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, 1997 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
(Address of principal executive offices)
92614
(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; 48,857,500 shares as of April 30, 1997.
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NONA MORELLI'S II, INC.
INDEX
Page
PART I
Item 1. Financial Statements
Consolidated Condensed Balance Sheet
as of March 31, 1997 (unaudited) ...........................1
Consolidated Condensed Statements of Operations
for the Three and Nine Months Ended March 31, 1997
and 1996 (unaudited) .......................................3
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended March 31, 1997 and 1996 (unaudited) .....4
Notes to Consolidated Condensed Financial Statements ........5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................13
PART II
Item 1. Legal Proceedings .......................................15
Item 2. Changes In Securities....................................15
Item 3. Defaults Upon Senior Securities..........................15
Item 4. Submission Of Matters To A Vote Of Security Holders......15
Item 5. Other Information........................................16
Item 6. Exhibits And Reports On Form 8-K.........................16
Signatures...................................................17
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<TABLE>
<CAPTION>
NONA MORELLI'S II, INC.
Consolidated Condensed Balance Sheets
As of March 31, 1997 (Unaudited)
ASSETS March 31,
1997
(Unaudited)
----------------------
<S> <C>
Current assets:
Cash and cash equivalents $ 105,838
Accounts receivable, net 87,251
Inventory 73,713
Other current assets 79,148
Total current assets 345,950
Property and equipment
Food manufacturing equipment 1,067,935
Other 219,502
Accumulated depreciation and amortization (986,312)
Total property and equipment 301,125
Intangible assets:
Software 200,036
Accumulated amortization (170,530)
Total intangible assets 29,506
Other assets:
Equity investments 7,695,943
Note receivable 50,000
Deferred tax assets, net and other assets 879,461
Total other assets 8,625,404
TOTAL ASSETS $ 9,301,985
</TABLE>
See accompanying notes to these consolidated condensed financial statements
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<TABLE>
<CAPTION>
NONA MORELLI'S II, INC.
Consolidated Condensed Balance Sheets
As of March 31, 1997 (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
1997
(Unaudited)
--------------------
<S> <C>
Current liabilities:
Accounts payable, trade $ 980,229
Accrued expenses 728,748
Due to affiliates 1,823,198
Income taxes payable 1,243,396
Current maturities of long-term debt 1,240,305
Total current liabilities 6,015,876 Long term liabilities:
Long-term debt 1,345,880
Total long term liabilities 1,345,880
Total liabilities 7,361,756
Commitments and contingencies
Stockholders' equity
Preferred stock, Series D, $.01 par value; 24,000,000
shares authorized, issued and outstanding at
March 31, 1997 (aggregate liquidation of up to $10,000,000). 240,000
Common stock, $.01 par value; 50,000,000 shares
authorized; 48,857,500 shares issued and outstanding
at March 31, 1997. 488,575
Additional paid-in-capital 49,337,312
Accumulated deficit (37,279,043)
Cost of 20,000,115 treasury shares (10,002,425)
Common stock subscription and stockholders'
receivables (844,190)
Total stockholders' equity 1,940,229
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 9,301,985
</TABLE>
See accompanying notes to these consolidated condensed financial statements
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<TABLE>
<CAPTION>
NONA MORELLI'S II, INC.
Consolidated Condensed Statements of Operations
for Three and Nine Months Ended
March 31, 1997 and 1996 (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------ ------------------------------------------
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Gaming interest revenue $ - $ 1,959,324 $ - $ 9,479,206
Food sales revenue 348,591 277,977 1,060,737 838,253
Total revenue 348,591 2,237,301 1,060,737 10,317,459
Cost of food sales revenue 197,594 212,217 678,460 594,868
Total cost of revenue 197,594 212,217 678,460 594,868
Gross profit 150,997 2,025,084 382,277 9,722,591
Depreciation and amortization 37,781 1,178,870 98,449 3,855,973
Legal and professional fees 472,909 953,713 1,640,356 1,745,875
Loss on sale of assets 89,213 - 456,943 -
Write down of goodwill - - 3,318,107 -
Other valuation expenses - 4,439,483 - 4,439,483
Selling, general and administrative
expenses 563,497 718,543 1,061,544 1,115,180
Operating income (loss) (1,012,403) (5,265,525) (6,193,122) (1,433,920)
Other income (expense):
Equity in losses in affiliates (457,974) - (744,040) -
Interest expense (74,026) (71,868) (121,932) (267,965)
Total other income (expense) (532,000) (71,868) (865,972) (267,965)
Net income (loss) before income tax
provision (1,544,403) (5,337,393) (7,059,094) (1,701,885)
Income tax benefit (provision) - 408,723 - (1,221,350)
Net income (loss) $ (1,544,403) $ (4,928,670) $ (7,059,094) $ (2,923,235)
Net income (loss) per common share: $ (.03) $ (.11) $ (.15) $ (.07)
Weighted average number of common
shares outstanding used to compute
net income (loss) per common share: 48,453,745 43,924,109 46,199,447 43,660,595
</TABLE>
See accompanying notes to these consolidated condensed financial statements
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<TABLE>
<CAPTION>
NONA MORELLI'S II, INC.
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended
March 31, 1997 and 1996 (Unaudited)
Nine Months Ended
March 31,
----------------------------------------------------
1997 1996
(Unaudited) (Unaudited)
------------------------ -------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,059,094) $ (2,923,235)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 98,449 3,847,866
Effect of services exchanged for stock 323,766 1,401,166
Effect of exercise of options 5,300 -
Loss on sale of assets 456,943 -
Deferred taxes, net - 1,377,435
Write off of goodwill 3,318,107 -
Valuation expense - 4,439,483
Minority interest - (233,877)
Equity in losses in affiliates 744,040 -
Increases (decreases) in changes in assets and liabilities:
Accounts receivable (12,339) 37,385
Due from affiliate 3,887,435 214,543
Inventory 19,886 19,618
Other assets (8,253) 83,976
Accounts payable 12,817 (74,288)
Accrued expenses (188,169) 493,633
Due to affiliates 822,331 264,634
Net cash provided (used) by operating activities 2,421,219 8,948,339
CASH FLOWS FROM INVESTING ACTIVITIES:
Beneficial ownership interest - (9,604,598)
Purchase of leasehold improvements and equipment - (18,163)
Proceeds from sale of assets 524,111 -
Net cash provided (used) by investing activities 524,111 (9,622,761)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received from issuance of note payables 100,000 350,000
Proceeds received from repayment of shareholder notes receivable 198,758 (55,991)
Principal payments on notes payable (3,188,686) (165,101)
Net cash (used) provided by financing activities (2,889,928) 128,908
Net increase (decrease) in cash 55,402 (545,514)
Cash and cash equivalents, beginning of period 50,436 628,870
Cash and cash equivalents, end of period $ 105,838 $ 83,356
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 34,336 $ 10,924
Income taxes $ - $ 800
Non-cash investing and financing activities:
Purchase of Peony Garden (Note 3) for note payable $ - $ -
Common stock issued for services $ 323,766 $ 1,409,855
Exercise of options for reduction of debt $ 29,200 $ -
Purchase of NPC (Note 2) for notes payable $ 1,200,000 $ -
Purchase of NPC (Note 2) for accrued liability $ 125,000 $ -
Options exercised for reduction of debt $ 29,200 $ -
</TABLE>
See accompanying notes to these consolidated condensed financial statements
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997 (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. The Company was incorporated in the State of Colorado on February 6,
1989 as a successor to Nona Morelli Limited Partnership. At March 31, 1997, the
Company had three wholly-owned and one controlled subsidiary engaged in food
manufacturing and distribution, casino gaming and hotel management, and real
estate investments. The activities of the Company's subsidiaries are
international, with existing food and gaming activities in the United States,
and proposed activities in North Africa, the Caribbean and Europe.
Basis of Presentation
The accompanying unaudited consolidated condensed 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 consolidated condensed
financial statements include the consolidated condensed balance sheet as of
March 31, 1997, and the related consolidated condensed statements of operations
and cash flows of the Registrant and its subsidiaries for the nine months ended
March 31, 1997 and 1996. These unaudited consolidated condensed financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Registrant's fiscal 1996 Form 10-KSB. The results of
operations for the three and nine months ended March 31, 1997 and 1996 are not
necessarily indicative of the operating results for the full year.
Principles of Consolidation and Management Estimates
The unaudited consolidated condensed 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 unaudited consolidated condensed
financial statements include the accounts of the Company's controlled subsidiary
- -- Group V Corporation ("Group V") (formerly, NuOasis Gaming, Inc.) and its
wholly-owned subsidiaries, National Pools Corporation ("NPC")(Note 2), and
Casino Management of America, Inc. ("CMA"). All material inter-company accounts
and transactions have been eliminated in consolidation. Investments in 20% to
50% owned companies are accounted for using the equity method. The Company
reflects its share of net income or loss of these nonconsolidated affiliates in
Equity In Earnings (Losses) in affiliates (Note 3).
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.
Reclassification of Prior Year Amounts
To enhance comparability, the fiscal 1996 financial statements have been
reclassified, where appropriate, to conform with the financial statement
presentation used in fiscal 1997.
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997 (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 fiscal year
1997. Accordingly, the accompanying unaudited consolidated condensed financial
statements have been presented under the assumption the Company will continue as
a going concern.
Note 2. Acquisitions and Sale of Investments
Gaming Interest
On May 25, 1996 the Company purchased from Dragon Sight International Amusement
(Macau) Company ("Dragon"), a sole proprietorship consisting of Mr. Ng Man Sun
("Mr. Ng"), a 40% net profits interest in the gaming operations conducted by
Dragon at the Holiday Inn and Hyatt Hotels in Macau (the "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 for $20 million of the
Company's common stock. On or about September 30, 1996, 20,000,000 shares of the
Company's common stock 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").
The Company recognized a $6.6 million write down of the book value of the Gaming
Interest, during fiscal year 1996, 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 at
some time in fiscal 1997, the book value of the escrowed shares is presented in
a position similar to treasury stock as of March 31, 1997.
Gaming revenues in the amount of $3.9 million that were due as of June 30, 1996,
were collected in August 1996. Since the Gaming Interest was sold, gaming
revenues will not recur.
Group V Corporation
In July 1996, the Company sold 497,157 common shares of Group V for an
approximate amount of $124,000, resulting in a loss on sale of investment of
approximately $368,000, since the Company's book value basis of the 497,157
common shares was approximately $492,000. As of March 31, 1997, the Registrant
no longer holds common shares of Group V. On June 13, 1996, Nona entered into an
Option Agreement to sell the 250,000 Series B Preferred Shares (see National
Pools Corporation below) and at such time the entire Option Agreement is fully
exercised, the 39% voting control will change and accordingly, Group V will no
longer be consolidated with Nona. In June 1997, the Option was partially
exercised. (See National Pools Corporation below).
National Pools Corporation
On June 13, 1996, the Company entered into an Option Agreement ("Option") with
Joseph Monterosso ("Monterosso"), President of National Pools Corporation
("NPC"), an individual previously unrelated to Group V or the Company, and
granted such individual an option to purchase the 250,000 Series B Preferred
Shares of Group V owned by the Company at a purchase price of $13.00 per share,
or a total of $3,250,000, with a minimum purchase of 95,000 shares.
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997 (Unaudited)
The exercise of the Option was conditioned upon Group V shareholder approval of
a proposal to increase the authorized number of shares of Group V common stock.
The Option expires 90 days after the Annual Meeting of Shareholders of Group V,
which was held on May 5, 1997. Monterosso subsequently conditionally assigned
his rights under the Option as to 128,041 Series B Shares to certain
shareholders of NPC and other investors, leaving him with rights under the
Option to purchase 121,959 Series B Shares.
On November 21, 1996, Group V's Board of Directors approved the acquisition of
NPC. NPC was formed in 1993 for the purpose of developing and operating a system
to facilitate participation in group play in state lotteries in the United
States and the lotteries of foreign countries. The program developed by NPC was
named "Hit-LottoTM". The Hit-LottoTM program uses debit cards,
telecommunications, Internet Websites, and proprietary computer software to
organize and market lottery pools for lottery players who participate in various
state lotteries. Since inception NPC's operations have been devoted primarily to
the formulation and design of the telecommunication and computer technology to
support the Hit-LottoTM program. In August, 1994, Hit-LottoTM was tested in the
San Diego market: development is ongoing.
On December 24, 1996 Group V executed and closed the Stock Purchase Agreements
with each of the shareholders of NPC pursuant to which it agreed to issue a
series of Secured Promissory Notes (the "Notes") in the aggregate amount of
$1,200,000 and 1,000,000 shares of its common stock to the NPC shareholders in
exchange for all of the issued and outstanding shares of capital stock of NPC.
The Notes are convertible into a total of 241,900,000 shares of Group V's common
stock contingent upon NPC's operations achieving certain financial goals over
the next several fiscal years. The Notes are non-recourse to Group V and secured
by the assets of NPC, bear interest at 8% per annum, and are due and payable on
May 31, 1999. Under the terms of the Notes, for every $250,000 of net annual
operating income achieved by NPC, $7,500 in principal amount of the Notes may be
converted into 1,511,875 shares of restricted Group V common stock. As part of
this acquisition, the Company and Group V agreed to a debt assumption agreement
whereby all Group V debt in excess of $20,000 on December 24, 1996 is to be
assumed by Nona except for amounts owed to certain affiliates, which are to be
converted into shares of Group V common stock: the conversion rate is based upon
the prevailing market price on the date of the Group V Shareholders' Meeting
held on May 5, 1997.
The audited financial statements of NPC as of December 31, 1995 and 1994, and
the years then ended are incorporated by reference with Group V's Form 8-K/A,
dated December 24, 1996, (SEC File No. 000-18224) filed on or about March 28,
1997. Such audit reports explain that NPC's financial statements have been
prepared assuming that NPC will continue as a going concern and that such
statements do not include any adjustments that may result in the event it is
unable to do so. The audited financial statements of NPC also reflect that it
has incurred operating losses of $2,401,992 from its inception and had negative
working capital of $1,581,827, as of December 31, 1996.
Subject to the exercise of the Option and the sale by the Company of the Series
B Shares, Group V has agreed to fund NPC's future operations. At the meeting,
held on May 5, 1997, the Group V shareholders approved the amendment of the
Group V Certificate of Incorporation. And, in June 1997, Monterosso exercised
the Option as to 128,041 shares of Series B Preferred stock. However, if the
entire Series B Shares are not acquired pursuant to the Option, NPC may not have
sufficient working capital to "roll out" the Hit-LottoTM program on a commercial
basis, and there may not be a change of control of Group V.
Following the initial exercise of 128,041 Series B Shares, there are remaining
121,959 Series B Shares available under the Option. If exercised, the 121,959
Series B Shares could immediately be converted into 9,512,802 Group V restricted
common shares. The exercise and sale of such remaining Series B Shares will
result in an additional $1,573,000 in proceeds to Nona which Nona intends to
utilize to obtain a release of liability, if any, from any events while it
controlled Group V. As of the date of this Report, the remaining Option has not
been exercised.
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997 (Unaudited)
Basis of Presentation
As of March 31, 1997, Phase I has occurred and accordingly Phase I has
been reflected in the accompanying unaudited condensed financial
statements. The Phase II and III portions of the acquisition will be
reflected and recorded at such time when the events included in Phase
II and III have occurred; these events are expected to occur upon
exercise of the Option. As of the date of this Report, the Option has
been partially exercised. The acquisition of NPC has been recorded as a
purchase with Group V as the accounting acquiror. Since conversion of
the Notes is based upon future earnings of NPC, which is in itself
based upon the success of the Hit-Lottotm program, a developmental
business, the probability of the conversion is undeterminable and
uncertain. Although control of Group V may be transferred to the NPC
shareholders upon conversion of the Notes, due to this uncertainty, the
acquisition of NPC has been accounted for as a purchase with Group V
deemed the accounting acquiror.
Pro Forma Information
Unaudited pro forma financial information showing the effect of the NPC
acquisition by Group V is incorporated by reference with Group V's Form
8K/A, dated December 24, 1996 filed on or about March 28, 1997 and
Group V's Form 10-QSB/A for the quarter ended March 31, 1997 filed on
or about March 28, 1997 (SEC File No. 000-18224).
Cleopatra Palace and Cleopatra World
During the first two quarters of fiscal 1997, NuOasis International executed
letters of intent and was negotiating definitive agreements to acquire
Replacement Properties related to its international gaming and hospitality
activities. These negotiations are ongoing as of the date of this Report.
In July 1996, Cleopatra Palace, Ltd. ("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 (which the Company intends
to re-name "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 (the "European Partner") pursuant to which the
parties planned to form a joint venture ("JV"). In exchange for a 50% interest
in the JV, the European Partner would have initially provided the JV with up to
$13.5 million in working capital and the Company, through NuOasis International,
would have contributed or caused to be transferred its interest in the entities
which hold the rights to manage the Le Palace Hotel, the Cap Gammarth Casino and
the Hammamet Casino. However, covenants in the lease agreement between Cleopatra
World and the lessors of the Cap Gammarth resort facility precluded the
execution of the management agreement requested by the European Partner. As a
result, the JV with the European Partner, as originally envisioned, is not
capable of being finalized. As of the date of this Report, the Company is
exploring other structures with the European Partner and soliciting proposals
from other potential financial partners.
In October 1996, the Company and Cleopatra entered into a reorganization
agreement (the "Restructuring Agreement") with Cleopatra which resulted in
NuOasis International issuing $13.5 million ($2 million and $11.5 million) in
secured promissory notes (the "Cleopatra Notes"). In exchange for the Cleopatra
Notes, NuOasis International was to receive 70% of the outstanding stock of the
three Cleopatra subsidiaries, which owned the rights to the Cleopatra Cap
Gammarth Casino, the Cleopatra Hammamet Casino and the Cleopatra Monastir.
On January 27, 1997, the Company and Cleopatra amended the Restructuring
Agreement (the "Amendment") in an effort to stage the development and limit the
initial scale of the JV with the European Partner. The Amendment canceled the $2
million Cleopatra Note and in consideration for the 2.7 million shares of
Hartcourt common stock transferred to Cleopatra in December 1996, the $11.5
million Cleopatra Note. Pursuant to the Amendment and in lieu of NuOasis
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NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997 (Unaudited)
International receiving 70% of the outstanding stock of the three Cleopatra
subsidiaries as originally envisioned by the agreement, Cleopatra agreed to
repurchase certain of its outstanding shares and to issue additional shares to
NuOasis International as necessary to bring its equity ownership of Cleopatra
Palace up to 70%. As of March 31, 1997, Cleopatra Palace had not finalized its
share repurchases and NuOasis International's interest was 49%, with control of
the Board of Directors of Cleopatra Palace remaining with the other 51% equity
shareholders. Accordingly, Cleopatra Palace is presented at March 31, 1997 using
the equity method of accounting and is not consolidated with the Company (see
Note 3 included herein). At such time, when the recapitalization is completed
and NuOasis International's equity ownership is increased up to 70%, if
appropriate and at such time, step acquisition accounting will then be applied.
In this event, Cleopatra Palace will be consolidated with NuOasis International
and any earnings or losses not previously recorded under the equity method of
accounting will then be restated as appropriate.
In December 1996 NuOasis International acquired 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"). Control of the Board of Directors of Cleopatra World remains with the
other 50% equity shareholders and, accordingly, Cleopatra World is presented
using the equity method of accounting and is not consolidated with the Company
(see Note 3 included herein).
Sale of Pueblo Building
In February 1997 the Company received notice that the lessor of the Company's
former manufacturing facility in Pueblo, Colorado (the "Pueblo Building")
intends to exercise its option to purchase the Pueblo Building. On February 26,
1997, the sale of the Pueblo Building closed and the Company received a total
consideration of $450,000. As part of the total consideration received, the
Company's mortgage debt in the principle amount of $215,392 was fully satisfied,
the Company received cash in the amount of $148,820, and the Company received a
note receivable in the amount of $50,000, both bearing 8% interest per annum,
and secured by the Pueblo Building.
Note 3. Equity Investments/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. At June 30, 1996, since the project was not completed and the Peony
Garden Note was non recourse other than against the Company's interest in Peony
Garden, the Company had 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 its entire interest in Peony Garden for
$22 million, consisting of $10 million of Hartcourt common stock ("Hartcourt
Shares") 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
Hartcourt Shares represented a 43% equity interest in Hartcourt. Concurrent with
the closing of the sale of the Company's interest in Peony Garden, the Hartcourt
[NM\10Q\033197.QSB]-10
9
<PAGE>
NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997 (Unaudited)
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. 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, approximately $7 million, resulting in a $2.6 million
write down during fiscal year ended June 30, 1996. During the quarter ended
March 31, 1997, 3.3 million Hartcourt Shares were exchanged to acquire
additional equity ownership in the Cleopatra entities (see Note 2 included
herein). As a result, the Registrant's equity ownership in and advances to its
Cleopatra subsidiaries and Hartcourt as of March 31, 1997 is as follows:
NuOasis International's
Book Value
NuOasis International's Basis of Investment in
Percentage Ownership and Advances to its
Affiliate at March 31, 1997 Non-Consolidated Affiliates
- ---------------------- ----------------------- ---------------------------
Hartcourt 7.5% (A) $ 1,225,805
Cleopatra 49% (B) $ 5,923,094
Cleopatra's World 50% (C) $ 547,044
(A) The percentage ownership is based upon unaudited financial
statements of Hartcourt as of December 31,1996 (latest
available as of the date of this Report). The accounting
method used is the lower of cost or market, and accordingly,
Hartcourt is not consolidated with the Company. The $1,225,805
book value represents 700,000 shares at the original book
value amount of $1.75 per share.
(B) The percentage ownership is based upon unaudited
financial statements of Cleopatra as of March 31, 1997.
The equity method of accounting is used since the equity
ownership is 49% and control of the Board of Directors of
Cleopatra lies with the other 51% equity owners.
Accordingly, Cleopatra is not consolidated with the
Company.
(C) The percentage ownership is based upon unaudited
financial statements of Cleopatra's World as of March 31,
1997. Although the equity ownership is 50%, the equity
method of accounting is used since control of the Board
of Directors of Cleopatra's World lies with the other 50%
equity owners. Accordingly, Cleopatra World is not
consolidated with the Company.
The Company's ultimate realization of value from the Hartcourt Shares 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 the Hartcourt Shares at its current basis.
Following the exchange of Hartcourt shares for the Cleopatra Notes (see Note 2
included herein) and the interest in Cleopatra's World, NuOasis International
owned approximately 700,000 of the originally issued Hartcourt Shares, which it
intends to exchange in the future for other equity investments.
Note 4. Long-Term Debt
In August 1996, the Company paid $3.2 million as full payment of the principal
and accrued interest on the original note issued as part of the purchase of the
Gaming Interest on May 25, 1996.
[NM\10Q\033197.QSB]-10
10
<PAGE>
NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997 (Unaudited)
On December 24, 1996, in connection with the acquisition of NPC (see Note 2
included herein), notes payables in the aggregate principle amount of $1.2
million were issued by Group V.
On March 20, 1997, Fantastic Foods entered into a working capital note payable
agreement, collateralized by the Notes Receivables received from the sale of the
Pueblo building (Note 2), for $100,000 bearing interest at 18% per annum and
maturing on March 19, 1998.
Note 5. Stockholders' Equity
Common Stock Subscriptions and Stockholders' Receivable
During fiscal year 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 ended June 30, 1996 and approximately $120,000 during July 1996. 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 $280,000 at March 31,
1997.
During fiscal year ended June 30, 1996, 868,824 common shares of Group V were
issued upon exercise of options by the former President of Group V in the amount
of $104,258, or $.12 per share. Group V 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 was fully
paid during the first quarter of fiscal year 1997.
Exercised Options
On October 8, 1996, 50,000 common shares were issued upon exercise of an option
by John D. Desbrow, former Secretary and former Director of the Company in the
amount of $29,200, or approximately $.58 per share. In lieu of cash being
received for payment of the exercise price, the Company received a credit of
$29,200 against amounts owed to Mr. Desbrow for professional services performed
pursuant to a consulting agreement with Mr. Desbrow.
Note 6. Commitments and Contingencies
Capital Requirements of Cleopatra
At March 31, 1997, Cleopatra has approximately $3,500,000 deposited with the
builders of the Cap Gammarth Casino and the Hammamet Casino. Cleopatra has
approximately $2,000,000 remaining to be paid, as security deposits and advance
rent, before it can take possession of the two casinos. Construction on the
Hammamet Casino was completed in January 1997. Construction on the Cap Gammarth
Casino is near completion. Cleopatra estimates remaining expenditures and
working capital requirements, including security deposits and advance rental
payments, related to equipping and opening the two casinos to be approximately
$13.5 million in aggregate. In addition, Cleopatra's World may require
approximately $1.5 million during 1997 to reduce short term debt and secure
working capital lines of credit. To finance the expected $15 million in future
capital costs the Company is currently negotiating possible joint ventures with
potential European partners and soliciting financing proposals from vendors and
private investors, both in the United States and internationally. On behalf of
Cleopatra, the Company has arranged for a credit facility with Banque Francaise
de L'Orient (the "Bank") which Cleopatra may utilize to borrow up to $25
million, subject to Cleopatra or the Company providing collateral to secure such
credit facility which is acceptable to the bank. At March 31, 1997 Cleopatra had
utilized approximately $500,000 of the subject credit facility, which was
initially secured by approximately $500,000 of deposits of NuOasis
International.
Through March 31, 1997 the Company and its subsidiaries have, with few
exceptions, financed all operations with internally generated funds and the
Company's common stock. Through March 31, 1997 the lessors of the two Tunisian
[NM\10Q\033197.QSB]-10
11
<PAGE>
NONA MORELLI'S II, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997 (Unaudited)
casinos and the Le Palace Hotel have, from time to time, been in default or
there has been a dispute under their respective lease agreements as to
construction and occupancy completion dates. In each instance of a default or
dispute with the lessors, Cleopatra Palace and Cleopatra's World have waived or
renegotiated the terms of the various lease agreements. However, construction is
complete on the Hammamet Casino and a portion of the Le Palace Hotel, and the
hotel and Cap Gammarth Casino are promised to be completed no later than the
fall of 1997. Further, while the Company has been able to meet its financial
commitments to date, Cleopatra Palace was in default at March 31, 1997 on
payment of the first installment of rent on the Hammamet casino but was in
negotiation with the lessor to forebear and revise the terms of the subject
lease agreement. As of the date of this Report, negotiations were continuing.
To meet its planned opening dates during this calendar year the Company must
secure additional third party debt or equity financing. If for any reason, a
proposed joint venture is not formed, or if the lessor of the Hammamet Casino
decides to terminate the forbearance, or if Cleopatra Palace is unable to obtain
financing from vendors or from the Bank, or if Cleopatra Palace or NuOasis
International are unable to otherwise meet their commitments under the various
agreements to provide the furniture, fixtures, equipment and working capital for
the proposed casinos once construction is completed, the Company may be required
to intercede and provide the requisite financing and working capital, or be
forced to sell all or a portion of its respective interest, or lose its
respective rights to the projects and properties entirely.
Commitments
The Company has no commitment for material capital expenditures; it negotiated a
release of its guarantee of the obligation of Cleopatra Palace under the lease
agreement related to the Cap Gammarth Casino following a default by the lessor
of the Cap Gammarth Casino.
The Company is, however, actively pursuing financing to fund the activities of
Cleopatra Palace and Cleopatra's World which may involve the pledge or
hypothecation of some or all of the Company's assets.
Note 7. Subsequent Events
Director Resignations
Effective the close of business on January 2, 1997, Liu Chen Mei Huan and Cheng
Tai Chee resigned as Directors of the Registrant in order to pursue other
opportunities. There were no disagreements between the Registrant and either Ms.
Huan or Mr. Chee at the time of their resignations. The letters of resignation
were attached as Exhibits to a current report on Form 8-K filed January 2, 1997.
Moving and Combining of Plant Facilities
In March 1997, Fantastic Foods International initiated a plan to combine it's
two plant facilities into one location which was remodeled during the last
fiscal year. Although Fantastic Foods International expects to incur a one time
moving charge, the combination of the two facilities is an effort to reduce
fixed overhead costs with out reducing production capabilities. The actual
moving and combination of the plants has not occurred yet, however, its
estimated to be completed prior to September 30, 1997.
[NM\10Q\033197.QSB]-10
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(c) Liquidity and Capital Resources
Working capital, cash and cash equivalents and current ratios are
reflected in the following table:
March 31,
1997
(unaudited)
---------------------
Working Capital (Deficit) $ (5,669,926)
Cash and Cash Equivalents $ 105,838
Current Ratio .06
The most significant effects on working capital and its components
during the nine months ended March 31, 1997 were the payment of $3.2 million in
principal and interest on the Registrant's note issued to acquire the Gaming
Interest, the continued accrual of legal and professional advisory fees and the
acquisition of NPC by Group V whereby Group V assumed current liabilities in the
approximate amount of $2.1 million as part of acquiring NPC.
The proceeds in the approximate amount of $3 million anticipated to be
received from the exercise of the Option (see Note 2 of the footnotes to the
accompanying unaudited financial statements included herein at Item 1) will not
improve the Company's cash position since the $3 million proceeds are earmarked
and will be used (as described in Note 2 of the footnotes) to purchase CMA and
fund the operations of Group V. However, at such time that the entire NPC
acquisition has occurred, Group V will no longer be consolidated with Nona,
which will cause a positive effect on the Company's negative working capital,
whereby the assumed current liabilities by Group V in the approximate amount of
$1.2 million as part of acquiring NPC may no longer be part of Nona's total
short term debt due to the change in reporting entity (i.e.
Group V may no longer be consolidated with Nona).
The Registrant's current plan for growth is to increase its working
capital by continuing to convert 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 Company
anticipates receiving a distribution of operating revenues from the Tunisian
casinos beginning in fiscal 1998 which, at the present time, is subject to
obtaining financing and completion during this calendar year. However, there are
no assurances that the subject casinos will open during this calendar year since
the financing required by Cleopatra to complete and open the properties has not
yet been committed. As of the date of this Report, the Company's sole
operations, other than its equity investments, are derived from its food
manufacturing subsidiary and, therefore, there is considerable risk that the
Company will not have adequate working capital to sustain its current status,
and that the Company or its subsidiaries may not be able to secure the required
debt or equity financing to complete their proposed projects during this
calendar year. In this event the Company or its subsidiaries may be forced to
sell certain or all of its projects, or contribute them to a third party, on
terms which would preclude the Company from realizing any future benefit from
the projects. The Company does not currently have any significant capital
commitments, however, the Company 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.
Three Months Ended March 31, 1997 Compared to Three Months Ended
March 31, 1996
The Registrant's total food sales for the three months ended March 31,
1997 were $348,591 as compared to $277,977 for the comparable period last year,
resulting in an increase of $70,614 or 25%. The increase is primarily
attributable to an increase in additional customers.
[NM\10Q\033197.QSB]-10
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<PAGE>
The Registrant's total cost of food sales for the three months ended
March 31, 1997 were $197,594 as compared to $212,217 for the comparable period
last year, resulting in an increase of $14,623 or 7%. The increase in total cost
of food sales is primarily attributable to the larger volume experienced during
the current quarter and having no business interruption as there was during the
comparable period last year. A change in sales mix also caused an improvement of
19% in relative total cost of sales.
The Registrant's total gaming revenues for the three months ended March
31, 1997 were $0 as compared to $1,959,324 for the comparable period this year.
The decrease is attributable to the sale of the Gaming Interest. Since the
Gaming Interest sale was effective June 30, 1996, there was no revenue earned
during the current period as compared to the same period last year. Gaming
Interest revenues will not exist in the future.
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,
however, amortization expense of $1,067,136 was incurred during the quarter
ended March 31, 1996. Since the sale of the Gaming Interest was effective June
30, 1996, there was no amortization expense of the Gaming Interest during the
current quarter as there was during the same quarter last year resulting in a
decrease in total depreciation and amortization expense of approximately $1.1
million.
The Registrant's total legal and professional fees, and general and
administrative expenses were $472,909 and $563,497, respectively, for the three
months ended March 31, 1997, as compared to $953,713 and $718,543 respectively
for the comparable period last year. The decrease in legal and professional fees
is primarily attributable to a decrease in professional services provided by
consultants under professional advisory and management agreements over the same
period last year.
The Registrant's total operating loss for the three months ended March
31, 1997 was $1,012,403 as compared to an operating loss of $5,265,525 for the
comparable period last year. The decrease of approximately $4.2 million is
primarily attributable to the lack of gaming revenues due to the sale of the
Gaming Interest discussed above and various valuation expenses incurred during
the same quarter last year, whereas there were no such valuation expenses during
the current quarter.
The Registrant's total other expense for the current period was
$532,000, as compared to $71,808 for the same period last year. The increase is
primarily attributable to losses from equity investments in the amount of
$457,974. There were no such losses from equity investments during the same
period last year.
Nine Months Ended March 31, 1997 Compared to Nine Months Ended
March 31, 1996
The Registrant's total food sales for the nine months ended March 31,
1997 were $1,060,737 as compared to $838,253, for the comparable period last
year, resulting in an increase of $222,484 or 27%. The increase is primarily
attributable to an increase in additional customers and having no interruption
of business like the comparable period last year whereby one of two
manufacturing locations underwent remodeling during September and October of
1996.
The Registrant's total cost of food sales for the nine months ended
March 31, 1997 was $678,460 as compared to $594,868 for the comparable period
last year, resulting in an increase of $83,592 or 14%. The increase in total
cost of food sales is again, primarily attributable to the larger volume
experienced during the current quarter and having no business interruption as
there was during the comparable period last year. A small change in sales mix
also caused a slight improvement of 7% in relative total cost of sales.
The Registrant's total gaming revenues for the nine months ended March
31, 1996 were $9,479,206 as compared to $0 for the comparable period this year.
The decrease is attributable to the sale of the Gaming Interest. Since the
Gaming Interest sale was effective June 30, 1996, there was no revenue earned
during the current period as compared to the same period last year. Gaming
Interest revenues will not exist in the future.
[NM\10Q\033197.QSB]-10
14
<PAGE>
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,
however, amortization expense of $2,134,272 was incurred during the nine months
ended March 31, 1996. Since the sale of the Gaming Interest was effective June
30, 1996, there was no amortization expense of the Gaming Interest during the
current period as there was during the same period last year resulting in a
decrease in depreciation and amortization expense of approximately $2.1 million.
The loss on sale of assets in the amount of $456,943 is attributable to
the sale of 497,157 common shares of Group V, as discussed above and the sale of
the Pueblo building as discussed in Note 2. There were no such sales during the
comparable period last year.
The Registrant's total legal and professional fees, and general and
administrative expenses were $1,640,356 and $1,061,544, respectively, for the
nine months ended March 31, 1997, as compared to $1,745,875 and $1,115,180
respectively, for the comparable period last year. Slight decreases in legal and
professional fees and general and administrative expenses is primarily
attributable to small decreases in professional services provided by consultants
under professional advisory and management agreements over the same period last
year.
As a result of the NPC acquisition, the excess of the purchase price
over the fair market value of the net assets acquired was approximately
$3,318,107 and was assumed to be allocated to goodwill. Due to Group V's and
NPC's historical negative cash flows from operations and working capital
deficit, the goodwill of $3,318,107 is immediately written off due to the
uncertainty of realizing any future benefit from this asset. There was no such
write off during the comparable period last year.
The Registrant's total operating loss for the nine months ended March
31, 1997 was $6,193,122 as compared to an operating loss of $1,433,920 for the
comparable period last year. The decrease of approximately $4.8 million is
primarily attributable to the lack of gaming revenues due to the sale of the
Gaming Interest discussed above and various valuation expenses incurred during
the same period last year, whereas there were no such valuation expenses during
the current period.
The Registrant's total other expense for the current period was
$865,972, as compared to $267,965 for the same period last year. The increase is
primarily attributable to losses from equity investments in the amount of
$744,040. There were no such losses from equity investments during the same
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.
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
[NM\10Q\033197.QSB]-10
15
<PAGE>
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:
On January 2, 1997 the Registrant filed a Current Report on
Form 8-K dated January 2, 1997 reporting effective the close
of business on January 2, 1997 the resignation of Liu Chen Mei
Huan and Cheng Tai Chee as Directors of the Registrant.
On June 19, 1997 the Registrant filed a Current Report on Form
8-K dated June 13, 1997 reporting the partial exercise of the
Option by Monterosso (see Note 2.)
[NM\10Q\033197.QSB]-10
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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: July 17, 1997 By: /s/ Fred G. Luke
--------------------------------------------
Fred G. Luke, Chief Executive Officer
and Director
Nona Morelli's II, Inc.
Dated: July 17, 1997 By: /s/ Jon L. Lawver
--------------------------------------------
Jon L. Lawver, President and Principal
Accounting Person
Fantastic Foods International, Inc.
[NM\10Q\033197.QSB]-10
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 105,838
<SECURITIES> 0
<RECEIVABLES> 87,251
<ALLOWANCES> 0
<INVENTORY> 73,713
<CURRENT-ASSETS> 345,950
<PP&E> 1,287,437
<DEPRECIATION> 986,312
<TOTAL-ASSETS> 9,301,985
<CURRENT-LIABILITIES> 6,015,876
<BONDS> 0
0
240,000
<COMMON> 488,243
<OTHER-SE> 1,211,654
<TOTAL-LIABILITY-AND-EQUITY> 9,301,985
<SALES> 348,591
<TOTAL-REVENUES> 348,591
<CGS> 197,594
<TOTAL-COSTS> 197,594
<OTHER-EXPENSES> (1,163,400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,026
<INCOME-PRETAX> (1,544,403)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,544,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,544,403)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
