ITEM 1 - BUSINESS
The Company
Captain Tony's Pizza, Inc. ("Captain Tony's" or the "Company") is a New York corporation which was incorporated on September 10, 1985. The Company is primarily in the business of franchising Captain Tony's Pizza restaurants in the United States and abroad. As of June 30, 1996, the Company had a total of ten (10) franchisees and currently (as of August 31, 1996), the Company has a total of nine (9) franchisees. The Company has seven (7) franchisees operating Captain Tony's restaurants in the United States and two (2) franchisees in England. The Company has no company owned stores currently. CTP Equipment Inc. ("CTP"), a New York corporation, was incorporated as a wholly-owned subsidiary of the Company on September 2, 1988. CTP sells restaurant equipment to prospective and existing franchisees. The Company is working to expand its franchise network in the United States and abroad and exploring new and different ways to market its food products. In addition, over the past two to three years, the Company has been actively seeking acquisition or merger candidates. The Company has agreed in principle to acquire and merge with two companies as more fully explained in Item 4
ITEM 6 - SELECTED FINANCIAL DATA
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND FINANCIAL CONDITION
The Company's cash position increased from $36,644 at June 30, 1995 to a balance of $47,369 at June 30, 1996 due primarily to the net income for the current year. The Company's balance sheet reflects only cash as an asset at June 30, 1996. This balance, along with the receipt of continuing franchise royalties is sufficient to pay the expenses of operating the business in its current mode.
Working capital increased to $43,176 at June 30, 1996 from $33,731 at June 30, 1995. The ratio of current assets to current liabilities increased to 10.7 to 1 compared with 4.8 to 1 at June 30, 1995.
The Company's financial position at June 30, 1996 is liquid with all of its assets in the form of cash. It should be noted that the merger agreements approved by the shareholders on September 18, 1996 provides for the remaining cash at that time to be paid as a bonus to President Michael J. Martella and further provides for an infusion of $2,000,000 of cash capital for the marketing of new franchises.
CAPITAL RESOURCES
Until the possibility of a successful merger became realizable, the Company did not have and did not contemplate any material future commitments for capital expenditures. The nature of the franchising business, which is the Company's current concentration, did not require large amounts of capital to be invested in equipment or real estate. However, with the capital to be received as a result of the approved merger, the ownership and operation of company stores once again may become part of management's strategic direction and the marketing of new franchises and master franchise agreements, will requires significant amounts for advertising and travel.
RESULTS OF OPERATIONS
The Company earned net income of $8,679 in fiscal 1996 compared with a loss of $43,019 in fiscal 1995 and a loss of $21,085 in fiscal 1994. The changes in profitability can be attributed to the following significant factors:
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following illustrates the recent history of changes in the number of franchisees and the resulting royalty income over the last three years:
In the opinion of management, efforts to sell new franchises throughout the last three years were hindered by a lack of capital for financing expansion, by the uncertainties caused by the lack of consumer confidence in the economy, and by the Company's lack of name recognition in an industry dominated by much larger national chains of quick service restaurants. As a result, initial franchise fees, equipment sales, and food and merchandise sales remained flat or decreased. New franchises create recurring royalty income and usually generate additional equipment, product and merchandise sales for the Company. Certain delinquent royalty situations in Ohio and England were corrected in 1995 by agreeing to fixed fee contracts. Fixed fees reduce the administrative cost of verifying royalties based on sales and tend to encourage regular and timely payment. In addition, starting in fiscal 1995, franchisees have been purchasing pizza ingredients direct from the supplier relieving the Company from extending credit for such purchases.
During fiscal 1996, four franchisees closed stores in Ohio, California, and England. In August 1996, one additional store in California closed bringing the current total to nine existing franchisees. The Company is currently engaged in dispute with its Ohio franchisee involving nonpayment of royalties. This dispute could result in litigation being pursued.
Institutional food sales decreased by $60,948 in fiscal 1994 reflecting the end of sales to Eastman Kodak Company's food service operation offset by the addition of the University of Rochester as a customer, providing for a net increase in volume of $39,726. However, the U of R month-to-month contract was
terminated by the customer effective April 1, 1995. Since then, the Company has not had any similar food service contracts but would enter into such with any interested party on agreeable terms. The Company has not formally discontinued the institutional food service business. Inquiries and quotations continue to be handled routinely but thus far have not resulted in any contracts. Similarly, equipment sales would be contracted if requested by franchisees.
With the decline in revenues, management has been taking necessary steps to reduce fixed overhead - cutting occupancy costs, office personnel, accounting and legal fees, and other administrative expenses. Operating, general and administrative expenses decreased by 55% for the current year versus the prior year.
TRENDS AND OUTLOOK
Management continues to seek new franchisees to increase the Company's revenues while effectively containing expenses. Moreover, continuing efforts are being made to increase collections of royalties from existing franchisees.
With the significant decline in the number of franchisees and the need for capital infusion to expand the franchising business , management has sought viable merger or acquisition candidates and believes that the acquisitions approved at the Special Shareholders Meeting on September 18,1996 will enhance the value of shareholders' investments and provide the capital resources and profitability to grow the Company.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
These items are contained elsewhere in this report.
ITEM 9
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive officers and directors of the Company:
Michael J. Martella is a Director, President, Treasurer, and Chief Executive Officer of the Company and President and Director of CTP. He has been an officer of the Company since it was incorporated and has been President of the Company since 1986. He received an ABA Degree from Rochester Institute of Technology in 1977. From 1982 to 1984 he was General Manager of the original Captain Tony's on Winton Road. From 1984 until September 1986, he was a registered representative of J.W. Gant & Associates, Inc., a securities broker. He is sole shareholder and President of Captain Tony's Winton Road, Inc., which operates a Captain Tony's franchised restaurant.
Lou Gurnick is a Director of the Company. Mr. Gurnick, for the last five years, has been a principal of Franchise Business International, Santa Monica, California, and a franchise consultant with extensive domestic and international experience. He is a former Vice President of Midas Muffler and was the prime architect of the Midas expansion in Canada and Europe. He formerly served on the Board of Directors and the International Committee of the International Franchise Association. He currently lectures in Franchising at UCLA Extension, University of Nebraska, Manchester Business School (Liverpool, U.K.) and speaks before various other groups.
Robert J. Wood is a Director and Secretary of the Company and a certified public accountant with over thirty years experience in financial reporting and general business consulting. Mr. Wood received a B.A. degree in Business Administration from St. John Fisher College in 1962 and obtained his CPA certificate in 1965. Mr. Wood is a member of the American Institute of Certified Public Accountants and is a member of and Chapter Government Relations Director for the New York State Society of Certified Public Accountants. Mr. Wood is also qualified as an AICPA Peer Reviewer and, as such, assists fellow practitioners in meeting professional standards in accounting and auditing practices.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth all compensation received by the Company's chief executive officer and all directors and officers of the Company during the last three fiscal years. No officer's compensation exceeded $60,000 in any year.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of Common Stock beneficially owned by the directors and principal stockholders (those owning 5% of the Company's outstanding common stock) of the Company and all executive officers and directors as a group, as of August 23, 1996.
ITEM 13
ITEM 13 -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has a signed franchise agreement with a corporation owned by Michael J. Martella, a principal shareholder and officer of the Company. In recognition of his status as a founder and his store's availability as a model for prospective franchisees he pays no continuing franchise royalty fee and has not done so since October 1993. The value of this concession amounts to approximately $30,000 through June 30, 1996. Until June 1995, the Company also had a signed franchise agreement with a corporation owned by Michael H. Martella, a substantial shareholder who also paid no continuing franchise royalty fee. In addition, all purchases for resale to institutional food customers were made from the franchised store owned by Michael H. Martella.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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, thereunder duly authorized.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors Captain Tony's Pizza, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Captain Tony's Pizza, Inc. and Subsidiary as of June 30, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Captain Tony's Pizza, Inc. and Subsidiary as of June 30, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles.
We have also audited the schedule listed in the Index at Item 14 (Schedule II) for each of the three years in the period ended June 30, 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
Mangel, Metzger, Barr & Co., LLP
Rochester, New York July 18 ,1996 (except for Note J, as to which the date is August 2, 1996)
-F-1-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
-F-2-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
-F-3-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
The accompanying notes are an integral part of the consolidated financial statements.
-F-4-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
-F-5-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY Captain Tony's Pizza, Inc. (the Company) was incorporated under the laws of the State of New York on September 10, 1985, and formed to franchise and operate restaurants under the name "Captain Tony's Pizza and Pasta Emporium".
ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, CTP Equipment, Inc. ("CTP"). Intercompany transactions and balances have been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK The Company maintains its cash balances in primarily one financial institution located in the state of Florida. These balances are insured by the Federal Deposit Insurance Corporation up to $100,000.
CASH For cash flow reporting purposes, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
INVENTORIES Inventories, which consisted of unprocessed food supplies, beverages, packaging supplies and resale merchandise, were valued at cost (first-in, first-out method) which was lower than market.
EQUIPMENT Equipment was recorded on the basis of cost. Depreciation was provided using the straight-line and accelerated methods over the assets' estimated useful lives which range from 5 to 7 years. Major renewals and betterments are capitalized, while repairs and maintenance are charged to operations as incurred. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts and the related gain or loss is reflected in operations.
PREFERRED STOCK Shareholders of the Company have authorized the issuance of up to 950,000,000 non-voting shares of preferred stock with terms to be established by the Board of Directors. No shares of this preferred stock have been issued, nor does the Company have any present plan for the issuance or sale of any such shares. As part of this authorization by the shareholders, the shareholders voted to amend the Certificate of Incorporation to allow for the issuance of preferred shares. However, no amendment has been filed as yet.
-F-6-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
JUNE 30, 1996, 1995 AND 1994
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
FRANCHISE FEE REVENUES The Company recognizes initial franchise fees when all material services or conditions relating to the sale are substantially performed. This is normally upon the opening of the franchise unit. Services consist of various elective services including facilities and equipment design and selection and training of the franchisee's management and staff in the operations and management of a franchise. The direct incremental costs associated with these services, primarily travel expenses, are deferred until the related revenue is recognized. Franchise royalty fees, whether based on a percentage of sales reported by franchisees or a fixed amount, are recognized as revenue when cash payments are received.
The Company may enter into master franchise agreements which grant master franchisees the exclusive right to develop and operate specific numbers of Captain Tony's locations within territories for a fee. Fees from master franchises are recognized based on the terms and conditions of each agreement. If initial services must be performed by the Company and the master franchise fee relates to the number of area outlets, the master franchise fee is generally deferred and recognized ratably as units are opened. However, when there is no substantial performance required of the Company and the fees are non-refundable and do not relate to the number of area outlets, fees are generally recognized in income when the agreement is signed.
In certain instances involving individual or master franchises, the Company may receive a portion of franchise fees in notes. If the notes are personally guaranteed by individuals whose net worths exceed Company requirements, or the facts and circumstances support collectibility of the note, the portion of the fees represented by notes also is recognized in income. Otherwise, fees are recognized as income on an installment basis as cash is received.
Generally, master franchise agreements further provide for an initial franchise fee for each franchise unit opened under the master franchise agreement, part of which is payable to the Company. These fees are non-refundable and recognized in income when all material services required of the Company, if any, are substantially performed, which is normally upon opening of the franchise unit.
INSTITUTIONAL FOOD SALES The Company sells pizza, on a wholesale basis, to commercial/corporate customers primarily for resale in the customers' cafeterias, and purchases the pizza from franchises. No such sales have occurred since April 1, 1995.
EQUIPMENT SALES The Company, through its wholly-owned subsidiary, CTP Equipment, Inc. ("CTP")., sells restaurant equipment to Company franchisees. The Company franchisees are not obligated to purchase equipment from CTP, but they often do. An equipment inventory is not maintained by the Company. All franchisee orders for equipment must be accompanied by receipt of cash payment before the Company orders the equipment from a third-party vendor. The Company charges the franchisees with the direct cost of the equipment plus a reasonable profit margin.
-F-7-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
JUNE 30, 1996, 1995 AND 1994
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
COMMISSIONS During 1996, the Company discontinued purchasing and reselling food and other items to franchisees. Instead, the Company receives commissions on food purchases that franchisees make from a specific vendor.
ADVERTISING COSTS The Company expenses advertising and promotion costs as incurred. Advertising and promotion costs for the years ended June 30, 1996, 1995 and 1994 were $2,181, $16 and $1,607, respectively.
INCOME TAXES Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statement and tax basis of assets and liabilities, as measured by the enacted tax rates which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or noncurrent, depending on the classification of the assets and liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. The principal type of temporary difference between assets and liabilities for financial statement and tax return purposes is net operating loss carryforwards.
PER SHARE DATA Per share data is based on the weighted average number of common shares outstanding during the periods.
NOTE B: FRANCHISE OPERATIONS
During fiscal year 1994, the Company opened four additional franchised units, which are located in Ohio (1), Arizona (1), which is part of a California master franchise agreement, and London, England (2). Three franchised units were closed during the year. These units were all located in London, England. As of June 30, 1994, a total of eighteen franchised units were open. Initial franchise fees relating to the four additional units opened during 1994 amounted to $10,663.
Also, during fiscal 1994, the Company negotiated new arrangements with its three Ohio franchisees which call for flat monthly fees aggregating $685 commencing in July 1994. In addition, due to the termination of the United Kingdom master franchisee, the five franchisees in the United Kingdom were offered the opportunity to continue as franchisees by signing agreements calling for fixed but escalating royalties. Three of the five have signed agreements providing for annual payments approximating $14,000.
During fiscal year 1995, four franchised units closed, leaving a total of fourteen remaining at June 30, 1995. One unit transferred ownership resulting in transfer franchise fee revenue of $2,500.
During fiscal year 1996, four franchise units closed, leaving a total of ten remaining at June 30, 1996. Two units transferred ownership resulting in transfer franchise fee revenue of $5,000.
-F-8-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
JUNE 30, 1996, 1995 AND 1994
NOTE C: INCOME TAXES
The Company has net operating loss carryforwards of approximately $650,000 that are available to offset future taxable income and expire at various dates through the year 2010.
A deferred tax asset as of June 30, 1996 and 1995 of approximately $140,000 relating to the aforementioned net operating loss carryforwards has been entirely offset by a valuation allowance of the same amount.
A reconciliation of income taxes for the year ended June 30, 1996 is as follows:
NOTE D: RELATED PARTY TRANSACTIONS
As of June 30, 1996, the Company has one franchise unit that is owned and operated by a related party. The franchise is owned by a major shareholder and officer of the Company, and does not pay franchise fees on their sales.
During the year ended June 30, 1996, the Company issued 10,000 shares of common stock to a director of the Company for services rendered. The stock was valued at $.01 per share based upon an independent appraisal.
During the years ended June 30, 1995 and 1994, the Company purchased pizza from franchises owned by related parties for resale to commercial/corporate customers. In each of the years ended June 30, 1995 and 1994, the entire cost of institutional food sales resulted from these purchases. There have been no institutional food sales since April 1, 1995.
NOTE E: COMMITMENTS
The Company had a lease agreement for office space with an unrelated party which expired November 30, 1995. Further, the Company had a lease agreement for restaurant space with an unrelated party which expired in fiscal 1995. These agreements were classified as operating leases.
Following is a summary of rental expenses under all operating leases:
-F-9-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
JUNE 30, 1996, 1995 AND 1994
NOTE F: SETTLEMENT OF CLAIM
During July 1992, a former franchisee filed a claim against the Company seeking a judgment against the Company to recover certain losses, as well as punitive damages. This matter was settled during fiscal year 1994 for an amount of $4,000.
NOTE G: SUPPLEMENTAL CASH FLOW INFORMATION
There were no cash payments for income taxes for the years ended June 30, 1996, 1995 and 1994. Interest paid in the years ended June 30, 1996, 1995 and 1994 was $0, $1,384 and $2,270, respectively.
NOTE H: SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company currently operates in generally three industry segments: franchising, restaurant equipment sales and institutional food sales.
Financial information by industry segment is as follows:
Only cash and office equipment assets cannot be identified with a particular segment. All other assets are identified with the franchising segment exclusively.
During fiscal 1995 and 1994, the Company had a customer from whom it derived more than 10% of its consolidated revenues. Sales to the customer represented 100% and 62% of the sales in the institutional food sales segment, or approximately 25% and 20% of consolidated revenues for fiscal 1995 and 1994, respectively.
-F-10-
CAPTAIN TONY'S PIZZA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
JUNE 30, 1996, 1995 AND 1994
NOTE I: OTHER MATTERS
In April 1995, the Board of Directors approved for submission to a vote of the shareholders at the Annual Meeting on June 5, 1995, the Purchase and Sale Agreements hereinafter described. On May 10, 1995, the Company executed a Stock Purchase and Sale Agreement which provided for the sale of 5,000,000 shares of the Company's authorized and unissued common stock to an unrelated party for cash consideration of $50,000. An Asset Purchase and Sale Agreement provided for the sale of substantially all operating assets of the Company, except cash and certain other assets and including, among other assets, all franchise contracts, to an officer/shareholder of the Company for consideration of $10,500, consisting of 1,050,000 shares of the Company's issued and outstanding common stock owned by the officer/shareholder. This Agreement also provided for the assumption of certain liabilities related to the operating assets sold. The Company had received an independent opinion of the fairness of the consideration to be paid for the operating assets.
Prior to the vote, the unrelated party exercised its right to cancel the Stock Purchase and Sale Agreement because of the threat of dissenting action by a single shareholder pursuant to certain provisions of the New York Business Corporation Law. The Asset Purchase and Sale Agreement was approved by shareholders and extended for six months to enable the Company to find a substitute party to agree to the same or similar terms contained in the cancelled Stock Purchase and Sale Agreement. No such party was found, and as of June 30, 1996 the Asset Purchase and Sale Agreement has expired.
NOTE J: SUBSEQUENT EVENT
On August 2, 1996, the Board of Directors of the Company approved the signing of letters of intent to acquire two privately-held corporations in a stock-for-stock exchange which would result in the shareholders of the acquired corporations owning initially approximately 95% and up to 98% of the Company's outstanding common stock. Final agreement on this proposed merger is subject to, among other things, satisfactory completion of due diligence reviews and the approval of shareholders.
-F-11-
CAPTAIN TONY'S PIZZA, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS