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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended June 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission file number 0-19522
N.U. Pizza Holding Corporation
(Exact name of registrant as specified in its charter)
Nevada 95-3656327
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16800 Devonshire Street, Suite 305 Granada Hills, CA 91344
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 368-2616
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
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Common ($0.001 par value) O.T.C. (NUZA)
Preferred ($0.10 par value) None
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of shares of the voting stock held by
non-affiliates of the Company, based on the bid price of such stock on the
Over-The-Counter electronic bulletin board. on October 7, 1997 was $1,769,022.
The number of shares of Common Stock outstanding as of October 7, 1997
was 31,139,008.
Documents Incorporated by Reference
None
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PART I
ITEM 1. BUSINESS
General
The Company consists of N. U. Pizza Holding Corporation and its wholly-owned
subsidiaries Formaggi Inc. and Numero Uno Franchise Corporation.
N. U. Pizza Holding Corporation was incorporated under the laws of the State of
Nevada in 1981 as Gelet Enterprises, Inc. In April 1993, Gelet Enterprises, Inc.
changed its name to N. U. Pizza Holding Corporation. Its principal place of
business is 16800 Devonshire Street, Suite 305, Granada Hills, California 91344,
telephone number (818) 368-2616. Numero Uno Franchise Corporation, franchises a
chain of restaurants known as Numero Uno Pizzeria. Numero Uno Franchise
Corporation has developed a unique system for producing and merchandising
distinctive, high quality Sicilian style, deep-dish pizza, sandwiches and other
Italian food products. There are two types of Numero Uno establishments: (1)
full service Numero Uno Pizzeria Restaurants which offer server-assisted, sit
down, dining room service, with takeout and delivery service as an ancillary
feature of its business, (2) Numero Uno Pizzeria and Sandwich establishments
which provide only limited dine-in service and which feature takeout and
delivery services. The Company operates four full-service Numero Uno Pizza
Restaurants.
Numero Uno Franchise Corporation maintains centralized franchising, buying,
personnel, systems, pricing, advertising, merchandizing and accounting functions
at its principal executive offices. Most of the Company's business is currently
done in Southern California.
Formaggi Inc., which is currently a wholly-owned subsidary, franchises the
"Oregon's Originial Sandwich Express and Bakery" concept and a new dual concept
known as "Formaggi Pizza/Sandwich Express". Both concepts feature limited
dine-in service and provide takeout, delivery, and, in some instances,
drive-thru services. Formaggi Inc. also operates the bakery that produces the
bread products used in the Sandwich Express restaurants. Most of Formaggi Inc.'s
business is currently done in Oregon.
Pursuant to a stock purchase agreement (the "Agreement") dated February 1, 1994,
as amended, Woodbury, Inc., an affiliate, acquired all of the issued and
outstanding shares of common stock of N. U. Pizza Holding Corporation. The
agreement was approved by the respective directors of both companies and the
transaction was formally closed on April 19, 1994. The consideration paid to the
shareholders for the acquisition of N. U. Pizza Holding Corporation was 80,000
shares of Woodbury, Inc.'s convertible
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preferred stock. Upon formalization of the acquisition of N. U. Pizza Holding
Corporation by Woodbury, Inc., the directors of N. U. Pizza Holding Corporation
and Woodbury, Inc. approved the merger of Woodbury, Inc. into its newly acquired
subsidiary, N. U. Pizza Holding Corporation. The stockholder of Woodbury, Inc.
received one share of common stock of N. U. Pizza Holding Corporation for each
share of Woodbury, Inc. common stock that he owned. N. U. Pizza Holding
Corporation has amended its articles of incorporation to provide for
capitalization similar to that of Woodbury, Inc., including the authorization of
convertible preferred stock. The merger of Woodbury, Inc. and its wholly- owned
subsidiary did not require Woodbury, Inc. shareholder action. Ronald J. Gelet,
who was the sole officer and director of the Company prior to the merger has
remained in his capacity as president and director.
On January 7, 1997, N.U. Pizza Holding Corporation consummated an asset purchase
agreement whereby it bought certain assets from the DAS Group, Inc., the owner
of a bakery and the franchisor of Originial Sandwich Express Restaurants for
consideration of $200,000 in cash. Upon the closing of the agreement, N. U.
Pizza Holding Corporation contributed the $200,000 of assets it purchased from
the DAS Group, Inc., to a corporation known as Formaggi Inc., a recently
organized Nevada corporation, in exchange for 2,000,000 shares of Formaggi
Inc.'s common stock. Currently, there are no other shareholders in Formaggi
Inc..
Formaggi Inc. currently operates the bakery and franchises Oregon's Original
Sandwich Express and Bakery Restaurants and a new dual concept known as Formaggi
Pizza/Sandwich Express. N. U. Pizza Holding Corporation has a wholly-owned
subsidiary known as Numero Uno Franchise Corporation, which was incorporated in
1975, to franchise Numero Uno Pizza Restaurants.
The Company's Products
The distinguishing characteristics of the Numero Uno system include, but are not
limited to, a unique and readily recognizable design, color scheme and layout
for the premises where such business is conducted; distinctive furnishings;
specialized paper products; signs and advertising; and distinctive trade names,
service marks and other identifying marks, designs, logos and commercial symbols
including, without limitation, "Numero Uno Pizzeria,", "Numero Uno Takeout and
Delivery," "One Bite and We Gotcha" and "Pizza, Pasta and More." In addition,
the Company and its president have created and perfected unique and distinctive
methods for preparing, serving and merchandising Sicilian-style deep dish pizza,
sandwiches and other related food products including the use of specially
prepared ingredients and secret recipes which the Company and its president
originated.
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Pizza is clearly the most important product in the Company's line. Deep dish,
Sicilian-style is the most popular product and New York-style thin crust pizza
is second in demand.
As of June 30, 1997, there were 57 franchised restaurants in the Numero Uno
system featuring dine-in facilities as well as takeout and delivery services.
Also, as of June 30, 1997, the Company owned and operated four full service
restaurants.
Domestic Franchising
The Company began franchising Numero Uno full service restaurants in 1975.
Through franchising activities, the Company has established a good reputation
and a demand for its deep dish, Sicilian-style pizza, sandwiches and other
Italian food products. The name Numero Uno and the related tradenames,
trademarks, service marks, logo designs and commercial symbols have come to
signify to the public the highest standards of quality, cleanliness, appearance
and service, all of which are publicized through various advertising media. The
Company currently engages in the sale and administration of full service
restaurant franchises as well as takeout and delivery restaurant franchises.
The franchise terms granted to each franchisee are subject to terms and
conditions of the then applicable franchise agreement. Over the past twenty
years, the franchise licenses have been modified so that the terms of the
franchise agreements range from ten to twenty years; initial franchise fees
range from $6,000 to $25,000 and royalty fees are either a percentage of
revenues ranging from 3.0% to 7.0% of net franchise sales, or are fixed at
either $1,250 or $1,800 per month. Advertising fees are fixed at $200 per month.
Typically, the franchise agreements provide for either a protected delivery
territory or an exclusive delivery territory.
The Company provides the franchisee assistance with site selection, lease
negotiations, architectural designs and training. On a continuing basis, the
Company creates, develops and purchases local and regional advertising, public
relations and promotional campaigns. The Company negotiates purchase contracts
for proprietary and mandatory products on an annual basis. Also, on an ongoing
basis, the Company provides supervision and operating assistance to franchisees.
International Franchising
International development agreements grant the licensee the right to develop the
Numero Uno system and concept in an overseas market by opening either franchised
full service or takeout and delivery restaurants.
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The license grants exclusivity for a fixed period of years providing that the
licensee fulfills the development schedule set forth in the respective
agreement. The initial non-refundable fee is based on the negotiated number of
restaurants to be opened under the agreement, with a typical fee ranging from
$10,000 to $15,000 per restaurant. Typically, the first restaurant must be
opened within one year of execution of the agreement with the balance of
restaurants to be opened within five years.
Once the development terms are met, the licensee has the right to extend the
term of the agreement for an additional 25 years and also has the right to open
additional restaurants. The Company receives a negotiated initial fee for the
opening of each additional restaurant. The Company also receives a royalty fee,
typically 2.0% of net sales, from restaurants that are operating under
international development agreements. The initial and ongoing services provided
by the Company are the same as for domestic contracts with the exception of
advertising services.
There are currently five international development agreements in effect: China;
South Korea; Indonesia; Lebanon and the United Arab Emirates; and the
Philippines. Currently, one restaurant is open in China, ten restaurants are
open in South Korea, one restaurant is open in Indonesia and four restaurants
are open in Kuwait.
Company-owned Restaurants
During 1996, the Company had the opportunity to acquire three existing,
profitable franchise restaurants and currently operates those restaurants, along
with a new test concept store. The Company has decided to concentrate its growth
and effort in the domestic and international franchising of the Numero Uno
concept and to providing assistance to Formaggi Inc. to grow its two concepts
outside of California. No additional company operations will be added and the
marginal company restaurants, if not all, will be franchised.
Merchandise, Suppliers and Distributors
There are numerous products and recipes in the Numero Uno system that are
proprietary in nature. These items have either been developed by Numero Uno or
by others for exclusive use with the Numero Uno system. Whenever possible,
license agreements are entered into with outside vendors to prepare these
products for ultimate distribution exclusively to Numero Uno restaurants. This
is to ensure that the highest level of quality is maintained and that there is
consistency throughout the chain. Proprietary items include, but are not limited
to the following items: tomato sauce, meat sauce, alfredo sauce, soup, garlic
sauce and recipes for dough, lasagna and meatballs. Two dough recipes are the
most
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important products in the Numero Uno system. Both dough recipes were developed
by Ronald J. Gelet and are directly responsible for the uniqueness of the
respective pizza products. The formula and ownership of the recipes belong to
Mr. Gelet. The Company, pursuant to a licensing agreement, has the exclusive
right to the use and distribution of the formula and recipe. Mr. Gelet receives
a royalty based on total pounds of dough sold through an exclusivity agreement
with the Company.
Each restaurant must order and purchase all dough, spices, sauces and other
proprietary items designated by the Company, exclusively from the Company or its
designated distributor. These items are made available on terms and at prices
equally applicable to all restaurants located within the same freighting area
and are competitive with other items of like quality and quantity. Pizza dough,
spices and sauces are produced from secret recipes; consequently, in order to
preserve the confidentiality of such recipes, it is essential that the source of
purchase be limited.
To further ensure high standards of quality and consistency throughout the
Numero Uno Pizzeria chain, there are many additional items which are set forth
in the operations manual as mandatory for use in Numero Uno restaurants.
Mandatory items, unlike proprietary items, are items that are not exclusively
produced for the Numero Uno system but are brand items or items that are
identified by Numero Uno as having specific quality or nature. These items
include, but are not limited to the following: pepperoni, bulk Italian sausage,
pasta products, tomatoes, canned sauces, spices, seasonings, grades of
vegetables, salad bar items and percent of leanness in meat products.
Employees
The Company currently has seventy-one "non-union" employees. This does not
include personnel that are employed by the Company's franchisees. Management
believes that its employee relations are generally good.
Competition
There is a tremendous amount of competition in the pizza business. The Company
faces competition for patronage of customers in varying degrees from national,
regional and local chains which are located in the Company's marketplace. Many
of these competitors offer merchandise similar to that available by the Company.
The Company attempts to compete by offering what it believes to be higher
quality food and better service at reasonable prices.
The Company's major national competitors include Pizza Hut,
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Dominos and Little Caesar's. Regional competitors include Shakey's, Round Table,
Mountain Mike's Pizza and Papa Murphys Pizza. There is also significant
independent competition which currently accounts for more than 50% of the pizza
market in Southern California.
In the recent past, the competition in the Southern California marketplace has
intensified. Predatory pricing and deep discounting have had an effect on
consumers' brand loyalty. The Company also competes for the customers' dollar
with virtually all restaurants in the Southern California marketplace whether or
not they specialize in pizza or offer Italian specialty items.
Trademarks, Service Marks, Tradenames, Logo Types and Commercial Symbols
"Numero Uno" is a registered service mark in the State of California. The Numero
Uno name was first used in California on June 15, 1973 and was registered as a
state service mark on February 27, 1986 as Reg. #26019. A separate California
service mark registration for the words "Numero Uno" with design was obtained on
March 22, 1986 as Reg. #4242. Both of said registrations are currently held by
N. U. Pizza Holding Corporation.
On September 6, 1985, the Company obtained a state service mark registration for
"Numero Uno Pizza, Pasta and More" as Reg. #24304. The Company was issued a
certificate of registration by the United States Patent and Trademark Office
evidencing the registration on March 11, 1986 of the service mark "One Bite and
We Gotcha" on the principal register as Reg. #1386261 and a Section 8 Affidavit
of Use has been timely filed. The Company was also issued a certificate of
registration by the United States Patent and Trademark Office for the mark
"Pizza, Pasta and More" which was registered on the principal register on May 6,
1986 as Reg. #1392746 and a Section 8 Affidavit of Use was timely filed. The
mark "Numero Uno Takeout and Delivery" is not separately registered. The Company
does not believe that such registration would be significantly beneficial
inasmuch as the distinctive part of the mark, the words "Numero Uno," are
already the subject of a state registration.
On April 18, 1996, the Company applied for a registered trade mark in the State
of Oregon for "Formaggi" as Serial #75/094005. The application is currently
pending with the U.S. Patent and Trademark Office. Formaggi Inc. owns by
assignment "Oregon's" Original Sandwich Express Bakery" trademark as Reg. #
1747562 with the U.S. Patent and Trademark Office.
There are presently no effective adverse determinations of the United States
Patent and Trademark Office; the trademark administrator of any state or any
court; no impending
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interference, opposition or cancellation proceedings; nor any pending material
litigation involving any of the foregoing marks which is relevant to their use
in California. With the exception of the agreement with Pizzeria Uno Corporation
(which prevents the Company from using the name anywhere within the continental
United States except for California), there are no agreements currently in
effect which significantly limit the rights of the Company or its affiliated
entities to use or license the use of any of the said marks. Furthermore, there
are no infringing uses actually known to the Company which would materially
affect the use of any of the marks in California.
The Company has copyrights on certain confidential operations manuals and
confidential food preparation manuals. These copyrights are not registered.
Under each franchise agreement, the franchisee is granted the right to use the
manuals during the term of his franchise, subject to the confidentiality
restrictions and other terms and conditions contained in the franchise
agreement. There are presently no effective determinations of the copyright
office, or any court, any pending interference, opposition or cancellation
proceedings, or any material litigation involving manuals which is relevant to
their use in California.
ITEM 2. PROPERTIES
Restaurants
All of the Company-owned restaurant sites are leased. In many instances, the
Company has also signed or guaranteed leases for restaurants operated by
franchisees. The leases for the restaurant premises vary as to their terms,
rental provisions, expiration dates and the existence of renewal options. The
number of years remaining on the leased locations range from approximately one
to eight years. The termination of any of the leases due to expire within the
next two years (without renewal options) would not have a material adverse
effect on the operations of the Company. Most of the leases provide for a fixed
minimum rent and some have provisions for additional rent based on a percentage
of the total sales in excess of certain amounts. Many leases also provide that
the Company shall pay all, or a portion of, the real estate taxes, insurance
charges and maintenance expenses related to the leased premises.
The Company has historically acquired locations for new restaurants through a
variety of methods including direct leases, assignments of subleases of existing
facilities and build-to-suit leases. In many cases, the Company is able to lease
or sublease existing buildings that have previously been used for restaurants.
In connection with the opening of new restaurants, the Company generally makes
capital improvements and incurs
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expenses of approximately $300,000 to $400,000 per restaurant. These costs
consist of leasehold improvements, inventory, fixtures, equipment, furniture,
signs, pre-opening costs and, in some cases, lease acquisition costs.
Company-owned restaurants are either located in or adjacent to shopping centers
of varying sizes and have adjacent parking facilities or are free-standing with
parking that is specific to the location. The restaurants generally operate from
11:00 a.m. to 9:00 p.m., Sunday through Thursday, and 11:00 a.m. to 11:00 p.m.
on Friday and Saturday. Particular location schedules may vary slightly.
Corporate Office
The Company relocated its corporate offices during the year ended June 30, 1997
and currently leases space located at 16800 Devonshire Street, Suite 305,
Granada Hills, California. The space is approximately 2,000 square feet. There
is approximately thirty months remaining on the lease.
ITEM 3. LEGAL PROCEEDINGS
1. Jasvir Singh Basi aka David Basi, Ravinder K. Basi aka Linda Basi, and
Basi Food Company, Inc. vs. Ronald J. Gelet, Numero Uno Franchise Corporation,
Numero Uno, Inc., Gregory Golem and Does 1 through 100, inclusive, Superior
Court of the State of California for the County of Los Angeles, Case No.
LC023294. In October 1985, the Company entered into a franchise agreement with
Jasvir Singh Basi and Ravinder Kaur Basi for a full service restaurant located
in Winnetka, California. In or about June 1993, a dispute arose between the
Basis and the Company relating to the nature of the Basis' delivery rights and
the geographic territory originally allocated to them. Pursuant to the franchise
agreement, the Basis' right to delivery into the originally allocated area was
non-exclusive and, upon the occurrence of certain conditions. was subject to
termination followed by renegotiation of an alternate delivery area with a new
one. The Basis denied that they had agreed to a replacement delivery area and,
further alleged that, by separate agreement, their delivery area was expressly
agreed to. The Basis responded with a cross-complaint which sought compensatory
and punitive damages and other relief based on claims of breach of contract,
breach of covenant of good faith and fair dealing, intentional interference with
prospective advantage, intentional infliction of emotional distress and
violations of the Racketeer Influenced and Corrupt Organizations Act
("R.I.C.O."). The Company filed a demurrer to the cross complaint and the Basis
filed a first amended cross complaint in January 1994. On September 27, 1994,
the parties settled the lawsuit. The Company agreed to a royalty abatement
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which commenced on October 1, 1994 and continues for five years thereafter. The
Company also agreed to a one-time waiver of the transfer fee should the
franchisee decide to sell its franchise. In addition, the parties established
the boundaries of the franchisee's geographic territory and delivery rights.
As part of the settlement agreement, one of the plaintiffs entered into a new
franchise agreement with the Company in October, 1995. Subsequently, the
plaintiff breached his obligations under the franchise agreement by failing to
pay required fees and his franchise was terminated by the Company. The plaintiff
refused to vacate the restaurant he was subleasing from the Company, continued
to use Company trademarks and breached his building lease with the landlord by
failing to pay rent which was due. The Company was forced to pay back rent to
the landlord and utilities.
The plaintiff and the Company agreed to arbitrate their claims. The plaintiff
filed a claim against the Company and its president for fraud, intentional
infliction of emotional distress and breach of fiduciary duty in the amount of
$418,000. The Company filed a cross claim against the plaintiff for breach of
contract and trademark infringement for $100,000. The Company is also seeking
indemnification for rents and utilities paid on behalf of the plaintiff and
damages for trademark infringement and unfair competition claims in the amount
of $7,000.
Management believes that the Company will prevail in arbitration, because the
plaintiff's claims are without merit, and at best the plaintiff can only seek
damages for breach of his franchise agreement since the September, 1994
settlement agreement was reached between the parties. Management also believes
that the outcome will not have a material adverse effect on the Company's
financial position.
2. Shaikh Irshad Ahmad Taj vs. Numero Uno, Inc., Numero Uno Franchise
Corporation and N. U. Pizza Holding Corporation, Orange County Superior Court
Case No. 719323. This is an action filed for breach of contract which was filed
on October 20, 1993 in the Orange County Superior Court against the Company, its
president and several of its subsidiaries. The matter arose out of a promissory
note executed by the Company on October 1, 1991 in the original amount of
$130,000 and which was secured by a security agreement. Plaintiff alleged that
the Company breached the security agreement and therefore the entire amount of
the promissory note is accelerated. The complaint was served on the Defendants
in April 1994 and the defendants answered the complaint. A Mandatory Settlement
conference was held on September 16, 1994 and the parties were unable to reach a
settlement. The Court ordered the matter to binding arbitration and at a hearing
on December 8, 1995, the matter was resolved in
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favor of the Company. The Company was held not to be liable for any portion of
the note.
3. Numero Uno Franchise Corporation vs. Thomas Chan, Anita Chan, Danny Kong
and Judy Kong and Does 1 through 10, inclusive, Los Angeles Superior Court Case
No. BC109959. This matter arose out of the breach of a sublease by an assignee
of the Defendants. On or about January 29, 1982, Defendants subleased premises
from the Company and on or about March 20, 1992, Defendants assigned their
right, title and interest to the sublease to other assignees. The assignment
specifically stated that it "shall not release the originally named sublessees
from liability for the continued performance on the terms and provisions on the
part of the sublessee to keep informed." Commencing on or about January 1, 1994,
the new sublessees failed and continued to fail to pay rent to the lessor or to
the Company.
As a result of the failure to pay rent, the landlord brought an action in the
Los Angeles Municipal Court entitled William Ong d/b/a Fairview Enterprises vs.
Numero Uno Franchise Corporation to recover damages for breach of lease in the
sum of $15,086. The Company stipulated with the landlord in August 1994 to
payment of $43,645 in monthly installments of $2,012. A judgment may be entered
against the Company, if it fails to meet its monthly payment obligation. The
Company had performed all of the conditions and obligations to be performed
under the sublease and believed that it is entitled to indemnification from the
Defendants in the same amount stipulated in the Ong action. On October 15, 1994,
the Company entered into a Stipulated Judgment whereby the Defendants agreed to
pay the Company $31,000 in monthly installments of $750. During the year ended
June 30, 1997, with $10,000 remaining due on the installment agreement, the
sublessee agreed to pay the Company $6,000 and the remaining $4,000 was forgiven
by the Company.
4. Maurice Pack vs. Mission Gorge Pizza, Inc., Numero Uno Franchise
Corporation and N. U. Pizza Holding Corporation, Los Angeles Superior Court Case
No. LC033111. This was a complaint filed on July 21, 1995 for $50,943 due on a
promissory note and guarantees. The Company guaranteed a franchisee's note
payments. The franchisee defaulted on payments under the promissory note due to
the plaintiff beginning in April 1995 and continuing thereafter. A status
conference had been set for May 17, 1996 but was taken off the calendar when the
parties settled the matter. The Company agreed to pay the plaintiff $56,723 in
monthly installments until paid in full.
5. Filet Menu, Inc. vs. Numero Uno, Inc., Gelet Enterprises, Inc. and Ronald
J. Gelet, Los Angeles Superior Court Case No. DC114313. This is an action filed
on October 12, 1994 against the Company for breach of a settlement agreement.
This matter
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arose out of the settlement of a previously filed lawsuit filed by the plaintiff
against the Company in 1987. As part of that settlement agreement, the Company
entered into a written agreement with the plaintiff for the purchase and payment
of merchandise. The plaintiff alleged that the Company breached that agreement
by failing to purchase all the required items and also failed to pay for some
items which were delivered under the settlement agreement. The Company contended
that Filet Menu breached the settlement agreement. The Company answered the
complaint and the Superior Court referred the matter to the Joint Association
Settlement Program. After a settlement conference was held, the parties settled
the matter. As part of the second settlement agreement, the Company agreed to
pay the plaintiff an irrevocable consulting fee of $500,000, payable in monthly
installments of $4,167 for a period of ten years commencing on June 15, 1996 and
to use the plaintiff as exclusive supplier of various paper products used by the
Company in Numero Uno restaurants for a period of five years. Subsequently,
Numero Uno Franchise Corporation filed a Demand for Arbitration before
JAMS/Endispute, Inc. alleging that Filet Menu violated the terms of the second
settlement agreement. In November 1996, the parties entered into a new third
settlement agreement which superseded both previous agreements referenced above.
This final settlement agreement required the Company to make an immediate cash
payment of $101,000 and subsequent installment payments totalling $117,500 plus
interest on or before November 1, 2001.
6. Robert and Frances Clayton vs. Numero Uno Takeout and Delivery, Inc.,
Gelet Enterprises, Inc., Numero Uno Franchise Corporation, Ronald J. Gelet,
Gregory R. Golem and Bradley Harrington, Orange County Superior Court Case No.
749134. This action for breach of lease was filed June 26, 1995 by the landlord
of premises leased by Numero Uno Takeout and Delivery in Huntington Beach,
California. In March 1995, Numero Uno Takeout and Delivery vacated the premises.
The plaintiffs sought rent in the amount of $20,512 and other amounts for
damages according to proof. The Company contended that Numero Uno Takeout and
Delivery was a defunct entity and there was no contractual liability on behalf
of the Company and other named defendants. Defendants Gelet Enterprises, Inc.,
Numero Uno Franchise Corporation., Ronald J. Gelet and Gregory R. Golem answered
the complaint on August 16, 1995. After some discovery, the Court assigned the
case to nonbinding arbitration. An arbitration hearing was held on June 20, 1996
and the arbitrator awarded the plaintiffs $31,781. Numero Uno Franchise
Corporation did not agree with the award and filed a Request For Trial De Novo
with the Court and a court date was set for October 28, 1996. Prior to trial,
the parties entered into a settlement agreement which provides for a stipulation
for judgment should the Company fail to pay installments pursuant to the terms
of the settlement agreement. The Company agreed to pay $16,500 plus interest in
monthly installments until paid in full.
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7. Commercial Ventures vs. N. U. Pizza Holding Corporation, Los Angeles
Municipal Court Case No. 95T03975. This action was filed on August 8, 1995 and
alleged breach of contract by the Company arising out of a lease agreement
entered into in June 1990. The plaintiffs sued for back rent and other damages.
The action was filed in Municipal Court, the jurisdictional limit of the court
in which the plaintiff filed the action was $25,000. The parties agreed to
stipulate to the settlement of this matter by the payment from the Company to
the plaintiff of the sum of $12,913 which was paid in full on March 5, 1996.
8. Konstantin Gontmaher vs. Numero Uno, Inc., et al., Los Angeles Superior
Court Case No. BC013580. This matter was filed on November 14, 1994 alleging
breach of contract and various other causes of action against the Company. The
plaintiff was a franchisee of the Numero Uno restaurant location in Northridge,
California. The Company filed a demurrer and motion to strike. The demurrer was
sustained in the third through tenth causes of action with the plaintiff given
twenty days to amend the complaint. The plaintiff did not amend and the case was
on the verge of being dismissed when the plaintiff obtained new counsel and
filed a Motion for Leave to file a First Amended Complaint for amounts owing on
a note under the franchise agreement. At the same time, the Company filed a
motion for Leave to File a Cross-complaint. Both motions were granted by the
Court on May 17, 1996 and the trial was eventually set for March 10, 1997. Prior
to trial, the parties settled the matter with the plaintiff agreeing to pay the
Company $30,000.
9. Dolan Construction Company, Inc. vs. Numero Uno Franchise Corporation,
Orange County Municipal Court Case No. 300623. This was an action filed for
breach of contract and foreclosure of mechanics liens filed on September 22,
1995. The dispute centered around a parcel of real property located in Santa
Ana, California for which the Company contracted with the plaintiff to perform
improvements. The plaintiff sought $15,764 as the outstanding balance owed on
the contract. The Company responded to the complaint on October 31, 1995. After
some discovery, a Trial Setting Conference was set for April 25, 1996 but was
taken off the calendar when the matter was settled. The Company agreed to pay
the plaintiffs $15,129 at the rate of $500 per month until paid in full. The
Company entered into a stipulation for entry of judgment with the plaintiff
which may be filed with the Court in the event that the Company defaults on any
payment due to the plaintiff.
10. Century Entertainment Center, L.P. vs. Numero Uno Franchise Corporation,
Los Angeles Superior Court Case No. BC138386. This was an action filed on
November 2, 1995 for unlawful detainer for one of the Numero Uno restaurant
locations. The landlord was seeking approximately $58,000 in past due rent. A
Status Conference was held on December 1, 1995 and a trial date was set
12
<PAGE> 14
for December 18, 1995. Numero Uno Franchise Corporation made a motion to
continue the trial date which was granted and then after several more
continuances the plaintiffs and Numero Uno Franchise Corporation entered into a
stipulation to continue the trial date. The matter was settled with the Company
paying the landlord $30,000 and entering into a new lease for the premises. Upon
payment in full, the plaintiff dismissed the action.
11. Brian Moore and Linda Moore vs. Numero Uno Franchise Corporation and N. U.
Pizza Holding Corporation, Orange County Superior Court Case No. 752894. This
action was filed on September 18, 1995 for breach of a promissory note and
security agreement made by the Company to Brilinca Corporation. The plaintiffs,
Brian and Linda Moore are the assignees of Brilinca Corporation. The Moores
alleged that the Company defaulted on amounts owing to them of $77,917. In
addition to Numero Uno Franchise Corporation, the plaintiffs have sued N. U.
Pizza Holding Corporation as guarantor of Numero Uno Franchise Corporation's
obligations. A tentative settlement was reached with the Moores' attorney but
the Moores did not agree with the terms. Because the parties were in settlement
negotiations, the Court took the hearing on the Right to Attach Order and the
Settlement Conference off the calendar. The Settlement Conference, however, was
held on June 28, 1996. The parties were unable to settle the matter and a trial
date was scheduled for October 16, 1996. Prior to the trial date, the parties
settled the matter with the Company agreeing to pay approximately $54,500 plus
interest at 10% per annum in monthly installments until paid in full.
12. Shin vs. Numero Uno Franchise Corporation, Los Angeles Superior Court. On
July 28, 1995, an action was filed for amounts due on a promissory note. The
plaintiffs alleged that the Company was in arrears on an installment note made
on July 16, 1993 for approximately $107,900. The Company responded to the
complaint on September 19, 1995 and the parties settled the matter on April 4,
1996 with the Company paying the plaintiffs $96,000. The remaining balance of
$11,900 was forgiven by the plaintiffs.
13. Janet Tseng-Law and Ronald E. Law vs. Numero Uno Franchise Corporation, N.
U. Pizza Holding Corporation and Numero Uno Takeout and Delivery, Inc., Whittier
Municipal Court Case No. 95C03094. This is an action for breach of contract for
failure of Numero Uno Takeout and Delivery, Inc. to make payments on a
promissory note. The plaintiffs are seeking $12,604. The action was filed on
September 28, 1995 and an answer was filed on behalf of Numero Uno Franchise
Corporation and N. U. Pizza Holding Corporation on December 6, 1995. The Company
subsequently made a settlement offer to the plaintiffs but the plaintiffs'
counsel has not pursued settlement. Currently, the case is dormant. The Company
believes the matter will eventually be settled for no
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<PAGE> 15
more than the balance due on the original promissory note.
14. Numero Uno Franchise Corporation vs. John Dino, D.J. Clark, Pro Form
Management Company and James Xanthos, Los Angeles Superior Court Case No.
BC142602. A complaint was filed by Numero Uno Franchise Corporation on January
17, 1996 for damages and injunctive relief for service mark infringement,
dilution of mark, common law trademark and service mark infringement, unfair
competition and breach of contract. James Xanthos, a former franchisee of Numero
Uno Franchise Corporation, sold his restaurant to the remaining defendants (the
"Pro Form defendants"). Specifically excluded from the assets sold to Pro Form
defendants was the right to use the name Numero Uno. The Pro Form defendants
continued, however, to use the name and Numero Uno's other trademarks. In
addition to filing the complaint, the Company filed an Application for Temporary
Restraining Order and a Preliminary Injunction. The Preliminary Injunction was
granted on February 2, 1996. The Pro Form defendants continued, however, to use
the Numero Uno name and marks. Subsequently, the Company filed and Application
for an Order to Show Cause re Contempt. The Court held the Pro Form defendants
in contempt and issued a bench warrant and ordered the Pro Form defendants to
appear in Court again on April 2, 1996. On March 15, 1996, the Company filed a
Request for Entry of Default against the Pro Form defendants and default was
entered on the same day. At June 30, 1996, the defendants still had not appeared
before the Court and the Company subsequently decided to withdraw its action.
15. Peggy Latham vs. Numero Uno Franchise Corporation, et al, Los Angeles
Municipal Court Case No. 018336Y. This is an action filed against the Company on
October 18, 1996 for sexual battery, intentional infliction of emotional
distress and other allegations concerning sexual discrimination. The matter
arose out of an alleged incident between an employee of the Company and the
plaintiff. The Company investigated the matter and believed it was without
merit. A status conference was held on June 2, 1997 and the Court set the matter
for trial on October 20, 1997. Prior to the trial date, the Company resolved the
matter by paying the plaintiff a settlement of $5,000.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of the Company's security holders.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANTS, COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
On December 30, 1993, the Company's common stock was authorized for trading in
the over-the-counter market on the "Electronic Bulletin Board" under the symbol
"NUZA." The Company's common stock is not listed on NASDAQ. The Company's common
stock did not start to trade on the over-the-counter market until January 1995.
The following table shows the range of high and low bid quotations of the
Company's common stock as traded in the over-the-counter market:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, June 30, June 30,
1997 1996 1995
------------- ------------- -------------
High Low High Low High Low
Fiscal Period Bid Bid Bid Bid Bid Bid
- ------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter 0.31 0.13 0.72 0.25 N/A N/A
Second Quarter 0.18 0.08 0.43 0.16 N/A N/A
Third Quarter 0.18 0.11 0.34 0.16 4.50 1.00
Fourth Quarter 0.16 0.07 0.34 0.22 1.44 0.34
</TABLE>
The above quotations were reported by the National Daily Quotation Service and
were furnished by the National Quotation Bureau, Inc. The quotations represent
prices between dealers, do not include retail markups, markdowns or commissions
and do not necessarily represent prices at which actual transactions were or
could have been effected.
Holders
As of October 7, 1997, the total number of shareholders was 506.
Dividends
The Company has not declared dividends on its common stock since its inception,
and the Company does not anticipate paying dividends in the foreseeable future.
The Company's Preferred Series B Stock bears a coupon rate of 9% which is
cumulative. Since the Company has not declared dividends, this amount is
accumulating and will accumulate until such time as dividends are paid.
15
<PAGE> 17
The Company's Preferred Series C Stock bears a coupon rate of 10% which is
cumulative and provides an option to convert the Preferred Stock to Common Stock
at $.50 per share. Since the Company has not declared dividends, this amount is
accumulating and will accumulate until such time as dividends are paid.
Dividends in arrears at June 30, 1997 totaled $3,000.
16
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Eleven
Year Ended Year Ended Year Ended Months Ended Year Ended
June 30, June 30, June 30, June 30, July 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Franchise Revenue $ 1,449,600 $ 1,144,800 $ 743,100 $ 2,387,800 $ 2,329,100
Franchise Operating
Income (Loss) $ 199,100 $ (1,133,900) $ (2,055,500) $ 175,800 $ (170,400)
Company-owned
Restaurant Sales $ 1,708,200 $ 483,200 $ 3,460,000 $ 2,218,500 $ 697,300
Company-owned
Restaurant
Income (Loss) $ (114,600) $ (137,500) $ (1,022,500) $ (234,400) $ 23,200
Net Income (Loss) $ 82,900 $ (1,273,800) $ (2,923,500) $ (62,600) $ (152,000)
Net Income (Loss)
per Common Share $ - $ (.08) $ (.29) $ (.01) $ (.03)
Weighted Average
Number of Shares 30,846,616 15,420,508 10,203,653 6,186,200 6,020,000
Outstanding
Cash Dividends per
Common Share None None None None None
Total Assets $ 2,439,600 $ 2,880,300 $ 2,168,800 $ 3,394,900 $ 2,280,700
Long-term
Obligations $ 320,900 $ 783,800 $ 241,600 $ 637,400 $ 285,800
Stockholders'
Equity (Deficit) $ 1,068,200 $ 555,300 $ (160,100) $ 304,900 $ 327,000
Working Capital
Deficiency $ (459,300) $ (579,100) $ (1,396,800) $ (1,343,900) $ (865,300)
Current Ratio .52 .58 .26 .34 .39
Number of Franchised
Restaurants 57 51 44 44 48
Number of Company-
owned Restaurants
Including the Bakery
(1997) 5 4 6 14 0
</TABLE>
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This analysis of the Company's financial condition, capital resources and
operating results should be viewed in conjunction with the accompanying
consolidated financial statements, including the notes thereto.
Liquidity and Capital Resources
The Company achieved profitability in the year ended June 30, 1997 for the first
time in the past five years and, as a result, has an accumulated deficit of
$4,477,400 and a working capital deficit of $459,300 at June 30, 1997. There has
been a minimal return on assets.
During the year ended June 30, 1997, the Company reported net income of $82,900
despite increased competition in the marketplace from both national and regional
pizza restaurant chains. Until recently, the Company's profitability was also
negatively impacted by depressed economic conditions in Southern California.
The Company's business continues to generate negative cash flows. During the
year ended June 30, 1997, the Company operated four Company-owned restaurants
resulting in negative cash flows and operating losses. The Company's franchise
operations have started to improve and were profitable in the current year. The
acquisition of the assets of an Oregon restaurant chain in January 1997 for cash
of $200,000, the additional payment of $100,000 to an individual who sold the
Company a restaurant during the year ended June 30, 1996 for common stock and a
$101,000 settlement payment to a vendor also reduced the Company's cash
resources.
During the years ended June 30, 1996 and 1995, the Company was forced to take
back many previously sold restaurant locations because, in many cases, the
Company remained obligated as lessee on the restaurant location. The operation
of these locations and losses recognized on uncollectible notes receivable from
franchisees, forced the Company to incur significant net losses of $1,273,800
and $2,923,500, respectively, for the years ended June 30, 1996 and 1995.
Despite these drains on cash flow, in management's opinion, the Company's
ability to continue as a going concern has improved for the following reasons:
The Company has reduced its operating costs in the current year primarily as a
result of the sale or closure of underperforming and unprofitable Company-owned
restaurant locations and the
18
<PAGE> 20
renegotiation of restaurant lease commitments during the years ended June 30,
1997 and 1996. The Company also continued to reduce its liabilities by the
payment of obligations from its cash flow.
As the Company owns and operates fewer restaurants, the amount of cash required
to support its operations has been substantially reduced. Financial commitments
and uncertainties affecting cash flow have also been reduced. To continue this
trend, the Company plans to sell existing company-owned restaurants to new
franchisees in the next fiscal year.
The Company's cash outflow for capital expenditures was only $12,200 for the
year ended June 30, 1997. This reduction in capital expenditures is due to the
disposition of the Company's older restaurants in the year ended June 30, 1996.
Property and equipment of $310,000 was sold during the year ended June 30, 1997
in exchange for notes receivable.
The Company has continued to settle lawsuits and in management's opinion is not
currently involved in any material litigation which could result in additional
obligations. The Company settled a lawsuit in the current year with a major
supplier and significantly reduced its future commitments. During the year ended
June 30, 1996, the Company agreed to pay the supplier an irrevocable consulting
fee of $500,000, payable in monthly installments of $4,200 for a period of ten
years commencing on June 15, 1996 and to use the supplier exclusively for
various paper products used by the Company in Numero Uno Pizzeria restaurants
for a period of five years. During the current year, the Company filed a demand
for arbitration alleging that the supplier violated the terms of a settlement
agreement reached during the year ended June 30, 1996. In November 1996, the
parties entered into a new settlement agreement. Pursuant to the terms of the
new final settlement agreement, the Company made a lump sum payment of $101,000
to the supplier and agreed to make monthly installment payments totalling
$117,500 plus interest at 8% per annum through November 1, 2001 to fully satisfy
its obligation.
The Company has reduced and extended its long-term debt requirements. During the
year ended June 30, 1997, principal payments on long-term debt totalled $541,000
compared to $435,200 during the year ended June 30, 1996.
During the year ended June 30, 1997, the Company has continued to raise capital
through stock offerings ($515,000). Collections on notes receivable remained
stable and totalled $191,800 for the year ended June 30, 1997. The Company also
borrowed $140,600 from its president and an affiliated corporation that he
controls.
19
<PAGE> 21
Due to the factors discussed above, although cash flow has declined in the
current year, in management's opinion, cash flow should improve and stabilize in
the future.
The Company plans to grow through the acquisition of established restaurant
businesses which may help increase its profitability in the near future, and the
Company will also continue to concentrate on strengthening its existing
franchise base and expanding its international franchising operations.
Operating Activities
Accounts receivable have increased $47,700 to $127,900 at June 30, 1997
primarily because franchisees have had continued difficulty making royalty
payments in a timely manner. Past due royalties of $83,500 were converted to
notes receivable during the year ended June 30, 1997.
Inventories increased $7,700 to $24,500 at June 30, 1997 due to the completion
and opening of a restaurant location that was under construction at June 30,
1996 and the purchase of inventory at the Sandwich Express bakery.
Prepaid expenses increased $3,500 to $78,300 at June 30, 1997 due primarily to
an agreement whereby the Company received $15,000 of consulting services in
exchange for 150,000 shares of common stock at $.10 per share.
Deposits and other assets increased $11,500 to $33,300 at June 30, 1997 due to
the payment of a rent deposit on one of the restaurants purchased during June
1996.
Accounts payable and accrued expenses decreased $60,100 to $516,300 at June 30,
1997 due to the increased payment of outstanding trade payables during the year.
Deferred franchise fee income decreased $64,000 to $100,900 at June 30, 1997.
The Company entered into a new licensing agreement for fees of $25,000 and
$89,000 of deferred franchise fees were recognized as income during the year
ended June 30, 1997.
Accrued franchise advertising payable decreased $68,900 to $46,600 at June 30,
1997. Correspondingly, restricted cash and franchisee advertising receivable
have also decreased $68,900 to $17,000 and $29,600, respectively, at June 30,
1997.
Investing Activities
Notes receivable increased $141,100 to $725,300 at June 30, 1997. The Company
exchanged $305,000 of notes receivable for fixed assets, exchanged $83,500 of
accounts receivable for notes
20
<PAGE> 22
receivable, received $5,000 of fixed assets in exchange for a reduction in notes
receivable and received $191,800 of principal payments on outstanding amounts
due. In addition, the Company specifically wrote off notes receivable of
$181,400 and increased its reserve for possible future notes receivable losses
by $130,800.
In January 1997, the Company paid $200,000 to acquire certain assets of the DAS
Group, Inc. which included worldwide franchising rights ($20,000), a covenant
not to compete ($36,000) and goodwill ($144,000). Goodwill represents the excess
of the purchase price of the net assets of the DAS Group, Inc. over their fair
value at the date of acquisition.
Net leasehold improvements, property and equipment and construction in progress
decreased $457,800 to $1,154,100 at June 30, 1997. The decrease is due primarily
to depreciation and amortization of $240,200, the sale of equipment and
leasehold improvements with net book values totaling $234,800, purchases of
$12,200 and $5,000 of equipment received as payment on a note receivable.
Financing Activities
Long-term debt decreased $557,900 to $411,200, accrued litigation settlements
decreased $373,300 to $122,500 and loans payable to related parties increased
$170,600 to $173,900 at June 30, 1997. The Company borrowed $13,100, made
principal payments on long-term debt of $541,000 and paid $118,300 toward an
accrued litigation settlement. The Company recognized $260,000 of income as a
previously accrued litigation settlement to a supplier was modified. The Company
also received $140,600 from related parties.
Common stock and additional paid-in capital increased $7,100 and $559,900 to
$31,100 and $5,989,100, respectively, at June 30, 1997.
The Company raised $652,000 from Regulation S stock offering subscriptions and
issued common stock in exchange for $15,000 of consulting services. The Company
collected $515,000 of the subscriptions. In addition, the Company paid an
additional $100,000 to an individual who sold the Company a restaurant during
the year ended June 30, 1996 in exchange for common stock. The Company agreed to
make the payment since the seller was unable to sell the Company's common stock
at a value established by the parties in connection with the Company's
acquisition of the restaurant. The Company charged the $100,000 payment to
additional paid-in capital.
21
<PAGE> 23
Results of Operations
Year Ended June 30, 1997 as Compared to the Year Ended June 30, 1996
Franchise Operations
Initial franchise fees increased $25,100 to $89,000 (39.3%) as compared to
$63,900 for the year ended June 30, 1996. The increase resulted from the opening
of the first international restaurant location in Indonesia in December 1996.
For the year ended June 30, 1997, the Company earned royalty income of $554,400,
a decrease of $58,000 (9.5%) as compared to royalty income of $612,400 for the
year ended June 30, 1996. This decrease is due primarily to a continued decline
in system- wide sales and the conversion of three franchises into Company- owned
restaurants in June 1996 from which the Company no longer receives royalties.
The overall decrease in royalty income was offset in part by the acquisition of
Sandwich Express in January 1997. Royalties earned from new franchisees totaled
$49,400 during the year ended June 30, 1997.
Rental income for the year ended June 30, 1997 increased $17,900 (10.9%) to
$181,800 as compared to $163,900 for the year ended June 30, 1996. This increase
is due to increased rental receipts from franchisees who pay their rent to the
Company who, in turn, pays rent directly to the landlord.
Interest income decreased $40,500 (47.8%) to $44,200 for the year ended June 30,
1997 as compared to $84,700 for the year ended June 30, 1996. This decrease is
due to the Company's successful collection of notes receivable during the year
ended June 30, 1996 resulting in fewer interest bearing notes receivable
outstanding during the year ended June 30, 1997.
Rebate income decreased $8,700 (4.9%) to $169,800 for the year ended June 30,
1997 as compared to $178,500 for the year ended June 30, 1996. This decrease is
due primarily to an overall decrease in system-wide sales for the year ended
June 30, 1997.
Other income increased $53,800 (203.8%) to $80,200 for the year ended June 30,
1997 as compared to $26,400 for the year ended June 30, 1996 due to the
collection of past due charges from a former franchisee, increased pizza sauce
sales and increased vending machine income for the year ended June 30, 1997.
The Company recognized $260,000 of forgiveness of debt income for the year ended
June 30, 1997 due to the reduction of a previously accrued litigation settlement
with a major supplier.
22
<PAGE> 24
The Company recognized $70,200 of gain on the sales of restaurant equipment and
leasehold improvements during the year ended June 30, 1997.
Rent expense decreased $8,200 (3.3%) to $238,400 for the year ended June 30,
1997 as compared to $246,600 for the year ended June 30, 1996. This decrease is
due primarily to a reduction in rents paid for restaurant equipment.
General and administrative expenses consist of corporate payroll and related
benefits, insurance, professional fees, license fees and depreciation and
amortization. These expenses decreased $134,800 (13.6%) to $854,300 for the year
ended June 30, 1997 as compared to $989,100 for the year ended June 30, 1996.
This decrease is due primarily to an overall reduction in administrative and
management staff expenses and legal fees.
Bad debt expense decreased $311,200 (75.8%) to $99,400 for the year ended June
30, 1997 as compared to $410,600 for the year ended June 30, 1996. The Company
wrote off a substantial amount of franchisee accounts and notes receivable
during the year ended June 30, 1996.
During the year ended June 30, 1997, the Company's consulting expense decreased
$28,400 (71.7%) to $11,200 as compared to $39,600 for the year ended June 30,
1996. The Company entered into only one consulting agreement during the year
ended June 30, 1997 totaling $15,000, of which $3,800 remained as prepaid
consulting fees at June 30, 1997.
Interest expense decreased $31,600 (42.8%) to $42,200 for the year ended June
30, 1997 as compared to $73,800 for the year ended June 30, 1996. This decrease
is due primarily to a continued reduction in notes payable.
During the year ended June 30, 1997, the Company settled a lawsuit by agreeing
to pay the plaintiff $5,000. During the year ended June 30, 1996, the Company
settled a lawsuit by agreeing to pay a plaintiff supplier an irrevocable
consulting fee of $500,000. At June 30, 1996, the Company also expected to
settle a lawsuit in the amount of $19,000 and accrued the settlement at June 30,
1996.
Company-owned Restaurant Operations
Company-owned restaurant revenues increased $1,225,000 (253.5%) to $1,708,200
for the year ended June 30, 1997 as compared to $483,200 for the year ended June
30, 1996. From October 1995 until June 1996, no Company-owned restaurants were
in operation. The significant increase in revenues is due to the acquisition of
three restaurants in June 1996 and the opening of a new restaurant during the
current year.
23
<PAGE> 25
As a result of restaurant openings gross profit increased $833,800 (259.8%) from
$320,900 for the year ended June 30, 1996 to $1,154,700 for the year ended June
30, 1997. Gross profit, as a percentage of sales increased 1.2% from 66.4% to
67.6% for the year ended June 30, 1997. The increase was due to the opening of
new restaurant locations which feature quality food and service at moderate
prices and whose menus offer dishes with slightly lower costs.
Overall company-owned restaurant expenses increased $1,202,100 (193.7%) to
$1,822,800 for the year ended June 30, 1997 compared to $620,700 for the year
ended June 30, 1996.
These increases are due to the acquisition of the Sandwich Express bakery in
January 1997 and the operation of four company-owned restaurants for the entire
year ended June 30, 1997.
For the year ended June 30, 1997, the Company had net income of $82,900 compared
to a net loss of $1,273,800 for the year ended June 30, 1996.
Year Ended June 30, 1996 Compared to the Year Ended June 30, 1995
Franchise Operations
Franchise fees decreased $177,700 (73.6%) to $63,900 as compared to $241,600 for
the year ended June 30, 1995. The decrease resulted from higher fees earned
during the year ended June 30, 1995 due to the opening of two international
restaurants, one in Kuwait and one in South Korea.
Royalties decreased $198,300 (24.5%) to $612,400 as compared to royalties earned
of $810,700 during the year ended June 30, 1995. The decrease was due primarily
to the Company operating a higher number of restaurants during the year ended
June 30, 1995, a reduction in royalty percentages charged franchisees and the
closing of a greater number of franchised restaurants during the year ended June
30, 1996.
Rental income decreased $138,400 (45.8%) to $163,900 as compared to rental
income earned of $302,300 during the year ended June 30, 1995. The decrease is
due to the majority of the Company's sublessees having negotiated their own
leases directly with landlords instead of paying their rent to the Company.
Historically, the Company's only source of rental income was from franchisees
who purchased restaurants that were previously owned by the Company and from
independent business owners who became sublessees of the Company when a
Company-owned restaurant was sold or closed. The Company, who remained obligated
on the leases, would collect rent from the franchisees or independent business
owners (subleases) and pay it directly to lessors. This trend of decreased
rental income is expected to continue in
24
<PAGE> 26
future periods.
During the year ended June 30, 1996, interest income increased $30,200 (55.4%)
to $84,700 as compared to interest income earned of $54,500 during the year
ended June 30, 1995. This increase is due primarily to collectible accrued
interest on notes receivable assumed or taken back during the year ended June
30, 1996.
Rebate income decreased $36,100 (16.8%) to $178,500 during the year ended June
30, 1996 as compared to rebate income earned of $214,600 during the year ended
June 30, 1995. The decrease is attributed to lower sales during the year ended
June 30, 1996.
The Company had $192,900 of forgiveness of debt income during the year ended
June 30, 1996. The Company paid $150,200 of its loan balance to a bank and the
unpaid balance of $29,500 was forgiven by the bank; the remaining $163,400 of
forgiveness of debt income recognized was related to amounts due to various note
holders and vendors.
The Company recognized $177,900 of losses from the sale or closure of six
Company-owned restaurants during the year ended June 30, 1996. During the year
ended June 30, 1995, the Company incurred $880,600 of losses on the closure of
five and the sale of eight Company-owned restaurants and its centralized
telephone center. The restaurants were closed in both years due to poor
operating performance.
General and administrative expenses consist of corporate payroll and related
benefits, insurance, professional fees, license fees, depreciation and
amortization. Administrative expenses decreased $354,100 (26.4%) to $989,100 as
compared to $1,343,200 for the year ended June 30, 1995. The decrease was due to
reduced corporate payroll resulting from restaurant dispositions (only six
employees for ten months of the year ended June 30, 1996). This decrease was
offset by legal expenses of approximately $206,000 incurred in defending
lawsuits against the Company.
Bad debt expense increased $22,000 (5.7%) to $410,600 due to the continued
writeoff of uncollectible franchise notes and accounts receivable during the
year ended June 30, 1996.
Consulting expense decreased $552,900 (93.3%) to $39,600 for the year ended June
30, 1996 compared to $592,500 for the year ended June 30, 1995. During the year
ended June 30, 1995, the Company entered into significant consulting agreements
in exchange for common stock.
Interest expense decreased $62,500 (45.9%) to $73,800 as compared to $136,300
for the year ended June 30, 1995. The decrease resulted from the repayment of
notes payable during the year ended June 30, 1996. There were no significant
additions to
25
<PAGE> 27
notes payable until June 1996.
During the year ended June 30, 1996, the Company settled a lawsuit by agreeing
to pay the plaintiff an irrevocable consulting fee of $500,000. The Company also
expected to settle a lawsuit with a plaintiff for approximately $19,000 and
therefore accrued this amount at June 30, 1996.
Company-owned Restaurant Operations
Sales decreased $2,976,800 (86.0%) to $483,200 for the year ended June 30, 1996
as compared to sales of $3,460,000 for the year ended June 30, 1995. The
decrease resulted from the sale and closure of six Company-owned restaurants in
the first two quarters of the year ended June 30, 1996.
As a result of restaurant closures, gross profit decreased $1,564,700 (83.0%)
from $1,885,600 for the year ended June 30, 1995 to $320,900 for the year ended
June 30, 1996. Gross profit, as a percentage of sales, increased to 11.9% from
54.5% to 66.4% for the year ended June 30, 1996. The increase was due to the
closure of new upscale prototype restaurants featuring quality food and service
at moderate prices. The menu featured dishes with a higher cost such as shrimp
and pesto sauce.
Operating expenses decreased $1,523,700 (85.1%) from $1,790,300 for the year
ended June 30, 1995 to $266,600 for the year ended June 30, 1996 as a result of
restaurant closures.
General and administrative expenses consist mainly of advertising, rent,
depreciation and amortization and property taxes. General and administrative
expenses decreased $926,000 (82.9%) to $191,800 for the year ended June 30, 1996
as compared to $1,117,800 for the year ended June 30, 1995. The decrease is due
to the closure of Company-owned restaurants in the first two quarters of the
year ended June 30, 1996. Company-owned restaurants generated high
administrative expenses whey they were in operation.
President's Comments
The Company reported a net profit of $82,900 for the year ended June 30, 1997.
This is the first profitable year in recent years and represents a dramatic
turnaround from the $1,273,800 net loss incurred in the year ended June 30, 1996
and the $2,923,500 loss incurred in the year ended June 30, 1995.
During the current fiscal year, the Company acquired the assets of an Oregon
restaurant chain called Oregon's Original Sandwich Express and Bakery. These
assets were immediately sold to Formaggi Inc. in exchange for 2,000,000 shares
of stock. This
26
<PAGE> 28
transaction was done for two primary reasons; to provide the Company with a
vehicle with which to expand nationally; and, secondly, to give the Company a
new concept which it could use in its existing restaurants. The transaction also
enabled the Company to incorporate its pizza operation into a sandwich
restaurant chain to determine the viability of a combined concept. One of the
Oregon sandwich restaurants was converted into a new dual concept restaurant and
has shown significant increases in sales since the conversion. Recently, a
Numero Uno Pizzeria restaurant incorporated the Sandwich concept into its
operations and it has also experienced a significant increase in sales. The
Company believes that this dual concept is its vehicle of the future.
Numero Uno Company-owned restaurant operations have not performed as well as
anticipated by management. Sales volume and other revenues have reached
projections, however, profitability of operations has not met expectations.
Franchise sales have started to improve and, as a result, revenues to the
Company from this area have stabilized.
The international marketplace continues to perform well. The Company has entered
into new development agreements in the Philippines and Indonesia. Kuwait and
South Korea continue to expand on schedule. Management anticipates the sale of
at least one additional international development agreement during the year
ended June 30, 1998.
Based on the operating results for the year ended June 30, 1997, the Company had
decided to pursue the following objectives:
* Seek a merger or acquisition candidate that can either be
incorporated into the Numero Uno concept or whose operations can
utilize the Numero Uno concept
* Sell existing Company-owned restaurants to new franchisees so that
the Company's energy and resources can be focused on more profitable
areas
* Seek a financial partner to accelerate the conversion, growth and
expansion of the Numero Uno Pizzeria/ Sandwich Express dual concept
Management will be seeking shareholder confirmation of these ideas at the next
shareholders' meeting.
Clearly, the year ended June 30, 1997 was a success. Management believes it has
confirmed the future of the Company but anticipates that the first and second
quarters of fiscal 1998 will be, at best, marginally profitable. However,
management is confident that fiscal 1998 will continue to show improved
operating results.
27
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related information required to be filed hereunder
are indexed on Page F-1 of this report and are incorporated herein by reference.
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and other significant employees of the Company are listed
below, together with certain information concerning them. None of the executive
officers or other significant employees have an employment agreement with the
Company.
<TABLE>
<CAPTION>
Name Age Positions
- --------------- --- -----------------------------
<S> <C> <C>
Ronald J. Gelet 54 Chairman of the Board,
President of the Company and affiliated
companies
Gloria A. Gelet 49 Director
Daniel A. Rouse 47 Director
</TABLE>
Business Experience
The following is a brief account of the business experience during the last five
years of the Company's directors and executive officers:
Ronald J. Gelet is the founder of the Numero Uno Pizzeria and Italian Restaurant
concept. He serves as Chairman of the Board and President of N. U. Pizza Holding
Corporation and affiliated companies, Numero Uno Franchise Corporation, Numero
Uno, Inc. and Formaggi Inc. Mr. Gelet has over 25 years of extensive
entrepreneurial and management experience in the restaurant
28
<PAGE> 30
business. Mr. Gelet attended the University of Wisconsin, Madison where he
received a Bachelor of Arts degree.
Gloria A. Gelet is the Advertising Director of the Company and is the spouse of
Ronald J. Gelet, the founder of the Numero Uno Pizzeria and Italian Restaurant
concept. Mrs. Gelet has over 20 years experience in marketing and management in
the restaurant franchising industry and has been employed by the Company since
1984 as a marketing consultant and currently as the Director of Advertising.
Daniel A. Rouse is the Vice President of Operations of the Company. Mr. Rouse
has over 20 years experience in the food service industry and has been employed
by the Company since 1994 as the Vice President of Operations.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows all cash compensation incurred by the Company for
services rendered during the year ended June 30, 1997, to each of the Company's
directors and executive officers and to all executive officers as a group:
<TABLE>
<CAPTION>
Name Office Cash Compensation
- --------------- ------------------------- -----------------
<S> <C> <C>
Ronald J. Gelet President $ 126,076
Gloria A. Gelet Director of Advertising $ 30,535
Daniel A. Rouse Vice President Operations $ 41,900
All executive
officers as a
group (3 persons) $ 198,511
</TABLE>
In addition, $19,762 was paid for Mr. Gelet's family medical insurance.
Compensation Under Plans
None.
29
<PAGE> 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Name Office Amount Percentage
- ---------------------------- ------------- --------- ----------
<S> <C> <C> <C>
Ronald J. Gelet (1) President and 5,093,200 16.3%
15834 Highland Court Director
Solana Beach, California
Numero Uno Development, Inc. - 774,072 2.5%
Gelet Family Trust
312 S. Cedros Avenue #315
Solana Beach, California
</TABLE>
(1) Includes 100,000 shares held by the Joseph James Gelet Trust for the benefit
of Mr. Gelet's son. In addition, Gloria A. Gelet is the beneficial owner of Mr.
Gelet's stock. Mr. Gelet disclaims beneficial ownership of 400,000 shares held
by his brother, Steve Gelet.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the eleven months ended June 30, 1994, Ronald J. Gelet, President of the
Company, as owner of the secret recipe for proprietary pizza dough assigned his
rights, as part of a divorce settlement, to receive a licensing fee of $.08 per
pound from the manufacturer for purchases of the pizza dough made by the Company
and its franchisees. Mr. Gelet continues to receive revenue pursuant to an
exclusivity agreement with the Company. Income from the Company is in
consideration for the exclusive use of his dough products and recipes in
designated territories. Such fee is calculated at $.02 per pound of dough
purchased by the Company and its franchisees. At June 30, 1997, the Company owed
Mr. Gelet $33,300 in dough royalties.
Mr. Gelet converted $522,900 of his debt from the Company to common stock during
the year ended June 30, 1995.
During the year ended June 30, 1997, Mr. Gelet and an affiliated corporation,
CMG Sales, Inc., that he controls, loaned the Company $45,600 and $95,000,
respectively. These loans totaling $140,600 are payable on demand. Mr. Gelet's
loan is non-interest bearing and CMG Sales, Inc.'s loan bears interest at 5% per
annum.
30
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Reference is made to the Index to Financial
Statements of the Company on page F-1 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedule. The following financial statement schedule
is submitted herewith:
Schedule II - Valuation and Qualifying Accounts on page F-41
All other schedules are omitted because they are not required, inapplicable or
the information is otherwise shown in the financial statements or notes thereto.
(a)(3) Exhibits. The following documents are exhibits to this Annual Report on
Form 10-K:
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C> <C>
3.1 Articles of Incorporation of Gelet Enterprises, *
Inc. dated August 28, 1981 filed as Exhibit 3.1
to the Company's Annual Report on Form 10-K for
the eleven months ended June 30, 1994.
3.2 Certificate of Amendment of Articles of *
Incorporation of Gelet Enterprises, Inc. dated March 24,
1988 filed as Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the eleven months ended June 30, 1994.
3.3 By-laws of Gelet Enterprises, Inc dated *
September 9, 1981 filed as Exhibit 3.3 to
the Company's Annual Report on Form 10-K
for the eleven months ended June 30, 1994.
3.4 First Amendment to the By-laws of Gelet *
Enterprises, Inc. dated February 18, 1988
filed as Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the eleven months
ended June 30, 1994.
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C> <C>
3.5 Certificate of Amendment of Articles of *
Incorporation dated March 11, 1993 filed
as Exhibit 3.5 to the Company's Annual
Report on Form 10-K for the eleven months
ended June 30, 1994.
3.6 Certificate of Name Change dated March *
11, 1993 filed as Exhibit 3.6 to the
Company's Annual Report on Form 10-K
for the eleven months ended June 30, 1994.
3.7 Certificate of Amendment of Articles of *
Incorporation dated April 9, 1994 filed
as Exhibit 3.7 to the Company's Annual
Report on Form 10-K for the eleven months
ended June 30, 1994.
3.8 Articles of Merger of Woodbury, Inc. into *
N. U. Holding Corporation filed
April 19, 1994 filed as Exhibit 3.8 to
the Company's Annual Report on Form 10-K
for the eleven months ended June 30, 1994.
3.9 Certificate of Amendment of Articles of *
Incorporation of N. U. Pizza Holding
Corporation filed April 27, 1993 filed
as Exhibit 3.9 to the Company's Annual
Report on Form 10-K for the eleven months
ended June 30, 1994.
3.10 Certificate of Name Change dated April *
27, 1993 filed as Exhibit 3.10 to the
Company's Annual Report on Form 10-K
for the eleven months ended June 30, 1994.
3.11 Certificate of Amendment of Articles of *
Incorporation of N. U. Pizza Holding
Corporation filed May 6, 1994 filed as
Exhibit 3.11 to the Company's Annual
Report on Form 10-K for the eleven months
ended June 30, 1994.
10.1 Full Service Franchise Agreement filed as *
Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the eleven months ended June 30, 1994.
10.2 Takeout and Delivery Franchise Agreement *
filed as Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the eleven months ended
June 30, 1994.
</TABLE>
32
<PAGE> 34
<TABLE>
<S> <C> <C>
10.3 Dough Exclusivity Agreement between N. U. *
Pizza Holding Corporation and Ronald J.
Gelet filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the eleven months
ended June 30, 1994.
22.1 List of Subsidiaries.
</TABLE>
* By this reference incorporated herein and made a part hereof.
33
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California on October 14, 1997.
Date: October 14, 1997 N. U. Pizza Holding Corporation
By: /s/ Ronald J. Gelet
-------------------------------------
Ronald J. Gelet, President
Pursuant to requirements of the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: October 14, 1997 _________________________________________
Ronald J. Gelet,
Director, President, Chief
Executive Officer, Chief
Financial and Accounting
Officer
Date: October 14, 1997 _________________________________________
Gloria A. Gelet
Director
Date: October 14, 1997 _________________________________________
Dan Rouse
Director
34
<PAGE> 36
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-2
Consolidated Balance Sheets, June 30, 1997 and 1996 F-4
Consolidated Statements of Operations, Years Ended
June 30, 1997, 1996 and 1995 F-6
Consolidated Statements of Stockholders' Equity (Deficit),
Years Ended June 30, 1997, 1996 and 1995 F-8
Consolidated Statements of Cash Flows, Years Ended
June 30, 1997, 1996 and 1995 F-9
Notes to Consolidated Financial Statements F-12
</TABLE>
F-1
<PAGE> 37
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
N. U. Pizza Holding Corporation and Subsidiaries
I have audited the accompanying consolidated balance sheets of N. U. Pizza
Holding Corporation and Subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended June 30, 1997, 1996 and 1995. I have also
audited the consolidated financial statement schedule listed in the index at
Item 14. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. My responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. I believe that my audits provide a reasonable
basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of N. U. Pizza Holding
Corporation and Subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for the years ended June 30, 1997, 1996
and 1995, in conformity with generally accepted accounting principles. Also, in
my opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
F-2
<PAGE> 38
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has suffered recurring
losses from operations and has negative working capital at June 30, 1997. As
discussed in Note 1 to the consolidated financial statements, these factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Bennett Block Accountancy Corporation
Los Angeles, California
September 18, 1997
F-3
<PAGE> 39
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 255,100
Restricted cash 17,000 44,900
Franchisee advertising receivable 29,600 70,600
Receivables, net of allowance for
doubtful accounts of $65,900 and
$48,000, respectively 127,900 80,200
Current portion of notes receivable,
net of allowance for possible future
losses of $376,300 and $547,300,
respectively 213,000 254,800
Inventories 24,500 16,800
Prepaid expenses 78,300 74,800
---------- ----------
Total current assets 490,300 797,200
---------- ----------
Other assets:
Notes receivable, net of allowance for
possible future losses of $40,200 and
$0, respectively 512,300 329,400
Intangibles assets, net of accumulated
amortization of $250,400 and $180,000,
respectively 249,600 120,000
Deposits and other assets 33,300 21,800
---------- ----------
795,200 471,200
---------- ----------
Leasehold improvements, property and
equipment and construction in progress,
net of accumulated depreciation and
amortization 1,154,100 1,611,900
---------- ----------
$2,439,600 $2,880,300
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 40
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 180,800 $ 631,100
Accounts payable and accrued expenses 516,300 576,400
Accrued franchise advertising 46,600 115,500
Current portion - accrued litigation
settlements 32,000 50,000
Loans payable to related parties 173,900 3,300
----------- -----------
Total current liabilities 949,600 1,376,300
----------- -----------
Long-term debt, net of current portion 230,400 338,000
Accrued litigation settlements, net
of current portion 90,500 445,800
Deferred franchise fee income 100,900 164,900
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, Series B, $.10 par
value per share, authorized 10,000,000
shares, 80,000 shares issued and
outstanding (aggregate liquidation
preference $400,000) 8,000 8,000
Preferred stock, Series C, $.10 par
value per share, authorized 44,000
shares, 44,000 shares issued and
outstanding (aggregate liquidation
preference $220,000) 4,400 4,400
Common stock, $.001 par value per
share, authorized 50,000,000 shares,
issued, subscribed and outstanding
31,139,008, and 24,039,008, respectively 31,100 24,000
Additional paid-in capital 5,989,100 5,429,200
Notes receivable arising from stock
purchase agreements (487,000) (350,000)
Accumulated deficit (4,477,400) (4,560,300)
----------- -----------
1,068,200 555,300
----------- -----------
$ 2,439,600 $ 2,880,300
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 41
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
FRANCHISE OPERATIONS:
REVENUES:
Initial franchise fees $ 89,000 $ 63,900 $ 241,600
Royalties 554,400 612,400 810,700
Rental income 181,800 163,900 302,300
Interest income 44,200 84,700 54,500
Rebate income 169,800 178,500 214,600
Other income 80,200 26,400 --
Forgiveness of debt 260,000 192,900 --
Gain (loss) on sales of
restaurants and equipment 70,200 (177,900) (880,600)
----------- ----------- -----------
1,449,600 1,144,800 743,100
----------- ----------- -----------
COSTS AND EXPENSES:
Rent 238,400 246,600 338,000
General and administrative 854,300 989,100 1,343,200
Bad debt expense 99,400 410,600 388,600
Consulting 11,200 39,600 592,500
Interest expense 42,200 73,800 136,300
Litigation settlements 5,000 519,000 --
----------- ----------- -----------
1,250,500 2,278,700 2,798,600
----------- ----------- -----------
Franchise operating income
(loss) 199,100 (1,133,900) (2,055,500)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 42
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
COMPANY-OWNED RESTAURANT
OPERATIONS:
Sales $ 1,708,200 $ 483,200 $ 3,460,000
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 553,500 162,300 1,574,400
Operating 827,600 266,600 1,790,300
General and administrative 441,700 191,800 1,117,800
------------ ------------ ------------
1,822,800 620,700 4,482,500
------------ ------------ ------------
Company-owned restaurant
loss (114,600) (137,500) (1,022,500)
------------ ------------ ------------
Income (loss) before income
tax provision (benefit) 84,500 (1,271,400) (3,078,000)
Income tax provision
(benefit) 1,600 2,400 (154,500)
------------ ------------ ------------
Net income (loss) $ 82,900 $(1,273,800) $ (2,923,500)
============ ============ ============
Net income (loss)
per share $ - $ (.08) $ (.29)
============ ============ ============
Weighted average number of
shares outstanding 30,846,616 15,420,508 10,203,653
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 43
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock
Common Stock Series B & C
------------------------------------- ------------------------
Shares Note
Issued, Sub- issued Shares Additional
scribed and for Shares Issued and Paid-in Accumulated
Outstanding Par Value Subscribed Outstanding Par Value Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 8,002,700 $ 8,000 $ -- 80,000 $ 8,000 $ 651,900 $ (363,000) $ 304,900
Common shares issued
and subscribed 6,221,254 6,200 $ (210,000) -- -- 2,618,300 -- 2,414,500
Preferred shares issued -- -- -- 44,000 4,400 39,600 -- 44,000
Net loss -- -- -- -- -- -- (2,923,500) (2,923,500)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1995 14,223,954 14,200 (210,000) 124,000 12,400 3,309,800 (3,286,500) (160,100)
Common shares issued
and subscribed, net
of uncollectible
subscriptions of
$210,000 (Note 4) 9,815,054 9,800 (140,000) -- -- 2,119,400 -- 1,989,200
Net loss -- -- -- -- -- -- (1,273,800) (1,273,800)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1996 24,039,008 24,000 (350,000) 124,000 12,400 5,429,200 (4,560,300) 555,300
Common shares issued
and subscribed 7,100,000 7,100 (137,000) -- -- 559,900 -- 430,000
Net income -- -- -- -- -- -- 82,900 82,900
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1997 31,139,008 $ 31,100 $ (487,000) 124,000 $ 12,400 $ 5,989,100 $(4,477,400) $ 1,068,200
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
* Share amounts restated to reflect recapitalization with Woodbury, Inc. in
April 1994.
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 44
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 82,900 $(1,273,800) $(2,923,500)
Adjustments to reconcile
net income (loss) to net
cash used by
operating activities:
Depreciation and
amortization 310,600 157,900 325,300
Gain on sale of
restaurants and
equipment (70,200) (13,900) (125,100)
Loss on sale of
restaurants and
equipment -- 191,800 1,005,700
Litigation settlements 18,100 519,000 --
Forgiveness of debt (260,000) (192,900) --
Realization of deferred
income (89,000) (58,900) (210,800)
Stock issued for
consulting services 15,000 -- 592,500
Unamortized intangible
asset written off -- -- 133,000
Provision for doubtful
receivables 95,800 410,700 388,600
Decrease in income
taxes payable -- -- (153,700)
Changes in assets
and liabilities:
Receivables, net (176,400) (158,300) 46,500
Inventories (7,700) 12,000 41,000
Prepaid expenses and
other current assets (15,000) (6,100) (8,000)
Accounts payable and
accrued expenses (178,400) 162,700 267,200
Deferred franchise
fee income 25,000 25,000 (1,200)
Income taxes payable -- (3,200) (800)
----------- ----------- -----------
Net cash used by
operating activities (249,300) (228,000) (623,300)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 45
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from investing
activities:
Additions to notes
receivable $ -- $ (12,700) $ (318,400)
Collections on notes
receivable 191,800 219,000 200,800
Acquisition of intangibles (200,000) -- --
Proceeds from sale of
restaurants and equipment -- -- 142,500
Capital expenditures (12,200) (10,000) (619,700)
----------- ----------- -----------
Net cash (used) provided
by investing activities (20,400) 196,300 (594,800)
----------- ----------- -----------
Cash flows from financing
activities:
Increase (decrease) in
loans payable to
related parties 140,600 (116,700) 130,500
Increase in notes payable -- 10,000 107,400
Principal payments on
long-term debt (541,000) (435,200) (345,800)
Collections of subscription
notes receivable -- 20,000 --
Proceeds from issuance of
common stock 415,000 793,600 1,301,900
----------- ----------- -----------
Net cash provided
by financing activities 14,600 271,700 1,194,000
----------- ----------- -----------
Net (decrease) increase in
cash and cash equivalents (255,100) 240,000 (24,100)
Cash and cash equivalents,
beginning of period 255,100 15,100 39,200
----------- ----------- -----------
Cash and cash equivalents,
end of period $ -- $ 255,100 $ 15,100
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 46
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental information:
Cash paid for interest $ 42,200 $ 73,800 $ 103,200
Cash paid for taxes 2,400 3,200 4,000
Non-cash transactions:
Forgiveness of receivables
in exchange for fixed
assets $ 5,000 $ 151,700 $ 227,800
Notes receivable issued
in exchange for accounts
receivable 83,500 87,400 --
Notes receivable issued
for stock 652,000 140,000 210,000
Notes receivable received
for fixed assets 305,000 477,500 --
Note payable issued in
exchange for accounts
payable -- 38,500 --
Issuance of stock in
exchange for fixed assets -- 1,245,000 230,600
Conversion of debt to
equity -- 310,600 566,900
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 47
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
During the year ended June 30, 1997, the Company reported net income of $82,900.
This was the first time in several years that the Company has been profitable
despite increased competition in the marketplace from both national and regional
pizza restaurant chains. Until recently, the Company's profitability was also
negatively impacted by depressed economic conditions within Southern California.
During the years ended June 30, 1996 and 1995, the Company was forced to take
back many previously sold restaurant locations because, in many cases, the
Company remained obligated as lessee on the restaurant location. The operation
of these restaurants and losses recognized on uncollectible notes receivable
from franchisees forced the Company to incur significant net losses of
$1,273,800 and $2,923,500, respectively, during the years ended June 30, 1996
and 1995. These trends have had an adverse affect on the Company's operations.
As a result, the Company has an accumulated deficit of $4,477,400 and a working
capital deficit of $459,300 at June 30, 1997.
During the current year, the Company increased its revenues as a result of
acquiring certain assets of an Oregon restaurant chain (Note 2) and by operating
its new Company-owned restaurant locations, acquired at the end of fiscal 1996,
for most of the year. The Company's franchise operations have started to improve
and have been profitable. However, Company-owned restaurants have still shown
operating losses. The Company continued to reduce its operating costs, primarily
as a result of the sale or closure of underperforming and unprofitable
Company-owned restaurant locations and the renegotiation of restaurant lease
commitments during the year ended June 30, 1996. The Company also continued to
reduce its liabilities by the payment of obligations from cash flow.
Management has the following short-term and long-term operating and financial
plans to further reduce its working capital deficit and to provide the working
capital necessary to fund operations. The Company intends to expand its
franchising operations internationally as there is worldwide demand for its
products. The Company already has franchises in three Asian countries and
Kuwait, and has entered into a new development agreement with a franchisee in
the Philippines. Management anticipates the sale of at least one additional
international development agreement during the next fiscal year.
F-12
<PAGE> 48
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
Secondly, the Company intends to sell existing Company-owned restaurant units to
new franchisees so that the amount of cash required to support this segment of
its operations can be substantially reduced.
Thirdly, the Company plans to grow through the acquisition or merger with
established restaurant businesses which may increase its profitability in the
near future. The Company recently entered into an agreement to invest in the
acquisition of an Oregon's Original Sandwich Express and Bakery restaurant
location (Note 16).
Lastly, the Company continues to seek a financial partner that will accelerate
the growth and expansion of the Numero Uno/Sandwich Express dual concept.
It is not possible to predict the success of management's subsequent efforts. If
management is unable to achieve its goals, the Company will find it necessary to
undertake actions as may be appropriate to continue operations and meet its
commitments such as raising capital through additional stock issuances or debt
financing.
The accompanying consolidated financial statements do no include any adjustments
relating to the recoverability and classification of the recorded asset amounts
or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.
2. Organization
N. U. Pizza Holding Corporation was incorporated in Nevada in 1981 as Gelet
Enterprises, Inc. In April 1993, Gelet Enterprises, Inc. changed its name to N.
U. Pizza Holding Corporation.
On January 7, 1997, N.U. Pizza Holding Corporation consummated an Asset Purchase
Agreement whereby it bought certain assets from the DAS Group, Inc., the owner
of a bakery and the franchisor of Oregon sandwich restaurants for consideration
of $200,000 in cash. Upon the closing of the Agreement, N.U. Pizza Holding
Corporation contributed the $200,000 of assets purchased from the DAS Group,
Inc. to its wholly-owned subsidiary, Formaggi Inc., a recently organized Nevada
corporation, in exchange for 2,000,000 shares of Formaggi Inc.'s common stock
(Note 3). Formaggi Inc. currently owns the bakery and franchises Oregon's
Original
F-13
<PAGE> 49
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Organization (continued)
Sandwich Express and Bakery restaurants. N.U. Pizza Holding Corporation also
owns a wholly-owned subsidiary, Numero Uno Franchise Corporation, which was
incorporated in 1975 to franchise Numero Uno Pizzeria restaurants. All
Company-owned restaurants, the bakery and most of the franchises are located in
Southern California and Oregon.
Franchised and Company-owned restaurants (including a bakery - 1997) for the
years ended June 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Franchised Company-owned
Restaurants Restaurants
----------- -------------
<S> <C> <C>
Balance - July 1, 1994 44 14
Opened or purchased 11 5
Sold to or taken over
by the Company (5) 0
Sold to franchisees 0 (8)
Closed or terminated (6) (5)
----- -----
Balance - June 30, 1995 44 6
Opened or purchased 17 4
Sold to or taken over
by the Company (3) 0
Sold to franchisees 0 (5)
Closed or terminated (7) (1)
----- -----
Balance - June 30, 1996 51 4
Opened or purchased 12 1
Closed or terminated (6) (0)
----- -----
Balance - June 30, 1997 57 5
===== =====
</TABLE>
F-14
<PAGE> 50
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of N. U. Pizza
Holding Corporation and its wholly-owned subsidiaries, Formaggi Inc. and Numero
Uno Franchise Corporation, ("the Company").
Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Franchise Operations
The Company recognizes fifty percent of revenue earned from the sale of all
individual and area franchises at the opening of each restaurant. The balance of
the revenue is recognized over the sixty month period subsequent to the opening
of the restaurant.
Management is also committed and obligated to provide certain supervisory
functions to franchisees over the sixty months subsequent to the execution of
the licensing agreement.
Royalty Fees
Royalties are charged to most franchisees based upon either a percentage of
gross receipts or a fixed fee, depending on the terms of the individual
franchise agreement, and are recognized as earned. During the years ended June
30, 1997, 1996 and 1995, in order to sell some Company-owned restaurants, the
Company enticed potential buyers by offering to reduce, defer, or in one case,
eliminate royalties.
F-15
<PAGE> 51
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Advertising Costs and Fees
Direct-response advertising costs are capitalized and are amortized over the
period during which the future benefits are expected to be received; all other
advertising costs are expensed as incurred. Advertising costs for the years
ended June 30, 1997, 1996 and 1995 were $46,700, $42,000 and $101,100,
respectively.
A fixed advertising fee is charged and billed to franchisees for use in
creating, developing and purchasing local, regional and national advertising,
public relations and promotional campaigns. Any unexpended advertising fees
collected are deposited in a restricted bank account and recorded, along with
uncollected advertising receivables, as a current liability.
At June 30, 1997 and 1996, the Company had restricted cash of $17,000 and
$44,900, respectively. During the year ended June 30, 1996, the Company
experienced difficulties collecting agreed upon advertising fees from most of
its franchisees. Accordingly, the Company wrote off advertising receivables of
approximately $56,700 and correspondingly reduced accrued franchise advertising
on behalf of those franchisees.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and highly liquid
investments with a maturity of ninety days or less when purchased.
Inventories
Inventories consist principally of food products and supplies and are stated at
the lower of cost (first-in, first-out method) or market.
Leasehold Improvements
Leasehold improvements are stated at cost. Amortization is provided using the
straight-line method over the estimated useful lives of the improvements or the
term of the lease, whichever is shorter. Leasehold improvements reacquired from
franchisees are recorded at current market value which approximates historical
book value.
F-16
<PAGE> 52
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment is stated at cost and includes restaurant equipment,
furniture, fixtures and office equipment and vehicles. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
which range from three to seven years. Equipment reacquired from franchisees is
recorded at current market value which approximates historical book value.
Construction in Progress
Construction in progress is stated at cost and represents the amount paid for
certain restaurant equipment, leasehold improvements and capitalized costs
incurred during the significant remodeling of a nonoperating restaurant that was
purchased by the Company during the year ended June 30, 1996. The Company opened
the restaurant and placed it in service for full operation during the year ended
June 30, 1997.
Intangible Assets
At June 30, 1997, intangible assets consisted of $200,000 of assets purchased
from DAS Group, Inc. which included worldwide franchising rights ($20,000), a
covenant not to compete ($36,000) and goodwill ($144,000). Goodwill represents
the excess of the purchase price of the net assets of the DAS Group, Inc. over
their fair value at the date of acquisition, January 7, 1997 (Note 2).
Intangible assets at June 30, 1997 and 1996 also include licensing rights to
pizza dough recipes acquired at a cost of $300,000.
Goodwill is being amortized on the straight-line method over fifteen years.
Franchising rights, the covenant not to compete and licensing rights are being
amortized over five years. Amortization expense of $70,400, $60,000 and $60,000,
related to these assets, was charged to operations during the years ended June
30, 1997, 1996, and 1995, respectively.
At June 30, 1994, intangible assets consisted of licensing rights and customer
telephone listings, valued at $190,000, recorded in the October 1993 acquisition
of takeout and delivery restaurants which utilized a centralized telephone
center. The listings were used in the direct marketing of the takeout and
delivery locations. The unamortized balance of the listings, which totalled
approximately $133,000, was charged to operations when the Company closed the
centralized telephone center during the year ended June 30, 1995 (Note 6).
F-17
<PAGE> 53
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Income Taxes
N.U. Pizza Holding Corporation files consolidated federal and state income tax
returns with its wholly-owned subsidiary Numero Uno Franchise Corporation.
Formaggi Inc. files separate federal and state income tax returns.
The Company records its taxes in accordance with Financial Accounting Standards
Board Statement 109, Accounting for Income Taxes. The Company accounts for its
investment tax credits using the flow through method. Under this method,
investment tax credits are accounted for as a reduction of Federal income tax
expense in the period in which the credits are utilized.
Impairment of Long-Lived Assets
During the year ended June 30, 1996, the Company elected early adoption of SFAS
No. 121, "Accounting for the Impairment of Long- Lived Assets and Long-Lived
Assets to Be Disposed Of." Historically, the Company has complied with the
requirements of SFAS No. 121. This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Also, in general, long-lived
assets and certain identifiable intangibles to be disposed of should be reported
at the lower of carrying amount or fair value less cost to sell. The
implementation of SFAS No. 121 did not have any effect on the Company's
financial position or results of operations.
Accounting for Stock-Based Compensation
In December. 1996, the Company entered into written Employee Stock Option Plans
whereby it authorized the issuance of stock options totaling 6,800,000 shares to
its president and other key employees. The president's authorized option is for
4,000,000 shares and is exercisable at a price of $0.12 per share. All other
authorized employee options are exercisable at $0.10 per share. As of June 30,
1997, none of the options authorized had been issued.
F-18
<PAGE> 54
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation (continued)
SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted by the
Company during the year ended June 30, 1997 as required by this statement. Under
this standard, companies are encouraged, but not required, to adopt the fair
value method of accounting for employee stock-based transactions. Under the fair
value method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period. Companies are permitted to continue to account for employee
stock-based transactions under Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," but are required to disclose pro
forma net income and earnings per share as if the fair value method had been
adopted. The implementation of SFAS No. 123 did not have any effect on the
Company's financial position or results of operations.
SFAS No. 128, "Earnings per Share," was issued on March 3, 1997, and is not
effective for the Company's current fiscal year. This pronouncement provides a
different method of calculating earnings per share than is currently used in
accordance with APB No. 15, "Earnings per Share." SFAS No. 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted earnings
per share. Because of prior period losses, other potentially dilutive securities
have an antidilutive effect in all periods. Accordingly, calculations under the
new standard, which will be adopted during the year ended June 30, 1998, are not
expected to be significantly different from those calculated under the current
method.
Reclassification of Prior Year Balances
Certain prior year balances have been reclassified in the financial statements
to conform to the current year's presentation.
Net Income (Loss) per Share
Net income (loss) per share is calculated based on the weighted average number
of common stock shares outstanding during each period.
F-19
<PAGE> 55
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Receivable
Notes receivable are primarily derived from the sale of franchise rights and
restaurants and consist of various installment notes due from franchisees. The
notes are collateralized by franchise rights, store equipment and leasehold
improvements. Payments are due from franchisees in monthly installments and bear
interest at per annum rates which range from 8% to 12%.
During the current year, the Company agreed to sell 5,300,000 shares of common
stock at $.10 per share, 1,000,000 shares of common stock at $.07 per share and
650,000 shares of common stock at $.08 per share in exchange for non-interest
bearing subscription notes receivable totaling $652,000. At June 30, 1997,
$137,000 remained unpaid on the notes receivable. As of September 18, 1997, the
unpaid balance had not been collected and is recorded as a charge to
stockholders' equity at June 30, 1997 (Note 13).
During the year ended June 30, 1996, the Company agreed to sell 1,000,000 shares
of common stock at $.31 per share and 1,000,000 shares of common stock at $.21
per share, respectively, in exchange for non-interest bearing subscription notes
receivable in the amounts of $310,000 and $210,000. At June 30, 1997 and 1996,
$350,000 remained unpaid on these notes receivable. As of September 18, 1997,
the unpaid balance had not been collected and is recorded as a charge to
stockholders' equity at June 30, 1997 and 1996 (Note 13).
During the year ended June 30, 1995, the Company agreed to sell 333,333 shares
of common stock at $.75 per share in exchange for a 6% per annum subscription
note receivable in the amount of $250,000 which was due on June 30, 1995. At
June 30, 1995, $210,000 remained unpaid on the note and was recorded as a charge
to stockholders' deficit. A total of 60,000 shares were issued on note
receivable collections. However, the parties subsequently agreed to amend the
subscription agreement and the remaining shares were never issued. Accordingly,
the note balance was canceled and common stock and additional paid-in capital
were reduced by $200 and $209,800, respectively (Note 13).
During the year ended June 30, 1995, in connection with an agreement with a
financial public relations firm, which assisted the Company in raising funds
from Regulation S offerings, the Company was requested by the firm to make a
short-term loan to another one of their clients.
F-20
<PAGE> 56
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Receivable (continued)
The Company agreed to loan the unaffiliated corporation $228,500. The note bore
interest at 6% per annum and was due on June 1, 1995. At June 30, 1995, the
balance remained unpaid and was in default and was therefore classified as a
current asset. At June 30, 1996, the entire amount of the loan remained unpaid
and the $228,500 balance was written off as uncollectible.
Interest is not accrued on notes that are over six months in arrears. At June
30, 1997, there is approximately $471,300 in notes receivable which are six
months or more past due. Management believes that their collateral is sufficient
to recover the past due balances. At June 30, 1997 and 1996, respectively, the
Company has provided an allowance of $416,500 and $547,300 for possible future
losses on notes receivable.
Notes receivable are scheduled to mature over the next five years as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended June 30, 1998 $ 213,000
1999 79,500
2000 79,400
2001 78,600
2002 25,100
2003 and thereafter 249,700
----------
$ 725,300
==========
</TABLE>
5. Leasehold Improvements, Property and Equipment and Construction in
Progress
Leasehold improvements, property and equipment and construction in progress
consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Leasehold improvements $ 941,200 $ 912,000
Furniture, fixtures and equipment 118,700 114,000
Restaurant equipment 463,000 546,000
Construction in progress - 255,000
Vehicles 38,900 38,900
---------- ----------
1,561,800 1,865,900
Less accumulated depreciation
and amortization 407,700 254,000
---------- ----------
$1,154,100 $1,611,900
========== ==========
</TABLE>
F-21
<PAGE> 57
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions
The Company has various transactions with its president, Ronald J. Gelet and
with an affiliated corporation that he controls. The total amount payable to
these related parties consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Accrued dough royalties - officer $ 33,300 $ 3,300
Loan payable-officer, noninterest
bearing cash advances 45,600 -
Note payable-affiliated corporation,
bearing interest at 5% per annum,
due on demand 95,000 -
---------- ----------
$ 173,900 $ 3,300
========== ==========
</TABLE>
On July 1, 1993, the Company entered into a licensing agreement with its
president assuring the Company and its franchisees exclusive use of the
president's dough recipes and products in California and internationally. The
initial term of the agreement is five years and the fee payable to the president
was $300,000 (Note 3). The Company has ten additional five year options to renew
the licensing agreement under the same terms. The Company and its franchisees
also are required to pay the president a $.02 per pound royalty on the dough
products used in operations. During the years ended June 30, 1997, 1996 and
1995, the Company incurred royalty expense of $30,000, $31,500 and $50,300,
respectively, in connection with this agreement.
The agreement stipulated that the $300,000 fee was to be paid to the president,
$200,000 in cash by January 1, 1994 and that the balance was to be recorded as a
note payable to the president for $100,000. The note bore interest at 8% per
annum and was due on thirty days demand. The president was not paid the $200,000
in cash, the $100,000 8% demand note payable or accrued royalties. On May 3,
1995, the Company converted $522,900 of its debt, including these obligations,
to the president, into 697,200 shares of common stock at $.75 per share (Note
13). The market value per share of common stock on May 3, 1995 was approximately
$1.25.
F-22
<PAGE> 58
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions (continued)
The value assigned to restricted common stock of $.75 per share was management's
best estimate of the stock's fair market value. Management determined the value
based on the quoted market price per share of unrestricted common stock on May
3, 1995 of approximately $1.25. The reduction in value to $.75 per share from
the $1.25 quoted market price per share of unrestricted common stock reflects
management's best estimate of the lack of liquidity of restricted shares.
The Company held a 25% interest in a partnership that was the general partner in
a partnership that owned a franchised restaurant (Note 7). The partnership in
which the Company held an interest was formally dissolved on November 20, 1996.
During fiscal 1994, the partnership incurred management fees of $26,800 but paid
only $5,000 of this amount to the Company. At June 30, 1994, the partnership
also owed the Company $116,400 in royalty fees. The unpaid balances of royalties
and management fees were charged to operations during the year ended June 30,
1995. Also, during the years ended June 30, 1996 and 1995, the Company continued
to bill royalties and advertising to the partnership. However, the royalties and
advertising billed were uncollectible and were charged to operations and against
advertising payable, respectively, during the years ended June 30, 1996 and
1995. The partnership sold the restaurant during the year ended June 30, 1996.
In October, 1993, Numero Uno Franchise Corporation acquired four take out and
delivery restaurant locations and customer listings from Numero Uno Takeout and
Delivery Corporation ("T.O.D."), a related party, in exchange for forgiveness of
T.O.D.'s note payable to the Company in the amount of $107,000 and the
assumption of approximately $190,000 of T.O.D.'s liabilities.
During the year ended June 30, 1995, the Company closed its centralized
telephone center and wrote off the unamortized balance remaining on the customer
listings (Note 3) which was approximately $133,000.
7. Investment in Partnership
The Company held a 25% interest in Numero Uno Investors One, a dissolved
partnership that was a general partner in a partnership that owned a franchised
restaurant (Note 6). In prior years, when the partnership owned a franchised
restaurant, the Company's share of losses was recognized until its basis in the
investment equalled the investment's carrying value. The equity method of
accounting
F-23
<PAGE> 59
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Investment in Partnership (continued)
was then suspended. Subsequently, additional losses were recognized by the
Company when it became evident to the Company that receivables from the
partnership were uncollectible. The restaurant was sold during the year ended
June 30, 1996.
8. Dependence on Major Vendor
During the years ended June 30, 1997, 1996 and 1995, purchases from one vendor
represented approximately 14.7%, 5.6% and 11.4%, respectively, of the costs and
expenses of the Company. Management believes that the Company is not dependent
on this vendor.
9. Note Payable to Bank
At June 30, 1994, the Company maintained a term loan with an outstanding balance
of $217,500, secured by substantially all Company assets, with a local bank. The
loan was in default.
During the year ended June 30, 1995, the Company negotiated new repayment terms
with the bank and the maturity date was extended to June 1, 1995. The Company
paid $25,000 in October 1994, which included $6,600 in accrued interest and
legal fees of $2,000, and $5,000 per month thereafter. At June 1, 1995, the
Company was unable to pay the remaining balance due on the loan of approximately
$179,700 but, continued to pay $5,000 per month on the obligation while
negotiations continued with the bank to extend the maturity date of the loan. In
March 1996, when the balance of the note was $154,500, the bank discounted the
note $29,500 and the Company paid the remaining balance due of $125,000. During
the year ended June 30, 1996, the Company recognized forgiveness of debt income
of $29,500 in connection with this transaction.
The weighted average interest rate on borrowings in connection with this loan
were 16.39% and 11.04%, respectively, for the years ended June 30, 1996 and
1995. There were no borrowings from financial institutions classified as
short-term at June 30, 1997 or 1996.
F-24
<PAGE> 60
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Notes secured by equipment,
bearing interest
from 8% to 11.5% per annum,
maturing through November 2000. $ 84,600 $ 454,300
Unsecured notes, bearing interest
from 6% to 12.8% per annum,
maturing through April 2006. 326,600 514,800
---------- ----------
411,200 969,100
Less current maturities 180,800 631,100
---------- ----------
$ 230,400 $ 338,000
========== ==========
</TABLE>
Long-term debt is scheduled to mature over the next five years as follows:
<TABLE>
<S> <C>
Year ended June 30, 1998 $ 180,800
1999 109,700
2000 51,500
2001 8,500
2002 2,100
2003 and thereafter 58,600
----------
$ 411,200
==========
</TABLE>
At June 30, 1997, none of the Company's notes payable were in default. Current
maturities of long-term debt at June 30, 1996 included $81,800 of notes payable
which were in default. All notes payable that were in default at June 30, 1996
were paid by the Company during the year ended June 30, 1997.
F-25
<PAGE> 61
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Accrued Litigation Settlements
During fiscal 1994, an action was filed by a vendor against the Company for
breach of a 1987 settlement agreement which obligated the Company to purchase
certain restaurant supply items exclusively from the vendor and to pay for some
items which were delivered under the 1987 settlement agreement.
During the year ended June 30, 1996, the parties settled the matter out of court
(Note 16) and the Company agreed to pay the vendor an irrevocable consulting fee
of $500,000, payable in monthly installments of $4,200 for a period of ten years
which began on June 15, 1996. The Company also agreed to use the plaintiff
vendor as the exclusive supplier of various paper products used in its
restaurants for a five year period. The president of the Company personally
guaranteed the Company's obligations under the agreement.
During the current year, the Company filed a demand for arbitration alleging
that the vendor violated the terms of the settlement agreement reached during
the year ended June 30, 1996. In November, 1996, the parties entered into a
third settlement agreement which superseded both previous agreements. Pursuant
to the terms of the new final settlement agreement, the Company made a lump sum
payment of $101,000 to the vendor and agreed to make monthly installment
payments totalling $117,500 plus interest at 8% per annum through November 1,
2001 to fully satisfy its obligation.
In October 1996, an action was filed against the Company for sexual battery,
intentional infliction of emotional distress and other allegations concerning
sexual discrimination. The matter arose out of an alleged incident between an
employee of the Company and the plaintiff. The Company resolved the matter by
agreeing to pay the plaintiff a settlement of $5,000 (Note 16). This amount has
been accrued at June 30, 1997.
These liabilities are scheduled to mature over the next five years as follows:
<TABLE>
<S> <C>
Year ended June 30, 1998 $ 32,000
1999 27,000
2000 27,000
2001 27,000
2002 9,500
----------
$ 122,500
==========
</TABLE>
F-26
<PAGE> 62
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Preferred Stock
On December 8, 1995, the Company's Board of Directors approved an increase in
the Company's authorized Series B preferred shares from 1,000,000 to 10,000,000
shares.
In June 1995, the Board of Directors authorized the issuance of 44,000 shares of
Series C preferred stock at $1.00 per share ($.10 par value) and granted an
option to acquire 40,000 shares of common stock at $.10 per share to an
individual noteholder in exchange for the cancellation of a $40,000 note payable
plus accrued interest of $4,000.
As the preferred shares issued were restricted securities for which market
quotations are not available, the valuation of preferred shares and the option
to acquire common shares was based upon the estimated fair market value of the
Company's restricted Section 144 common shares at the date of the exchange
transaction.
The valuation of restricted shares and options issued was reduced from the
quoted market price for unrestricted shares in June 1995 of approximately $1.25
per share to $1.00 per share because of their lack of liquidity.
The shares were subscribed for at June 30, 1995 and issued September 7, 1995.
The shares are non-voting, bear a coupon rate of 10% per annum, are cumulative,
have a liquidation preference of $5.00 per share and are convertible into common
shares at $.50 per share. The preferred stock does not have the right of
redemption at the shareholder's option.
The Company authorized the issuance of 80,000 shares of Series B preferred stock
to its president in April 1994 as part of the merger agreement with Woodbury,
Inc. (Note 2). These shares were issued June 22, 1994. The shares are fully
voting, bear a coupon rate of 9% per annum, are cumulative, have a liquidation
preference of $5.00 per share and are convertible at a rate of one share of
common for each share of preferred stock. The shares are redeemable by the
Company upon thirty days written notice to the shareholder.
No dividends were paid to the shareholder or former noteholder during the years
ended June 30, 1997, 1996 or 1995. Dividends in arrears totalled $3,000 at June
30, 1997.
F-27
<PAGE> 63
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Common Stock
On November 22, 1994, the Company's Board of Directors approved an increase in
the Company's authorized common shares from 10,000,000 to 20,000,000 shares and
on December 8, 1995, the Company's Board of Directors approved an additional
increase from 20,000,000 to 50,000,000 authorized shares.
During the year ended June 30, 1997, the Company raised approximately $515,000
from Regulation S stock offerings. In addition, the Company issued 150,000
shares of its common stock at $.10 per share to a consultant in exchange for
$15,000 of future consulting services. At June 30, 1997, prepaid consulting
services totalled $3,800. During the current year, the Company agreed to sell
5,300,000 shares of common stock at $.10 per share, 1,000,000 shares of common
stock at $.07 per share and 650,000 shares of common stock at $.08 per share in
exchange for non-interest bearing subscription notes receivable totaling
$652,000. At June 30, 1997, $137,000 remained unpaid on the notes receivable. As
of September 18, 1997, the unpaid balance had not been collected and is recorded
as a reduction of stockholders' equity at June 30, 1997 (Note 4).
During the year ended June 30, 1996, the Company raised approximately $793,600
from Regulation S stock offerings. In addition, the Company issued 700,000
shares of its common stock at $.25 per share for a total of $175,000 to two
legal firms in exchange for the cancellation of the Company's outstanding
accounts payable balances with the firms. The Company also issued 542,276 shares
of its common stock at $.25 per share ($135,600) in exchange for the
cancellation of a note payable due to a former franchisee. Also, in connection
with the purchase of three Company-owned restaurants, the Company issued the
following shares of common stock: 800,000 at $.25 per share ($200,000), 716,667
at $.30 per share ($215,000) and 1,200,000 at $.25 per share ($300,000).
During the current year, the Company paid an additional $100,000 to an
individual who sold the Company a restaurant during the year ended June 30, 1996
in exchange for common stock. The Company agreed to make the payment since the
seller was unable to sell the Company's common stock at the value established by
the parties in connection with the Company's acquisition of the restaurant. The
Company charged the $100,000 payment to additional paid-in capital.
F-28
<PAGE> 64
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Common Stock (continued)
The Company also entered into a subscription agreement during the year ended
June 30, 1996, whereby the Company would issue 1,000,000 shares of common stock
at $.21 per share and 1,000,000 shares of common stock at $.31 per share in
exchange for subscription notes receivable of $210,000 and $310,000,
respectively. At June 30, 1997 and 1996, $350,000 of these subscription notes
receivable had not been collected and is recorded as a charge to stockholders'
equity (Note 4).
During the year ended June 30, 1995, the Company raised approximately $1,300,000
from Regulation S stock offerings. Also, the Company entered into agreements
with three public relations consulting firms. The consultants agreed to provide
services in the amount of $592,500 in exchange for 790,000 shares of common
stock at a price of $.75 per share. As all services were provided, the Company
charged these costs to operations during the year ended June 30, 1995.
During the year ended June 30, 1995, the Company agreed to sell 333,333 shares
of common stock at $.75 per share in exchange for a 6% per annum subscription
note receivable in the amount of $250,000 which was due on June 30, 1995. At
June 30, 1995, $210,000 remained unpaid on the note and was recorded as a charge
to stockholders' deficit. A total of 60,000 shares were issued on note
receivable collections. However, the parties subsequently agreed to amend the
subscription agreement and the remaining shares were never issued. Accordingly,
the note balance was canceled and common stock and additional paid-in capital
were reduced by $200 and $209,800, respectively (Note 4).
In May 1995, the Company converted $522,900 of its president's debt to equity by
issuing 697,200 shares of common stock at $.75 per share (Note 6).
During the years ended June 30, 1997, 1996 and 1995, restricted Section 144
common stock was issued in exchange for the purchases of Company-owned
restaurants, the settlement of indebtedness and consulting services. The
valuation of shares issued was based upon the estimated fair value of the
Company's restricted Section 144 common shares at the date of each exchange
transaction. The value of the restricted shares issued was reduced from the
quoted market price for unrestricted shares at the dates of issuance because of
their lack of liquidity.
F-29
<PAGE> 65
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Foreign Currency Transactions
All transactions with foreign franchises are conducted in U. S. Dollars. There
is no material currency gain or loss.
15. Income Taxes
The Company had been assessed $86,000 by the California Franchise Tax Board for
unpaid taxes arising from a transaction completed in 1982 and 1983. With
accumulated interest, the total due at June 30, 1994 was approximately $230,000.
The Company disputed the claim and during the year ended June 30, 1995, the
Franchise Tax Board abated the full amount of the assessment. Income taxes
payable of $153,700, recorded at June 30, 1994, which represented management's
estimate of the Company's maximum liability, were reversed during the year ended
June 30, 1995 and are reflected as an income tax benefit in the statement of
operations.
Due to recurring net losses, the Company's income tax liability has been limited
to the minimum California and Oregon franchise taxes. These taxes totalled
$1,600, $2,400 and $3,200 for the years ended June 30, 1997, 1996 and 1995,
respectively.
At June 30, 1997, the Company had Federal net operating loss carryforwards of
approximately $4,261,550 for tax purposes. Net operating losses are scheduled to
expire as follows:
<TABLE>
<S> <C>
Year ended June 30, 2007 $ 254,624
2008 284,457
2010 3,065,845
2011 392,299
2012 264,325
----------
$4,261,550
==========
</TABLE>
These operating losses may be subject to limitations imposed by the Internal
Revenue Code because of changes in the Company's stock ownership. The Company
does not anticipate that these limitations will affect the utilization of the
net operating loss carryforwards prior to their expiration.
F-30
<PAGE> 66
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Income Taxes (continued)
The Company's deferred tax benefit is approximately $1,505,000 at June 30, 1997.
The Company has provided a valuation allowance in that amount as it is the
opinion of management that, due to the nature of the items generating the
operating loss carryforwards, it is more likely than not that these items will
expire before the Company is able to realize their benefit.
Expected Federal tax benefits for the years ended June 30, 1997, 1996 and 1995
are approximately $93,400, $450,000 and $1,030,000, respectively, for a total of
$1,573,400. Due to the current year's significant reduction in net operating
loss, the likelihood of realizing future tax benefits is higher than in prior
years. As a result, the valuation allowance has been decreased at June 30, 1997
by $245,000, the entire amount of the expected reduction in tax benefits.
During the years ended June 30, 1996 and 1995, the valuation allowance was
increased because there were significant net operating losses which reduced the
likelihood of realizing future tax benefits.
16. Commitments and Contingencies
Commitments
The Company is obligated, under various operating leases for the rental of
restaurant sites, to pay either the monthly fixed rent or the base rent plus a
percentage rent based upon sales, depending upon the individual lease agreement
for the location. In some instances, the Company is also responsible for the
payment of property taxes, insurance and other charges. The majority of the
leased properties are subleased to the Company's franchisees for the full term
of the lease and at aggregate rentals equal to the aggregate rentals paid by the
Company.
F-31
<PAGE> 67
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Additionally, the Company leases certain executive office space under an
operating lease. Future minimum lease payments are as follows over the next five
years:
<TABLE>
<CAPTION>
Restaurant Office
Space Space
---------- ----------
<S> <C> <C>
Year ended June 30, 1998 $ 839,400 $ 28,800
1999 569,700 28,800
2000 493,400 24,000
2001 301,100 -
2002 203,800 -
Thereafter 202,800 -
---------- ----------
$2,610,200 $ 81,600
========== ==========
</TABLE>
Total minimum future rental payments shown above have not been reduced by
$2,356,600 of sublease rentals to be received in the future under non-cancelable
operating subleases.
Following is a summary of rental expense for franchise operations and
Company-owned restaurant operations:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Minimum rentals $ 421,500 $ 394,100 $ 1,040,700
Less sublease
rentals 181,800 163,900 302,300
----------- ----------- -----------
Total rent expense $ 239,700 $ 230,200 $ 738,400
=========== =========== ===========
</TABLE>
In August, 1997, the Company and an affiliated corporation agreed to the
formation of a new corporation in which they would be 24% and 27% shareholders,
respectively. The new corporation has agreed to purchase the business and assets
of an existing Sandwich Express restaurant. The Company has agreed to forgive
$15,400 in receivables, which arose after June 30, 1997, from the current owners
of the restaurant in exchange for its stock ownership. At September 18, 1997,
the acquisition of the restaurant had not been finalized.
F-32
<PAGE> 68
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation
In 1987, as part of a settlement of a previously filed complaint, the Company
agreed to make certain purchases and pay certain amounts to a plaintiff
supplier. In October 1994, the plaintiff alleged that the Company breached that
agreement by failing to purchase all the required items and also by failing to
pay for some items which were delivered under the settlement agreement. The
Company contended that the plaintiff breached the settlement agreement. The
Company answered the complaint and the Superior Court referred the matter to the
Joint Association Settlement Program. After a settlement conference was held,
the parties settled the matter.
As part of the second settlement agreement, the Company agreed to pay the
plaintiff an irrevocable consulting fee of $500,000, payable in monthly
installments of $4,200 for a period of ten years commencing on June 15, 1996 and
to use the plaintiff as exclusive supplier of various paper products used by the
Company in Numero Uno restaurants for a period of five years. Subsequently, the
Company filed a Demand for Arbitration before JAMS/Endispute, Inc. alleging that
the plaintiff violated the terms of the second settlement agreement. In November
1996, the parties entered into a new third settlement agreement which superseded
both previous agreements referenced above. This final settlement agreement
required the Company to make an immediate cash payment of $101,000 and
subsequent installment payments totaling $117,500 plus interest on or before
November 1, 2001. At June 30, 1997, the Company classified the remaining amount
due under the terms of the final settlement agreement as an accrued litigation
settlement on its balance sheet (Note 11).
In November 1995, an action was filed against the Company for unlawful detainer
at one of its restaurant locations. The landlord was seeking approximately
$58,000 in past due rent. The matter was settled out of court and the Company
paid the landlord $30,000. The action has been dismissed by the landlord.
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments under the terms of a promissory note and
Security Agreement. The plaintiffs alleged that the Company defaulted on amounts
due them totalling approximately $77,900. A tentative settlement was reached
with the plaintiff's attorney but the plaintiffs did not agree to the terms. A
Settlement Conference was held on June 29, 1996. The
F-33
<PAGE> 69
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
parties were unable to settle the matter at the Conference and the Court
scheduled a trial date for October 16, 1996. However, prior to the trial date,
the parties settled the matter with the Company agreeing to pay the sum of
approximately $54,500 plus interest at 10% per annum in monthly installments
until paid in full. The Company has made regular monthly installment payments
and the unpaid balance of approximately $24,500 has been classified as a current
liability at June 30, 1997.
In September 1995, a complaint was filed against the Company for breach of
contract and foreclosure of mechanics liens. The dispute centered around a piece
of real property for which the Company contracted with the plaintiff to perform
investment services. The plaintiff sought the sum of $15,800 as the outstanding
balance owed on the contract. The Company responded to the complaint on October
31, 1995. After some discovery, the matter was settled. The Company agreed to
pay the plaintiff the sum of $15,200 at the rate of $500 per month until paid in
full. The Company entered into a stipulation for entry of judgment with the
plaintiff, which may be filed with the Court in the event that the Company
defaults on any payment due to the plaintiff.
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments on a Promissory Note totalling
approximately $12,800. The Company filed an answer on December 6, 1995 and made
a settlement offer to the plaintiffs but the plaintiffs' counsel has not pursued
settlement. Currently, the case is dormant and the Company believes that the
matter will eventually be settled for no more that the current balance due on
the original promissory note of approximately $12,800, which has been classified
as a current liability at June 30, 1997.
On August 8, 1995 a landlord of a leased restaurant location filed an action
alleging breach of contract arising out of a lease agreement entered into by
himself and Gelet Enterprises, Inc. in June 1990. The lease agreement was
amended in January 1993 and again in April 1995. The plaintiff sued for back
rent and other damages. The parties agreed to settle matter by the Company
paying the plaintiff $12,900 in March 1996.
On July 28, 1995, an action was filed against the Company for an amount due on a
Promissory Note payable. The plaintiffs alleged that the Company was in arrears
on an installment note made on
F-34
<PAGE> 70
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
July 16, 1993. The balance on the note at June 30, 1995 was approximately
$107,900. The Company responded to the complaint on September 19, 1995 and in
April 1996, the Company paid the plaintiffs $96,000 as a settlement of the
action and the remaining balance of $11,900 was forgiven by the plaintiffs.
In June 1995, the landlord of premises leased by Numero Uno Takeout and Delivery
Corporation filed a complaint against the Company and other defendants for
breach of a lease agreement in the amount of approximately $20,500. The
plaintiffs contend that the premises were vacated in March 1995 and that the
Company and other defendants are responsible for the unpaid rent. The Company
contends that Numero Uno Takeout and Delivery Corporation is a defunct entity
and that there is no contractual liability on behalf of the Company and the
other named defendants. After the discovery stage, the Court assigned the case
to nonbinding arbitration which was held on June 20, 1996. Thereafter, the
arbitrator awarded the plaintiffs the sum of $31,800. The Company did not agree
with the award of the arbitrator and filed a Request For Trial De Novo with the
Court. Subsequently, the Court set a trial date for March 31, 1997. Prior to
trial, the parties entered into a settlement agreement which provides for a
stipulation for judgment should the Company fail to pay installments pursuant to
the terms of the settlement. The Company agreed to pay $16,500 plus interest in
monthly installments until paid in full. At June 30, 1997, approximately $12,000
remained unpaid and was accrued as a current liability in connection with this
case.
In May 1987, the Company guaranteed the payments on a note payable to a former
franchisee by the party to whom the franchise was sold. In April 1995, the
outside party defaulted on the note payable and the plaintiff noteholder filed a
complaint for approximately $50,900, the balance remaining on the note. The
parties settled the matter; the Company agreed to pay the plaintiff $56,700 in
monthly installments of $2,500 until paid in full.
In November 1994, a franchisee filed an action against the Company alleging
breach of contract and various other causes of action. Prior to trial, the
parties settled the matter with the plaintiff agreeing to pay the Company
$30,000.
F-35
<PAGE> 71
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
In January 1982, the Company subleased a restaurant location to a franchisee. In
March 1992, the franchisee assigned their right, title and interest to the
sublease. The sublease specifically stated that it shall not release the
originally named sublessee from liability for the continued performance on the
terms and provisions of the sublessee. In January 1994, the assignees failed to
pay rent to the lessor or to the Company.
As a result of the failure to pay rent, the landlord brought an action against
the Company to recover damages for breach of the lease. In August 1994, the
Company stipulated with the landlord to a payment of $43,600 and a judgment may
be entered against the Company if it fails to meet the obligation. The Company
has performed all of the conditions and obligations to be performed under the
original sublease and believes that it is entitled to indemnification from the
sublessee in the same amount as the stipulated agreement with the landlord. The
Company entered into a stipulated agreement with the sublessee who agreed to pay
the Company $31,000 in monthly installments of $750 which began on October 15,
1994. During the year ended June 30, 1997, with $10,000 remaining due on the
installment agreement, the sublessee agreed to pay the Company $6,000 and the
remaining $4,000 was forgiven by the Company.
In October 1996, an action was filed against the Company for sexual battery,
intentional infliction of emotional distress and other allegations concerning
sexual discrimination. The matter arose out of an alleged incident between an
employee of the Company and the plaintiff. The Company investigated the matter
and believes it is without merit. A status conference was held on June 2, 1997
and the Court set the matter for trial on October 20, 1997. Prior to the trial
date, the Company resolved the matter by paying the plaintiff a settlement of
$5,000.
F-36
<PAGE> 72
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
On January 17, 1996, the Company filed an action against the former franchisee
and the current owners of a restaurant for damages and injunctive relief for
service mark infringement, dilution of mark, common law trademark and service
mark infringement, unfair competition and breach of contract. The former
franchisee closed his location and sold the assets to the current owners to be
used in operating an independent restaurant. Specifically excluded from the sale
of assets was the right to use the name Numero Uno and trademarks. The new
owners, however, continued to use the name and other trademarks.
On March 15, 1996, the Company filed a Request for Entry of Default against the
defendants and default was entered on the same day. At June 30, 1996, the
defendants still had not appeared before the Court and the Company subsequently
decided to withdraw its action.
In October 1993, an action was filed against the Company and other defendants by
a former franchisee. The matter arose out of a note payable executed by one of
the Company's wholly-owned subsidiaries in the amount of approximately $130,000
which was secured by and under an accompanying security agreement. The plaintiff
alleged that the Company's wholly-owned subsidiary breached the security
agreement and therefore the entire amount of the promissory note was
accelerated. The plaintiff also contended that the Company is liable under the
alter ego theory for the debt of the wholly-owned subsidiary.
In September 1994, a Mandatory Settlement Conference was held but the parties
were unable to reach a settlement. The Court ordered the matter to binding
arbitration on December 8, 1995 and the matter was resolved in favor of the
Company. The Company was held not liable for any portion of the note payable.
In June 1993, a dispute arose between a franchisee and the Company relating to
the termination of the franchisee's delivery rights and the exclusivity of the
franchisee's original geographic territory. The plaintiff franchisee sought
compensatory and punitive damages of approximately $130,000, alleging that its
geographic territory was exclusive and its delivery rights nonterminable by the
Company. The Company strongly disagreed and contended that the geographic
territory assigned to the franchisee was nonexclusive and terminable by the
Company and that a replacement delivery area was agreed to by the
F-37
<PAGE> 73
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation (continued)
franchisee. In September 1994, the parties settled the matter. The settlement
agreement grants the franchisee an abatement of the payment of royalties to the
Company for a five year period and a one-time waiver of the transfer fee should
the franchisee decide to sell its franchise. The parties established the
boundaries of the franchisee's geographic territory and delivery rights.
As part of the settlement agreement, one of the plaintiffs entered into a new
franchise agreement with the Company in October, 1995. Subsequently, the
plaintiff breached his obligations under the franchise agreement by failing to
pay required fees and his franchise was terminated by the Company. The plaintiff
refused to vacate the restaurant he was subleasing from the Company, continued
to use Company trademarks and breached his building lease with the landlord by
failing to pay rent which was due. The Company was forced to pay back rent to
the landlord and utilities.
The plaintiff and the Company agreed to arbitrate their claims. The plaintiff
filed a claim against the Company and its president for fraud, intentional
infliction of emotional distress and breach of fiduciary duty in the amount of
$418,000. The Company filed a cross claim against the plaintiff for breach of
contract and trademark infringement for $100,000. The Company is also seeking
indemnification for rents and utilities paid on behalf of the plaintiff and
damages for trademark infringement and unfair competition claims in the amount
of $7,000.
Management believes that the Company will prevail in arbitration, because the
plaintiff's claims are without merit, and at best the plaintiff can only seek
damages for breach of his franchise agreement since the September, 1994
settlement agreement was reached between the parties. Management also believes
that the outcome will not have a material adverse effect on the Company's
financial position.
F-38
<PAGE> 74
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Industry Segments
The Company operates principally in the food service industry, operating two
segments: franchising and Company-owned restaurants. The franchising segment
sells individual, multi-unit and territorial restaurant franchise licenses. The
Company- owned restaurant segment operates full-service and takeout and delivery
Numero Uno pizza restaurants. Total revenues, by segment, include sales to
unaffiliated customers, as reported in the Company's consolidated statements of
operations. Operating income (loss) is total revenue, less operating expenses.
F-39
<PAGE> 75
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Industry Segments (continued)
Segment information is as follows:
<TABLE>
<CAPTION>
Company-owned
Franchising Restaurants
----------- -------------
<S> <C> <C>
Year ended June 30, 1997
Revenues from unaffiliated
customers $ 1,405,400 $ 1,708,200
Operating income (loss) 199,100 (114,600)
Identifiable assets at
June 30, 1997 2,600 1,151,500
Year ended June 30, 1996
Revenues from unaffiliated
customers $ 1,060,100 $ 483,200
Operating loss (1,133,900) (137,500)
Identifiable assets at
June 30, 1996 21,600 1,590,300
Year ended June 30, 1995
Revenues from unaffiliated
customers $ 688,600 $ 3,460,000
Operating loss (2,055,500) (1,022,500)
Identifiable assets at
June 30, 1995 36,100 752,900
Depreciation:
For the year ended
June 30, 1997 $ 23,700 $ 216,500
For the year ended
June 30, 1996 22,300 75,600
For the year ended
June 30, 1995 38,100 198,700
Capital expenditures:
For the year ended
June 30, 1997 $ 12,200 $ 5,000
For the year ended
June 30, 1996 7,800 1,398,900
For the year ended
June 30, 1995 35,800 1,078,100
</TABLE>
F-40
<PAGE> 76
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Fourth Quarter Adjustments
During the fourth quarter of the years ended June 30, 1996 and 1995, the Company
recorded significant adjustments to its accounts which resulted in increasing
net loss by approximately $1,072,400 and $1,129,700, respectively. The
adjustments in 1996 were principally attributable to the write off of
uncollectible notes receivable and the recording of an accrued litigation
settlement. The adjustments in 1995 were principally attributable to the write
off of uncollectible notes receivable and the balance of the unamortized
telephone center.
F-41
<PAGE> 77
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to
Charged to Charged to Loss on
Beginning Costs and Sales of Specific Ending
Description Balance Expenses Restaurants Write-offs Balance
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended June 30, 1997:
Allowance for doubtful
accounts $ 48,000 $ 45,200 $ -- $ 7,300 $ 65,900
Loss on allowance for
uncollectible notes
receivable 547,300 50,500 -- 181,300 416,500
Valuation allowance for
deferred income tax
assets 1,750,000 -- -- 245,000 1,505,000
For the year ended June 30, 1996:
Allowance for doubtful
accounts $ 86,600 $ 73,000 $ -- $ 111,600 $ 48,000
Loss on allowance for
uncollectible notes
receivable 499,700 337,700 -- 290,100 547,300
Valuation allowance for
deferred income tax
assets 1,300,000 450,000 -- -- 1,750,000
For the year ended June 30, 1995:
Allowance for doubtful
accounts $ 212,200 $ 51,000 $ 65,100 $ 241,700 $ 86,600
Loss on allowance for
uncollectible notes
receivable 185,200 337,600 -- 23,100 499,700
Valuation allowance for
deferred income tax
assets 270,000 1,030,000 -- -- 1,300,000
</TABLE>
F-42
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 17,000
<SECURITIES> 0
<RECEIVABLES> 812,700
<ALLOWANCES> 442,200
<INVENTORY> 24,500
<CURRENT-ASSETS> 490,300
<PP&E> 1,561,800
<DEPRECIATION> 407,700
<TOTAL-ASSETS> 2,439,600
<CURRENT-LIABILITIES> 949,600
<BONDS> 320,900
0
12,400
<COMMON> 31,100
<OTHER-SE> 1,024,700
<TOTAL-LIABILITY-AND-EQUITY> 2,439,600
<SALES> 1,708,200
<TOTAL-REVENUES> 3,157,800
<CGS> 553,500
<TOTAL-COSTS> 2,373,200
<OTHER-EXPENSES> 5,000
<LOSS-PROVISION> 99,400
<INTEREST-EXPENSE> 42,200
<INCOME-PRETAX> 84,500
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 82,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,900
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
