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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended June 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission file number 0-19522
N.U. Pizza Holding Corporation
(Exact name of registrant as specified in its charter)
Nevada 95-365327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15414 Cabrito Road, Suite A Van Nuys, CA 91406-1419
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 779-8600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
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<S> <C>
Common ($0.001 par value) O.T.C. (NUZA)
Preferred ($0.10 par value ) None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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.
[x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K [ ]
The aggregate market value of shares of the voting stock held by
non-affiliates of the Company, based on the bid price of such stock on the
Over-The-Counter electronic bulletin board on October 2, 1996 was $4,681,631.
The number of shares of Common Stock outstanding as of October 2, 1996
was 27,539,008.
Documents Incorporated by Reference
None
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PART I
ITEM 1. BUSINESS.
General.
N.U. Pizza Holding Corporation and Subsidiaries, (the "Company") was
incorporated under the laws of the State of Nevada in 1981 as Gelet
Enterprises, Inc. In April 1993 Gelet Enterprises, Inc. changed its name to
N.U. Pizza Holding Corporation. Its principal place of business is 15414
Cabrito Road, Suite A, Van Nuys, California 91406, telephone number (818)
779-8600. The Company franchises and operates a chain of restaurants known as
Numero Uno and has developed a unique system for producing and merchandising
distinctive and high quality Sicilian-style, deep dish pizza and other Italian
food products. There are two types of establishments: (1) full service Numero
Uno restaurants which offer full, server-assisted, sit down, dining room
service, with takeout and delivery service as an ancillary feature of the
business, and (2) establishments which provide only limited dine-in service and
which feature takeout and delivery services. The Company maintains centralized
franchising buying, personnel, systems, pricing, advertising, merchandizing and
accounting functions at its principal executive offices. Most of the Company's
business is currently done in the Southern California area.
Pursuant to a stock purchase agreement (the "Agreement") dated
February 1, 1994, as amended, Woodbury, Inc., an affiliate, acquired all of the
issued and outstanding shares of stock of N.U. Pizza Holding Corporation; the
agreement was approved by the respective directors of both companies, and the
transaction was formally closed on April 19, 1994. The consideration paid to
the shareholders for the acquisition of N.U. Pizza Holding Corporation was
80,000 shares of Woodbury, Inc.'s convertible preferred stock. Upon the
formalization of the acquisition of N.U. Pizza Holding Corporation by
Woodbury, Inc., the directors of N.U. Pizza Holding Corporation and Woodbury,
Inc. approved the merger of Woodbury, Inc. into its newly acquired subsidiary,
N.U. Pizza Holding Corporation. The stockholder of Woodbury, Inc. received one
share of stock of N.U. Pizza Holding Corporation for each share of Woodbury,
Inc. stock that he owned. N.U. Pizza Holding Corporation has amended its
articles to provide for capitalization similar to that of Woodbury, Inc.,
including the authorization of convertible preferred stock. The merger of
Woodbury, Inc. and its wholly-owned subsidiary did not require Woodbury, Inc.
shareholder action. Ronald Gelet, who was the sole officer and director of the
Company prior to the merger, has remained in his capacity as president and
director.
The Company's Pizza.
The distinguishing characteristics of the Numero Uno system include,
but are not limited to a unique and readily recognizable design, color scheme
and layout for the premises where such business is conducted; distinctive
furnishings; specialized paper products; signs and advertising; and distinctive
trade names, service marks and other identifying marks, designs, logos and
commercial symbols including, without limitation, "Numero Uno Pizzeria" and
"Numero Uno Takeout and Delivery" also "One Bite and We Gotcha" and "Pizza,
Pasta and
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More." In addition, the Company and its president have created and perfected
unique and distinctive methods for preparing, serving and merchandising
Sicilian-style deep dish pizza and other related food products, including the
use of specially prepared ingredients and secret recipes which the Company and
its president originated.
Pizza is clearly the most important product in the Company's line.
Deep dish, Sicilian-style is the most popular product and New York-style thin
pizza is second in demand.
As of June 30, 1996, there were 49 full service restaurants in
operation featuring dine-in facilities as well as takeout and delivery
services. In addition, there were 2 takeout and delivery restaurants with
limited dine-in seating areas. Also, as of June 30, 1996, the Company owned
and operated 3 full service restaurants and was in the process of remodeling
another restaurant which it intends to have in full operation during the year
ended June 30, 1997.
Domestic Franchising.
The Company began franchising Numero Uno full service restaurants in
1975. Through franchising activities, the Company has established a good
reputation and a demand for its deep dish, Sicilian-style pizza and other
Italian food products. The name Numero Uno and the related tradenames,
trademarks, service marks, logo designs and commercial symbols, have come to
signify to the public the highest standards of quality, cleanliness, appearance
and service, all of which are publicized through various advertising media.
The Company currently engages in the sale and administration of full service
restaurant franchises as well as takeout and delivery restaurant franchises.
The franchise terms granted to each franchisee is subject to terms and
conditions of the then applicable franchise agreement. Over the past 20 years,
the franchise licenses have been modified so that the terms of the franchise
agreements range from 10 to 20 years; initial franchise fees range from $6,000
to $25,000 and royalty fees are either a percentage of revenues, ranging from
4.5% to 7.0% of net franchise sales, or are fixed at either $1,250 or $1,800
per month; advertising fees are either a percentage of revenues, ranging from
2.0% to 4.0% of net franchise sales, or are fixed at either $1,000 or $1,400
per month. Typically, the franchise agreements provide for either a protected
delivery territory or an exclusive delivery territory.
The Company provides the franchisee assistance with site selection,
lease negotiations, architectural designs and training. On a continuing basis
the Company creates, develops and purchases local and regional advertising,
public relations and promotional campaigns. The Company negotiates purchase
contracts for proprietary and mandatory products on an annual basis. Also, on
an ongoing basis, the Company provides supervision and operating assistance to
franchisees.
International Franchising.
International development agreements grant the licensee the right to
develop the Numero Uno system and concept in an overseas market by opening up
either franchised full service or takeout and delivery restaurants.
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The license grants exclusivity for a fixed period of years providing
that the licensee fulfills the development schedule set forth in the respective
agreement. The initial non-refundable fee is based on the negotiated number of
restaurants to be opened under the agreement, with a typical fee ranging from
$10,000 to $15,000 per restaurant. Typically, the first restaurant must be
opened within one year of execution of the agreement, with the balance of
restaurants to be opened within five years.
Once the development terms are met, the licensee has the right to
extend the term of his agreement for an additional 25 years and also has the
right to open up additional restaurants. The Company receives a negotiated
initial fee for the opening of each additional restaurant. The Company also
receives a royalty fee, typically 2.0% of net sales, of restaurants that are
operating under international development agreements. The initial and ongoing
services provided by the Company are the same as for domestic contracts with
the exception of advertising services.
There are currently four international development agreements in
effect: China; South Korea; Indonesia; and Kuwait, Lebanon and the United Arab
Emirates. Currently, one restaurant is open in China, ten restaurants are
open in Korea and four restaurants are open in Kuwait. Also, a restaurant in
Indonesia is scheduled to open in December 1996.
Company-owned Restaurants.
During the eleven months ended June 30, 1994, the Company acquired 16
restaurants and closed 2 restaurants, during the year ended June 30, 1995, the
Company acquired an additional five restaurants, closed five restaurants and
sold eight restaurants, leaving six restaurants in operation at the close of
business on June 30, 1995. Five of these restaurants were sold and one was
closed. From October 1995 until June 1996 no Company-owned restaurants were in
operation. The Company decided to temporarily discontinue Company-owned
operations to concentrate on strengthening its existing franchise base. Having
achieved that goal in June 1996, the Company acquired four Company-owned
restaurants. The Company is aggressively seeking a merger or acquisition
candidate as an integral part of its 1996-1997 fiscal year growth plan. The
Company has entered into a letter of intent to purchase the assets of the
restaurant chain known as Oregon's Original Sandwich Express and Bakery
("Sandwich Express"). Upon execution of the definitive agreement, the Company
intends to retrofit the Sandwich Express chain into a new sit down restaurant
concept featuring Numero Uno products.
Merchandise, Suppliers and Distributors.
There are numerous products and recipes in the Numero Uno system that
are proprietary in nature. These items have either been developed by Numero
Uno or by others for exclusive use with the Numero Uno system. Whenever
possible, license agreements are entered into with outside vendors to prepare
these products for ultimate distribution exclusively to Numero Uno restaurants.
This is to ensure that the highest level of quality is maintained and that
there is consistency throughout the chain. Proprietary items include, but are
not limited to the following items: tomato sauce, meat sauce, alfredo sauce,
soup, garlic sauce, and the recipes for dough, lasagna and the meatballs. Two
dough recipes are the most important products in the Numero
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Uno system. Both dough recipes were developed by Mr. Ronald J. Gelet and are
directly responsible for the uniqueness of the respective pizza products. The
formula and ownership of the recipes belong to Mr. Gelet, and the Company,
pursuant to a licensing agreement, has the exclusive right to the use and
distribution of the formula and recipe. Mr. Gelet receives a royalty based on
total pounds sold through an exclusivity agreement with N.U. Pizza Holding
Corporation.
Each restaurant must order and purchase all dough, spices, sauces and
other proprietary items designated by the Company, exclusively from the Company
or its designated distributor. These items are made available on terms and at
prices equally applicable to all restaurants located within the same freighting
area and are competitive with other items of like quality and quantity. Pizza
dough, spices and sauces are produced from secret recipes; consequently, in
order to preserve the confidentiality of such recipes, it is essential that the
source of purchase be limited.
To further ensure high standards of quality and consistency throughout
the chain, there are many additional items which are set forth in the
operations manual as mandatory for use in Numero Uno restaurants. Mandatory
items, unlike proprietary items, are items that are not exclusively produced
for the Numero Uno system but are brand items or items that are identified by
Numero Uno as having specific quality or nature. These items include, but are
not limited to the following: pepperoni, bulk Italian sausage, tortellini, and
other pasta products, tomatoes, canned sauces, spices, seasonings, grades of
vegetables, salad bar items and percent of leanness in meat products.
Employees.
The Company currently has thirty-six "non-union" employees. This does
not include personnel that are employed by the Company's franchisees.
Management believes that its employee relations are generally good.
Competition.
There is a tremendous amount of competition in the pizza business.
The Company faces competition for patronage of customers in varying degrees
from national, regional and local chains which are located in the Company's
market place. Many of these competitors offer merchandise similar to that
available by the Company. The Company attempts to compete by offering what it
believes to be higher quality food and better service at reasonable prices.
The Company's major national competitors include Pizza Hut, Dominos
and Little Caesar's. Regional competitors include Shakey's, Round Table,
Lamppost Pizza and Ameci's. There is also significant independent competition
which currently accounts for more than 50% of the pizza market in Southern
California.
During the past three years, the competition in the Southern
California market place has intensified. Predatory pricing and deep
discounting have had an effect on consumers' brand loyalty. The Company also
competes for the customers' dollar with virtually all restaurants in the
Southern California market place whether or not they specialize in pizza or
offer Italian
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specialty items.
Trademarks, Service Marks, Tradenames, Logo Types and Commercial Symbols.
"Numero Uno" is a registered service mark in the State of California.
The Numero Uno name was first used in California on June 15, 1973 and was
registered as a state service mark on February 27, 1986 as Reg. #26019. A
separate California service mark registration for the words "Numero Uno" with
design was obtained on March 22, 1986 as Reg. #4242. Both of said
registrations are currently held by N.U. Pizza Holding Corporation.
On September 6, 1985, the Company obtained a state service mark
registration for "Numero Uno Pizza, Pasta and More" Reg. #24304. The Company
was issued a certificate of registration by the United States Patent and
Trademark Office evidencing the registration on March 11, 1986 of the service
mark "One Bite and We Gotcha" on the principal register (Reg. #1386261) and a
Section 8 Affidavit of Use has been timely filed. The Company was also issued
a certificate of registration by the United States Trademark Office for the
mark "Pizza, Pasta and More" which was registered on the principal register on
May 6, 1986, (Reg. #1392746). A Section 8 Affidavit of Use was timely filed.
The mark "Numero Uno Takeout and Delivery" is not separately registered. The
Company does not believe that such registration would be significantly
beneficial, inasmuch as the distinctive part of the mark, the words "Numero
Uno", are already the subject of a state registration.
There are presently no effective adverse determinations of the United
States Patent and Trademark Office; the trademark administrator of any state
or of any court; no impending interference, opposition or cancellation
proceedings; nor any pending material litigation involving any of the foregoing
marks which is relevant to their use in California. With the exception of the
agreement with Pizzeria Uno Corporation (which prevents the Company from using
the name anywhere within the continental United States, except for California)
there are no agreements currently in effect which significantly limit the
rights of the Company or its affiliated entities to use or license the use of
any of the said marks. Furthermore, there are no infringing uses actually
known to the Company which would materially affect the use of any of the marks
in California.
The Company has copyrights on certain confidential operations manuals
and confidential food preparation manuals. These copyrights are not registered.
Under each franchise agreement, the franchisee is granted the right to use the
manuals during the term of his franchise, subject to the confidentiality
restrictions and other terms and conditions contained in the franchise
agreement. There are no presently effective determinations of the copyright
office, or any court, any pending interference, opposition or cancellation
proceedings, or any material litigation involving the manuals which is relevant
to their use in California.
ITEM 2. PROPERTIES.
Restaurants.
All of the Company-owned restaurant sites are leased. In many
instances, the Company
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has also signed or guaranteed leases for restaurants operated by franchisees.
The leases for the restaurant premises vary as to their terms, rental
provisions, expiration dates and the existence of renewal options. The number
of years remaining on the leased locations (excluding unexercised options)
range from approximately 1 to 9 years. The termination of any of the leases
due to expire within the next two years (without renewal options) would not
have a material adverse effect on the operations of the Company. Most of the
leases provide for a fixed minimum rent and some have provisions for additional
rent based on a percentage of the total sales in excess of certain amounts.
Many leases also provide that the Company shall pay all, or a portion of, the
real estate taxes, insurance charges and maintenance expenses related to the
leased premises.
The Company has historically acquired locations for new restaurants
through a variety of methods including direct leases, assignments of subleases
of existing facilities and build-to-suit leases. In many cases, the Company is
able to lease or sublease existing buildings that have previously been used for
restaurants. In connection with the opening of new restaurants, the Company
generally makes capital investments and incurs expenses of approximately
$300,000 to $400,000 per restaurant. These costs consist of leasehold
improvements, inventory, fixtures, equipment, furniture, signs, pre-opening
costs and, in some cases, lease acquisition costs.
Company-owned restaurants are either located in or adjacent to
shopping centers of varying sizes and have adjacent parking facilities or are
free-standing with parking that is specific to the location. The restaurants
generally operate from 11:00 a.m. to 9:00 p.m., Sunday through Thursday, and
11:00 a.m. to 11:00 p.m. on Friday and Saturday. Particular location schedules
may vary slightly.
Corporate Office.
The Company leases its corporate offices located at 15414 Cabrito
Road, Suite A, Van Nuys, California 91406. The space is approximately 4,300
square feet. There is approximately thirteen months remaining on the lease and
it is the intention of the Company to relocate the corporate offices at the
expiration of the lease.
ITEM 3. LEGAL PROCEEDINGS.
1. Jasvir Singh Basi aka David Basi, Ravinder K. Basi aka Linda Basi,
and Basi Food Company, Inc. vs. Ronald J. Gelet, Numero Uno Franchise
Corporation, Numero Uno, Inc., Gregory Golem, and Does 1 through 100 inclusive,
Superior Court of the State of California for the County of Los Angeles, Case
No. LC023294. In October of 1985, the Company entered into a franchise
agreement with Jasvir Singh Basi and Ravinder Kaur Basi for a full service unit
to be located in Winnetka, California. In or about June, 1993, a dispute arose
between the Basis and the Company relating to the nature of the Basis' delivery
rights and the geographic territory originally allocated to them. Pursuant to
the franchise agreement, the Basis' right to delivery into the originally
allocated area was non-exclusive and, upon the occurrence of certain
conditions, was subject to termination followed by renegotiation of an
alternate delivery area with a new one. The Basis denied that they had agreed
to a replacement delivery area and, further, alleged that, by separate
agreement, their delivery area was expressly agreed to. The
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Basis responded with a cross-complaint, which sought compensatory and punitive
damages, and other relief based on claims of breach of contract, breach of
covenant of good faith and fair dealing, intentional interference with
prospective advantage, intentional infliction of emotional distress, and
violations of the Racketeer Influenced and Corrupt Organizations Act
("R.I.C.O."). The Company filed a demurrer to the cross complaint and the
Basis filed a first amended cross-complaint in January, 1994. On September 27,
1994, the parties settled the lawsuit. The Company agreed to a royalty
abatement which commenced on October 1, 1994 and continues for five years
thereafter.
2. Shaikh Irshad Ahmad Taj vs. Numero Uno, Inc., Numero Uno Franchise
Corporation, and N. U. Pizza Holding Corporation, Orange County Superior Court
Case No. 719323. This is an action filed for breach of contract which was
filed on October 20, 1993 in the Orange County Superior Court against the
Company, its president and several of its subsidiaries. The matter arises out
of a promissory note executed by the Company on October 1, 1991, in the
original principal amount of $130,000, and which was secured by a security
agreement. Plaintiff alleges that the Company breached the security agreement
and therefore the entire amount of the promissory note is accelerated. The
complaint was served on the Defendants in April 1994. Defendants answered the
complaint. The Mandatory Settlement conference was held on September 16, 1994.
The parties were unable to reach a settlement and the Court ordered the matter
to binding arbitration. At an arbitration hearing on December 8, 1995, the
matter was resolved in favor of the Company. The Company was held not to be
liable for any portion of the note.
3. Numero Uno Franchise Corporation vs. Thomas Chan, Anita Chan,
Danny Kong and Judy Kong and Does 1 - 10, inclusive, Los Angeles Superior Court
Case No. BC109959. This matter arises out of the breach of a sublease by the
an assignee of the Defendants. On or about January 29, 1982, Defendants
subleased the premises from the Company and on or about March 20, 1992,
Defendants assigned their right, title and interest to the sublease to other
assignees. The assignment specifically stated that it "shall not release the
originally named sublessees from liability for the continued performance on the
terms and provisions on the part of the sublessee to keep informed."
Commencing on or about January 1, 1994, the new sublessees failed and continued
to fail to pay rent to the lessor or the Company.
As a result of the failure to pay rent, the landlord brought an
action in the Los Angeles Municipal Court entitled William Ong d/b/a Fairview
Enterprises vs. Numero Uno Franchise Corporation to recover damages for breach
of lease in the sum of $15,086.00. The Company stipulated with the landlord in
August 1994 to payment of the sum of $43,644.78 in monthly installments of
$2,011.94. A judgment may be entered against the Company if it fails to meet
its monthly payment obligation. The Company has performed all of the
conditions and obligations to be performed under the sublease and believes that
it is entitled to indemnification from the Defendants in the same amount
stipulated in the Ong action. The Company entered into a Stipulated judgment
where by the Defendants agreed to pay the Company $31,000.00 in monthly
installments of $750.00 which began on October 15, 1994.
4. Maurice Pack vs. Numero Uno Franchise Corporation and N.U. Pizza
Holding Corporation, Los Angeles Superior Court Case No. LC033111. This is a
complaint filed on July 21, 1995 for $50,943.02 due on a promissory note and
guarantees. The Company
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guaranteed a franchisee's note payments. The franchisee defaulted on payments
under the promissory note due to the plaintiff beginning in April 1995 and
continuing thereafter. A status conference had been set for May 17, 1996, but
was taken off the calendar when the parties settled the matter. The Company
agreed to pay to plaintiff the sum of $56,723.43 in monthly installments until
paid in full.
5. Filet Menu, Inc. vs. Numero Uno, Inc., Los Angeles Superior Court
Case No. DC114313. This is an action filed on October 12, 1994 against the
Company for breach of a settlement agreement. This matter arises out of the
settlement of a previous lawsuit filed by the plaintiff against the Company in
1987. As part of that settlement, the Company entered into a written agreement
with the plaintiff for the purchase and payment of merchandise. The plaintiff
alleges that the Company breached that agreement by failing to purchase all the
required items and also failed to pay for some items which were delivered
under the settlement agreement. The Company contends that Filet Menu breached
the settlement agreement. The Company answered the complaint and the Superior
Court referred the matter to the Joint Association Settlement Program. After
a settlement conference was held, the parties settled the matter. As part of
the settlement agreement, the Company agreed to pay the plaintiff an
irrevocable consulting fee of $500,000, payable in monthly installments of
$4,166.66 for a period of ten years commencing on June 15, 1996, and to use the
plaintiff as exclusive supplier of various paper products used by the Company
in Numero Uno Restaurants for a period of five years. Subsequently, Numero Uno
Franchise Corporation filed a Demand for Arbitration before JAMS/Endispute,
Inc. alleging that Filet Menu violated the terms of the Settlement Agreement.
The Company intends to vigorously prosecute the matter in Arbitration and
expects to obtain a favorable ruling.
6. Robert and Frances Clayton vs. Numero Uno Take Out and Delivery,
Inc., Gelet Enterprises, Inc., Numero Uno Franchise Corp., Ronald J. Gelet,
Gregory R. Golem and Bradley Harrington, Orange County Superior Court Case No.
749134. This action for breach of lease was filed on June 26, 1995 by the
landlord of premises leased by Numero Uno Take Out and Delivery in Huntington
Beach, California. In March of 1995, Numero Uno Takeout and Delivery vacated
the premises. The plaintiffs are seeking rent in the sum of $20,512.00 and
other amounts for damages according to proof. Numero Uno Take Out and Delivery
is a defunct entity. There is no contractual liability on behalf of the other
named defendants. Defendants Gelet Enterprises, Inc., Numero Uno Franchise
Corp., Ronald J. Gelet and Gregory R. Golem answered the complaint on August
16, 1995. After some discovery, the Court assigned the case to nonbinding
arbitration. An arbitration hearing was held on June 20, 1996. Thereafter, the
arbitrator awarded plaintiffs the sum of $31,781.05. Numero Uno Franchise
Corporation did not agree with the award of the arbitrator and filed a Request
For Trial De Novo with the Court. Subsequently the Court set a trail date for
October 28, 1996. The Company believes that it will obtain a favorable outcome
at the trial.
7. Commercial Ventures vs. N.U. Pizza Holding Corporation, Los
Angeles Municipal Court Case No. 95T03975. This action was filed August 8,
1995 and alleged breach of contract arising out of lease agreement entered into
in June of 1990. The plaintiffs sued for back rent and other damages. The
action was filed in Municipal Court, the jurisdictional limit of the court in
which plaintiff filed the action was $25,000. The parties agreed to stipulate
to the settlement of this matter by the payment from the Company to the
plaintiff of the sum of
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$12,912.50. The settlement was paid in full on March 5, 1996.
8. Konstantin Gontmaher vs. Numero Uno Inc., et al., Los Angeles
Superior Court Case No. BC013580. This matter was filed on November 14, 1994
alleging breach of contract and various other causes of action. The plaintiff
was a franchisee of the Numero Uno location in Northridge, California. The
Company filed a demurrer and motion to strike. The demurrer was sustained in
the third through tenth causes of action with plaintiffs given twenty days to
amend their complaint. Plaintiff did not amend, and the case was on the verge
of being dismissed, when plaintiff obtained new counsel and filed a Motion for
Leave to file a First Amended Complaint. At the same time, the Company filed
a Motion For Leave to file a Cross-Complaint for amounts owing on a note and
under the franchise agreement. Both Motions were granted by the Court on May
17, 1996. The case is presently in the discovery stage with a Status
Conference scheduled for December 5, 1996. Plaintiff dismissed two causes of
action and some unrelated defendants in July 1996. The Company's demurrer and
motion to strike portions of the First Amended Complaint were granted in
substantial part on August 9, 1996. The restaurant is closed. The plaintiff
would like to get out of the long-term lease, which has another nine years to
run. In addition, the plaintiff franchisee owes the Company approximately
$150,000. The Company has no interest in assuming the lease, even at a reduced
rent. The Company believes that the matter will eventually be settled with the
plaintiff on terms favorable to the Company.
9. Dolan Construction Company, Inc. vs. Numero Uno Franchise
Corporation, Orange County Municipal Court Case No. 300623. This is an action
for breach of contract and foreclosure of mechanics liens filed on September 22
1995. The dispute centers around a parcel of real property located in Santa
Ana, California, for which the Company contracted with the plaintiff to perform
improvements. The plaintiff is seeking the sum of $15,764 as the outstanding
balance owed on the contract. The Company responded to the complaint on
October 31, 1995. After some discovery, a Trial Setting Conference was set for
April 25, 1995 but was taken off calendar when the matter was settled. Numero
Uno Franchise Corporation agreed to pay the plaintiffs the sum of $15,129.00 at
the rate of $500.00 a month until paid in full. Numero Uno Franchise
Corporation entered into a stipulation for entry of judgement with the
plaintiff, which may be filed with the Court in the event that Numero Uno
Franchise Corporation defaults on any payment due to the plaintiff.
10. Shin vs Numero Uno Franchise Corporation, Los Angeles Superior
Court. On July 28, 1995, an action was filed for money due on a promissory
note. The plaintiffs allege that the Company is in arrears on an installment
note made on July 16, 1993 for approximately $107,900. The Company responded
to the complaint on September 19, 1995. The Company settled the matter on
April 4, 1996, for the sum of $96,000 which has been paid in full.
11. Century Entertainment Center, L.P. vs. Numero Uno Franchise
Corporation, Los Angeles Superior Court Case No. BC 138386. This is an action
filed on November 2, 1995 for unlawful detainer for one of the Numero Uno
restaurant locations. The landlord was seeking approximately $58,000 in past
due rent. A Status Conference was held on December 1, 1995 and a trial date
was set for December 18, 1995. Numero Uno Franchise Corporation made a motion
to continue the
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trial date which was granted and then after several more continuances, the
plaintiffs and Numero Uno Franchise Corporation entered into a stipulation to
continue the trial date. The matter was settled with Numero Uno Franchise
Corporation agreeing to pay the landlord the sum of $30,000.00 in monthly
installments until approximately mid-1997 for prior rent arrearages and
entering into a new lease for the premises. Upon payment in full, the
plaintiff has agreed to dismiss the action.
12. Brian Moore and Linda Moore vs. Numero Uno Franchise Corporation
and N.U. Pizza Holding Corporation, Orange County Superior Court Case
No.752894. This action was filed on September 18, 1995 for breach of a
Promissory Note and Security Agreement made by the Company to Brilinca
Corporation. The plaintiffs, Brian and Linda Moore, are the assignees of
Brilinca Corporation. The Moores allege that the Company defaulted on amounts
owing to them in the sum of $77,916.51. In addition to Numero Uno Franchise
Corporation, the plaintiffs have sued N. U. Pizza Holding Corporation as
guarantor of Numero Uno Franchise Corporation's obligations. A tentative
settlement was reached with the Moores' attorney, but the Moores did not agree
to the terms. Because the parties were in settlement negotiations, the Court
took the hearing on the Right to Attach Order and the Settlement Conference off
calendar. The Settlement Conference, however, was held on June 28, 1996. The
parties were unable to settle the matter at the Conference and the judge
scheduled a trial date for October 16, 1996. The Company believes that the
matter will eventually be settled for no more than the balance due on the
original Note.
13. Janet Tseng-Law and Ronald E. Law vs. Numero Uno Franchise
Corporation, N.U. Pizza Holding Corporation and Numero Uno Takeout And
Delivery, Inc., Whittier Municipal Court Case No.95C03094. This is an action
for breach of contract for failure of Numero Uno Takeout and Delivery, Inc. to
make payments on a Promissory Note. The plaintiffs are seeking the sum of
$12,603.91. The action was filed on September 28, 1995. An answer was filed
on behalf of Numero Uno Franchise Corporation and N. U. Pizza Holding
Corporation on December 6, 1995. The Company subsequently made a settlement
offer to the plaintiffs but plaintiffs' counsel has not pursued settlement.
Currently the case is dormant. The Company believes that the matter will
eventually be settled for no more than the balance due on the original
Promissory Note.
14. Numero Uno Franchise Corporation vs. John Dino, D.J. Clark, Pro
Form Management Company and James Xanthos, Los Angeles Superior Court Case No.
BC142602. A complaint was filed by Numero Uno Franchise Corporation on January
17, 1996 for damages and injunctive relief for service mark infringement,
dilution of mark, common law trademark and service mark infringement, unfair
competition and breach of contract. James Xanthos, a former franchisee of
Numero Uno, sold his restaurant to the remaining defendants (the "Pro Form
defendants"). Specifically excluded from the assets sold to Pro Form
defendants was the right to use the name Numero Uno. The Pro Form defendants
continued, however, to use the name and Numero Uno's other trademarks. In
addition to filing the complaint, the Company filed an Application for
Temporary Restraining Order and a Preliminary Injunction. The Preliminary
Injunction was granted on February 2, 1996. The Pro Form defendants continued,
however, to use the Numero Uno name and marks. Subsequently, the Company filed
an Application for an Order to Show Cause re Contempt. The Court held the Pro
Form defendants in contempt and issued a bench warrant and ordered the Pro Form
defendants to appear in Court again on April 2, 1996. On March 15, 1996, the
Company filed a Request for Entry of Default against the Pro Form defendants
and default was entered on the same day. The defendants still
10
<PAGE> 12
have not appeared before the Court and the Company intends to file a Request
for Default Judgment in the near future.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANTS, COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
On December 30, 1993, the Company's common stock was authorized for
trading in the over-the-counter market on the "Electronic Bulletin Board" under
the symbol "NUZA." The Company's common stock is not listed on NASDAQ. The
Company's common stock did not start to trade on the over-the-counter market
until January 1995.
The following table shows the range of high and low bid quotations of
the Company's common stock as traded in the over-the-counter market.
<TABLE>
<CAPTION>
High Low High Low
Fiscal Period Bid Bid Fiscal Period Bid Bid
- ------------- --- --- ------------- --- ---
<S> <C> <C> <C> <C> <C>
1996 1995
- ---- ----
First Quarter 0.72 0.25 First Quarter N/A N/A
Second Quarter 0.43 0.16 Second Quarter N/A N/A
Third Quarter 0.34 0.16 Third Quarter 4.50 1.00
Fourth Quarter 0.34 0.22 Fourth Quarter 1.44 0.34
</TABLE>
The above quotations were reported by the National Daily Quotation Service and
were furnished by the National Quotation Bureau, Inc. The quotations represent
prices between dealers, do not include retail markups, markdowns or commissions
and do not necessarily represent prices at which actual transactions were or
could have been effected.
Holders.
As of October 2, 1996, the total number of shareholders was 495.
Dividends.
The Company has not declared any dividends on its common stock since
its inception, and the Company does not anticipate paying dividends in the
foreseeable future.
The Company's Preferred Series B Stock bears a coupon rate of 9%,
which is cumulative. Since the Company has not declared dividends, this amount
is accumulating, and will accumulate until such time as dividends are paid.
11
<PAGE> 13
The Company's Preferred Series C Stock bears a coupon rate of 10%,
which is cumulative and provides an option to convert the Preferred Stock to
Common Stock at $.50 a share. Dividends in arrears totaled $1,800 at June 30,
1996.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED YEAR ENDED
YEAR ENDED YEAR ENDED ------------------- -------------------------------
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JULY 31, 1993 JULY 31, 1992
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Franchise Revenue 1,144,800 743,100 2,387,800 2,329,100 3,009,300
Franchise Operating (1,133,900) (2,055,500) 175,800 (170,400) (300,000)
Income (loss)
Company-owned Restaurant 483,200 3,460,000 2,218,500 697,300 1,550,600
Sales
Company-owned Restaurant (137,500) (1,022,500) (234,400) 23,200 (233,100)
Operating Income (loss)
Net Loss (1,273,800) (2,923,500) (62,600) (152,000) (537,900)
Net Loss per Common
Share (.08) (.29) (.01) (.03) (.09)
Weighted Average Number
of Shares Outstanding 15,420,508 10,203,653 6,186,200 6,020,000 6,020,000
Cash Dividends per
Common Share None None None None None
Total Assets 2,880,300 2,168,800 3,394,900 2,280,700 2,722,500
Long-Term Obligations 783,800 241,600 637,400 285,800 524,100
Stockholders' Equity
(Deficit) 555,300 (160,100) 304,900 327,000 479,000
Working Capital
Deficiency (579,100) (1,396,800) (1,343,900) (865,300) (760,400)
Current Ratio 0.58 0.26 0.34 0.39 0.56
Number of Franchise
Stores 51 44 44 48 48
Number of Company-owned
Stores 4 6 14 0 3
</TABLE>
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This analysis of the Company's financial condition, capital resources
and operating results should be viewed in conjunction with the accompanying
financial statements, including the notes thereto.
Liquidity and Capital Resources.
The Company has not achieved profitability for the past three years
and, as a result, the Company has an accumulated deficit of $4,560,300 and a
working capital deficit of $579,100 at June 30, 1996. There has been a minimal
return on assets.
During the year ended June 30, 1996, the Company's profitability
continued to be negatively impacted by the overall recession and economy of
Southern California and increased competition in the market place from both
national and regional pizza chains. The Company's customer base has still not
recovered from the Northridge earthquake which occurred in January 1994. The
increased competition and decrease in customer base has resulted in lower
chain-wide sales compared to the year ended June 30, 1995, resulting in lower
royalties.
The Company's business is generating negative cash flows from
operations. During the year ended June 30, 1995, the Company developed a
prototype restaurant which stressed quality food and service, an upscale decor
in a casual atmosphere and moderate prices. The community was not receptive to
the new concept. Six Company-owned restaurants, including those that were
converted to the new prototype format, at significant costs, generated
significant negative cash flows, as a result, the locations were sold or closed
during the year ended June 30, 1996 and 1995.
Despite these negative trends, in management's opinion, the Company's
ability to continue as a going concern has improved greatly since June 30, 1995
for the following reasons:
As the Company owns and operates fewer restaurants, the amount of cash
required to support its operations has been substantially reduced.
Accordingly, financial commitments and uncertainties affecting cash flow have
also been reduced.
The Company's cash outflow for capital expenditures was only $10,000
for the year ended June 30, 1996 as compared to $619,700 for the year ended
June 30, 1995. This reduction in capital expenditures is due to the
disposition of the Company's prototype restaurants which were built at a
significant cost in the year ended June 30, 1995. Non-cash capital expenditures
of $1,245,000 incurred in acquiring Company-owned restaurants during the year
ended June 30, 1996 were financed by stock issuances.
The Company has fully repaid its note payable to a bank and has
settled lawsuits which
13
<PAGE> 15
has reduced and extended its long-term debt requirements. During the year
ended June 30, 1996, principal payments on long-term debt totalled $435,200 as
compared to $345,800 during the year ended June 30, 1995. The Company has also
paid officer loans of $116,700.
As of June 30, 1996, the Company's potential defaults on its
obligations totalled $81,100. Payments are currently being made on some of
these obligations and other obligations are the subject of litigation. Since
the Company's cash flow has improved and repayment terms have been established
with most of the Company's creditors, management believes that its defaults
will be minimized and it is unlikely that the Company will default on any
additional obligations.
During the year ended June 30, 1996, the Company has continued to
raise capital through stock offerings ($793,600) and satisfied its debt
obligations through stock issuances ($310,600). Collections on notes
receivable totalled $219,000, an increase of $18,200 for the year ended June
30, 1996, as compared to the year ended June 30, 1995.
Due to the factors discussed above, cash flow has increased
significantly and, in managements's opinion, cash flow should continue to
improve and stabilize in the future.
In June 1996, the Company purchased four new restaurants which are
expected to generate positive cash flow and be profitable. The Company plans
to grow through the acquisition of established restaurant businesses which may
help increase its profitability in the near future. In addition, the Company
recently entered into a non-specific letter of intent to purchase the assets of
an Oregon restaurant chain. The Company will also continue to concentrate on
strengthening its existing franchise base.
Operating Activities.
Advertising receivables decreased $5,700 to $70,600 and accounts
receivable increased $42,400 to $80,200 at June 30, 1996. The increases and
decreases were due to the addition of or write off of several receivables in
conjunction with the purchase, take-over or closure of franchised restaurants.
Inventories decreased $12,000 to $16,800 at June 30, 1996 from $28,800
at June 30, 1995. This decrease was due to the reduction in the number of
Company-owned restaurants at June 30, 1996. At June 30, 1996 the Company
operated three restaurants as compared to six at June 30, 1995.
Prepaid expenses increased $41,000 to $74,800 at June 30, 1996 from
$33,800 at June 30, 1995. The increase is due to the acquisition of four
Company-owned restaurants in June 1996. Also, the Company has prepaid legal
fees of $21,400.
Intangible assets decreased $60,000 to $120,000 at June 30, 1996 as a
result of amortization. The intangible assets consisted of licensing rights to
pizza dough recipes. The dough recipe rights are being amortized over a five
year period.
Accounts payable and accrued expenses decreased $67,500 to $576,400
at June 30, 1996. This decrease is due to the conversion of $38,500 of
accounts payable to a note payable,
14
<PAGE> 16
the conversion of $153,600 of accounts payable to equity and $71,000 of
accounts payable were forgiven by a creditor. These decreases are offset by an
increase in accrued payroll of $195,600 representing deferred salary of the
president of the Company.
The Company has accrued a litigation settlement of $495,800 at June
30, 1996. The liability arose when the Company agreed to pay an irrevocable
consulting fee of $500,000 to a plaintiff vendor. The obligation is payable in
monthly installments of approximately $4,200 for ten years. The initial
monthly payment, under the terms of the settlement agreement, was made in June,
1996.
Deferred franchise fees decreased $33,900. The Company received
$25,000 for an international licensing agreement for Indonesia. This increase
is offset by the recognition of $58,900 of previously deferred franchise fees.
Investing Activities.
Notes receivable decreased $363,300 from $947,500 at June 30, 1995 to
$584,200 at June 30, 1996. This decrease is due to the collection of $219,000
of principal payments on outstanding notes and $188,000 of Company notes
receivable assumed by new franchisees when they purchased restaurant franchises
from the original franchisee. These decreases are offset by an increase of
$12,700 due to a new loan made, an $87,400 note assumed in exchange for
accounts receivable and $477,500 of new notes made in connection with the sales
of Company-owned restaurants. Notes receivable of $486,300 were written off
and a additional $47,600 was reserved during the current year.
Fixed assets increased $845,300 from $1,020,600 at June 30, 1995 to
$1,865,900 at June 30, 1996 primarily due to the acquisition of four
Company-owned restaurants in June 1996, totaling $1,245,000. The Company also
purchased $10,000 in additional fixed assets during the year ended June 30,
1996. A $409,800 offsetting decrease is due primarily to the sale and closure,
during the first and second quarters of the year ended June 30, 1996, of six
Company-owned restaurants.
Financing Activities.
Note payable to bank and long term debt decreased $305,800 to $969,100
at June 30, 1996 from $1,274,900 at June 30, 1995. The Company received a loan
of $10,000 during the year ended June 30, 1996, converted $38,500 in accounts
payable to a note payable, and financed $348,100 in connection with the
purchase of four Company-owned restaurants. These increases were offset by the
conversion of a $135,600 note payable to equity, cash payments of $435,200 on
loan obligations and forgiveness of debt of $131,600.
Common stock increased $9,800 to $24,000 at June 30, 1996 from $14,200
at June 30, 1995. Additional paid in capital increased $2,119,400 to
$5,429,200 at June 30, 1996 from $3.309,800 at June 30, 1995. The increase was
due to the raising of $793,600 of capital through Regulation S offerings, the
conversion of $310,600 of debt to equity and $1,025,000 of stock issuances in
connection with the purchases of four Company-owned restaurants in June, 1996.
15
<PAGE> 17
Results of Operations
Year Ended June 30, 1996
Compared to the Year Ended June 30, 1995.
Franchise Operations.
Franchise fees decreased $177,700 to $63,900 or 73.6% compared to the
year ended June 30, 1995. The decrease resulted from higher fees earned
during the year ended June 30, 1995 due to the opening of two international
units, one in Kuwait and one in Korea.
Royalties decreased $198,300 to $612,400 or 24.5% compared to
royalties earned of $810,700 during the year ended June 30, 1995. The decrease
was due primarily to the Company operating a higher number of restaurants
during the year ended June 30, 1995, a reduction in royalty percentages charged
franchisees and the closing of a greater number of franchised restaurants
during the year ended June 30, 1996.
Rental income decreased $ 138,400 to $163,900 or 45.8% as compared to
rental income of $302,300 during the year ended June 30, 1995. The decrease is
due to the majority of earned the Company's sublessees having negotiated their
own leases directly with landlords instead of paying their rent to the Company.
Historically, the Company's only source of rental income was from franchisees
who purchased restaurants that were previously owned by the Company and from
independent business owners who became sublessees of the Company when a
Company-owned restaurant was sold or closed. The Company, who remained
obligated on the leases, would collect rent from the franchisees or independent
business owners (subleases) and pay it directly to lessors. This trend of
decreased rental income is expected to continue in future periods.
During the year ended June 30, 1996, interest income increased $30,200
to $84,700 or 55.4% compared to interest income earned of $54,500 during the
year ended June 30, 1995. This increase is due primarily to collectible
accrued interest on notes receivable assumed or taken back during the current
year.
Rebate income decreased $36,100 to $178,500 or 16.8% during the year
ended June 30, 1996 compared to rebate income earned of $214,600 during the
year ended June 30, 1995. The decrease is attributed to lower sales during the
current year.
The Company had $192,900 of forgiveness of debt income during the year
ended June 30, 1996. The Company paid $150,200 of its loan balance to a bank
and the unpaid balance of $29,500 was forgiven by the bank, the remaining
$163,400 of forgiveness of debt income recognized was related to amounts due to
various note holders and vendors.
The Company recognized $177,900 of losses from the sale or closure of
six Company-owned restaurants during the year ended June 30, 1996. During the
year ended June 30, 1995, the Company incurred $880,600 of losses on the
closure of five and the sale of eight Company-owned restaurants and its
centralized phone center. The restaurants were closed in both years
16
<PAGE> 18
due to poor operating performance.
General and administrative expenses consist of corporate payroll and
related benefits, insurance, professional fees, license fees, depreciation and
amortization. Administrative expenses decreased $354,100 to $989,100 or 26.4%
compared to $1,343,200 for the year ended June 30, 1995. The decrease was due
to reduced corporate payroll resulting from restaurant dispositions (only six
employees for ten months of the year ended June 30, 1996). This decrease was
offset by legal expenses of approximately $206,000 incurred in defending
lawsuits against the Company.
Bad debt expense increased $ 22,000 to $410,600 due to the continued
writeoff of uncollectible franchisee notes and accounts receivable in the year
ended June 30, 1996.
Consulting expense decreased $552,900 to $39,600 or 93.3% during the
year ended June 30, 1996 compared to consulting expense of $592,500 during the
year ended June 30, 1995. During the year ended June 30, 1995, the Company
entered into significant consulting agreements in exchange for common stock.
Interest expense decreased $62,500 to $73,800 or 45.9% as compared to
$136,300 during the year ended June 30, 1996. The decrease resulted from the
repayment of notes payable during the current year. There were no significant
additions to notes payable until June, 1996.
During the year ending June 30, 1996 the Company settled a lawsuit by
agreeing to pay the plaintiff an irrevocable consulting fee of $500,000 payable
in monthly installments of $4,166.67 for a period of ten years commencing June
15, 1996. The Company also expects to settle a lawsuit during the year ended
June 30, 1997 whereby the Company will be ordered to pay the plaintiff no more
than $19,000, this amount has been accrued at June 30, 1996.
Company-owned Restaurant Operations.
Sales decreased 86.0% or $2,976,800 to $483,200 in the year ended June
30, 1996 as compared to sales of $3,460,000 during the year ended June 30,
1995. The decrease resulted from the sale and closure of six Company-owned
restaurants in the first two quarters of the year ended June 30, 1996.
As a result of restaurant closures, gross profit decreased $1,564,700
or 83.0% from $1,885,600 during the year ended June 30, 1995 to $320,900 during
the year ended June 30, 1996. Gross profit, as a percentage of sales,
increased to 11.9% from 54.5% to 66.4% in the year ended June 30, 1996. The
increase was due to the closure of new upscale prototype restaurants featuring
quality food and service at moderate prices. The menu featured dishes with a
higher cost, ie. shrimp and pesto.
Operating expenses decreased 85.1% or $1,523,700 from $1,790,300
during the year ended June 30, 1995 to $266,600 during the year ended June 30,
1996, as a result of restaurant closures.
General and Administrative expenses consist mostly of advertising,
rent, depreciation and
17
<PAGE> 19
property taxes. General and administrative expenses decreased $926,000 to
$191,800 or 82.9% during the year ended June 30, 1996 as compared to
$1,117,800 in the year ended June 30, 1995. The decrease is due to the closure
of Company-owned restaurants in the first two quarters of the year ended June
30, 1996. Company-owned restaurants generated high administrative expenses
when they were in operation.
Year ended June 30, 1995
Compared to the Eleven Months Ended June 30, 1994.
Franchise Operations.
Initial franchise fees increased $168,100 or 229.0% as compared to the
eleven months ended June 30, 1994. This increase was due to the opening of two
international units, one in Kuwait and one in Korea during the year ended June
30, 1995.
Royalties decreased $256,200 or 24.0% compared to annualized royalties
of $1,066,900 in the eleven months ended June 30, 1994. The decrease was due
primarily to the Company operating a higher number of restaurants as
Company-owned instead of franchised restaurants during the year ended June 30,
1995.
Rental income decreased $540,200 or 64.0% compared to annualized
rental income of $842,500 for the eleven months ended June 30, 1994 due to the
majority of the Company's sublessees having negotiated their own leases
directly with landlords instead of paying their rent through the Company.
Historically, the Company's only source of rental income was from franchisees
who purchased restaurants that were previously owned by the Company and from
independent business owners who became sublessees of the Company when a
Company-owned restaurant was sold or closed. The Company, who remained
obligated on the lease, would collect rent from the franchisees or independent
business owners (subleases) and pay it directly to lessors. This trend of
decreased rental income is expected to continue in future periods.
Interest income during the year ended June 30, 1995 decreased $27,300
to $54,500, or 33.4%, from $81,800 for the eleven months ended June 30, 1994.
This decrease is primarily due to uncollectible notes receivable since the
Company does not accrue interest income on notes receivable that are more than
six months in arrears.
The Company incurred $880,600 of losses on the closure of five and
sale of eight Company-owned restaurants and the centralized phone center. The
restaurants were closed due to poor performance.
General and administrative expenses consist of corporate payroll and
related benefits, insurance, professional fees, license fees, deprecation and
amortization. Administrative expenses remained virtually the same compared to
annualized expenses in the eleven months ended June 30, 1994.
Bad debt expense of $388,600 was charged to operations due to the
closure of several franchised restaurants. The franchised restaurants closed
due to poor performance.
18
<PAGE> 20
Consulting fees increased $592,500 for the year ending June 30, 1995.
This increase is due primarily to consulting agreements entered into by the
Company in exchange for common stock.
Interest expense increased $64,100 due to the increase in notes
payable in conjunction with the purchase of five Company-owned restaurants.
Company-owned Restaurant Operations.
Sales increased 42.9% to $3,460,000 in the year ended June 30, 1995
compared to annualized sales of $2,420,800 in the eleven months ended June 30,
1994. The increase resulted from the Company's operating 14 restaurants for
the majority of the year. Most of the sales and closure of Company-owned
restaurants took place in the last quarter of the year ended June 30, 1995.
The Company entered the eleven months ended June 30, 1994 with no Company-owned
restaurants and acquired most of its restaurants during the second and third
quarters of the year ended June 30, 1995.
Gross profit, as a percentage of sales, decreased to 54.5% in the year
ended June 30, 1995 from 72.0% during the eleven months ended June 30, 1994.
The decrease was due to the development of a new upscale prototype restaurant
featuring quality food and quality service at moderate prices. The menu
featured dishes with a higher cost, ie. shrimp and pesto. The menu's moderate
prices however, resulted in higher cost of sales.
Cost of sales as a percentage of sales, decreased to 45.5% during the
year ended June 30, 1995 from 28.0% during the eleven months ended June 30,
1994. The increase was due to the introduction of higher priced ingredients in
conjunction with the development of a new upscale prototype.
Operating expenses as a percentage of sales decreased to 51.7% during
the year ended June 30, 1995 from 59.7% in the eleven months ended June 30,
1994. The decrease was due primarily to changing from a time share main frame
accounting system to an in-house personal computer accounting system.
General and administrative expenses consist mostly of advertising,
rent, depreciation and property taxes. General and administrative expenses
increased $610,200 to 32.3% as a percentage of sales during the year ended June
30, 1995 compared to 22.9% in the eleven months ended June 30, 1994. The
increase is primarily due to higher expenses and a per unit sales decrease. The
increase is also due to the current year increase in Company-owned restaurants
which resulted in higher rent expense than in the previous years.
President's Comments
During the year ended June 30, 1996, the Company showed dramatic
improvement. The Company was able to implement and complete its short-term
strategic plan. The objectives of the strategic plan were as follows: stop
negative cash flow; dispose of all unprofitable or under-performing
Company-owned restaurants; and strengthen the financial position of the Company
19
<PAGE> 21
through the payment of most long-term debt obligations or conversion of such
long-term debt to equity.
Having achieved its short-term objectives, the Company is now
concentrating its efforts to develop the Numero Uno concept of the future and
to achieve rapid growth, enhanced revenues and profitability. The Company has
purchased three existing Numero Uno franchised restaurants and one independent
restaurant which it intends to convert and remodel. The Company is now
operating three of the locations as Company-owned restaurants. The fourth
restaurant is scheduled to open in November 1996. The three operating
restaurants are meeting or exceeding the Company's sales projections, are
producing positive cash flow and are profitable.
The Company has entered into a non-specific letter of intent to
purchase the assets of the restaurant chain known as Oregon's Original Sandwich
Express and Bakery ("Sandwich Express"). Upon execution of the definitive
agreement, the Company intends to retrofit the Sandwich Express chain into a
dual concept.
The concept will be limited service, waiter assisted, sit-down
restaurants featuring Numero Uno's award winning thick and thin crust pizza,
pastas and salads, as well as specialty sandwiches and bread products. This
represents an excellent opportunity to increase sales as 80% of Sandwich
Express' sales are derived from lunch business and approximately 80% of Numero
Uno's business is derived from evening business. Furthermore, the menus
complement each other as Numero Uno's cuisine appeals to customers during
Spring, Fall and Winter months and Sandwich Express' fare is popular during
Spring and Summer months.
The name for the new concept has already been registered and the
prototype plan developed. Management believes that the revenues of the
proposed acquired Sandwich Express restaurants will increase dramatically and
that the new concept will generate sales in excess of industry averages. The
Company will begin developing Company-owned restaurants and selling individual
and territorial franchises outside the State of California as soon as the
definitive agreement is executed.
The international marketplace has grown more rapidly than the Company
expected; we now have ten restaurants open and operating in South Korea, four
in Kuwait and one in China. We expect four more restaurants to open in Korea
and at least two in Kuwait during the year ending June 30, 1997. In addition,
a licensing agreement was sold for Indonesia and one restaurant is expected to
open in December 1996.
The new Company-owned restaurants, the pending proposed acquisition of
Sandwich Express and the rapidly expanding international marketplace leads
Management to believe that the Company will have profitable operations for the
year ending June 30, 1997.
For the year ended June 30, 1996, the Company would have achieved
break even operations or been marginally profitable had it not been for the
significant legal expenses incurred corporately (for matters settled and
outstanding), and in connection with the proposed acquisition of Sandwich
Express. The Company also charged off or wrote down certain assets to net
realizable value during the year ended June 30, 1996. As a result, the Company
20
<PAGE> 22
experienced a higher than expected net loss. Despite these significant
charges, there was approximately a $1,650,000 reduction in net loss.
Management feels that the Company is in its best position since the
late 1980's. The Company is ready to achieve ongoing profitability and rapid
growth.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and related financial information required to
be filed hereunder are indexed on Page F-1 of this report and are incorporated
herein by reference.
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and other significant employees of the Company
are listed below, together with certain information concerning them. None of
the executive officers or other significant employees have an employment
agreement.
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
Ronald J. Gelet 53 Chairman of the Board, President of the Company
and affiliated companies.
Gloria Gelet 48 Director
</TABLE>
Business Experience.
The following is a brief account of the business experience during the
last five years of the Company's directors and executive officers:
Ronald J. Gelet. Mr. Gelet is the founder of the Numero Uno Pizzeria
and Italian Restaurant concept. He serves as Chairman of the Board and
President of N.U. Pizza Holding
21
<PAGE> 23
Corporation and the affiliated companies, Numero Uno Franchise Corporation and
Numero Uno, Inc. Mr. Gelet has 25 years of extensive entrepreneurial and
management experience in the restaurant business. Mr. Gelet attended the
University of Wisconsin-Madison, where he received a Bachelor of Arts degree.
Gloria A. Gelet, Mrs. Gelet is the Advertising Director of the Company
and is the spouse of Ronald J. Gelet, the founder of the Numero Uno Pizzeria
and Italian Restaurant concept. Mrs. Gelet has 20 years experience in
marketing and management in the restaurant franchising industry and has been
employed by the Company since 1984 as a marketing consultant and currently is
the Advertising Director.
ITEM 11. EXECUTIVE COMPENSATION.
The following table shows all cash compensation incurred by the
Company for services rendered during the fiscal year ended June 30, 1996, to
each of the Company's directors and executive officers, and to all executive
officers as a group:
<TABLE>
<CAPTION>
Name Office Cash Compensation
- ---- ------ -----------------
<S> <C> <C>
Ronald J. Gelet President $213,200
Gloria Gelet Advertising Director $ 45,400
All Executive Officers
as a Group (2 persons) $258,600
</TABLE>
In addition, $17,500 was paid for Mr. Gelet's family medical insurance.
Compensation Under Plans.
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
<TABLE>
<CAPTION>
Name Office Amount Percentage
- ---- ------ ------ ----------
<S> <C> <C> <C>
Ronald J. Gelet (1) President and Director 5,093,200 18.5%
1336 Via Mill Cumbres
Solana Beach, California
Numero Uno
Development Inc. Gelet Family Trust 774,072 2.8%
722 Genevieve Street #G
Solana Beach, California
</TABLE>
(1) Includes 100,000 shares held by the Joseph James Gelet Trust for the
benefit of Mr. Gelet's
22
<PAGE> 24
son. In addition, Gloria Gelet is a beneficial owner of Mr. Gelet's stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Ronald J. Gelet, President of the Company, as owner of the secret
recipe for proprietary pizza dough assigned his rights as part of a divorce
settlement to receive a licensing fee of 8 cents per pound from the
manufacturer for purchases of the pizza dough made by the Company and its
franchisees during the year ended June 30, 1995. Mr. Gelet continues to
receive revenue pursuant to an exclusivity agreement with the Company. Income
from the Company is in consideration for the exclusive use of his dough
products and recipes in designated territories. Such fee is calculated at two
cents per pound of dough purchased by the Company and its franchisees.
Mr. Gelet converted $522,900 of his debt to the Company to common
stock during year ended June 30, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K.
(a)(1) Financial Statements. Reference is made to the Index to Financial
Statements of the Company on page F-1 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedule. The following financial schedule is
submitted herewith:
Schedule II-Valuation and Qualifying Accounts F-40
All other schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the financial statements
or notes thereto.
(a)(3) Exhibits. The following documents are exhibits to this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
Number Description
- ------ -----------------------------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of Gelet Enterprises, Inc. dated *
August 28, 1981 filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1994.
3.2 Certificate of Amendment of Articles of Incorporation of *
</TABLE>
23
<PAGE> 25
<TABLE>
<S> <C> <C>
Gelet Enterprises, Inc. dated March 24, 1988 filed
as Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1994.
3.3 By-Laws of Gelet Enterprises, Inc. 9/9/81 filed as Exhibit *
3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30,1994.
3.4 First Amendment to the By-Laws of Gelet Enterprises Inc. dated *
February 18, 1988 filed as Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
3.5 Certificate of Amendment of Articles of Incorporation, dated *
March 11, 1993 filed as Exhibit 3.5 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
3.6 Certificate of Name Change, dated March 11, 1993 filed as *
Exhibit 3.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994.
3.7 Certificate of Amendment of Articles of Incorporation, dated *
April 9,1994 filed as Exhibit 3.7 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1994.
3.8 Articles of Merger of Woodbury, Inc. into N.U. Pizza Holding *
Corporation filed April 19, 1994 filed as Exhibit 3.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994.
3.9 Certificate of Amendment of Articles of Incorporation of Numero *
Uno Holding Corporation filed April 27, 1993 filed as Exhibit 3.9
to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994.
3.10 Certificate of Name Change dated April 27, 1993 filed as Exhibit *
3.10 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994.
3.11 Certificate of Amendment of Articles of Incorporation of N.U. *
Pizza Holding Corporation filed May 6, 1994 filed as Exhibit
3.11 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994.
10.1 Full Service Franchise Agreement filed as Exhibit 10.1 to the *
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994.
</TABLE>
24
<PAGE> 26
<TABLE>
<S> <C> <C>
10.2 Take-Out and Delivery Franchise Agreement filed as Exhibit 10.2 *
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994.
10.3 Dough Exclusivity Agreement between N.U. Pizza Holding *
Corporation and Ronald J. Gelet filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1994.
22.1 List of Subsidiaries.
</TABLE>
* By this reference incorporated herein and made a part hereof.
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, there unto duly authorized, in the City of
Van Nuys, State of California on October 10, 1996.
Date: October 10, 1996
N.U. Pizza Holding Corporation
By:/s/ RONALD J. GELET
-------------------------------
Ronald J. Gelet, President
Pursuant to requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
October 10, 1996 /s/
-----------------------------
Ronald J. Gelet
Director, President, Chief Executive
Officer, Chief Financial and Accounting
Officer
October 10, 1996 /s/
-----------------------------
Gloria Gelet
Director
October 10, 1996 /s/
-----------------------------
Dan Rouse
Director
26
<PAGE> 28
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1996 and 1995 and
Eleven Months Ended June 30, 1994
<TABLE>
<CAPTION>
Page
------
<S> <C>
Independent Auditor's Report F-2
Consolidated Balance Sheets, June 30, 1996 and 1995 F-4
Consolidated Statements of Operations, Years Ended
June 30, 1996 and 1995 and Eleven Months Ended
June 30, 1994 F-6
Consolidated Statements of Stockholders' Equity (Deficit),
Years Ended June 30, 1996 and 1995 and Eleven Months
Ended June 30, 1994 F-8
Consolidated Statements of Cash Flows, Years Ended
June 30, 1996 and 1995 and Eleven Months Ended
June 30, 1994 F-9
Notes to Consolidated Financial Statements F-12
</TABLE>
F-1
<PAGE> 29
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
N. U. Pizza Holding Corporation and Subsidiaries
I have audited the accompanying consolidated balance sheets of
N. U. Pizza Holding Corporation and Subsidiaries as of June 30, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended June 30, 1996 and 1995
and the eleven months ended June 30, 1994. I have also audited the
consolidated financial statement schedule listed in the index at Item 14.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. I believe that my audits
provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of N. U. Pizza
Holding Corporation and Subsidiaries as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for the years ended June 30,
1996 and 1995 and the eleven months ended June 30, 1994, in conformity with
generally accepted accounting principles. Also, in my opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
F-2
<PAGE> 30
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has suffered
recurring losses from operations and has negative working capital at June 30,
1996. As discussed in Note 1 to the consolidated financial statements, these
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Bennett Block Accountancy Corporation
Los Angeles, California
September 19, 1996
F-3
<PAGE> 31
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 255,100 $ 15,100
Restricted cash 44,900 11,800
Franchisee advertising receivable 70,600 76,300
Receivables, net of allowance for
doubtful accounts of $48,000 and
$86,600, respectively 80,200 37,800
Current portion of notes receivable,
net of allowance for possible future
losses of $547,300 and $499,700,
respectively 254,800 288,100
Inventories 16,800 28,800
Prepaid expenses 74,800 33,800
---------- ----------
Total current assets 797,200 491,700
---------- ----------
Other assets:
Notes receivable, net of current
portion 329,400 659,400
Intangibles assets, net of accumulated
amortization of $180,000 and $120,000,
respectively 120,000 180,000
Deposits and other assets 21,800 48,700
471,200 888,100
---------- ----------
Leasehold improvements, property and
equipment and construction in progress,
net of accumulated depreciation and
amortization 1,611,900 789,000
---------- ----------
$2,880,300 $2,168,800
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 32
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable to bank $ - $ 179,700
Current portion of long-term debt 631,100 853,600
Accounts payable and accrued expenses 576,400 643,900
Accrued franchise advertising 115,500 88,100
Current portion - accrued litigation
settlement 50,000 -
Loans payable to officer 3,300 120,000
Income taxes payable - 3,200
---------- ----------
Total current liabilities 1,376,300 1,888,500
---------- ----------
Long-term debt, net of current portion 338,000 241,600
Accrued litigation settlement, net
of current portion 445,800 -
Deferred franchise fee income 164,900 198,800
Commitments and contingencies - -
Stockholders' equity (deficit):
Preferred stock, Series B, $.10 par
value per share, authorized 10,000,000
shares, 80,000 shares issued and
outstanding (aggregate liquidation
preference $400,000) 8,000 8,000
Preferred stock, Series C, $.10 par
value per share, authorized 44,000
shares, 44,000 shares issued and
outstanding (aggregate liquidation
preference $220,000) 4,400 4,400
Common stock, $.001 par value per
share, authorized 50,000,000 shares,
issued, subscribed and outstanding
24,039,008, and 14,223,954,
respectively 24,000 14,200
Additional paid-in capital 5,429,200 3,309,800
Notes receivable arising from stock
purchase agreements (350,000) (210,000)
Accumulated deficit (4,560,300) (3,286,500)
---------- ----------
555,300 (160,100)
---------- ----------
$2,880,300 $2,168,800
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 33
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
ELEVEN MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
FRANCHISE OPERATIONS:
REVENUES:
Initial franchise fees $ 63,900 $ 241,600 $ 73,500
Royalties 612,400 810,700 978,000
Rental income 163,900 302,300 772,300
Interest income 84,700 54,500 81,800
Licensing fees - - 212,700
Rebate income 178,500 214,600 205,700
Other income 26,400 - 26,600
Forgiveness of debt 192,900 - -
(Loss) gain on sales of
restaurants and equipment (177,900) (880,600) 37,200
---------- ---------- ----------
1,144,800 743,100 2,387,800
---------- ---------- ----------
COSTS AND EXPENSES:
Rent 246,600 338,000 865,200
General and administrative 989,100 1,343,200 1,274,600
Bad debt expense 410,600 388,600 -
Consulting 39,600 592,500 -
Interest expense 73,800 136,300 72,200
Litigation settlements 519,000 - -
---------- ---------- ----------
2,278,700 2,798,600 2,212,000
---------- ---------- ----------
Franchise operating (loss)
income (1,133,900) (2,055,500) 175,800
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 34
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
ELEVEN MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
COMPANY-OWNED RESTAURANT
OPERATIONS:
Sales $ 483,200 $ 3,460,000 $ 2,218,500
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 162,300 1,574,400 620,100
Operating 266,600 1,790,300 1,325,200
General and administrative 191,800 1,117,800 507,600
----------- ----------- -----------
620,700 4,482,500 2,452,900
----------- ----------- -----------
Company-owned restaurant
loss (137,500) (1,022,500) (234,400)
----------- ----------- -----------
Loss before income
tax provision (benefit) (1,271,400) (3,078,000) (58,600)
Income tax provision
(benefit) 2,400 (154,500) 4,000
----------- ----------- -----------
Net loss $(1,273,800) $(2,923,500) $ (62,600)
=========== =========== ===========
Net loss per share $ (.08) $ (.29) $ (.01)
=========== =========== ===========
Weighted average number of
shares outstanding 15,420,508 10,203,653 6,186,200
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 35
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
ELEVEN MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
Preferred Stock
Common Stock Series B & C
---------------------------------- -----------------------
Shares Note
Issued, Sub- issued Shares Additional
scribed and for shares Issued and Paid-in Accumulated
Outstanding Par Value Subscribed Outstanding Par Value Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 1, 1993 * 6,020,000 $ 6,000 $ - - - $ 621,400 $ (300,400) $ 327,000
Common shares issued * 1,982,700 2,000 - - - 30,500 - 32,500
Preferred shares issued - - - 80,000 $ 8,000 - - 8,000
Net loss - - - - - - (62,600) (62,600)
----------- ------- --------- ------- ------- ---------- ----------- -----------
Balance, June 30, 1994 * 8,002,700 8,000 - 80,000 8,000 651,900 (363,000) 304,900
Common shares issued
and subscribed 6,221,254 6,200 $(210,000) - - 2,618,300 - 2,414,500
Preferred shares issued - - - 44,000 4,400 39,600 - 44,000
Net loss - - - - - - (2,923,500) (2,923,500)
----------- ------- --------- ------- ------- ---------- ----------- -----------
Balance, June 30, 1995 14,223,954 14,200 (210,000) 124,000 12,400 3,309,800 (3,286,500) (160,100)
Common shares issued and sub-
scribed, net of uncollectible
subscriptions of $210,000
(Note 4) 9,815,054 9,800 (140,000) - - 2,119,400 - 1,989,200
Net loss - - - - - (1,273,800) (1,273,800)
----------- ------- --------- ------- ------- ---------- ----------- -----------
Balance, June 30, 1996 24,039,008 $24,000 $(350,000) 124,000 $12,400 $5,429,200 $(4,560,300) $ 555,300
=========== ======= ========= ======= ======= ========== =========== ===========
</TABLE>
* Share amounts restated to reflect recapitalization with Woodbury, Inc.
in April 1994.
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 36
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
ELEVEN MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $(1,273,800) $(2,923,500) $ (62,600)
Adjustments to reconcile
net loss to net cash
(used) provided by
operating activities:
Depreciation and
amortization 157,900 325,300 201,800
Gain on sale of
restaurants and
equipment (13,900) (125,100) (37,200)
Loss on sale of
restaurants and
equipment 191,800 1,005,700 -
Litigation settlements 519,000 - -
Forgiveness of debt (192,900) - -
Realization of deferred
income (58,900) (210,800) (212,700)
Stock issued for
consulting services - 592,500 -
Unamortized intangible
asset written off - 133,000 -
Provision for doubtful
receivables 410,700 388,600 -
(Decrease) increase in
income taxes payable - (153,700) 16,900
Changes in assets
and liabilities:
Receivables, net (158,300) 46,500 (425,900)
Inventories 12,000 41,000 (69,800)
Prepaid expenses and
other current assets (6,100) (8,000) (49,600)
Accounts payable and
accrued expenses 162,700 267,200 292,300
Deferred franchise
fee income 25,000 (1,200) 369,900
Income taxes payable (3,200) (800) 800
---------- ---------- ---------
Net cash (used)
provided by
operating activities (228,000) (623,300) 23,900
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 37
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
ELEVEN MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from investing
activities:
Additions to notes
receivable $ (12,700) $ (318,400) $ (138,500)
Collections on notes
receivable 219,000 200,800 132,000
Proceeds from sale of
restaurants and equipment - 142,500 -
Capital expenditures (10,000) (619,700) (9,500)
---------- ---------- ----------
Net cash provided (used)
by investing activities 196,300 (594,800) (16,000)
---------- ---------- ----------
Cash flows from financing
activities:
Increase (decrease) in
loans payable to officer (116,700) 130,500 185,900
Increase in notes payable 10,000 107,400 -
Principal payments on
long-term debt (435,200) (345,800) (232,800)
Collections of subscription
notes receivable 20,000 - -
Proceeds from issuance of
common stock 793,600 1,301,900 32,500
Proceeds from issuance of
preferred stock - - 8,000
---------- ---------- ----------
Net cash provided (used)
by financing activities 271,700 1,194,000 (6,400)
---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents 240,000 (24,100) 1,500
Cash and cash equivalents,
beginning of period 15,100 39,200 37,700
---------- ---------- ----------
Cash and cash equivalents,
end of period $ 255,100 $ 15,100 $ 39,200
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 38
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
ELEVEN MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental information:
Cash paid for interest $ 73,800 $103,200 $ 81,300
Cash paid for taxes 3,200 4,000 -
Non-cash transactions:
Forgiveness of receivables
in exchange for fixed
assets $ 151,700 $227,800 $722,600
Forgiveness of debt -
advertising fees - - 92,700
Notes receivable issued
in exchange for accounts
receivable 87,400 - -
Notes receivable issued
for stock 140,000 210,000 -
Notes receivable issued
for fixed assets 477,500 - -
Assumption of liabilities
in exchange for intangible
assets - - 190,000
Note payable issued in
exchange for accounts
payable 38,500 - -
Issuance of stock in
exchange for fixed assets 1,245,000 230,600 778,400
Conversion of debt to
equity 310,600 566,900 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 39
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
During the year ended June 30, 1996, the Company's profitability continued to
be negatively impacted by depressed economic conditions which continue to exist
within the economy of Southern California and increased competition in the
market place from both national and regional pizza chains. These trends have
had a negative impact on the Company's operations since 1994. As a result, the
Company has an accumulated deficit of $4,560,300 and a working capital deficit
of $579,100 at June 30, 1996.
During the year ended June 30, 1995, the Company was forced to take back many
previously sold restaurants because, in many cases, the Company remained
obligated as the lessee on the restaurant location. The operation of these
restaurants, as well as losses recognized on uncollectible notes receivable
from franchisees, forced the Company to incur a significant operating loss of
$3,078,000.
In the year ended June 30, 1996, the Company reduced its operating losses by
approximately $1,800,000 to $1,271,400. This was achieved by substantially
reducing operating costs, through the planned sale and closure of
underperforming and unprofitable Company-owned restaurant locations and the
renegotiation of restaurant location lease commitments. The Company also
reduced its liabilities by the payment of obligations from improved cash flow
and the conversion of debt to equity through the issuance of common stock.
Management has both short-term and long-term operating and financial plans to
correct its working capital deficit and to provide the working capital
necessary to fund operations.
Management's plans are threefold. First, to own and operate only profitable
Company-owned restaurants. As the Company has sold or closed its unprofitable
locations and now owns and operates fewer locations, the amount of cash
required to support this segment of its operations has been substantially
reduced.
Secondly, the Company intends to expand its franchising operations
internationally as there is worldwide demand for its products. The Company
already has franchises in two Asian countries and Kuwait, which will be opening
additional locations, and has sold a licensing agreement for Indonesia with
plans to open a location in October 1996.
F-12
<PAGE> 40
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
Thirdly, the Company plans to grow through the acquisition of established
restaurant businesses which may help increase its profitability in the near
future. The Company recently entered into a non-specific letter of intent to
purchase the assets of an Oregon restaurant chain.
It is not possible to predict the success of management's subsequent efforts.
If management is unable to achieve its goals, the Company will find it
necessary to undertake actions as may be appropriate to continue operations and
meet its commitments such as raising capital through additional stock issuances
or debt financing.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of the recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
2. Organization
N. U. Pizza Holding Corporation and Subsidiaries (the "Company") was
incorporated in Nevada in 1981 as Gelet Enterprises, Inc. In April 1993, Gelet
Enterprises, Inc. changed its name to N. U. Pizza Holding Corporation. On
April 19, 1994, N. U. Pizza Holding Corporation acquired Woodbury, Inc. in a
reverse merger. The Company has several wholly-owned subsidiaries, including
Numero Uno, Inc., which was incorporated in 1973 to own and operate
restaurants, and Numero Uno Franchise Corporation, which was incorporated in
1975 to franchise Numero Uno Pizzeria restaurants. All Company-owned
restaurants and most of the franchises are located in Southern California.
F-13
<PAGE> 41
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Organization (continued)
Franchised and Company-owned restaurants for the years ended June 30, 1996 and
1995 and the eleven months ended June 30, 1994 are as follows:
<TABLE>
<CAPTION>
Franchised Company-owned
Restaurants Restaurants
------------- -------------
<S> <C> <C>
Balance - July 1, 1993 48 0
Opened or purchased 19 16
Sold to or taken over
by the Company (16) 0
Closed or terminated (7) (2)
----- -----
Balance - June 30, 1994 44 14
Opened or purchased 11 5
Sold to or taken over
by the Company (5) 0
Sold to franchisees 0 (8)
Closed or terminated (6) (5)
----- -----
Balance - June 30, 1995 44 6
Opened or purchased 17 4
Sold to or taken over
by the Company (3) 0
Sold to franchisees 0 (5)
Closed or terminated (7) (1)
----- -----
Balance - June 30, 1996 51 4
===== =====
</TABLE>
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of N. U. Pizza
Holding Corporation and its wholly-owned subsidiaries, Numero Uno Franchise
Corporation, Numero Uno, Inc., and Westwood Pizzerias, Inc.
F-14
<PAGE> 42
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Franchise Operations
The Company recognizes fifty percent of revenue earned from the sale of all
individual and area franchises at the opening of each restaurant. The balance
of the revenue is recognized over the sixty month period subsequent to the
opening of the restaurant.
Management is also committed and obligated to provide certain supervisory
functions to franchisees over the sixty months subsequent to the execution of
the licensing agreement.
Royalty Fees
Royalties are charged to most franchisees based upon either a percentage of
gross receipts or a fixed fee, depending on the terms of the individual
franchise agreement, and are recognized as earned. During the years ended June
30, 1996 and 1995, in order to sell some Company-owned restaurants, the
Company enticed potential buyers by offering to reduce, defer, or in one case,
eliminate royalties.
Advertising Fees
An advertising fee is charged and billed to franchisees as either a percentage
of gross receipts or as a fixed fee, depending on the terms of the individual
franchise agreement. This fee is collected for use in creating, developing and
purchasing local, regional and national advertising, public relations and
promotional campaigns. Any unexpended advertising fees collected are deposited
in a restricted bank account and recorded, along with uncollected advertising
receivables, as a current liability.
F-15
<PAGE> 43
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Advertising Fees (continued)
During the year ended June 30, 1996, the Company experienced difficulties
collecting agreed upon advertising fees from most of its franchisees.
Accordingly, the Company wrote off advertising receivables of approximately
$56,700 and correspondingly, reduced the advertising payable to these
franchisees.
At June 30, 1996 and 1995, the Company had restricted cash of $44,900 and
$11,800, respectively. During the eleven months ended June 30, 1994, the
Company borrowed $56,200 of restricted funds for working capital purposes.
Approximately $50,600 of restricted funds were repaid during the year ended
June 30, 1995 and the balance of approximately $5,600 was repaid during the
year ended June 30, 1996.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and highly liquid
investments with a maturity of ninety days or less when purchased.
Inventories
Inventories consist principally of food products and supplies and are stated at
the lower of cost (first-in, first-out method) or market.
Leasehold Improvements
Leasehold improvements are stated at cost. Amortization is provided using the
straight-line method over the estimated useful lives of the improvements or the
term of the lease, whichever is shorter. Leasehold improvements reacquired
from franchisees are recorded at current market value which approximates
historical book value.
Property and Equipment
Property and equipment is stated at cost and includes restaurant equipment,
furniture and fixtures and vehicles. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. Equipment reacquired from franchisees is recorded
at current market value which approximates historical book value.
F-16
<PAGE> 44
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Construction in Progress
Construction in progress is stated at cost and represents the amount paid for
certain restaurant equipment, leasehold improvements and capitalized costs
incurred during the remodeling of a nonoperating restaurant that was purchased
by the Company during the year ended June 30, 1996. The Company expects the
restaurant to be placed in service for full operation during the year ended
June 30, 1997.
Intangible Assets
At June 30, 1996 and 1995, intangible assets consisted of licensing rights to
pizza dough recipes that are amortized using the straight-line method over a
sixty month period. At June 30, 1994, intangible assets consisted of these
licensing rights and customer telephone listings, valued at $190,000, recorded
in the October 1993 acquisition of takeout and delivery restaurants which
utilized a centralized telephone center. The listings were used in the direct
marketing of the takeout and delivery locations. The unamortized balance of
the listings, which totalled approximately $133,000, was charged to operations
when the Company closed the centralized telephone center during the year ended
June 30, 1995 (Note 6).
Income Taxes
The Company accounts for its investment tax credits using the flow through
method. Under this method, investment tax credits are accounted for as a
reduction of Federal income tax expense in the period in which the credits are
utilized. The Company implemented SFAS No. 109, "Accounting for Income Taxes"
effective in the eleven month period ended June 30, 1994. The cumulative
effect of the change was immaterial.
F-17
<PAGE> 45
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
During the year ended June 30, 1996, the Company elected early adoption of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." Historically, the Company has complied with the
requirements of SFAS No. 121. This statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Also, in general,
long-lived assets and certain identifiable intangibles to be disposed of should
be reported at the lower of carrying amount or fair value less cost to sell.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," will be adopted by the
Company during the year ended June 30, 1997 as required by this statement.
When adopted, SFAS No. 123 is not expected to have any effect on the Company's
financial position or results of operations, but may require the Company to
provide expanded disclosure.
Reclassification of Prior Year Balances
Certain prior year balances have been reclassified in the financial statements
to conform to the current year's presentation.
Net Loss Per Share
Net loss per share is calculated on the weighted average number of common stock
shares outstanding during each period.
F-18
<PAGE> 46
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Receivable
Notes receivable are primarily derived from the sale of franchise rights and
restaurants and consist of various installment notes from franchisees. The
notes are collateralized by franchise rights, store equipment and leasehold
improvements. Payments are due from franchisees in monthly installments and
bear interest at per annum rates which range from 8% to 12%.
During the current year, the Company agreed to sell 1,000,000 shares of common
stock at $.31 per share and 1,000,000 shares of common stock at $.21 per share
in exchange for non-interest bearing subscription notes receivable in the
amounts of $310,000 and $210,000, respectively. At June 30, 1996, $350,000
remained unpaid on the notes receivable. As of September 19, 1996, the unpaid
balance had not been collected and is recorded as a charge to stockholders'
equity at June 30, 1996 (Note 13).
During the year ended June 30, 1995, the Company agreed to sell 333,333 shares
of common stock at $.75 per share in exchange for a 6% per annum subscription
note receivable in the amount of $250,000 which was due on June 30, 1995. At
June 30, 1995, $210,000 remained unpaid on the note and was recorded as a
charge to stockholders' deficit. A total of 60,000 shares were issued on note
receivable collections. However, the parties subsequently agreed to amend the
subscription agreement and the remaining shares were never issued.
Accordingly, the note balance was canceled and common stock and additional
paid-in capital were reduced by $200 and $209,800, respectively (Note 13).
During the year ended June 30, 1995, in connection with an agreement with a
financial public relations firm, which assisted the Company in raising funds
from Regulation S offerings, the Company was requested by the firm to make a
short-term loan to another one of their clients.
The Company agreed to loan the unaffiliated corporation $228,500. The note
bore interest at 6% per annum and was due on June 1, 1995. At June 30, 1995,
the balance remained unpaid and was in default and was therefore classified as
a current asset. At June 30, 1996, the entire amount of the loan remained
unpaid and the $228,500 balance was written off as uncollectible. At June 30,
1995, $114,250 was reserved for future possible losses. During each of the
years ended June 30, 1996 and 1995, $114,250 was charged to operations due to
the loan's uncollectibility.
F-19
<PAGE> 47
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Receivable (continued)
Interest is not accrued on notes that are over six months in arrears. At June
30, 1996, there is approximately $395,200 in notes receivable which are six
months or more past due. Management believes that their collateral is
sufficient to recover the past due balances. At June 30, 1996 and 1995,
respectively, the Company has provided an allowance of $547,300 and $499,700
for possible future losses on notes receivable.
Notes receivable are scheduled to mature over the next five years as follows:
<TABLE>
<S> <C>
Year ended June 30, 1997 $ 254,800
1998 46,800
1999 45,700
2000 47,300
2001 49,600
2002 and thereafter 140,000
----------
$ 584,200
==========
</TABLE>
5. Leasehold Improvements, Property and Equipment and Construction in Progress
Leasehold improvements, property and equipment and construction in progress
consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Leasehold improvements $ 912,000 $ 577,500
Furniture and fixtures 114,000 106,200
Restaurant equipment 546,000 298,000
Construction in progress 255,000 -
Vehicles 38,900 38,900
---------- ----------
1,865,900 1,020,600
Less accumulated depreciation
and amortization 254,000 231,600
---------- ----------
$1,611,900 $ 789,000
========== ==========
</TABLE>
F-20
<PAGE> 48
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions
The Company has various transactions with its president, Ronald J. Gelet. The
total amount payable to its president consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Accrued dough royalties $ 3,300 $ 28,300
Loan payable, noninterest bearing
cash advances - 91,700
---------- ----------
$ 3,300 $ 120,000
========== ==========
</TABLE>
On July 1, 1993, the Company entered into a licensing agreement with its
president assuring the Company and its franchisees exclusive use of the
president's dough recipes and products in California and internationally. The
initial term of the agreement is five years and the fee payable to the
president was $300,000. The Company has ten additional five year options to
renew the licensing agreement under the same terms. The Company and its
franchisees also are required to pay the president a $.02 per pound royalty on
the dough products used in operations. During the years ended June 30, 1996
and 1995 and the eleven months ended June 30, 1994, the Company incurred
royalty expense of $31,500, $50,300 and $45,900, respectively, in connection
with this agreement.
The agreement stipulated that the $300,000 fee was to be paid to the president,
$200,000 in cash by January 1, 1994 and that the balance was to be recorded as
a note payable to the president for $100,000. The note bore interest at 8% per
annum and was due on thirty days demand. The president was not paid the
$200,000 in cash, the $100,000 8% demand note payable or accrued royalties.
On May 3, 1995, the Company converted $522,900 of its debt, including these
obligations, to the president, into 697,200 shares of common stock at $.75 per
share (Note 13). The market value per share of common stock on May 3, 1995 was
approximately $1.25.
F-21
<PAGE> 49
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions (continued)
The value assigned to restricted common stock of $.75 per share was
management's best estimate of the stock's fair market value. Management
determined the value based on the quoted market price per share of unrestricted
common stock on May 3, 1995 of approximately $1.25. The reduction in value to
$.75 per share from the $1.25 quoted market price per share of unrestricted
common stock reflects management's best estimate of the lack of liquidity of
restricted shares.
The Company holds a 25% interest in a partnership that is the general partner
in a partnership that owned a franchised restaurant (Note 7). During the
eleven months ended June 30, 1994, the partnership incurred management fees of
$26,800 but was able to pay only $5,000 of this amount to the Company. At June
30, 1994, the partnership owed the Company $116,400 in royalty fees. The
partnership also owed the Company $92,700 in advertising fees that were written
off during the eleven months ended June 30, 1994. The unpaid balance of
royalties and management fees were charged to operations during the year ended
June 30, 1995. Also, during the years ended June 30, 1996 and 1995, the
Company continued to bill royalties and advertising to the partnership.
However, the royalties and advertising were uncollectible and charged to
operations and against advertising payable, respectively, during the years
ended June 30, 1996 and 1995. The partnership sold the restaurant during the
year ended June 30, 1996.
On December 9, 1991, Numero Uno Franchise Corporation entered into a
development agreement with Numero Uno Takeout and Delivery Corporation
("T.O.D."), a related party. Pursuant to the agreement, the Company granted
T.O.D. the exclusive right for a period of ten years to operate and grant
franchises to third parties for the ownership and operation of takeout and
delivery restaurants utilizing the Numero Uno system in certain Southern
California counties. The agreement contained four successive options to renew
the agreement for ten year periods.
F-22
<PAGE> 50
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions (continued)
The Company also sold T.O.D. seven operating full service restaurant contracts,
two takeout and delivery contracts and ten additional contracts in Orange
County, California in consideration for a $750,000 note receivable. All income
from this transaction was deferred. The deferred income and related note
receivable were written down to $107,000 at July 31, 1993. Subsequent to July
31, 1993, T.O.D. defaulted on the note. In October 1993, the parties
terminated the contract and the Company acquired four T.O.D. locations and
customer listings in exchange for forgiveness of T.O.D.'s indebtedness and the
assumption of approximately $190,000 in liabilities. In connection with this,
the Company recognized license fee income of $212,700 during the eleven months
ended June 30, 1994 based on the excess value of assets received over
liabilities assumed.
During the year ended June 30, 1995, the Company closed its centralized
telephone center and wrote off the unamortized balance remaining on the
customer listings (Note 3) which was approximately $133,000.
7. Investment in Partnership
The Company holds a 25% interest in Numero Uno Investors, a partnership that is
a general partner in a partnership that owned a franchised restaurant (Note 6).
In prior years, when the partnership owned a franchised restaurant, the
Company's share of losses was recognized until its basis in the investment
equalled the investment's carrying value. The equity method of accounting was
then suspended. The Company began recognizing additional losses in connection
with the investment during the eleven months ended June 30, 1994 when it became
evident to the Company that receivables from the partnership were
uncollectible. The restaurant was sold during the year ended June 30, 1996.
As of June 30, 1996, the Company has not guaranteed obligations of the
partnership or otherwise committed to provide further financial support to the
partnership.
8. Dependence on Major Vendor
During the years ended June 30, 1996 and 1995 and the eleven months ended June
30, 1994, purchases from one vendor represented approximately 5.6%, 11.4% and
11.3%, respectively, of the costs and expenses of the Company. Management
believes that the Company is not dependent on this vendor.
F-23
<PAGE> 51
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Note Payable to Bank
The Company maintained a term loan, secured by substantially all Company
assets, with a local bank. The note was renewable annually, bore interest at a
reference rate plus 2.5% and was payable on demand. Initially, no demand was
made and the Company was required to make one principal payment of $9,082 at
the end of the first thirty days of the loan term followed by monthly interest
payments. The Company was then obligated to pay the remaining principal
balance due at the maturity date of the loan. The note was originally
scheduled to mature on April 4, 1994, but was renewed for sixty days by the
bank. The Company failed to pay the entire balance of the note at the extended
maturity date of June 5, 1994. As a result of this violation, the Company
defaulted on the note pursuant to the loan agreement. The balance due and
payable at June 30, 1994 was $217,500.
During the year ended June 30, 1995, the Company negotiated new repayment terms
with the bank and the maturity date was extended to June 1, 1995. The Company
paid $25,000 in October 1994, which included $6,600 in accrued interest and
legal fees of $2,000, and $5,000 per month thereafter. At June 1, 1995, the
Company was unable to pay the remaining balance due on the loan of
approximately $179,700 but, continued to pay $5,000 per month on the obligation
while negotiations continued with the bank to extend the maturity date of the
loan. In March 1996, when the balance of the note was $154,500, the bank
discounted the note $29,500 and the Company paid the remaining balance due of
$125,000. During the year ended June 30, 1996, the Company recognized
forgiveness of debt income of $29,500 in connection with this transaction.
The weighted average interest rate on borrowings in connection with this loan
were 16.39%, 11.04% and 9.15% for the years ended June 30, 1996 and 1995 and
the eleven months ended June 30, 1994, respectively. There were no borrowings
classified as short-term at June 30, 1996.
F-24
<PAGE> 52
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Secured notes, bearing interest
from 8% to 11.5% per annum,
maturing through November 2000. $ 454,300 $ 815,700
Unsecured notes, bearing interest
from 6% to 12.8% per annum,
maturing through April 2006. 514,800 279,500
---------- ----------
969,100 1,095,200
Less current maturities 631,100 853,600
---------- ----------
$ 338,000 $ 241,600
========== ==========
</TABLE>
Current maturities of long-term debt at June 30, 1996 include only $81,100 of
notes payable which are in default as compared to $519,200 of notes payable
which were in default at June 30, 1995. Of the notes payable that were in
default at June 30, 1995, $231,700 were paid, $113,300 were forgiven by the
noteholder and recognized as income by the Company, $135,600 were converted to
equity during the year ended June 30, 1996 and $38,600 remain in default.
The long-term debt is scheduled to mature over the next five years as follows:
<TABLE>
<S> <C>
Year ended June 30, 1997 $ 631,100
1998 142,900
1999 123,500
2000 52,900
2001 7,000
2002 and thereafter 11,700
----------
$ 969,100
==========
</TABLE>
F-25
<PAGE> 53
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Accrued Litigation Settlement
During the eleven months ended June 30, 1994, an action was filed by a vendor
against the Company for breach of a 1987 settlement agreement which obligated
the Company to purchase certain restaurant supply items exclusively from the
vendor and to pay for some items which were delivered under the 1987 settlement
agreement.
During the year ended June 30, 1996, the parties settled the matter out of
court (Note 16) and the Company agreed to pay the vendor an irrevocable
consulting fee of $500,000, payable in monthly installments of $4,200 for a
period of ten years which began on June 15, 1996. The Company also agreed to
use the plaintiff vendor as the exclusive supplier of various paper products
used in its restaurants for a five year period. The president of the Company
has personally guaranteed the Company's obligations under the agreement.
This liability is scheduled to mature over the next five years as follows:
<TABLE>
<S> <C>
Year ended June 30, 1997 $ 50,000
1998 50,000
1999 50,000
2000 50,000
2001 50,000
2002 and thereafter 245,800
----------
$ 495,800
==========
</TABLE>
12. Preferred Stock
On December 8, 1995, the Company's Board of Directors approved an increase in
the Company's authorized Series B preferred shares from 1,000,000 to 10,000,000
shares.
In June 1995, the Board of Directors authorized the issuance of 44,000 shares
of Series C preferred stock at $1.00 per share ($.10 par value) and granted an
option to acquire 40,000 shares of common stock at $.10 per share to an
individual noteholder in exchange for the cancellation of a $40,000 note
payable plus accrued interest of $4,000.
F-26
<PAGE> 54
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Preferred Stock (continued)
As the preferred shares issued were restricted securities for which market
quotations are not available, the valuation of preferred shares and the option
to acquire common shares was based upon the estimated fair market value of the
Company's restricted Section 144 common shares at the date of the exchange
transaction.
The valuation of restricted shares and options issued was reduced from the
quoted market price for unrestricted shares in June 1995 of approximately $1.25
per share to $1.00 per share because of their lack of liquidity.
The shares were subscribed for at June 30, 1995 and issued September 7, 1995.
The shares are non-voting, bear a coupon rate of 10% per annum, are cumulative,
have a liquidation preference of $5.00 per share and are convertible into
common shares at $.50 per share. The preferred stock does not have the right
of redemption at the shareholder's option.
The Company authorized the issuance of 80,000 shares of Series B preferred
stock to its president in April 1994 as part of the merger agreement with
Woodbury, Inc. (Note 2). These shares were issued June 22, 1994. The shares are
fully voting, bear a coupon rate of 9% per annum, are cumulative, have a
liquidation preference of $5.00 per share and are convertible at a rate of one
share of common for each share of preferred stock. The shares are redeemable
by the Company upon thirty days written notice to the shareholder.
No dividends were paid to the shareholder or former noteholder during the years
ended June 30, 1996 and 1995 or the eleven months ended June 30, 1994.
Dividends in arrears totalled $1,800 at June 30, 1996.
13. Common Stock
On November 22, 1994, the Company's Board of Directors approved an increase in
the Company's authorized common shares from 10,000,000 to 20,000,000 shares and
on December 8, 1995, the Company's Board of Directors approved an additional
increase from 20,000,000 to 50,000,000 authorized shares.
F-27
<PAGE> 55
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Common Stock (continued)
During the year ended June 30, 1996, the Company raised approximately $793,600
from Regulation S stock offerings. In addition, the Company issued 700,000
shares of its common stock at $.25 per share for a total of $175,000 to two
legal firms in exchange for the cancellation of the Company's outstanding
accounts payable balances with the firms. The Company also issued 542,276
shares of its common stock at $.25 per share ($135,600) in exchange for the
cancellation of a note payable due to a former franchisee. Also, in connection
with the purchase of three Company-owned restaurants, the Company issued the
following shares of common stock: 800,000 at $.25 per share ($200,000), 716,667
at $.30 per share ($215,000) and 1,200,000 at $.25 per share ($300,000). The
Company also entered into a subscription agreement whereby the Company would
issue 1,000,000 shares of common stock at $.21 per share and 1,000,000 shares
of common stock at $.31 per share in exchange for subscription notes receivable
at $210,000 and $310,000, respectively. At June 30, 1996, $350,000 of these
subscription notes receivable had not been collected and is recorded as a
charge to stockholders' equity (Note 4).
During the year ended June 30, 1995, the Company raised approximately
$1,300,000 from Regulation S stock offerings. Also, the Company entered into
agreements with three public relations consulting firms. The consultants
agreed to provide services in the amount of $592,500 in exchange for 790,000
shares of common stock at a price of $.75 per share. As all services were
provided, the Company charged these costs to operations during the year ended
June 30, 1995.
During the year ended June 30, 1995, the Company agreed to sell 333,333 shares
of common stock at $.75 per share in exchange for a 6% per annum subscription
note receivable in the amount of $250,000 which was due on June 30, 1995. At
June 30, 1995, $210,000 remained unpaid on the note and was recorded as a
charge to stockholders' deficit. A total of 60,000 shares were issued on note
receivable collections. However, the parties subsequently agreed to amend the
subscription agreement and the remaining shares were never issued.
Accordingly, the note balance was canceled and common stock and additional
paid-in capital were reduced by $200 and $209,800, respectively (Note 4).
F-28
<PAGE> 56
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Common Stock (continued)
In May 1995, the Company converted $522,900 of its president's debt to equity
by issuing 697,200 shares of common stock at $.75 per share (Note 6).
During the years ended June 30, 1996 and 1995, restricted Section 144 common
stock was issued in exchange for the purchases of Company-owned restaurants,
the settlement of indebtedness and consulting services. The valuation of
shares issued was based upon the estimated fair value of the Company's
restricted Section 144 common shares at the date of each exchange transaction.
The value of the restricted shares issued was reduced from the quoted market
price for unrestricted shares at the dates of issuance because of their lack of
liquidity.
In April 1994, the shareholders approved the stock purchase of Woodbury, Inc.
The Company converted its outstanding common shares to be comparable to
Woodbury Inc. shares (a reverse merger)(Note 2). The Company's authorized
shares were increased from 2,500,000 to 10,000,000 and the par value of common
stock was changed from $.01 to $.001. All references to the number of common
shares and per share information in the 1994 financial statements have been
adjusted to reflect the recapitalization.
14. Foreign Currency Transactions
All transactions with foreign franchises are conducted in U. S. Dollars. There
is no material currency gain or loss.
15. Income Taxes
The Company had been assessed $86,000 by the California Franchise Tax Board for
unpaid taxes arising from a transaction completed in 1982 and 1983. With
accumulated interest, the total due at June 30, 1994 was approximately
$230,000. The Company disputed the claim and during the year ended June 30,
1995, the Franchise Tax Board abated the full amount of the assessment. Income
taxes payable of $153,700, recorded at June 30, 1994, which represented
management's estimate of the Company's maximum liability, were reversed during
the year ended June 30, 1995 and are reflected as an income tax benefit in the
statement of operations.
F-29
<PAGE> 57
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Income Taxes (continued)
Due to recurring net losses, the Company's income tax liability has been
limited to the minimum California Franchise taxes. These taxes totalled
$2,400, $3,200 and $4,000 for the years ended June 30, 1996 and 1995 and the
eleven months ended June 30, 1994, respectively.
At June 30, 1996, the Company had Federal net operating loss carryforwards of
approximately $4,949,800 for tax purposes. Net operating losses are scheduled
to expire as follows:
<TABLE>
<S> <C>
Year ended June 30, 2006 $ 537,900
2007 152,000
2008 62,600
2009 2,923,500
2010 1,273,800
----------
$4,949,800
==========
</TABLE>
These operating losses are subject to limitations imposed by the Internal
Revenue Code because of changes in the Company's stock ownership. The Company
does not anticipate that these limitations will affect the utilization of the
nol carryforwards prior to their expiration.
The Company's deferred tax benefit is approximately $1,750,000. The Company
has provided a valuation allowance in that amount as it is the opinion of
management that, due to the nature of the items generating the operating loss
carryforwards, it is more likely than not that these items will expire before
the Company is able to realize their benefit.
Expected Federal tax benefits for the years ended June 30, 1996 and 1995 and
the eleven months ended June 30, 1994 are approximately $450,000, $1,030,000
and $22,900, respectively, for a total of $1,502,900. Due to the current
year's significant net operating loss, the likelihood of realizing future tax
benefits is low. As a result, the valuation allowance has been increased each
year by the entire amount of the expected tax benefits.
F-30
<PAGE> 58
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies
Commitments
The Company is obligated, under various operating leases for the rental of
restaurant sites, to pay either the monthly fixed rent or the base rent plus a
percentage rent based upon sales, depending upon the individual lease agreement
for the location. In some instances, the Company is also responsible for the
payment of property taxes, insurance and other charges. The majority of the
leased properties are subleased to the Company's franchisees for the full term
of the lease and at aggregate rentals equal to the aggregate rentals paid by
the Company. Additionally, the Company leases certain executive office space
under an operating lease. Future minimum lease payments are as follows over
the next five years:
<TABLE>
<CAPTION>
Restaurant Office
Space Space
---------- ----------
<S> <C> <C>
Year ended June 30, 1997 $1,136,000 $ 38,200
1998 839,400 3,200
1999 569,700 -
2000 493,400 -
2001 301,100 -
Thereafter 406,600 -
---------- ----------
$3,746,200 $ 41,400
========== ==========
</TABLE>
Total minimum future rental payments shown above have not been reduced by
$3,314,100 of sublease rentals to be received in the future under
non-cancelable operating subleases.
Following is a summary of rental expense for franchise operations and
Company-owned restaurant operations:
<TABLE>
<CAPTION>
Eleven
Year Ended Year Ended Months Ended
June 30, 1996 June 30, 1995 June 30, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Minimum rentals $ 394,100 $ 1,040,700 $ 755,900
Less sublease
rentals 163,900 302,300 364,900
----------- ----------- -----------
Total rent expense $ 230,200 $ 738,400 $ 391,000
=========== =========== ===========
</TABLE>
F-31
<PAGE> 59
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation
In 1987, as part of a settlement of a previously filed complaint, the Company
agreed to make certain purchases and pay certain amounts to the plaintiff
supplier. In October 1994, the plaintiff alleged that the Company breached
that agreement by failing to purchase all the required items and also failing
to pay for some items which were delivered under the settlement agreement. The
Company contends that the plaintiff breached the settlement agreement. The
Company answered the complaint and the Superior Court referred the matter to
the Joint Association Settlement Program. After a settlement conference was
held, the parties settled the matter.
As part of the settlement agreement, the Company agreed to pay the plaintiff an
irrevocable consulting fee of $500,000, payable in monthly installments of
$4,200 for a period of ten years commencing on June 15, 1996 and use the
plaintiff as exclusive supplier of various paper products used by the Company
in Numero Uno restaurants for a period of five years. Subsequently, the
Company filed a Demand for Arbitration before JAMS/Endispute, Inc. alleging
that the plaintiff violated the terms of the original settlement agreement.
The Company intends to vigorously prosecute the matter in Arbitration and
expects to obtain a favorable ruling to reduce the amount of the $500,000
settlement. At June 30, 1996, the Company classified the remaining $495,800
under the terms of the current settlement agreement as an accrued litigation
settlement on its balance sheet (Note 11).
In November 1995, an action was filed against the Company for unlawful detainer
at one of its restaurant locations. The landlord was seeking approximately
$58,000 in past due rent. The matter was settled out of court and the Company
agreed to pay the landlord $30,000, in monthly installments of $2,000 until
mid-1997, for prior rent arrearages and enter into a new lease for the
premises. Upon payment in full, the landlord has agreed to dismiss the action.
F-32
<PAGE> 60
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments under the terms of a Promissory Note and
Security Agreement. The plaintiffs alleged that the Company defaulted on
amounts due them totalling approximately $77,900. A tentative settlement was
reached with the plaintiff's attorney but the plaintiffs did not agree to the
terms. A Settlement Conference was held on June 29, 1996. The parties were
unable to settle the matter at the Conference and the Court scheduled a trial
date for October 16, 1996. The Company has been making monthly payments on the
note and believes that the matter will eventually be settled for not more than
the original outstanding balance due on the note payable of which approximately
$58,600 has been classified as a current liability at June 30, 1996.
In September 1995, a complaint was filed against the Company for breach of
contract and foreclosure of mechanics liens. The dispute centers around a
piece of real property for which the Company contracted with the plaintiff to
perform investment services. The plaintiff is seeking the sum of $15,800 as
the outstanding balance owed on the contract. The Company responded to the
complaint on October 31, 1995. After some discovery, the matter was settled.
The Company agreed to pay the plaintiff the sum of $15,200 at the rate of $500
per month until paid in full. The Company entered into a stipulation for entry
of judgment with the plaintiff, which may be filed with the Court in the event
that the Company defaults on any payment due to the plaintiff.
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments on a Promissory Note totalling
approximately $12,800. The Company filed an answer on December 6, 1995 and
made a settlement offer to the plaintiffs but the plaintiffs' counsel has not
pursued settlement. Currently, the case is dormant and the Company believes
that the matter will eventually be settled for no more that the current balance
due on the original Promissory Note of approximately $12,800, which has been
classified as a current liability at June 30, 1996.
F-33
<PAGE> 61
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
On August 8, 1995 a landlord of a leased restaurant location filed an action
alleging breach of contract arising out of a lease agreement entered into by
himself and Gelet Enterprises, Inc. in June 1990. The lease agreement was
amended in January 1993 and again in April 1995. The plaintiff sued for back
rent and other damages. The parties agreed to settle matter by the Company
paying the plaintiff $12,900 in March 1996.
On July 28, 1995, an action was filed against the Company for an amount due on
a Promissory Note payable. The plaintiffs alleged that the Company was in
arrears on an installment note made on July 16, 1993. The balance on the note
at June 30, 1995 was approximately $107,900. The Company responded to the
complaint on September 19, 1995 and in April 1996, the Company paid the
plaintiffs $96,000 as a settlement of the action and the remaining balance of
$11,900 was forgiven by the plaintiffs.
In June 1995, the landlord of premises leased by Numero Uno Takeout and
Delivery Corporation filed a complaint against the Company and other defendants
for breach of a lease agreement in the amount of approximately $20,500. The
plaintiffs contend that the premises were vacated in March 1995 and that the
Company and other defendants are responsible for the unpaid rent. The Company
contends that Numero Uno Takeout and Delivery Corporation is a defunct entity
and that there is no contractual liability on behalf of the Company and the
other named defendants. After the discovery stage, the Court assigned the case
to nonbinding arbitration which was held on June 20, 1996. Thereafter, the
arbitrator awarded the plaintiffs the sum of $31,800. The Company did not
agree with the award of the arbitrator and filed a Request For Trial De Novo
with the Court. Subsequently, the Court set a trial date for October 28, 1996.
At June 30, 1996, $19,000 was accrued as a current liability in connection with
this case.
In May 1987, the Company guaranteed the payments on a note payable to a former
franchisee by the party to whom the franchise was sold. In April 1995, the
outside party defaulted on the note payable and the plaintiff noteholder filed
a complaint for approximately $50,900, the balance remaining on the note. The
parties settled the matter; the Company agreed to pay the plaintiff $56,700 in
monthly installments until paid in full.
F-34
<PAGE> 62
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
In November 1994, a franchisee filed an action against the Company alleging
breach of contract and various other causes of action. The Company filed a
demurrer and Motion to Strike because the plaintiff franchisee was in default
of his franchise agreement and on its note payable to the Company in the amount
of approximately $150,000. The demurrer was sustained in the third through
tenth causes of action with the plaintiff given twenty days to amend their
complaint. The plaintiff did not amend and the case was on the verge of being
dismissed when the plaintiff obtained new counsel and filed a Motion For Leave
to file a First Amended Complaint. At the same time, the Company filed a
Motion for Leave to file a cross-complaint. Both Motions were granted by the
Court on May 17, 1996. The case is presently in the discovery stage. The
plaintiff dismissed two causes of action in July 1996 and the Company's
demurrer and Motion to Strike portions of the First Amended Complaint were
granted in substantial part on August 9, 1996. The restaurant is closed and
the plaintiff would like to get out of the long-term lease which has another
nine years to run. The Company has no interest in assuming the lease, even at
a reduced rent and the Company believes that the matter will eventually be
settled with the plaintiff on terms favorable to the Company. At June 30,
1996, the Company has fully reserved all amounts due from the franchisee.
In October 1993, an action was filed against the Company and other defendants
by a former franchisee. The matter arose out of a note payable executed by one
of the Company's wholly-owned subsidiaries in the amount of approximately
$130,000 which was secured by and under an accompanying security agreement.
The plaintiff alleged that the Company's wholly-owned subsidiary breached the
security agreement and therefore the entire amount of the promissory note was
accelerated. The plaintiff also contended that the Company is liable under an
alter ego theory for the debt of the wholly-owned subsidiary.
In September 1994, a Mandatory Settlement Conference was held but the parties
were unable to reach a settlement. The Court ordered the matter to binding
arbitration on December 8, 1995 and the matter was resolved in favor of the
Company. The Company was held not to be liable for any portion of the note
payable.
F-35
<PAGE> 63
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
In June 1993, a dispute arose between a franchisee and the Company relating to
the termination of the franchisee's delivery rights and the exclusivity of the
franchisee's original geographic territory. The plaintiff franchisee sought
compensatory and punitive damages of approximately $130,000, alleging that its
geographic territory was exclusive and its delivery rights were nonterminable
by the Company. The Company strongly disagreed and contended that the
geographic territory assigned to the franchisee was nonexclusive and terminable
by the Company and that a replacement delivery area was agreed to by the
franchisee.
In September 1994, the parties settled the matter. The settlement agreement
grants the franchisee an abatement of the payment of royalties to the Company
for a five year period and a one-time waiver of the transfer fee should the
franchisee decide to sell its franchise. The parties established the
boundaries of the franchisee's geographic territory and delivery rights. The
Company has no further obligation to the franchisee.
In January 1982, the Company subleased a restaurant location to a franchisee.
In March 1992, the franchisee assigned their right, title and interest to the
sublease. The sublease specifically stated that it shall not release the
originally named sublessee from liability for the continued performance on the
terms and provisions of the sublessee. In January 1994, the assignees failed
to pay rent to the lessor or to the Company.
As a result of the failure to pay rent, the landlord brought an action against
the Company to recover damages for breach of the lease. In August 1994, the
Company stipulated with the landlord to a payment of $43,600 and a judgment may
be entered against the Company if it fails to meet the obligation. The Company
has performed all of the conditions and obligations to be performed under the
original sublease and believes that it is entitled to indemnification from the
sublessee in the same amount as the stipulated agreement with the landlord.
The Company has entered into a stipulated agreement with the sublessee who has
agreed to pay the Company $31,000 in monthly installments of $750 which began
on October 15, 1994.
F-36
<PAGE> 64
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
On January 17, 1996, the Company filed an action against the former franchisee
and the current owners of a restaurant for damages and injunctive relief for
service mark infringement, dilution of mark, common law trademark and service
mark infringement, unfair competition and breach of contract. The former
franchisee closed his location and sold the assets to the current owners to be
used in operating an independent restaurant. Specifically excluded from the
sale of assets was the right to use the name Numero Uno and trademarks. The
new owners, however, continued to use the name and other trademarks.
On March 15, 1996, the Company filed a Request for Entry of Default against the
defendants and default was entered on the same day. At June 30, 1996, the
defendants have not appeared before the Court and the Company intends to file a
Request for Default Judgment in the near future.
17. Industry Segments
The Company operates principally in the food service industry, operating two
segments: franchising and Company-owned restaurants. The franchising segment
sells individual, multi-unit and territorial restaurant franchise licenses.
The Company-owned restaurant segment operates full-service and takeout and
delivery Numero Uno pizza restaurants. Total revenues, by segment, include
sales to unaffiliated customers, as reported in the Company's consolidated
statements of operations. Operating profit (loss) is total revenue, less
operating expenses.
F-37
<PAGE> 65
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Industry Segments (continued)
Segment information is as follows:
<TABLE>
<CAPTION>
Company-owned
Franchising Restaurants
------------- -------------
<S> <C> <C>
Year ended June 30, 1996
Revenues from unaffiliated
customers $ 1,060,100 $ 483,200
Operating loss (1,133,900) (137,500)
Identifiable assets at
June 30, 1996 21,600 1,590,300
Year ended June 30, 1995
Revenues from unaffiliated
customers $ 688,600 $ 3,460,000
Operating loss (2,055,500) (1,022,500)
Identifiable assets at
June 30, 1995 36,100 752,900
Eleven months ended
June 30, 1994
Revenues from unaffiliated
customers $ 2,306,000 $ 2,218,500
Operating profit (loss) 175,800 (234,400)
Identifiable assets at
June 30, 1994 154,300 1,346,600
Depreciation:
For the year ended
June 30, 1996 $ 22,300 $ 75,600
For the year ended
June 30, 1995 38,100 198,700
For the eleven months ended
June 30, 1994 30,900 87,400
Capital expenditures:
For the year ended
June 30, 1996 $ 7,800 $ 1,398,900
For the year ended
June 30, 1995 35,800 620,300
For the eleven months ended
June 30, 1994 9,500 1,432,300
</TABLE>
F-38
<PAGE> 66
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Fourth Quarter Adjustments
During the fourth quarter of the years ended June 30, 1996 and 1995, the
Company recorded significant adjustments to its accounts which resulted in
increasing net loss by approximately $1,072,400 and $1,129,700, respectively.
The adjustments in 1996 were principally attributable to the write off of
uncollectible notes receivable and the recording of an accrued litigation
settlement. The adjustments in 1995 were principally attributable to the write
off of uncollectible notes receivable and the balance of the unamortized
telephone center.
F-39
<PAGE> 67
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to
Charged to Loss on
Beginning Costs and Sale of Specific Ending
Description Balance Expenses Restaurants Write-offs Balance
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
For the year ended June 30, 1996:
Allowance for doubtful
accounts $ 86,600 $ 73,000 $ - $ 111,600 $ 48,000
Loss on allowance for
uncollectible notes
receivable 499,700 337,700 - 290,100 547,300
Valuation allowance for
deferred income tax
assets 1,300,000 450,000 - - 1,750,000
For the year ended June 30, 1995:
Allowance for doubtful
accounts $ 212,200 $ 51,000 $ 65,100 $ 241,700 $ 86,600
Loss on allowance for
uncollectible notes
receivable 185,200 337,600 - 23,100 499,700
Valuation allowance for
deferred income tax
assets 270,000 1,030,000 - - 1,300,000
For the eleven months ended June 30, 1994:
Allowance for doubtful
accounts $ 197,300 $ (400)$ 15,300 $ - $ 212,200
Loss on allowance for
uncollectible notes
receivable 98,400 - 86,800 - 185,200
Valuation allowance for
deferred income tax
assets 247,100 22,900 - - 270,000
</TABLE>
F-40
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 44,900
<SECURITIES> 0
<RECEIVABLES> 919,500
<ALLOWANCES> 595,300
<INVENTORY> 16,800
<CURRENT-ASSETS> 797,200
<PP&E> 1,865,900
<DEPRECIATION> 254,000
<TOTAL-ASSETS> 2,880,300
<CURRENT-LIABILITIES> 1,376,300
<BONDS> 783,800
0
12,400
<COMMON> 24,000
<OTHER-SE> 518,900
<TOTAL-LIABILITY-AND-EQUITY> 2,880,300
<SALES> 483,200
<TOTAL-REVENUES> 1,628,000
<CGS> 162,300
<TOTAL-COSTS> 1,733,700
<OTHER-EXPENSES> 519,000
<LOSS-PROVISION> 410,600
<INTEREST-EXPENSE> 73,800
<INCOME-PRETAX> (1,271,400)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (1,273,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,273,800)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
