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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, 1998
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
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(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 2, 1998 was $525,435.
The number of shares of Common Stock outstanding as of October 2, 1998 was
32,139,008.
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 establishments which provide
only limited dine-in service and which feature takeout and delivery services.
The Company currently operates one full service Numero Uno Pizza Restaurant.
Numero Uno Franchise Corporation maintains centralized franchising, buying,
personnel, systems, pricing, advertising, merchandising and accounting functions
at its principal executive offices. Most of the Company's business is currently
done in Southern California.
Formaggi Inc., which is a wholly-owned subsidiary, franchises the "Oregon's
Original 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-through services.
All 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 Original 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 Formaggi Inc. in exchange for 2,000,000
shares of Formaggi Inc.'s common stock. Currently, there are no other
shareholders in Formaggi Inc.
Formaggi Inc. 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
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president originated.
Pizza is clearly the most important product in the Company's line. Deep dish,
Sicilian-style is the most popular product and New York-style thin crust pizza
is second in demand.
As of June 30, 1998 there were 53 franchised restaurants in the Numero Uno and
Sandwich Express system featuring dine-in facilities as well as takeout and
delivery services. Also, as of June 30, 1998 the Company owned and operated one
full service restaurant.
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 trade names,
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 monthly royalty fees are the higher of $1,200
or 5% of net franchise revenues. Advertising fees are the higher of $800 or 3%
of net franchise revenues. 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.
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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.
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 nonrefundable 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, there are fifteen
international units opened and operating.
Company-owned Restaurants
The Company sold two of its restaurants and exchanged one restaurant for shares
of common stock in a related entity during the fiscal year ended June 30, 1998.
The Company currently operates one restaurant. The Company has decided to
concentrate its growth and effort in the domestic and international franchising
of the Numero Uno concept, to providing assistance to Formaggi Inc. and to grow
its two concepts outside of California and Oregon. No additional Company
operations will be added and the existing Company-owned restaurant is expected
to 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
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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 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 sixteen "nonunion" employees. This does not include
personnel that are employed by the Company's franchisees. Management believes
that its employee relations are generally good.
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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 made available by the
Company. The Company attempts to compete by offering what it believes to be
higher quality food and better service at reasonable prices.
The Company's major national competitors include Pizza Hut, Dominos and Little
Caesar's. Regional competitors include Shakey's, Round Table, Mountain Mike's
Pizza and Papa Murphy's 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, Trade names, 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
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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 November 11, 1997, the Company received a registered trademark in the State
of Oregon for "Formaggi" as Reg. #2112981. 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 by the United States
Patent and Trademark Office; the trademark administrator of any state or any
court; no impending interference, opposition or cancellation proceedings; nor
any pending material litigation involving any of the foregoing marks which is
relevant to their use in California. With the exception of the agreement with
Pizzeria Uno Corporation (which prevents the Company from using the name
anywhere within the continental United States except for California), there are
no agreements currently in effect which significantly limit the rights of the
Company or its affiliated entities to use or license the use of any of the said
marks. Furthermore, there are no infringing uses actually known to the Company
which would materially affect the use of any of the marks in California.
The Company has copyrights on certain confidential operations manuals and
confidential food preparation manuals. These copyrights are not registered.
Under each franchise agreement, the franchisee is granted the right to use the
manuals during the term of his franchise, subject to the confidentiality
restrictions and other terms and conditions contained in the franchise
agreement. There are 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
The Company-owned restaurant site is 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 six years. The
termination of any of the leases due to expire within
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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 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.
Historically, Company-owned restaurants were either located in or adjacent to
shopping centers of varying sizes and had adjacent parking facilities or were
freestanding with parking that was specific to the location. 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 eighteen months remaining on the lease.
ITEM 3. LEGAL PROCEEDINGS
Pending
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
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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
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
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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. 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 more than the balance due
on the original promissory note.
Settled
3. 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 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 pay
the supplier a total of $238,000 consisting of immediate cash payment of
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$101,000, subsequent installment payments totaling $37,000 plus interest of 8%
on or before November 1, 1998 and $100,000 (reduced by the plaintiff to $75,000
during the current year) payable in sixty monthly installments of $1,250.
4. 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 favor of the Company. The
Company was held not to be liable for any portion of the note.
5. 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
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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.
6. 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. At June 30, 1998, approximately $15,600
remained unpaid.
7. 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 non binding 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 which were paid in full during the year ended June 30,
1998.
8. 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
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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.
9. 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.
10. 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.
11. 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 for
December 18, 1995. Numero Uno Franchise Corporation made a motion to continue
the trial date which was granted and then
13
<PAGE> 15
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.
12. Brian Moore and Linda Moore vs. Numero Uno Franchise Corporation and N. U.
Pizza Holding Corporation, Orange County Superior Court Case No. 752894. This
action was filed on September 18, 1995 for breach of a promissory note and
security agreement made by the Company to Brilinca Corporation. The plaintiffs,
Brian and Linda Moore are the assignees of Brilinca Corporation. The Moores
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. At June
30, 1998 approximately $500 remained unpaid.
13. 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.
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
14
<PAGE> 16
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.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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,
1998 1997 1996
------------------ ------------------ ------------------
High Low High Low High Low
Fiscal Period Bid Bid Bid Bid Bid Bid
- ------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter 0.08 0.05 0.31 0.13 0.72 0.25
Second Quarter 0.08 0.04 0.18 0.08 0.43 0.16
Third Quarter 0.08 0.04 0.18 0.11 0.34 0.16
Fourth Quarter 0.06 0.02 0.16 0.07 0.34 0.22
</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, 1998, the total number of shareholders was 509.
16
<PAGE> 18
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.
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, 1998 totaled $4,200.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Eleven
Year Ended Year Ended Year Ended Year Ended Months Ended
June 30, June 30, June 30, June 30, June 30,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Franchise Revenue $ 1,443,800 $ 1,449,600 $ 1,144,800 $ 743,100 $ 2,387,800
Franchise Operating
(Loss) Income $ (96,600) $ 199,100 $ (1,133,900) $ (2,055,500) $ 175,800
Company-owned
Restaurant Sales $ 1,109,800 $ 1,708,200 $ 483,200 $ 3,460,000 $ 2,218,500
Company-owned
Restaurant
(Loss) $ (249,200) $ (114,600) $ (137,500) $ (1,022,500) $ (234,400)
Net (Loss) Income $ (348,300) $ 82,900 $ (1,273,800) $ (2,923,500) $ (62,600)
Net (Loss) Income
per Common Share -
Basic and Diluted $ (.01) $ -- $ (.08) $ (.29) $ (.01)
Weighted Average
Number of Shares
Outstanding -
Basic and Diluted 31,522,570 30,846,616 15,420,508 10,203,653 6,186,200
Cash Dividends per
Common Share None None None None None
Total Assets $ 1,911,100 $ 2,439,600 $ 2,880,300 $ 2,168,800 $ 3,394,900
Long-term
Obligations $ 124,000 $ 320,900 $ 783,800 $ 241,600 $ 637,400
Stockholders'
Equity (Deficit) $ 854,900 $ 1,068,200 $ 555,300 $ (160,100) $ 304,900
Working Capital
Deficiency $ (577,200) $ (459,300) $ (579,100) $ (1,396,800) $ (1,343,900)
Current Ratio .33 .52 .58 .26 .34
Number of Franchised
Restaurants 53 57 51 44 44
Number of Company-
owned Restaurants
Including the Bakery
(1997) 1 5 4 6 14
</TABLE>
18
<PAGE> 20
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 minimized its operating losses in a transitional year ended June 30,
1998. At June 30, 1998, the Company has an accumulated deficit of $4,825,700 and
a working capital deficit of $577,200. There has been a minimal return on
assets.
During the year ended June 30, 1998, the Company incurred a net loss of $ 14,300
before fourth quarter adjustments to noninterest bearing notes receivable from
franchisees and the allowance for possible future losses on interest bearing
notes receivable. After adjustments to notes receivable, the Company's net loss
increased $ 334,000 to $ 348,300.
The Company's business began to generate positive cash flows during the year
ended June 30, 1998. At June 30, 1997, the Company operated four Company-owned
restaurants resulting in negative cash flows and operating losses. This trend
continued in the current year as the Company was in the process of selling
and/or exchanging three Company-owned restaurants. At June 30, 1998, the Company
owned only one Numero Uno Pizzeria restaurant location.
The Company's franchise operations lost $96,600 in the current year but would
have been profitable except for losses of approximately $604,000 recognized on
uncollectible and discounted notes receivable from franchisees. Principle
payments on long-term debt of approximately $200,000 also reduced the Company's
cash resources.
During the year ended June 30, 1997, the Company reported net income of $82,900;
however, the acquisition of the assets of an Oregon restaurant chain in January
1997 for cash of $200,000, an 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 significantly reduced the
Company's cash resources.
19
<PAGE> 21
Despite continued operating losses and 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 further reduced its operating costs in the current year
primarily as a result of the sale and/or exchange of under performing and
unprofitable Company-owned restaurant locations and additional reduction of
restaurant lease commitments. The Company realized proceeds of $157,000 from the
sale of restaurants and equipment during the current year. The Company also
continued to reduce its liabilities by the payment of obligations from this
source of 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.
The Company's cash outflow for capital expenditures was only $10,000 and
$12,200, respectively, for the years ended June 30, 1998 and 1997. This
reduction in capital expenditures is also due to the disposition of the
Company's restaurants in the years ended June 30, 1998 and 1997. Property and
equipment of $573,900 and $310,000, respectively, were sold during the years
ended June 30, 1998 and 1997 in exchange for notes receivable.
The Company has settled all but two of its lawsuits and in management's opinion
is not currently involved in any significant litigation which could result in
material obligations. The Company settled a lawsuit in the year ended June 30,
1997 with a major supplier and significantly reduced future commitments. In
November 1996, the parties entered into a revised settlement agreement. Pursuant
to the terms of the new settlement agreement, the Company made a lump sum
payment of $101,000 to the supplier and agreed to make monthly installment
payments totaling $37,000 plus interest at 8% per annum through November 1,
1998. The revised settlement also required the Company to pay $75,000 to the
supplier in sixty monthly installments of $1,250. At June 30, 1998, these
commitments had a combined remaining balance of $67,800.
The Company has reduced and extended its long-term debt requirements. During the
year ended June 30, 1998, principal payments on long-term debt totaled $199,100
compared to $541,000 for the year ended June 30, 1997.
Collections on notes receivable totaled $87,400 for the year ended June 30,
1998. The Company borrowed $9,600 from its president, accrued additional
obligations to him of $30,000 during the current year and repaid $50,000 of his
borrowings
20
<PAGE> 22
through a stock issuance.
Due to factors discussed above, although cash flow was only slightly positive in
the current year, in management's opinion, cash flow should improve and
stabilize in the future.
The Company plans to grow through a contemplated sales transaction which
management anticipates will reduce the Company's liabilities and provide cash to
enable the Company to concentrate on strengthening its existing franchise base,
implement its dual pizza/sandwich concept, create new food concepts and expand
its international franchising operations.
Operating Activities
Accounts receivable have decreased $80,900 to $47,000 at June 30, 1998.
Franchisees made payments of $128,500 during the year ended June 30, 1998. Past
due royalties of $69,300 were converted to notes receivable, receivables of
$35,100 were exchanged for common stock in affiliated corporations, previously
reserved accounts receivable of $32,500 and receivables recorded in connection
with expenses incurred in sales of certain franchises of $72,500 were written
off during the year ended June 30, 1998.
Inventories decreased $20,900 to $3,600 at June 30, 1998 due to the disposition
of three Company-owned restaurants and the closure of the Sandwich Express
bakery during the year ended June 30, 1998.
Prepaid expenses decreased $55,200 to $23,100 at June 30, 1998 due primarily to
the expiration of prepaid advertising, consulting, insurance and rent as well as
the disposition of three Company-owned restaurants during the year ended June
30, 1998.
Deposits and other assets increased $700 to $34,000 at June 30, 1998 due to the
payment of a rent security deposit.
Accounts payable and accrued expenses decreased $54,700 to $461,600 at June 30,
1998 due to the increased payment of outstanding trade payables during the year.
Deferred franchise fee income of $34,000 was realized during the year ended June
30, 1998.
Accrued franchise advertising payable decreased $17,000 to $29,600 at June 30,
1998. Correspondingly, restricted cash and franchisee advertising receivable
have also decreased $17,000 to $13,000 and $16,600, respectively, at June 30,
1998.
21
<PAGE> 23
Investing Activities
Notes receivable and notes receivables from related parties increased increased
$348,300 to $1,073,600 at June 30, 1998. The Company issued $862,000 of notes
receivable in connection with the sale of Company-owned restaurants, exchanged
$69,300 of accounts receivable for notes receivable, received $9,100 of common
stock in an affiliated corporation in lieu of payment on a note receivable and
received $87,400 of principal payments on outstanding amounts due. In addition,
the Company specifically wrote off reserved notes receivable of $219,500 and
discounted certain noninterest bearing notes receivable by $267,000.
During the year ended June 30, 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. In October 1997, the new corporation finalized the
purchase of the business and assets of an existing Sandwich Express restaurant.
The Company agreed to forgive $17,000 in receivables from the current co-owners
of the restaurant in exchange for its stock ownership in the new corporation.
In January 1998, the Company exchanged one of its Company-owned restaurants for
4,000,000 shares (25%) of the common stock of an affiliated corporation. The
investment was recorded at $245,200 which was the net book value of the
restaurant equipment and leasehold improvements transferred of $211,600 plus
other current assets transferred of $33,600.
During the year ended June 30, 1998, the affiliated corporations in which the
Company has common stock investments incurred immaterial losses. At June 30,
1998, the cost of these investments was not adjusted as the carrying value of
the investments approximated their estimated recovery value.
Net leasehold improvements and property and equipment decreased $939,700 to
$214,400 at June 30, 1998. The decrease is due primarily to depreciation and
amortization of $164,200, the sale of equipment and leasehold improvements with
net book values totaling $573,900, the exchange of equipment and leasehold
improvements with net book values totaling $211,600 for common stock in an
affiliated corporation and purchases of new equipment of $10,000.
22
<PAGE> 24
Financing Activities
Long-term debt decreased $144,400 to $266,800, accrued litigation settlements
decreased $54,700 to $67,800 and loans payable to related parties decreased
$10,400 to $163,500 at June 30, 1998. The Company made principal payments on
long-term debt of $144,400 and paid $54,700 toward an accrued litigation
settlement. The Company issued 1,000,000 shares of common stock for $.05 per
share ($50,000) as payment on a loan from the president of the Company. The
Company also accrued $30,000 of additional dough royalties due to the president
of the Company and received $9,600 of additional advances.
Common stock and additional paid-in capital increased $1,000 and $49,000 to
$32,100 and $6,038,100, respectively, at June 30, 1998. The Company issued
1,000,000 shares of common stock at $.05 per share as payment on a loan from the
president of the Company.
The Company also wrote off $85,000 of uncollectible subscription notes
receivable.
Results of Operations
Year Ended June 30, 1998 as Compared to the Year Ended June 30, 1997
Franchise Operations
Initial franchise fees decreased $40,000 to $49,000 (44.9%) as compared to
$89,000 for the year ended June 30, 1997. The Company recognized $34,000 of
previously deferred franchise fees and received $15,000 of transfer fees on
franchises that were sold during the year ended June 30, 1998. No new
international development agreements were made during the year ended June 30,
1998.
For the year ended June 30, 1998, the Company earned royalty income of $491,200,
a decrease of $63,200 (11.4%) as compared to royalty income of $554,400 for the
year ended June 30, 1997. This decrease is due primarily to a continued decline
in system-wide sales and the closure of six franchises.
The overall decrease in royalty income was offset in part by royalties of
$54,800 received from Sandwich Express franchisees during the year ended June
30, 1998.
Rental income for the year ended June 30, 1998 decreased $112,700
23
<PAGE> 25
(62.0%) to $69,100 as compared to $181,800 for the year ended June 30, 1997.
This decrease is due to an increased number of franchisees paying their rent
directly to the landlord instead of passed through the Company as in prior
years.
Interest income decreased $3,700 (8.4%) to $40,500 for the year ended June 30,
1998 as compared to $44,200 for the year ended June 30, 1997. This decrease is
due to fewer interest bearing notes receivable outstanding during the year ended
June 30, 1998.
Rebate income decreased $15,500 (9.1%) to $154,300 for the year ended June 30,
1998 as compared to $169,800 for the year ended June 30, 1997. This decrease is
due primarily to an overall decrease in system-wide sales for the year ended
June 30, 1998.
Other income increased $52,900 (65.9%) to $133,100 for the year ended June 30,
1998 as compared to $80,200 for the year ended June 30, 1997 due primarily to
the receipt of a one-time payment of $83,000 from a vendor when the Company
agreed to change its sole supplier of soft drink products.
The Company recognized $137,400 of forgiveness of debt income for the year ended
June 30, 1998 due to a $25,000 reduction of a previously accrued litigation
settlement with a major supplier and the write off of $112,400 of previously
accrued accounts payable.
The Company recognized $369,200 of gain on the sales of restaurant equipment and
leasehold improvements during the year ended June 30, 1998.
Rent expense decreased $169,700 (71.1%) to $68,700 for the year ended June 30,
1998 as compared to $238,400 for the year ended June 30, 1997. This decrease is
due primarily to an increase in rents paid directly to the landlord by
franchisees instead of passed through the Company.
General and administrative expenses consist of corporate payroll and related
benefits, insurance, professional fees, license fees and depreciation and
amortization. These expenses decreased $36,500 (4.3%) to $817,800 for the year
ended June 30, 1998 as compared to $854,300 for the year ended June 30, 1997.
This decrease is due primarily to an overall reduction in administrative and
management staff expenses and legal fees.
Bad debt expense increased $237,500 (238.9%) to $336,900 for the year ended June
30, 1998 as compared to $99,400 for the year ended June 30, 1997. The Company
wrote off substantially more uncollectible accounts and notes receivable than
during the year ended June 30, 1997.
24
<PAGE> 26
The Company recorded $267,000 of discounts on notes receivable to reduce the
carrying value of noninterest bearing notes receivable to their fair value at
June 30, 1998. An imputed interest rate of 8% was applied to the future cash
flows of noninterest bearing notes receivable to determine the discount. There
were no noninterest bearing notes receivable at June 30, 1997.
During the year ended June 30, 1998, the Company's consulting expense decreased
$7,500 (67.0%) to $3,700 as compared to $11,200 for the year ended June 30,
1997. The Company did not enter into any new consulting agreements during the
year ended June 30, 1998.
Interest expense increased by a minor amount of $4,100 (9.7%) to $46,300 for the
year ended June 30, 1998 as compared to $42,200 for the year ended June 30,
1997.
There were no litigation settlements during the year ended June 30, 1998. During
the year ended June 30, 1997, the Company settled a lawsuit by agreeing to pay a
plaintiff $5,000.
Company-owned Restaurant Operations
Company-owned restaurant revenues decreased $598,400 (35.0%) to $1,109,800 for
the year ended June 30, 1998 as compared to $1,708,200 for the year ended June
30, 1997. The Company disposed of three of its Company-owned restaurants and
closed the bakery during the year ended June 30, 1998.
As a result of restaurant disposals and the bakery closure, gross profit
decreased $414,000 (35.9%) from $1,154,700 for the year ended June 30, 1997 to
$740,700 for the year ended June 30, 1998. Gross profit, as a percentage of
sales decreased insignificantly from 67.6% for the year ended June 30, 1997 to
66.7% for the year ended June 30, 1998.
Overall Company-owned restaurant expenses decreased $463,800 (25.4%) to
$1,359,000 for the year ended June 30, 1998 compared to $1,822,800 for the year
ended June 30, 1997 due to the dispositions of the Company-owned restaurants and
closure of the bakery.
During the year ended June 30, 1998, the Company incurred a net loss of $ 14,300
before fourth quarter adjustments to noninterest bearing notes receivable from
franchisees and the allowance for possible future losses on interest bearing
notes receivable. After adjustments to notes receivable, the Company's net loss
increased $ 334,000 to $ 348,300. During the year ended June 30, 1997, the
Company reported net income of $82,900.
25
<PAGE> 27
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 was 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
was 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 was
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 was
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
26
<PAGE> 28
accrued litigation settlement with a major supplier.
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 was
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 was 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
was 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 a 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
27
<PAGE> 29
$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 was due to the acquisition of three restaurants in June 1996 and the
opening of a new restaurant during the current year.
As a result of the 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.
President's Comments
This has been a very successful year for the Company. The Company incurred a net
loss of only $14,300 for the year ended June 30, 1998 before fourth quarter
adjustments which discounted noninterest bearing notes receivable from
franchisees and increased the allowance for possible future losses on interest
bearing notes receivable. Furthermore, the Company has substantially reduced its
account payable and other debts, combined its sandwich concept into operating
Numero Uno locations, opened and franchised new restaurants featuring the dual
concept-pizza and sandwiches, and has once again begun to grow the Numero Uno
System.
Most importantly, the Company is currently negotiating a sales transaction which
was presented, discussed and approved at the Company's last shareholders'
meeting. Management anticipates that the transaction will improve the Company's
overall financial position by eliminating current and long-term debt and provide
the cash necessary to give the Company the financial strength to expand the
Company's breadth of operations.
28
<PAGE> 30
Management is hopeful that negotiations will be completed, a letter of intent
will be consummated, and the sale will be finalized before December 31, 1998.
Clearly, the year ended June 30, 1998 was successful in many ways. The Company
minimized its operating losses, reduced its obligations and achieved its
objective of combining its sandwich concept into operating Numero Uno Pizzeria
locations.
The entire management team is optimistic about the Company's future and
confident that future operations will be profitable and shareholders will see
increased value.
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 55 Chairman of the Board, President
of the Company and affiliated
companies
Gloria A. Gelet 50 Director
Daniel A. Rouse 48 Director
</TABLE>
29
<PAGE> 31
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 and
Formaggi Inc. Mr. Gelet has over 25 years of extensive entrepreneurial and
management experience in the restaurant business. Mr. Gelet attended the
University of Wisconsin, Madison where he received a Bachelor of Arts degree.
Gloria A. Gelet 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, 1998, 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 $148,300
Gloria A. Gelet Director of Advertising $ 28,800
Daniel A. Rouse Vice President Operations $ 41,900
All executive
officers as a
group (3 persons) $219,000
</TABLE>
30
<PAGE> 32
In addition, $25,500 was paid for Mr. Gelet's family medical insurance.
Compensation Under Plans
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Name Office Amount Percentage
---- ------ ------ ----------
<S> <C> <C> <C>
Ronald J. Gelet (1) President and 5,093,200 15.9%
15834 Highland Court Director
Solana Beach, California
Numero Uno Development, Inc. - 774,072 2.4%
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 1,400,000 shares held
by his brother, Stephen R. Gelet.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 1998, the Company issued 1,000,000 shares of
common stock at $.05 per share to Mr. Gelet's brother, Stephen R. Gelet, which
the Company applied as a payment of $50,000 on a loan payable to Mr. Gelet.
During the year ended June 30, 1998, the Company sold one of its Company-owned
restaurants to RJM, Inc., an affiliated corporation, in exchange for a
noninterest bearing note receivable of $262,000. The net book value of the
restaurant equipment, leasehold improvements and other current assets sold was
$260,600 and the Company recognized a gain on the sale of $1,400.
During the year ended June 30, 1998, the Company exchanged one of its
Company-owned restaurants for 4,000,000 shares (25%) of the common stock of NUN,
Inc., a company that Mr. Gelet controls. The investment was recorded at $245,200
which was the net book value of the restaurant equipment and leasehold
improvements
31
<PAGE> 33
transferred of $211,600 plus other current assets transferred of $33,600.
During the year ended June 30, 1997, the Company and an affiliated corporation,
CMG Sales, Inc., agreed to the formation of a new corporation, FCA, Inc., in
which they would be 24% and 27% shareholders, respectively. On October 1, 1997,
the new corporation finalized the purchase of the business and assets of an
existing Sandwich Express restaurant. The Company agreed to forgive $17,000 in
receivables from the current co-owners of the restaurant in exchange for its
stock ownership in the new corporation.
During the year ended June 30, 1998, the affiliated corporations in which the
Company has common stock investments incurred immaterial losses. At June 30,
1998, the cost of these investments was not adjusted as the carrying value of
the investments approximated their estimated recovery value.
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, 1998, the Company owed
Mr. Gelet $63,300 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., loaned the Company $45,600 and $95,000, respectively. These
loans totaled $140,600 and are payable on demand. Mr. Gelet's loan is
noninterest bearing and CMG Sales, Inc.'s loan bears interest at 5% per annum.
During the year ended June 30, 1998, Mr. Gelet loaned the Company $9,600 and was
repaid $50,000 through a stock issuance. The balances due on these loans at June
30, 1998 were $5,200 and $95,000, respectively, totaling $100,200.
32
<PAGE> 34
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-47
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>
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.
3.5 Certificate of Amendment of Articles of *
Incorporation dated March 11, 1993 filed
</TABLE>
33
<PAGE> 35
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.
34
<PAGE> 36
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.
* By this reference incorporated herein and made a part hereof.
35
<PAGE> 37
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 13, 1998.
Date: October 13, 1998 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 13, 1998 /s/
-----------------------------------------
Ronald J. Gelet,
Director, President, Chief
Executive Officer, Chief
Financial and Accounting
Officer
Date: October 13, 1998 /s/
-----------------------------------------
Gloria A. Gelet
Director
Date: October 13, 1998 /s/
-----------------------------------------
Daniel A. Rouse
Director
36
<PAGE> 38
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-2
Consolidated Balance Sheets, June 30, 1998 and 1997 F-4
Consolidated Statements of Operations, Years Ended
June 30, 1998, 1997 and 1996 F-6
Consolidated Statements of Stockholders' Equity (Deficit),
Years Ended June 30, 1998, 1997 and 1996 F-8
Consolidated Statements of Cash Flows, Years Ended
June 30, 1998, 1997 and 1996 F-9
Notes to Consolidated Financial Statements F-12
</TABLE>
F-1
<PAGE> 39
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended June 30,
1998. I have also audited the consolidated financial statement schedule listed
in the index at Item 14. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Company's management. My responsibility is to express an opinion on these
consolidated financial statements and consolidated 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 consolidated financial position of N. U.
Pizza Holding Corporation and Subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998, in conformity with generally accepted
accounting principles. Also, in my opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein.
F-2
<PAGE> 40
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, 1998. 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.
/s/
-----------------------------------------
Bennett Block Accountancy Corporation
Los Angeles, California
September 9, 1998
F-3
<PAGE> 41
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 54,800 $ --
Restricted cash 13,000 17,000
Franchisee advertising receivable 16,600 29,600
Receivables, net of allowance for
doubtful accounts of $21,100 and
$65,900, respectively 47,000 127,900
Current portion of related party
note receivable 25,700 --
Current portion of notes receivable -
franchisees, net of allowances of
of $20,700 and $376,300, respectively 104,300 213,000
Inventories 3,600 24,500
Prepaid expenses 23,100 78,300
---------- ----------
Total current assets 288,100 490,300
---------- ----------
Other assets:
Related party note receivable,
net of allowances of $110,300 129,100 --
Notes receivable - franchisees,
net of allowances of $236,000
and $40,200, respectively 814,500 512,300
Intangibles assets, net of
accumulated amortization of
$331,200 and $250,400, respectively 168,800 249,600
Investments in affiliated corporations 262,200 --
Deposits and other assets 34,000 33,300
---------- ----------
1,408,600 795,200
---------- ----------
Leasehold improvements and property
and equipment, net of accumulated
depreciation and amortization 214,400 1,154,100
---------- ----------
$1,911,100 $2,439,600
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 42
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 175,300 $ 180,800
Accounts payable and accrued expenses 461,600 516,300
Accrued franchise advertising 29,600 46,600
Current portion - litigation settlements 35,300 32,000
Loans payable to related parties 163,500 173,900
----------- -----------
Total current liabilities 865,300 949,600
----------- -----------
Long-term debt, net of current portion 91,500 230,400
Litigation settlements, net of current
portion 32,500 90,500
Deferred franchise fee income 66,900 100,900
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,
shares issued, subscribed and
outstanding 32,139,008, and 31,139,008 32,100 31,100
Additional paid-in capital 6,038,100 5,989,100
Notes receivable arising from stock
purchase agreements (402,000) (487,000)
Accumulated deficit (4,825,700) (4,477,400)
----------- -----------
854,900 1,068,200
----------- -----------
$ 1,911,100 $ 2,439,600
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 43
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
FRANCHISE OPERATIONS:
REVENUES:
Initial franchise fees $ 49,000 $ 89,000 $ 63,900
Royalties 491,200 554,400 612,400
Rental income 69,100 181,800 163,900
Interest income 40,500 44,200 84,700
Rebate income 154,300 169,800 178,500
Other income 133,100 80,200 26,400
Forgiveness of debt 137,400 260,000 192,900
Gain (loss) on sales of
restaurants and equipment 369,200 70,200 (177,900)
----------- ----------- -----------
1,443,800 1,449,600 1,144,800
----------- ----------- -----------
COSTS AND EXPENSES:
Rent 68,700 238,400 246,600
General and administrative 817,800 854,300 989,100
Bad debt expense 336,900 99,400 410,600
Discounts on notes receivable 267,000 -- --
Consulting 3,700 11,200 39,600
Interest expense 46,300 42,200 73,800
Litigation settlements -- 5,000 519,000
----------- ----------- -----------
1,540,400 1,250,500 2,278,700
----------- ----------- -----------
Franchise operating (loss)
income (96,600) 199,100 (1,133,900)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 44
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
COMPANY-OWNED RESTAURANT
OPERATIONS:
Sales $ 1,109,800 $ 1,708,200 $ 483,200
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 369,100 553,500 162,300
Operating 619,000 827,600 266,600
General and administrative 370,900 441,700 191,800
------------ ------------ ------------
1,359,000 1,822,800 620,700
------------ ------------ ------------
Company-owned restaurant
loss (249,200) (114,600) (137,500)
------------ ------------ ------------
(Loss) income before income
tax provision (345,800) 84,500 (1,271,400)
Income tax provision 2,500 1,600 2,400
------------ ------------ ------------
Net (loss) income $ (348,300) $ 82,900 $ (1,273,800)
============ ============ ============
Net (loss) income
per share - basic $ (.01) $ -- $ (.08)
============ ============ ============
Weighted average number
of shares outstanding -
basic 31,522,570 30,846,616 15,420,508
============ ============ ============
Net (loss) income
per share - diluted $ (.01) $ -- $ (.08)
============ ============ ============
Weighted average number
of shares outstanding -
diluted 31,522,570 30,846,616 15,420,508
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 45
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<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, 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 sub-
scriptions of $210,000
(Notes 4 and 13) 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
Common shares issued
and subscribed, net
of uncollectible sub-
scriptions of $85,000
(Notes 4 and 13) 1,000,000 1,000 85,000 -- -- 49,000 -- 135,000
Net loss -- -- -- -- -- -- (348,300) (348,300)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 32,139,008 $ 32,100 $ (402,000) 124,000 $ 12,400 $ 6,038,100 $(4,825,700) $ 854,900
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 46
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (348,300) $ 82,900 $(1,273,800)
Adjustments to reconcile
net (loss) income to net
cash provided (used) by
operating activities:
Depreciation and
amortization 245,000 310,600 157,900
Gain on sale of restaurants
and equipment (369,200) (70,200) (13,900)
Loss on sale of restaurants
and equipment -- -- 191,800
Litigation settlements -- 5,000 519,000
Forgiveness of debt (137,400) (260,000) (192,900)
Realization of deferred
income (34,000) (89,000) (58,900)
Stock issued for
consulting services -- 15,000 --
Provision for doubtful
receivables 336,900 99,400 410,600
Discounts on notes
receivable 267,000 -- --
Changes in assets
and liabilities:
Receivables, net (128,500) (176,400) (158,300)
Inventories 20,900 (7,700) 12,000
Prepaid expenses and
other current assets 41,100 (15,000) (6,100)
Accounts payable and
accrued expenses 116,400 (168,900) 162,800
Deferred franchise
fee income -- 25,000 25,000
Income taxes payable -- -- (3,200)
----------- ----------- -----------
Net cash provided (used)
by operating activities 9,900 (249,300) (228,000)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 47
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from investing
activities:
Additions to notes
receivable $ -- $ -- $ (12,700)
Collections on notes
receivable 87,400 191,800 219,000
Acquisition of intangibles -- (200,000) --
Proceeds from sale of
restaurants and equipment 157,000 -- --
Capital expenditures (10,000) (12,200) (10,000)
--------- --------- ---------
Net cash provided (used)
by investing activities 234,400 (20,400) 196,300
--------- --------- ---------
Cash flows from financing
activities:
Increase (decrease) in loans
payable to related parties 9,600 140,600 (116,700)
Increase in notes payable -- -- 10,000
Principal payments on
long-term debt (199,100) (541,000) (435,200)
Collections of subscription
notes receivable -- -- 20,000
Proceeds from issuance of
common stock -- 415,000 793,600
--------- --------- ---------
Net cash (used) provided
by financing activities (189,500) 14,600 271,700
--------- --------- ---------
Net increase (decrease) in
cash and cash equivalents 54,800 (255,100) 240,000
Cash and cash equivalents,
beginning of period -- 255,100 15,100
--------- --------- ---------
Cash and cash equivalents,
end of period $ 54,800 $ -- $ 255,100
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 48
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental information:
Cash paid for interest $ 46,300 $ 42,200 $ 73,800
Cash paid for taxes 2,500 2,400 3,200
Noncash transactions:
Notes receivable issued
in exchange for accounts
receivable $ 69,300 $ 83,500 $ 87,400
Note payable issued in
exchange for accounts
payable 39,600 -- 38,500
Conversion of debt to
equity 50,000 -- 310,600
Investments in exchange
for assets 262,200 -- --
Notes receivable received
for assets 862,000 305,000 477,500
Forgiveness of receivables
in exchange for fixed
assets -- 5,000 151,700
Notes receivable issued
for stock -- 652,000 140,000
Issuance of stock in
exchange for fixed assets -- -- 1,245,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 49
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
During the year ended June 30, 1998, the Company incurred a net loss of $ 14,300
before fourth quarter adjustments. Additional losses were recognized due to
adjustments for discounts on noninterest bearing notes receivable from
franchisees and increases in the allowance for possible future losses on
interest bearing notes receivable. After adjustments to notes receivable, the
Company's net loss increased $ 334,000 to $ 348,300.
During the year ended June 30, 1997, the Company expanded its Company-owned
restaurant operations by acquiring certain assets of an Oregon restaurant chain
and began operating its new Company-owned California restaurant locations,
acquired in the spring of 1996. While the Company increased its revenues, both
its Oregon operations and Company-owned restaurants showed operating losses. In
the year ended June 30, 1997, the Company began to reduce its operating losses
by either closing or selling under performing and unprofitable locations to new
franchisees. More locations were sold in the current year. At June 30, 1998, the
Company owned only one restaurant location.
During the years ended June 30, 1996 and 1995, the Company incurred significant
net losses of $1,273,800 and $2,923,500, respectively, as it was forced to take
back, operate and sell or close several previously sold restaurant locations
because, in many cases, the Company remained obligated as lessee on the
restaurant location and honored its commitments.
These trends have had an adverse effect on the Company's operations. As a
result, the Company has an accumulated deficit of $4,825,700 and a working
capital deficit of $577,200 at June 30, 1998.
During the year ended June 30, 1998, franchise operations stabilized and
continued to improve. The Company continued to reduce its operating costs,
primarily as a result of the sale of restaurant locations and the renegotiation
of restaurant lease commitments. The Company has also continued to reduce its
liabilities by the payment of obligations from improved cash flow.
F-12
<PAGE> 50
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
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 is currently negotiating a sales transaction that management
anticipates will provide the Company with sufficient cash flow to substantially
reduce its debts and improve the Company's overall financial position
which will enable the Company to concentrate on its dual concept - pizza and
sandwiches, new smaller express and fresh Mexican food ideas. Management also
anticipates that subsequent to the transaction, the Company will continue to
develop the Numero Uno concept within a significant portion of California,
retain exclusive rights to the Numero Uno name on an international basis and
have the right to own restaurants without paying franchise and royalty fees.
Secondly, management has concluded that its ability to grow the pizza/sandwich
dual concept in Oregon and Washington necessitates that the Company find an
equity partner to help fund the operations of Formaggi Inc., or it will sell its
wholly-owned subsidiary during the next fiscal year.
The Company also intends to expand its franchising operations internationally as
there is worldwide demand for its products. The Company currently has fifteen
franchises opened and operating in four Asian countries, Lebanon and the United
Arab Emirates. The Company has found this to be a profitable growth area.
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.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of the recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
F-13
<PAGE> 51
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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). During the year ended June 30, 1998, Formaggi Inc.
closed the bakery and currently holds a partial interest in one Oregon
restaurant (Note 6) and franchises Oregon's Original 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. A Company-owned restaurant and most of the franchises are
located in Southern California.
F-14
<PAGE> 52
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Organization (continued)
Franchised and Company-owned restaurants (including a bakery - 1997) for the
years ended June 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Franchised Company-owned
Restaurants Restaurants
----------- -------------
<S> <C> <C>
Balance - July 1, 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
Opened or purchased 0 0
Sold to or taken over
by the Company 0 0
Sold to franchisees 2 (2)
Closed or terminated (6) (2)
------ ------
Balance - June 30, 1998 53 1
====== ======
</TABLE>
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of N. U. Pizza
Holding Corporation and its wholly-owned subsidiaries, Formaggi Inc. and Numero
Uno Franchise Corporation, (the "Company").
Intercompany transactions and balances have been eliminated in consolidation.
F-15
<PAGE> 53
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Franchise Operations
The Company recognizes fifty percent of revenue earned from the sale of all
individual and area franchises at the opening of each restaurant. The balance of
the revenue is recognized over the sixty month period subsequent to the opening
of the restaurant.
Management is also committed and obligated to provide certain supervisory
functions to franchisees over the sixty months subsequent to the execution of
the licensing agreement.
Royalty Fees
Royalties are charged to most franchisees based upon either a percentage of
gross receipts or a fixed fee, depending on the terms of the individual
franchise agreement, and are recognized as earned. During the years ended June
30, 1998, 1997 and 1996, in order to sell some Company-owned restaurants, the
Company enticed potential buyers by offering to reduce, defer, or in one case,
eliminate royalties.
Investments
Investments in the common stock of affiliated corporations in which the Company
has a 20% to 50% interest are accounted for under the equity method.
Accordingly, the investments in these affiliates (Note 6) are carried at cost,
adjusted for the Company's proportionate share of earnings and losses.
F-16
<PAGE> 54
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, 1998, 1997 and 1996 were $38,100, $46,700 and $42,000,
respectively.
An 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, 1998, 1997 and 1996, the Company had restricted cash of $13,000,
$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.
F-17
<PAGE> 55
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Leasehold Improvements
Leasehold improvements are stated at cost. Amortization is provided using the
straight-line method over the estimated useful lives of the improvements or the
term of the lease, whichever is shorter. Leasehold improvements reacquired from
franchisees are recorded at current market value which approximates historical
book value.
Property and Equipment
Property and equipment is stated at cost and includes restaurant equipment,
furniture, 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.
Intangible Assets
At June 30, 1998, 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, 1998 and 1997 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 $80,800, $70,400 and $60,000,
related to these assets, was charged to operations during the years ended June
30, 1998, 1997, and 1996, respectively.
F-18
<PAGE> 56
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Statement Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About
Fair Value of Financial Instruments", requires that the Company disclose
estimated fair values for its financial statement instruments.
The carrying amount of cash is assumed to be its fair value because of the
liquidity of the instrument. Accounts receivable, accounts payable and accrued
expenses approximate fair value because of the short maturity of these
instruments. The carrying amounts of interest bearing notes receivable from
franchisees and long-term debt are assumed to be recorded at fair value since
the rates specified in the notes and long-term debt approximate current market
rates. Noninterest bearing notes receivable from franchisees (including a
related party) have been discounted to fair value (Notes 4 and 6). It was not
practicable to estimate the fair value of the interest, certain notes receivable
from and notes payable to related parties as payments on these instruments are
not based on fixed payment terms.
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 SFAS No. 109, "Accounting for
Income Taxes". Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year end based on
enacted tax laws and statutory rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable for the period
and the change during the period in deferred tax assets and liabilities.
F-19
<PAGE> 57
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Income Taxes (continued)
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
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,
1998, none of the options authorized had been issued.
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
F-20
<PAGE> 58
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)
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.
Earning per Share
SFAS No. 128, "Earnings per Share," was issued on March 3, 1997, and was
effective for the Company's current fiscal year. This pronouncement provides a
different method of calculating earnings per share than was previously used in
accordance with Accounting Principles Board (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 reflected in the financial statements under
the new standard were not different from those calculated under the APB No. 15
method.
Net (loss) income per basic and diluted share are calculated based on the
weighted average number of common stock shares outstanding during each period.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", was issued in June 1997 and
established standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. In addition to
net income, comprehensive income includes changes in equity during a period,
except those resulting from investments by and distributions to owners. The
Company will adopt SFAS No. 130, which is effective for fiscal years beginning
after December 15, 1997, in the first quarter of the year ending June 30, 1999.
F-21
<PAGE> 59
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", established standards for reporting information about operating
segments in annual and interim financial statements. SFAS No. 131 also
established standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt SFAS No. 131 in the
first quarter of the year ending June 30, 1999. Reporting and disclosures under
SFAS No. 131 are not expected to be materially different than present
disclosures.
Reclassification of Prior Year Balances
Certain prior year balances have been reclassified in the financial statements
to conform to the current year's presentation.
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 generally collateralized by franchise rights, store equipment and
leasehold improvements. Payments on interest bearing notes from franchisees are
due in monthly installments and bear interest at per annum rates which range
from 8% to 11%. During the year ended June 30, 1998, the Company sold
Company-owned restaurants and changed franchisees at several locations.
Noninterest bearing notes receivable were issued by the Company in several of
these transactions.
At June 30, 1998, the Company had noninterest bearing notes receivable from
franchisees including a related party (Note 6) and the buyers of Company-owned
restaurants with a carrying value of $687,700. The notes have been discounted to
their fair value of $420,700 by applying an imputed interest rate of 8% to their
future cash flows. The interest rate used is the current interest rate at which
the Company negotiates similar transactions with other borrowers. The Company
intends to hold these notes to maturity and has recorded an allowance of
$267,000 at June 30, 1998 to reflect the terms negotiated for carrying value
purposes.
F-22
<PAGE> 60
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Receivable (continued)
The Company has also provided an allowance for possible future losses of
$100,000 and $416,500, respectively, on interest bearing notes receivable at
June 30, 1998 and 1997. Management believes that the Company's collateral is
sufficient to recover any past due balances on notes receivable. Interest is not
accrued on notes that are over six months in arrears.
During the year ended June 30, 1997, the Company sold 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 noninterest
bearing subscription notes receivable totaling $652,000. At June 30, 1997,
$137,000 had not been collected on these notes and was recorded as a reduction
of stockholders' equity. At June 30, 1998, $85,000 was written off as
uncollectible on one note and $52,000 remained unpaid on another note
receivable. As of September 9, 1998, the unpaid balance on the note had not been
collected and is recorded as a charge to stockholders' equity at June 30, 1998
(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 noninterest bearing subscription notes
receivable in the amounts of $310,000 and $210,000 (Note 13). At June 30, 1998
and 1997, $350,000 remained unpaid on these notes receivable. As of September 9,
1998, the unpaid balance had not been collected. The unpaid balance is recorded
as a charge to stockholders' equity at June 30, 1998 and 1997 (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 required by the firm to make a
short-term loan to another one of their clients.
The Company agreed to loan the unaffiliated corporation $228,500. The note bore
interest at 6% per annum and was due on June 1, 1995. At June 30, 1995, the
balance remained unpaid and was in default and was therefore classified as a
current asset. At June 30, 1996, the entire amount of the loan remained unpaid
and the $228,500 balance was written off as uncollectible.
F-23
<PAGE> 61
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Receivable (continued)
Notes receivable before allowances are scheduled to mature over the next five
years as follows:
<TABLE>
<S> <C>
Year ended June 30, 1999 $ 125,000
2000 110,600
2001 106,000
2002 74,600
2003 69,600
2004 and thereafter 689,700
----------
$1,175,500
==========
</TABLE>
5. Leasehold Improvements and Property and Equipment
Leasehold improvements and property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Leasehold improvements $ 225,000 $ 941,200
Furniture, fixtures and equipment 118,700 118,700
Restaurant equipment 120,600 463,000
Vehicles 38,900 38,900
---------- ----------
503,200 1,561,800
Less accumulated depreciation
and amortization 288,800 407,700
---------- ----------
$ 214,400 $1,154,100
========== ==========
</TABLE>
F-24
<PAGE> 62
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,
affiliated corporations that he controls and an employee. The total amount
payable to these related parties consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
Note receivable - affiliated
franchisee corporation,
noninterest bearing, due in
monthly installments of $1,000,
balance due in full at maturity
in 2007, net of discount of
$110,300 (Note 4) $ 141,100 $ --
Note receivable - employee,
noninterest bearing, due
on demand 13,700 --
--------- ---------
Total receivable 154,800 --
--------- ---------
Accrued dough royalties - officer (63,300) (33,300)
Loan payable - officer, noninterest
bearing cash advances (5,200) (45,600)
Note payable-affiliated corporation,
bearing interest at 5% per annum,
due on demand (95,000) (95,000)
--------- ---------
Total payable (163,500) (173,900)
--------- ---------
$ (8,700) $(173,900)
========= =========
</TABLE>
F-25
<PAGE> 63
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions (continued)
Related party notes receivable before allowances are scheduled to mature over
the next five years as follows:
<TABLE>
<S> <C>
Year ended June 30, 1999 $ 25,700
2000 12,000
2001 12,000
2002 12,000
2003 12,000
2004 and thereafter 191,400
----------
$ 265,100
==========
</TABLE>
During the current year, the Company issued 1,000,000 shares of common stock at
$.05 per share as payment on a loan payable to an officer.
During the year ended June 30, 1998, the Company sold one of its Company-owned
restaurants to an affiliated corporation in exchange for a noninterest bearing
note receivable of $262,000. The net book value of restaurant equipment,
leasehold improvements and other current assets transferred was $260,600 and the
Company recognized a gain on the sale of $1,400. The noninterest bearing note
receivable was discounted by $110,300.
During the year ended June 30, 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. On October 1, 1997, the new corporation finalized
the purchase of the business and assets of an existing Sandwich Express
restaurant. The Company agreed to forgive $17,000 in receivables from the
current co-owners of the restaurant in exchange for its stock ownership in the
new corporation.
On January 1, 1998, the Company exchanged one of its Company-owned restaurants
for 4,000,000 shares (25%) of the common stock of an affiliated corporation. The
investment was recorded at $245,200 which was the net book value of the
restaurant equipment and leasehold improvements transferred of $211,600 plus
other current assets transferred of $33,600.
F-26
<PAGE> 64
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions (continued)
During the year ended June 30, 1998, the affiliated corporations in which the
Company has common stock investments incurred immaterial losses. At June 30,
1998, the cost of these investments was not adjusted as the carrying value of
the investments approximated their estimated recovery value.
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, 1998, 1997 and
1996, the Company incurred royalty expense of $30,000, $30,000 and $31,500,
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 the stock's fair market
value at that date of $.75 per share.
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 the year ended June 30, 1996, the Company billed 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 year ended June 30, 1996. The partnership sold
the restaurant during the year ended June 30, 1996.
F-27
<PAGE> 65
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 equaled the investment's carrying value. The equity method of
accounting 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, 1998, 1997 and 1996, purchases from one vendor
represented approximately 9.6%, 14.7% and 5.6%, 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, 1995, the Company maintained a term loan with an outstanding balance
of $179,700, secured by substantially all Company assets, with a local bank. The
loan was in default. At June 30, 1995, the Company was unable to pay the
remaining balance due on the loan 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
was 16.39% for the year ended June 30, 1996.
There were no borrowings from financial institutions classified as short-term at
June 30, 1998, 1997 or 1996.
F-28
<PAGE> 66
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,
1998 1997
------------- -------------
<S> <C> <C>
Notes secured by equipment,
bearing interest
from 8% to 11.5% per annum,
maturing through November 2000 $ 36,800 $ 84,600
Unsecured notes, bearing interest
from 6% to 12.8% per annum,
maturing through April 2006 230,000 326,600
------------- -------------
266,800 411,200
Less current maturities 175,300 180,800
------------- -------------
$ 91,500 $ 230,400
============= =============
</TABLE>
Long-term debt is scheduled to mature as follows:
<TABLE>
<S> <C>
Year ended June 30, 1999 $ 175,300
2000 76,400
2001 15,100
----------
$ 266,800
==========
</TABLE>
11. Litigation Settlements
During the year ended June 30, 1994, an action was filed by a vendor against the
Company for breach of a 1987 settlement agreement which obligated the Company to
purchase certain restaurant supply items exclusively from the vendor and to pay
for some items which were delivered under the 1987 settlement agreement.
F-29
<PAGE> 67
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Litigation Settlements (continued)
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 year ended June 30, 1997, 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 was required to
pay the plaintiff a total sum of $238,000 consisting of an immediate lump sum
payment of $101,000 to the vendor, monthly installment payments totaling $37,000
plus interest at 8% per annum through November 1, 1998 and $100,000 (reduced to
$75,000 by the plaintiff during the current year) payable in sixty monthly
installments of $1,250.
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
paying the plaintiff a settlement of $5,000 during the current year (Note 16).
This amount was accrued at June 30, 1997.
F-30
<PAGE> 68
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Litigation Settlements (continued)
Litigation settlements are scheduled to mature as follows:
<TABLE>
<S> <C>
Year ended June 30, 1999 $ 35,300
2000 15,000
2001 15,000
2002 2,500
----------
$ 67,800
==========
</TABLE>
12. Preferred Stock
On December 8, 1995, the Company's Board of Directors approved an increase in
the Company's authorized Series B preferred shares from 1,000,000 to 10,000,000
shares.
In June 1995, the Board of Directors authorized the issuance of 44,000 shares of
Series C preferred stock at $1.00 per share ($.10 par value) and granted an
option to acquire 40,000 shares of common stock at $.10 per share to an
individual note holder 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 are nonvoting, 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.
F-31
<PAGE> 69
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Preferred Stock (continued)
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 note holder during the years
ended June 30, 1998, 1997 or 1996. Dividends in arrears totaled $4,200 at June
30, 1998.
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 current year, the Company issued 1,000,000 shares of its common stock
at $.05 per share as payment on a loan from an officer of the Company.
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 totaled $3,800 which were charged to operations during the current
year. During the year ended June 30, 1997, the Company also 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 noninterest bearing subscription notes receivable totaling
$652,000. At June 30, 1997, $137,000 had not been collected on these notes and
was recorded as a reduction of stockholders' equity. During the year ended June
30, 1998, $85,000 was written off as uncollectible on one note receivable and
$52,000 remained unpaid on another note receivable. As of
F-32
<PAGE> 70
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Common Stock (continued)
September 9, 1998, the unpaid balance had not been collected and is recorded as
a reduction of stockholders' equity at June 30, 1998 (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 year ended June 30, 1997, 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.
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, 1998 and 1997, $350,000 of these subscription notes
receivable had not been collected and were recorded as a charge to stockholders'
equity (Note 4).
At June 30, 1995, $210,000 remained unpaid on a subscription note receivable and
was recorded as a charge to stockholders' deficit. A total of 60,000 shares were
issued on note receivable collections. However, the parties subsequently agreed
to amend the subscription agreement and the remaining shares were never issued.
Accordingly, the note balance was canceled and common stock and additional
paid-in capital were reduced by $200 and $209,800, respectively (Note 4).
F-33
<PAGE> 71
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Common Stock (continued)
During the years ended June 30, 1997 and 1996, 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.
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
Due to recurring net losses, the Company's income tax liability has been limited
to the minimum California and Oregon franchise taxes. These taxes totaled
$1,700, $1,700 and $2,400 for the years ended June 30, 1998, 1997 and 1996,
respectively.
At June 30, 1998, the Company had Federal net operating loss carryforwards of
approximately $4,157,300 for tax purposes. Net operating losses are scheduled to
expire as follows:
<TABLE>
<S> <C>
Year ended June 30, 2007 $ 150,400
2008 284,500
2010 3,065,800
2011 442,300
2012 214,300
----------
$4,157,300
==========
</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-34
<PAGE> 72
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Income Taxes (continued)
The tax effects of temporary differences that give rise to significant portions
of the Company's deferred tax benefit arise from deferred tax assets which
consist of net operating loss carryforwards, the allowance for possible future
losses on accounts and notes receivable, allowance for discounting the carrying
value of noninterest bearing notes receivable, accrued litigation settlements,
accrued officer compensation, and depreciable assets (the use of different
depreciation methods and lives for financial statement and income tax purposes).
Deferred tax liabilities are attributable to differences in the recognition of
franchise fee income and the recognition of gains and losses from restaurant and
equipment installment sales.
The Company's deferred tax benefit is approximately $1,468,000 at June 30, 1998.
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, 1998, 1997 and 1996
were approximately $14,100, $93,400 and $450,000, respectively, for a total of
$557,500. Due to the current year's reduction in tax net operating losses, the
likelihood of realizing future tax benefits is higher than at June 30, 1997.
Accordingly, the valuation allowance has been decreased at June 30, 1998 by
$37,000, the entire amount of the expected reduction in tax benefits.
During the year ended June 30, 1997, the Company reduced its net operating
losses significantly and the valuation allowance was decreased $245,000 due to
the increased realization of future tax benefits. During the year ended June 30,
1996, the valuation allowance was increased $350,000 because there was a
substantial net operating loss which reduced the likelihood of realizing future
tax benefits.
F-35
<PAGE> 73
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies
Commitments
The Company is obligated, under various operating leases for the rental of
restaurant sites, to pay either the monthly fixed rent or the base rent plus a
percentage rent based upon sales, depending upon the individual lease agreement
for the location. In some instances, the Company is also responsible for the
payment of property taxes, insurance and other charges. The majority of the
leased properties are subleased to the Company's franchisees for the full term
of the lease and at aggregate rentals equal to the aggregate rentals paid by the
Company.
Additionally, the Company leases certain executive office space under an
operating lease. Future minimum lease payments are as follows over the next five
years:
<TABLE>
<CAPTION>
Restaurant Office
Space Space
---------- ----------
<S> <C> <C>
Year ended June 30, 1999 $ 668,200 $ 28,800
2000 591,900 24,000
2001 399,600 -
2002 302,300 -
2003 165,800 -
Thereafter 113,300 -
---------- ----------
$2,241,100 $ 52,800
========== ==========
</TABLE>
Total minimum future rental payments shown above have not been reduced by
$2,175,300 of sublease rentals to be received in the future under noncancelable
operating subleases.
F-36
<PAGE> 74
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Commitments (continued)
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, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Minimum rentals $ 195,400 $ 421,500 $ 394,100
Less sublease
rentals 69,100 181,800 163,900
----------- ----------- -----------
Total rent expense $ 126,300 $ 239,700 $ 230,200
=========== =========== ===========
</TABLE>
Litigation - Pending
In June 1993, a dispute arose between a franchisee and the Company relating to
the termination of the franchisee's delivery rights and the exclusivity of the
franchisee's original geographic territory. The plaintiff franchisee sought
compensatory and punitive damages of approximately $130,000, alleging that its
geographic territory was exclusive and its delivery rights non terminable by the
Company. The Company strongly disagreed and contended that the geographic
territory assigned to the franchisee was nonexclusive and terminable by the
Company and that a replacement delivery area was agreed to by the franchisee. In
September 1994, the parties settled the matter. The settlement agreement grants
the franchisee an abatement of the payment of royalties to the Company for a
five year period and a one-time waiver of the transfer fee should the franchisee
decide to sell its franchise. The parties established the boundaries of the
franchisee's geographic territory and delivery rights.
As part of the settlement agreement, one of the plaintiffs entered into a new
franchise agreement with the Company in October, 1995. Subsequently, the
plaintiff breached his obligations under the franchise agreement by failing to
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
F-37
<PAGE> 75
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation - Pending (continued)
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.
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments on a Promissory Note totaling
approximately $12,800. The Company filed an answer on December 6, 1995 and made
a settlement offer to the plaintiffs but the plaintiffs' counsel has not pursued
settlement. Currently, the case is dormant and the Company believes that the
matter will eventually be settled for no more that the current balance due on
the original promissory note of approximately $12,800, which has been classified
as a current liability at June 30, 1998.
F-38
<PAGE> 76
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation - Settled
In 1987, as part of a settlement of a previously filed complaint, the Company
agreed to make certain purchases and pay certain amounts to a plaintiff
supplier. In October 1994, the plaintiff alleged that the Company breached that
agreement by failing to purchase all the required items and also by failing to
pay for some items which were delivered under the settlement agreement. The
Company contended that the plaintiff breached the settlement agreement. The
Company answered the complaint and the Superior Court referred the matter to the
Joint Association Settlement Program. After a settlement conference was held,
the parties settled the matter.
As part of the second settlement agreement, the Company agreed to pay the
plaintiff an irrevocable consulting fee of $500,000, payable in monthly
installments of $4,200 for a period of ten years commencing on June 15, 1996 and
to use the plaintiff as exclusive supplier of various paper products used by the
Company in Numero Uno 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 pay the plaintiff a total of $238,000 consisting of an
immediate cash payment of $101,000, subsequent installment payments totaling
$37,000 plus interest at 8% per annum due on or before November 1, 1998 and
$100,000 (reduced to $75,000 by the plaintiff in the current year) payable in
sixty monthly installments of $1,250.
At June 30, 1998, 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).
F-39
<PAGE> 77
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation - Settled (continued)
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 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.
F-40
<PAGE> 78
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation - Settled (continued)
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 note holder filed
a complaint for approximately $50,900, the balance remaining on the note. The
parties settled the matter; the Company agreed to pay the plaintiff $56,700 in
monthly installments of $2,500 until paid in full. At June 30, 1998,
approximately $15,600 remained unpaid and was accrued as a current liability in
connection with this case.
In June 1995, the landlord of premises leased by Numero Uno Takeout and Delivery
Corporation filed a complaint against the Company and other defendants for
breach of a lease agreement in the amount of approximately $20,500. The
plaintiffs 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 which was paid in full during the current year.
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.
F-41
<PAGE> 79
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation - Settled (continued)
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 and the plaintiff paid the Company $30,000 during the
year ended June 30, 1997.
In September 1995, a complaint was filed against the Company for breach of
contract and foreclosure of mechanics liens. The dispute centered around a piece
of real property for which the Company contracted with the plaintiff to perform
investment services. The plaintiff sought the sum of $15,800 as the outstanding
balance owed on the contract. The Company responded to the complaint on October
31, 1995. After some discovery, the matter was settled. The Company agreed to
pay the plaintiff the sum of $15,200 at the rate of $500 per month. The amount
was paid in full during the year ended June 30, 1997. 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 November 1995, an action was filed against the Company for unlawful detainer
at one of its restaurant locations. The landlord was seeking approximately
$58,000 in past due rent. The matter was settled out of court and the Company
paid the landlord $30,000 during the year ended June 30, 1997 and entered into a
new lease for the premises. The action has been dismissed by the landlord.
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments under the terms of a promissory note and
Security Agreement. The plaintiffs alleged that the Company defaulted on amounts
due them totaling approximately $77,900. A tentative settlement was reached with
the plaintiff's attorney but the plaintiffs did not agree to the terms. A
Settlement Conference was held on June 29, 1996. The parties were unable to
settle the matter at the Conference and the Court scheduled a trial date for
October 16, 1996. However, prior to the trial date, the parties settled the
matter with the Company agreeing to pay the sum of approximately $54,500 plus
interest at 10% per annum in monthly installments until paid in full. The
Company has made regular monthly installment payments
F-42
<PAGE> 80
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (continued)
Litigation - Settled (continued)
and the unpaid balance of approximately $500 has been classified as a current
liability at June 30, 1998.
On July 28, 1995, an action was filed against the Company for an amount due on a
Promissory Note payable. The plaintiffs alleged that the Company was in arrears
on an installment note made on July 16, 1993. The balance on the note at June
30, 1995 was approximately $107,900. The Company responded to the complaint on
September 19, 1995 and in April 1996, the Company paid the plaintiffs $96,000 as
a settlement of the action and the remaining balance of $11,900 was forgiven by
the plaintiffs.
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 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-43
<PAGE> 81
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-44
<PAGE> 82
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, 1998
Revenues from unaffiliated
customers $ 1,403,300 $ 1,109,800
Operating (loss) (96,600) (249,200)
Identifiable assets at
June 30, 1998 -- 214,400
Year ended June 30, 1997
Revenues from unaffiliated
customers $ 1,405,400 $ 1,708,200
Operating (loss) income 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
Depreciation:
For the year ended
June 30, 1998 $ 2,600 $ 161,600
For the year ended
June 30, 1997 23,700 216,500
For the year ended
June 30, 1996 22,300 75,600
Capital expenditures:
For the year ended
June 30, 1998 $ -- $ 10,000
For the year ended
June 30, 1997 12,200 5,000
For the year ended
June 30, 1996 7,800 1,398,900
</TABLE>
F-45
<PAGE> 83
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, 1998 and 1996, the Company
recorded significant adjustments to its accounts which resulted in increasing
net loss by approximately $470,000 and $1,072,400, respectively. The adjustments
in 1998 were principally attributable to increasing the allowance for possible
losses on franchisee notes receivable, to the write off of uncollectible
subscription notes receivable, the recording of discounts on noninterest bearing
notes receivable and the recording of accrued legal expense. The adjustments in
1996 were principally attributable to the write off of uncollectible notes
receivable and the recording of an accrued litigation settlement.
F-46
<PAGE> 84
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to
Charged to Loss on
Beginning Costs and Specific Ending
Description Balance Expenses Write-offs Balance
- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the year ended June 30, 1998:
Allowance for doubtful
accounts $ 65,900 $ 32,500 $ 77,300 $ 21,100
Loss on allowance for
uncollectible notes
receivable 416,500 219,400 535,900 100,000
Discount on noninterest
bearing notes receivable -- 267,000 -- 267,000
Valuation allowance for
deferred income tax
assets 1,505,000 (37,000) -- 1,468,000
For the year ended June 30, 1997:
Allowance for doubtful
accounts $ 48,000 $ 45,200 $ 27,300 $ 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
</TABLE>
F-47
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 67,800
<SECURITIES> 0
<RECEIVABLES> 209,700
<ALLOWANCES> 41,800
<INVENTORY> 3,600
<CURRENT-ASSETS> 288,100
<PP&E> 503,200
<DEPRECIATION> 288,800
<TOTAL-ASSETS> 1,911,100
<CURRENT-LIABILITIES> 865,300
<BONDS> 124,000
0
12,400
<COMMON> 32,100
<OTHER-SE> 810,400
<TOTAL-LIABILITY-AND-EQUITY> 1,911,100
<SALES> 1,109,800
<TOTAL-REVENUES> 2,553,600
<CGS> 369,100
<TOTAL-COSTS> 1,880,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 603,900
<INTEREST-EXPENSE> 46,300
<INCOME-PRETAX> (345,800)
<INCOME-TAX> 2,500
<INCOME-CONTINUING> (348,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (343,800)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
