split shares of common stock at an exercise price of $1.90; the warrants expired April 12, 2001. The Company also issued 150,000 post-split shares of restricted stock as a commission on the transaction. The Company and the investor have entered into an escrow agreement for this transaction and the shares were issued into escrow, pending funding. As of January 31, 2002, the Company has received $1,425,000 of the total $1,500,000 financing and 2,850,000 of the total 3,000,000 shares have been released. The balance of the April 1998 financing agreement has been terminated by both parties. 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, 2002, 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 Ending January 31, 2002, 2001 and 2000 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, 2002, 2001 and 2000. As a result of the company's financial condition, it frequently issues common stock to acquire various service. When the issue price is below the current market price, the company incurs stock purchase expense. In the years ended January 31, 2002, 2001 and 2000, stock purchase discount expense was $503,500, $993,300, and $471,907. The company maintains a staff of several personnel. Salary and related payroll tax expense for the years ended January 31, 2002, 2001 and 2000 were $525,000, $402,000 and $396,000, respectively. The increase from 2001 to 2002 was due substantially to bonus payments made to two employees and a salary increase. 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, 2002, 2001 and 2000 were $1,760,000, $1,028,000 and $1,765,000, 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, 2002, 2001 and 2000 were $118,000, $525,000 and $642,000, respectively. The loss from operations for the years ended January 31, 2002, 2001 and 2000 was ($3,833,000), ($3,793,000) and ($5,784,000), respectively. 9 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. In April 1996, the Company engaged L. Eric Whetstone to provide business consulting services. As compensation for these services, Mr. Whetstone received a one-time grant of 250,000 shares of restricted stock and an annual grant of 37,500 shares of restricted stock for the five-year period of the consulting agreement. In January 1998, the Company accelerated the payment of the annual compensation to Mr. Whetstone called for over the term of the five-year contract and issued him 175,000 shares of restricted stock. Also in January 1998, Mr. Whetstone was issued a warrant to purchase 1,000,000 shares of common stock. The warrants have an exercise price of $1.90 and an original expiration date of January 5, 2001. The warrants have since been extended until January 2004. 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 retained the services of Claridge Capital Corporation to assist with the Marketing, Sales and maintenance of the Company's web site. Claridge's services were effectively terminated in November 2001. The Company hired IC Ads, Inc. to develop and maintain the Company's new web site (www.tastyfries.com). ITEM 7. FINANCIAL STATEMENTS. Audited balance sheets as of January 31, 2002 and 2001, and the related statements of operations, of stockholders' equity deficiency and of cash flows for the years ended January 31, 2002, 2001 and 2000 and for the period from October 18, 1985 (inception) to January 31, 2002 are included after Item 12 herein. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Management is not aware, and has not been advised by any former accountants, of any disagreement on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. Management has not consulted the accountants regarding either the application of accounting principles to any specified transaction or any disagreement with any former 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 The current directors of the Company will serve until the next annual (or special in lieu of annual) 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 65 President, Chief Executive Officer, Treasurer and Chairman of the Board* 10 Leonard J. Klarich 67 Vice President, Secretary and Director* Jurgen A. Wolf 67 Director* Ian D. Lambert 56 Director Kurt R. Ziemer 46 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. IAN D. LAMBERT - Mr. Lambert was appointed as a director of the Company in July 1995 and was re-elected to the Board in September 1995. He is a Director of Quotemedia.com, Inc. ( formerly International Tasty Fries, Inc.) and until November 1996 was President of Yukon Spirit Mines Ltd. (subsequently renamed Gainey Resources Ltd.). Quotemedia.com and Gainey Resourses Ltd. are or were affiliated entities. Quotemedia.com has a distributorship agreement with the Company for a number of European countries; Gainey's (Yukon Spirit Mines, Ltd.) distribution agreement was reacquired by the Company in April 1998. Mr. Lambert has been involved with the financing and management of numerous resource and industrial based public companies, both in Canada and the U.S., since the early 1980's, and currently his positions in reporting companies include: Director, Covik Development Corp., (oil & gas exploration), April 1990 to present; Director, Trade Winds Resourses, Ltd. (mineral exploration), April 1990 to present; Director LiteWave Corp. (affinity marketing), February 1999 to present; Director, Sunorca Development Corp. (energy development), December 2000 to present; Director Quotemedia.com, Inc. (Quotestream software developer), May 1994 to present; Secretary Centurion Health Corpotation (medical services/clinic operations). SEE "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". 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. 11 (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 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 COMPENSATION (1) Fiscal Year Name & Ended Restricted Principal Position January 31, Salary Bonus Stock - ------------------ ------------ -------- ----- ---------- 2002 $240,000 $0 2001 $240,000 $0 Edward C. Kelly 2000 $240,000 $0 President, CEO & Chairman (2) Leonard J. Klarich 2001 $ 0 $0 2000 $ 0 $0 1999 $ 12,400 $0 Secretary, Director & Vice President (3) (1) There were no long-term incentive payments made in the year-ended January 31, 2002. (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) accrued director compensation of approximately $833 per month since September 1995; (ii) a restricted stock award of 9,206 post-split shares granted to Mr. Kelly as a component of his compensation for the fiscal year ended January 31, 1996; (iii) options granted to each board member on October 1, 1996 12 by the Board of Directors for 50,000 post-split shares of restricted common stock exercisable for three years at $4.00 per share and an option granted for 1,000,000 post-split shares of common stock exercisable for two years at .50 per share. (3) This table does not include: (i) accrued director compensation of approximately $833 per month since September 1995; (ii) an option to purchase 1,042 post-split shares of common stock exercisable at $2.40 per share until December 15, 2005, automatically granted to each non-employee director under the 1995 Stock Option Plan on December 15, 1995, (iii) an option to purchase 4,082 post-split shares of common stock exercisable at $2.45 per share until December 15, 2006, automatically granted to each non-employee director under the 1995 Stock Option Plan. (C) OPTIONS/S.A.R. GRANTS TABLE OPTION GRANTS IN THE FISCAL YEAR ENDED JANUARY 31, 2002 Each of our Director's received a seven year option to purchase 50,000 shares of our common stock at an exercise price of $.45. (D) AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR VALUE TABLE. None. (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 $8.20 per share. (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. 13 (H) REPORT ON REPRICING OF OPTIONS/SARS None 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, 2002, 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 2,020,000 3% 650 Sentry Parkway, Suite One Blue Bell, PA 19422 (1) Whetstone Ventures Corp. 2,895,500 5% 11 Waterfront Estates, Estates Drive Lancaster, PA 19601 (2,3) L. Eric & Ilona Whetstone 2,985,500 5% 11 Waterfront Estates, Estates Drive Lancaster, PA 19601 (3) David Rights 1095 Rydal Road Rydal, PA 19046 4,800,000 8% Ahmad Zhobi U.A.E. 3,900,000 7% Zekra Zhobi 2,680,000 4% - ----------- (1) Does not include an option for 100,000 shares of common stock granted by the Board of Directors on July 1, 1998 exercisable until July 21, 2001 @ $.50 per share; options for 300,000 shares expiring ratably between June 10, 2002 and June 10, 2008 at exercise prices ranging from $.45 to $8.20 per share. Options pursuant to Employment Contract. SEE "EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS 14 (2) Does not include 900,000 additional shares issued to Lancaster Investments pursuant to the terms of the April 1998 financing. These additional shares are being held in escrow pending the complete funding of the transaction and will be released from escrow on a pro-rata basis as the financing is completed. As of January 31, 2001, $1,425,000 of the total $1,500,000 financing has been received and 2,850,000 of the total 3,000,000 shares have been released. The balance of the April 1998 financing agreement has been terminated by both parties. SEE "LIQUIDITY AND CAPITAL RESOURCES". (3) Includes 150,000 post-split shares of common stock issued to L. Eric Whetstone in connection with the April 1998 financing from Lancaster Investment Corp. (B) SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of April 26, 2001, 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 2,020,000 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 0 1285 West Pender Street Vancouver, B.C. Canada (3) Ian D. Lambert 281,978 0 c/o International Tasty Fries, Inc. 595 Howe Street, Suite 602 Vancouver, B.C. V6C 2T5 (4) Kurt R. Ziemer 804,576 1% 599 Valley View Drive New Holland, PA 17557 (5) All Officers and Directors 3,286,554 5% as a group (5 persons) * less than 1% 15 (1) Does not include an option for 300,000 shares expiring ratably between June 10, 2002 and June 10, 2008 at exercise prices ranging from $.45 to $8.20 per share. Options pursuant to Employment Contract. SEE "EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS (2) Does not include: (i) an option to purchase 1,042 post-split shares of common stock exercisable at $2.40 per share until December 15, 2005, automatically granted to each non-employee director under the 1995 Stock Option Plan on December 15, 1995; (ii) an option to purchase 4,082 post-split shares of common stock exercisable at $2.45 per share until December 15, 2006, automatically granted to each non-employee director under the 1995 Stock Option Plan; and (iii) options for 300,000 shares expiring ratably between June 10, 2002 and June 10, 2008 at exercise prices ranging from $.45 to $8.20 per share. (3) Does not include: (i) an option to purchase 1,042 post-split shares of common stock exercisable at $2.40 per share until December 15, 2005, automatically granted to each non-employee director under the 1995 Stock Option Plan on December 15, 1995, (ii) an option to purchase 4,082 post-split shares of common stock exercisable at $2.45 per share until December 15, 2006, automatically granted to each non-employee director under the 1995 Stock Option Plan and (iii) options for 250,000 shares expiring ratably between June 10,2002 and June 10, 2008 at exercise prices ranging from $.45 to $8.20 per share. (4) 436,952 post-split shares were issued to International Tasty Fries, Inc. in 1995 as consideration for a financing. Mr. Lambert is the President of International Tasty Fries and is a shareholder of that company. Does not include: (i) an option to purchase 1,042 post-split shares of common stock exercisable at $2.40 per share until December 15, 2005, automatically granted to each non-employee director under the 1995 Stock Option Plan on December 15, 1995, (ii) an option to purchase 4,082 post-split shares of common stock exercisable at $2.45 per share until December 15, 2006, automatically granted to each non-employee director under the 1995 Stock Option Plan. options for 250,000 shares expiring ratably between June 10,2002 and June 10, 2008 at exercise prices ranging from $.45 to $8.20 per share. (5) Does not include 680 shares underlying an option exercisable at $2.45 per share until December 15, 2006, automatically granted to each non-employee director under the 1995 Stock Option Plan and options for 200,000 expiring ratably between June 10, 2002 and June 10, 2008 at exercise prices ranging from $.45 to $8.20 per share. 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. In connection with the Subscription Agreement dated April 13, 1998 between the Company and Lancaster Investment Corp., the Company granted Whetstone Ventures, Inc. the right to name one of the five directors to the Board of Directors of Tasty Fries, Inc. Together with a previous right of appointment (from the April 1996 stock purchase agreement), Whetstone Ventures, Inc. may appoint two members to the Board of Directors of Tasty Fries, Inc. Subsequently, the balance of the April 1998 financing agreement was terminated by both parties with Whetstone Ventures, Inc.'s right of appointment being recinded by the Company. 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. Mr. Ian Lambert, a director of the Company since July 1995. He is a Director of Quotemedia.com (formerly International Tasty Fries, Inc.), and until November 1996, was President of Yukon Spirit Mines Ltd. (now doing business as Gainey Resources Ltd.). Quotemedia.com and Gainey Resources Ltd. are or were are affiliated entities. Quotemedia.com has a distributorship agreement with the Company for a number of European countries; Gainey's distribution agreement was reacquired by the Company in April 1998. Mr. Lanbert has been involved with 16 the financing and management of numerous resource and industrial based public companies, both in Canada and the U.S., since the early 1980's, and currently his positions in reporting companies include: Director, Covik Development Corp., (oil & gas exploration), April 1990 to present; Director, Trade Winds Resources Ltd., (mineral exploration) April 1990 to present; Director, Dimensions West Engery Inc., (oil & gas production) April 1990 to present; Director, Lite Wave Corp., (affinity marketing) February 199 to present; Director, Sunorca Development Corp. (energy development) December 2000 to present; Director, Quotemedia.com, Inc. (Quotestream software developer) may, 1994 to present; Secretary, Centurion Health Corporation (medical services/clinic operations). SUBSEQUENT EVENTS NONE 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 and March 20, 2001 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. TASTY FRIES, INC. Date as of filing By: ----------------------------- 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. April 30, 2002 - ------------------------------------- Edward C. Kelly, Chairman, CEO President, Treasurer & Director April 30, 2002 - ------------------------------------- Leonard J. Klarich, Vice President, Secretary & Director April 30, 2002 - ------------------------------------- Jurgen A. Wolf, Director April 30, 2002 - ------------------------------------- Ian D. Lambert, Director April 30, 2002 - ------------------------------------- Kurt N. Ziemer, Director 17 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) _____________ Financial Statements Years Ended January 31, 2002, 2001, and 2000 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) TABLE OF CONTENTS Page Independent Auditor's Report 1 - 2 Balance Sheets 3 Statements of Operations 4 Statements of Changes in Stockholders' Equity Deficiency 5 - 9 Statements of Cash Flows 10 - 11 Notes to Financial Statements 12 - 22 INDEPENDENT AUDITOR'S REPORT April 12, 2002 Board of Directors and Stockholders Tasty Fries, Inc. Blue Bell, Pennsylvania We have audited the accompanying balance sheets of Tasty Fries, Inc. (A Development Stage Company) as of January 31, 2002 and 2001, and the related statements of operations, of changes in stockholders' equity deficiency, and of cash flows for the years then ended and for the period from October 18, 1985 (inception) to January 31, 2002. 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 of Tasty Fries, Inc. (A Development Stage Company) for the year ended January 31, 2000, and for the period from October 18, 1985 (inception) to January 31, 2000 were audited by other auditors, whose report dated March 31, 2000 on those statements was unqualified and included an explanatory paragraph that described their substantial doubt about the Company's ability to continue as a going concern as discussed in Note 1 to the financial statements. The statements of operations, of changes in stockholders' equity deficiency and of cash flows for the period from October 18, 1985 (inception) to January 31, 2002 include costs and expenses of $19,185,066 and other expense of $2,521,100 which relate to periods reported on by the other auditors. Our opinion on the statements of operations, of changes in stockholders' equity deficiency and of cash flows for the period from October 18, 1985 (inception) to January 31, 2002, insofar as it relates to the amounts reported upon by the other auditors, is based solely on the report of the other auditors. 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 sheets as of January 31, 2002 and 2001 and the related statements of operations, of changes in stockholders' equity deficiency and of cash flows for the years then ended and, based on our audit and the report of other auditors, the statements of operations, of stockholders' equity deficiency and of cash flows for the period from October 18, 1985 (inception) to January 31, 2002, present fairly, in all material respects, the financial position of Tasty Fries, Inc. (A Development Stage Company) as of January 31, 2002 and 2001 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' equity deficiency as of January 31, 2002. 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 in the outcome of this uncertainty. GOLDENBERG ROSENTHAL, LLP Jenkintown, Pennsylvania 2 TASTY FRIES, INC. (A Development Stage Company) BALANCE SHEETS - -------------------------------------------------------------------------------- January 31 ---------------------------- ASSETS 2002 2001 ------------ ------------ Current assets Cash .......................................... $ 120,566 $ 86,978 Prepaid expense ............................... 24,598 -- ------------ ------------ Total current assets .......................... 145,164 86,978 Furniture and office equipment, net of accumulated depreciation of $74,062 in 2002 and $67,641 in 2001 ............................... 3,633 10,054 Other assets Royalty rights ................................ 1,500,000 -- ------------ ------------ Total Assets .................................... $ 1,648,797 $ 97,032 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIENCY Current liabilities Accounts payable and accrued expenses ......... $ 739,783 $ 565,064 Current maturities of long-term debt .......... 600,000 -- Stockholder loan payable ...................... 312,566 270,000 ------------ ------------ Total current liabilities ..................... 1,652,349 835,064 ------------ ------------ Long-term debt, net of current maturities ....... 750,000 -- Unearned revenue ................................ 320,000 320,000 ------------ ------------ 1,070,000 320,000 ------------ ------------ Commitments and contingencies Stockholders' equity deficiency Common stock, $.001 par value Authorized 100,000,000 shares Issued and outstanding 59,171,758 shares in 2002 and 40,734,011 shares in 2001 ..... 59,171 40,734 Additional paid-in capital .................... 28,261,075 24,400,084 Deficit accumulated in the development stage .. (29,331,798) (25,498,850) ------------ ------------ (1,011,552) (1,058,032) Less: Subscription receivable ................. (62,000) -- ------------ ------------ Total stockholders' equity deficiency ......... (1,073,552) (1,058,032) ------------ ------------ Total Liabilities and Stockholders' Equity Deficiency .................................... $ 1,648,797 $ 97,032 ============ ============ See notes to financial statements 3
TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF OPERATIONS YEARS ENDED JANUARY 31, 2002, 2001 AND 2000 AND OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 - ---------------------------------------------------------------------------------------------------------- Cumulative Year Ended January 31 Since -------------------------------------------- Inception 2002 2001 2000 ------------ ------------ ------------ ------------ Revenues .................................. $ -- $ -- $ -- $ -- ------------ ------------ ------------ ------------ Costs and expenses Research, machine and product development 5,528,301 1,759,899 1,094,067 144,403 Selling, general and administrative ..... 19,572,151 1,529,532 1,531,888 5,113,797 ------------ ------------ ------------ ------------ Total costs and expenses ................ 25,100,452 3,289,431 2,625,955 5,258,200 ------------ ------------ ------------ ------------ Loss before other income (expense) ........ (25,100,452) (3,289,431) (2,625,955) (5,258,200) ------------ ------------ ------------ ------------ Other income (expense) Interest income ......................... 21,274 -- -- -- Forfeited distributor deposits .......... 15,000 -- -- -- Stock purchase discount ................. (2,277,552) (503,500) (993,350) (471,907) Interest expense ........................ (1,990,068) (40,017) (173,379) (53,550) ------------ ------------ ------------ ------------ Total other income (expense) ............ (4,231,346) (543,517) (1,166,729) (525,457) ------------ ------------ ------------ ------------ Net loss .................................. $(29,331,798) $ (3,832,948) $ (3,792,684) $ (5,783,657) ============ ============ ============ ============ Net loss per share of common stock ........ ($0.08) ($0.12) ($0.27) ============ ============ ============ Weighted average shares outstanding ....... 46,957,387 30,905,531 21,341,885 ============ ============ ============
See notes to financial statements 4
TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 - ------------------------------------------------------------------------------------------------- Deficit Accumulated Total in the Stockholders' Common Additional Development Equity Stock Paid-in 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) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 - ------------------------------------------------------------------------------------------------- (continued) Deficit Accumulated Total in the Stockholders' Common Additional Development Equity Stock Paid-in 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) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 - ------------------------------------------------------------------------------------------------- (continued) Deficit Accumulated Total in the Stockholders' Common Additional Development Equity Stock Paid-in 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) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 - ------------------------------------------------------------------------------------------------- (continued) Deficit Accumulated Total in the Stockholders' Common Additional Development Equity Stock Paid-in Capital Stage (Deficiency) ----------- --------------- ----------- ------------ Balance, January 31, 1999 (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 (carried forward) ............ 40,734 24,400,084 (25,498,850) (1,058,032) (continued)
See notes to financial statements 8
TASTY FRIES, INC. (A Development Stage Company) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY DEFICIENCY OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 - ------------------------------------------------------------------------------------------------- (continued) Deficit Accumulated Total in the Stockholders' Common Additional Development Equity Stock Paid-in Capital Stage (Deficiency) ----------- --------------- ----------- ------------ 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 ............ $ 59,171 $28,261,075 $(29,331,798) $(1,011,552) =========== =========== ============ ===========
See notes to financial statements 9
TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 2002, 2001, AND 2000 AND OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 - ----------------------------------------------------------------------------------------------------------------------------- Cumulative Year Ended January 31 Since ----------------------------------------- Inception 2002 2001 2000 ------------ ----------- ----------- ----------- Cash flows from operating activities ............................ $(29,331,798) $(3,832,948) $(3,792,684) $(5,783,657) Net loss Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization ............................. 310,918 6,421 10,204 141,869 Common stock issued for services .......................... 10,203,835 2,049,254 1,316,317 2,805,398 Common stock issued for litigation settlement ............. 764,364 114,675 -- 125,000 Stock purchase discount ................................... 2,277,552 503,500 993,300 471,907 Common stock issued for interest on convertible notes ..... 1,129,196 -- -- -- Common stock issued for repurchase of distributorships .... 250,000 -- -- 250,000 Accrued interest on notes and convertible notes payable ... 438,594 40,017 -- -- (Increase) decrease in assets Prepaid expenses ........................................ (24,598) (24,598) -- -- Other assets ............................................ -- -- -- 123,313 Increase (decrease) in liabilities Accounts payable and accrued expenses ................... 1,249,766 134,702 340,638 (297,175) Unearned revenue ........................................ 320,000 -- -- 59,000 ------------ ----------- ----------- ----------- Net cash used in operating activities ......................... (12,412,171) (1,008,977) (1,132,225) (2,104,345) ------------ ----------- ----------- ----------- Cash flows from investing activities Purchase of furniture and office equipment .................... (77,695) -- -- (7,519) Loan costs .................................................... (236,856) -- -- -- ------------ ----------- ----------- ----------- Net cash used in investing activities ......................... (314,551) -- -- (7,519) ------------ ----------- ----------- ----------- Cash flows from financing activities Proceeds from convertible notes payable ....................... 2,600,000 -- -- -- Issuance of common stock ...................................... 8,960,173 780,000 1,257,200 1,156,173 Costs of raising capital ...................................... (318,700) -- (318,700) -- Notes payable, net ............................................ 1,525,816 262,566 270,000 900,000 Officer/director note ......................................... 80,000 -- -- -- ------------ ----------- ----------- ----------- Net cash provided by financing activities ..................... 12,847,289 1,042,566 1,208,500 2,056,173 ------------ ----------- ----------- ----------- Increase (decrease) in cash (carried forward) ................... 120,567 33,589 76,275 (55,691) (continued) See notes to financial statements
10
TASTY FRIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 2002, 2001, AND 2000 AND OCTOBER 18, 1985 (INCEPTION) TO JANUARY 31, 2002 - ------------------------------------------------------------------------------------------------------------------------ (continued) Cumulative Year Ended January 31 Since --------------------------------------- Inception 2002 2001 2000 ------------ ----------- ---------- ----------- Increase (decrease) in cash (brought forward) ................ 120,567 33,589 76,275 (55,691) Cash, beginning of period .................................... -- 86,978 10,703 66,394 ------------ ----------- ---------- ----------- Cash, end of period .......................................... $ 120,567 $ 120,567 $ 86,978 $ 10,703 ============ =========== ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest ................. $ 54,803 $ -- $ -- $ 8,952 ============ =========== ========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock for services .................... $ 10,203,835 $ 2,049,254 $1,316,317 $ 2,805,398 Issuance of common stock for conversion of note payable .. 2,675,000 -- -- -- Issuance of common stock for repurchase of distributorship 475,000 -- -- 250,000 Issuance of common stock for litigation settlement ....... 764,364 114,675 -- 125,000 Accrued interest on notes payable ........................ 438,594 40,017 -- -- Issuance of common stock to pay accrued expenses ......... 550,000 -- 550,000 -- Issuance of common stock to pay note payable ............. 1,270,000 370,000 900,000 -- 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 ..... 62,000 62,000 -- --
See notes to financial statements 11 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 The Company is a development stage company since it has DESCRIPTION OF not completed designing, testing, and manufacturing its BUSINESS sole product, a vending machine that will cook and dispense french fries. For the past four years the Company has been tooling and producing its first 25 machines. This process has been extended for a long period of time as a result of limited 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 operations from the sale of its french fry vending machine since inception and its 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. NOTE 2 FURNITURE AND OFFICE EQUIPMENT AND DEPRECIATION SUMMARY OF SIGNIFICANT Furniture and office equipment are stated at cost. ACCOUNTING Depreciation is determined using the straight-line POLICIES method over the estimated useful lives of the equipment, ranging from 3 to 7 years. Depreciation expense for the years ended January 31, 2002, 2001, and 2000 was $6,421, $10,204, and $12,037, respectively. 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. 12 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 IMPAIRMENT OF LONG-LIVED ASSETS SUMMARY OF SIGNIFICANT In accordance with Statement of Financial Accounting ACCOUNTING POLICIES Standards ("SFAS") No. 121, "Accounting for the (continued) Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", assets are generally evaluated on a market-by-market basis in making a determination as to whether such assets are impaired. At each year-end, the Company reviews its long-lived assets for impairment based on estimated future nondiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values. 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. 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. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in its financial statements and accompanying notes. Actual results could differ from those estimates. 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. 13 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 LOSS PER SHARE SUMMARY OF SIGNIFICANT In March, 1997, the Financial Accounting Standards Board ACCOUNTING POLICIES issued SFAS No. 128, "Earnings Per Share". The statement (continued) 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 2002, 2001, and 2000; 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 3 Vending machines are carried at the lower of market or VENDING net realizable value. Net realizable value is defined as MACHINES 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 4 As of January 31, 2002, the Company had two demand notes SUBSCRIPTIONS receivable resulting from the sale of common stock. RECEIVABLE These notes total $62,000 and are non-interest bearing. The notes have been presented in the accompanying balance sheet as subscriptions receivable reducing stockholders' equity. NOTE 5 In June, 1997, the Company received $1,000,000 in CONVERTIBLE exchange for notes convertible into the Company's common NOTES PAYABLE stock. These convertible notes bear interest at the rate of 7% per annum and were due May 14, 2000. The holders of these notes were entitled, at their option, to convert any or all of the principal into the Company's common stock at a conversion price for each share of common stock equal to 70% of the average closing bid price of common stock for the five business days immediately preceding the date of receipt of notice of conversion. The convertible debt was discounted for the beneficial conversion feature, additional paid in capital was increased by the discounted amount, and the discount was amortized using the interest method over the term of the convertible debt or ratably when conversion occurs. The discount is fully amortized. Pursuant to the terms of the financing, the Company issued 1,142,857 shares of common stock to be held in escrow, pending the potential conversion of notes. 14 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5 In September, 1997, the note holders converted an CONVERTIBLE aggregate of $397,679 of principal into 700,000 shares NOTES PAYABLE of common stock. In November, 1997, the Company issued (continued) an additional 380,000 shares of common stock to be held in escrow for potential conversion of notes. In February, 1998, an additional 444,000 shares of common stock were issued into escrow, pending conversion of the notes. During the year ended January 31, 1999, the Company issued 1,480,280 shares of common stock in satisfaction of the remaining $602,321 of convertible notes. In November, 1997, in a separate transaction, the Company received $1,600,000 in exchange for notes convertible into the Company's common stock. These convertible notes bear interest at the rate of 6% per annum and were due May 14, 2000. The holders of these notes were entitled, at their option, to convert any or all of the principal into the Company's common stock at a conversion price for each share of common stock equal to 70% of the average closing bid price of common stock for the five business days immediately preceding the date of receipt of notice of conversion. These convertible notes were also recorded in the method described in the second preceding paragraph. The discount is fully amortized. Pursuant to the terms of the financing, the Company issued 2,400,000 shares of common stock to be held in escrow, pending the potential conversion of notes. In February, 1998, an additional 960,000 shares of common stock were issued into escrow, pending conversion of the notes. During the year ended January 31, 1999, the Company issued 4,105,870 shares of common stock in satisfaction of these convertible notes. NOTE 6 During the year ended January 31, 2000, the Company UNEARNED issued 500,000 shares of common stock to reacquire an REVENUE existing distributorship valued at $41,000. The Company also received $100,000 as a deposit on the machines in production. As of January 31, 2002 and 2001, unearned amounts related to distribution rights were $210,000 and deposits on machines totalled $110,000. NOTE 7 As of January 31, 2002, the Company entered into an ROYALTY RIGHTS agreement to settle a liability under a modified judgement in which the Company re-acquired royalty rights from California Food and Vending, Inc. for $1,500,000 (see Notes 9 and 11). Amortization of the royalty rights will be based on sales of vending machines and potato product. Amortization has not yet begun as of January 31, 2002. 15 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8 As of January 31, 2001, the Company had received DEMAND NOTES $270,000 through a loan made to the Company by a PAYABLE stockholder. The loan bears interest at 18% per annum and was repaid in June 2001 by issuance of common stock. As of January 31, 2002, the following loans were outstanding: Officer, interest at 7.5%, without established repayment terms ............ $ 64,000 Stockholder, non-interest bearing, without established repayment terms .... 50,000 Stockholder, non-interest bearing, without established repayment terms .... 198,566 -------- $312,566 ======== NOTE 9 NOTES PAYABLE California Food & Vending, Inc. - installment note payable over 24 months with accrued interest at 8%, final payment due January, 2004. $1,350,000 Less current maturities .................. 600,000 ---------- Long-term debt, net of current maturities ............................. $ 750,000 ========== NOTE 10 During the years ended January 31, 2002, 2001, and 2000, COMMITMENTS the Company incurred $29,096, $25,680, and $42,946, respectively, for the rental of office space. The Company's current lease commitments total approximately $3,000 per month until May 31, 2002. 16 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11 CALIFORNIA FOOD & VENDING, INC. LITIGATION In May, 1991, the Company entered into a joint venture agreement with California Food & Vending, Inc. ("CFV"), another vending and food service company with a high interest in the research and development of a french fry vending machine. The companies planned to work together in the manufacturing and marketing of a french fry machine. Disputes arose between the parties, litigation was instituted by CFV and in July, 1999 the disputes were settled and the litigation dismissed. Pursuant to the settlement agreement, the Company regained distributorship rights for the State of California; agreed to pay CFV the sum of $1,000,000 which has been paid; issue 250,000 shares of Company common stock to CFV; and CFV will receive $350 for each of the first 500 machines produced and $450 per machine thereafter and $.25 for each pound of potato product sold by Tasty Fries, Inc. As of January 31, 2002, the Company re-acquired all of the royalty rights from CFV for $1,500,000, payable in installments through January, 2004 (see Notes 7 and 9). PRIZE FRIZE LITIGATION On August 28, 1996, the Company, the President of the Company and Premier Design, Ltd., were added as defendants to a civil law suit in the Riverside County Branch of the Superior Court of the State of California brought by Prize Frize, Inc. ("Prize Frize"), William Bartfield and Larry Wirth. The suit also named as defendants approximately 25 other parties, all allegedly involved, in some manner, in the pursuit of the french fry vending machine concept and/or business. The case was removed to Federal Court. The Company successfully moved for dismissal of the claim on behalf of itself and its President; the case was dismissed on June 2, 1997. The dismissal was reversed on appeal by the Federal Court and the case was remanded to State Court. The plaintiffs' claim against Tasty Fries was severed. The claims against the President of the Company and Premier Design, Ltd. were dismissed. The claim brought by Prize Frize asserted that the Company has usurped its trade secrets by developing a French fry vending machine, which utilizes the basic American food potato product. As of October 1, 2001, a Settlement Agreement and Mutual General Release ("Settlement Agreement") was entered into by and between the Company and Prize Frize, Inc. Under the Settlement Agreement, Prize Frize agreed to dismiss the litigation and released all claims, known and unknown, against the Company and its officers and directors. The Company paid no 17 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11 PRIZE FRIZE LITIGATION (continued) LITIGATION (continued) monies to Prize Frize in consideration for the Settlement Agreement or the dismissal of the action. The Company, however, granted Prize Frize a right of first refusal to supply all of the Company's requirements for a Basic American Food ("BAF") potato product known as "Russet Fries" in the quantities requested by the Company, at the times and places requested by the Company and at the best possible and commercially reasonable price offered by any BAF distributor. If, however, Prize Frize, is unable or unwilling to provide the Company with necessary quantities of the Russet Fries at said prices, the Company may purchase the Russet Fries from another source. Pursuant to the Settlement Agreement the litigation was subsequently dismissed with prejudice. NOTE 12 As of September 18, 1995, the Company established an STOCK OPTION incentive stock option plan (the "Plan") and presently PLAN has reserved 1,500,000 shares of the Company's common stock for issuance under the Plan. During the year ended January 31, 1999 the Company granted 1,000,000 options to employees. These options have an exercise price of $.50 and vest immediately. In the year ended January 31, 2000, 500,000 options were granted to certain non-employee directors of the Company. These options have an exercise price of $.50 and vest immediately. Each Board member also was granted a 50,000 share option for each year of service to the Tasty Fries Board. Each Board member will receive a 50,000 share option for each full year of service to the Company, commencing with the year June 10, 1994 and ending on the date the Board member resigns or otherwise is removed from office. The exercise price for such stock option shall be the closing price of the stock on June 9, or the closest day thereto, of each such year. Each board member is granted the right to exercise his option at any time up to seven years from the date his right to acquire stock vests. All issuances were granted at not less than fair market value of the Company's common stock at time of grant. In March, 2000, the Board of Directors approved a stock option plan for a key employee who shall receive a 30,000 share option for each full year of service to the Company, commencing with the year beginning June 10, 1994 and ending on the date she resigns or is otherwise removed from office. The acquisition price for such stock shall be the closing price of the stock on June 9 (or the closest business day thereto) of each such year. This employee is granted the right to exercise this option to acquire the Company's stock at any time up to seven years from the date her right to acquire stock vests. 18 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 Options dated December 31, 1999 with an expiration date STOCK OPTION of December 31, 2001 and an option dated June 1, 1998 PLAN with an expiration date of July 1, 2000 were both (continued) extended and remain effective with a new expiration date of December 31, 2004. The number of shares per Option (100,000) remain the same as does the exercise price ($.50). In November 2001 and January 2002, the Board of Directors approved the issuance of 200,000 and 500,000 options, respectively to the chief operating officer, at $.10 per share and $.43 per share, respectively. As of January 31, 2002 and 2001, no options have been exercised. Transactions in the Plan are as follows:
Weighted Average Exercise Exercise Price Price Per Vested Per Vested Granted Vested Common Common Shares Shares Stock Share ------- --------- ---------- ----------- Balance, February 1, 1999 ...... 1,012,926 1,012,926 $.52 Activity during the year ended January 31, 2000 ....... 1,750,000 1,750,000 $.45 to $8.20 $1.70 --------- --------- Balance, January 31, 2000 ..... 2,762,926 2,762,926 $1.26 Activity during the year ended January 31, 2001 ....... 180,000 180,000 $.45 $.45 --------- --------- Balance, January 31, 2001 ..... 2,942,926 2,942,926 $1.22 Activity during the year ended January 31, 2002 ....... 700,000 700,000 $.10 to $.43 $.34 --------- --------- Balance, January 31, 2002 ..... 3,642,926 3,642,926 $1.05 ========= =========
19 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 The Company accounts for stock-based compensation in STOCK OPTION accordance with Statement of Financial Accounting PLAN (continued) 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 pro forma 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. 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 Ended January 31 ------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ Net loss As reported ........... ($3,832,948 ) ($3,792,684 ) ($5,783,657 ) Pro forma ............. ( 3,878,948 ) ( 3,844,284 ) ( 6,212,402 ) Net loss per common share As reported ........... ( .08 ) ( .12 ) ( .27 ) Pro forma ............. ( .08 ) ( .12 ) ( .29 ) Significant assumptions used to calculate the fair value of the awards are as follows: Year Ended January 31 ------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ Risk free interest rates of 5.00% 6.00% 6.00% return ................ Expected option life ...... 84 months 84 months 84 months Volatility ................ 50% 50% 50% Expected dividends ........ -- -- -- NOTE 13 On July 29, 1991, the Board of Directors authorized PREFERRED STOCK 5,000,000 shares of preferred stock at a par value of $.001 per share. No shares of preferred stock have been issued. 20 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14 As of January 31, 2002 and 2001, the Company had OPTIONS AND 32,350,000 and 11,225,000 warrants and 10,475,680 and WARRANTS ISSUED 9,775,680 options, respectively, to purchase common AND OUTSTANDING stock outstanding. The warrants and options are exercisable at share prices between $.40 and $8.20 per share and expire at various dates through December, 2007. NOTE 15 The Company has approximately $16,000,000 in net INCOME TAXES operating loss carryforwards, which can be used to offset future taxable income. The net operating loss carryforwards expire through 2020. The components of the Company's deferred tax assets as of January 31, 2002 and 2001 are as follows: 2002 2001 ---------- ----------- Net operating loss carryforwards .. $7,400,000 $ 6,800,000 Valuation allowance ............... (7,400,000) (6,800,000) ---------- ----------- Deferred tax asset ................ $ -- $ -- ========== =========== The valuation allowance increased by $600,000 and $580,000 in the years ended January 31, 2002 and 2001, 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, 2002, 2001, and 2000. NOTE 16 In April, 1998, the Company entered into an agreement to APRIL 1998 receive $1,500,000 in proceeds from the sale of FINANCING restricted stock to a U.S. corporation. The Company issued 3,000,000 shares of common stock as consideration for the investment. The Company also issued warrants to purchase 1,500,000 shares of common stock at an exercise price of $1.90; the warrants expired April 12, 2001. The Company also issued 150,000 shares of restricted stock as a commission on the transaction. The Company and the investor have entered into an escrow agreement for this transaction and all of the shares were issued into escrow, pending funding. As of January 31, 2002, $1,425,000 of the $1,500,000 in proceeds has been received by the Company and 2,850,000 of the 3,000,000 shares of restricted common stock held in escrow have been released to the investor. The balance of the April 1998 financing agreement has been terminated by both parties. 21 TASTY FRIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 17 The Company accrued Board of Directors' fees for the DIRECTORS' FEES years ended January 31, 1997 through January 31, 2002 in the amount of $310,000. Interest has not been accrued on the unpaid balance. The following shares of stock were issued to retire $300,000 of this liability: January 2001 500,000 shares at $.40 each $200,000 November 2001 909,890 shares at $.11 each 100,000 -------- $300,000 ======== NOTE 18 In July, 2000, the Board of Directors approved the terms EMPLOYMENT AGREEMENT 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. NOTE 19 The Company conducts nondirect response advertising and ADVERTISING utilizes a website to market its product. These costs EXPENSE are expensed as incurred. Advertising costs for the years ended January 31, 2002 and 2001 were $105,717 and $3,000, respectively. 22 -----END PRIVACY-ENHANCED MESSAGE-----