<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999.
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to __________.
Commission file number 0-19522
N. U. PIZZA HOLDING CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Nevada
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(State or other jurisdiction of incorporation or organization)
95-3656327
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(I.R.S. Employer Identification No.)
16800 Devonshire St., Suite 305 Granada Hills, CA 91344
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818) 368-2616
-------------------------------
(Registrant's telephone number, including area code)
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 and Exchange
Act of 1934 during the preceding 12 months (or 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
As of March 31, 1999, there were 48,164,008 shares of common stock
outstanding. Par value is $.001.
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
ASSETS (Unaudited) (Audited)
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 50,700 $ 54,800
Restricted cash 16,700 13,000
Franchisee advertising receivable 52,500 16,600
Receivables, net of allowance for
doubtful accounts of $21,100 106,100 47,000
Current portion of related party
notes receivable 25,500 25,700
Current portion of notes receivable -
franchisees, net of allowances
of $20,700 117,500 104,300
Inventories 3,500 3,600
Prepaid expenses 17,600 23,100
----------- -----------
Total current assets 390,100 288,100
----------- -----------
Other assets:
Related party notes receivable, net
of allowances of $110,300 124,900 129,100
Notes receivable - franchisees, net
of allowances of $236,000 880,200 814,500
Intangible assets, net of accumulated
amortization of $345,000 and $331,200,
respectively 155,000 168,800
Investments in affiliated corporations 295,900 262,200
Deposits and other assets 39,300 34,000
----------- -----------
1,495,300 1,408,600
----------- -----------
Leasehold improvements and property
and equipment, net of accumulated
depreciation and amortization of
$183,100 and $288,800, respectively 21,200 214,400
----------- -----------
$ 1,906,600 $ 1,911,100
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
2
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 180,500 $ 175,300
Accounts payable and accrued expenses 295,900 461,600
Accrued franchise advertising 69,200 29,600
Current portion - litigation settlements 30,300 35,300
Loans payable to related parties 111,900 163,500
----------- -----------
Total current liabilities 687,800 865,300
----------- -----------
Long-term debt, net of current portion 113,400 91,500
Litigation settlements, net of
current portion 8,700 32,500
Deferred franchise fee income 37,600 66,900
Stockholders' equity:
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,
48,164,008 and 32,139,008 shares issued,
subscribed and outstanding, respectively 48,100 32,100
Additional paid-in capital 6,182,100 6,038,100
Notes receivable arising from stock
purchase agreements (402,000) (402,000)
Accumulated deficit (4,781,500) (4,825,700)
----------- -----------
1,059,100 854,900
----------- -----------
$ 1,906,600 $ 1,911,100
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements and management's discussion
and analysis of financial condition and results of operations.
3
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
FRANCHISE OPERATIONS:
REVENUES:
Initial franchise fees $ 9,800 $ 9,800 $ 39,300 $ 29,300
Royalties 97,200 119,500 295,700 387,700
Rental income 6,100 11,800 15,700 67,300
Interest income 11,400 16,800 33,200 28,400
Rebate income 30,800 34,700 98,800 119,200
Other income 14,400 31,600 50,900 130,800
Gain on sale of restaurant
and equipment 2,700 19,700 18,500 26,200
---------- ---------- ----------- -----------
172,400 243,900 552,100 788,900
---------- ---------- ----------- -----------
COSTS AND EXPENSES:
Rent 9,000 27,400 17,500 101,100
General and administrative 122,600 152,900 453,200 528,200
Interest expense 5,000 1,200 19,400 4,700
---------- ---------- ----------- -----------
136,600 181,500 490,100 634,000
---------- ---------- ----------- -----------
Franchise operating income 35,800 62,400 62,000 154,900
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements and management's discussion
and analysis of financial condition and results of operations.
4
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
COMPANY-OWNED RESTAURANT
OPERATIONS:
Sales $ 20,700 $ 149,200 $ 160,700 $ 1,000,100
---------- ---------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 4,900 45,200 50,400 325,000
Operating 12,500 68,400 82,000 462,600
General and administrative 4,600 105,400 44,400 421,900
---------- ---------- ----------- -----------
22,000 219,000 176,800 1,209,500
---------- ---------- ----------- -----------
Company-owned restaurant loss (1,300) (69,800) (16,100) (209,400)
---------- ---------- ----------- -----------
Income (loss) before
income tax provision 34,500 (7,400) 45,900 (54,500)
Income tax provision - - 1,700 1,600
---------- ---------- ----------- -----------
Net income (loss) $ 34,500 $ (7,400) 44,200 (56,100)
---------- ----------
---------- ----------
Accumulated deficit,
beginning of period (4,825,700) (4,477,400)
----------- -----------
Accumulated deficit,
end of period $(4,781,500) $(4,533,500)
----------- -----------
----------- -----------
Net income (loss)
per share - basic $ 0.00 $ 0.00 $ 0.00 $ 0.00
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average number of
shares outstanding - basic 48,164,008 31,772,341 41,438,182 31,347,037
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net income (loss)
per share - diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average number
of shares outstanding -
diluted 48,164,008 31,772,341 41,438,182 31,347,037
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements and management's discussion
and analysis of financial condition and results of operations.
5
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 44,200 $ (56,100)
----------- ----------
Adjustments to reconcile net
income (loss) to net cash (used)
provided by operating activities:
Depreciation and amortization 29,900 203,500
Gain on sale of restaurants and equipment (18,500) (26,200)
Realization of deferred income (29,300) (29,300)
Changes in assets and liabilities:
Receivables, net (56,400) 13,400
Inventories 100 16,600
Prepaid expenses (500) 36,500
Accounts payable and accrued expenses (84,200) (63,300)
Accrued royalties due to officer 26,900 --
Deposits (5,300) (9,700)
----------- ----------
Net cash (used) provided by
operating activities (93,100) 85,400
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,100) --
Collections on notes receivable 125,500 71,600
Investments in affiliates (20,800) --
----------- ----------
Net cash provided by investing activities 103,600 71,600
----------- ----------
</TABLE>
See accompanying notes to financial statements and management's discussion
and analysis of financial condition and results of operations.
6
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amounts due to related parties $ - $ 32,100
Increase in notes payable 116,800 -
Principal payments on long-term debt (131,400) (160,500)
----------- -----------
Net cash used by financing activities (14,600) (128,400)
----------- -----------
Net (decrease) increase
in cash and cash equivalents (4,100) 28,600
Cash and cash equivalents,
beginning of period 54,800 -
----------- -----------
Cash and cash equivalents, end of period $ 50,700 $ 28,600
----------- -----------
----------- -----------
Supplemental information:
Cash paid for interest $ 17,100 $ 4,700
Cash paid for income taxes $ 1,700 $ 1,600
Non-cash transactions:
Notes receivable issued in exchange
for fixed assets, prepaid expenses
and accounts receivable $ 200,000 $ 531,400
Common stock issued in exchange for accrued
expenses and loans to related parties 160,000 50,000
Note payable issued in exchange for
investment in affiliated corporation 12,900 -
Notes receivable issued in
exchange for accounts receivable - 30,800
Accounts and note receivable
forgiven in exchange for investment - 17,000
Leasehold improvements, property and
equipment and other assets transferred
in exchange for investment in affiliate - 239,900
</TABLE>
See accompanying notes to financial statements and management's discussion
and analysis of financial condition and results of operations.
7
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
In the opinion of management of N. U. Pizza Holding Corporation and
Subsidiaries (the "Company"), the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position of the
Company as of March 31, 1999 and the results of its operations and changes in
its cash flows for the three and nine month periods presented.
The consolidated financial statements and notes are presented as permitted by
Form 10-Q and do not contain certain information included in the annual
consolidated financial statements and notes.
These unaudited consolidated financial statements should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
June 30, 1998.
Note 1.
A summary of significant accounting policies is currently on file with the
Securities and Exchange Commission on Form 10-K.
The accompanying consolidated financial statements include the accounts of
N. U. Pizza Holding Corporation and its wholly-owned subsidiaries, Numero Uno
Franchise Corporation and Formaggi Inc. (the "Company"). Intercompany
transactions and balances have been eliminated in consolidation.
Certain prior period balances have been reclassified in the consolidated
financial statements to conform to the current period's presentation.
Note 2. Litigation
PENDING
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
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.
As part of the settlement agreement, one of the plaintiffs entered into a new
franchise agreement with the Company in October 1995. Subsequently, the
plaintiff breached his obligations under the franchise agreement by failing
to
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pay required fees and his franchise was terminated by the Company. The
plaintiff refused to vacate the restaurant he was subleasing from the
Company, continued to use Company trademarks and breached his building lease
with the landlord by failing to pay rent which was due. The Company was
forced to pay back rent to the landlord and outstanding utility bills.
The plaintiff and the Company agreed to arbitrate their claims. The
plaintiff filed a claim against the Company and its president for fraud,
intentional infliction of emotional distress and breach of fiduciary duty in
the amount of $418,000. The Company filed a cross claim against the
plaintiff for breach of contract and trademark infringement for $100,000.
The Company is also seeking indemnification for rents and utilities paid on
behalf of the plaintiff and damages for trademark infringement and unfair
competition claims in the amount of $7,000.
Management believes that the Company will prevail in arbitration, because the
plaintiff's claims are without merit, and at best, the plaintiff can only
seek damages for breach of his franchise agreement since the September 1994
settlement agreement was reached between the parties. Management also
believes that the outcome will not have a material adverse effect on the
Company's financial position.
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments on a Promissory Note totaling
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.
SETTLED
In 1987, as part of a settlement of a previously filed complaint, the Company
agreed to make certain purchases and pay certain amounts to a plaintiff
supplier. In October 1994, the plaintiff alleged that the Company breached
that agreement by failing to purchase all the required items and also by
failing to pay for some items which were delivered under the settlement
agreement. The Company contended 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 second 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 to use the plaintiff as exclusive supplier of various paper products used
by the Company in Numero Uno Pizzeria 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
second settlement agreement. In November 1996, the parties entered into a
third settlement agreement which superseded both previous agreements
referenced above. This final settlement agreement required the Company to
pay the plaintiff a total of $238,000 consisting of an immediate cash payment
of $101,000, subsequent installment payments totaling $37,000 plus interest
at 8%
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per annum due on November 1, 1998 and $100,000 (reduced to $75,000 during the
year ended June 30, 1998) payable in sixty monthly installments of $1,250.
At March 31, 1999, the Company classified the remaining amount due under the
terms of the final settlement agreement as a litigation settlement on its
balance sheet.
In January 1982, the Company subleased a restaurant location to a franchisee.
In March 1992, the franchisee assigned his 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 sublease. 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 entered into a stipulated agreement
with the sublessee who agreed to pay the Company $31,000 in monthly
installments of $750 which began on October 15, 1994. During the year ended
June 30, 1997, with $10,000 remaining due on the installment agreement, the
sublessee agreed to pay the Company $6,000 and the remaining $4,000 was
forgiven by the Company.
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 of $2,500 until paid in full. At
March 31, 1999 approximately $700 remained unpaid and was accrued as a
current liability in connection with this case.
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 contended that the premises were vacated in March
1995 and that the Company and other defendants were responsible for the
unpaid rent. The Company contended that Numero Uno Takeout and Delivery
Corporation was a defunct entity and that there was 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 March 31, 1997. Prior to trial, the parties entered
into a settlement agreement which provides for a stipulation for judgment
should the Company fail to pay installments pursuant to the terms of the
settlement. The Company agreed to pay $16,500 plus interest in monthly
installments which was paid in full during the year ended June 30, 1998.
In November 1994, a franchisee filed an action against the Company alleging
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breach of contract and various other causes of action. Prior to trial, the
parties settled the matter with the plaintiff paying the Company $30,000
during the year ended June 30, 1997.
In September 1995, a complaint was filed against the Company for breach of
contract and foreclosure of mechanics liens. The dispute centered around a
piece of real property for which the Company contracted with the plaintiff to
perform investment services. The plaintiff sought 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 which was paid in full during the year ended June 30, 1997.
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 paid the landlord $30,000 during the year ended June 30, 1997
and entered into a new lease for the premises. The action has been dismissed
by the landlord.
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 totaling 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. However, prior to the trial date, the parties
settled the matter with the Company agreeing to pay the sum of approximately
$54,500 plus interest at 10% per annum in monthly installments which was paid
in full during the nine months ended March 31, 1999.
In October 1996, an action was filed against the Company for sexual battery,
intentional infliction of emotional distress and other allegations concerning
sexual discrimination. The matter arose out of an alleged incident between
an employee of the Company and the plaintiff. The Company investigated the
matter and believed it was without merit. A status conference was held on
June 2, 1997 and the Court set the matter for trial on October 20, 1997.
Prior to the trial date, the Company resolved the matter by paying the
plaintiff a settlement of $5,000.
Note 3. Income Taxes
The Company's federal income tax provisions for the three and nine month
periods presented have been eliminated by the utilization of net operating
loss carryforwards. The Company would have been required to pay federal
income taxes in these periods had it not been able to utilize these
carryforwards. A provision for minimum state income taxes has been provided
in the consolidated financial statements.
11
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Note 4. Resignation of Officer and Directors
On January 1, 1999, the Company's founder and president, Ronald J. Gelet,
resigned his directorship and officerships in the Company so that he would
have more time to deal with some serious family matters and to pursue other
interests, both of a personal and professional nature. In conjunction with
Mr. Gelet's decision, his wife, Gloria Gelet, also resigned her directorship
in the Company as of January 1, 1999.
Dan Rouse, vice president and a director of the Company for the past five
years, with the approval of the Company's board of directors, has succeeded
Mr. Gelet as president of the Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999:
LIQUIDITY AND CAPITAL RESOURCES.
For the nine months ended March 31, 1999, the Company had an overall negative
cash flow of $4,100. Collection of principal amounts due on notes receivable
were offset by the Company's continued payments on outstanding trade and
notes payable. Cash and cash equivalents at March 31, 1999 were $50,700.
OPERATING ACTIVITIES.
Accounts receivable increased $59,100 to $106,100 at March 31, 1999 due to
franchisees not making timely royalty payments.
Prepaid expenses decreased $5,500 to $17,600 at March 31, 1999. The decrease
is due primarily to the sale of the one remaining Company-owned restaurant in
November 1998 and the expiration of prepaid advertising, consulting,
insurance and rent recorded at June 30, 1998.
Inventories decreased $100 to $3,500 during the nine months ended March 31,
1999 due to normal business fluctuations.
Deposits increased $5,300 to $39,300 during the nine months ended March 31,
1999 due to the payment of a security deposit on a proposed new restaurant
location.
Intangible assets decreased $13,800 to $155,000 at March 31, 1999 due to
normal monthly amortization.
Accounts payable and accrued expenses decreased $165,700 to $295,900 at March
31, 1999, primarily due to the increased payment of outstanding trade
payables and the exchange of accrued salaries of $81,500 for 8,162,800 shares
of common stock.
Accrued franchise advertising payable increased $39,600 during the nine
months ended March 31, 1999. This increase is offset by an increase in
advertising fund receivables of $35,900 and an increase in advertising cash
of $3,700.
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Deferred license fees of $29,300 were recognized as income during the nine
months ended March 31, 1999.
Related party loans payable decreased $51,600 to $111,900 at March 31, 1999
due to the accrual of $26,900 of additional dough royalties due to the former
president of the Company. This increase was offset by a decrease of $78,500
resulting from the exchange of 7,862,200 shares of common stock for
outstanding amounts due to the former president of the Company.
INVESTING ACTIVITIES:
Notes receivable - franchisees and related party notes receivable increased
$74,500 to $997,700 and $150,400, respectively, at March 31, 1999 due to the
issuance of $200,000 of notes receivable in exchange for fixed assets,
receivables and prepaid expenses and the collection of $125,500 of
outstanding amounts due to the Company.
Net leasehold improvements and property and equipment decreased $193,200 to
$21,200 at March 31, 1999. The decrease was due primarily to the sale of the
one remaining Company-owned restaurant, a capital expenditure of $1,100 and
to normal monthly depreciation and amortization.
The Company invested an additional $20,800 of cash and assumed a liability of
$12,900 of an affiliated corporation during the nine months ended March 31,
1999.
FINANCING ACTIVITIES.
Long-term debt and accrued litigation settlements decreased $1,700 to
$332,900 at March 31, 1999 due to borrowings of $116,800 and the assumption
of a $12,900 liability in exchange for an investment in an affiliated
corporation. These increases were offset by principal payments of $131,400.
RESULTS OF OPERATIONS.
NINE MONTHS ENDED MARCH 31, 1999
AS COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
FRANCHISE OPERATIONS.
For the nine months ended March 31, 1999, the Company recognized initial
franchise fees of $29,300 from one international license contract and $10,000
from two one-time transfer fees from franchisees, a 34.1% increase in fees
from the same period in 1998.
The Company recognized $295,700 of royalty income during the nine months
ended March 31, 1999, a $92,000 (23.7%) decrease from royalty income of
$387,700 recognized for the comparable period in 1998. The decrease was due
primarily to a reduction in the total number of operating franchised
restaurants during the nine months ended March 31, 1999 as compared to the
same period in 1998.
Rental income decreased $51,600 (76.7%) during the nine months ended March
31, 1999 as compared to the nine months ended March 31, 1998, due to the
decrease
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in rental receipts from franchisees who pay their rent directly to the
landlord instead of to the Company as a pass through to the landlord.
Similarly, rent expense decreased $83,600 (82.7%) to $17,500 during the nine
months ended March 31, 1999. Historically, the Company's only source of
rental income was from franchisees who purchased restaurants that were
previously owned by the Company. The Company, who remained obligated on the
lease, would collect rent from the franchisees (subleases) and pay it
directly to the landlord. This trend is expected to continue until all
franchisees negotiate their own leases directly with lessors.
Interest income increased $4,800 (16.9%) to $33,200 for the nine months ended
March 31, 1999 as compared to $28,400 for the nine months ended March 31,
1998. This increase is due to an increase in collections on notes receivable.
Rebate income decreased $20,400 (17.1%) to $98,800 during the nine months
ended March 31, 1999 as compared to the nine months ended March 31, 1998, due
to an overall decline in system-wide sales.
Other income decreased $79,900 (61.1%) to $50,900 for the nine months ended
March 31, 1999 due primarily to a one-time $83,000 receipt during the nine
months ended March 31, 1998 from a vendor when the Company agreed to change
its soft drink supplier. This decrease was offset by an increase in income
from leasing equipment during the nine months ended March 31, 1999.
The Company recognized a gain of $18,500 on the sale of its one remaining
Company-owned restaurant and equipment during the nine months ended March 31,
1999.
General and administrative expenses decreased $75,000 (14.2%) to $453,200
during the nine months ended March 31, 1999 as compared to the nine months
ended March 31, 1998 due primarily to an overall reduction in administrative
and management expenses.
Interest expense increased $14,700 (312.8%) to $19,400 for the nine months
ended March 31, 1999 as compared to the nine months ended March 31, 1998 due
to a change in interest payments on the Company's long-term debt.
COMPANY-OWNED RESTAURANT OPERATIONS.
Company-owned restaurant revenues decreased $839,400 or 83.9% during the nine
months ended March 31, 1999 as compared to the same period in 1998. The
Company owned four operating restaurants and the Sandwich Express bakery
during the majority of the nine months ended March 31, 1998 as compared to
owning only one Company-owned restaurant during four of the nine months ended
March 31, 1999. The Company, as lessee on a restaurant location, also earned
revenues when it had to temporarily operate a restaurant for approximately
two of the nine months ended March 31, 1999 because the sublessee/franchisee
defaulted on the franchise agreement and ceased operating the restaurant.
Due to the decrease in sales volume, gross profit decreased $564,800 (83.7%)
for the nine months ended March 31, 1999 as compared to the same period in
1998. Gross profit as a percentage of sales increased slightly by 1.1% from
67.5% to 68.6% for the nine months ended March 31, 1999 as compared to the
comparable period in 1998.
14
<PAGE>
Company-owned restaurant costs and expenses decreased $758,100 or 85.7%
during the nine months ended March 31, 1999 as compared to the same period in
1998 as a result of the sales of four Company-owned restaurants and the
closure of the Sandwich Express bakery during the year ended June 30, 1998.
THREE MONTHS ENDED MARCH 31, 1999
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
FRANCHISE OPERATIONS.
For the three months ended March 31, 1999 and 1998, the Company recognized
initial franchise fees of $9,800 from one international license contract.
The Company recognized $97,200 of royalty income during the three months
ended March 31, 1999, a $22,300 (18.7%) decrease from royalty income of
$119,500 recognized for the comparable period in 1998. The decrease was due
primarily to a reduction in the total number of operating franchised
restaurants during the three months ended March 31, 1999 as compared to the
same period in 1998.
Rental income decreased $5,700 (48.3%) during the three months ended March
31, 1999 as compared to the three months ended March 31, 1999, due to the
decrease in rental receipts from franchisees who pay their rent directly to
the landlord instead of to the Company as a pass through to the landlord.
Similarly, rent expense decreased $18,400 (67.2%) during the three months
ended March 31, 1999. Historically, the Company's only source of rental
income was from franchisees who purchased restaurants that were previously
owned by the Company. The Company, who remained obligated on the lease,
would collect rent from the franchisees (subleases) and pay it directly to
the landlord. This trend is expected to continue until all franchisees
negotiate their own leases directly with lessors.
Interest income decreased $5,400 (32.1%) to $11,400 for the three months
ended March 31, 1999 as compared to $16,800 for the three months ended March
31, 1998. This decrease is due to a decrease in collections on notes
receivable during the current quarter.
Rebate income decreased $3,900 (11.2%) to $30,800 during the three months
ended March 31, 1999 as compared to the three months ended March 31, 1998,
due to an overall decline in system-wide sales.
Other income decreased $17,200 (54.4%) to $14,400 for the three months ended
March 31, 1999 due primarily to decreases in salad dressing sales revenue and
vendor game income earned during the quarter ended March 31, 1999.
The Company recognized a gain of $2,700 on the sale of equipment during the
three months ended March 31, 1999.
General and administrative expenses decreased $30,300 (19.8%) to $122,600
during the three months ended March 31, 1999 as compared to the three months
ended March 31, 1998 due primarily to an overall reduction in administrative
and management expenses.
Interest expense increased $3,800 (316.7%) to $5,000 for the three months
ended March 31, 1999 as compared to the three months ended March 31, 1999 due
to a change in interest payments on the Company's long-term debt.
15
<PAGE>
COMPANY-OWNED RESTAURANT OPERATIONS.
Company-owned restaurant revenues decreased $128,500 or 86.1% during the
three months ended March 31, 1999 as compared to the same period in 1998. The
Company owned four operating restaurants and the Sandwich Express bakery
during the three months ended March 31, 1998 as compared to the temporary
operation of one previously franchised Company-owned restaurant during two of
the three months ended March 31, 1999.
Due to the reduction in sales volume, gross profit decreased $88,200 (84.8%)
for the three months ended March 31, 1999 as compared to the same period in
1998. Gross profit as a percentage of sales, however, increased by 6.6% from
69.7% to 76.3% for the three months ended March 31, 1999. This increase was
due to lower food costs and labor incurred in temporarily operating a
franchised location.
Company-owned restaurant costs and expenses decreased $156,700 or 90.2%
during the three months ended March 31, 1999 as compared to the same period
in 1998 as a result of the sales of four Company-owned restaurants and the
closure of the Sandwich Express bakery during the year ended June 30, 1998.
PRESIDENT'S COMMENTS:
For nearly three years, the Company has been undergoing a major strategic
transformation. We are pleased to report that for the third consecutive
quarter, the Company has been profitable, which validates the progress we
have made toward our operational and financial goals. We believe that
management has laid the groundwork for continued profitability and growth.
Our pipeline of new products and marketing techniques is more exciting than
it has been for several years. We have developed a growth strategy which we
will begin implementing in the fourth quarter of the current fiscal year. We
have also retained a financial advisor to assist us in obtaining the
financing needed to fund our expansion.
We want to reestablish Numero Uno as the number one brand of pizza and
believe that we have developed a competitive, leverageable strategy to
achieve this goal.
Do we face tough challenges? Yes we do; but we always have. The challenges
we face highlight exactly why we have worked so hard to emphasize and
concentrate on what we do best-make pizza. Therefore we have pursued a
strategy that can be summed up in one word-focus.
We are very optimistic that management will continue to make the Company much
stronger and more competitive for the long term. Our positive results so far
this year demonstrate our commitment to our shareholders, and we are
confident that shareholder value will grow as we continue to execute our
growth strategy.
16
<PAGE>
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
During the current fiscal year, the Company began the process of identifying,
evaluating and implementing changes to computer programs necessary to address
the year 2000 issue. This issue affects computer systems that have
time-sensitive programs that may not properly recognize the year 2000. This
could result in major system failures or miscalculations. The Company is
currently addressing its internal year 2000 issue with modifications to
existing programs and conversions to new programs. The Company is also
communicating with franchisees, vendors and others with which it conducts
business to help them identify and resolve the 2000 issue.
The total cost associated with the required modifications and conversions is
not expected to be material to the Company's consolidated results of
operations and financial position and is being expensed as incurred.
If necessary modifications and conversions by the Company and those with
which it conducts business are completed in a timely manner, the year 2000
issue is not expected by management of the Company to have a material adverse
effect on the Company's consolidated results of operations and financial
position.
Certain statements in this report may be forward-looking in nature or
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements in this Form 10-Q relate to
the Company's Year 2000 compliance efforts, including expectations about
compliance timetables and costs.
Actual results may differ from those expressed or implied in forward-looking
statements. With respect to any forward-looking statements contained in this
report, the Company believes that its results are subject to a number of risk
factors, including the ability of the Company to identify and address
successfully Year 2000 issues in a timely manner, and at costs that are
reasonably in line with projections, and the ability of the Company's vendors
to identify and address successfully their own Year 2000 issues in a timely
manner.
Any forward-looking statements in this report should be evaluated in light of
these important risk factors.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - None
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
17
<PAGE>
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, thereunto duly authorized, in the City of
Granada Hills, State of California on May 13, 1999.
N. U. PIZZA HOLDING CORPORATION
By: /s/ Dan Rouse
---------------------------------
Dan Rouse
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.
/s/ Dan Rouse Dated: 5/13/99
- ------------------------------- -----------------------
Dan Rouse
Director and President
/s/ Deborah Murphy Dated: 5/13/99
- ------------------------------- -----------------------
Deborah Murphy
Director, Vice President and
Secretary
/s/ Jane Yennie Dated: 5/13/99
- ------------------------------- -----------------------
Jane Yennie
Treasurer and Controller
/s/ Michael L. Lorella Dated: 5/13/99
- ------------------------------- -----------------------
Michael L. Lorella
Director
18
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 67,400
<SECURITIES> 0
<RECEIVABLES> 317,900
<ALLOWANCES> 41,800
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<OTHER-SE> 998,600
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