Tasty Fries, says chief, has 'weathered the storm'
After financial losses and delays, the company says its french fry vending machines are due soon.
By Rosland Briggs
PHILADELPHIA INQUIRER STAFF WRITER, September 23, 1998.
In 1995, Tasty Fries Inc. shareholders were told their investment would soon pay off: The company's french fry vending machines were about to hit the market.
Investors held out hope throughout 1996. By 1997, the company promised the wait finally would be over. It wasn't. It's now September 1998. The Blue Bell company still has not begun mass producing the machines -- nor has it had any revenues since its founding 13 years ago. But Edward Kelly, the company president and chief executive officer, says 25 machines are about to be built by a manufacturer in Bucks County, and contracts with distributors are being negotiated to get those machines into discount department stores. The company also has secured financing that will allow it to produce more machines while it awaits payments from its clients, he said.
Of course, Tasty Fries' investors have heard the "about to's" before -- while watching the company accumulate a $12.1 million deficit.
"We've gotten a lot of shareholders upset because they've been promised something, and it hasn't come to pass," said Kelly, who took over in 1994.
"The worst thing that can happen to a company is not missing a delivery date, but that something goes wrong with the machine."
"We've steered this ship into some waters that have been very favorable for us," he said. "We've weathered the storm. Building 25 machines is a huge deal for us."
The french fry vending machine concept has been around since the 1970s, said Tim Sanford, editor of Vending Times magazine in New York.
Already, Ore-Ida, a division of the H.J. Heinz Co., and a California company called KRh Thermal Systems have introduced machines into the $32.9 billion vending industry.
"Part of the problem is it's difficult to sell new kinds of vending machines, because you tend to run out of money," Sanford said. "One of the great unknowns about the french fry machine is [ whether and how often people will buy ] . A lot depends on location."
Since 1993, Tasty Fries has been working to perfect a vending machine that cooks french fries quickly without refrigeration and the excessive smoke and unsanitary conditions that plagued previous attempts.
It took two years to produce one that shapes, cooks and delivers 32 french fries using dehydrated potatoes, water and vegetable oil. Then the company had problems developing a way to mass produce the machines quickly and cheaply.
The first 10 machines cost the company $40,000 each to make, Kelly said. With plans to sell them at around $9,000, that was too expensive. And the production time, almost one week per machine, was too long, Kelly said.
"To the naked eye, people that saw the machine a year ago . . . can't understand why don't we just build the machine," said Kelly, who is one of seven employees. "Because we can't. It's not cost-effective."
To reduce the production cost and time, the company developed a tooling program, which took 28 months and $1.5 million to complete. It allowed the company's manufacturers to use equipment to build the machine's 3,100 parts separately through molding instead of handmaking them.
"Tooling is the difference between handmaking a dress and running 500 down the production line with automated sewing machines," he said. It "allows us to come out with handmade parts every time without going through that process."
After a year of tinkering, the company has cut the manufacturing price to $6,000 and the manufacturing time to 40 hours per machine, Kelly said.
The 10 original machines have not been sold and serve as demonstration models.
Lack of money also delayed the machine's debut, Kelly said. To raise money for the tooling program, Kelly sought private investors and equity loans. Last year, the company received $2.6 million in convertible note financing from a European investor. In May, it received $1.5 million from a private investor.
The company, previously known as Adelaide Holdings Inc., has accumulated a deficit of $12.1 million since starting in 1985.
It spent $7.5 million developing its first machine, which was declared a failure in 1992. The new model, made under the Tasty Fries name, has cost $5 million to develop, Kelly said.
"Most people that want to invest in a product want something that's through the [ research and development ] phase," Kelly said. "Private investment individuals were the only people willing to step up to the plate and take a swing."
On Sept. 14, the company said it had secured a deal that would provide short-term loans of up to $10 million a month while it awaits payments from buyers of the machines. The financing deal expires after 12 months and requires that Tasty Fries pay a 10 percent interest fee.
"When you sell on terms of 30, 60 or 90 days, as a small company, you can't wait that long to get money back," said Anthony DiMarco, president of Globus Group in Miami, the lender. "We come in and float the money and we wait 30, 60 or 90 days to get paid."
While the company sought money to continue between fiscal years 1996 and 1997, Kelly's compensation increased 50 percent to $240,000. In fiscal 1998, which ended in January, it increased to $289,000. He said half of his salary came in cash, the other half in Tasty Fries stock. To date, he owns 1.5 million shares of common stock, he said. Kelly also received 1.5 million shares of restricted stock worth about 69 cents each in September 1997. The stock, which is traded on the Nasdaq market, closed yesterday at 78 cents a share.
"The stock option was part of a stock option repurchase plan, which is not unnatural," Kelly said. "I am the developer of the machine, and the patent is in my name."
With financing temporarily under control, Tasty Fries' next task is lining up distributors to sell the machines. Many of those previously selected canceled contracts because preproduction lasted so long.
Distributors would sell the machines directly to schools, malls, hospitals, and other high-traffic locations. Tasty Fries would supply the dehydrated potatoes, the vegetable oil and the serving cups, Kelly said.
"I've made a living in subcontracting, and I'm a believer in it," Kelly said. "When outsourcing, you have to have an expert in-house that knows what they're doing."
He said Tasty Fries is expected to sign a contract soon with Scholer & Associates, a distributor in Cleveland.
"Frankly, I think he's going to succeed in spite of the past," said Eric Scholer, the distributor's president. "One of the reasons I decided to come on board is because somebody technical is at the reins running something this new."
He said his company would sell 18 of the first 25 machines, which are scheduled to roll off the production lines within two months.
Although one manufacturer in Ivyland, Pa., which Kelly refused to name, has been selected to build the first 25 machines, the company still needs to find three or four more to produce large quantities.
Tasty Fries also has to contend with at least two similar machines already up and running in this country.
Ore-Ida launched its French Fry Vendor four years ago and has sold 700 units, said spokesman Grant Jones. Its machine uses a hot-air convection oven to heat the fries, which are fried, coated with oil, and flash frozen before vending.
Hot Choice by KRh Thermal Systems has introduced 300 machines into the market since starting three years ago, said Peter DeLeon, marketing manager. Before marketing its machine, which sells a variety of products that are cooked with two heating technologies, it tried a frying process similar to what Tasty Fries uses. It canned the idea because of problems with keeping the oil clean and replacing it, he said.
But because KRh vends a variety of products and uses a different cooking method, Kelly said it is "definitely not" a competitor.
In Switzerland, a company called Tege SA also has produced a french fry machine that uses powdered potatoes. It spent five years developing it and had five machines in operation as of June, according to company news releases.
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