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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, 2000
OR
[x] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission file number 0-19522
N. U. PIZZA HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 95-3656327
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3550 WILSHIRE BOULEVARD, SUITE 1725 LOS ANGELES, CA 90010
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213)252-9991
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common ($0.001 par value) O.T.C. (NUZA)
Preferred ($0.10 par value) None
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of shares of the voting stock held by non-affiliates
of the Company, based on the bid price of such stock on the Over-The-Counter
electronic bulletin board on October 2, 2000 was $1,407,010.
The number of shares of Common Stock outstanding as of October 2, 2000 was
51,164,008.
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 3550 Wilshire Boulevard, Suite 1725, Los Angeles, California 90010,
telephone number (213) 252-9991.
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.
On February 4, 2000, the Company filed voluntary petition under Chapter 11 of
the United States Bankruptcy Code with the United States Bankruptcy Court for
the Central District of California. In a Chapter 11 filing, substantially all
liabilities as of the petition date are subject to compromise or other treatment
under a plan of reorganization. Generally, actions to enforce or otherwise
effect payment of all pre-Chapter 11 liabilities are stayed while the Company
continue their business operations as debtors-in-possession. The Debtor's
Chapter 11 case resulted from sequence of events stemming primarily from Company
not being able to restructure the monthly payment plans. After filing of Chapter
11 the Company and attorneys have worked with franchisees on their past due
royalty and note payments due to the Company. Plans have been worked out with
franchisees to pay arrears on short term notes, effective since April 2000.
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
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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 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.
During the year ended June 30, 2000, the Company entered into an agreement with
Salsa Fresh, Inc. This agreement gave the Company the exclusive rights to the
Salsa Fresh Grill name and concept as well as right to franchise and develop the
concept. The company felt this would be a good additional concept for future
growth. The Salsa Fresh Grill concept is appealing in many ways and is bringing
additional lunch business where Numero Uno is traditionally more dinner driven.
There are currently three dual concept units operating.
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.
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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 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, 2000 there were 31 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
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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.
The license grants exclusivity for a fixed period of years providing that the
licensee fulfills the development schedule set forth in the respective
agreement. The initial non-refundable fee is based on the negotiated number of
restaurants to be opened under the agreement, with a typical fee ranging from
$10,000 to $15,000 per restaurant. Typically, the first restaurant must be
opened within one year of execution of the agreement with the balance of
restaurants to be opened within five years.
Once the development terms are met, the licensee has the right to extend the
term of the agreement for an additional 25 years and also has the right to open
additional restaurants. The Company receives a negotiated initial fee for the
opening of each additional restaurant. The 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, 2000, there was no Company owned or operated
restaurants. 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
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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, has the exclusive right to the use and
distribution of the formula and recipe. Mr. Gelet receives a royalty of $2,000
per month.
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
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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 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.
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There are presently no effective adverse determinations by the United States
Patent and Trademark Office; the trademark administrator of any state or any
court; no impending interference, opposition or cancellation proceedings; nor
any pending material litigation involving any of the foregoing marks which is
relevant to their use in California. With the exception of the agreement with
Pizzeria Uno Corporation (which prevents the Company from using the name
anywhere within the continental United States except for California), there are
no agreements currently in effect which significantly limit the rights of the
Company or its affiliated entities to use or license the use of any of the said
marks. Furthermore, there are no infringing uses actually known to the Company
which would materially affect the use of any of the marks in California.
The Company has copyrights on certain confidential operations manuals and
confidential food preparation manuals. These copyrights are not registered.
Under each franchise agreement, the franchisee is granted the right to use the
manuals during the term of his franchise, subject to the confidentiality
restrictions and other terms and conditions contained in the franchise
agreement. There are presently no effective determinations of the copyright
office, or any court, any pending interference, opposition or cancellation
proceedings, or any material litigation involving manuals which is relevant to
their use in California.
ITEM 2. PROPERTIES
RESTAURANTS
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 five 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
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approximately $150,000 to $250,000 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, 2000
and currently leases space located at 3550 Wilshire Boulevard, Suite 1725, Los
Angeles, California. The space is approximately 1,000 square feet and there are
approximately six months remaining on the lease.
ITEM 3. LEGAL PROCEEDINGS
PENDING
1. N.U. PIZZA HOLDING CORPORATION VS. RENO IANNINI, ET AL, U.S. BANKRUPTCY
COURT, CENTRAL DISTRICT OF CALIFORNIA, ADVERSARY NO. 00-01563. In September,
1998, The Company entered into a lease, as lessee, for property located in
Laguna Niguel, CA. In December 1999, the Company entered into an agreement
whereby the defendant agreed to take over the operation of the restaurant,
assume the real property lease and assume two equipment leases under which the
Company was liable. On February 1, 2000, The defendant took over physical
possession of the real property and, breached the terms of the agreement with
the Company by failing, among other things, to pay the landlord and equipment
lessors. The Company initiated an adversary action on October 10, 2000 against
the defendant, seeking damages according to proof, no less than $50,000 plus
exemplary and punitive damages. A Status Conference is scheduled for December
21, 2000.
2. 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, 2000.
3. JASVIR SINGH BASI AKA DAVID BASI, RAVINDER K. BASI AKA LINDA BASI, AND BASI
FOOD COMPANY, INC. VS. RONALD J. GELET, NUMERO UNO
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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 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
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material adverse effect on the Company's financial position. A trial date for
this arbitration has not been set, but is presently anticipated to be in January
or February 2001.
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, 2000, 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.
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 made monthly payments
from August 1, 1999 through December 31, 1999. The remaining unpaid balance is
subject to the outcome of the bankruptcy filing.
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 was paid during the year ended June 30, 2000.
7. FILET MENU, INC. VS. NUMERO UNO, INC., GELET ENTERPRISES, INC. AND RONALD
J. GELET, Los Angeles Superior Court Case No. DC114313.
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This is an action filed on October 12, 1994 against the Company for breach of a
settlement agreement. This matter arose out of the settlement of a previously
filed lawsuit filed by the plaintiff against the Company in 1987. As part of
that settlement agreement, the Company entered into a written agreement with the
plaintiff for the purchase and payment of merchandise. The plaintiff alleged
that the Company breached that agreement by failing to purchase all the required
items and also failed to pay for some items which were delivered under the
settlement agreement. The Company contended that Filet Menu breached the
settlement agreement. The Company answered the complaint and the Superior Court
referred the matter to the Joint Association Settlement Program. After a
settlement conference was held, the parties settled the matter. As part of the
second settlement agreement, the Company agreed to pay the plaintiff an
irrevocable consulting fee of $500,000, payable in monthly installments of
$4,167 for a period of ten years commencing on June 15, 1996 and to use the
plaintiff as exclusive supplier of various paper products used by the Company in
Numero Uno restaurants for a period of five years. Subsequently, Numero Uno
Franchise Corporation filed a Demand for Arbitration before JAMS/Endispute, Inc.
alleging that Filet Menu violated the terms of the second settlement agreement.
In November 1996, the parties entered into a new third settlement agreement
which superseded both previous agreements referenced above. This final
settlement agreement required the Company to pay the supplier a total of
$238,000 consisting of immediate cash payment of $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. During the year
ended June 30, 2000, the Company made monthly payments of $1,250 through
December 1999. The remaining unpaid balance is subject to the outcome of the
bankruptcy filing.
8. MAURICE PACK VS. MISSION GORGE PIZZA, INC., NUMERO UNO FRANCHISE CORPORATION
AND N. U. PIZZA HOLDING CORPORATION, Los Angeles Superior Court Case No.
LC033111. This was a complaint filed on July 21, 1995 for $50,943 due on a
promissory note and guarantees. The Company guaranteed a franchisee's note
payments. The franchisee defaulted on payments under the promissory note due to
the plaintiff beginning in April 1995 and continuing thereafter. A status
conference had been set for May 17, 1996 but was taken off the calendar when the
parties settled the matter. The Company agreed to pay the plaintiff $56,723 in
monthly installments which were paid in full during the year ended June 30,
1999.
9. 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
11
<PAGE>
subsequently made a settlement offer to the plaintiffs but the plaintiffs'
counsel has not pursued settlement. The Court on its own motion dismissed the
case without prejudice for failure to prosecute the action by plaintiffs on
April 10, 1998. As a result, forgiveness of debt income for approximately
$12,900 was recorded during year ended June 30, 2000.
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. 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.
12
<PAGE>
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.
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, 2000 June 30, 1999 June 30, 1998
----------------- ---------------- ----------------
Fiscal Period High Bid Low Bid High Bid Low Bid High Bid Low Bid
------------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 0.09 0.02 0.06 0.00 0.08 0.05
Second Quarter 0.06 0.01 0.00 0.00 0.08 0.04
Third Quarter 0.06 0.01 0.04 0.00 0.08 0.04
Fourth Quarter 0.06 0.03 0.06 0.00 0.06 0.02
</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 2, 2000, the total number of shareholders was 521.
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
13
<PAGE>
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, 2000 totaled $6,600.
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,
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Franchise Revenue $ 673,700 $ 729,600 $ 1,443,800 $ 1,449,600 $ 1,144,800
Franchise Operating
(Loss) Income $ (481,600) $(1,964,900) $ (96,600) $ 199,100 $(1,133,900)
Company-owned
Restaurant Sales $ - $ 192,700 $1,109,800 $ 1,708,200 $ 483,200
Company-owned
Restaurant Loss $ - $ (26,500) $ (249,200) $ (114,600) $ (137,500)
Net (Loss) Income $ (482,400) $(1,993,100) $ (348,300) $ 82,900 $(1,273,800)
Net (Loss) Income
per Common Share -
Basic and Diluted (.01) $ (.05) $ (.01) $ - $ (.08)
Weighted Average
Number of Shares
Outstanding -
Basic and Diluted 49,413,323 40,436,879 31,522,570 30,846,616 15,420,508
Cash Dividends per
Common Share None None None None None
Total Assets $ 705,800 $ 906,600 $1,911,100 $ 2,439,600 $ 2,880,300
Long-term
Obligations $ 236,000 $ 237,800 $ 124,000 $ 320,900 $ 783,800
Stockholders'
(Deficit) Equity $ (968,300) $ (575,900) $ 854,900 $ 1,068,200 $ 555,300
Working Capital
Deficiency $ (587,300) $ (769,500) $ (577,200) $ (459,300) $ (579,100)
Current Ratio .18 .37 .33 .52 .58
Number of Franchised
Restaurants 31 38 53 57 51
Number of Company-
owned Restaurants
Including the Bakery
(1997) 0 0 1 5 4
</TABLE>
14
<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, 2000, the Company has an deficit of $7,301,200 and a working capital
deficit of $587,300. There has been a minimal return on assets.
During the year ended June 30, 2000, the Company incurred a net loss of $250,300
before fourth quarter adjustments to increase the allowance for possible losses
on franchisee notes receivable and to write off uncollectible subscription notes
receivable. After these adjustments, the Company's net loss increased $232,100
to $482,400.
For the years ended June 30, 2000, 1999 and 1998, the Company's business
generated negative or minimal cash flows from operations. At June 30, 2000,
there were no Company-owned restaurants.
The Company's franchise operations lost $481,600 in the current year. Principal
payments on long-term debt of approximately $127,800 also reduced the Company's
cash resources.
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, 2000. The amount of cash required to
support its operations has been substantially reduced as the Company owned no
restaurants at June 30, 1999 and 2000.
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.
During the year ended June 30, 2000, the Company received principal payments on
notes receivable from franchisees of $26,300. The Company
15
<PAGE>
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 $0 and $1,100,
respectively, for the years ended June 30, 2000 and 1999. This reduction in
capital expenditures is due to the disposition of Company-owned restaurants in
recent years. Property and equipment of $573,900 were sold during the year ended
June 30, 1998 in exchange for notes receivable.
The Company has continued to make required principal payments on its long-term
debt requirements until December 1999. During the year ended June 30, 2000,
principal payments on long-term debt totaled $127,800 compared to $167,900 for
the year ended June 30, 1999.
Collections on notes receivable totaled $273,300 for the year ended June 30,
2000.
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.
On July 23, 1999, the Company entered into agreements with two consultants. The
agreements are for a fourteen month period and expired on September 30, 2000.
The consultants assisted the Company with the expansion of its operations by
identifying, evaluating and structuring acquisitions of other companies. The
consultants also provided 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 2,000,000 shares of the Company's common stock at an exercise
price of $.03 per share. On September 22, 1999, one of the consultants exercised
his option by paying the Company $30,000 in exchange for 1,000,000 shares of the
Company's common stock. On February 28, 2000, the second consultant exercised
his option by paying the Company $60,000 in exchange for 2,000,000 shares of the
Company's common stock.
OPERATING ACTIVITIES
Accounts receivable have decreased $75,100 to $0 at June 30, 2000.
There is no inventory on hand at June 30, 2000 as the Company-owned restaurant
at June 30, 1998 was sold during the year ended June 30, 1999.
Prepaid expenses decreased $15,700 to $0 at June 30, 2000.
Deposits decreased $21,600 to $1,300 at June 30, 2000 due to the fewer lease
commitments during the year ended June 30, 2000.
Accounts payable and accrued expenses decreased $347,800 to $2,700 at
16
<PAGE>
June 30, 2000. This was due primarily to the Company's filing of voluntary
petition under Chapter 11 of the United States Bankruptcy Code with the United
States Bankruptcy Court for the Central District of California. The unpaid
obligations are subject to outcome of the bankruptcy filing.
Deferred franchise fee income realized decreased $22,900 to $0 during the year
ended June 30, 2000.
Accrued franchise advertising payable decreased $52,400 to $0 at June 30, 2000.
Restricted cash increased $5,300 to $22,100 and franchisee advertising
receivable have decreased 35,600 to $0, at June 30, 2000.
INVESTING ACTIVITIES
No advances were made to affiliated corporations during the year ended June 30,
2000.
Notes receivable - franchisees and notes receivable from related parties
increased $167,300 to $1,086,500 at June 30, 2000. The Company received a
$263,500 note during the year ended June 30, 2000.
Net intangible asset decreased $8,300 to $0 at June 30, 2000 due to the sale of
the intangible asset.
FINANCING ACTIVITIES
Long-term debt decreased $26,500 to $354,800 due to a combination of payments on
loans and new notes payable during the year ended June 30, 2000.
Litigation settlements decreased $241,300 to $0. Accrued settlements of $241,300
were offset by payments of $15,000 during the year ended June 30, 2000. The
remaining unpaid balance is subject to the outcome of the bankruptcy filing.
Loans payable to related parties increased $106,400 to $592,800 at June 30,
2000.
Common stock and additional paid-in capital increased $3,000 and $87,000 to
$51,400 and $6,269,100, respectively, at June 30, 2000.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2000 AS COMPARED TO THE YEAR ENDED JUNE 30, 1999
FRANCHISE OPERATIONS
Initial franchise fees decreased $31,700 to $28,300 (52.8%) as compared to
$60,000 for the year ended June 30, 1999. The Company recognized $22,900
previously deferred franchise fees and received no transfer fees on franchises
that were sold during the year ended June
17
<PAGE>
30, 2000. No new international development agreements were made during the year
ended June 30, 2000.
For the year ended June 30, 2000, the Company earned royalty income of $344,300,
a decrease of $48,900 (12.4%) as compared to royalty income of $393,200 for the
year ended June 30, 1999. This decrease is due primarily to a continued decline
in system-wide sales.
Rental income for the year ended June 30, 2000 decreased $20,300 (100.0%) to $0
as compared to $20,300 for the year ended June 30, 1999. 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 decreased $13,400 (30.1%) to $31,100 for the year ended June 30,
2000 as compared to $44,500 for the year ended June 30, 1999. This decrease is
due to interest bearing notes receivable deemed uncollectible during the year
ended June 30, 2000.
Rebate income decreased $22,600 (16.2%) to $117,100 for the year ended June 30,
2000 as compared to $139,700 for the year ended June 30, 1999. This decrease is
due primarily to an overall decrease in system-wide sales for the year ended
June 30, 2000.
Other income increased $71,300 (103.8%) to $140,000 for the year ended June 30,
2000 as compared to $68,700 for the year ended June 30, 1999 primarily due to
the receipt, during the year ended June 30, 2000, of a one-time payment of
$120,000 from a promotion company to be used exclusively.
The Company recognized $12,900 and $3,200 of forgiveness of debt income for the
years ended June 30, 2000 and 1999, respectively, due to the write off of
previously accrued accounts payable and notes payable.
Rent expense increased $43,000 (80.5%) to $96,400 for the year ended June 30,
2000 as compared to $53,400 for the year ended June 30, 1999. This increase is
due primarily in rents paid for closed restaurants and storage space for
equipments.
General and administrative expenses consist of corporate payroll and related
benefits, insurance, professional fees, license fees and depreciation and
amortization. These expenses decreased $156,200 (22.5%) to $538,200 for the year
ended June 30, 2000 as compared to $694,400 for the year ended June 30, 1999.
This decrease is due primarily to an overall reduction in administrative and
management staff expenses.
Bad debt expense decreased $721,900 (75.7%) to $232,100 for the year ended June
30, 2000 as compared to $954,000 for the year ended June 30, 1999. The Company
wrote off substantially more uncollectible accounts receivable, notes receivable
- franchisees and subscription notes receivable than during the year ended June
30, 1999.
18
<PAGE>
During the year ended June 30, 2000, the Company's consulting expense increased
$2,500 (3.7%) to $70,000 as compared to $67,500 for the year ended June 30,
1999.
Interest expense increased by $45,200 (82.0%) to $100,300 for the year ended
June 30, 2000 as compared to $55,100 for the year ended June 30, 1999 due to an
increase in the amount of notes payable.
The Company recorded no litigation settlements during the year ended June 30,
2000.
The Company recorded $71,800 of discounts on notes receivable to reduce the
carrying value of noninterest bearing notes receivable to their fair value at
June 30, 2000. 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 no income on the sale of restaurants and equipment during
the year ended June 30, 2000 as compared to a $3,100 loss on the sales of
restaurant equipment and leasehold improvements during the year ended June 30,
1999.
During the year ended June 30, 2000, the Company recorded no loss on investments
in affiliated corporations as compared to a $473,500 loss during the year ended
June 30, 1999, 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.
COMPANY-OWNED RESTAURANT OPERATIONS
Company-owned restaurant revenues decreased $192,700 (100.0%) to $0 for the year
ended June 30, 2000 as compared to $192,700 for the year ended June 30, 1999.
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. During the year ended June 30, 2000, there was no Company owned or
operated restaurants.
Overall Company-owned restaurant expenses decreased $156,200 (100.%) to $0 for
the year ended June 30, 2000 compared to $156,200 for the year ended June 30,
1999 due to the dispositions of the Company-owned restaurants.
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
19
<PAGE>
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 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
20
<PAGE>
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 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
21
<PAGE>
(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.
PRESIDENT'S COMMENTS
The results for the fiscal year ending June 30, 2000 were promising.
Since filing, the Company has been working diligently to develop a plan to
come out of chapter 11. Because of an unresolved pending lawsuit identified
in this filing and previous filings, we do not anticipate that we will be
able to present a plan to the bankruptcy court before mid 2001.
In addition to working on the bankruptcy, we have spent a great deal of time
with various investors and investment groups trying to raise capital for
growth and to take the Company out of chapter 11. While there have been
several indications of interest, no definite commitments have been obtained
and probably will not be obtained until we resolve the outstanding legal
matter.
The Company is also exploring several opportunities to help it grow both within
and outside the State of California.
Needless to say, the past year has been a difficult one for the Company. We are
optimistic that once the pending lawsuit is resolved, regardless of the outcome,
we will then be able to present a plan that will result in the survival of the
Company, and, more importantly, give the Company an opportunity to prosper and
grow.
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.
22
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Board of Directors of N.U. Pizza Holding Corporation (the "Company") voted
to dismiss Bennett Block Accountancy Corporation ("BBAC") as its independent
certified public accountant.
None of the BBAC reports on the Company's financial statements for the prior
fiscal years contained an adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles.
The decision to change accountants was recommended by the Company's Audit
Committee and approved by the Company's Board of Directors.
For the prior fiscal years, and through the date of this Annual Report on Form
10-K, the Company is unaware of any disagreement with BBAC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement if not resolved to their satisfaction,
would have caused said accountants to make a reference to the subject matter of
the disagreement in connection with any report issued by same.
The Company has engaged a new accounting firm, Grobstein, Horwath & Company LLP,
to act as certifying accountants for the year ended June 30, 2000.
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, 1999 - February 15, 2000:
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>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
February 15, 2000 - June 30, 2000:
Daniel A. Rouse 50 Chairman of the Board; President;
Treasurer; Director
Deborah Murphy 41 Vice President; Secretary; Director
Michael Lorella 46 Director
</TABLE>
The term of the Directors listed above expires on January 1, 2001.
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:
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 for the past fourteen
years. Prior to her employment with the Company, she was a legal secretary for
many years.
JANE YENNIE was relieved of her responsibility of Corporate Controller and was
let go on April 15, 2000.
MICHAEL LORELLA has owned a restaurant and supermarket equipment company for the
past 20 years.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows all cash compensation incurred by the Company for
services rendered during the year ended June 30, 2000, 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>
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 $ 39,584
All executive officers as a group (3 persons) $120,584
</TABLE>
In addition, $13,800 was paid for Mr. Gelet's family's medical insurance.
24
<PAGE>
COMPENSATION UNDER PLANS
None.
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 1,000,000 2.0%
15834 Highland Court Board, Former President
Solana Beach, CA and Former Director
Daniel A. Rouse Chairman of the Board, 4,500,000 8.8%
3550 Wilshire Blvd. President, Treasurer,
Suite 1725 Secretary and Director
Los Angeles, CA
Deborah Murphy 4,600,000 9.0%
312 S. Cedros Avenue
#315
Solana Beach, CA
---------------------------
Directors and officers 10,100,000 19.7%
as a group ========== =====
(3 persons)
OTHER
RJM, Inc. 4,500,000 8.8%
312 S. Cedros Avenue #315
Solana Beach, CA
---------------------------
4,500,000 8.8%
========== =====
</TABLE>
(1) 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.
25
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 3, 1999, the Company signed a Promissory Note of $592,800 to its
former President. The Promissory Note is consolidating all monies owed to the
former President and is secured by all of the assets of the Company, bears
interest at 6% per annum and is due on demand.
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
26
<PAGE>
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 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, 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.
27
<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-37
All other schedules are omitted because they are not required, inapplicable or
the information is otherwise shown in the financial statements or notes thereto.
(a)(3) Exhibits. The following documents are exhibits to this Annual Report on
Form 10-K:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of Gelet Enterprises, *
Inc. dated August 28, 1981 filed as Exhibit 3.1
to the Company's Annual Report on Form 10-K for
the eleven months ended June 30, 1994.
3.2 Certificate of Amendment of Articles of *
Incorporation of Gelet Enterprises, Inc.
dated March 24, 1988 filed as Exhibit 3.2 to
the Company's Annual Report on Form 10-K
for the eleven months ended June 30, 1994.
3.3 By-laws of Gelet Enterprises, Inc. dated *
September 9, 1981 filed as Exhibit 3.3 to
the Company's Annual Report on Form 10-K
for the eleven months ended June 30, 1994.
3.4 First Amendment to the By-laws of Gelet *
Enterprises, Inc. dated February 18, 1988
filed as Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the eleven months
ended June 30, 1994.
3.5 Certificate of Amendment of Articles of *
Incorporation dated March 11, 1993 filed
as Exhibit 3.5 to the Company's Annual
Report on Form 10-K for the eleven months
ended June 30, 1994.
3.6 Certificate of Name Change dated March *
11, 1993 filed as Exhibit 3.6 to the
Company's Annual Report on Form 10-K
for the eleven months ended June 30, 1994.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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.
29
<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 November 13, 2000.
Date: November 13, 2000 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: November 13, 2000 /s/ DANIEL A. ROUSE
-------------------------------------
Daniel A. Rouse,
Chairman of the Board, President,
Treasurer, Secretary and Director
Date: November 13, 2000 /s/ MICHAEL LORELLA
-------------------------------------
Michael Lorella,
Director
30
<PAGE>
N.U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT - June 30, 2000 F-1
INDEPENDENT AUDITOR'S REPORT - June 30, 1999 and 1998 F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3 and F-4
Consolidated Statements of Operations F-5 and F-6
Consolidated Statements of Stockholders' Equity (Deficit) F-7
Consolidated Statements of Cash Flows F-8 to F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11 to F-36
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-37
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
N. U. Pizza Holding Corporation and Subsidiaries (Debtor in Possession)
We have audited the accompanying consolidated balance sheet of N. U. Pizza
Holding Corporation and Subsidiaries (Debtor in Possession) as of June 30, 2000,
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the year then ended. We 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. Our responsibility is to express an
opinion on these consolidated financial statements and consolidated financial
statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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. We believe that our audit provides a
reasonable basis for our opinion.
In our 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 (Debtor in Possession) as of June 30,
2000, and the results of their operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles. Also in our
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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, on February 4, 2000, the Company filed a
voluntary petition for reorganization under Chapter 11 ("Chapter 11"), Title 11
of the United States Bankruptcy Code. The Company is currently operating its
business under the jurisdiction of Chapter 11 and the United States Bankruptcy
Court in the Central District of California, San Fernando Valley Division, (the
"Bankruptcy Court"), and continuation of the Company as a going concern is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the requisite parties under the
United States Bankruptcy Code and confirmation by the Bankruptcy Court and the
Company's ability to return to profitability, generate sufficient cash from
operations and obtain financing sources to meet its future obligations. In
addition, the Company has experienced operating losses, and negative operating
cash flows and is currently in default under substantially all of its
pre-petition debt agreements. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that might result from the outcome of these
uncertainties.
Grobstein, Horwath & Company LLP
Sherman Oaks, California
November 3, 2000
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 sheet of N. U. Pizza
Holding Corporation and Subsidiaries as of June 30, 1999, and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for each of the years in the two 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 the results
of their operations and their cash flows for each of the years in the two-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.
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 3 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 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Bennett Block Accountancy Corporation
Torrance, California
September 22, 1999
F-2
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 43,200 $ 60,600
Restricted cash 22,100 16,800
Franchisee advertising receivable - 35,600
Receivables, net of allowance for doubtful
accounts of $21,100 - 54,000
Advances to affiliated corporations - 42,400
Current portion of related party notes
receivable, net of allowance of $150,300 - 96,700
Current portion of notes receivable - franchisees,
net of allowance of $57,900 and $295,700 61,700 130,500
Prepaid expenses and other current assets - 15,700
------------------- -------------------
Total Current Assets 127,000 452,300
------------------- -------------------
OTHER ASSETS
Notes receivable - franchisees, net of
allowance of $389,400 and $118,600 577,500 423,100
Intangible assets, net of accumulated
amortization of $3,600 - 8,300
Deposits 1,300 22,900
------------------- -------------------
Total Other Assets 578,800 454,300
------------------- -------------------
TOTAL ASSETS $ 705,800 $ 906,600
=================== ===================
</TABLE>
See accompanying independent auditors' reports and notes.
F-3
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
LIABILITIES NOT SUBJECT TO COMPROMISE
Accounts payable and accrued expenses $ 2,700 $ 350,500
Accrued franchise advertising - 52,400
Current portion of long-term debt 118,800 167,700
Current portion of litigation settlements - 164,800
Loans payable to related parties 592,800 486,400
------------------- -------------------
Total Current Liabilities not Subject to Compromise 714,300 1,221,800
------------------- -------------------
Long-term debt, net of current portion 236,000 161,300
Litigation settlements, net of current portion - 76,500
Deferred franchise fee income - 22,900
------------------- -------------------
Total Non-Current Liabilities not Subject to Compromise 236,000 260,700
------------------- -------------------
LIABILITIES SUBJECT TO COMPROMISE 723,800 -
------------------- -------------------
STOCKHOLDERS' DEFICIT
Preferred stock, Series B, $.10 par value per share,
10,000,000 shares authorized, 80,000 shares issued and
outstanding (aggregate liquidation preference $400,000) 8,000 8,000
Preferred stock, Series C, $.10 par value per share,
44,000 shares authorized, issued and outstanding
(aggregate liquidation preference $220,000) 4,400 4,400
Common stock, $.001 par value per share, 100,000,000
50,000,000 shares authorized, 51,164,008 and
48,164,008 shares issued and outstanding 51,400 48,400
Additional paid-in capital 6,269,100 6,182,100
Accumulated deficit (7,301,200) (6,818,800)
------------------- -------------------
Total Stockholders' Deficit (968,300) (575,900)
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 705,800 $ 906,600
=================== ===================
</TABLE>
See accompanying independent auditors' reports and notes.
F-4
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
FRANCHISE OPERATIONS
REVENUES
Initial franchise fees $ 28,300 $ 60,000 $ 49,000
Royalties 344,300 393,200 491,200
Rental income - 20,300 69,100
Interest income 31,100 44,500 40,500
Rebate income 117,100 139,700 154,300
Other income 140,000 68,700 133,100
Forgiveness of debt 12,900 3,200 137,400
Gain on sale of restaurants
and equipment - - 369,200
------------------- ------------------- -------------------
Total Revenues 673,700 729,600 1,443,800
------------------- ------------------- -------------------
COSTS AND EXPENSES
Rent 96,400 53,400 68,700
General and administrative 538,200 694,400 817,800
Bad debt expense 232,100 954,000 336,900
Consulting expense 70,000 67,500 3,700
Interest expense 100,300 55,100 46,300
Litigation settlements - 238,500 -
Discounts on notes receivable 71,800 - 267,000
Reorganization costs 46,500 - -
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 -
------------------- ------------------- -------------------
Total Costs and Expenses 1,155,300 2,694,500 1,540,400
------------------- ------------------- -------------------
FRANCHISE OPERATING LOSS (481,600) (1,964,900) (96,600)
------------------- ------------------- -------------------
</TABLE>
See accompanying independent auditors' reports and notes.
F-5
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
COMPANY OWNED RESTAURANT OPERATIONS
SALES $ - $ 192,700 $ 1,109,800
------------------- ------------------- -------------------
COSTS AND EXPENSES
Cost of sales - 63,000 369,100
Operating - 104,400 619,000
General and administrative - 51,800 370,900
------------------- ------------------- -------------------
Total Costs and Expenses - 219,200 1,359,000
------------------- ------------------- -------------------
COMPANY OWNED RESTAURANT LOSS - (26,500) (249,200)
------------------- ------------------- -------------------
LOSS BEFORE PROVISION FOR INCOME TAXES (481,600) (1,991,400) (345,800)
PROVISION FOR INCOME TAXES 800 1,700 2,500
------------------- ------------------- -------------------
NET LOSS $ (482,400) $ (1,993,100) $ (348,300)
=================== =================== ===================
NET LOSS PER SHARE - BASIC $ (0.01) $ (0.05) $ (0.01)
=================== =================== ===================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 49,413,323 40,436,879 31,522,570
=================== =================== ===================
NET LOSS PER SHARE - DILUTED $ (0.01) $ (0.05) $ (0.01)
=================== =================== ===================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 49,413,323 40,436,879 31,522,570
=================== =================== ===================
</TABLE>
See accompany independent auditors' reports and notes.
F-6
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON STOCK SERIES B & C
--------------------------------------- ----------------------
SHARES ISSUED, NOTE ISSUED SHARES ADDITIONAL
SUBSCRIBED 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, 1997 31,139,008 $ 31,100 $ (487,000) 124,000 $ 12,400 $5,989,100 $(4,477,400) $1,068,200
Common shares issued
as payment on loan to
former officer 1,000,000 1,000 - - - 49,000 - 50,000
Uncollectible sub-
subscription note
receivable - - 85,000 - - - - 85,000
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
as payment on loan to
former officer 16,025,000 16,300 - - - 144,000 - 160,300
Uncollectible sub-
subscription note
receivable - - 402,000 - - - - 402,000
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)
Common shares issued in
exchange for consulting
services 3,000,000 3,000 - - - 87,000 - 90,000
Net loss - - - - - - (482,400) (482,400)
-------------- --------- ----------- ----------- --------- ------------- ------------ -----------
Balance - June 30, 2000 51,164,008 $ 51,400 $ - 124,000 $ 12,400 $6,269,100 $(7,301,200) $(968,300)
============== ========= =========== =========== ========= ============= ============ ===========
</TABLE>
See accompanying independent auditors' reports and notes.
F-7
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (482,400) $ (1,993,100) $ (348,300)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,200 30,700 245,000
Loss (gain) on sales and abandonment
of restaurants and equipment - 3,100 (369,200)
Loss on investments in affiliated
corporations - 473,500 -
Gain on sale of intangible asset (3,400) - -
Impairment of intangible assets - 155,000 -
Litigation settlements (57,200) 238,500 -
Forgiveness of debt (12,900) (3,200) (137,400)
Realization of deferred franchise fee income (22,900) (44,000) (34,000)
Provision for doubtful receivables (91,600) 954,000 336,900
Discounts on notes receivable 71,800 - 267,000
Sources and (uses) of cash from changes in
operating assets and liabilities:
Accounts receivable 75,100 (70,200) (128,500)
Inventories - 3,600 20,900
Prepaid expenses 15,700 1,400 32,300
Accounts payable and accrued expenses 7,200 123,400 116,400
Accrued expenses due to related party - 90,000 -
----------------- ------------------ ------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (499,400) (37,300) 1,100
----------------- ------------------ ------------------
</TABLE>
See accompanying independent auditors' reports and notes.
F-8
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES
Collections on notes receivable - franchisees $ 26,300 $ 132,900 $ 87,400
Collections on related party notes receivable 247,000 4,400 -
Investments in affiliated corporations - (46,200) -
Advances to affiliated corporations 42,400 (42,400) -
Capital expenditures - (1,100) (10,000)
Proceeds from sales of restaurants and equipment - - 157,000
Decrease in deposits 21,600 1,500 8,800
Proceeds from sale of intangible asset 10,500 - -
----------------- ------------------ ------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 347,800 49,100 243,200
----------------- ------------------ ------------------
FINANCING ACTIVITIES
Increase in loans payable to related parties 172,000 161,900 9,600
Increase in additional paid-in capital 87,000 - -
Increase in common stock 3,000 - -
Principal payments on long-term debt (127,800) (167,900) (199,100)
----------------- ------------------ ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
134,200 (6,000) (189,500)
----------------- ------------------ ------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,400) 5,800 54,800
BEGINNING CASH AND CASH EQUIVALENTS 60,600 54,800 -
----------------- ------------------ ------------------
ENDING CASH AND CASH EQUIVALENTS $ 43,200 $ 60,600 $ 54,800
================= ================== ==================
</TABLE>
See accompanying independent auditors' reports and notes.
F-9
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------
<S> <C> <C> <C>
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 100,300 $ 46,100 $ 46,300
Cash paid for taxes $ 1,700 $ 800 $ 2,500
NONCASH TRANSACTIONS
Notes receivable received for assets $ 263,500 $ 200,000 $ 862,000
Investments in exchange for assets $ - $ 165,100 $ 262,200
Conversion of debt to equity $ - $ 160,300 $ 50,000
Notes payable issued for fixed assets $ 263,500 $ 165,100 $ -
Notes receivable issued in exchange for
accounts receivable $ - $ - $ 69,300
Note payable issued in exchange for accounts
payable $ - $ - $ 39,600
</TABLE>
See accompanying independent auditors' reports and notes.
F-10
<PAGE>
--------------------------------------------------------------------------------
N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
N. U. Pizza Holding Corporation (Debtor in Possession) 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 (Debtor in
Possession) consummated an Asset Purchase Agreement ("the Agreement")
whereby it bought certain assets from the DAS Group, Inc., the owner
of a bakery and the franchisor of Oregon's Original Sandwich Express
and Bakery 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 Nevada corporation,
in exchange for 2,000,000 shares of Formaggi, Inc.'s common stock.
During the year ended June 30, 1998, Formaggi, Inc. closed its
Company-owned operations and, due to recurring losses incurred 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.
N. U. Pizza Holding Corporation (Debtor in Possession) 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 (Debtor in Possession)
in exchange for N. U. Pizza Holding Corporation's (Debtor in
Possession) 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
inactive. N. U. Pizza Holding Corporation (Debtor in Possession) is
currently managing the Company's franchising operations.
N. U. Pizza Holding Corporation (Debtor in Possession) and its
inactive Subsidiaries ("the Company") plan to continue to develop the
Numero Uno and Salsa Fresh restaurant concepts within a significant
portion of California by introducing new products, retaining existing
profitable products and by eliminating unprofitable menu items.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - ORGANIZATION (CONTINUED)
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.
Franchised and Company-owned restaurants for the years ended June 30,
2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
FRANCHISED COMPANY-OWNED
RESTAURANTS RESTAURANTS
----------- -------------
<S> <C> <C>
Balance- June 30, 1998 53 1
Previously sold restaurants taken
back and operated by the Company -- 2
Sold to franchisees 2 (2)
Closed or terminated (17) (1)
------ -----
Balance - June 30, 1999 38 --
======
Closed or terminated (7)
-------
Balance - June 30, 2000 31
=======
</TABLE>
NOTE 2 - 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 inactive
subsidiaries, Formaggi, Inc. and Numero Uno Franchise Corporation.
All material intercompany transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements
in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and 1998, in order to
sell some Company-owned restaurants, the Company enticed potential
buyers by offering to reduce or defer payment of royalties.
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, 2000, 1999 and 1998
were $23,800, $8,600, and $38,100, respectively.
An advertising fee is charged and billed to franchisees for use in
creating, developing and purchasing local, regional and national
advertising, public relations and promotional campaigns. Any
unexpended advertising fees collected are deposited in a restricted
bank account and recorded, along with uncollected advertising
receivables, as a current liability.
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.
INTANGIBLE ASSETS
Intangible assets at June 30, 1999 consisted of a liquor license
acquired at a cost of $11,900. The liquor license was sold during
the year ended June 30, 2000 for $10,500. A gain of $3,400 was
recognized on the sale.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
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. 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 $8,300, $15,000
and $80,800 related to these assets, was charged to operations during
the years ended June 30, 2000, 1999, and 1998, 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 and cash equivalents 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. 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.
INCOME TAXES
N. U. Pizza Holding Corporation (Debtor in Possession) 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.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
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 in accordance with SFAS No. 121.
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, 2000, none of the
options authorized had been issued.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED)
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 Consolidated
Financial Statements under the new standard were not different from
those calculated under the APB No. 15 method.
Net loss per basic and diluted share are calculated based on the
weighted average number of common stock shares outstanding during each
period.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," was 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 consolidated 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.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," established standards for reporting information about
operating segments in annual and interim Consolidated 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.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no pending accounting pronouncements that are anticipated
to have a material impact on the Company's financial position or
results of operations.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain prior year balances have been reclassified to conform to the
current year's presentation.
NOTE 3 - GOING CONCERN
GENERAL
On February 4, 2000, (the "Petition Date") N. U. Pizza Holding
Corporation (the "Debtor") filed a voluntary petition for relief under
Chapter 11 ("Chapter 11"), Title 11 of the United States Code, U.S.C.
Sections 101-1330 as amended (the "Bankruptcy Code"), with the United
States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court"). The bankruptcy case of the Debtor is being
administered before the Bankruptcy Court under Case No. SV00-11215 GM.
Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, N. U. Pizza
Holding Corporation, as Debtor and Debtor-in-Possession, has continued
to manage and operate its assets and businesses pending the
confirmation of a reorganization plan and subject to the supervision
and orders of the Bankruptcy Court.
REORGANIZATION PLAN PROCEDURES
The Debtor expects to reorganize its affairs under the protection of
Chapter 11 and to propose a plan of reorganization. Although
management expects to file a plan of reorganization during 2001 which
would contemplate emergence in 2001, there can be no assurance at this
time that a plan of reorganization proposed by the Debtor will be
approved or confirmed by the Bankruptcy Court, or that such plan will
be consummated. The consummation of a plan of reorganization is the
principal objective
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - GOING CONCERN (CONTINUED)
REORGANIZATION PLAN PROCEDURES (CONTINUED)
of the Company's Chapter 11 case. A plan of reorganization sets forth
the means for satisfying the Debtor's claims and interests, including
the liabilities subject to compromise. The consummation of a plan of
reorganization for the Debtor will require the requisite vote of
impaired creditors and stockholders under the Bankruptcy Code and
confirmation of the plan by the Bankruptcy Court.
The consolidated financial statements have been presented in
accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") and have been
prepared in accordance with generally accepted accounting principles
applicable to a going concern, which principles, except as otherwise
disclosed, assume that assets will be realized and liabilities will be
discharged in the ordinary course of business. As a result of the
Chapter 11 cases and circumstances relating to this event, default on
all pre-petition debt, negative cash flows, its recurring losses, and
current economic conditions, such realization of assets and
liquidation of liabilities are subject to significant uncertainty.
While under the protection of Chapter 11, the Debtor may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for
amounts other than those reflected in the consolidated financial
statements. Additionally, the amounts reported on the consolidated
balance sheet as of June 30, 2000 could materially change because of
changes in business strategies and the effects of any proposed plan of
reorganization.
The appropriateness of using the going concern basis of accounting is
dependent upon, among other things, confirmation of a plan of
reorganization, future profitable operations, and the ability to
generate sufficient cash from operations and to meet obligations.
In the Chapter 11 case, substantially all unsecured liabilities as of
the Petition Date are subject to compromise or other treatment under a
plan of reorganization which must be confirmed by the Bankruptcy Court
after submission to any required vote by affected parties. For
financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction is dependent on the outcome of the Chapter
11 cases, have been segregated and classified as liabilities subject
to compromise under reorganization proceedings in the June 30, 2000
consolidated balance sheet. Generally, all actions to enforce or
otherwise effect repayment of pre-Chapter 11 liabilities as well as
all pending litigation against the Debtor are stayed while the Debtor
continues its business operations as debtor-in-possession. Unaudited
schedules have been filed by the Debtor
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - GOING CONCERN (CONTINUED)
REORGANIZATION PLAN PROCEDURES (CONTINUED)
with the Bankruptcy Court setting forth the assets and liabilities of
the Debtor as of the Petition Date as reflected in the Debtor's
accounting records. The ultimate amount of and settlement terms for
such liabilities are subject to an approved plan of reorganization and
accordingly are not presently determinable.
CONSOLIDATED STATEMENTS OF OPERATIONS
Pursuant to SOP 90-7, revenues and expenses, realized gains and
losses, and provisions for losses resulting from the reorganization of
the business are reported in the Consolidated Statement of Operations
for the year ended June 30, 2000 separately as reorganization items.
Professional fees are expensed as incurred. Interest expense is
reported only to the extent that it will be paid during the cases or
that it is probable that it will be an allowed claim.
Reorganization items, if material, are reported separately within the
operating, investing and financing categories of the Consolidated
Statement of Cash Flows for the year ended June 30, 2000.
NOTE 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 3%
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.
At June 30, 2000, the Company had noninterest bearing notes receivable
from franchisees with a carrying value of $303,800. The notes were
discounted to their estimated fair value of $232,000 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
intends to hold these notes to maturity and recorded an allowance of
$187,700 at June 30, 2000.
At June 30, 1998, the Company had noninterest bearing notes receivable
from franchisees, including a related party, and the buyers of
Company-owned restaurants with a carrying value of $687,700. The notes
were discounted to their estimated 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
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - NOTES RECEIVABLE (CONTINUED)
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. 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 $375,500 and $432,400, respectively, on interest and noninterest
bearing notes receivable at June 30, 2000 and 1999. Management
believes that the Company's collateral is sufficient to recover any
past due balances on notes receivable.
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. During the years ended June 30, 1999 and 1998, the uncollected
balance of the note receivable was written off as uncollectible in the
amounts of $52,000 and $85,000, respectively.
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. 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.
Notes receivable before allowances are scheduled to be received over
the next five years as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30:
<S> <C>
2001 $ 119,600
2002 118,600
2003 121,300
2004 115,000
2005 142,600
Thereafter 469,400
--------------
$ 1,086,500
===============
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - 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,
2000 1999
------------ ------------
<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 allowance of
$150,300 at June 30, 1999 $ -- $ 96,700
Advances to affiliated corporations,
noninterest bearing, due on demand -- 42,400
------------ ------------
Total receivable -- 139,100
------------ ------------
Accrued dough royalties - former
president (35,500) (20,000)
Accrued consulting fees - former
president -- (60,000)
Note payable - former president,
bearing interest at 6% per annum,
due on demand; secured by all
assets of the Company (592,800) --
Loan payable - former president,
noninterest bearing cash advances
and accrued compensation, due on
demand (30,100) (311,400)
Note payable - affiliated corporation,
bearing interest at 5% per annum, due
on demand -- (95,000)
Less liabilities subject to compromise 65,600 --
------------ ------------
Total payable (592,800) (486,400)
------------ ------------
$ (592,800) $ (347,300)
============ ============
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - 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 former 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.
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.
At June 30, 1999, the Company determined that the carrying value of
its investments in two 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 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.
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
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - RELATED-PARTY TRANSACTIONS (CONTINUED)
exercised its first five-year renewal option. On March 20, 2000, the
Company entered into a new licensing agreement with its former
president expiring July 31, 2000. The agreement provides for renewal
periods every six months. As of July 31, 2000, the Company renewed the
agreement for the six months ending January 31, 2001. Under the terms
of the agreement, the Company is required to pay the former president
$2,000 per month. Prior to March 20, 2000, the Company and its
franchisees were required to pay the former president a $.02 per pound
royalty on the dough products used in operations. During the years
ended June 30, 2000, 1999 and 1998, the Company incurred royalty
expense of $25,500, $30,000 and $30,000, respectively 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 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, 2000, 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. 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.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DEPENDENCE ON MAJOR VENDOR
During the year ended June 30, 2000, the Company paid $70,000 to its
former president for consulting fees.
During the years ended June 30, 1999 and 1998, purchases from one
vendor represented approximately 5.6% and 9.6%, of the costs and
expenses of the Company owned restaurant operations, respectively.
Management believed that the Company was not dependent on this vendor.
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
-------------- --------------
<S> <C> <C>
Notes payable, secured by equipment,
bearing interest from approximately
8% to 32% per annum, maturing
through March 2004 $ 354,800 $ 138,800
Unsecured notes payable, bearing
interest from 8% to 10% per annum,
maturing through April 2006 216,200 190,200
------------- --------------
571,000 329,000
Less current maturities -- 167,700
Less liabilities subject to compromise 216,200 --
------------- --------------
$ 354,800 $ 161,300
============= ==============
</TABLE>
Long-term debt is scheduled to mature as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30:
<S> <C>
2001 $ 118,800
2002 122,200
2003 79,500
2004 34,300
-------------
$ 354,800
=============
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - LONG-TERM DEBT (CONTINUED)
LIABILITIES SUBJECT TO COMPROMISE
The principal categories of obligations classified as liabilities
subject to compromise under reorganization cases are identified below.
The amounts below in total may vary significantly from the stated
amount of proofs of claim that will be filed with the Bankruptcy Court
and may be subject to future adjustment depending on Bankruptcy Court
action, further developments with respect to potential disputed
claims, determination as to the value of any collateral securing
claims, or other events.
Additional claims may arise from the rejection of additional real
estate leases and executory contracts by the Debtor.
<TABLE>
<S> <C>
Unsecured notes payable $ 216,200
Loans payable to related parties 65,600
Trade accounts payable 341,600
Accrued franchise advertising 22,100
Other 78,300
-------------
$ 723,800
=============
</TABLE>
As a result of the Chapter 11 filing, no principal or interest
payments will be made on unsecured prepetition debt without Bankruptcy
Court approval or until a plan of reorganization providing for the
repayment terms has been confirmed by the Bankruptcy Court and becomes
effective. Therefore, interest on prepetition unsecured obligations
has not been accrued after the Petition Date.
NOTE 8 - 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.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMMITMENTS (CONTINUED)
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>
YEARS ENDING JUNE 30:
2001 $ 133,700 $ 13,200
2002 76,500 --
2003 39,000 --
2004 36,500 --
2005 18,200 --
------------- -----------
$ 303,900 $ 13,200
============= ===========
</TABLE>
Total minimum future rental payments shown above have not been reduced
by $303,900 of sublease rentals to be received in the 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, 2000 June 30, 1999 June 30, 1998
------------- ------------- --------------
<S> <C> <C> <C>
Minimum rentals $ 96,400 $ 78,000 $ 195,400
Less sublease rentals -- 15,700 69,100
----------- ----------- ------------
Total rent expense $ 96,400 $ 62,300 $ 126,300
=========== =========== ============
</TABLE>
During the year ended June 30, 2000, the Company leased restaurant
equipment under capitalized leases expiring through March 2004. The
restaurant equipment with a cost of $263,500 was sold to new
franchisees in exchange for notes receivable (Note 4).
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMMITMENTS (CONTINUED)
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 initially 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. At June 30,
1999, the carrying value of the restaurant equipment was 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
incurred in connection with the restaurant equipment as of June 30,
2000 for each of the next five years are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30:
<S> <C>
2001 $ 167,800
2002 152,900
2003 92,600
2004 36,500
-------------
Total minimum lease payments 449,800
Less: amount representing interest (95,000)
-------------
Present value of minimum lease payments 354,800
Less: current portion (118,800)
-------------
$ 236,000
=============
</TABLE>
The Company is in the process of reviewing its leases in the Chapter
11 cases to determine whether they should be rejected, assumed or
assigned.
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, 2000 and 1999.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
PENDING LITIGATION (CONTINUED)
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, 2000, 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 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.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
PENDING LITIGATION
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. In April 1998, the court dismissed
the case. The Company wrote off the note payable of $12,900 during the
year ended June 30, 2000.
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 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
made monthly payments from August 1, 1999 through December 1999. The
remaining unpaid balance is subject to the outcome of the bankruptcy
proceedings.
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 was recorded in accrued litigation settlements at June
30, 1999 and paid during the year ended June 30, 2000.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION SETTLEMENTS (CONTINUED)
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 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 (reduced to $75,000 by the plaintiff during the year
ended June 30, 1998) payable in sixty monthly installments of $1,250.
During the year ended June 30, 2000, the Company made the monthly
payments of $1,250 through December 1999. The remaining unpaid balance
is subject to the outcome of the bankruptcy proceedings.
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.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION SETTLEMENTS (CONTINUED)
In June 1995, the landlord of premises leased by Numero Uno Takeout
and Delivery Corporation filed a complaint against the Company and
other defendants for breach of a lease agreement in the amount of
approximately $20,500. The plaintiffs contend that the premises were
vacated in March 1995 and that the Company and other defendants are
responsible for the unpaid rent. The Company contends that Numero Uno
Takeout and Delivery Corporation is a defunct entity and that there is
no contractual liability on behalf of the Company and the other named
defendants. After the discovery stage, the Court assigned the case to
nonbinding arbitration which was held on June 20, 1996. Thereafter,
the arbitrator awarded the plaintiffs the sum of $31,800. The Company
did not agree with the award of the arbitrator and filed a Request For
Trial De Novo with the Court. Subsequently, the Court set a trial date
for March 31, 1997. Prior to trial, the parties entered into a
settlement agreement which provides for a stipulation for judgment
should the Company fail to pay installments pursuant to the terms of
the settlement. The Company agreed to pay $16,500 plus interest in
monthly installments which was paid in full during the year ended June
30, 1998.
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 28, 1996. The parties were unable to
settle the matter at the Conference and the Court scheduled a trial
date for October 16, 1996. However, prior to the trial date, the
parties settled the matter with the Company agreeing to pay the sum of
approximately $54,500 plus interest at 10% per annum in monthly
installments until paid in full. The Company made regular monthly
installment payments and the unpaid balance was paid in full during
the year ended June 30, 1999.
NOTE 9 - 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.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - PREFERRED STOCK (CONTINUED)
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, 2000, 1999, or 1998. Dividends in arrears on
preferred stock were approximately $6,600 at June 30, 2000.
NOTE 10 - COMMON STOCK
In November 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. In December 1995, the Company's Board of Directors
approved another increase from 20,000,000 to 50,000,000 authorized
shares. In August 1999, the Company's Board of Directors approved an
additional increase from 50,000,000 to 100,000,000 authorized shares.
During the year ended June 30, 2000, the Company issued 3,000,000
shares of its common stock to a third party at $0.03 per share
($90,000) as payment for consulting services in the areas of
management, strategic planning, corporate financing and marketing in
connection with the Company's line of business.
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.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - COMMON STOCK (CONTINUED)
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.
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 of these notes receivable was written off as uncollectible
during the year ended June 30, 1999.
NOTE 11 - FOREIGN CURRENCY TRANSACTIONS
All transactions with foreign franchises are conducted in U. S.
Dollars. There is no material currency gain or loss.
NOTE 12 - 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 were $800, $1,700 and $2,500 for the years ended June 30,
2000, 1999 and 1998, respectively.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
At June 30, 2000, the Company had Federal net operating loss
carryforwards of approximately $6,965,600 for tax purposes. Net
operating losses are scheduled to expire as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
<S> <C>
2007 $ 150,400
2008 284,500
2011 3,065,800
2012 959,500
2013 389,000
2014 1,716,200
2015 400,200
---------------
$ 6,965,600
===============
</TABLE>
These operating losses may be subject to limitations imposed by the
Internal Revenue Code because of changes in the Company's stock
ownership. The Company does not anticipate that these limitations will
affect the utilization of the net operating loss carryforwards prior
to their expiration.
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 $2,368,300 at June
30, 2000. 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.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
Expected Federal tax benefits for the years ended June 30, 2000, 1999
and 1998 were approximately $136,100, $583,400, and $132,300,
respectively. Due to the current year's increase in tax net operating
losses, the likelihood of realizing future tax benefits is lower than
at June 30, 1999. Accordingly, the valuation allowance has been
increased at June 30, 2000 by $136,100, 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, 1999, the likelihood of realizing future tax benefits was
lower than at June 30, 1998. Accordingly, the valuation allowance was
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.
NOTE 13 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the years ended June 30, 2000 and 1999,
the Company recorded significant adjustments to its accounts which
resulted in increasing net loss by approximately $232,100 and
$1,821,000, respectively. The adjustments for the years ended June 30,
2000 were attributable to the write off of uncollectible franchise
notes receivable and increasing the allowance for possible losses on
franchise notes receivable. 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.
NOTE 14 - INDUSTRY SEGMENTS
The Company operates principally in the food service industry, and has
operated two segments: franchising and Company-owned restaurants. The
franchising segment sells individual, multi- unit and territorial
restaurant franchise licenses. The Company- owned restaurant segment
operated 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-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - INDUSTRY SEGMENTS (CONTINUED)
Segment information is as follows:
<TABLE>
<CAPTION>
Company-owned
Franchising Restaurants
----------------- -----------------
<S> <C> <C>
YEAR ENDED JUNE 30, 2000
Revenues from unaffiliated customers $ 642,600 --
Operating loss (481,600) --
Identifiable assets at June 30, 2000 -- --
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
DEPRECIATION
For the year ended June 30, 2000 $ -- $ --
For the year ended June 30, 1999 -- 15,700
For the year ended June 30, 1998 2,600 161,600
CAPITAL EXPENDITURES
For the year ended June 30, 2000 $ -- $ --
For the year ended June 30, 1999 1,100 --
For the year ended June 30, 1998 -- 10,000
</TABLE>
F-36
<PAGE>
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N. U. PIZZA HOLDING CORPORATION AND SUBSIDIARIES
(DEBTOR IN POSSESSION)
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, 2000:
Allowance for doubtful accounts $ 21,100 $ -- $ 21,100 $ --
Loss on allowance for uncollectible
notes receivable 432,400 232,100 289,000 375,500
Discount on noninterest bearing
notes receivable 132,200 71,800 132,200 71,800
Valuation allowance for deferred
income tax assets 2,232,300 136,100 -- 2,368,300
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
</TABLE>
F-37
