<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 1997.
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to __________.
Commission file number 0-19522
N. U. PIZZA HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Nevada
-------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
95-3656327
-------------------------------------------------------------
(I.R.S. Employer Identification No.)
16800 Devonshire St., Suite 305 Granada Hills, CA 91344
-------------------------------------------------------------
(Address of principal executive offices)
(818) 368-2616
-------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
As of December 31 1997, there were 31,139,008 shares of common stock
outstanding. Par value is $.001.
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PART I - FINANCIAL INFORMATION
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,800 $ --
Restricted cash 7,300 17,000
Franchisee advertising receivable 33,700 29,600
Receivables, net of allowance for
doubtful accounts of $65,900 134,700 127,900
Current portion of notes receivable,
net of allowance for possible future
losses of $376,300 203,800 213,000
Inventories 20,900 24,500
Prepaid expenses 30,800 78,300
---------- ----------
Total current assets 434,000 490,300
---------- ----------
Other assets:
Notes receivable, net of allowance for
possible future losses of $40,200 769,100 512,300
Intangible assets, net of accumulated
amortization of $290,800 and $250,400,
respectively 209,200 249,600
Investments 17,000 --
Deposits 34,700 33,300
---------- ----------
1,030,000 795,200
---------- ----------
Leasehold improvements and property
and equipment, net of accumulated
depreciation and amortization of
$434,700 and $407,000, respectively 785,800 1,154,100
---------- ----------
$2,249,800 $2,439,600
========== ==========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 180,800 $ 180,800
Accounts payable and accrued expenses 492,400 516,300
Accrued franchise advertising 41,000 46,600
Current portion - accrued litigation
settlements 27,000 32,000
Loans payable to related parties 198,500 173,900
Income taxes payable 1,600 --
----------- -----------
Total current liabilities 941,300 949,600
----------- -----------
Long-term debt, net of current portion 128,300 230,400
Accrued litigation settlements, net
of current portion 79,300 90,500
Deferred franchise fee income 81,400 100,900
Stockholders' equity:
Preferred stock, Series B, $.10 par
value per share, authorized 10,000,000
shares, 80,000 shares issued and
outstanding (aggregate liquidation
preference $400,000) 8,000 8,000
Preferred stock, Series C, $.10 par
value per share, authorized 44,000
shares, 44,000 shares issued and
outstanding (aggregate liquidation
preference $220,000) 4,400 4,400
Common stock, $.001 par value per
share, authorized 50,000,000 shares,
31,139,008 shares issued, subscribed
and outstanding 31,100 31,100
Additional paid-in capital 5,989,100 5,989,100
Notes receivable arising from stock
purchase agreements (487,000) (487,000)
Accumulated deficit (4,526,100) (4,477,400)
----------- -----------
1,019,500 1,068,200
----------- -----------
$ 2,249,800 $ 2,439,600
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
FRANCHISE OPERATIONS:
REVENUES:
Initial franchise fees $ 9,700 $ 38,500 $ 19,500 $ 52,000
Royalties 129,400 135,500 268,200 257,900
Rental income 25,500 41,800 55,500 98,200
Interest income 5,400 11,800 11,600 21,200
Rebate income 49,800 50,600 84,500 93,500
Other income 12,100 100 99,200 19,600
Gain on sale of restaurant
and equipment 6,500 - 6,500 -
---------- ---------- ---------- ----------
238,400 278,300 545,000 542,400
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Rent 33,100 50,500 73,700 115,300
General and administrative 210,200 214,400 375,300 381,500
Interest expense 2,600 8,000 3,500 18,100
---------- ---------- ---------- ----------
245,900 272,900 452,500 514,900
Franchise operating ---------- ---------- ---------- ----------
income (loss) (7,500) 5,400 92,500 27,500
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
COMPANY-OWNED RESTAURANT
OPERATIONS:
Sales $ 392,900 $ 401,300 $ 850,900 $ 753,800
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 125,400 111,800 279,800 219,200
Operating 182,400 301,200 394,200 444,500
General and
administrative 130,300 (34,700) 316,500 84,300
------------ ------------ ------------ ------------
438,100 378,300 990,500 748,000
------------ ------------ ------------ ------------
Company-owned
restaurant income
(loss) (45,200) 23,000 (139,600) 5,800
------------ ------------ ------------ ------------
Income (loss) before
income tax provision (52,700) 28,400 (47,100) 33,300
Income tax provision -- -- 1,600 2,400
------------ ------------ ------------ ------------
Net income (loss) $ (52,700) $ 28,400 (48,700) 30,900
============ ============
Accumulated deficit,
beginning of period (4,477,400) (4,560,300)
------------ ------------
Accumulated deficit,
end of period $(4,526,100) $(4,529,400)
============ ============
Net income (loss)
per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
============ ============ ============ ============
Weighted average
number of shares
outstanding 31,139,008 29,486,834 31,139,008 25,986,834
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (48,700) $ 30,900
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 156,400 143,000
Gain on sale of restaurants
and equipment (6,500) --
Realization of deferred income (19,500) (27,000)
Changes in assets and liabilities:
Receivables, net (45,800) (53,000)
Inventories 3,600 (3,400)
Prepaid expenses and other
current assets 44,400 35,300
Accounts payable and accrued
expenses (32,200) (91,000)
Deposits (1,400) (15,200)
Income taxes payable 1,600 2,400
------------ ------------
Net cash provided by
operating activities 51,900 22,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on notes receivable 39,600 52,800
Capital expenditures -- (1,700)
------------ ------------
Net cash provided
by investing activities 39,600 51,100
------------ ------------
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amounts due
to related parties $ 24,600 $ 15,000
Principal payments on long-term debt (113,300) (505,000)
Proceeds from issuance of common stock -- 515,000
------------ ------------
Net cash (used) provided
by financing activities (88,700) 25,000
------------ ------------
Net increase in cash and
cash equivalents 2,800 98,100
Cash and cash equivalents,
beginning of period -- 255,100
------------ ------------
Cash and cash equivalents,
end of period $ 2,800 $ 353,200
============ ============
Supplemental information:
Cash paid for interest $ 3,500 $ 8,000
Cash paid for income taxes $ -- $ 800
Non-cash transactions:
Notes receivable issued in
exchange for accounts receivable $ 30,800 $ 68,900
Note receivable issued in exchange
for fixed assets, prepaid expenses
and accounts receivable 262,000 --
Accounts and note receivable
forgiven in exchange for investment 17,000 --
Notes receivable issued for stock -- 91,200
Forgiveness of debt in exchange for
a reduction in accounts payable -- 23,000
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
In the opinion of management of N.U. Pizza Holding Corporation and Subsidiaries
(the "Company"), the accompanying unaudited financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position of the Company as of December 31, 1997 and the
results of its operations and changes in its cash flows for the three and six
month periods presented.
The financial statements and notes are presented as permitted by Form 10-Q and
do not contain certain information included in the annual financial statements
and notes.
These unaudited financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended June 30, 1997.
Note 1 -
A summary of significant accounting policies is currently on file with the
Securities and Exchange Commission on Form-10K.
The accompanying consolidated financial statements include the
accounts of N. U. Pizza Holding Corporation and its wholly-owned
subsidiaries, Numero Uno Franchise Corporation and Formaggi Inc.
(the "Company"). Intercompany transactions and balances have
been eliminated in consolidation.
Certain prior period balances have been reclassified in the consolidated
financial statements to conform to the current period's presentation.
Note 2 - Litigation
Pending
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments on a Promissory Note totalling
approximately $12,800. The Company filed an answer on December 6, 1995 and made
a settlement offer to the plaintiffs but the plaintiffs' counsel has not pursued
settlement. Currently, the case is dormant and the Company believes that the
matter will eventually be settled for no more that the current balance due on
the original promissory note of approximately $12,800, which has been classified
as a current liability.
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In June 1993, a dispute arose between a franchisee and the Company relating to
the termination of the franchisee's delivery rights and the exclusivity of the
franchisee's original geographic territory. The plaintiff franchisee sought
compensatory and punitive damages of approximately $130,000, alleging that its
geographic territory was exclusive and its delivery rights nonterminable by the
Company. The Company strongly disagreed and contended that the geographic
territory assigned to the franchisee was nonexclusive and terminable by the
Company and that a replacement delivery area was agreed to by the franchisee. In
September 1994, the parties settled the matter. The settlement agreement grants
the franchisee an abatement of the payment of royalties to the Company for a
five year period and a one-time waiver of the transfer fee should the franchisee
decide to sell its franchise. The parties established the boundaries of the
franchisee's geographic territory and delivery rights.
As part of the settlement agreement, one of the plaintiffs entered into a new
franchise agreement with the Company in October 1995. Subsequently, the
plaintiff breached his obligations under the franchise agreement by failing to
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 and
utilities to the landlord.
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.
Settled
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
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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.
In 1987, as part of a settlement of a previously filed complaint, the Company
agreed to make certain purchases and pay certain amounts to a plaintiff
supplier. In October 1994, the plaintiff alleged that the Company breached that
agreement by failing to purchase all the required items and also by failing to
pay for some items which were delivered under the settlement agreement. The
Company contended that the plaintiff breached the settlement agreement. The
Company answered the complaint and the Superior Court referred the matter to the
Joint Association Settlement Program. After a settlement conference was held,
the parties settled the matter.
As part of the second settlement agreement, the Company agreed to pay the
plaintiff an irrevocable consulting fee of $500,000, payable in monthly
installments of $4,200 for a period of ten years commencing on June 15, 1996 and
to use the plaintiff as exclusive supplier of various paper products used by the
Company in Numero Uno restaurants for a period of five years. Subsequently, the
Company filed a Demand for Arbitration before JAMS/Endispute, Inc. alleging that
the plaintiff violated the terms of the second settlement agreement. In November
1996, the parties entered into a new third settlement agreement which superseded
both previous agreements referenced above. This final settlement agreement
required the Company to make an immediate cash payment of $101,000 and
subsequent installment payments totaling $117,500 plus interest on or before
November 1, 2001. At December 31, 1997, the Company has classified the remaining
amount due under the terms of the final settlement agreement as an accrued
litigation settlement on its balance sheet.
In November 1995, an action was filed against the Company for unlawful detainer
at one of its restaurant locations. The landlord was seeking approximately
$58,000 in past due rent. The matter was settled out of court and the Company
paid the landlord $30,000. The action has been dismissed by the landlord.
In September 1995, an action was filed against the Company for breach of
contract for failure to make payments under the terms of a promissory note and
Security Agreement. The plaintiffs alleged that the Company defaulted on amounts
due them totalling approximately $77,900. A tentative settlement was reached
with the plaintiff's attorney but the plaintiffs did not agree to the terms. A
Settlement Conference was held on June 29, 1996. The parties were unable to
settle the matter at the Conference and the Court scheduled a trial date for
October 16, 1996. However,
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prior to the trial date, the parties settled the matter with the Company
agreeing to pay the sum of approximately $54,500 plus interest at 10% per annum
in monthly installments until paid in full. The Company has made regular monthly
installment payments and the unpaid balance has been classified as a current
liability.
In September 1995, a complaint was filed against the Company for breach of
contract and foreclosure of mechanics liens. The dispute centered around a piece
of real property for which the Company contracted with the plaintiff to perform
investment services. The plaintiff sought the sum of $15,800 as the outstanding
balance owed on the contract. The Company responded to the complaint on October
31, 1995. After some discovery, the matter was settled. The Company agreed to
pay the plaintiff the sum of $15,200 at the rate of $500 per month until paid in
full. The Company entered into a stipulation for entry of judgment with the
plaintiff, which may be filed with the Court in the event that the Company
defaults on any payment due to the plaintiff.
On August 8, 1995, a landlord of a leased restaurant location filed an action
alleging breach of contract arising out of a lease agreement entered into by
himself and Gelet Enterprises, Inc. in June 1990. The lease agreement was
amended in January 1993 and again in April 1995. The plaintiff sued for back
rent and other damages. The parties agreed to settle matter by the Company
paying the plaintiff $12,900 in March 1996.
On July 28, 1995, an action was filed against the Company for an amount due on a
Promissory Note payable. The plaintiffs alleged that the Company was in arrears
on an installment note made on July 16, 1993. The balance on the note at June
30, 1995 was approximately $107,900. The Company responded to the complaint on
September 19, 1995 and in April 1996, the Company paid the plaintiffs $96,000 as
a settlement of the action and the remaining balance of $11,900 was forgiven by
the plaintiffs.
In June 1995, the landlord of premises leased by Numero Uno Takeout and Delivery
Corporation filed a complaint against the Company and other defendants for
breach of a lease agreement in the amount of approximately $20,500. The
plaintiffs contended that the premises were vacated in March 1995 and that the
Company and other defendants were responsible for the unpaid rent. The Company
contended that Numero Uno Takeout and Delivery Corporation was a defunct entity
and that there was no contractual liability on behalf of the Company and the
other named defendants. After the discovery stage, the Court assigned the case
to nonbinding arbitration which was held on June 20, 1996. Thereafter, the
arbitrator awarded the plaintiffs the sum of $31,800. The Company did not agree
with the award of the arbitrator and filed a Request For Trial De Novo with the
Court. Subsequently, the Court set a trial date for March 31, 1997.
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Prior to trial, the parties entered into a settlement agreement which provides
for a stipulation for judgment should the Company fail to pay installments
pursuant to the terms of the settlement. The Company agreed to pay $16,500 plus
interest in monthly installments until paid in full. The unpaid balance has been
accrued as a current liability in connection with this case.
In May 1987, the Company guaranteed the payments on a note payable to a former
franchisee by the party to whom the franchise was sold. In April 1995, the
outside party defaulted on the note payable and the plaintiff noteholder filed a
complaint for approximately $50,900, the balance remaining on the note. The
parties settled the matter; the Company agreed to pay the plaintiff $56,700 in
monthly installments of $2,500 until paid in full.
In November 1994, a franchisee filed an action against the Company alleging
breach of contract and various other causes of action. Prior to trial, the
parties settled the matter with the plaintiff agreeing to pay the Company
$30,000.
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 sublease. In January 1994, the assignees failed to
pay rent to the lessor or to the Company.
As a result of the failure to pay rent, the landlord brought an action against
the Company to recover damages for breach of the lease. In August 1994, the
Company stipulated with the landlord to a payment of $43,600 and a judgment may
be entered against the Company if it fails to meet the obligation. The Company
has performed all of the conditions and obligations to be performed under the
original sublease and believes that it is entitled to indemnification from the
sublessee in the same amount as the stipulated agreement with the landlord. The
Company entered into a stipulated agreement with the sublessee who agreed to pay
the Company $31,000 in monthly installments of $750 which began on October 15,
1994. During the year ended June 30, 1997, with $10,000 remaining due on the
installment agreement, the sublessee agreed to pay the Company $6,000 and the
remaining $4,000 was forgiven by the Company.
On January 17, 1996, the Company filed an action against a 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
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from the sale of assets was the right to use the name Numero Uno and trademarks.
The new owners, however, continued to use the name and other trademarks.
On March 15, 1996, the Company filed a Request for Entry of Default against the
defendants and default was entered on the same day. At June 30, 1996, the
defendants still had not appeared before the Court and the Company subsequently
decided to withdraw its action.
In October 1993, an action was filed against the Company and other defendants by
a former franchisee. The matter arose out of a note payable executed by one of
the Company's wholly-owned subsidiaries in the amount of approximately $130,000
which was secured by and under an accompanying security agreement. The plaintiff
alleged that the Company's wholly-owned subsidiary breached the security
agreement and therefore the entire amount of the promissory note was
accelerated. The plaintiff also contended that the Company is liable under the
alter ego theory for the debt of the wholly-owned subsidiary.
In September 1994, a Mandatory Settlement Conference was held but the parties
were unable to reach a settlement. The Court ordered the matter to binding
arbitration on December 8, 1995 and the matter was resolved in favor of the
Company. The Company was held not liable for any portion of the note payable.
Note 3 - Investment
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, which arose after June 30, 1997, from the current owners
of the restaurant in exchange for its stock ownership in the new corporation.
Note 4 - Income Taxes
The Company's federal income tax provisions for the three month and six month
periods ended December 31, 1996 have been eliminated by the utilization of net
operating loss carryforwards. The Company would have been required to pay
additional federal income taxes in these periods had it not been able to utilize
these carryforwards. A provision for minimum state income taxes has been
provided in the consolidated financial statements.
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PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Six Months Ended December 31, 1997:
Liquidity and Capital Resources.
For the six months ended December 31, 1997, cash of $51,900 was provided by
operating activities. This marks the second consecutive quarter that cash flow
has been provided from operating activities. The Company attained positive cash
flow for the six months ended December 31, 1997 from the collection of principal
amounts due on its notes receivable and 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. Cash and cash equivalents at December 31, 1997 were $2,800.
Operating Activities.
Accounts receivable increased $6,800 to $134,700 at December 31 1997. An
increase of $45,800 in receivables caused by franchisees not paying their
royalties timely was offset by conversions of accounts receivable to notes
receivable totaling $39,000.
Prepaid expenses decreased $47,500 to $30,800 at December 31, 1997. The decrease
is due primarily to the expiration of prepaid advertising, consulting, insurance
and rent at June 30, 1997.
Inventories decreased $3,600 to $20,900 at December 31, 1997 and deposits
increased $1,400 to $34,700 at December 31, 1997 due to normal business
fluctuations.
Accounts payable and accrued litigation settlements decreased $28,900 to
$519,400 at December 31, 1997, primarily due to the increased payment of
outstanding trade payables and the continued payment of accrued litigation
settlements.
Accrued franchise advertising payable decreased $5,600 during the six months
ended December 31, 1997. This decrease is offset by an increase in advertising
fund receivables of $4,100 and a decrease in advertising cash of $9,700.
Deferred license fees of $19,500 were recognized as income during the six months
ended December 31, 1997.
Income taxes payable increased $1,600 at December 31, 1997 due to the
recognition of required minimum state tax liabilities for the
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current fiscal year.
Investing Activities:
Notes receivable increased $247,600 to $972,900 at December 31, 1997 due to the
issuance of $287,200 of notes receivable in exchange for fixed assets,
receivables and prepaid expenses and the collection of $39,600 of outstanding
amounts due to the Company.
Net leasehold improvements and property and equipment decreased $368,300 to
$785,800 at December 31, 1997. The decrease was due to the sale of one
Company-owned restaurant and to normal monthly depreciation and amortization.
The Company forgave $17,000 of accounts and notes receivable from the previous
owners of a Sandwich Express Restaurant in exchange for a 27% stock ownership
interest in a new corporation formed with an affiliated corporation.
Financing Activities.
Long-term debt decreased $88,700 to $586,900 at December 31, 1997 due to
payments of $113,300 on outstanding obligations. This decrease was offset by an
increase in amounts due to related parties of $24,600.
Results of Operations.
Six Months Ended December 31, 1997
As Compared to Six Months Ended December 31, 1996
Franchise Operations.
For the six months ended December 31, 1997, the Company recognized initial
franchise fees of $19,500 from one international license contract, a 62.5%
decrease in fees from the same period in 1996.
The Company recognized $268,200 of royalty income during the six months ended
December 31, 1997, a $10,300 (4%) increase from royalty income of $257,900
recognized for the comparable period in 1996. The increase was due primarily to
additional royalties received in connection with the franchise operations of
Sandwich Express.
Rental income decreased $42,700 (43.5%) during the six months ended December 31,
1997 as compared to the six months ended December 31, 1996, due to the decrease
in rental receipts from franchisees who pay their rent directly to the landlord
instead of to the Company as a pass through to the landlord. Similarly,
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rent expense decreased by approximately the same amount. Historically, the
Company's only source of rental income was from franchisees who purchased
restaurants that were previously owned by the Company. The Company, who remained
obligated on the lease, would collect rent from the franchisees (subleases) and
pay it directly to the landlord. This trend is expected to continue until all
franchisees negotiate their own leases directly with lessors.
Interest income decreased $9,600 (45.3%) to $11,600 for the six months ended
December 31, 1997 as compared to $21,200 for the six months ended December 31,
1996. This decrease is due to an increase in collections on notes receivable and
the Company's policy of not accruing interest income on notes receivable that
are over six months in arrears.
Rebate income decreased $9,000 (9.6%) to $84,500 during the six months ended
December 31, 1997 as compared to the six months ended December 31, 1996, due to
an overall decline in system-wide sales.
Other income increased $79,600 (406.1%) to $99,200 for the six months ended
December 31, 1997 due primarily to the one-time receipt of $83,000 from a vendor
when the Company agreed to change its soft drink supplier.
The Company recognized a gain of $6,500 on the sale of a restaurant and
equipment during the six months ended December 31, 1997.
General and administrative expenses decreased $6,200 (1.6%) to $375,300 during
the six months ended December 31, 1997 as compared to the six months ended
December 31, 1996 due primarily to an overall reduction in administrative and
management expenses.
Interest expense decreased $14,600 (80.7%) to $3,500 for the six months ended
December 31, 1997 as compared to the six months ended December 31, 1996 due to a
significant decrease in the Company's long-term debt.
Company-owned Restaurant Operations.
Company-owned restaurant revenues increased $97,100 or 12.9% during the six
months ended December 31, 1997 compared to the same period in 1996. The Company
owned four operating restaurants and the Sandwich Express bakery during majority
of the six months ended December 31, 1997 as compared to three restaurants
during the six months ended December 31, 1996.
Due to the increase in sales volume, gross profit increased $36,500 (6.8%) for
the six months ended December 31, 1997 as
16
<PAGE> 17
compared to the same period in 1996. Gross profit as a percentage of sales
decreased 3.8% from 70.9% to 67.1% for the six months ended December 31, 1997.
The decrease was due to increases in food costs.
Company-owned restaurant costs and expenses increased $181,900 or 34.4% during
the six months ended December 31, 1997 as compared to the same period in 1996 as
a result of the increased overhead costs incurred in operating an additional
Company-owned restaurant and bakery.
Three Months Ended December 31, 1997
As Compared to Three Months Ended December 31, 1996
Franchise Operations.
For the three months ended December 31, 1997, the Company recognized initial
franchise fees of $9,700 from one international license contract, a 74.8%
decrease in fees from the same period in 1996.
The Company recognized $129,400 of royalty income during the three months ended
December 31, 1997, a $6,100 (4.5%) decrease from royalty income of $135,500
recognized for the comparable period in 1996. The decrease was due primarily to
an overall decline in system-wide sales.
Rental income decreased $16,300 (39.0%) during the three months ended December
31, 1997 as compared to the three months ended December 31, 1996, due to the
decrease in rental receipts from franchisees who pay their rent directly to the
landlord instead of to the Company as a pass through to the landlord. Similarly,
rent expense decreased by approximately the same amount. Historically, the
Company's only source of rental income was from franchisees who purchased
restaurants that were previously owned by the Company. The Company, who remained
obligated on the lease, would collect rent from the franchisees (subleases) and
pay it directly to the landlord. This trend is expected to continue until all
franchisees negotiate their own leases directly with lessors.
Interest income decreased $6,400 (54.2%) to $5,400 for the three months ended
December 31, 1997 as compared to $11,800 for the three months ended December 31,
1996. This decrease is due to an increase in collections on notes receivable and
the Company's policy of not accruing interest income on notes receivable that
are over six months in arrears.
Rebate income decreased $800 (1.6%) during the three months ended December 31,
1997 as compared to the three months ended December
17
<PAGE> 18
31, 1996, due to an overall decline in system-wide sales.
Other income increased $12,000 (1200.0%) to $12,100 for the three months ended
December 31, 1997. The increase was due primarily to salad dressing sales
revenue and vending game income earned during the quarter ended December 31,
1997.
The Company recognized a gain of $6,500 on the sale of a restaurant and
equipment during the three months ended December 31, 1997.
General and administrative expenses decreased $4,200 (2%) to $210,200 during
the three months ended December 31, 1997 as compared to the three months ended
December 31, 1996 due primarily to an overall reduction in administrative and
management expenses.
Interest expense decreased $5,400 (67.5%) to $2,600 for the three months ended
December 31, 1997 as compared to the three months ended December 31, 1996 due to
a significant decrease in the Company's long-term debt.
Company-owned Restaurant Operations.
Company-owned restaurant revenues decreased $8,400 or 2.1% during the three
months ended December 31, 1997 compared to the same period in 1996. The Company
owned four operating restaurants and the Sandwich Express bakery during the
majority of the three months ended December 31, 1997 as compared to three
restaurants during the three months ended December 31, 1996. There was an
overall decrease in system-wide sales during the current quarter.
Due to the decrease in sales volume, gross profit decreased $22,000 (7.6%) for
the three months ended December 31, 1997 as compared to the same period in 1996.
Gross profit as a percentage of sales decreased 4.1% from 72.1% to 68% for the
three months ended December 31, 1997. The decrease was due to increases in food
costs.
Company-owned restaurant costs and expenses increased $46,200 or 17.3% during
the three months ended December 31, 1997 as compared to the same period in 1996
as a result of the increased overhead costs incurred in operating an additional
Company-owned restaurant and bakery.
18
<PAGE> 19
President's Comments:
The first and second quarter results, for the year ended June 30, 1998, were in
line with management's projections. The third quarter should also show a loss,
mostly unusual in nature, due to losses associated with the sale of
company-owned restaurants. These transactions should be completed by the end of
the third quarter and operations should become profitable. The Company's
objectives for the year ending June 30, 1998 remain as follows:
1. Seek an equity partner for Formaggi Inc. which is
now a wholly-owned subsidiary of N. U. Pizza
Holding Corporation. An infusion of equity will
give Formaggi Inc. the ability to aggressively
grow the pizza/sandwich dual concept in the states
of Oregon and Washington.
2. Aggressively pursue expansion in the international marketplace
which the Company believes is an area that can provide the Company
with substantial short-term and long-term profitability with
minimal expenditures of capital and minimal risk.
3. Franchise the pizza/sandwich dual concept throughout the state of
California under the Numero Uno Pizza/Sandwich Express name.
4. Pursue territorial development agreements outside the states of
California, Oregon and Washington for the Numero Uno Pizza/Sandwich
Express dual concept.
5. Sell existing Company-owned restaurants to franchisees so that the
Company's energy and resources can be focused on profitable areas.
6. Search for restaurant chains that are merger/acquisition
candidates. The Company believes that this is the best and most
cost effective way for it to grow domestically. Typically, existing
operations are acquired at a fraction of the cost that it would
take to develop an area and bring with it an established customer
base, existing revenue, name recognition and immediacy.
7. Enhance shareholder value.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 1 None
Item 2 None
Item 3 None
Item 4 None
Item 5 None
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits - none
b) No reports on Form 8-K were filed during the quarter ended
December 31, 1997
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Granada
Hills, State of California on February 16, 1998.
N.U. PIZZA HOLDING CORPORATION
By: /s/
------------------------------------
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.
/s/ Dated: 2/16/98
- ------------------------------------ --------------
Ronald J. Gelet
Director, President and Chief
Executive Officer
/s/ Dated: 2/16/98
- ------------------------------------ --------------
Gloria Gelet
Director
/s/ Dated: 2/16/98
- ------------------------------------ --------------
Jane Yennie
Controller
/s/ Dated: 2/16/98
- ------------------------------------ --------------
Dan Rouse
Director
21
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
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<RECEIVABLES> 814,400
<ALLOWANCES> 442,200
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12,400
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<OTHER-SE> 976,000
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