SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996 Commission File No. 0-18377
--------
NONA MORELLI'S II, INC.
(Exact name of registrant as specified in its charter)
Colorado
(State or other jurisdiction of incorporation or organization)
84-1126818
(I.R.S. Employer Identification Number)
2 Park Plaza, Suite 470, Irvine, California 92614
(Address of principal executive offices) (Zip Code)
(714) 833-5381
(Registrant's telephone number, including area code)
N/A
(Former Address, if changed since last report)
N/A
(Former Zip Code, if changed since last report)
N/A
(Former telephone number, if changed since last report)
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 shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of capital stock, as of the latest practicable date.
Common Stock $.01 par; 45,105,500 shares as of November 30, 1996.
Total No. of Pages: 21
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NONA MORELLI'S II, INC.
INDEX
Page
PART I
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996
(unaudited) and June 30, 1995 (audited) ...................1
Consolidated Statements of Operations for the Three
and Nine Months Ended March 31, 1996 and 1995 (unaudited) .3
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1996 and 1995 (unaudited) .................4
Notes to Consolidated Financial Statements .................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................10
PART II
Item 1. Legal Proceedings ..........................................14
Item 2. Changes In Securities ......................................14
Item 3. Defaults Upon Senior Securities ............................14
Item 4. Submission Of Matters To A Vote Of Security Holders ........14
Item 5. Other Information ..........................................14
Item 6. Exhibits And Reports On Form 8-K ...........................14
Signatures .................................................15
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<TABLE>
<CAPTION>
NONA MORELLI'S II, INC.
Consolidated Balance Sheets
As of March 31, 1996 (Unaudited) and June 30, 1995 (Audited)
ASSETS March 31, June 30,
1996 1995
------------------ ------------------
(Unaudited) (Audited)
Current assets: ------------------ ------------------
<S> <C> <C>
Cash and cash equivalents $ 83,356 $ 628,870
Accounts receivable, net 117,856 155,241
Due from affiliate 1,896,685 2,111,228
Inventory 79,503 99,121
Other current assets 204,432 228,506
------------------ ------------------
Total current assets 2,381,832 3,222,966
------------------ ------------------
Property and equipment
Food manufacturing equipment 1,045,384 2,926,988
Other 104,773 104,666
Accumulated depreciation and amortization (775,823) (1,464,463)
------------------ -------------------
Total property and equipment 374,334 1,567,191
------------------ -------------------
Other assets:
Gaming Interest 17,730,877 20,932,285
Property held for sale 539,213 662,812
Beneficial ownership 7,004,598 -
Deferred tax assets, net - 810,102
Deposits and other assets 15,150 397,080
------------------ -------------------
Total other assets 25,289,838 22,802,279
------------------ ------------------
TOTAL ASSETS $ 28,046,004 $ 27,592,436
================== ==================
</TABLE>
See accompanying notes to these consolidated financial statements
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<TABLE>
<CAPTION>
NONA MORELLI'S II, INC.
Consolidated Balance Sheets
As of March 31, 1996 (Unaudited) and June 30, 1995 (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1996 1995
(Unaudited) (Audited)
------------------- ----------------
Current liabilities:
<S> <C> <C>
Accounts payable, trade $ 278,943 $ 353,231
Accrued expenses 301,413 95,279
Income taxes payable 854,571 249,266
Due to affiliates 470,357 205,723
Current portion of notes payables 3,002,835 3,149,536
-------------------- --------------
Total current liabilities 4,908,119 4,053,035
-------------------- ----------------
Long term liabilities:
Long-term portion of notes payables 551,847 220,247
-------------------- ----------------
Total long term liabilities 551,847 220,247
-------------------- ----------------
Total liabilities 5,459,966 4,273,282
-------------------- ----------------
Commitments and contingencies
Minority interest - 233,877
-------------------- ----------------
Stockholders' equity
Preferred stock, Series C, $.01 par value; 1,000,000 shares authorized; 13,477
shares issued and outstanding at March 31, 1996 and June 30, 1995,
respectively
(aggregate liquidation of $13,477). 135 135
Preferred stock, Series D, $.01 par value;
24,000,000 shares authorized; issued and outstanding at
March 31, 1996 and June 30, 1995, respectively
(aggregate liquidation of up to $10,000,000). 240,000 240,000
Common stock, $.01 par value; 50,000,000 shares
authorized; 44,712,551 and 42,708,751 shares issued
and outstanding at March 31, 1996 and June 30,
1995, respectively 447,125 427,088
Common stock subscription and stockholders' receivables (1,081,559) (946,814)
Additional paid-in-capital 47,406,457 44,867,753
Accumulated deficit (24,423,695) (21,500,460)
Cost of 115 treasury shares (2,425) (2,425)
-------------------- -----------------
Total stockholders' equity 22,586,038 23,085,277
-------------------- -----------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 28,046,004 $ 27,592,436
==================== =================
</TABLE>
See accompanying notes to these consolidated financial statements
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<TABLE>
<CAPTION>
NONA MORELLI'S II, INC.
Consolidated Statements of Operations
for Three and Nine Months Ended
March 31, 1996 and 1995 (Unaudited)
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------------------- ------------------------------------
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C>
Gaming revenue $ -- $ 495,532 $ -- $ 2,665,375
Gaming interest revenue 1,959,324 -- 9,479,206 -
Food sales revenue 277,977 318,354 838,253 1,229,199
---------------- ------------------ --------------- --------------
Total revenue 2,237,301 813,886 10,317,459 3,894,574
---------------- ------------------ --------------- --------------
Cost of gaming revenue -- 452,982 -- 2,256,556
Cost of food sales revenue 212,217 237,057 594,868 707,223
---------------- ------------------ --------------- --------------
Total cost of revenue 212,217 690,039 594,868 2,963,779
---------------- ------------------ --------------- --------------
Gross profit 2,025,084 123,847 9,722,591 930,795
---------------- ------------------ --------------- --------------
Depreciation and amortization 1,178,870 196,695 3,855,973 590,100
Write down of fixed assets 1,073,303 - 1,073,303 -
Write down of beneficial ownership 2,600,000 - 2,600,000 -
Other valuation expense 766,180 - 766,180 -
Selling, general and administrative expenses 1,672,256 468,548 2,861,055 2,246,223
---------------- ------------------ --------------- --------------
Operating income (loss) (5,265,525) (541,396) (1,433,920) (1,905,528)
---------------- ------------------ --------------- --------------
Other income (expense) (71,868) 10,614 (267,965) 281,908
---------------- ------------------ --------------- --------------
Net income (loss) before income tax provision (5,337,393) (530,782) (1,701,885) (1,623,620)
---------------- ------------------ --------------- ---------------
Income tax benefit (provision) 408,723 -- (1,221,350) -
---------------- ------------------ --------------- --------------
Net income (loss) $ (4,928,670) $ (530,782) $ (2,923,235) $ (1,623,620)
================ ================== =============== ===============
Net income (loss) per common share $ (.11) $ (.06) $ (.07) $ (.20)
================ ================== =============== ===============
Weighted average number of common shares
outstanding used to compute net loss per
common share 43,924,109 8,606,389 43,660,595 8,236,200
================ ================== =============== ==============
</TABLE>
See accompanying notes to these consolidated financial statements
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<TABLE>
<CAPTION>
NONA MORELLI'S II, INC.
Consolidated Statements of Cash Flows
for the Nine Months Ended
March 31, 1996 and 1995 (Unaudited)
Nine Months Ended March 31,
--------------------------------------------
1996 1995
-------------------- ----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,923,235) $ (1,623,620)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 3,847,866 590,100
Services exchanged for stock 1,401,166 1,032,363
Valuation expenses 4,439,483 --
Deferred taxes, net 1,377,435 --
Minority interest (233,877) --
Other -- 969,758
Increases (decreases) in changes in assets and liabilities:
Accounts receivable 37,385 (319,600)
Due from affiliate 214,543 --
Inventory 19,618 (38,316)
Other assets 83,976 (706,719)
Accounts payable (74,288) (379,674)
Accrued expenses 493,633 58,163
Due to affiliates 264,634 --
------------------- ----------------------
Net cash provided (used) by operating activities 8,948,339 (417,545)
-------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Beneficial ownership interest (9,604,598)
Purchase of leasehold improvements and equipment (18,163) --
-------------------- ---------------------
Net cash used by investing activities (9,622,761) --
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in common stock subscription and stockholders' receivable (55,991) --
Proceeds received from issuance of note payable 350,000 --
Principal payments on notes payables (165,101) (125,173)
-------------------- ----------------------
Net cash provided (used) by financing activities 128,908 (125,173)
-------------------- ----------------------
Net increase (decrease) in cash (545,514) (542,718)
-------------------- ----------------------
Cash and cash equivalents, beginning of period 628,870 1,196,691
-------------------- ---------------------
Cash and cash equivalents, end of period $ 83,356 $ 653,973
==================== =====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 11,000 $ --
Income taxes 800 --
Non-cash investing and financing activities:
Common stock issued for services $ 1,409,855 $ 1,032,363
</TABLE>
See accompanying notes to these consolidated financial statements
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 (Unaudited)
Note 1. General
Description of Business
Nona Morelli's II Inc. and its subsidiaries (the "Registrant", or the
"Company"), operates as a holding company for leisure and entertainment-related
businesses. At March 31, 1996, the company had three wholly-owned and one
controlled subsidiary engaged in food manufacturing and distribution, casino
gaming and real estate investments.
The activities of the Company's subsidiaries are international, with existing
food and gaming activities in the United States and Asia, and proposed
activities in North Africa and Europe.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all normal
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation have been included. The unaudited condensed consolidated
financial statements include the condensed consolidated balance sheet as of
March 31, 1996, and the related condensed consolidated statements of operations
and cash flows of the Registrant and its subsidiaries for the nine months then
ended. These unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements included
in the Registrant's fiscal 1995 Form 10-KSB. The results of operations for the
three and nine months ended March 31, 1996 and 1995 are not necessarily
indicative of the operating results for the full year.
Principles of Consolidation and Management Estimates
The Company was incorporated in the State of Colorado on February 6, 1989 as a
successor to Nona Morelli Limited Partnership. The unaudited condensed
consolidated financial statements, and references therein to the Company,
include the accounts of the Company and its wholly-owned subsidiaries; NuOasis
International, Inc. ("NuOasis International"), Fantastic Foods International,
Inc. ("Fantastic Foods") and NuOasis Properties, Inc. ("NuOasis Properties"). In
addition, the consolidated financial statements include the accounts of the
Company's controlled subsidiary -- NuOasis Gaming, Inc. ("NuOasis Gaming") and
its wholly-owned subsidiaries, Ba-Mak Gaming International, Inc. ("BGI") and
Casino Management of America, Inc. ("CMA"). All material inter-company accounts
and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Amortization of Gaming Interest
The Company amortizes its interest in the profits of the two Macau casinos (see
Note 2) over a period of five years using the straight line method. Amortization
during fiscal 1995 for the period since acquisition, May 25, 1995, through June
30, 1995, amounted to $410,437. Amortization for the quarter ended March 31,
1996 amounted to $1,067,136.
Reclassification of Prior Year Amounts
To enhance comparability, the 1995 financial statements have been reclassified,
where appropriate, to conform with the financial statement presentation used in
1996.
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 (Unaudited)
Going Concern
The Company has experienced recurring net losses, has limited liquid resources,
negative working capital and one of its operating subsidiaries was liquidated
during fiscal year 1995. Management's intent is to continue searching for
additional sources of capital and new operating opportunities. In the interim,
the Company will continue operating with minimal overhead and key administrative
functions will be provided by consultants who are compensated primarily in the
form of the Company's common stock. Management estimates that the Company will
need to utilize its common stock to fund its operations through the end of
fiscal 1996 and through fiscal year 1997. Accordingly, the accompanying
consolidated financial statements have been presented under the assumption the
Company will continue as a going concern.
Note 2. Acquisition and Subsequent Sale of Investment
Gaming Interest
On May 25, 1995 the Company purchased from Mr. Ng Man Sun ("Mr. Ng"), doing
business as Dragon, a 40% net profits interest in the gaming operations
conducted by Dragon at the Holiday Inn and Hyatt Hotels in Macau (the "Gaming
Interest"). The Gaming Interest was recorded as an investment in gaming property
using the accounting basis of the elements of the consideration given having an
aggregate book value of $21,342,722, and has been amortized on a straight line
basis over a period of five years. Amortization expense and accumulated
amortization with respect to the Gaming Interest was $3,611,845 and $410,437 for
the nine months ended March 31, 1996 and the year ended June 30,1995,
respectively. The Company recorded $9,479,206 and $2,111,228 in gaming revenues
from the Gaming Interest for the nine months ended March 31, 1996, and for the
period from May 25, 1995 to June 30, 1995, respectively. The Company has entered
into an agreement to sell the Gaming Interest and, as a result, these revenues
will not recur in future years.
On August 5, 1996, NuOasis International, holder of the Gaming Interest, entered
into an agreement with Mr. Ng to sell the Gaming Interest for 20,000,000 shares
of the Company's common stock issued by the Company in the original purchase of
the Gaming Interest. On or about September 30, 1996, the subject shares were
tendered by Mr. Ng to a third party escrow agent pending the closing of the
purchase of replacement properties which NuOasis International is currently
negotiating to purchase ("the Replacement Property").
Subsequent to March 31, 1996, the Company recognized a $6.6 million write down
of the book value of the Gaming Interest to bring the value of the shares held
in escrow for the purchase of the Replacement Property to the basis of the stock
originally issued to Mr. Ng, which was $.50 a share or $10 million in aggregate.
Since the intended purchase of the Replacement Property will be effective later
in fiscal 1997, the book value of the escrowed shares will be presented in a
position similar to treasury stock subsequent to March 31, 1996.
The gaming revenues for the three months ended March 31, 1996 were classified as
Due from Affiliate as of March 31, 1996 in the amount of approximately
$1,959,324 and were subsequently collected in August 1996.
BGI
In October 1994, BGI filed for protection under Chapter 11 of the U.S.
Bankruptcy Code in the Eastern District of Louisiana. While under the protection
of Chapter 11, BGI continued to operate as a charitable bingo route operator in
Louisiana as Debtor-in-Possession. It was management's objective to reorganize
BGI's debt under Chapter 11 and fully continue its gaming operations.
Accordingly, BGI was accounted for as a continuing operation up through April
1995.
On April 20, 1995, upon motion from the United States Trustee, an order
converting the case to Chapter 7 was issued and a Chapter 7 Trustee was
appointed. The trustee took possession of BGI's assets and is in the process of
liquidating such assets for the benefit of BGI's bankruptcy estate. As such, all
gaming operations at BGI ceased and accordingly, BGI has been accounted for as a
disposition of an investment which resulted in (a) the write-off of $1,056,978
and $1,415,050 of total assets and liabilities, respectively; and (b) a net loss
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 (Unaudited)
on disposal of investment in the amount of approximately $140,949. Fiscal 1995
gaming revenues include approximately $1.2 million in BGI revenues which will
not be recurring in future years. As of the date of this Report, the Trustee's
administration of the bankruptcy estate is ongoing.
Note 3. Beneficial Ownership Interest
Effective December 31, 1995, the Company acquired from Silver Faith Development
Limited ("SFDL"), an affiliate of the Company and Mr. Ng., an interest in three
buildings currently under construction located in a large master planned
commercial and residential real estate development located in Beijing, Peoples
Republic of China ("PRC") known as The Peony Garden project ("Peony Garden").
The purchase price of the Company's interest in Peony Garden was $21 million for
which the Company issued an 8% Promissory Note in the principal amount of $21
million (the "Peony Garden Note"). The Peony Garden Note was non recourse and
fully collateralized by the interest acquired, with the outstanding principal
balance convertible into the shares of the Company's common stock. In January
1996, the Company made a prepayment of principal on the Peony Garden Note in the
amount of $9.6 million.
In April 1996, the Company requested a title opinion on Peony Garden in
conjunction with NuOasis International's efforts to receive financing on the
property. Upon receipt of the title opinion in October 1996, the Company learned
that under PRC law, real property cannot be transferred until completion of the
project. Since the project was not completed at June 30, 1996, and the Peony
Garden Note was non recourse other than against the Company's interest in Peony
Garden, the Company has presented its investment in Peony Garden as a beneficial
ownership interest in the real estate development.
On August 8, 1996, the Company entered into an agreement with The Hartcourt
Companies, Inc. ("Hartcourt") to sell the Company's entire interest in Peony
Garden for $22 million, consisting of $10 million of Hartcourt common stock and
a $12 million Convertible Promissory Note secured by the Peony Garden interest
being sold (the "Hartcourt Note"). The sale closed on October 8, 1996 and,
according to unaudited information received from Hartcourt, the Company's
investment in the Hartcourt stock represents an equity interest of approximately
43%. Concurrent with the closing of the sale of the Company's interest in Peony
Garden, the Hartcourt Note was assigned to SFDL in exchange for the Peony Garden
Note (the "Note Swap"). No profit was recognized on the Note Swap or the
transaction since the difference between the sales price and the Company's basis
in Peony Garden represents approximately the amount of interest on the Peony
Garden Note that would otherwise have been capitalized during the construction
of the Peony Garden project. At March 31, 1996, the beneficial ownership
interest in Peony Garden of $9.6 million was reduced to the value of the
Company's equity in Hartcourt on or about the closing date of approximately $7
million resulting in a $2.6 million write down. The Company's ultimate
realization of value from the investment in Hartcourt is dependent upon many
factors, such as changes in the equity value in Hartcourt, which itself is
dependent upon uncertainties surrounding Peony Garden, and upon the Company's
ability to dispose of its investment at its current basis. The Company intends
to exchange the Hartcourt equity investment for other equity investments.
Note 4. Long-Term Debt
In October 1995, Fantastic Foods entered into a working capital loan agreement
(the "Loan") with a financial institution, whereby Fantastic Foods borrowed
$350,000 for a term of forty seven months bearing an interest rate of prime plus
4% (prime rate at June 30, 1996 was 8.25%) per annum and collateralized by all
accounts receivable, inventory, and equipment related to Fantastic Foods food
manufacturing activities.
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 (Unaudited)
Note 5. Stockholders' Equity
Common Stock Subscriptions and Stockholders' Receivable
During the nine months ended March 31, 1996, the Company incurred expenses on
behalf of Cleopatra amounting to $876,093 which is included as a stockholders'
receivable at March 31, 1996, net of an allowance for possible loss of $766,180
which is included in Other Valuation Expense.
During the quarter ended March 31, 1996, 868,824 common shares of NuOasis Gaming
were issued upon exercise of options by the President of NuOasis Gaming in the
amount of $104,258, or $.12 per share. NuOasis Gaming received a note receivable
in the amount of $78,758, bearing interest of 10%, and a cash payment of $25,500
as consideration for the exercise of these options. The note receivable has been
classified as Stockholder Receivable in the amount of $78,758 at March 31, 1996
and was fully paid subsequent to March 31, 1996.
Note 6. Subsequent Events
Cleopatra
Subsequent to March 31, 1996, NuOasis International executed letters of intent
and was negotiating definitive agreements to acquire Replacement Properties
related to its international gaming and hospitality activities.
In July 1996, Cleopatra signed two letters of intent with a company owning a
hotel and casino project in Monastir, Tunisia, pursuant to which Cleopatra (or
its designee, Cleopatra World), would lease the casino and through NuOasis
International manage the hotel (to be re-named "Cleopatra Palace Resort -
Monastir"), and provide Las Vegas casino gaming management for the casino (the
"Monastir Casino").
In September 1996, the Company entered into an agreement in principle with a
European hotel management company pursuant to which the parties plan to form a
joint venture. In exchange for a 50% interest in the new joint venture, the
European hotel operator will provide the new joint venture with up to $13.5
million in working capital and the Company, through NuOasis International, will
contribute or cause to be transferred its interest in the entities which hold
the rights to manage the Le Palace Hotel, the Cap Gammarth Casino, the Hammamet
Casino and the Monastir Casino.
In October 1996, the Company and Cleopatra entered into a reorganization
agreement with Cleopatra which will result in NuOasis International issuing
$13.5 million in secured promissory notes in consideration for 70% of the
outstanding stock of three Cleopatra subsidiaries, including Cleopatra Cap
Gammarth Casino, Cleopatra Hammamet Casino and Cleopatra Monastir. Additionally,
the Company and Cleopatra agreed to increase NuOasis International's equity
interest in Cleopatra from 28% to 33%.
Additionally, following the restructuring agreement with Cleopatra, NuOasis
International executed an agreement to purchase a 50% interest in Cleopatra
World, Inc., a British Virgin island corporation ("Cleopatra World"), the lessor
of the Le Palace Hotel and the commercial center, residential complex, real
estate and improvements surrounding the Cap Gammarth Casino (the "Cap Gammarth
Resort").
National Pools Corporation
On June 13, 1996, Nona entered into an Option Agreement with Joseph Monterosso,
President of National Pools Corporation ("NPC"), an individual previously
unrelated to the NuOasis Gaming or Nona, and granted such individual an option
to purchase the 250,000 Series B Preferred Shares of the NuOasis Gaming owned by
Nona at a purchase price of $13.00 per share, or a total of $3,250,000, with a
minimum purchase of 110,000 shares.
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 (Unaudited)
The exercise of the option is conditioned upon shareholder approval of a
proposal to increase the authorized number of shares of common stock of the
NuOasis Gaming by at least twenty million (20,000,000) shares. The option is
assignable and shall expire 90 days after the next Annual Meeting of
Shareholders of NuOasis Gaming. On December 12, 1996, the Company was notified
that effective November 30, 1996, Mr. Monterosso had assigned the option as to
95,000 Series B Preferred Shares, leaving him with an option to acquire 155,000
Series B Preferred Shares. As of the date of this Report, no part of the
aggregate option to purchase 250,000 Series B Preferred shares has been
exercised.
On November 21, 1996, NuOasis Gaming's board of directors approved the
acquisition of NPC. The acquisition is expected to be financed by the issuance
of securities of NuOasis Gaming, however, a definitive agreement has not been
signed. Moreover, the acquisition is contingent upon the occurrence of certain
events including but not limited to: (a) NPC shareholder approval; (b) exercise
of that certain option agreement between Monterosso and Nona; (c) Monterosso
securing financing that would allow the exercise of the option by Monterosso
and/or one or more qualified private investors; (d) reaching an agreement to
sell CMA; and (e) shareholder approval of a proposal to increase the number of
authorized shares of common stock of NuOasis Gaming by at least 20,000,000
shares. There are no assurances that such transaction will occur, and because of
on-going negotiations and uncertainties surrounding the realization of such
transaction, NuOasis Gaming cannot determine the ultimate effect on NuOasis
Gaming's financial position at this time.
On November 25, 1996, NuOasis Gaming's Board of Directors elected Joseph
Monterosso to fill one of the vacancies on NuOasis Gaming's Board of Directors.
Additionally, on November 25, 1996, Fred G. Luke resigned as President of
NuOasis Gaming and the Board of Directors of NuOasis Gaming elected Joseph
Monterosso to the office of President.
Exercise of Options
Subsequent to March 31, 1996, 400,000 common shares were issued upon exercise of
options by the Chief Executive Officer of the Company in the amount of 440,000,
or $1.10 per share. The Company received a note receivable in the amount of
$440,000 and cash payments in the aggregate amount of $40,000 were made prior to
year end and approximately $120,000 subsequent to year end. The note bears
interest of 10% and is due in May 1997. The note receivable has been classified
as Stockholder Receivable in the amount of $400,000 subsequent to March 31,
1996.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(a) Significant Developments During the Quarter ended March 31, 1996.
In January 1996, the Registrant made a prepayment of principal on the Peony
Garden Note in the amount of $9.6 million and subsequently, in August 1996, the
Registrant entered into an agreement with The Hartcourt Companies, Inc.
("Hartcourt") to sell the Registrant's entire interest in Peony Garden (see Note
3 of the footnotes to the accompanying unaudited financial statements included
herein at Item 1).
(b) Significant Subsequent Events
Gaming Interest
On August 5, 1996, NuOasis International, holder of the Gaming
Interest, entered into an agreement with Mr. Ng to sell the Gaming Interest (see
Note 2 of the footnotes to the accompanying unaudited financial statements
included herein at Item 1).
Peony Garden
As discussed above, the sale of the Peony Garden interest occurred on
August 8, 1996 and closed on October 8, 1996.
Cleopatra
Subsequent to March 31, 1996, NuOasis International and Cleopatra
entered into negotiations and several agreements (see Note 6 of the footnotes to
the accompanying unaudited financial statements included herein at Item 1)
National Pools Corporation
On June 13, 1996, Nona entered into an Option Agreement with Joseph
Monterosso, President of National Pools Corporation ("NPC"), an individual
previously unrelated to NuOasis Gaming or Nona, and granted such individual an
option to purchase the 250,000 Series B Preferred Shares of NuOasis Gaming owned
by Nona at a purchase price of $13.00 per share, or a total of $3,250,000, with
a minimum purchase of 110,000 shares (see Note 6 of the footnotes to the
accompanying unaudited financial statements included herein at Item 1)
(c) Going Concern
The Registrant has experienced recurring net losses, has limited liquid
resources, negative working capital and one of its operating subsidiaries was
liquidated during fiscal year 1995. Management's intent is to continue searching
for additional sources of capital and, in the case of NuOasis Gaming, new
operating opportunities. In the interim, the Registrant intends to continue
operating with minimal overhead and key administrative functions provided by
consultants who are compensated in the form of the Registrant's common stock. It
is estimated, based upon its historical operating expenses and current
obligations, that the Registrant may need to utilize its common stock for future
financial support to finance its needs during fiscal year 1997. Accordingly, the
accompanying consolidated financial statements have been presented under the
assumption the Registrant will continue as a going concern.
[NM\10Q\033196.QSB] - 16
10
<PAGE>
(d) Liquidity and Capital Resources
A comparison of working capital, cash and cash equivalents and current ratios
are reflected in the following table:
March 31, June 30,
1996 1995
------------ ----------
(unaudited) (audited)
Working Capital (Deficit) $(2,526,287) $(830,069)
Cash and Cash Equivalents $ 83,356 $ 628,870
Current Ratio .49 .8
The most significant effects on working capital and its components during the
nine months ended March 31, 1996 were (i) earned revenue of approximately $9.4
million from the Gaming Interest; (ii) the pre-payment of $9.6 million in
principal on the Registrant's note issued to acquire the interest in Peony
Garden; (iii) an increase in current liabilities of approximately $846,000; and;
(iv) a decrease in cash of approximately $545,000.
The Registrant's current plan for growth is to increase its working capital by
converting the shares of Hartcourt received from the sale of Peony Garden into
additional equity investments and, in turn, use these additional equity
investments along with external debt and equity financing, if any can be
arranged, to finance the activities of its subsidiaries, and for future
acquisitions in its three business segments. Additionally, the Registrant
anticipates receiving a distribution of net operating revenues from the
Cleopatra casinos, which at the present time, subject to obtaining financing,
are scheduled to be completed during the next calendar year. However, there are
no assurances that the subject casinos will open during the next calendar year
since the financing required by Cleopatra to complete and open its properties
has not yet been committed. As of the date of this Report, the Registrant's sole
operations are derived from its food manufacturing subsidiary and, therefore,
there is considerable risk that the Registrant will not have adequate working
capital to sustain its current status, and that the Registrant or its
subsidiaries may not be able to secure the required debt or equity financing to
complete their proposed projects during the next calendar year, in which case
the Registrant or its subsidiaries may be forced to sell the projects or
contribute them to a third party on terms which would preclude the Registrant
from realizing significant future benefit, or any benefit at all from the
projects. The Registrant does not currently have any significant capital
commitments, however, the Registrant may need to issue additional shares of its
common stock to pay for services incurred, to finance the operations of its
subsidiaries, and to continue to sustain itself.
(e) Cash Flows
Cash provided by operating activities was $8,948,339 for the nine months ended
March 31,1996 as compared to $417,545 in cash used by operating activities for
the comparable period last year. The increase is primarily attributable to the
receipt of $9.6 million generated from the Gaming Interest. Although revenues
were accrued, there was no receipt of cash flow from the Gaming Interest during
the same period last year.
Cash used in investing activities was $9,622,761 as compared to $0 for the
comparable period last year. The increase is primarily attributable to the $9.6
million principal payment made to acquire the Registrant's beneficial ownership
interest in Peony Garden as discussed above.
Cash provided by financing activities was $128,908 for the nine months ended
March 31, 1996 as compared to $125,173 in cash used by financing activities for
the comparable period last year. The increase is primarily attributable to a
$350,000 loan obtained by Fantastic Foods for the repayment of existing debt,
improvement of plant and equipment and for general working capital purposes.
[NM\10Q\033196.QSB] - 16
11
<PAGE>
(f) Results of Operations
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
The Registrant's total food sales for the three months ended March 31, 1996
were $277,977 as compared to $318,354, for the comparable period last year,
resulting in a decrease of $40,377 or 12%. The decrease is primarily
attributable to a combination of a $91,581 decrease in co-packing sales and a
$51,201 increase in fresh pasta sales.
The Registrant's total cost of food sales for the three months ended March
31, 1996 were $212,217 as compared to $237,057 for the comparable period last
year, resulting in a decrease of $24,840 or 10%, which is primarily attributable
to the lower food sales discussed above. Additionally, continued efforts to
increase operating efficiencies have not compensated for the higher absorption
of overhead on lower sales, and the Registrant's continued change in emphasis
from the sale of its own brand label products to sales through private labeling
arrangements has not yet had a positive effect on gross profit margin resulting
in little change in gross profit margin.
The Registrant's total gaming revenues for the three months ended March 31,
1996 were $1,959,324 as compared to $495,532 for the comparable period last
year, resulting in an increase of $1,463,792 or 295%. The increase is primarily
attributable to the timing of the acquisition of the Gaming Interest. Since the
Gaming Interest was acquired on May 25, 1995 three months of revenue were earned
during the current period as compared to the same period last year which
included no revenues from the Gaming Interest. For the comparable period last
year $495,532 of revenues were generated from BGI's operations. Since the Gaming
Interest was sold after year end and BGI ceased operations, these revenues will
not exist in the future.
Since March 31, 1994, the Registrant has reported, on a consolidated basis,
the revenues and net assets of NuOasis Gaming. The Registrant's cost of gaming
revenue was $452,982 for the three months ended March 31, 1995, as compared to
$0 for the three months ended March 31, 1996. Since cost of gaming revenue of
$452,982 was solely from the operations of BGI, the decrease is attributable to
the cessation of BGI's operations in April 1995 due to BGI's Chapter 7
bankruptcy proceedings.
The Gaming Interest acquired in May 1995 was an acquisition of a forty
percent (40%) net operating profits interest in the operations of two Macau
casinos and, accordingly, had no effect on the total cost of gaming revenue.
Amortization expense of $1,067,136 contributed to the increase in the total
depreciation and amortization expense of $1,178,870 during the three months
ended March 31, 1996.
The Registrant's general and administrative expenses were $1,672,256 for
the three months ended March 31, 1996, as compared to $468,548 for the
comparable period last year, resulting in an increase of $1,203,708. The
increase is primarily attributable to an increase in the Registrant's legal
services provided in connection with the Registrant's legal proceedings and an
increase in professional services provided in connection with consulting and
advisory agreements.
The Registrant incurred a one time valuation expense in connection with the
sale of Peony Garden discussed above. Since the value of the Registrant's equity
in Hartcourt on or about the closing date was approximately $7 million, which is
lower than the Registrant's net investment in the Peony Garden interest of $9.6
million, the Registrant recognized a write down for the difference in the amount
of approximately $2.6 million.
During the last fiscal quarter, the Registrant remodeled and improved its
food processing equipment in its California locations and leased its Colorado
facility held for sale. In connection therewith, the Company reevaluated the use
and value of its older equipment and wrote off certain impaired equipment with a
net book value of approximately $1 million.
[NM\10Q\033196.QSB] - 16
12
<PAGE>
During the three months ended March 31, 1996, the Registrant incurred
expenses on behalf of Cleopatra amounting to $876,093 which is included as a
stockholders' receivable at March 31, 1996, net of an allowance for possible
loss of $766,180 which is included in Other Valuation Expense.
The Registrant's total operating loss for the three months ended March 31,
1996 was $5,265,525 as compared to an operating loss of $541,396 for the
comparable period last year, resulting in an operating loss increase of
$4,724,129. The increase is attributable and the one time valuation expenses of
approximately $2.6 million, $1 million, and $766,180 as discussed above.
Comparatively, there were no such valuation expenses in the comparable period
last year.
Nine Months Ended March 31, 1996 Compared to Nine Months Ended March 31,
1995
The Registrant's total food sales for the nine months ended March 31, 1996
were $838,253 as compared to $1,229,199, for the comparable period last year,
resulting in a decrease of $390,946 or 31%. The decrease is primarily due to the
closure of the Registrants manufacturing locations which underwent remodeling
during September and October for 1995. There was no such closure during the same
period last year.
The Registrant's total cost of food sales for the nine months ended March
31, 1996 were $594,868 as compared to $707,223 for the comparable period last
year, resulting in a decrease of $112,355 or 15%, which is primarily
attributable to the lower food sales discussed above. Additionally, continued
efforts to increase operating efficiencies have not compensated for the higher
absorption of overhead on lower sales, and the Registrant's continued change in
emphasis from the sale of its own brand label products to sales through private
labeling arrangements has not yet had a positive effect on gross profit margin
resulting in a decrease in gross profit margin to 29% for the nine months ended
March 31, 1996 from 42% for the comparable period last year.
The Registrant's total gaming revenues for the nine months ended March 31,
1996 were $9,479,206 as compared to $2,665,375 for the comparable period last
year, resulting in an increase of $6,813,831 or 255%. The increase is primarily
attributable to the timing of the acquisition of the Gaming Interest. Since the
Gaming Interest was acquired on May 25, 1995, nine months of revenue were earned
during the current period as compared to the same period last year which
included no revenues from the Gaming Interest. For the comparable period last
year $2,665,375 of revenues were generated from BGI's operations. Since the
Gaming Interest was sold after year end and BGI ceased operations, these
revenues will not exist in the future.
Since March 31, 1994, the Registrant has reported, on a consolidated basis,
the revenues and net assets of NuOasis Gaming. The Registrant's cost of gaming
revenue was $2,256,556 for the nine months ended March 31, 1995, as compared to
$0 for the nine months ended March 31, 1996. Since cost of gaming revenue of
$2,256,556 was solely from the operations of BGI, the decrease is attributable
to the cessation of BGI's operations in April 1995 due to BGI's Chapter 7
bankruptcy proceedings.
The Gaming Interest acquired in May 1995 was an acquisition of a forty
percent (40%) net operating profits interest in the operations of two Macau
casinos and, accordingly, had no effect on the total cost of gaming revenue.
Amortization expense of $3,201,408 contributed to the increase in the total
depreciation and amortization expense of $3,855,973 during the nine months ended
March 31, 1996.
The Registrant's general and administrative expenses were $2,861,055 for
the nine months ended March 31, 1996, as compared to $2,246,223 for the
comparable period last year, resulting in an increase of $614,832. The increase
is primarily attributable to an increase in the Registrant's legal services
provided in connection with the Registrant's legal proceedings and an increase
in professional services provided in connection with consulting and advisory
agreements.
The Registrant incurred a one time valuation expense in connection with the
sale of Peony Garden discussed above. Since the value of the Registrant's equity
in Hartcourt on or about the closing date was approximately $7 million, which is
lower than the Registrant's net investment in the Peony Garden interest of $9.6
million, the Registrant recognized a write down for the difference in the amount
of approximately $2.6 million.
[NM\10Q\033196.QSB] - 16
13
<PAGE>
During the nine months ended March 31, 1996, the Registrant remodeled and
improved its food processing equipment in its California locations and leased
its Colorado facility held for sale. In connection therewith, the Company
re-evaluated the use and value of its older equipment and wrote off certain
impaired equipment with a net book value of approximately $1 million.
During the nine months ended March 31, 1996, the Registrant incurred
expenses on behalf of Cleopatra amounting to $876,093 which is included as a
stockholders' receivable at March 31, 1996, net of an allowance for possible
loss of $766,180 which is included in Other Valuation Expense.
The Registrant's total operating loss for the nine months ended March 31,
1996 was $1,433,920 as compared to an operating loss of $1,905,528 for the
comparable period last year, resulting in an operating loss decrease of
$471,608. The decrease is attributable to the combination of a $9,479,206
increase in the Registrant's revenues generated from its Gaming Interest and one
time valuation expenses of approximately $2.6 million, $1 million, and $766,180
as discussed above. Comparatively, there were no such Gaming Interest revenues
and valuation expenses in the comparable period last year.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant knows of no significant changes in the status of the pending
litigation or claims against the Registrant as described in Form 10-KSB for the
Registrant's fiscal year ended June 30, 1996, the Registrants most recent filing
prior to this Report.
Item 2. Changes In Securities
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
(a) Exhibits:
Exhibit Number Description of Exhibit
-------------------------------- --------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
[NM\10Q\033196.QSB] - 16
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<PAGE>
SIGNATURES
Pursuant to the requirements 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.
NONA MORELLI'S II, INC.
Dated: December 13, 1996 By: /s/ Fred G. Luke
------------------------------------
Fred G. Luke,
Chief Executive Officer
and Director
Dated: December 13, 1996 By: /s/ Steven H. Dong
------------------------------------
Steven H. Dong,
Chief Financial Officer
[NM\10Q\033196.QSB] - 16
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 83,356
<SECURITIES> 0
<RECEIVABLES> 2,014,541
<ALLOWANCES> 0
<INVENTORY> 79,503
<CURRENT-ASSETS> 2,381,832
<PP&E> 1,150,157
<DEPRECIATION> (775,823)
<TOTAL-ASSETS> 28,046,004
<CURRENT-LIABILITIES> 4,908,119
<BONDS> 0
0
240,135
<COMMON> 447,125
<OTHER-SE> 21,898,780
<TOTAL-LIABILITY-AND-EQUITY> 28,046,004
<SALES> 2,237,301
<TOTAL-REVENUES> 2,237,301
<CGS> 212,217
<TOTAL-COSTS> 212,217
<OTHER-EXPENSES> 7,290,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,868
<INCOME-PRETAX> (5,337,393)
<INCOME-TAX> 408,723
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,928,670)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
</TABLE>
