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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, 1999
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 1, 1999 was $1,788,913.
The number of shares of Common Stock outstanding as of October 1, 1999 was
49,164,008.
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.
N. U. Pizza Holding Corporation owns a wholly-owned subsidiary, Numero Uno
Franchise Corporation, which was incorporated in 1975 to franchise a chain of
restaurants known as Numero Uno Pizzeria. On July 15, 1998, Numero Uno
Franchise Corporation assigned all of its assets, including franchise agreements
then in effect, and certain trademarks to N. U. Pizza Holding Corporation in
exchange for N. U. Pizza Holding Corporation's assumption of specific
liabilities of Numero Uno Franchise Corporation. In January 1999, the officers
and directors of Numero Uno Franchise Corporation resigned. Numero Uno
Franchise Corporation is currently inactive. N. U. Pizza Holding Corporation is
managing the Company's franchising operations.
The Company 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, and (2) Numero Uno Pizzeria establishments which
provide only limited dine-in service and which feature takeout and delivery
services.
N. U. Pizza Holding 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 of N. U. Pizza Holding
Corporation, franchised the "Oregon's Original Sandwich Express and Bakery"
concept and a new dual concept known as "Formaggi Pizza/Sandwich Express." Both
concepts featured limited dine-in service and provided takeout, delivery, and,
in some instances, drive-through services. All of Formaggi Inc.'s business was
conducted in Oregon. During the years ended June 30, 1999 and 1998, all of the
Oregon's Original Sandwich Express and Bakery and Formaggi
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Pizza/Sandwich Express restaurants were closed and Formaggi Inc. ceased all
franchising operations. At June 30, 1999, Formaggi, Inc. wrote off its
remaining unamortized intangible assets.
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 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 remained in his capacity as
president and director until he resigned on January 1, 1999.
On January 7, 1997, N. U. Pizza Holding Corporation consummated an asset
purchase agreement whereby it bought certain intangible 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
intangible assets it purchased from the DAS Group, Inc., to Formaggi Inc. in
exchange for 2,000,000 shares of Formaggi Inc.'s common stock. As discussed
above, the unamortized balance of the intangible assets of $155,000 was written
off by Formaggi, Inc. at June 30, 1999. Currently, there are no other
shareholders of Formaggi Inc.
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 former president have created and perfected unique and
distinctive methods for preparing, serving and merchandising Sicilian-style,
deep dish pizza, sandwiches and other
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related Italian food products including the use of specially prepared
ingredients and secret recipes which the Company and its former 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, 1999 there were 38 franchised restaurants in the Numero Uno
system featuring dine-in facilities as well as takeout and delivery services.
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-five 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
per month or 3% of net franchise revenues. Typically, the franchise agreements
provide for either a protected or exclusive delivery territory.
The Company provides the franchisee assistance with site selection, lease
negotiations, architectural designs and training. On a continuing basis, the
Company creates, develops and purchases local and regional advertising, public
relations and promotional campaigns. The Company negotiates purchase contracts
for proprietary and mandatory products on an annual basis. Also, on an ongoing
basis, the Company provides supervision and operating assistance to franchisees.
INTERNATIONAL FRANCHISING
International development agreements grant the licensee the right to develop the
Numero Uno system and concept in an overseas market by opening either franchised
full service or takeout and delivery restaurants.
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The license grants exclusivity for a fixed period of years providing that the
licensee fulfills the development schedule set forth in the respective
agreement. The initial 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 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 nine international units opened and
operating.
COMPANY-OWNED RESTAURANTS
During the year ended June 30, 1999, the Company was forced to take back and
operate two previously sold restaurant locations because the Company remained
obligated as lesee on the restaurant location and honored its commitments. At
June 30, 1999, however, all Company-owned restaurants were either sold or
closed. The Company has decided to concentrate its growth and effort in the
domestic franchising and joint venturing of the Numero Uno concept through dual
concept restaurants - pizza and sandwiches, smaller express restaurants and
licensed, branded restaurants and no additional wholly-owned Company operations
are expected to be added.
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 the Company or
by others for exclusive use with the Numero Uno system. Whenever possible,
license agreements are entered into with outside vendors to prepare these
products for ultimate distribution exclusively to Numero Uno restaurants. This
is to ensure that the highest level of quality is maintained and that there is
consistency throughout the chain. Proprietary items include, but are not
limited to the following items: tomato sauce, meat sauce, alfredo sauce, soup,
garlic sauce and recipes for dough, lasagna and meatballs. Two dough recipes
are the most important products in the Numero Uno system. Both dough recipes
were developed by the Company's founder and former president, 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, which is currently being
renegotiated, has
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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 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 four "nonunion" employees. This does not include
personnel that are employed by the Company's franchisees. Management believes
that its employee relations are generally good.
COMPETITION
There is a tremendous amount of competition in the pizza business. The Company
faces competition for patronage of customers in varying degrees from national,
regional and local chains which are located in the Company's marketplace. Many
of these competitors offer merchandise similar to that 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 and Round Table 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
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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 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
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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
In many instances, the Company has 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 six months to six years. The termination of any of the leases due
to expire within the next two years (without renewal options) would not have a
material adverse effect on the operations of the Company. Most of the leases
provide for a fixed minimum rent and some have provisions for additional rent
based on a percentage of the total sales in excess of certain amounts. Many
leases also provide that the Company shall pay all, or a portion of, the real
estate taxes, insurance charges and maintenance expenses related to the leased
premises.
The Company has historically acquired locations for Company-owned 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 has
historically made capital improvements and incurred expenses of approximately
$300,000 to $400,000 per restaurant. These costs consisted 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 operated 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
varied 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 and
there are approximately nine
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months remaining on the lease.
ITEM 3. LEGAL PROCEEDINGS
PENDING
1. VENTURA TAFT VS. N. U. PIZZA HOLDING CORPORATION, VAN NUYS SUPERIOR COURT
CASE NO. LC042907. During the year ended June 30, 1999, an action was filed for
breach of contract against the Company, as lessee, by a landlord of a leased
restaurant location that the Company subleased to a franchisee who subsequently
vacated the premises. The plaintiff is claiming damages of $80,000. The
Company had reached a tentative settlement of $65,000 with the plaintiff which
is being renegotiated by the parties. Management was confident that settlement
of the matter will not be materially different than $65,000 which has been
recorded in accrued litigation settlements at June 30, 1999.
2. JASVIR SINGH BASI AKA DAVID BASI, RAVINDER K. BASI AKA LINDA BASI, AND BASI
FOOD COMPANY, INC. VS. RONALD J. GELET, NUMERO UNO FRANCHISE CORPORATION, NUMERO
UNO, INC., GREGORY GOLEM AND DOES 1 THROUGH 100, INCLUSIVE, Superior Court of
the State of California for the County of Los Angeles, Case No. LC023294. In
October 1985, the Company entered into a franchise agreement with Jasvir Singh
Basi and Ravinder Kaur Basi for a full service restaurant located in Winnetka,
California. In or about June 1993, a dispute arose between the Basis and the
Company relating to the nature of the Basis' delivery rights and the geographic
territory originally allocated to them. Pursuant to the franchise agreement,
the Basis' right to delivery into the originally allocated area was
non-exclusive and, upon the occurrence of certain conditions was subject to
termination followed by renegotiation of an alternate delivery area with a new
one. The Basis denied that they had agreed to a replacement delivery area and,
further alleged that, by separate agreement, their delivery area was expressly
agreed to. The Basis responded with a cross- complaint which sought
compensatory and punitive damages and other relief based on claims of breach of
contract, breach of covenant of good faith and fair dealing, intentional
interference with prospective advantage, intentional infliction of emotional
distress and violations of the Racketeer Influenced and Corrupt Organizations
Act ("R.I.C.O."). The Company filed a demurrer to the cross complaint and the
Basis filed a first amended cross complaint in January 1994. On September 27,
1994, the parties settled the lawsuit. The Company agreed to a royalty abatement
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
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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 former 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.
3. 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.
4. MICHAEL MCDONNELL AND SANDRA MCDONNELL VS. N.U. PIZZA HOLDING CORPORATION,
NUMERO UNO FRANCHISE CORPORATION, DAN ROUSE, ET AL., in the Circuit Court of the
State of Oregon for the County of Marion, Case No. 97C13097. During the year
ended June 30, 1999, an action was filed against the Company in the State of
Oregon for breach of contract, violation of The Franchise Act and fraud. The
plaintiff is seeking $100,000 plus attorney's fees. At June 30, 1999, the
plaintiff was not moving forward with the case and is presently in bankruptcy.
The Company intends to file a motion for summary judgment, and management
believes that the Company will ultimately prevail at trial should a summary
judgment not be granted.
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SETTLED
5. SALEEM BAAKZA VS. RONALD J. GELET, NUMERO UNO FRANCHISE CORPORATION AND N.
U. PIZZA HOLDING CORPORATION, Superior Court of the State of California, County
of Ventura Case No. SC021983. During the year ended June 30, 1996, the Company
purchased a restaurant in exchange for shares of its common stock. The seller
(plaintiff) was unable to subsequently sell the Company's common stock at the
value established by the parties in connection with the Company's acquisition of
the restaurant.
During the year ended June 30, 1999, the plaintiff filed an action against the
Company alleging breach of contract, fraud and various other causes of action.
In May 1999, the parties resolved their differences by entering into a
settlement agreement. Pursuant to the terms of the settlement agreement, the
Company has agreed to pay the plaintiff a total sum of $158,500, consisting of
two monthly payments of $29,250 which were made in May and June, 1999 and the
balance of $100,000 in twenty-five monthly installments of $4,000 plus interest
at 9% per annum. Pursuant to the settlement agreement, the Company made its
initial $4,000 payment to the plaintiff on May 1, 1999 and is scheduled to
resume monthly payments on August 1, 1999. All unpaid principal and interest is
expected to be repaid in installments by the Company by November 1, 2001.
6. FEIRING VS. N. U. PIZZA HOLDING CORPORATION, NUMERO UNO FRANCHISE
CORPORATION, RON GILLETTE, DAN ROUSE, ET AL., in the Circuit Court of the State
of Oregon for the County of Polk, Case No. 97P1233. During the year ended June
30, 1999, an action was filed against the Company in the Circuit Court of the
State of Oregon alleging breach of contract, violation of The Franchise Act and
fraud. The plaintiff sued for $100,000 plus attorney's fees. The Company
settled the matter for $15,000 which has been recorded in accrued litigation
settlements at June 30, 1999.
7. 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
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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 $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 year ended
June 30, 1998) payable in sixty monthly installments of $1,250.
8. NUMERO UNO FRANCHISE CORPORATION VS. THOMAS CHAN, ANITA CHAN, DANNY KONG
AND JUDY KONG AND DOES 1 THROUGH 10, INCLUSIVE, Los Angeles Superior Court Case
No. BC109959. This matter arose out of the breach of a sublease by an assignee
of the Defendants. On or about January 29, 1982, Defendants subleased premises
from the Company and on or about March 20, 1992, Defendants assigned their
right, title and interest to the sublease to other assignees. The assignment
specifically stated that it "shall not release the originally named sublessees
from liability for the continued performance on the terms and provisions on the
part of the sublessee to keep informed." Commencing on or about January 1,
1994, the new sublessees failed and continued to fail to pay rent to the lessor
or to the Company.
As a result of the failure to pay rent, the landlord brought an action in the
Los Angeles Municipal Court entitled WILLIAM ONG D/B/A FAIRVIEW ENTERPRISES VS.
NUMERO UNO FRANCHISE CORPORATION to recover damages for breach of lease in the
sum of $15,086. The Company stipulated with the landlord in August 1994 to
payment of $43,645 in monthly installments of $2,012. A judgment may be entered
against the Company, if it fails to meet its monthly payment obligation. The
Company had performed all of the conditions and obligations to be performed
under the sublease and believed that it is entitled to indemnification from the
Defendants in the same amount stipulated in the ONG action. On October 15,
1994, the Company entered into a Stipulated Judgment whereby the Defendants
agreed to pay the Company $31,000 in monthly installments of $750. During the
year ended June 30, 1997, with $10,000 remaining due on the installment
agreement, the sublessee agreed to pay the Company $6,000 and the remaining
$4,000 was forgiven by the Company.
9. 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
11
<PAGE>
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 which
were paid in full during the year ended June 30, 1999.
10. 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.
11. 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.
12. 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
12
<PAGE>
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 which was paid in full during the year ended June 30, 1997.
13. 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 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.
14. 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 which were paid in full during
the year ended June 30, 1999.
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
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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.
14
<PAGE>
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, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
Fiscal Period High Bid Low Bid High Bid Low Bid High Bid Low Bid
- ------------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 0.06 0.00 0.08 0.05 0.31 0.13
Second Quarter 0.00 0.00 0.08 0.04 0.18 0.08
Third Quarter 0.04 0.00 0.08 0.04 0.18 0.11
Fourth Quarter 0.06 0.00 0.06 0.02 0.16 0.07
</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 1, 1999, the total number of shareholders was 525.
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, 1999 totaled $5,400.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, June 30, June 30, June 30, June 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Franchise Revenue $ 729,600 $ 1,443,800 $ 1,449,600 $ 1,144,800 $ 743,100
Franchise Operating
(Loss) Income $(1,964,900) $ (96,600) $ 199,100 $(1,133,900) $(2,055,500)
Company-owned
Restaurant Sales $ 192,700 $ 1,109,800 $ 1,708,200 $ 483,200 $ 3,460,000
Company-owned
Restaurant Loss $ (26,500) $ (249,200) $ (114,600) $ (137,500) $(1,022,500)
Net (Loss) Income $(1,993,100) $ (348,300) $ 82,900 $(1,273,800) $(2,923,500)
Net (Loss) Income
per Common Share -
Basic and Diluted $ (.05) $ (.01) $ - $ (.08) $ (.29)
Weighted Average
Number of Shares
Outstanding -
Basic and Diluted 40,436,879 31,522,570 30,846,616 15,420,508 10,203,653
Cash Dividends per
Common Share None None None None None
Total Assets $ 906,600 $ 1,911,100 $ 2,439,600 $ 2,880,300 $ 2,168,800
Long-term
Obligations $ 237,800 $ 124,000 $ 320,900 $ 783,800 $ 241,600
Stockholders'
(Deficit) Equity $ (575,900) $ 854,900 $ 1,068,200 $ 555,300 $ (160,100)
Working Capital
Deficiency $ (769,500) $ (577,200) $ (459,300) $ (579,100) $(1,396,800)
Current Ratio .37 .33 .52 .58 .26
Number of Franchised
Restaurants 38 53 57 51 44
Number of Company-
owned Restaurants
Including the Bakery
(1997) 0 1 5 4 6
</TABLE>
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<PAGE>
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
At June 30, 1999, the Company has an accumulated deficit of $6,818,800 and a
working capital deficit of $769,500. There has been a minimal return on assets.
During the year ended June 30, 1999, the Company incurred a net loss of $172,100
before fourth quarter adjustments to increase the allowance for possible losses
on franchisee notes receivable, to write off uncollectible subscription notes
receivable, to write off the unrecoverable carrying amount of investments in
affiliated corporations and to record accrued litigation settlements. After
these adjustments, the Company's net loss increased $1,821,000 to $1,993,100.
For the years ended June 30, 1999, 1998 and 1997, the Company's business
generated negative or minimal cash flows from operations. At June 30, 1997, the
Company operated four Company-owned restaurants resulting in negative cash flows
and operating losses. This trend has continued during the years ended June 30,
1998 and 1999 as the Company was in the process of closing and selling and/or
exchanging Company-owned restaurants. At June 30, 1999, there were no
Company-owned restaurants.
The Company's franchise operations lost $1,964,900 in the current year which
includes litigation settlement costs of $238,500, losses on investments in
affiliated corporations of $473,500, impairment loss on intangible assets of
$155,000 and bad debt expense of $954,000. Principal payments on long-term debt
of approximately $168,000 and additional advances to affiliated corporations of
approximately $42,400 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.
Despite continued operating losses and drains on cash flow, in
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<PAGE>
management's opinion, the Company's ability to continue as a going concern has
improved for the following reasons:
The Company plans to raise additional cash through offerings of its common stock
which is needed to substantially reduce the Company's liabilities and improve
the Company's overall financial position.
The Company is continuing to reduce its operating costs primarily as a result of
staff reductions, fewer lease commitments and the settlement of significant
lawsuits during the year ended June 30, 1999. The amount of cash required to
support its operations has been substantially reduced as the Company owned no
restaurants at June 30, 1999.
The Company has invested in and advanced affiliated corporations approximately
$533,000 during the years ended June 30, 1999, 1998 and 1997. This has had a
substantial negative impact on the Company's cash flow as it has been unable to
recoup these investments. The Company plans to reduce future investments in
these affiliated corporations and is now concentrating its efforts on
potentially franchising or joint venturing smaller restaurants. Smaller
restaurants will require less cash outlay to open, have lower operating costs
and should be profitable.
The Company is reevaluating its existing product lines and intends to keep only
those menu items which have been historically profitable. Many existing items
will be dropped from the Company's current menu and will be replaced with new
products. The Company will also lower its prices and offer larger sizes of its
products.
The Company is also expanding its marketing approach and is developing Internet
delivery zones. The Company is attempting to generate significantly higher
sales at a low cost and is currently contracting with independent pizza parlors
to direct orders received from customers on the Internet to the nearest location
for a fee.
Subsequent to June 30, 1999, the Company entered into agreements with two
consultants whereby the consultants will assist the Company with the expansion
of its operations by identifying, evaluating and structuring acquisitions of
other companies. The consultants will also provide ongoing consulting services
in the areas of management, strategic planning, corporate financing and
marketing in connection with the Company's line of business.
During the year ended June 30, 1999, the Company received principal payments on
notes receivable from franchisees of $132,900. The Company also continued to
reduce its liabilities by the payment of obligations from this source of cash
flow.
The Company's cash outflow for capital expenditures was only $1,100 and $10,000,
respectively, for the years ended June 30, 1999 and 1998. This reduction in
capital expenditures is also due to the disposition of Company-owned restaurants
in recent years. Property and equipment of $573,900 and $310,000, respectively,
were sold
18
<PAGE>
during the years ended June 30, 1998 and 1997 in exchange for notes receivable.
The Company has continued to make required principal payments on its long-term
debt requirements. During the year ended June 30, 1999, principal payments on
long-term debt totaled $167,900 compared to $199,100 for the year ended June 30,
1998.
Collections on notes receivable totaled $137,300 for the year ended June 30,
1999. The Company borrowed $267,900 from its former president, accrued
additional obligations to him of $90,000 and repaid $106,000 of his borrowings
in cash and $160,300 of his borrowings through a stock issuance during the year
ended June 30, 1999.
OPERATING ACTIVITIES
Accounts receivable have increased $7,000 to $54,000 at June 30, 1999.
Franchisees made payments of $73,000 and previously reserved accounts receivable
of $66,000 were written off during the year ended June 30, 1999.
Inventories decreased $3,600 and there is no inventory on hand at June 30, 1999
as the Company-owned restaurant at June 30, 1998 was sold during the year ended
June 30, 1999.
Prepaid expenses decreased $7,400 to $15,700 at June 30, 1999 due primarily to
the expiration of prepaid advertising, consulting, insurance and rent in
connection with the disposition of the Company-owned restaurant during the year
ended June 30, 1999.
Deposits decreased $1,600 to $22,900 at June 30, 1999 due to the sale of the
Company-owned restaurant during the year ended June 30, 1999.
Accounts payable and accrued expenses increased $120,200 to $350,500 at June 30,
1999. This was due primarily to the Company's limited ability to generate cash
flow to pay its obligations.
Deferred franchise fee income of $44,000 was realized during the year ended June
30, 1999.
Accrued franchise advertising payable increased $22,800 to $52,400 at June 30,
1999. Correspondingly, restricted cash and franchisee advertising receivable
have also increased $22,800 to $16,800 and $35,600, respectively, at June 30,
1999.
INVESTING ACTIVITIES
Advances of $42,400 were made to affiliated corporations during the year ended
June 30, 1999.
Notes receivable - franchisees and notes receivable from related parties
decreased $423,300 to $650,300 at June 30, 1999. The
19
<PAGE>
Company received a $200,000 note in connection with the sale of a Company-owned
restaurant, collected $137,300 of principal payments on outstanding amounts due
and wrote off reserved notes receivable of $486,000 during the year ended June
30, 1999.
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.
During the year ended June 30, 1999, after having contributed an additional
$46,200 in cash and $165,100 in restaurant equipment to the affiliated
corporations, the Company's management determined that the carrying value of its
investments in affiliated corporations, which totaled $473,500, was not
recoverable due to certain factors that now exist regarding the investees' poor
financial condition and the industry in which they operate. Accordingly, the
Company wrote off the entire carrying value of the investments.
Net intangible assets decreased $170,000 to $8,300 at June 30, 1999 due to
normal amortization of $15,000 and the write off of $155,000, the unamortized
balance of the "Oregon's Original Sandwich Express and Bakery" intangible assets
purchased from the DAS Group, Inc. during the year ended June 30, 1997.
Net leasehold improvements and property and equipment decreased $214,400 at June
30, 1999. The decrease is due to depreciation and amortization of $15,700, the
sale of equipment and leasehold improvements with net book values totaling
$199,800 and purchases of new equipment of $1,100.
FINANCING ACTIVITIES
Long-term debt increased $62,200 to $329,000 due to the lease of restaurant
equipment of $165,100 (subsequently contributed to an affiliated corporation).
This increase was offset by principal
20
<PAGE>
payments on long-term debt of $102,900.
Litigation settlements increased $173,500 to $241,300. Accrued settlements of
$238,500 were offset by payments of $65,000 during the year ended June 30, 1999.
Loans payable to related parties increased $91,800 to $486,600 at June 30, 1999.
During the year ended June 30, 1999, the Company borrowed $267,900 from its
former president, accrued additional obligations to him of $90,000 and repaid
$106,000 of his borrowings in cash and $160,300 of his borrowings through a
stock issuance.
Common stock and additional paid-in capital increased $16,300 and $144,000 to
$48,400 and $6,182,100, respectively, at June 30, 1999. The Company issued
16,025,000 shares of common stock at $.01 per share as payment on amounts due to
its former president.
The Company also wrote off $402,000 of uncollectible stock subscription notes
receivable.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999 AS COMPARED TO THE YEAR ENDED JUNE 30, 1998
FRANCHISE OPERATIONS
Initial franchise fees increased $11,000 to $60,000 (22.4%) as compared to
$49,000 for the year ended June 30, 1998. The Company recognized $44,000 of
previously deferred franchise fees and received $16,000 of transfer fees on
franchises that were sold during the year ended June 30, 1999. No new
international development agreements were made during the year ended June 30,
1999.
For the year ended June 30, 1999, the Company earned royalty income of $393,200,
a decrease of $98,000 (20.0%) as compared to royalty income of $491,200 for the
year ended June 30, 1998. This decrease is due primarily to a continued decline
in system-wide sales and the closure of a total of seventeen Numero Uno and
Sandwich Express franchises.
Rental income for the year ended June 30, 1999 decreased $48,800 (70.6%) to
$20,300 as compared to $69,100 for the year ended June 30, 1998. This decrease
is due to the continued increase in the number of franchisees paying their rent
directly to the landlord instead of rents being passed through the Company as in
prior years.
Interest income increased $4,000 (9.9%) to $44,500 for the year ended June 30,
1999 as compared to $40,500 for the year ended June 30, 1998. This increase is
due to an increase in interest bearing notes receivable outstanding during the
year ended June 30, 1999.
Rebate income decreased $14,600 (9.5%) to $139,700 for the year ended June 30,
1999 as compared to $154,300 for the year ended June
21
<PAGE>
30, 1998. This decrease is due primarily to an overall decrease in system-wide
sales for the year ended June 30, 1999.
Other income decreased $64,400 (48.4%) to $68,700 for the year ended June 30,
1999 as compared to $133,100 for the year ended June 30, 1998 primarily due to
the receipt, during the year ended June 30, 1998, 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 $3,200 and $137,400 of forgiveness of debt income for the
years ended June 30, 1999 and 1998, respectively, due to the write off of
previously accrued accounts payable.
Rent expense decreased $15,300 (22.3%) to $53,400 for the year ended June 30,
1999 as compared to $68,700 for the year ended June 30, 1998. This decrease is
due primarily to an increase in rents paid directly to the landlord by
franchisees instead of rents being 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 $123,400 (15.1%) to $694,400 for the
year ended June 30, 1999 as compared to $817,800 for the year ended June 30,
1998. This decrease is due primarily to an overall reduction in administrative
and management staff expenses.
Bad debt expense increased $617,100 (183.2%) to $954,000 for the year ended June
30, 1999 as compared to $336,900 for the year ended June 30, 1998. The Company
wrote off substantially more uncollectible accounts receivable, notes
receivable - franchisees and subscription notes receivable than during the year
ended June 30, 1998.
During the year ended June 30, 1999, the Company's consulting expense increased
$63,800 (172.4%) to $67,500 as compared to $3,700 for the year ended June 30,
1998. In December 1998, the Company entered into a consulting agreement with
its former president and agreed to pay fees of $10,000 per month resulting in
the increase.
Interest expense increased by $8,800 (19.0%) to $55,100 for the year ended June
30, 1999 as compared to $46,300 for the year ended June 30, 1998 due to an
increase in the amount of notes payable.
The Company recorded $238,500 of litigation settlements during the
year ended June 30, 1999.
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.
The Company recognized a $3,100 loss on the sale of restaurants and
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<PAGE>
equipment during the year ended June 30, 1999 as compared to a $369,200 gain on
the sales of restaurant equipment and leasehold improvements during the year
ended June 30, 1998. A larger number of Company-owned restaurants were sold
during the year ended June 30, 1998.
During the year ended June 30, 1999, the Company recorded a loss on investments
in affiliated corporations of $473,500 when the Company determined that the
carrying value of its investments was not recoverable due to certain factors
that now exist regarding the investees' financial condition and the industry in
which they operate.
During the year ended June 30, 1999, the $155,000 unamortized balance of the
"Oregon's Original Sandwich Express and Bakery" intangible assets purchased from
the DAS Group, Inc. during the year ended June 30, 1997, were written off.
COMPANY-OWNED RESTAURANT OPERATIONS
Company-owned restaurant revenues decreased $917,100 (82.6%) to $192,700 for the
year ended June 30, 1999 as compared to $1,109,800 for the year ended June 30,
1998. The decrease was due to the sale and closure of the Company's restaurants
during the year ended June 30, 1998. The Company, as lessee on the leases of
two restaurant locations, was forced to take back and operate the restaurants
during the year ended June 30, 1999 when the current franchisees failed to meet
their obligations. At June 30, 1999, all Company-owned restaurants had been
closed or sold.
As a result of restaurant disposals, gross profit decreased $611,000 (82.5%)
from $740,700 for the year ended June 30, 1998 to $129,700 for the year ended
June 30, 1999. Gross profit, as a percentage of sales increased insignificantly
from 66.7% for the year ended June 30, 1998 to 67.3% for the year ended June 30,
1999.
Overall Company-owned restaurant expenses decreased $833,700 (84.2%) to $156,200
for the year ended June 30, 1999 compared to $989,900 for the year ended June
30, 1998 due to the dispositions of the Company-owned restaurants.
During the year ended June 30, 1999, the Company incurred a net loss of
$1,993,100 as compared to a net loss of $348,300 for the year ended June 30,
1998. The increase in loss of $1,644,800 resulted from additional losses on
interest bearing notes receivable and stock subscription notes receivable,
litigation settlements and the write offs of Formaggi Inc.'s net assets and
investments in affiliated corporations.
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
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<PAGE>
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 was 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 (62.0%) to
$69,100 as compared to $181,800 for the year ended June 30, 1997. This decrease
was due an increased number of franchisees paying their rent directly to the
landlord instead of being 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 was
due primarily 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
was 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 as compared to
$70,200 for the year ended June 30, 1997. A larger number of Company-owned
restaurants were sold 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
was due primarily to an increase in rents being paid directly to landlords by
franchisees instead of being
24
<PAGE>
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 was 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 a substantial amount of franchisee accounts and notes receivable and
stock subscription notes receivable during the year ended June 30, 1997.
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 the 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 $279,400 (22.0%) to
$989,900 for the year ended June 30, 1998 as compared to
25
<PAGE>
$1,269,300 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 $348,300
due to the imputation of $267,000 of discounts to noninterest bearing notes
receivable from franchisees and an increase to the allowance for possible future
losses on interest bearing notes receivable. During the year ended June 30,
1997, the Company reported net income of $82,900 as there was no discount
expense in the year ended June 30, 1997 as the Company had only interest bearing
notes receivable.
PRESIDENT'S COMMENTS
Since taking over as president on January 1, 1999, I have been working to
position the Company for renewed growth.
I initially reviewed several transaction completed by the Company and determined
that due to present circumstances, significant assets needed to be written off
to properly reflect the Company's financial condition and enter the new
millennium positively.
With the assistance of my management team, the Company has developed a
comprehensive growth plan. It is anticipated that growth will occur through
three vehicles: dual concept restaurants - pizza and sandwiches, smaller express
restaurants that can potentially either be franchised or joint ventured and the
development of licensed, branded restaurants. In the future, all new
restaurants in California will be known as Numero Uno Magic Pizza, once the
trademark for the name "Magic Pizza" has been licensed from its owner, the
Company's former president. Numero Uno Magic Pizza restaurants will feature a
new line of New York style pizzas, Numero Uno's award-winning thick crust pizza
and a pared down menu.
We have also developed Internet delivery zones based on concentric cable
television zones. This plan gives the Company the ability to maximize its
marketing efforts and minimize expenses while reaching more customers and
servicing a substantially larger geographic area.
The first Numero Uno Magic Pizza express prototype restaurant opened in August
1999 and generated sales approximately 20% greater than expected by management.
The first dual concept restaurant is expected to open in mid-October 1999,
followed by another restaurant opening approximately thirty days later. The
first Internet order and delivery zone is being developed in the San Fernando
Valley area of Los Angeles and should be operational in early 2000.
Management is comfortable with the position of the Company, excited about its
new development plan and optimistic about the growth of the Company over the
next few years. However, the management team is not only committed to growth,
but to profitability as well.
26
<PAGE>
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995
During the year ended June 30, 1999, the Company began the process of
identifying, evaluating and implementing changes to computer programs necessary
to address the year 2000 issue. This issue affects computer systems that have
time-sensitive programs that may not properly recognize the year 2000. This
could result in system failures or miscalculations. The Company is currently
addressing its internal year 2000 issue with modifications to existing programs
and conversions to new programs. The Company is also communicating with
franchisees, vendors and other with which it conducts business to help them
identify and resolve the year 2000 issue.
The total cost associated with the required modifications and conversions is not
expected to be material to the Company's consolidated results of operations and
financial position and is being expensed as incurred.
If necessary modifications and conversions by the Company and those with which
it conducts business are completed in a timely manner, the year 2000 issue is
not expected by management of the Company to have a material adverse effect on
the Company's consolidated results of operations and financial position.
Certain statements in this report may be forward-looking in nature or
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements in this Form 10-K relate to the
Company's year 2000 compliance efforts, including expectations about compliance
timetables and costs.
Actual results may differ from those expressed or implied in forward-looking
statements. With respect to any forward-looking statements contained in this
report, the Company believes that its results are subject to a number of risk
factors, including the ability of the Company to identify and address
successfully year 2000 issues in a timely manner, and at costs that are
reasonably in line with projections, and the ability of the Company's vendors to
identify and address successfully their own year 2000 issues in a timely manner.
Any forward-looking statements in this report should be evaluated in light of
these important risk factors.
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.
27
<PAGE>
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>
July 1, 1998 -
December 31, 1998:
Ronald J. Gelet 56 Chairman of the Board; President
of the Company; President of Affiliated
Companies; Director
Gloria A. Gelet 51 Director
Daniel A. Rouse 49 Vice President; Director
January 1, 1999 -
June 30, 1999:
Daniel A. Rouse 49 Chairman of the Board; President of the
Company; President of Affiliated Companies;
Director
Deborah Murphy 40 Vice President; Secretary; Director
Jane Yennie 51 Treasurer; Controller
Michael Lorella 45 Director
</TABLE>
The term of the Directors listed above expires on January 1, 2000.
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 served as Chairman of the Board, President and as a Director of N.
U. Pizza Holding Corporation and affiliated companies, Numero Uno Franchise
Corporation and Formaggi
28
<PAGE>
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. Mr. Gelet
resigned on January 1, 1999 from the Company so that he would have more time to
deal with some serious family matters and to pursue other interests both of a
personal and professional nature.
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 was employed by the Company since 1984
as a marketing consultant and as the Director of Advertising until she resigned
her directorship on January 1, 1999.
DANIEL A. ROUSE was the Vice President of Operations and a Director of the
Company from 1994 to December 31, 1998. On January 1, 1999, Mr. Rouse became
president of the Company. Prior to joining the Company, Mr. Rouse was the
Western Regional Franchise Director for Domino's Pizza from 1985 - 1989. He was
responsible for overseeing 429 franchised units throughout California, Nevada,
Arizona and Hawaii. From 1981 - 1985, Mr. Rouse served as Director of
Operations for Giordano's International Franchise Company with operational
responsibility for 30 company-owned and franchised restaurants with total sales
in excess of $45 million.
DEBORAH MURPHY has been the administrative assistant to Mr. Gelet for the past
thirteen years. Prior to her employment with the Company, she was a legal
secretary for many years.
JANE YENNIE joined the Company as Controller in 1995 bringing with her 26 years
of accounting and bookkeeping experience. Prior to joining the Company, she was
controller of Astro Pneumatic Tool Company from 1992 - 1995 and controller and
general manager for California Business News, Inc. from 1986 - 1991.
MICHAEL LORELLA has owned a restaurant and supermarket equipment company for the
past 20 years.
29
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table shows all cash compensation incurred by the Company for
services rendered during the year ended June 30, 1999, 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 Former President $ 48,000
Gloria A. Gelet Former Director of Advertising $ 14,400
Daniel A. Rouse President and Former Vice
President of Operations $ 41,900
Deborah Murphy Vice President and Secretary $ 39,100
Jane Yennie Treasurer and Controller $ 50,000
All executive officers as a group (5 persons) $193,400
</TABLE>
In addition, $13,400 was paid for Mr. Gelet's family's medical insurance.
COMPENSATION UNDER PLANS
None.
30
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Name and Address Office Amount Percentage
- ---------------- ------ ------ ----------
<S> <C> <C> <C>
Ronald J. Gelet (1) Former Chairman of 5,593,200 11.3%
15834 Highland Court Board, Former President
Solana Beach, CA and Former Director
Daniel A. Rouse Chairman of the Board, 4,500,000 9.2%
16800 Devonshire St. President and Director
Suite 305
Granada Hills, CA
Deborah Murphy Vice President, Secretary 4,600,000 9.4%
312 S. Cedros Avenue and Director
#315
Solana Beach, CA
Jane Yennie Treasurer and 250,000 .5%
16800 Devonshire St. Controller -------------------------
Suite 305
Granada Hills, CA
Directors and officers 14,943,200 30.4%
as a group ========== =====
(4 persons)
Other
- -----
Numero Uno Development, Inc. 774,072 1.6%
Gelet Family Trust
312 S. Cedros Avenue #315
Solana Beach, CA
RJM, Inc. 4,500,000 9.2%
312 S. Cedros Avenue #315
Solana Beach, CA
Federated Investments 650,000 1.3%
757 N. Point, #7
San Francisco, CA -------------------------
5,924,072 12.1%
========== =====
</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.
31
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 1999, the Company issued 16,025,000 shares of
common stock at $.01 per share as a payment on loans due to Mr. Gelet, former
president of the Company.
During the year ended June 30, 1999, the Company made total noninterest bearing
advances of $42,400 to Dual Concept I, Inc. and NUDAR, Inc., companies that are
controlled by the president of the Company.
During the year ended June 30, 1999, the Company entered into a five-year
consulting agreement with Mr. Gelet. Mr. Gelet agreed to perform forty hours
per month of consulting services in exchange for a fee of $10,000 per month plus
contingent annual adjustment increases, all out of pocket expenses, insurance
coverage for Mr. Gelet and his family for the rest of their lives, and a warrant
to purchase 4,000,000 shares of common stock at prices ranging from $.01 to $.04
per share. At June 30, 1999, $60,000 of compensation had been accrued in
connection with this agreement.
On July 1, 1993, the Company entered into a licensing agreement with Mr. Gelet,
assuring the Company and its franchisees exclusive use of his dough recipes and
products in California and internationally. The initial term of the agreement
was five years and the fee payable to the former president was $300,000, which
has been fully amortized. The initial term of the agreement was scheduled to
expire on June 30, 1998, but it has been extended by Mr. Gelet. Pursuant to the
original agreement, the Company has ten additional five year options to renew
the licensing agreement under the same terms. Since July 1, 1998, the original
terms of the agreement have remained in effect. The Company has exercised its
first five-year renewal option but is still in negotiations with Mr. Gelet
regarding changes to the renewal terms of the agreement. The Company and its
franchisees also are required to pay Mr. Gelet a $.02 per pound royalty on the
dough products used in operations. Pursuant to the terms of the original
agreement, the Company incurred royalty expense of $30,000 in each of the three
years ended June 30, 1999, 1998 and 1997. At June 30, 1999, $20,000 was accrued
as payable to Mr. Gelet for dough royalties.
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
years ended June 30, 1998 and 1999, principal payments of $10,600 and $4,400,
respectively, were collected on this note. The noninterest
32
<PAGE>
bearing note receivable was discounted by $110,300 during the year ended June
30, 1998 and an allowance for possible future losses of $40,000 was recorded
during the year ended June 30, 1999. At June 30, 1999, the balance of this note
receivable, net of allowances was $96,700.
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 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 investment in the new corporation.
During the year ended June 30, 1998, the affiliated corporations in which the
Company has common stock investments, NUN, Inc. and FCA, Inc., 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 year ended June 30, 1999, after having contributed another $46,200 in
cash and $165,100 in restaurant equipment to NUN, Inc., the Company determined
that the carrying value of its investment, $456,500, was not recoverable and
wrote off the entire balance. The Company wrote off its $17,000 investment in
FCA, Inc. during the year ended June 30, 1999 when Formaggi Inc. ceased
operations. This investment was also determined to not be recoverable.
During the year ended June 30, 1997, an affiliated corporation, CMG Sales, Inc.,
sold the Company a restaurant for a note receivable of $95,000. The note bears
interest at 5% per annum and is due on demand. The Company made no principal
payments on the note during the years ended June 30, 1998 and 1999.
During the year ended June 30, 1997, Mr. Gelet loaned the Company $45,600. This
loan was noninterest bearing and due on demand. During the year ended June 30,
1998, Mr. Gelet loaned the Company an additional $9,600, earned unpaid officer
compensation of $152,900 and was repaid $50,000 through a common stock issuance.
During the year ended June 30, 1999, Mr. Gelet loaned the Company an additional
$267,900, earned unpaid consulting fees of $60,000 and was repaid $32,600 in
cash and $81,800 through the issuance of common stock. The balance due on these
obligations at June 30, 1999 was $371,600.
33
<PAGE>
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-42
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
as Exhibit 3.5 to the Company's Annual
Report on Form 10-K for the eleven months
ended June 30, 1994.
34
<PAGE>
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.
10.3 Dough Exclusivity Agreement between N. U. *
Pizza Holding Corporation and Ronald J.
Gelet filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for
the eleven months ended June 30, 1994.
22.1 List of Subsidiaries.
</TABLE>
* By this reference incorporated herein and made a part hereof.
35
<PAGE>
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 12, 1999.
Date: October 12, 1999 N. U. Pizza Holding Corporation
By: /s/ Daniel A. Rouse
---------------------------
Daniel A. Rouse, 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 12, 1999
-----------------------------------
Daniel A. Rouse,
Chairman of the Board, President
and Director
Date: October 12, 1999
-----------------------------------
Deborah Murphy,
Vice President, Secretary and Director
Date: October 12, 1999
-----------------------------------
Jane Yennie,
Treasurer and Controller
Date: October 12, 1999
-----------------------------------
Michael Lorella,
Director
36
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Page
------
<S> <C>
Independent Auditor's Report F-2
Consolidated Balance Sheets, June 30, 1999 and 1998 F-4
Consolidated Statements of Operations, Years Ended
June 30, 1999, 1998 and 1997 F-6
Consolidated Statements of Stockholders' (Deficit) Equity,
Years Ended June 30, 1999, 1998 and 1997 F-8
Consolidated Statements of Cash Flows, Years Ended
June 30, 1999, 1998 and 1997 F-9
Notes to Consolidated Financial Statements F-12
</TABLE>
F-1
<PAGE>
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, 1999 and 1998,
and the related consolidated statements of operations, stockholders' (deficit)
equity and cash flows for each of the years in the three-year period ended June
30, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1999, 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>
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,
1999. As discussed in Note 1 to the consolidated financial statements, these
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Bennett Block Accountancy Corporation
Los Angeles, California
September 22, 1999
F-3
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 60,600 $ 54,800
Restricted cash 16,800 13,000
Franchisee advertising receivable 35,600 16,600
Receivables, net of allowance for
doubtful accounts of $21,100 54,000 47,000
Advances to affiliated corporations 42,400 -
Current portion of related party
notes receivable, net of allowances
of $150,300 and $0, respectively 96,700 25,700
Current portion of notes receivable -
franchisees, net of allowances of
of $295,700 and $20,700, respectively 130,500 104,300
Inventories - 3,600
Prepaid expenses 15,700 23,100
---------- ----------
Total current assets 452,300 288,100
---------- ----------
Other assets:
Related party notes receivable,
net of allowances of $0 and
$110,300, respectively - 129,100
Notes receivable - franchisees,
net of allowances of $118,600
and $236,000, respectively 423,100 814,500
Intangibles assets, net of
accumulated amortization of
$3,600 and $333,600, respectively 8,300 178,300
Investments in affiliated corporations - 262,200
Deposits 22,900 24,500
---------- ----------
454,300 1,408,600
---------- ----------
Leasehold improvements and property
and equipment, net of accumulated
depreciation and amortization - 214,400
---------- ----------
$ 906,600 $1,911,100
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 350,500 $ 230,300
Accrued franchise advertising 52,400 29,600
Current portion of long-term debt 167,700 175,300
Current portion of litigation settlements 164,800 35,300
Loans payable to related parties 486,400 394,800
---------- ----------
Total current liabilities 1,221,800 865,300
---------- ----------
Long-term debt, net of current portion 161,300 91,500
Litigation settlements, net of current
portion 76,500 32,500
Deferred franchise fee income 22,900 66,900
Commitments and contingencies - -
Stockholders' (deficit) 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 48,164,008, and 32,139,008 48,400 32,100
Additional paid-in capital 6,182,100 6,038,100
Notes receivable arising from stock
purchase agreements - (402,000)
Accumulated deficit (6,818,800) (4,825,700)
---------- ----------
(575,900) 854,900
---------- ----------
$ 906,600 $1,911,100
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
FRANCHISE OPERATIONS:
REVENUES:
Initial franchise fees $ 60,000 $ 49,000 $ 89,000
Royalties 393,200 491,200 554,400
Rental income 20,300 69,100 181,800
Interest income 44,500 40,500 44,200
Rebate income 139,700 154,300 169,800
Other income 68,700 133,100 80,200
Forgiveness of debt 3,200 137,400 260,000
Gain on sales of
restaurants and equipment - 369,200 70,200
---------- ---------- ----------
729,600 1,443,800 1,449,600
---------- ---------- ----------
COSTS AND EXPENSES:
Rent 53,400 68,700 238,400
General and administrative 694,400 817,800 854,300
Bad debt expense 954,000 336,900 99,400
Consulting expense 67,500 3,700 11,200
Interest expense 55,100 46,300 42,200
Litigation settlements 238,500 - 5,000
Discounts on notes receivable - 267,000 -
Loss on sales and abandonment
of restaurants and equipment 3,100 - -
Loss on investments in
affiliated corporations 473,500 - -
Impairment of intangible
assets 155,000 - -
---------- ---------- ----------
2,694,500 1,540,400 1,250,500
---------- ---------- ----------
Franchise operating (loss)
income (1,964,900) (96,600) 199,100
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
COMPANY-OWNED RESTAURANT
OPERATIONS:
Sales $ 192,700 $ 1,109,800 $ 1,708,200
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 63,000 369,100 553,500
Operating 104,400 619,000 827,600
General and administrative 51,800 370,900 441,700
----------- ----------- -----------
219,200 1,359,000 1,822,800
----------- ----------- -----------
Company-owned restaurant
loss (26,500) (249,200) (114,600)
----------- ----------- -----------
(Loss) income before
income tax provision (1,991,400) (345,800) 84,500
Income tax provision 1,700 2,500 1,600
----------- ----------- -----------
Net (loss) income $(1,993,100) $ (348,300) $ 82,900
=========== =========== ===========
Net (loss) income
per share - basic $ (.05) $ (.01) $ -
=========== =========== ===========
Weighted average number
of shares outstanding -
basic 40,436,879 31,522,570 30,846,616
=========== =========== ===========
Net (loss) income
per share - diluted $ (.05) $ (.01) $ -
=========== =========== ===========
Weighted average number
of shares outstanding -
diluted 40,436,879 31,522,570 30,846,616
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<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, 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 11) 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
Common shares issued
and subscribed, net
of uncollectible sub-
scriptions of $402,000
(Notes 4 and 11) 16,025,000 16,300 402,000 - - 144,000 - 562,300
Net loss - - - - - - (1,993,100) (1,993,100)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999 48,164,008 $ 48,400 $ - 124,000 $ 12,400 $ 6,182,100 $(6,818,800) $ (575,900)
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) income $(1,993,100) $ (348,300) $ 82,900
Adjustments to reconcile
net (loss) income to net
cash (used) provided by
operating activities:
Depreciation and
amortization 30,700 245,000 310,600
Loss (gain) on sales
and abandonment of
restaurants and equipment 3,100 (369,200) (70,200)
Loss on investments in
affiliated corporations 473,500 - -
Impairment of intangible
assets 155,000 - -
Litigation settlements 238,500 - 5,000
Forgiveness of debt (3,200) (137,400) (260,000)
Realization of deferred
franchise fee income (44,000) (34,000) (64,000)
Stock issued for
consulting services - - 15,000
Provision for doubtful
receivables 954,000 336,900 99,400
Discounts on notes
receivable - 267,000 -
Changes in assets
and liabilities:
Accounts receivable (70,200) (128,500) (176,400)
Inventories 3,600 20,900 (7,700)
Prepaid expenses 1,400 32,300 (15,000)
Accounts payable and
accrued expenses 123,400 116,400 (168,900)
Accrued expenses due
to related party 90,000 - -
Deposits 1,500 8,800 -
---------- ---------- ----------
Net cash (used) provided
by operating activities (35,800) 9,900 (249,300)
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from investing
activities:
Collections on notes
receivable - franchisees $ 132,900 $ 87,400 $ 191,800
Collections on related
party notes receivable 4,400 - -
Investments in affiliated
corporations (46,200) - -
Advances to affiliated
corporations (42,400) - -
Capital expenditures (1,100) (10,000) (12,200)
Proceeds from sales of
restaurants and equipment - 157,000 -
Acquisition of intangible
assets - - (200,000)
---------- ---------- ----------
Net cash provided (used)
by investing activities 47,600 234,400 (20,400)
---------- ---------- ----------
Cash flows from financing
activities:
Increase in loans payable
to related parties 161,900 9,600 140,600
Principal payments on
long-term debt (167,900) (199,100) (541,000)
Proceeds from issuance of
common stock - - 415,000
---------- ---------- ----------
Net cash (used) provided
by financing activities (6,000) (189,500) 14,600
---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents 5,800 54,800 (255,100)
Cash and cash equivalents,
beginning of period 54,800 - 255,100
---------- ---------- ----------
Cash and cash equivalents,
end of period $ 60,600 $ 54,800 $ -
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental information:
Cash paid for interest $ 46,100 $ 46,300 $ 42,200
Cash paid for taxes $ 800 $ 2,500 $ 2,400
Noncash transactions:
Notes receivable received
for assets $ 200,000 $ 862,000 $ 305,000
Investments in exchange
for assets $ 165,100 $ 262,200 $ -
Conversion of debt to
equity $ 160,300 $ 50,000 $ -
Notes payable issued for
fixed assets $ 165,100 $ - $ -
Notes receivable issued
in exchange for accounts
receivable $ - $ 69,300 $ 83,500
Note payable issued in
exchange for accounts
payable $ - $ 39,600 $ -
Forgiveness of receivables
in exchange for fixed
assets $ - $ - $ 5,000
Notes receivable issued
for stock $ - $ - $ 652,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
During the year ended June 30, 1999, N. U. Pizza Holding Corporation and
Subsidiaries (the "Company") incurred a net loss of $172,100 before fourth
quarter adjustments. Additional losses were recognized due to litigation
settlements, substantial increases to the allowances for uncollectible notes
receivable from franchisees and related parties and the writeoffs of Formaggi
Inc.'s net assets and the investments in affiliated corporations (Notes 3 and
6). After these adjustments, the Company's net loss increased $1,821,000 to
$1,993,100.
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 Formaggi Inc. restaurants. While the Company
increased its revenues, both its Oregon Formaggi Inc. operations and its
Company-owned California 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 restaurants to new
franchisees. More locations were sold in the year ended June 30, 1998 and
Formaggi Inc.'s restaurants and bakery operations were closed. The Company
owned only one restaurant location at June 30, 1998. During the current year,
the Company was forced to take back two previously sold restaurant locations
because the Company remained obligated as lessee on the restaurant locations and
honored its commitments. At June 30, 1999, the Company owned no restaurants.
Its remaining locations had either been sold or closed.
During the year ended June 30, 1999, franchise operations, which had stabilized
during the year ended June 30, 1998, began to decline. The Company continued to
reduce its operating costs, however, operating losses increased due to lower
royalty revenues from franchisees, the termination of the Company's Oregon
franchising operations, the writeoff of uncollectible notes receivable and high
litigation costs.
These trends have had an adverse effect on the Company's operations. As a
result, the Company has an accumulated deficit of $6,818,800 and a working
capital deficit of $769,500 at June 30, 1999.
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 plans to raise additional cash through offerings of its common stock
which is needed to substantially reduce the Company's liabilities and improve
the Company's overall financial position. This would enable the Company to
concentrate on
F-12
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
opening dual concept restaurants - pizza and sandwiches, potentially franchising
or joint venturing new, smaller express restaurants and developing licensed,
branded locations.
The Company plans to continue to develop the Numero Uno concept within a
significant portion of California by introducing new products, retaining
existing profitable products and by eliminating unprofitable menu items.
The Company intends to concentrate its marketing efforts through the use of
Internet marketing which management believes is a cost effective approach to
expanding its customer base.
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.
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 its Company-owned operations and, due to recurring losses, during
the year ended June 30, 1999, ceased all franchising of Oregon's Original
Sandwich Express and Bakery restaurants and wrote off its remaining
unamortized intangible assets.
F-13
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Organization (continued)
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. On July 15, 1998, Numero Uno Franchise Corporation
assigned all of its assets, including franchise agreements then in effect, and
certain trademarks to N. U. Pizza Holding Corporation in exchange for N. U.
Pizza Holding Corporation's assumption of specific liabilities of Numero Uno
Franchise Corporation. In January 1999, the officers and directors of Numero
Uno Franchise Corporation resigned. Numero Uno Franchise Corporation was
inactive as of June 30, 1999. N. U. Pizza Holding Corporation is currently
managing the Company's franchising operations.
Franchised and Company-owned restaurants (including a bakery - 1997) for the
years ended June 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Franchised Company-owned
Restaurants Restaurants
------------- -------------
<S> <C> <C>
Balance - June 30, 1996 51 4
Opened or purchased 12 1
Closed or terminated (6) 0
----- -----
Balance - June 30, 1997 57 5
Sold to franchisees 2 (2)
Closed or terminated (6) (2)
----- -----
Balance - June 30, 1998 53 1
Previously sold restaurants
taken back and operated
by the Company 0 2
Sold to franchisees 2 (2)
Closed or terminated (17) (1)
----- -----
Balance - June 30, 1999 38 0
===== =====
</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.
Intercompany transactions and balances have been eliminated in consolidation.
F-14
<PAGE>
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, 1999, 1998 and 1997, in order to sell some Company-owned restaurants, the
Company enticed potential buyers by offering to reduce or defer payment of
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.
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, 1999, 1998 and 1997 were $8,600, $38,100 and $46,700,
respectively.
F-15
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
ADVERTISING COSTS AND FEES (CONTINUED)
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and on deposit and highly liquid
investments with a maturity of ninety days or less when purchased.
INVENTORIES
Inventories consist principally of food products and supplies and are stated at
the lower of cost (first-in, first-out method) or market.
LEASEHOLD IMPROVEMENTS
Leasehold improvements are stated at cost. Amortization is provided using the
straight-line method over the estimated useful lives of the improvements or the
term of the lease, whichever is shorter. Leasehold improvements reacquired from
franchisees are recorded at current market value which approximates historical
book value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes restaurant equipment,
furniture, fixtures, 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.
F-16
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
INTANGIBLE ASSETS
Intangible assets at June 30, 1999 consisted of a liquor license acquired at a
cost of $11,900.
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 represented
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 also included the licensing rights to pizza
dough recipes acquired at a cost of $300,000, which have been fully amortized,
and the liquor license acquired at a cost of $11,900. During the year ended June
30, 1999, the unamortized balance of the assets purchased from the DAS Group,
Inc. of $155,000 was written off to franchise operations by the Company.
Goodwill was being amortized on the straight-line method over fifteen years.
All other intangible assets are amortized over five years. Amortization expense
of $15,000, $80,800 and $70,400 related to these assets, was charged to
operations during the years ended June 30, 1999, 1998, and 1997, respectively.
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 bearing notes receivable
from and notes payable to related parties as payments on these instruments are
not based on fixed payment terms.
F-17
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
INCOME TAXES
N. U. Pizza Holding Corporation files consolidated federal and state income tax
returns with its wholly-owned subsidiary Numero Uno Franchise Corporation.
Formaggi Inc. files separate federal and state income tax returns.
The Company records its taxes in accordance with 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.
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
The Company has historically complied with SFAS No. 121, "Accounting for the
Impairment of Long- Lived Assets and Long-Lived Assets to Be Disposed Of." This
statement requires that long-lived assets and certain identifiable intangibles
that are 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. During the year ended June 30,
1999, the Company wrote off the unamortized intangible assets of Formaggi Inc.
and its investments in affiliated corporations (Notes 1 and 6) in accordance
with SFAS No. 121.
F-18
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 1996, the Company established Employee Stock Option Based
Compensation Plans whereby it authorized the grant of stock options totaling
6,800,000 shares of common stock to its former president and other key
employees. The former 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, 1999, none of the
options authorized had been issued.
Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of expense when the option price is less than the fair market value
of the common stock at the date of grant. Under the current terms of the
Company's plans, the exercise price of each option is equal to the fair market
value of the Company's common stock at the date of grant. The Company adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" during the year ended June 30, 1997. The adoption of SFAS No. 123
disclosure-only provisions had no effect on either the Company's financial
position or its results of operations.
EARNING PER SHARE
SFAS No. 128, "Earnings per Share," was adopted by the Company during the year
ended June 30, 1998. 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.
F-19
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," was adopted by the Company in
the year ended June 30, 1999. SFAS No. 130 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 implementation of SFAS No. 130
did not have any effect on the reporting and display of the Company's financial
position or results of operations.
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 and was adopted during the
year ended June 30, 1999. SFAS No. 131 also established standards for related
disclosures about products and services, geographic areas and major customers.
Reporting and disclosures under SFAS No. 131 are not materially different from
reporting and disclosures made by the Company prior to the adoption of SFAS No.
131.
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, restaurant 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 years ended June 30, 1999 and 1998, the Company sold
Company-owned restaurants in exchange for notes receivable and changed
franchisees at several locations. During the year ended June 30, 1998,
noninterest bearing notes receivable were issued by the Company in several of
these transactions.
F-20
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Receivable (continued)
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 were 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 was the current interest rate at
which the Company negotiated similar transactions with other borrowers. The
Company intended to hold these notes to maturity and recorded an allowance of
$267,000 at June 30, 1998 to reflect the terms negotiated for carrying value
purposes. During the year ended June 30, 1999, the Company wrote off $185,500
of noninterest bearing notes receivable that had an allowance against them of
$134,800 at June 30, 1998.
The Company has also provided an allowance for possible future losses of
$432,400 and $100,000, respectively, on interest bearing notes receivable at
June 30, 1999 and 1998. 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
which was recorded as a charge to stockholders' equity. At June 30, 1999, the
remaining unpaid balance of $52,000 on the note receivable was written off as
uncollectible (Note 11).
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 which was recorded
as a charge to stockholders' equity. At June 30, 1999, the remaining unpaid
balance of $350,000 on the notes receivable was written off as uncollectible
(Note 11).
F-21
<PAGE>
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, 2000 $ 673,200
2001 54,500
2002 50,400
2003 55,200
2004 59,900
2005 and thereafter 321,700
----------
$1,214,900
==========
</TABLE>
5. Leasehold Improvements and Property and Equipment
Leasehold improvements and property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Leasehold improvements $ - $ 225,000
Furniture, fixtures and equipment 118,700 118,700
Restaurant equipment - 120,600
Vehicles 22,200 38,900
---------- ----------
140,900 503,200
Less accumulated depreciation
and amortization 140,900 288,800
---------- ----------
$ - $ 214,400
========== ==========
</TABLE>
F-22
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions
The Company has various transactions with its former president, Ronald J. Gelet,
affiliated corporations that he controls, affiliated corporations that are
controlled by certain officers of the Company and an employee. The total amount
payable to these related parties consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Note receivable - affiliated
franchisee corporation,
noninterest bearing, due in
monthly installments of $1,000,
original maturity date of June 2004
(in default), net of allowances of
$150,300 and $110,300,respectively
(Note 4) $ 96,700 $ 141,100
Note receivable - employee,
noninterest bearing, due
on demand - 13,700
Advances to affiliated corporations,
noninterest bearing, due on demand 42,400 -
---------- ----------
Total receivable 139,100 154,800
---------- ----------
Accrued dough royalties - former
president (20,000) (63,300)
Accrued consulting fees - former
president (60,000) -
Loan payable - former president,
noninterest bearing cash advances
and accrued compensation, due on
demand (311,600) (236,500)
Note payable - affiliated corporation,
bearing interest at 5% per annum,
due on demand (95,000) (95,000)
---------- ----------
Total payable (486,600) (394,800)
---------- ----------
$ (347,500) $ (240,000)
========== ==========
</TABLE>
F-23
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions (continued)
The Company issued 16,025,000 shares of common stock at $.01 per share
($160,300) and 1,000,000 shares of common stock at $.05 per share ($50,000)
during the years ended June 30, 1999 and 1998, respectively, as payment on
amounts due to a former officer.
During the year ended June 30, 1999, the Company made noninterest bearing
advances of $42,400 to two affiliated corporations that are controlled by the
president of the Company.
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
controlled by the former president of the Company. 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, 1999, the Company
contributed an additional $46,200 in cash and $165,100 in restaurant equipment
to the affiliated corporation.
There is no market for the Company's common stock investments in the affiliated
corporations. During the years ended June 30, 1998 and 1997, 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 their carrying value approximated their estimated recovery value.
At June 30, 1999, the Company determined that the carrying value of its
investments, which totaled $473,500, was not recoverable due to certain factors
that now exist regarding the investees' poor financial condition and the
industry in which they operate.
F-24
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions (continued)
Accordingly, the Company wrote off the entire carrying value of the
investments to franchise operations.
On July 1, 1993, the Company entered into a licensing agreement with its former
president assuring the Company and its franchisees exclusive use of the former
president's dough recipes and products in California and internationally. The
initial term of the agreement was five years and the fee payable to the former
president was $300,000 (Note 3). The initial term of the agreement was
scheduled to expire on June 30, 1998, but it has been extended by the Company's
former president. Pursuant to the original agreement, the Company has ten
additional five year options to renew the licensing agreement under the same
terms. Since July 1, 1998, the original terms of the agreement have remained in
effect. At September 22, 1999, the Company had exercised its first five-year
renewal option and was still in negotiations with its former president regarding
changes to the renewal terms of the agreement. The Company and its franchisees
also are required to pay the former president a $.02 per pound royalty on the
dough products used in operations. During each of the years ended June 30,
1999, 1998 and 1997, the Company incurred royalty expense of $30,000 in
connection with this agreement.
On December 30, 1998, the Company entered into an agreement with its former
president whereby he agreed to perform forty hours per month of consulting
services for the Company for a term of five years beginning January 1, 1999.
During the five year term of the agreement, each January 1 the agreement will be
automatically extended for successive one year periods unless the Company gives
its former president several months written notice of its intention to terminate
the agreement. Under the terms of the agreement, the Company will pay its
former president $10,000 per month, adjusted annually in an amount equal to 50%
of the increase of the highest paid officer of the Company's total compensation
package. Forty percent of each month's payment was to be paid on the first and
fifteenth day of the month and the remaining 20% was to be paid in either cash
or common stock at $.05 per share, at the former president's option, within
thirty days following the Company's fiscal year end. If the former president
requests cash and the Company is unable to pay, the former president has the
option to be paid in common stock at $.02 per share or to be issued a one year
note payable bearing interest at 10% per annum which is convertible into common
stock at $.025 per share.
Under the terms of the agreement, the Company will also pay all of the former
president's expenses related to performing the consulting services as well as
all costs to maintain insurance
F-25
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-Party Transactions (continued)
policies on the former president and his spouse for the remainder of their
lives. In addition, the Company issued a warrant to its former president to
purchase 4,000,000 shares of common stock on January 1, 1999 as follows:
1,000,000 shares at $.01 per share; 1,000,000 shares at $.02 per share;
1,000,000 shares at $.03 per share; and 1,000,000 shares at $.04 per share.
At June 30, 1999, the warrant had not been exercised and the Company had
expensed and accrued $60,000 of prior months' consulting fees due to its
former president (Note 6). At June 30, 1999, there was no accrual for
additional consulting fees. There was no annual adjustment increase in fees
as the provisions for an increase had not been achieved.
The Company held a 25% interest in a partnership that was the general partner in
a partnership that owned a franchised restaurant. The partnership in which the
Company held an interest was formally dissolved on November 20, 1996.
7. Dependence on Major Vendor
During the years ended June 30, 1999, 1998 and 1997, purchases from one vendor
represented approximately 5.6%, 9.6% and 14.7%, respectively, of the costs and
expenses of the Company. Management believes that the Company is not dependent
on this vendor.
8. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Notes payable, secured by equipment,
bearing interest from 8% to
13.1% per annum, maturing
through November 2003. $ 138,800 $ 36,800
Unsecured notes payable, bearing
interest from 8% to 10% per annum,
maturing through April 2006 190,200 230,000
---------- ----------
329,000 266,800
Less current maturities 167,700 175,300
---------- ----------
$ 161,300 $ 91,500
========== ==========
</TABLE>
F-26
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Long-Term Debt (continued)
Long-term debt is scheduled to mature as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended June 30, 2000 $ 167,700
2001 60,900
2002 39,000
2003 35,600
2004 11,300
2005 and thereafter 14,500
----------
$ 329,000
==========
</TABLE>
9. Commitments and Contingencies
COMMITMENTS
The Company is obligated, under various noncancellable 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 a
noncancellable 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, 2000 $ 587,000 $ 25,000
2001 394,700 -
2002 298,800 -
2003 168,900 -
2004 73,200 -
Thereafter 55,300 -
---------- ----------
$1,577,900 $ 25,000
========== ==========
</TABLE>
Total minimum future rental payments shown above have not been reduced by
$1,269,200 of sublease rentals to be received in the
F-27
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (continued)
future under noncancellable operating subleases.
Following is a summary of rental expense for franchise operations and
Company-owned restaurant operations:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Minimum rentals $ 78,000 $ 195,400 $ 421,500
Less sublease
rentals 15,700 69,100 181,800
----------- ----------- -----------
Total rent expense $ 62,300 $ 126,300 $ 239,700
=========== =========== ===========
</TABLE>
During the year ended June 30, 1999, the Company began leasing restaurant
equipment under capitalized leases expiring through November 1, 2003. The
restaurant equipment was recorded at $165,100, the present value of minimum
lease payments. The equipment was not used in the Company's business as it was
contributed to an affiliated corporation during the year ended June 30, 1999 and
was recorded as an investment in the affiliated corporation (Note 6). At June
30, 1999, the carrying value of the restaurant equipment has been written off as
management determined that the assets were not recoverable by the Company due to
the poor financial condition of the affiliated corporation.
Minimum future lease payments on the capitalized lease obligations (Note 8)
incurred in connection with the restaurant equipment as of June 30, 1999 for
each of the next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended June 30, 2000 $ 43,500
2001 43,500
2002 43,500
2003 38,100
2004 7,800
----------
Total minimum lease payments 176,400
Less: amount representing interest 37,600
----------
Present value of minimum lease
payments $ 138,800
==========
</TABLE>
F-28
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (continued)
PENDING LITIGATION
During the year ended June 30, 1999, an action was filed for breach of contract
against the Company, as lessee, by a landlord of a leased restaurant location
that the Company subleased to a franchisee who subsequently vacated the
premises. The plaintiff is claiming damages of $80,000. The Company had
reached a tentative settlement of $65,000 with the plaintiff which is being
renegotiated by the parties. Management was confident that settlement of the
matter will not be materially different than $65,000 which has been recorded in
accrued litigation settlements at June 30, 1999.
During the year ended June 30, 1999, an action was filed against the Company in
the State of Oregon for breach of contract, violation of The Franchise Act and
fraud. The plaintiff is seeking $100,000 plus attorney's fees. At June 30,
1999, the plaintiff was not moving forward with the case and is presently in
bankruptcy. The Company intends to file a motion for summary judgment, and
management believes that the Company will ultimately prevail at trial should a
summary judgment not be granted.
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
granted 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
F-29
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (continued)
PENDING LITIGATION (CONTINUED)
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 former 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, 1999.
LITIGATION SETTLEMENTS
During the year ended June 30, 1996, the Company purchased a restaurant in
exchange for shares of its common stock. The seller (plaintiff) was unable to
subsequently sell the Company's common stock at the value established by the
parties in connection with the Company's acquisition of the restaurant.
During the year ended June 30, 1999, the plaintiff filed an action against the
Company alleging breach of contract, fraud and
F-30
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (continued)
LITIGATION SETTLEMENTS (CONTINUED)
various other causes of action. In May 1999, the parties resolved their
differences by entering into a settlement agreement. Pursuant to the terms of
the settlement agreement, the Company has agreed to pay the plaintiff a total
sum of $158,500, consisting of two monthly payments of $29,250 which were made
in May and June, 1999 and the balance of $100,000 in twenty-five monthly
installments of $4,000 plus interest at 9% per annum. Pursuant to the
settlement agreement, the Company made its initial $4,000 payment to the
plaintiff on May 1, 1999 and is scheduled to resume monthly payments on August
1, 1999. All unpaid principal and interest is expected to be repaid in
installments by the Company by November 1, 2001.
During the year ended June 30, 1999, an action was filed against the Company in
the Circuit Court of the State of Oregon alleging breach of contract, violation
of the Franchise Act and fraud. The plaintiff sued for $100,000 plus attorney's
fees. The Company settled the matter for $15,000 which has been recorded in
accrued litigation settlements at June 30, 1999.
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.
During the year ended June 30, 1996, the parties settled the matter out of court
(Note 14) 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 former 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
F-31
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (continued)
LITIGATION SETTLEMENTS (CONTINUED)
(reduced to $75,000 by the plaintiff during the year ended June 30, 1998)
payable in sixty monthly installments of $1,250.
In January 1982, the Company subleased a restaurant location to a franchisee.
In March 1992, the franchisee assigned their right, title and interest to the
sublease. The sublease specifically stated that it shall not release the
originally named sublessee from liability for the continued performance on the
terms and provisions of the sublessee. In January 1994, the assignees failed to
pay rent to the lessor or to the Company.
As a result of the failure to pay rent, the landlord brought an action against
the Company to recover damages for breach of the lease. In August 1994, the
Company stipulated with the landlord to a payment of $43,600 and a judgment may
be entered against the Company if it fails to meet the obligation. The Company
has performed all of the conditions and obligations to be performed under the
original sublease and believes that it is entitled to indemnification from the
sublessee in the same amount as the stipulated agreement with the landlord. The
Company entered into a stipulated agreement with the sublessee who agreed to pay
the Company $31,000 in monthly installments of $750 which began on October 15,
1994. During the year ended June 30, 1997, with $10,000 remaining due on the
installment agreement, the sublessee agreed to pay the Company $6,000 and the
remaining $4,000 was forgiven by the Company.
In 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 and the entire balance was paid in full during
the year ended June 30, 1999.
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
F-32
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (continued)
LITIGATION SETTLEMENTS (CONTINUED)
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 year ended June 30, 1998.
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.
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
F-33
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was paid in full
during the year ended June 30, 1999.
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 year ended June 30, 1998.
Litigation settlements are scheduled to mature as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended June 30, 2000 $ 164,800
2001 59,500
2002 17,000
----------
$ 241,300
==========
</TABLE>
YEAR 2000 COMPLIANCE
During the year ended June 30, 1999, the Company began the process of
identifying, evaluating and implementing changes to computer programs necessary
to address the year 2000 issue. This issue affects computer systems that have
time-sensitive programs that may not properly recognize the year 2000. This
could result in major system failures or miscalculations. The Company is
currently addressing its internal year 2000 issue with modifications to existing
programs and conversions to new programs. The Company is also communicating
with franchisees, vendors and others with which it conducts business to help
them identify and resolve the year 2000 issue.
The total cost associated with the required modifications and conversions is not
expected to be material to the Company's consolidated results of operations and
financial position and is being expensed as incurred.
If modifications and conversions by the Company and those with which it conducts
business are completed in a timely manner, the year 2000 issue is not expected
by management of the Company to have a material adverse effect on the Company's
consolidated results of operations and financial position.
F-34
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Preferred Stock
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. 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.
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.
No dividends were paid to the shareholder or former note holder during the years
ended June 30, 1999, 1998 or 1997. Dividends in arrears on preferred stock
totaled approximately $5,400 at June 30, 1999.
F-35
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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 years ended June 30, 1999 and 1998, the Company issued 16,025,000
shares of its common stock at $.01 per share ($160,300) and 1,000,000 shares of
its common stock at $.05 per share ($50,000), respectively, as payments on a
loan to a former officer of the Company (Note 6).
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 year ended
June 30, 1998. During the year ended June 30, 1997, the Company agreed to sell
5,300,000 shares of common stock at $.10 per share, 1,000,000 shares of common
stock at $.07 per share and 650,000 shares of common stock at $.08 per share in
exchange for 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 and was recorded as a
reduction of stockholders' equity at June 30, 1998. The $52,000 note receivable
was written off as uncollectible during the year ended June 30, 1999 (Note 4).
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. The entire amount
F-36
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Common Stock (continued)
of these notes receivable was written off as uncollectible during the year ended
June 30, 1999 (Note 4).
During the year ended June 30, 1997, 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.
12. Foreign Currency Transactions
All transactions with foreign franchises are conducted in U. S. Dollars. There
is no material currency gain or loss.
13. 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, $2,500 and $1,600 for the years ended June 30, 1999, 1998 and 1997,
respectively.
At June 30, 1999, the Company had Federal net operating loss carryforwards of
approximately $6,565,400 for tax purposes. Net operating losses are scheduled
to expire as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended June 30, 2007 $ 150,400
2008 284,500
2011 3,065,800
2012 959,500
2013 389,000
2014 1,716,200
----------
$6,565,400
==========
</TABLE>
F-37
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Income Taxes (continued)
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.
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 $2,232,300 at June 30, 1999.
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, 1999, 1998 and 1997
were approximately $583,400, $132,300 and $233,400, respectively. Due to the
current year's increase in tax net operating losses, the likelihood of realizing
future tax benefits is lower that at June 30, 1998. Accordingly, the valuation
allowance has been increased at June 30, 1999 by $583,400, the entire amount of
the expected increase in tax benefits.
Due to the increase in tax net operating losses during the year ended June 30,
1998, the likelihood of realizing future tax benefits was lower than at June 30,
1997. Accordingly, the valuation allowance was increased at June 30, 1998 by
$132,300, the entire amount of the expected increase in tax benefits.
During the year ended June 30, 1997, the Company reduced its net operating
losses significantly and the valuation allowance was decreased $233,400 due to
the increased realization of future tax benefits.
F-38
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Subsequent Events
On July 23, 1999, the Company entered into agreements with two consultants. The
agreements are for a fourteen month period and are scheduled to expire on
September 30, 2000. The consultants are to assist the Company with the
expansion of its operations by identifying, evaluating and structuring
acquisitions of other companies. The consultants will also provide ongoing
consulting services in the areas of management, strategic planning, corporate
financing and marketing in connection with the Company's line of business.
In consideration for their efforts, the Company granted each consultant an
option to purchase 1,000,000 shares of the Company's common stock at an exercise
price of $.03 per share. The options are scheduled to expire on September 30,
1999. As of September 22, 1999, one of the consultants had exercised his
option.
In August 1999, the Company entered into negotiations with its former president
to obtain licensing rights to use the name "Magic Pizza" in connection with the
Company's advertising efforts. The former president obtained the registered
trademark for the name "Magic Pizza" during the year ended June 30, 1999.
In August 1999, the Company's Board of Directors approved an increase from
50,000,000 to 100,000,000 authorized shares of common stock.
15. Fourth Quarter Adjustments
During the fourth quarter of the years ended June 30, 1999 and 1998, the Company
recorded significant adjustments to its accounts which resulted in increasing
net loss by approximately $1,821,000 and $470,000, respectively. The
adjustments for the year ended June 30, 1999 were principally attributable to
increasing the allowance for possible losses on franchisee notes receivable, the
write off of uncollectible subscription notes receivable, the write off of the
unrecoverable carrying amount of investments in affiliated corporations and the
recording of accrued litigation settlements. The adjustments for the year ended
June 30, 1998 were the recording of discounts on noninterest bearing notes
receivable, increasing the allowance for possible losses on franchisee notes
receivable, the write off of uncollectible subscription notes receivable and the
recording of accrued legal expense.
F-39
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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-40
<PAGE>
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Industry Segments (continued)
<TABLE>
<CAPTION>
Segment information is as follows:
Company-owned
Franchising Restaurants
------------- -------------
<S> <C> <C>
Year ended June 30, 1999
Revenues from unaffiliated
customers $ 685,100 $ 192,700
Operating loss $ (1,964,900) $ (26,500)
Identifiable assets at
June 30, 1999 $ - $ -
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 income (loss) $ 199,100 $ (114,600)
Identifiable assets at
June 30, 1997 $ 2,600 $ 1,151,500
Depreciation:
For the year ended
June 30, 1999 $ - $ 15,700
For the year ended
June 30, 1998 $ 2,600 $ 161,600
For the year ended
June 30, 1997 $ 23,700 $ 216,500
Capital expenditures:
For the year ended
June 30, 1999 $ 1,100 $ -
For the year ended
June 30, 1998 $ - $ 10,000
For the year ended
June 30, 1997 $ 12,200 $ -
</TABLE>
F-41
<PAGE>
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, 1999:
Allowance for doubtful
accounts $ 21,100 $ 54,300 $ 54,300 $ 21,100
Loss on allowance for
uncollectible notes
receivable $ 100,000 $ 486,000 $ 153,600 $ 432,400
Discount on noninterest
bearing notes receivable $ 267,000 $ - $ 134,800 $ 132,200
Valuation allowance for
deferred income tax
assets $ 1,648,900 $ 583,400 $ - $ 2,232,300
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 $ 1,516,600 $ 132,300 $ - $ 1,648,900
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 $ (233,400)$ - $ 1,516,600
</TABLE>
F-42
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 77,400
<SECURITIES> 0
<RECEIVABLES> 536,900
<ALLOWANCES> 316,800
<INVENTORY> 0
<CURRENT-ASSETS> 452,300
<PP&E> 140,900
<DEPRECIATION> 140,900
<TOTAL-ASSETS> 906,600
<CURRENT-LIABILITIES> 1,221,800
<BONDS> 237,800
0
12,400
<COMMON> 48,400
<OTHER-SE> (636,700)
<TOTAL-LIABILITY-AND-EQUITY> 906,600
<SALES> 192,700
<TOTAL-REVENUES> 922,300
<CGS> 63,000
<TOTAL-COSTS> 184,160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 954,000
<INTEREST-EXPENSE> 55,100
<INCOME-PRETAX> (1,991,400)
<INCOME-TAX> 1,200
<INCOME-CONTINUING> (1,993,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,993,100)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
