SB-2/A 1 0001.txt [DESCRIPTION] SB-2 Registration Statement, First Amendment UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 1ST AMENDMENT File No. 333-32260 UPTOWN RESTAURANT GROUP, INC. (Name of small business issuer in its charter) COLORADO 65-0835444 (State or jurisdiction (Primary Standard (I.R.S. Employer incorporation or Industrial Identification No.) Organization) Classification Code Number) 955 E. Javelina Ave., Ste. 114, Mesa, AZ 85204; (480) 503-3363 (Address and telephone number of principal executive offices) 955 E. Javelina Ave., Ste. 114, Mesa, AZ 85204 (Address of principal place of business or intended principal place of business) R. Michael Jackson, 165 S. Union Blvd., # 705, Lakewood, CO 80228; (303)969-0808 (Name, Address and Telephone Number of Agent for Service of Process) Approximate date of proposed sale to the public: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________________________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________________________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE Title of each Dollar Proposed Proposed class of amount to maximum maximum securities be offering aggregate Amount of to be registered price per offering registration registered Unit price fee No Par Value up to $0.75 $8,601,662 $2,270.84 Common Stock $8,601,662 (estimate) PART I - INFORMATION REQUIRED IN PROSPECTUS Uptown Restaurant Group, Inc. A Colorado corporation Up to 11,543,883 Shares of Common Stock No Par Value This is an offering of shares of common stock of Uptown Restaurant Group, Inc., from time to time by selling shareholders. Uptown will not receive any of the proceeds from the sale of the shares by the selling shareholders. Uptown's common stock is currently reported on the NASD's OTC Bulletin Board under the symbol "UTRG." The selling shareholders may use this prospectus to offer and sell their shares at the prices quoted for the common stock in the over-the-counter market. The selling shareholders may also attempt to sell their shares in isolated transactions, at negotiated prices, with institutional or other investors. To the extent required, Uptown will disclose in a prospectus supplement the names of any agent or broker-dealer, applicable commissions or discounts, and any other required information about any particular offer. The selling shareholders will pay commission expenses and brokerage fees, if any. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Investing in the common stock involves risk. Your should purchase shares only if you can afford a complete loss. See "Risk Factors" beginning on page __. Dated: __________, 2000 TABLE OF CONTENTS Page SUMMARY..................................................... Risk Factors................................................ Use of Proceeds............................................. Dilution.................................................... Selling Security Holders.................................... Plan of Distribution........................................ Legal Proceedings........................................... Directors and Executive Officers, Promoters and Control Persons.......................... Security Ownership of Certain Beneficial Owners and Management....................... Description of Securities................................... Commission Position on Indemification for Securities Act Liabilities......................... Description of Business..................................... Management's Discussion and Analysis or Plan of Operation................................... Certain Relationships and Related Transactions........................................... Market for Common Equity and Related Stockholder Matters.................................... Executive Compensation...................................... Legal Matters............................................... Experts..................................................... Where You Can Find More Information......................... Financial Statements........................................ You should rely on the information contained in this prospectus. Uptown has not authorized anyone to provide you with information different from that contained in this prospectus. The selling shareholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus may be accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Summary Shares Offered Under this Prospectus. This prospectus covers the resale of shares by the selling shareholders. Uptown will not receive any of the proceeds of the shares offered under this prospectus. We have filed the registration statement that includes this prospectus with the SEC to comply with our agreements with the selling shareholders. The selling shareholders have obtained or will obtain the shares of common stock offered for resale under this prospectus: * by exercising warrants we issued, * by exchanging shares of common stock of NYB Foods, Inc., for our common stock shares in a merger with one of our subsidiaries, * by exchanging a promissory note or other indebtedness owed by us for shares of our common stock, or * by exchanging assets previously owned by 1 Potato 2, Inc., a Minnesota corporation, for shares of our common stock in an asset purchase transaction with one of our subsidiaries. Use of Proceeds. Uptown will not receive any cash proceeds from the resale of common shares by the selling shareholders. Some of the selling shareholders, however, may exercise warrants in order to acquire the common shares to be sold under this prospectus for a maximum exercise price of $0.35 per share. If received, we will use the net proceeds of a maximum of $1,219,750 primarily for working capital, the payment of indebtedness, and general corporate purposes, including the opening of new franchised restaurants, and the evaluation of opportunities to acquire new restaurant concepts. We cannot assure you that any of our development and acquisition plans will be successful. The Offering. Estimated common stock offered by selling shareholders upon exercise of up to 6,970,000 shares of common stock upon exercise of common stock purchase warrants.................. 6,970,000 Common stock offered by previous owners of NYB Foods stock....... 3,500,000 Common stock offered by 1 Potato 2, Inc. and Robert Blessing.............................................. 400,000 Common stock offered by selling shareholders upon conversion of indebtedness for common shares..................... 673,883 Estimated common stock outstanding after the Offering............ 26,536,313 _________________ Uptown issued 3,485,000 common stock purchase warrants to investors and other persons who arranged the transaction and agreed that the number of shares of common stock underlying the warrants which the warrantholders can acquire may be increased under certain circumstances. Because of the potential increase in the number of share that may be issued, we agreed to include twice the number of shares underlying the warrants, or a total of 6,970,000 shares, in this prospectus in case the number they are able to acquire increases. Even though up to an additional 6,970,000 shares of common stock underlying the warrants are being registered, we may never issue them and, even if issued, the holders may never sell them under this prospectus. Dilution. The holders of common stock purchase warrants will be able to exercise those warrants and purchase up to 6,970,000 additional shares of our common stock. If these individuals exercise all their warrants and tender the exercise price of $.35 per share, we would receive $1,219,750 and issue up to an additional 6,970,000 shares of common stock. The holders of these warrants also have a cashless exercise option, providing that they may exercise some or all their warrants and be issued a number of shares of common stock for free if the average price of the common stock is more than the warrant exercise price of $.35 per share. Also, if the effectiveness of the registration statement is suspended after warrants are exercised, but before the underlying common stock shares are issued, we may have to issue additional shares to the warrant holders if the bid price of our common stock is greater before the suspension than after the suspension is lifted. Uptown may elect to pay dividends in shares of common stock, and our board of directors may decide to issue additional shares. Consequently, substantial dilution of the voting power of the current shareholders is likely over time as warrants are exercised and dividends are paid in common shares. Such actions are also likely to depress the market price of the common stock. In any of the above-mentioned instances, one who purchases our common stock shares offered by this prospectus will have his or her interest in Uptown diluted. Plan of Distribution. Uptown is registering the shares on behalf of the selling shareholders, each of whom may, from time to time, offer his or her shares of common stock for sale under this prospectus at the prices then prevailing on the OTC Bulletin Board or otherwise in the over-the-counter market. Each selling shareholder may sell the shares of common stock in isolated transactions, at negotiated prices, with institutional or other investors. We will bear the costs, expenses and fees of the registration of the shares offered by this prospectus. The selling shareholders will bear the brokerage commissions and similar selling expenses, if any, attributable to the sale of shares. Description of Securities. Uptown's authorized capital consists of 50,000,000 shares of common stock, no par value, and 10,000,000 shares of no par value preferred stock. All common shares have equal voting rights and are non-assessable. Common stock voting rights are non-cumulative, so the holders of more than 50% of our common stock could, if they chose to do so, elect all the directors. Currently, we have 19,566,313 outstanding shares of common stock and 1,000 outstanding shares of non-voting Series B Preferred stock. Risk Factors An investment in Uptown's common stock involves a high degree of risk, including those risks discussed below. You should carefully consider these risk factors along with all the other information contained in this prospectus before you decide to purchase shares of our common stock. If any of these risks actually occur, our business, financial condition and operating results could be adversely affected. If that happens, the trading price of our common stock could decline, and you could lose part or all of your investment. Risks Related to Uptown's Business and Operations Uptown has Experienced Losses for the Years 1997 and 1998, and Our Future Operating Results are Uncertain. For the fiscal year ended December 31, 1998, we had a net loss of $1,282,682. For the 1997 fiscal year, our net loss was $340,364. In the 1998 financial statements, our accountants stated that, since Uptown had experienced significant net losses since its inception, had been unable to generate positive cumulative cash flows from operations, and had a significant working capital deficiency, they had substantial doubt about our ability to continue as a going concern. In addition, in 1999 we closed all our Wrapsters restaurants. Our future financial results will depend on, among other things, our ability to generate a level of revenues sufficient to offset our cost structure and our ability to reduce our operating costs. We cannot assure you that we will significantly increase our revenues or become profitable. Uptown Needs Additional Capital to RePay Short-Term Debt of $350,000 and for Other Capital Needs. In addition to our other outstanding obligations, we owe a total of $130,000 to four shareholders, and are liable on real estate and equipment leases for an additonal $220,000. The shareholder loans mature in 2001 and require interest-only payments semi-annually at the rate of 10%. The leases are currently in default since our previous management closed all the Wrapsters restaurants that had been operated in those locations, and the equipment leases have not been paid since December of 1999. We currently do not generate sufficient proceeds to repay these loans or to settle the lease liabilities, but we are working to resolve these conditions. If we cannot reach a satisfactory settlement of any of these loans or leases, we may be forced to sell some or all of our assets, to relinquish control of Uptown, or to renegotiate terms of our outstanding obligations on terms less favorable to us. Any event of that nature is likely to have material adverse effects. In addition, we may continue to have substantial capital needs that cannot be funded completely from operations. As a result, we may be required to raise additional capital through equity or debt financing. Those sources of financing, if available, may include bank financing, third party equity investors, capital leases, private limited partnerships, joint venture financing and sale leaseback arrangements. None of our lenders is under any obligation to make additional advances to us, nor are they under any obligation to approve any financing arrangement that we may negotiate. Further, we have no source of additional financing other than the maximum $1,219,750 we may receive upon the exercise of the common stock purchase warrants on the date of this prospectus. Consequently, we cannot assure you that any additional financing will be available to us when needed, on commercially reasonable terms, or at all. If we cannot obtain additional financing, our business operations and financial results will suffer. Uptown Faces Risks in Acquiring Complementary Businesses. One component of our growth strategy is to evaluate the feasibility of acquiring complementary businesses. Any potential acquisitions will involve a number of risks that could materially and adversely affect us, including: * diverting our management's attention from operational and financial matters, * assimilating the operations, technologies, products, and personnel of the acquired companies, * risks of entering markets in which we have no or limited prior experience, and * the potential loss of key personnel of the acquired companies. Acquisitions could involve the potentially dilutive issuance of equity securities and/or the incurrence of debt, contingent liabilities, and/or amortization expenses related to goodwill and other intangible assets, any of which could materially adversely affect our operating results and/or market price of the common stock. Shareholders generally do not have rights to approve any acquisitions we make. Any acquisition we make may have a material adverse effect on our business, financial condition, and results of operations. Uptown's Future Revenues are Dependent upon the Profitable Operations of Our Two Subsidiaries. In 1999, all our company-owned Wrapsters restaurants were closed. Now, our only business consists of two subsidiaries, NYB Foods, Inc., and 1 Potato 2 Franchising Corporation, and therefore we are largely dependent for our future revenues on our ability to operate our subsidiaries profitably. As we are presently organized, the only revenues we will receive in the future is the amount, if any, of dividends either of our two subsidiaries declares and pays to us. We cannot assure you that we will be able to operate these subsidiaries in a profitable manner so that they will be able to declare and pay dividends to us. Uptown is Dependent on Current Management. Robert D. Palmer, Jr., is our chief executive officer and the remaining directors are all important to our operations. We are heavily dependent upon the expertise and experience of these officers and directors. If any of them were to resign, we cannot assure you that we would be able to replace them, and our inability to do so could materially adversely affect our business. This prospectus contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are identified by words like "expects," "intends," "believes," "anticipates," "estimates," "may," "could," "should," "would," "will," "plans," "hopes" and similar expressions. Our actual results could differ materially from those anticipated in these forward-looking statements due to certain factors, including those described in "Risk Factors" and in other places in this prospectus. Use of Proceeds We will not receive any proceeds from the sales by the selling shareholders of the shares of common stock sold pursuant to this prospectus. However, if the holders of the common stock purchase warrants exercise all of their outstanding warrants, we may receive up to a maximum of $1,219,750 upon their exercise at the maximum exercise price of $0.35 per share, and we will issue up to 6,970,000 shares to these shareholders. Since the warrantholders have an option to exercise their warrants in a cashless transaction, we cannot assure you that we will receive any of these funds. We intend to use the net proceeds from the exercise of the warrants, if any, to develop new franchisees, to evaluate opportunities to acquire new restaurant concepts, to pay certain indebtedness, and for working capital. Dilution Dilution - Stock Purchase Agreement. Two investors, the Kazi Family Partnership, L.P., and Dr. C.R. Joshi, each purchased 1,700,000 shares of common stock in September, 1999, and, as part of the purchase agreement, we consented to a "Reset" provision. According to this Reset agreement, we would have been obligated to issue more shares to these two investors if the average bid price for our common stock fell below one-half the bid price on the day the shares were purchased. The closing price of our common stock on September 22, 1999, the closing date for this transaction, was $.812 per share. If the average bid price had been equal to or greater than one- half the bid price on the purchase date, no new shares would have been issued. If the average bid price fell below $0.409, which is one-half the bid price on the purchase date, the following formula would determine the number of new shares to be issued: * The difference between $0.409 and the average bid price during either the first sixty trading days after the purchase, or during the sixty-first through the one-hundredth trading days, * multiplied by 1,700,000, * with the resulting product being divided by the average bid price during the applicable period. Individuals who previously owned the shares of common stock of NYB Foods, Inc., were granted the same reset rights for the 7,500,000 shares of our common stock they were issued in the merger between NYB Foods, Inc., and NYB Acquisitions Corp. The first reset period terminated December 17, 1999, and the second reset period terminated February 17, 2000. The bid price for our common stock did not fall below $0.409 during either of those periods. Therefore, Uptown was not obligated to issue shares under the terms of the rest agreements. Dilution - Warrant Purchase Agreement. Investors acquired warrants to purchase 3,485,000 shares of our common stock in September, 1999. In the Warrant Purchase Agreement, we agreed to issue additional shares of common stock under certain circumstances. If the investors exercise all or part of their warrants but, before the shares are issued, the effectiveness of our registration statement is suspended for a reason other than that we possess material non-public information, and the bid price immediately before the suspension is greater than the bid price on the day after the suspension is lifted, we will be obligated to issue more shares, according to the following formula: * The number of shares the investor was entitled to receive pursuant to his warrant exercise which were not otherwise freely-tradable, * multiplied by the product of: - the number of shares he was entitled to under the warrant exercise, - multiplied by the product of the bid price immediately before the exercise, divided by the bid price immediately after the suspension was lifted. The holders of these common stock purchase warrants also may exercise their warrants and receive underlying common stock shares for no cash payment. This "cashless" exercise option provides that the holders of the warrants may exercise their warrants and receive underlying shares of common stock for no cash price according to the following formula: The number of shares issued to the warrantholder equals the average closing bid price for five trading days immediately preceding the exercise minus the exercise price of $.35, divided by the five-day average closing bid price; all multiplied by the number of shares with respect to which the warrants are being exercised. As an example, if the average closing bid price for our common stock for a five-trading-day period is $.50, and all 3,485,000 warrants are exercised pursuant to the "cashless" exercise option, we would be obligated to issue 1,045,500 shares of common stock to the warrantholders for no cash price. We may also elect to pay dividends in shares of common stock, and the board of directors may decide to issue additional shares. Consequently, substantial dilution of the voting power of the current shareholders is likely over time if warrants are exercised, if the average bid price for our common stock falls below $0.409 per share for an extended period of time, or if dividends are paid in common shares. Such conditions are also likely to depress the market price of the common stock. Selling Security Holders All 11,543,883 shares of Uptown's no par value common stock being offered by this prospectus are being offered by the following individuals, who are security holders of Uptown: ________________________________________________________________________________ Position, Office Amount of Held or Relationship Securities Amount to Amount Name with Uptown Owned Before be Offered After Offering Offering ________________________________________________________________________________ Robert D. Palmer, Jr. President, CEO 5,188,776 2,414,989 2,773,787 Chairman of Board Common Common 10.45% L. Bennett Berg, Director; Area 1,224,490 579,217 645,273 Trustee FBO Development Agent Common Common 2.43% Berg Family Trust for Tucson, AZ Gary F. Palmer Employee & brother 765,306 356,193 409,113 of President Common Common 1.54% Mary Jo DiVito None 306,122 142,477 163,645 Common Common Hank Rabin Area Development 15,306 7,124 8,182 Agent, Reno, NV Common Common Clyde E. Culp, III Director 1,328,883 428,883 900,000 Common Common 3.39% David Metz None 125,000 125,000 0 Common Common Brand Resources, Inc. None 75,000 75,000 0 Common Common design kontractors, inc. None 45,000 45,000 0 Common Common 1 Potato 2, Inc. None 540,000 360,000 180,000 Common Common Robert Blessing None 60,000 40,000 20,000 Common Common Mohamed Ghaus None 3,144,000 up to 0 Khalisa warrants 6,288,000 Common on exercise of warrants DSF Capital, Inc. None 161,000 up to 0 warrants 322,000 Common on exercise of warrants Bicoastal Assocs. None 100,000 up to 0 Corp. warrants 200,000 Common on exercise of warrants Man Chu Chow None 30,000 up to 0 warrants 60,000 Common on exercise of warrants Pacific Basin LLC None 50,000 up to 0 warrants 100,000 Common on exercise of warrants ________________________________________________________________________________ Plan of Distribution Uptown is registering the shares on behalf of the selling shareholders, including donees and pledgees selling shares received from a named selling shareholder after the date of this prospectus. Upon our being notified by a selling shareholder that a donee or pledgee is selling shares of our common stock, we will file a supplement to this prospectus disclosing the names of such selling donees and pledgees. The holders of common stock purchase warrants, when and if they exercise their warrants, may, from time to time, offer the underlying shares of common stock for sale under this prospectus at the prices then prevailing on the OTC Bulletin Board, or otherwise in the over-the-counter market. Each selling shareholder also may sell his or her shares of common stock in isolated transactions, at negotiated prices, with institutional or other investors. The selling shareholders have not informed us that they have entered into any agreements, understandings or arrangements with any underwriters regarding the sale of their securities, nor is there an underwriter acting in connection with the proposed sale of shares by the selling shareholders. However, each selling shareholder has indicated that sales may be effected for each selling shareholder through his personal broker. If all common stock purchase warrants are exercised, up to 6,970,000 shares of common stock will be offered by this prospectus. We will bear the costs, expense and fees of the registration of the shares offered by this prospectus. The selling shareholders will bear brokerage commissions and similar selling expenses, if any, attributable to the sale of shares. The shares of the common stock offered by the selling shareholders may be sold under this prospectus by one or more of the following methods, without limitation: * a block trade on which the broker-dealer so engaged will attempt to sell the shares of the common stock as agent, but may position and resell a portion of the block as principal to facilitate the transaction, * purchases by the broker-dealer as principal and resale by that broker- dealer for its account under this prospectus, * ordinary brokerage transactions and transactions in which the broker solicits purchases, or * face-to-face transactions between the selling shareholder and purchasers without a broker-dealer. These transactions may be effected at market prices prevailing at the time of sale or at negotiated prices. In effecting sales, a broker-dealer engaged by the selling shareholder may arrange for other brokers or dealers to participate. These brokers or dealers may receive commissions or discounts from the selling shareholders in amounts to be negotiated immediately before sale. Brokers or dealers and any participating brokers or dealers acting as described in this paragraph may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act in connection with such sales. Upon our being notified by a selling shareholder that any material arrangement has been entered into with a broker-dealer for the sale of shares of the common stock through a block trade, special offering, exchange distribution or secondary distribution, or a purchase by a broker or dealer, we will file a supplement to the prospectus, if required, under Rule 424(c) under the Securities Act, disclosing: * the name of each broker-dealer, * the number of shares involved, * the price at which such shares were sold, * the commissions paid or discounts or concessions allowed to such broker- dealer(s), where applicable, * that such broker-dealer(s) did not conduct any investigation to verify the information set out in this prospectus, as supplemented, and * other facts material to the transaction. Some of the shares of common stock being offered by this prospectus may be sold under Rule 144 under the Securities Act. Each of the selling shareholders has advised us that, as his shares become eligible for sale under Rule 144, he may, as an alternative to use of this prospectus, sell his shares under Rule 144. Because the selling shareholders may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, we will advise them of the requirement under the Securities Act that each of them, or any broker-dealer acting for him, must deliver a copy of this prospectus for any sale by the selling shareholder of shares of the common stock covered by this prospectus. We will also undertake, if, in our future opinion, this prospectus no longer complies with Section 10(a)(3) of the Securities Act, to advise the selling shareholders of this opinion, to request that the selling shareholders stop using this prospectus, and to confirm our then intention to amend the registration statement containing this prospectus to effect that compliance. We will also advise each of the selling shareholders that, if it is determined that he is an "underwriter," the selling shareholder may be found liable for monetary damages to purchasers under Section 11, 12(2) and 15 of the Securities Act if there are any defects in the registration statement, such as material misstatements or omissions, and also may be found liable under Section 10(b) of the Exchange Act and Rule 10b-5 for such material misstatements or omissions, if any. We and our officers and directors, and the selling shareholders, are obligated to take all steps as may be necessary to ensure that the offer and sale by the selling shareholder of the common stock offered by this prospectus shall comply with the requirements of the federal securities laws, including Regulation M. In general, Regulation M prohibits any selling shareholder or a broker-dealer acting for such selling shareholder from, directly or indirectly, bidding for or purchasing any shares of the common stock or attempting to induce any person to bid for or to purchase shares of the common stock during a restricted period, as defined in Rule 100, which ends when he has completed his participation in the offering made under this prospectus. Rule 102 provides certain exceptions for the selling shareholder, including exercising a common stock purchase warrant. Legal Proceedings Other than what is listed below, there are currently no pending legal proceedings, either material or ordinary, routine litigation incidental to the business, to which Uptown or any of our subsidiaries is a party. Uptown is not a party to any proceedings instituted by a governmental authority, and none are known to be contemplated by government authorities. Real Estate Leases. We previously owned "Wrapsters" restaurants which were located in the Abernathy Square shopping center in Atlanta, Georgia, and the Greenbrier shopping center in Virginia. Prior management closed the restaurants, and the landlords are requesting payment under the leases. Although legal proceedings have been commenced, and we believe reasonable and favorable settlements can be reached, we nevertheless face the potential of having judgments entered against us in excess of $175,000.00, representing the rent payments due under the remainder of the leases. Equipment Leases. Prior management signed five year leases for computerized cash register equipment for four Wrapsters restaurants. Since those restaurants were closed, the equipment is not currently being used, and no payments have been made on the leases since December, 1999. The lessor has declared a default under the leases and demanded payment in full of the remaining lease payments, in an amount in excess of $30,000.00. Although legal proceedings have been commenced, and we believe a reasonable and favorable settlement can be reached, we nevertheless face the potential of having a judgment entered against us in excess of $30,000.00, representing the payments due under the remainder of the leases. Claim Against Ex-President. Uptown's Board of Directors has authorized pursuing a claim through appropriate legal channels against our ex-president, Thomas E. Metzger. We will request an accounting or, in the alternative, damages from Mr. Metzger for transactions which occurred during his tenure in office, as follows: Mar. Metzger made cash withdrawals for which he has not produced exepnse reports, and tenant improvements and restaurant equipment were disposed of in connection with the closing of Wrapsters restaurants, but have not been documented. The claims are currently being reviewed by litigation counsel for filing in court. Directors and Executive Officers, Promoters and Control Persons Uptown's directors hold office until the next annual meeting of shareholders or until their successors have been elected and shall have been qualified. Uptown's officers are elected by the Board of Directors at its annual meeting after each annual meeting of shareholders and hold office until their next successors are elected and qualified or until their death, resignation or removal from office. There are no arrangements or understandings between any of Uptown's directors or executive officers and any other person pursuant to which such person is to be elected or selected as a director or officer other than the following: Robert D. Palmer, Jr., Clyde Culp, III and William Gallagher have entered into an agreement to vote their the shares of Uptown's common stock they own for the election of a Board of Directors consisting of Mr. Palmer, Mr. Culp, two candidates nominated by Mr. Palmer, and one candidate nominated by Mr. Culp for a period of three years. Uptown's officers and directors are set forth below. Officers serve at the pleasure of the Board of Directors. Directors serve until the next annual meeting of shareholders, expected to be held in December of 2000. ________________________________________________________________________________ Officer or Name and Address Age Office Director Since ________________________________________________________________________________ Robert D. Palmer, Jr. 60 President October, 1999 955 E. Javelina Ave., #114 CEO Mesa, AZ 85204 Chairman Clyde E. Culp, III 56 Director February, 1998 1907 Hidden Point Road Annapolis, MD 21401 L. Bennett Berg 67 Director December, 1999 4625 E. Broadway, # 117 Tucson, AZ 85711 Harold Kestenbaum 50 Director December, 1999 585 Stewart Avenue Secretary Garden City, NY 11530 William G. Norton 59 Director December, 1999 7000 Bass Lake Road, #200 Minneapolis, MN 55428 ________________________________________________________________________________ Robert D. Palmer, Jr., age 60, has been President and Chairman of the Board of Directors of NYB Foods, Inc., since the merger between NYB Acquisitions Corp., one of our wholly-owned subsidiaries, and NYB Foods, Inc. Mr. Palmer's term is until the next annual meeting of shareholders, to be held in December of 2000. Mr. Palmer served as President, Treasurer and Director of the previous NYB Foods, Inc., since its inception in 1996. In the past, Mr. Palmer has been an active advisor and consultant to franchisors. His experience is as follows: ATL International, Inc. (automotive franchises), January through September, 1995; Re-Bath Franchising Corp. (plastics manufacturing), Director of Franchising, April of 1991 through June of 1992; Mr. Palmer was President, Founder and Director of Franchising for USA Fast Lube Systems, Inc., from 1983 through October of 1988; and from 1978 until January of 1984, he was Founder, President and Director of Franchising for Grease Monkey International, Inc., and Grease Monkey Holding Corporation. Between 1984 and 1996, Mr. Palmer also served as independent consultant to the following franchising clients: Spinato's Pizza International, Inc. (pizza restaurants); Surface Renew-All, Inc., Chicago, IL (specialty coatings); The Packaging Store, Inc. (Quik Ship, Inc. division); Taco Rancho, U.S.A. (Mexican fast food); Packaging Plus Services, Inc. (packaging stores); Auto Spa Corporation (automotive franchisor); Shipping Connection, Inc. (packaging stores); Homewatch International, Inc. (home care services). Mr. Palmer attended the University of Colorado. L. Bennett Berg, age 67, is a Director. Mr. Berg's term is until the next annual meeting of shareholders, to be held in December of 2000. Mr. Berg has been the owner and operator of Western Lease Analysis, LLC, an Arizona limited liability company, since 1994, which is in the business of consulting with tenants concerning commercial leases. Since 1988, Mr. Berg has been the owner and operator of Berg Financial, LLC, an Arizona limited liability company, which provides consultation services to bankruptcy trustees and advises clients on loan "workout" arrangements. Mr. Berg is the New York Burrito Area Development Agent for Tucson, Arizona. William G. Norton, age 59, is one of our Directors. Mr. Norton's term is until the next annual meeting of shareholders, to be held in December of 2000. Mr. Norton earned a B.S. degree in Business and English from Northern Michigan University, and an M.B.A. degree from the Wharton Graduate School of Business, University of Pennsylvania. Mr. Norton is currently the president of "Foodmark," a national company specializing in providing strategic planning, marketing, communications and new product development consulting for the retail food and restaurant and food service industries. Foodmark's clients include ConAgra, General Mills, Nestle, Coca Cola, Land-O-Lakes, Malt-O-Meal, and Multifoods. Until we recently purchased substantially all its assets, Mr. Norton served as President, CEO, and a Director of 1 Potato 2, Inc., a national franchise chain which specialized in potato-based foods located primarily in foods courts in upscale shopping malls. Mr. Norton has also served on the Board of Directors for Source Food Technology, Inc., as Director of New Products for the Betty Crocker Division of General Mills, Inc., as Senior Vice President and Director of the Telesis Group New Product Workshop for Bozell & Jacobs, and as the President and CEO of Mrs. Clark's Foods, Inc., where he spearheaded the growth of the company's diversified private label food manufacturing. Mr. Norton received the American Marketing Association's "Edison Gold Award" for the best new product of 1998, and is listed in "Who's Who in American Business." Clyde E. Culp, III, age 56, has served on our Board of Directors since February of 1998. Mr. Culp's term is until the next annual meeting of shareholders, to be held in December of 2000. Mr. Culp was Chairman of Wrapsters, L.C., a Florida limited liability company, from its inception until February 28, 1998. From 1995 to 1996, Mr. Culp acted as an investor, developer, and consultant, and served on several boards of directors within the restaurant industry. From 1993 through 1995, Mr. Culp served as President of the "Long John Silver's" restaurant chain, Lexington, Kentucky. From 1990 through 1993, he served as President of "Embassy Suites Hotel" chain, Dallas, Texas. In addition to serving as one of our Directors, Mr. Culp also is the Chairman and Managing Member of Bakery Resources Group, LLC, a bakery in Baltimore, Maryland, Chairman of the Board of Directors of Tanners Group, Inc., Alpharetta, Georgia, and a Director of El Chico/Spaghetti Warehouse, Inc., Dallas, Texas. Mr. Culp earned a B.A. degree in Business from William & Mary College, and an M.B.A. degree in marketing and finance from New York University. Harold L. Kestenbaum, age 50, is our Secretary and one of our Directors. Mr. Kestenbaum's term is until the next annual meeting of shareholders, to be held in December of 2000. Mr. Kestenbaum is an attorney admitted to practice law in the State of New York and is our franchise attorney. He received a Bachelor of Arts degree in Sociology from Queens College, New York, and earned his Juris Doctorate degree from the University of Richmond School of Law, Richmond, Virginia. Mr. Kestenbaum was admitted to the New Jersey State Bar Association in 1975, and the New York Bar State Association in 1976. Since 1977, Mr. Kestenbaum has concentrated his law practice in the field of franchise law and, since 1990, has owned and operated his own law firm in Garden City, New York. From May, 1982, until September, 1986, Mr. Kestenbaum served as franchise and general counsel to Sbarro, Inc., a national franchisor of over 900 family-style Italian Restaurants and, since March of 1985, has been a director of Sbarro, whose securities were listed on the New York Stock Exchange. In addition, Mr. Kestenbaum currently sits on the board of directors of Global Travel Network. From September, 1983, to October, 1989, Mr. Kestenbaum served as President and Chairman of the Board of Directors of FranchiseIt Corporation, the first publicly-traded company specializing in providing franchise marketing and consulting services and equity financing to emerging franchise companies, which he co-founded. In addition to the above, Mr. Kestenbaum has been franchise counsel to over sixty regional, national or international franchise companies. Mr. Kestenbaum is a member of the American Bar Association's Corporation Banking and Business Law Section, a founding member of the New York State Bar Association's Franchise Law Section, serving the latter as Chairman for its Education and Seminar Subcommittee, as well as serving as a mediator for the Franchise Arbitration and Mediation Company. Security Ownership of Certain Beneficial Owners And Management The following table sets forth information concerning Uptown's securities owned of record and beneficially as of the date of this Offering Circular by each person known to Uptown to own of record or beneficially 5% or more of any class of our voting securities, by each of Uptown's Officers and Directors, and all officers and directors as a group. All shareholders listed below have sole voting and investment power with respect to their shares. ________________________________________________________________________________ Title of Name and Address of Amount and Nature of Percent of Selling Class Beneficial Owner Beneficial Ownership Class Shareholder ________________________________________________________________________________ Common Robert & Karene Palmer 5,188,776 26.52% Yes 955 E. Javelina Ave., #114 Mesa, AZ 85204 Common Berg Family Trust 1,224,490 6.26% Yes L. Bennett Berg, Trustee 4625 E. Broadway, # 117 Tucson, AZ 85711 Common Dr. C.R. Joshi 1,700,000 8.69% No 1350 Los Angeles Avenue Simi Valley, CA 93065 Common Kazi Family Partnership 1,700,000 8.69% No 13724 Sherman Way Van Nuys, CA 91405 Common Clyde E. Culp, III 1,328,883 6.79% Yes 1907 Hidden Point Road Annapolis, MD 21401 Common All Officers and 7,742,149 39.57% Directors as a Group (5 in number) ________________________________________________________________________________ L. Bennett Berg is one of Uptown's Directors and the Trustee of the Berg Family Trust, the owner of the shares. Mr. Berg is also one of the beneficiaries of the trust. Description of Securities Uptown's authorized capital stock consists of 50,000,000 shares of no par value common stock. All shares have equal voting rights and are non-assessable. Voting rights are not cumulative and, therefore, the holders of more than 50% of our common stock could, if they chose to do so, elect all the directors. Assuming sale of all the shares of common stock by the selling shareholders offered by this prospectus, the present shareholders will own, if the maximum 11,543,883 shares offered by this prospectus are sold, 56.50% of our outstanding Common Stock, and, therefore, will be able to elect all directors and control Uptown. Upon liquidation, dissolution or winding up of Uptown, our assets, after satisfaction of all liabilities, will be distributed pro rata to the holders of the Common Stock. The holders of the Common Stock do not have preemptive rights to subscribe for any of our securities and have no right to require Uptown to redeem or purchase their shares. The Shares of Common Stock presently outstanding are, and the Shares of Common Stock to be sold pursuant to this Offering will be, fully paid and non-assessable. Holders of Common Stock are entitled to dividends when, and if, declared by Uptown's Board of Directors out of funds legally available for that purpose. Uptown has not paid any cash dividends on its Common Stock to date. No assurance can be given that funds will be available to us in the future out of which dividends can be paid, or that Uptown will declare such dividends. Uptown has authorized 10,000,000 shares of no par value Preferred Stock. Currently, 1,000 shares of Series B Preferred Stock are issued and outstanding. We may issue Preferred Stock in one or more series at the discretion of the Board of Directors. In establishing a series, the Board of Directors is to give it a distinctive designation so as to distinguish it from the shares of all other series and classes, fix the number of shares in the series, and fix its preferences, rights and restrictions. All shares of any one series shall be alike in every particular unless otherwise provided in the articles of incorporation or Colorado statutes. Series B Preferred Stock. Uptown issued 113,500 shares of non-voting Series B Redeemable Convertible Preferred Stock, all but 1,000 of which shares have been converted into three shares of our common stock for each share of Series B Preferred. 112,500 previously-issued Series B Preferred shares have been exchanged for 337,500 shares of currently-outstanding common stock. Each of the 1,000 outstanding shares of Series B Preferred stock has a face value of ten dollars, with cumulative dividends payable at the rate of ten percent annually, payable semi- annually in cash or additional Series B shares, at our option. No dividends are payable on any other securities which are junior to the Series B shares, including our common stock, unless all accrued dividends have been paid to the holders of Series B shares. As of December 31, 1999, accrued but unpaid dividends on these preferred shares equaled $103,677. Uptown may, at any time, redeem the Series B shares for their face value of ten dollars per share, plus any accrued but unpaid dividends. In the event of the liquidation, dissolution or winding up of Uptown, Series B shareholders are entitled to be paid $10.00 per share, plus any accrued but unpaid dividends, out of our assets before any payment may be made to holders of our common stock, or any other securities junior to Series B Preferred shares. Series B Preferred shareholders may convert their Series B shares to shares of Uptown's preferred stock which are or become publicly traded shares. Currently, we have no preferred shares that are publicly traded. Warrants. On September 22, 1999, we issued 3,485,000 common stock purchase warrants to investors and others for $200,000.00. Each warrant entitles its holder to purchase one share of our common stock at the exercise price of $.35 for a period of five years, commencing September 22, 1999 and ending September 21, 2004. The warrantholders may exercise some or all their warrants and receive shares of our common stock without paying the exercise price under certain circumstances. Also, we may be required to issue more than one share of common stock per warrant if the effectiveness of our registration statement is suspended after a warrantholder exercises warrants, but before the shares are issued, and the price of our stock falls. We may force the exercise of the warrants if the closing bid for our common stock is $4.00 or greater for sixty consecutive trading days, or if we close on a secondary securities offering at a per-share offering price greater than $4.00. In either case, we must give written notice to the warrantholders and they will have 90 days to exercise their warrants. Any warrants which have not been exercised will be cancelled on the 91st day after the notice. We have undertaken to keep our registration statement current during the term of the warrants plus an additional 6 months after their term expires. Prior to exercise, the warrants do not entitle their holders to any voting rights, or any other rights as a shareholder of Uptown. The warrants contain anti-dilution provisions so as to avoid dilution of the equity interest represented by the underlying common stock upon the occurrence of certain events, such as share dividends or splits, mergers, or sale of assets. In the event of liquidation, dissolution or winding up of Uptown, holders of the warrants will not be entitled to participate in the distribution of assets. Holders of our warrants have no voting, preemptive, liquidiation or other rights of a shareholder, and no dividends will be declared on the warrants. Shares Eligible for Future Sale. 15,333,313 of our 19,566,313 currently-outstanding Shares of Common Stock are "restricted securities" and, under certain circumstances, may in the future be sold in compliance with Rule 144, adopted under the Securities Act of 1933, as amended. Future sales of our Common Stock could depress the market price for such Common Stock. Additional Sales of Shares of Common Stock are Likely to Cause the Market Price of Our Common Stock to Decline. Currently, 19,566,313 shares of our common stock are outstanding. The number of shares of common stock potentially issuable under our warrants is 3,485,000, or more if a provision of the Warrant Purchase Agreement is activated. The sale, or availability for sale, of substantial amounts of shares of common stock could materially adversely affect the market price of the common stock and could impair our ability to raise additional capital by selling equity securities. This number will increase if the trading price of the common stock declines further. The Market Price of Our Common Stock is Extremely Volatile. Trading volume and prices for the common stock have fluctuated widely since it first became publicly-traded. During the month of December, 1999, for example, the closing sales price of the common stock ranged from $.625 to $.937 per share. In addition, since our common stock began trading in January of 1999, the bid price for our common stock has reached a high of $2.625 per share in January of 1999, and a low of $0.4375 per share in April of 1999. These severe fluctuations may continue in response to quarterly variations in operating results, announced earnings, and other factors. We cannot always predict or foresee those events. The market price of the common stock could also be influenced by developments or matters not related to us, including the sale or attempted sale of a large amount of the common stock on the open market by a shareholder. Because of this volatility, your investment in us may result in a complete loss. Because Our Common Stock is Listed on the OTC Bulletin Board, its Liquidity may be Impaired. Trading in our common stock is conducted in the over-the-counter market and reported on the NASD's OTC Bulletin Board. Consequently, selling our shares may be more difficult because smaller quantities of shares may be bought and sold, transactions may be delayed, and the news media's coverage of us may be reduced. These factors could result in lower prices and larger spreads in the bid and asked prices for our shares. Further, securities analysts are unlikely to cover our stock, and institutional investors are unlikely to purchase our stock. We cannot assure you that we will ever be able to list our stock on the Nasdaq Small Cap Market, or any other market. "Penny Stock" Regulations may Impair the Liquidity of Our Common Stock. Because the bid price of our common stock is below $5.00 per share, shares of common stock may be subject to the SEC's Rule 15g-9 and other penny stock regulations under the Securities Exchange Act of 1934. Rule 15g-9 imposes sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the prospective purchaser and have received the purchaser's written consent to the transaction before the sale. Consequently, this rule and other "penny stock" regulations may adversely affect the ability of broker-dealers to sell our shares and may adversely affect the ability of holders to sell their shares of common stock in the secondary market. Uptown may Issue Additional Shares of Common Stock and Preferred Stock Without Shareholder Approval. Our board of directors may authorize us to issue one or more series of preferred stock or additional shares of common stock without shareholder approval, and the existence or terms of these securities may adversely affect the rights of holders of the common stock. In addition, the issuance of any additional shares of preferred or common stock may be used as an "anti-takeover" device without shareholder approval. Issuance of additional preferred stock or common stock, which may be accomplished through a public offering or a private placement to parties favorable to current management, may dilute the voting power of holders of common stock and may make it harder to remove current management, even if removal might be in the shareholders' best interests. Uptown Does not Intend to Pay Dividends on the Common Stock. We do not currently pay any dividends on the common stock and do not intend to pay dividends on the common stock in the foreseeable future. If we were to declare dividends on our common shares, we would be required to first pay accumulated but unpaid dividends of $103,677 to the holders of Series B Preferred shares. Commission Position on Indemnification For Securities Act Liabilities Our Articles of Incorporation indemnify, to the maximum extent permitted by law, any person who is or was a director, officer, agent, fiduciary or employee against any claim, liability or expense arising against or incurred by such person made party to a proceeding because he is or was a director, officer, agent, fiduciary or employee for us, or because he is or was serving another entity or employee benefit plan as a director, officer, partner, trustee, employee, fiduciary or agent at our request. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to Uptown's directors, officers and controlling persons pursuant to the foregoing provision, or otherwise, Uptown has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. Description of Business We were incorporated in the State of Colorado on February 23, 1996 as HAI Enterprises, Inc., and 976,200 shares of our no par value common stock were issued to founders and initial investors. On February 19, 1998, HAI Enterprises entered into a Plan of Merger with Wrapsters, L.C., a Florida limited liability company. In connection with the merger, the initial shareholders' shares were reverse-split 2-for-5, resulting in 390,480 then-outstanding common shares, and an additional 3,800,000 shares were issued to the owners of Wrapsters as follows: 1,900,00 shares to Clyde E. Culp, III, and 1,900,000 shares to Thomas E. Metzger. At the same time, 3,800,000 shares of common stock and 113,500 shares of Series B Preferred stock were issued to Santa Cruz Squeeze, Inc., a Texas corporation, in exchange for an investment of $1,000,000.00. The surviving corporation of the merger was HAI Enterprises, Inc., which changed its name to Wrapsters, Inc. Thus, at the completion of this merger, we had 7,990,480 shares of common stock, and 113,500 shares of Series B Preferred stock outstanding. Wrapsters, Inc., was in the business of developing, operating and selling franchises for fast food restaurants offering a variety of tortilla-wrapped sandwiches and meals. We operated as Wrapsters, Inc., for approximately eighteen months, meeting with limited success with our restaurants. In addition to selling and operating franchise restaurants, Wrapsters sought to acquire or merge with other franchise companies. In August of 1999, Wrapsters negotiated to acquire NYB Foods, Inc., a Colorado corporation, by means of a merger between one of Wrapsters' wholly- owned subsidiaries and NYB Foods, Inc. Wrapsters formed NYB Acquisitions Corp., a Colorado corporation, for the purpose of merging with NYB Foods, Inc., and became the surviving corporation. In connection with the merger, the shareholders of NYB Foods, Inc., exchanged all their shares for 7,500,000 shares of Wrapsters' common stock and $500,000.00. NYB Foods was merged into NYB Acquisitions Corp. After the merger was approved, we used another wholly-owned Colorado corporation, Wrapsters Acquisitions Corp., to acquire the existing franchisees, trademarks, and other assets, including two previously company-owned restaurants, from 1 Potato 2, Inc., a Minnesota corporation. The consideration given for these assets consisted of a promissory note from the subsidiary in the amount of $400,000.00, payable semi-annually over a five year term bearing interest at 7.5% per annum, and 600,000 share of our common stock. On December 15, 1999, our shareholders gave approval to change our name to Uptown Restaurant Group, Inc., and to increase the number of shares of common stock we are authorized to issue from 25,000,000 to 50,000,000. Also, we changed the name of NYB Acquisitions Corp. to NYB Foods, Inc., and we changed the name of Wrapsters Acquisitions Corp. to 1 Potato 2 Franchising Corporation. New York Burrito. NYB Foods, Inc., which is the surviving corporation of the merger into our wholly-owned subsidiary, offers to individuals, pursuant to a franchise agreement, the right to establish and operate, from a single location, a limited-cooking New York Burrito Gourmet Wraps specialty restaurant. Each wrap, or burrito, is made to order in full view for each customer. Operation of the restaurant requires limited on-location cooking, as the bulk of the foods utilized are centrally prepared and delivered to the restaurants through normal commercial food distribution companies. Most major ingredients necessary for the preparation of the food items are pre-cooked and quick-frozen, utilizing quick- chill cooking and packaging techniques by various manufacturers. Other items, including cheeses, greens and other condiments, are also pre-prepared and packaged for use in the New York Burrito locations. Its menu consists mainly of flavored tortillas filled with vegetarian-style pinto or black beans and rice, along with spiced meats, such as steak, chicken, barbeque, deli, cajun or teriyaki. An optional breakfast menu may also be served, which features breakfast burritos, other breakfast items, juice and coffee. NYB markets its franchises by means of advertising, trade shows and Area Development Agents. A Development Agent contract grants a Territory to an individual, giving him the exclusive right to sell New York Burrito franchises. The Development Agent agreement provides compensation, consisting of a portion of the initial franchise fees and a percentage of the on-going royalties, but requires certain levels of success, namely the selling and opening of an agreed- upon number of franchises within set time limits. The initial franchise fee for a New York Burrito restaurant is $15,000.00, and a reduced rate of $10,000.00 is offered to certain existing franchisees for additional franchises. A franchisee pays 7% of gross sales to NYB as a royalty, and 4% of gross sales for cooperative advertising. Franchisees are required to operate their restaurants in accordance with standards and procedures established by NYB, including those contained in the New York Burrito Operations Manual, prepared and distributed to franchisees. In addition, franchisees are granted the right to operate their businesses under the New York Burrito name with a "cactus skyline" trademark. NYB maintains a full-time training center at its corporate headquarters in Mesa, Arizona, and provides in-store training activities at its company-owned operating New York Burrito restaurant in Chandler, Arizona, which is contiguous to NYB's headquarters. NYB's primary business is the sale of franchises, rather than the operation of company-owned restaurants. New York Burrito restaurants generally operate from a retail location, such as a strip-type shopping center, shopping mall food court, or a free-standing location. Typical restaurant size varies from 750 to 2,000 square feet. A franchisee's initial investment to "build out" a store location and open for business, is estimated to range from $58,700.00 to $101,950.00, which amounts include the initial franchise fee. New York Burrito franchises must compete with other full-service and carry- out restaurants and other outlets specializing in burritos (wraps) or Mexican food, some of which are national or regional chains, or which may be more established. New York Burrito franchises will, to some extent, also have to compete with restaurants and food outlets offering other types of food products. Established in 1995, NYB currently owns one restaurant in Chandler, Arizona, and has fifty four New York Burrito franchise restaurants open in twenty three states and Puerto Rico. In addition, fifteen franchise restaurants are currently in development. In an unrelated transaction, on March 17, 1999, NYB sold the California franchise rights and entered into a License Agreement for the State of California with NYB West, Inc., a California company, which was the former Sub-Franchisor for California. NYB West, Inc., is now the franchisor of the ten New York Burrito franchise restaurants in California. NYB leases corporate offices at 955 East Javelina Avenue, Suite 114, Mesa, Arizona 85204, consisting of 8,223 square feet of office space, and general office furniture, supplies and equipment. The lease runs for five years, commencing February 1, 2000, and the base rent is $5,427 monthly, plus taxes and common area maintenance charges. Our company-owned New York Burrito restaurant, in Chandler, Arizona, is located at 1100 North Alma School Road, #5, Chandler, Arizona 85224, in leased space of 1,300 square feet, for $1,950 per month. The restaurant furniture and kitchen equipment, fixtures and leasehold improvements are currently valued at $8,892. The restaurant produces revenues for NYB, is used as a sales tool for prospective franchisees to visit, and for training of new franchisees. In addition to its company-owned restaurant and franchised restaurants, NYB owns its trademark, consisting of the New York Burrito name with a cactus skyline, which is registered with the United States Commissioner of Patents and Trademarks on the Principal Register, Reg. No. 1,993,286, August 13, 1996, with first use November 1, 1991, its UFOC, Franchise Agreements, and Area Development Agent agreements. NYB can be contacted at (480)503-3363 or (800)711-4036}, and its website can be found at www.newyorkburrito.com. 1 Potato 2. On November 11, 1999, one of our wholly-owned subsidiaries, Wrapsters Acquisitions Corp., acquired substantially all the assets from 1 Potato 2, Inc., a Minnesota corporation, explained above. Our subsidiary, 1 Potato 2 Franchising Corporation, operates and sells franchises for the operation of 1 Potato 2 fast food restaurants specializing in baked potatoes and other types of potato dishes. 1 Potato 2 restaurants are typically located in shopping mall food courts. 1 Potato 2 opened its first restaurant in 1978 and expanded the number of its company-owned restaurants until it began offering franchises in 1984. In 1986, concurrent with its acquisition by Bankers Restaurants, Inc., 1 Potato 2 began development of a more contemporary potato menu, including a number of proprietary items such as "lite" potato offerings, potato skins, potato soup, gourmet wraps and smoothies. Through 1991, 1 Potato 2 continued to open company-owned stores at the same time it sold franchises, when it was decided that, due to the relatively small size of a 1 Potato 2 unit, franchisee-operated stores were preferable. Thereafter, until 1995, 1 Potato 2 continued to sell its company-owned stores to franchisees. In March of 1995, 1 Potato 2 filed a Chapter 11 reorganization case in Bankruptcy Court in order to cancel unfavorable store leases and concentrate on selling franchises. The Plan of Reorganization was confirmed within 115 days. 1 Potato 2 restaurants have typically been located in food courts in regional shopping malls and downtown centers. Food courts are located in the center or courtyard of shopping malls or city center shopping areas and feature large capacity common seating surrounded by quick-service, convenience restaurants. In the future, the Company expects new franchised restaurants will be a combination of food courts and non-traditional locations, including high- traffic strip centers, airports and downtown locations. Marketing efforts have been minimal in the recent past, but we intend to market 1 Potato 2 franchises in much the same manner as New York Burrito franchises, by means of advertising, trade shows and Area Development Agents. The initial franchise fee for a 1 Potato 2 restaurant is $15,000.00 for the first location, and $10,000.00 for each additional location purchased by an existing franchisee. A franchisee will pay 6% of gross sales to the franchisor as a royalty, and 2% of gross sales for co-cooperative advertising. The two company-owned 1 Potato 2 restaurants are located in the Minneapolis/St. Paul area, at the Mall of America food court, and Ridgedale, Minnesota. The Mall of America store is 614 square feet for a base rent of $75,000 per year, and the Ridgedale Mall store is 737 square feet for a base rent of $25,757 per year. The restaurant furniture and kitchen equipment, fixtures and leasehold improvements for the two restaurants are currently valued at $63,800. The restaurants produces revenues for 1 Potato 2 Franchising, are used as sales tools for prospective franchisees to visit, and for training of new franchisees. In addition to its two company-owned and twenty-seven franchised restaurants, 1 Potato 2 Franchising owns its "1 Potato 2" trademark, its UFOC, and Franchise Agreements. 1 Potato 2 Franchising's corporate headquarters are now located in the same office with NYB, at 955 East Javelina Avenue, Suite 114, Mesa, Arizona 85204, telephone number (480)503-3363 or (800)711-4036, and its website can be found at www.1potato2.com. Future Additional Brands. In addition to expanding the number of franchise operations of New York Burrito and 1 Potato 2, Uptown will be seeking mergers with or acquisitions of other franchise operations. While Uptown and its officers and directors are seeking desirable merger or acquisition candidates, none have yet been identified and no negotiations are currently being pursued. Competition. Competition in the restaurant and fast food franchising industry is intense. New York Burrito and 1 Potato 2 restaurants compete with low-priced, casual dining and take-out restaurants primarily on the basis of quality, atmosphere, location and value. New York Burrito's and 1 Potato 2's takeout/ takehome business competes not only with full service restaurants, but also with take-out food service companies, fast-food restaurants, delicatessens, cafeteria-style buffets, prepared food stores, supermarkets and convenience stores. New York Burrito and 1 Potato 2 also compete with other restaurants and retail establishments for quality sites and franchisees. Many of our competitors are well established and have substantially greater financial, marketing and other resources than we do. Regional and national restaurant companies such as Taco Bell, Chipotle, Z-Teca and Taco John's have expanded their operations in our current and anticipated market areas. This competition could adversely affect our operating results. Competition in the food service business is often affected by: * changes in consumer tastes, preferences, and eating habits * national, regional, and local economic and real estate conditions, * demographic trends and traffic patterns, * increases in food and labor costs and availability, * the type, number and location of competing restaurants, * availability of product and local competitive factors, locale, and * the ability of our franchisees to operate a profitable business. Inflation, food costs, and other similar factors may also affect the restaurant industry. Some or all of these factors could adversely affect us and our future franchisees. Government Regulation. A variety of federal, state and local laws apply to us and our restaurant franchising businesses. Each of our restaurants, and those of our franchisees, is subject to permitting, licensing, and regulation by a number of governmental authorities, including zoning, health, safety, sanitation, building, and fire agencies in the state or municipality in which the restaurant is located. These restaurants must comply with federal, state and local government regulations applicable to the consumer food service business, including those relating to the preparation and sale of food, minimum wage requirements, overtime, unemployment and sales taxes, working and safety conditions, mandated health insurance coverage and citizenship requirements. Significant numbers of the service, food preparation and other personnel employed in our, and our franchisees', restaurants are compensated at rates related to the federal minimum wage, and increases in the minimum wage could increase our, and our franchisees', labor costs. Difficulties in obtaining or failure to obtain required licenses or approvals could delay or prevent the development of new restaurants and franchisees in a particular area. Americans with Disabilities Act. The federal Americans with Disabilities Act requires that places of public accommodation meet certain requirements related to access and use by persons with disabilities. We design our restaurants, and those of our franchisees, to be accessible to persons with disabilities and believe that we are in substantial compliance with all current applicable regulations relating to restaurant accommodation for persons with disabilities. Federal and State Franchise Law Compliance. Before a franchise can be sold, we must, through our subsidiaries, prepare a Uniform Franchise Offering Circular in accordance with regulations promulgated by the Federal Trade Commission of the U.S. Government, describing material aspects of the franchise offered, estimated costs of opening and operating the business, a description of the type of business offered, disclosure of information regarding the officers and key employees of the franchisor, and generally making full and fair disclosure of all material aspects of the franchise being offered and the company offering it. This UFOC must be updated continually as any aspect of the business changes, and requires time and effort of management, as well as attorney's fees. In addition, many of the states in which Uptown now has franchise operations, and in which we intend to offer franchises in the future, require that a franchisor submit itself and its franchise offering to a registration process prior to offering its franchises for sale in the state. Failure to comply with these requirements can result in a franchisor being permanently prohibited from offering franchises in that state, and could have similar repercussions in other states. Uptown is current and has maintained all its disclosures and UFOC's in all jurisdictions in which it does business, and has complied with all registration requirements that are applicable to its franchise operations. Management's Discussion and Analysis or Plan of Operation You should read the following discussion along with the consolidated financial statements and related notes to them included elsewhere in this prospectus. Effective August of 1999, we acquired all the outstanding common stock of NYB Foods, Inc., a Colorado corporation, through a merger with one of our wholly-owned subsidiary corporations. The acquisition will be handled as a pooling of interests for accounting purposes. For the years ended March 31, 1999 and 1998, NYB Foods, Inc., showed results of operations of $68,412 and ($20,342) respectively. NYB Foods, Inc., generates its operating revenue from the sale of its franchise agreements, fees from such franchises and from its company-owned restaurant. On November 11, 1999, we acquired substantially all the assets of 1 Potato 2, Inc., a Minnesota corporation, through another of our wholly-owned subsidiary corporations, Wrapsters Acquisitions Corp., in exchange for a promissory note in the principal amount of $400,000, payable in ten semi-annual installments at an interest rate of 7.5%, and 600,000 shares of our common stock. 1 Potato 2 generates its operating revenue from the sale of its franchise agreements, fees from such franchises, and from the two company-owned restaurants. Overview. Our growth strategy is to sell more of our two subsidiaries' restaurant franchises, New York Burrito and 1 Potato 2, to develop and expand their franchising programs, and to evaluate additional possible acquisitions. In addition to expanding our base of franchised restaurants in the territories in which we current are active, we may seek to acquire other restaurant fanchise concepts that would complement our existing businesses, allowing growth and improving profitability. We do not intend to open any company-owned restaurants, other than the one New York Burrito and two 1 Potato 2 locations we presently operate. A significant factor in the completion of the merger of NYB Foods into one of our subsidiaries was a commitment by outside investors in invest $1,050,000 in the new combined company. This financing was used primarily for the acquisition of NYB Foods and the payment of accumulated debt. Results of Operations for the Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998. Revenues. Total revenues increased from $342,498 in the year ended December 31, 1998, to $1,140,025 in the year ended December 31, 1999, a total increase of $797,527. This increase in sales is attributable to our two operating subsidiary franchise companies, NYB Foods, Inc., and 1 Potato 2 Franchising Corporation. We closed the last of our Wrapsters restaurants during the year, but acquired, through our subsidiaries, eighty-one franchise restaurants and three company-owned restaurants. Royalty and franchise fees earned during the years were $1,109,141, versus $315,026 in the prior year. This increase in royalty and franchise fees was partially offset by a loss from discontinued operations of $11,002. Net Loss. From inception until 1999, we have not been successful in generating revenues sufficient to meet our operating needs. For the years ended December 31, 1998 and 1997, we had net losses of $1,282,682 and $340,364 respectively. For the year ended December 31, 1999, we had net income of $87,715. Our cash and cash equivalents. For the year ended December 31, 1998, Uptown's liquidity was poor. All of our company-owned and franchised Wrapsters restaurants were closed in 1999, we had significant negative working capital, and had no means to pay off debt of $480,000.00 and lease obligations of $220,000.00. Improvement of our working capital will depend on the ability of our two subsidiaries to produce significant future revenues. We have incurred operating losses since inception and as of December 31, 1999 had an accumulated deficit of $2,204,366 and a working capital deficit of $98,135. We currently owe an aggregate of $130,000 principal in promissory notes to four shareholders. These promissory notes mature in 2001 and bear interest at the rate of 10% per annum. These shareholder notes are considered as short-term demand notes. We also are indebted to Copelco Capital under four equipment leases. We have received notices that the leases are in default, that the owner of the equipment has a right to repossess the equipment, and that an aggregate of $38,341 is due. In addition, we are liable on two real estate leases, one in Abernathy Square, Atlanta, Georgia, and one at Briarwood, Virginia. Although these leases represent potential liability in excess of $175,000, we have received no communications from the owners of the real estate demanding payment in approximately five months. We are in default under the equipment and real estate leases and, if we are sued for payment, we may be forced to sell some or all our assets, to relinquish control of one or both of our subsidiaries, or to negotiate terms of our outstanding obligations on terms less favorable to us. Any event of that nature is likely to have a material adverse effect on us. We have not paid dividends on the Class B Preferred shares since inception. Since all but 1,000 of the Class B shares have been converted to common stock, we have a limited obligation ($1,000 per year in preferred dividends) to pay dividends in the future. On the other hand, unpaid dividends from the past equals $103,677. We may continue to allow dividends to accrue, or we may issue Class B Preferred shares in payment of those dividends. Capital Resources. As of December 31, 1999, Uptown had $303,190 cash and $327,786 in notes receiveable. These capital resources decreased to $194,151 cash and $328,124 notes receivable by March 31, 2000. Changes in and Disagreements with Accountants Uptown previously employed the firm of Porter Keadle Moore, LLP, of Atlanta, Georgia, as our independent certified public accountants and auditors. They audited our books and prepared our financial statements for the year ended December 31, 1998. In the 1998 financial statements, our accountants stated that, since Uptown had experienced significant net losses since its inception, had been unable to generate positive cumulative cash flows from operations, and had a significant working capital deficiency, they had substantial doubt about our ability to continue as a going concern. In 1999, we acquired NYB Foods, Inc., through a merger with one of our subsidiaries, and, in connection with that merger, moved our corporate offices from Atlanta, Georgia, to Mesa, Arizona, and replaced our previous management team with the NYB Foods, Inc., management team. Due to the management change and the geographical move, we found it more convenient to employ NYB Foods, Inc.'s, auditor, James E. Raftery, CPA, PC, as our independent certified public accountants and auditors, and therefore dismissed Porter Keadle Moore in November of 1999. We have no disagreements with Porter Keadle Moore, LLP, nor with any other accountants. Certain Relationships and Related Transactions The following-described transactions involve Uptown and any of its officers, directors, nominees for such positions, beneficial owners of 5% or more of Uptown's outstanding common stock, or any of their family members: Acquisition of NYB Foods, Inc. In the merger between our subsidiary, NYB Acquisitions Corp., and NYB Foods, Inc., the NYB Foods shareholders received, in exchange for 100% of the outstanding shares of common stock of NYB Foods, 7,500,000 shares of our common stock and $500,000.00 in cash, as follows: Robert D. Palmer, Jr. 5,188,776 shares and $345,900.00 & Karene Palmer Berg Family Trust 1,224,490 shares and $81,600.00 In addition to the above shares and cash, these shareholders received registration rights for a portion of their shares, as reflected in this registration statement. Exchange of Shares of Common Stock for Promissory Notes. Prior to the acquisition of NYB Foods, Inc., one of our directors, Clyde E. Culp, III, agreed to exchange a promissory note in the principal amount of $428,883.00, which was owed to him by Uptown, for 428,883 shares of our common stock. Uptown agreed that it would include Mr. Culp's newly-issued shares of common stock in this registration statement. In addition, prior to the acquisition of NYB Foods, Inc., another of our shareholders, Santa Cruz Holdings, Inc., agreed to exchange a promissory note in the principal amount of $109,000.00, which was owed to it by Uptown, for 109,000 shares of our common stock. Issuance of Note and Common Stock for 1 Potato 2 Assets. William G. Norton, one of our current directors, is also a director and shareholder of 1 Potato 2, Inc. As such, he will benefit indirectly from the transaction in which our subsidiary acquired assets from 1 Potato 2, Inc., in exchange for 600,000 shares of our common stock and a promissory note in the principal amount of $400,000.00. Note Owed by Shareholder. One of our shareholders, our President and Chairman of the Board of Directors, Robert D. Palmer, Jr., has received advances on a loan from NYB Foods, Inc., which currently total $256,900. This note accrues interest at the rate of 8% per annum, is unsecured, and no repayment terms have been set. Market for Common Equity and Related Stockholder Matters Our no par value common stock is traded on the Over-The-Counter Bulletin Board, under the symbol "UTRG." On December 23, 1999, the high and low bids for the common stock were $.937 and $.687 respectively. The range of high and low sales prices for the common stock as quoted on the OTC Bulletin Board are listed below for the periods indicated. The quotes reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions. ________________________________________________________________________________ Calendar Quarter High Bid Low Bid ________________________________________________________________________________ 1st Quarter, 1999 $2.625 $0.875 2nd Quarter, 1999 $2.00 $0.4375 3rd Quarter, 1999 $1.50 $0.6875 4th Quarter, 1999 $1.031 $0.562 1st Quarter, 2000 $1.00 $0.375 ________________________________________________________________________________ Because the bid price of the common stock has been below $5.00 per share, the SEC's Rule 15g-9 may apply to the common stock. This rule imposes additional sales practice requirements on a broker-dealer that sells Rule 15g-9 securities to persons other than the broker-dealer's established customers and institutional accredited investors. For transactions covered under Rule 15g-9, the broker-dealer must make a suitability determination of the purchaser and receive the purchaser's written agreement to the transaction before the sale. In addition, broker-dealers, particularly if they are market makers in the common stock, have to comply with the disclosure requirements of Rules 15g-2, 15g-3, 15g-4, 15g-5, and 15g-6 under the Exchange Act unless the transaction is exempt under Rule 15g-1. Consequently, Rule 15g-9 and these other rules may adversely affect the ability of broker-dealers to sell or to make markets in the common stock and also may adversely affect the ability of purchasers of the shares offered by this prospectus to resell their shares. Holders of Record. We had approximately 299 holders of record of our common stock as of the shareholder meeting on December 15, 1999. Dividends. We have never paid cash dividends on our common stock and intend to retain earnings, if any, to use in operating and expanding our business. Our board of directors will determine the amount of future dividends, if any, based upon our earnings, financial condition, capital requirements and other conditions. Restriction on Ability to Pay Dividends. We currently have 1,000 shares of Series B Preferred stock outstanding. Each share of Series B Preferred stock has a face value of ten dollars, with cumulative dividends at the rate of ten percent, payable in cash or additional Series B shares, at our option, semi-annually. No dividends are payable on any other securities which are junior to the Series B shares, including on our common shares, unless all accrued dividends have been paid to the holders of Series B shares. Uptown may, at any time, redeem the Series B shares for their face value of $10.00 per share, plus any accrued but unpaid dividends. In the event of Uptown's liquidation, dissolution or winding up, Series B shareholders are entitled to be paid $10.00 per share, plus any accrued but unpaid dividends, out of Uptown's assets before any payment may be made to holders of our\} common stock, or any other securities junior to Series B Preferred shares. Executive Compensation The following is a summary table containing compensation awarded to, earned by, or paid to our chief executive officer, our mostly highly paid executive officers, and any other highly-paid officers, during the past three fiscal years: Summary Compensation Table ________________________________________________________________________________ Long Term Compensation __________________________________________________ Annual Compensation Awards Payouts ________________________________________________________________________________ (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Securities All Name Annual Restricted Under- Other and Compen- Stock lying LTIP Compen- Principal sation Award(s) Options/ Pay- sation Position Year Salary($) Bonus($)($) ($) SARs(#)($) outs($) ($) ________________________________________________________________________________ Thomas E. Metzger 1998 $175,000 $0 $0 $0 500,000 shares $0 $0 1999 $175,000 $0 $0 $0 0 $0 $0 Wiliam Gallagher 1999 $0 $0 $20,000 $0 0 $0 $0 ________________________________________________________________________________ The following is a summary table containing information pertaining to the granting of stock options and/or stock appreciation rights ("SARs") made during the past fiscal year to each of Uptown's executive officers: ________________________________________________________________________________ Option/SAR Grants in Last Fiscal Year Individual Grants ______________________________________________________________________________ (a) (b) (c) (d) (e) Number of % of Total Securities Options/SARs Underlying Granted to Options/SARs Employees in Exercise or Base Expiration Name Granted(#) Fiscal Year Price ($/Sh) Date ________________________________________________________________________________ Thomas E. Metzger 500,000 62.5% $1.00 per share 1/12/2004 Steven J. Devine 85,000 10.6% $1.00 per share 9/3/2003 142,500 17.8% $1.00 per share 1/12/2004 Charles D. Barnett 25,000 3.1% $1.00 per share 9/3/2003 ________________________________________________________________________________ Our Board of Directors adopted a Stock Appreciation Plan on September 3, 1998, but no SAR's were issued to any executive officer or employee. Our present board of directors repealed the SAR plan on December 15, 1999. Our Board of Directors also issued options to purchase 500,000 shares of our common stock at an exercise price of $1.00 per share to our past president, Thomas E. Metzger, on January 13, 1999. In connection with the merger of NYB Foods into our subsidiary, Mr. Metzger released and waived his rights to any such common stock purchase options, and the Stock Option Plan was repealed by our current board of directors on December 15, 1999. Compensation of Directors. Currently, we do not compensate our directors for their service on the Board of Directors, other than to reimburse them for their costs of travel and lodging to attend meetings, and payment of $1,000 annually to each director for attendance at and participation in each such meeting. During our last fiscal year, our directors were not compensated. Legal Matters R. Michael Jackson, Attorney at Law, Lakewood, Colorado, will pass on the validity of the common stock offered by this prospectus for us. Experts Our audited financial statements as of December 31, 1998 and for the year ended December 31, 1997, have been included in reliance of the report of Porter, Keadle & Moore. The audited financial statements of Uptown Restaurant Group, Inc., as of December 31, 1999, and for NYB Foods, Inc. as of March 31, 1999 and for the year ended March 31, 1998, have been included in reliance on the report of James Raftery & Associates, P.C., independent public accounts, given on the authority of that firm as experts in accounting and auditing. Where You Can Find More Information We must comply with the information requirements of the Exchange Act, and we file reports, proxy and information statements and other information with the SEC. Those reports, proxy and information statements, and other information may be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 on payment of the prescribed fees. In addition, the SEC maintains a website (http:\\www.sec.gov) that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC through the Electronic Data Gathering, Analysis and Retrieval system, or EDGAR. This prospectus is part of a registration statement on Form SB-2 that we have filed with the SEC under the Securities Act. This prospectus does not contain all the information contained in the registration statement, certain parts of which we have omitted in accordance with SEC rules. For further information about us and the shares covered by this prospectus, we refer you to the registration statement. Statements contained in this prospectus concerning the provisions of any document are not necessarily complete, and each of those statements is qualified by reference to the copy of that document filed with the SEC. Uptown Restaurant Group, Inc. Consolidated Financial Statements Prepared by Management, without audit March 31, 2000 Uptown Restaurant Group, Inc. Consolidated Balance Sheet For the Three Months Ending March 31, 2000 Assets Current Assets Cash $194,151 Accounts Receivable, net of allowance of $20,000 for 2000 53,669 Inventory 21,206 Prepaid Expenses 119,977 Notes Receivable 328,124 Total Current Assets 717,127 Property and Equipment, net 272,783 Other Assets Refundable deposits 2,066 Intangible Assets, net 644,399 Total Other Assets 646,465 Total Assets $1,636,375 LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts Payable $ 176,067 Notes Payable, current maturities 245,344 Deferred Tax Payable 3,673 Deferred Revenue 397,500 Total Current Liabilities 822,584 Long Term Liabilities Notes Payable, net of current maturities 324,361 Total Liabilities 1,146,945 Equity Preferred Stock, 1,000 issued and 10,000 outstanding Common Stock, 19,566,313 issued 2,675,162 and outstanding Retained Earnings (2,204,366) Net Income Y-T-D 8,634 Total Capital 489,430 Total Liabilities & Capital $1,636,375 Uptown Restaurant Group, Inc. Consolidated Statement of Income For the Three Months Ending March 31, 2000 Revenue $490,630 Operating Expenses 482,040 Net Income from Operations $ 8,590 Other Income and (Expenses) Miscellaneous Income 2,126 Interest Income 7,372 Interest Expense (9,454) 44 Net Income Before Taxes 8,634 Provision for Taxes Income tax (expense) 0 Net Income (Loss) 8,634 Primary Earnings Per Share $0.0004 Diluted Earnings Per Share $0.0004 Weighted Average Number of Common Shares Outstanding Primary 19,566,313 Diluted 19,566,313 Uptown Restaurant Group, Inc. Consolidated Statement of Shareholders Equity For the Three Months Ending March 31, 2000 Retained Earnings Preferred Stock Common Stock (Accumulated) No Par Value No Par Value (Deficit) Shares Amount Shares Amount NYB Foods, Inc. Beginning Balance December 31, 1999 $0 4,900,000 $81,631 $41,386 1 Potato 2 Franchising Corp. Beginning Balance December 31, 1999 375,000 70,875 Uptown Restaurant Group, Inc. Beginning Balance December 31, 1999 1,000 10,000 19,566,313 2,675,162 (2,204,366) Consolidated Net Income 8,634 Eliminated for Consolidating NYB (4,900,000) (81,631) (41,386) Eliminated for Consolidating 1P2 (375,000) (70,875) Ending Balance March 31, 2000 1,000 $10,000 19,566,313 $2,675,162 ($2,195,732) Uptown Restaurant Group, Inc. Consolidated Statement of Cash Flows For the Three Months Ending March 31, 2000 Cash Flow from Operating Activities Cash received from customers $366,147 Cash paid to employees and suppliers (481,631) Cash received from franchise sales 45,000 Cash paid for franchise sales (15,352) Miscellaneous income 2,126 Interest income (expense) net (2,082) Net Cash Used by Operating Activities (85,792) Cash Flow from Investing Activities Acquisition of equipment (4,136) Received from notes receivable 11,368 Investments in notes receivable (10,000) Net Cash Used by Investing Activities (2,768) Cash Flow from Financing Activities Payments made on notes payable (16,000) Lease payments for new equipment (4,479) Net Cash Used by Financing Activities (20,479) Net Increase (Decrease) in Cash (109,039) Beginning Cash Balance 303,190 Ending Cash Balance $194,151 Reconciliation of Net Income (loss) to Cash Provided (used) by Operating Activities Net Income $8,634 Adjustments to reconcile net income to cash provided (used) by operating activities Depreciation 8,189 Amortization 7,791 (Increase) Decrease in operating assets Accounts receivable (13,291) Advances (10,000) Inventory (3,997) Prepaid expenses 4,648 Increase (decrease) in operating liabilities Accounts payable (31,266) Deferred revenue (56,500) Net Cash Provided (Used) by Operating Activities ($85,792) Uptown Restaurant Group, Inc. Notes to the Consolidated Financial Statements March 31, 2000 The following financial statements are prepared by management, they are provided on an interim basis and contain all relevant information as of March 31, 2000. This summary of significant accounting policies of Uptown Restaurant Group, Inc. is presented to assist in understanding the Corporation's financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Note A - Summary of Significant Accounting Policies 1. Nature of Business Uptown Restaurant Group, Inc. (The Company)(f/k/a Wrapsters, Inc.) Was formed on February 19, 1998. The Company owns two wholly owned subsidiaries, NYB Foods, Inc. (NYB) and 1 Potato 2 Franchising Corp. NYB was incorporated in the state of Colorado on April 21, 1995 and maintains its principal place of business in Mesa, Arizona. The Corporation's principal business activity is that of a franchiser granting qualified persons franchises for the operation of quick serve restaurants that operate under the name New York Burrito Gourmet Wraps. NYB was purchased in a reverse merger with the Company on August 31, 1999. The Company formed a wholly owned subsidiary corporation by the name of NYB Acquisitions Corp. (NYBA). NYBA then exchanged 7,500,000 shares of the Company and $500,000 for all the outstanding stock of NYB. NYB was immediately dissolved and NYBA changed its name to NYB Foods, Inc. For accounting purposes NYB is considered the accounting acquirer since that entity clearly was responsible for over 90% of the revenue from operations for the period that the acquisition took place and its shareholders and board members were in the majority after the merger. No goodwill or other intangible assets resulted from this merger. The Company formed a second wholly owned subsidiary by the name of Wrapsters Acquisition Corp. (WAC). On November 11, 1999 WAC exchanged 600,000 shares of the Company and signed a promissory note for $400,000 in an asset exchange with a fast food restaurant. The assets acquired included two company stores and the royalty rights to 26 franchised stores. WAC subsequently changed its name to 1 Potato 2 Franchising Corp. (1P2). 2. Deferred Revenue Income from initial franchise fees is deferred and recognized when the franchisee commences operations. AT March 31, 2000 forty-one stores were sold but not opened, however seven have begun operations in the subsequent period at which time the initial franchise fee will be recognized as revenue. Transfer fees that were previously deferred were also recognized. 3. Property and Equipment Property and equipment are carried at cost. Depreciation of property and equipment is provided by using the straight-line method for financial reporting purposes over the estimated useful life of five, seven and thirty nine years. Depreciation expense for the period ending March 31, 2000 was $8,189. 4. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial sattements and consist of taxes currently due plus deferred taxes related primarily to differences between basis of equipment for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for capital losses that are not available to offset future income taxes. 5. Cash and Cash Equivalents For purposes of the statement of cash flows, the Corporation considers all short term debt securities purchased with a maturity of three months or less to be cash equivalents. 6. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reporting amounts and disclosures. Accordingly, actual results could differ from those estimates. 7. Inventories Inventory consists of spices, sauces, and packaging supplies, valued at lower of cost or market, on a first in, first out basis. 8. Prepaid Expenses Income from initial franchise fees is deferred and recognized when the franchise commences operations. Development agent commissions are paid when franchise fees are received and for matching purposes are recognized when the franchise commences operations. 9. Intangible Assets The Company recognized goodwill of $617,334 in the purchase of 1 Potato 2 Franchising Corp. Amortization of goodwill is provided using the straight-line method for financial reporting purposes over an estimated useful life of fifteen years. Amortization expense for the period ending March 31, 2000 was $7,791. Note B - Notes Receivable Note receivable secured by all contract rights, accounts receivable, and title in and to all New York Burrito franchise operations within the State of California. The note receivable bears interest at 8% per annum and is payable in three equal installments of $5,678 $ 18,286 An unsecured note receivable bearing interest at 8% per annum from a majority shareholder 266,900 Accrued interest 42,938 $328,124 Note C - Property and Equipment Property and equipment are summarized by major classifications as follows: Equipment $228,134 Training Facility 68,268 Leasehold Improvements 1,156 $297,558 Less Accumulated Depreciation ( 24,775) $272,783 Uptown Restaurant Group, Inc. Consolidated Financial Statements December 31, 1999 Table of Contents Page No. I. Independent Auditor's Report 1 II. Consolidated Financial Statements Consolidated Balance Sheet 2 Consolidated Statement of Income 3 Consolidated Statement of Shareholder's Equity 4 Consolidated Statement of Cash Flows 5-6 III. Notes to the Consolidated Financial Statement 7-11 James E. Raftery, CPA, PC 946 S. Stapley Drive, Suite 103 (480)835-1040 Mesa, Arizona 85204 FAX (480)835-8832 INDEPENDENT AUDITOR'S REPORT To the Shareholders Uptown Restaurant Group, Inc. I have audited the accompanying consolidated balance sheet of Uptown Restaurant Group, Inc. as of December 31, 1999 and the related statements of income and shareholder's equity and cash flows for the nine months then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted the audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and of the 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. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Uptown Restaurant Group, Inc. as of December 31, 1999 and the statements of income and shareholder's equity and cash flows for the nine months then ended in conformity with generally accepted accounting principles. James E. Raftery, CPA Mesa, Arizona May 5, 2000 Member, American Institute of Certified Public Accountants and Arizona Society of Certified Public Accountants Uptown Restaurant Group, Inc. Consolidated Balance Sheet December 31, 1999 Assets Current Assets Cash $303,190 Accounts Receivable, net of allowance of $20,000 30,716 Inventory 17,209 Prepaid Expenses 124,625 Notes Receivable 327,786 Total Current Assets 803,526 Property and Equipment, net 246,019 Other Assets Refundable deposits 2,066 Intangible Assets, net 652,190 654,256 $1,703,801 Liabilities and Stockholder's Equity Current Liabilities Accounts Payable and accrued expenses $ 207,333 Notes Payable, current maturities 236,655 Deferred Tax Payable 3,673 Deferred Revenue 454,000 Total Current Liabilities 901,661 Long Term Liabilities Notes Payable, net of current maturities 321,344 Total Liabilities 1,223,005 Equity Preferred Stock, no par value, 10,000,000 Shares authorized, 1,000 shares issued And outstanding 10,000 Common Stock, no par value, 50,000,000 Shares authorized, 19,566,313 shares Issued and outstanding 2,675,162 Retained Earnings (accumulated deficit) (2,204,366) Total Equity 480,796 $1,703,801 The accompanying notes are an integral part of this financial statement Uptown Restaurant Group, Inc. Consolidated Statement of Income Nine Months Ending December 31, 1999 Revenue $1,075,803 Operating Expenses 1,000,811 Net Income from Operations $ 74,992 Other Income and (Expenses) Miscellaneous Income 9,568 Interest Income 21,316 Interest Expense (6,302) 24,582 Net Income Before Taxes and Discontinued Operations 99,574 (Loss) from Discontinued Operations (11,002) Net Income Before Taxes 88,572 Provision for Taxes Income tax (expense) (857) Net Income 87,715 Primary Earnings Per Share $0.006 Diluted Earnings Per Share $0.005 Weighted Average Number of Common Shares Outstanding Primary 14,379,612 Diluted 17,521,825 The accompanying notes are an integral part of this financial statement Uptown Restaurant Group, Inc. Consolidated Statement of Shareholders Equity Nine Months Ending December 31, 1999 Retained Earnings Preferred Stock Common Stock (Accumulated) No Par Value No Par Value (Deficit) Shares Amount Shares Amount NYB Foods, Inc. Beginning Balance April 1, 1999 - $- 4,900,000 $81,631 $ 13,554 Uptown Restaurant Group, Inc. (f/k/a Wrapsters, Inc.) Balance immediately 113,500 990,594 7,990,480 $19,741 (2,292,081) before merger with - - 2,620,000 $13,554 (13,554) NYB Foods, Inc. Issuance of common - - 3,669,500 $1,000,000 - stock Conversion of (112,500) (980,594) 337,500 980,594 - Preferred stock Conversion of debt - - 537,886 575,068 - Exercise of stock - - 45,750 4,574 - options Net Income - - - - 87,715 Ending Balance December 31, 1999 1,000 $10,000 20,101,116 $2,675,162 ($2,204,366) The accompanying notes are an integral part of this financial statement Uptown Restaurant Group, Inc. Consolidated Statement of Cash Flows Nine Months Ended December 31, 1999 Cash Flow from Operating Activities Cash received from customers $1,109,141 Cash paid to employees and suppliers (960,225) Miscellaneous income 9,568 Income taxes (857) Interest income 21,316 Interest expense (6,302) Net cash provided (used) by operating activities 172,641 Cash Flow from Investing Activities Proceeds from notes receivable 41,714 Payments for notes receivable (50,050) Acquisition of equipment (1,868) Net cash provided (used) by investing activities (10,204) Cash Flow from Financing Activities Payments on notes payable (232,629) Proceeds from sale of stock 1,004,574 Purchase of subsidiary (700,000) Net cash provided (used) by financing activities 71,945 Net increase (decrease) in cash 234,382 Beginning cash balance 68,808 Ending cash balance 303,190 Non-cash investing and financing activities: Debt converted to equity $575,068 Reverse acquisition merger, note Payable for acquisition 400,000 The accompanying notes are an integral part of this financial statement Reconciliation of Net Income (Loss) to Cash Provided (used) by Operating Activities Net Income $ 87,715 Adjustments to reconcile net income To cash provided (used) by operating Activities Depreciation 9,355 Amortization 5,194 (Increase) decrease in operating assets Accounts receivable 33,338 Inventory (15,352) Prepaid Expenses 77,251 Increase (decrease) in operating liabilities Accounts payable 166,264 Accrued expenses (8,862) Deferred revenue (179,500) Advance (2,762) Net cash provided (used) by operating activities 172,641 The accompanying notes are an integral part of this financial statement Uptown Restaurant Group, Inc. Notes to the Consolidated Financial Statements December 31, 1999 Note A - Summary of Significant Accounting Policies This summary of significant accounting policies of Uptown Restaurant Group, Inc. is presented to assist in understanding the Corporation's financial statements. The financial statements and notes are the representation of the Corporation's management, who are responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. 1. Company Background and Nature of Business Uptown Restaurant Group, Inc. (The Company)(f/k/a Wrapsters, Inc.) Was formed on February 19, 1998. The Company owns two wholly owned subsidiaries, NYB Foods, Inc. (NYB) and 1 Potato 2, Inc. Since inception the Company operated quick service restaurants in the Southeastern United States, specializing in freshly prepared tortilla wraps, fruit smoothies and other related menu items. As of August, 1999 the Company no longer owned or operated any stores. The Corporation did recognize additional expenses after August 1999 for discontinued operations, in the amount of $11,002. NYB was incorporated in the state of Colorado on April 21, 1995 and maintains its corporate offices in Mesa, Arizona. The Corporation's principal business activity is that of a franchiser granting qualified persons franchises for the operation of quick serve restaurants that specialize in "wrap" foods and operate under the name New York Burrito Gourmet Wraps. NYB was purchased in a reverse merger with the Company on August 31, 1999. The Company formed a wholly owned subsidiary corporation by the name of NYB Acquisitions Corp. (NYBA) in the state of Colorado on November 8, 1999. NYBA then exchanged 7,500,000 shares of the Company and $500,000 for all the outstanding stock of NYB. NYB was immediately dissolved and NYBA changed its name to NYB Foods, Inc. For accounting purposes NYB is considered the accounting acquirer since that entity clearly was responsible for over 90% of the revenue from operations for the period presented, its shareholders comprised approximately 40% of the outstanding shares, and the board members were in the majority after the merger. No goodwill or other intangible assets resulted from this merger. The Company formed a second wholly owned subsidiary by the name of Wrapsters Acquisition Corp. (Wrapsters). On November 11, 1999 Wrapsters exchanged 600,000 shares of the Company and signed a promissory note for $400,000 in an asset exchange with a fast food restaurant franchising company. The assets acquired included two company stores and the royalty rights to 26 other stores. Wrapsters subsequently changed its name to 1 Potato 2 Franchising Corp. (1P2). 2. Deferred Revenue Income from initial franchise fees is deferred and recognized when the franchisee commences operations. At December 31, 1999 forty-three stores were either sold or transferred but not opened, however seven have begun operations in the subsequent fiscal year at which time the initial franchise fee will be recognized as revenue. Uptown Restaurant Group, Inc. Notes to the Consolidated Financial Statements December 31, 1999 Note A - Summary of Significant Accounting Policies 3. Property and Equipment Property and equipment are carried at cost. Depreciation of property and equipment is provided using the straight-line method for financial reporting purposes over the estimated useful life of five, seven and thirty nine years. Depreciation expense for the year ended December 31, 1999 was $9,355. 4. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between basis of equipment for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for capital losses that are not available to offset future income taxes. 5. Cash and Cash Equivalents For purposes of the statement of cash flows, the Corporation considers all short term debt securities purchased with a maturity of three months or less to be cash equivalents. 6. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reporting amounts and disclosures. Accordingly, actual results could differ from those estimates. 7. Inventories Inventory consists of spices, sauces, and packaging supplies, valued at lower of cost or market, on a first in, first out basis. 8. Prepaid Expenses Income from initial franchise fees is deferred and recognized when the franchise commences operations. Development agent commissions are paid when franchise fees are received and for matching purposes are recognized when the franchise commences operations. 9. Intangible Assets The Company recognized goodwill of $617,334 in the purchase of 1 Potato 2 Franchising Corporation. Amortization of goodwill is provided using the straight-line method for financial reporting purposes over an estimated useful life of fifteen years. Amortization expense for the year ended December 31, 1999 was $5,194. Uptown Restaurant Group, Inc. Notes to the Consolidated Financial Statements December 31, 1999 Note B - Notes Receivable Note receivable secured by all contract rights, accounts receivable, and title and interest in and to all New York Burrito franchise operations within the State of California. The note receivable bears interest at 8% per annum and is payable in six equal installments of $5,678 $ 33,286 An unsecured note receivable bearing interest at 8% per annum from a majority shareholder 256,900 Accrued interest 37,600 $327,786 Note C - Property and Equipment Property and equipment are summarized by major classifications as follows: Equipment $195,319 Training Facility 68,268 Leasehold Improvements 1,156 $264,743 Less Accumulated Depreciation ( 18,724) $246,019 Note D - Lease Obligations The Corporation conducts its operations from facilities in Arizona under an operating lease. The Corporation also has two month to month leases at other facilities. Future minimum rental payments required for the operating leases are as follows: Year Ended December 31, 2000 $ 54,272 2001 65,126 2002 65,126 2003 65,126 2004 65,126 2005 10,854 $325,630 Rental expense for the year ended December 31, 1999 was $78,442. Uptown Restaurant Group, Inc. Notes to the Consolidated Financial Statements December 31, 1999 Note E - Notes Payable Notes payable consisted of the following at December 31, 1999 Unsecured notes payable in semi-annual interest only installments of $6,500 interest is computed at a rate of 10.00% per annum. Principal balances due February 2001. $130,000 Note payable in monthly installments of $650, bearing interest at 10.351%, personally secured by shareholder 19,664 Unsecured, non-interest-bearing demand note. 8,993 Unsecured note payable in semi-annual installments averaging $46,000, bearing interest at 7.5% per annum. 390,302 Note payable in monthly installments of $470, bearing interest at 18.5% per annum, secured by vehicle. 9,040 557,999 Less current maturities (236,655) $321,344 The scheduled maturities of long-term debt are as follows: 2000 $236,655 2001 92,960 2002 87,854 2003 81,487 2004 59,043 $557,999 Note F - Income Taxes There has been a 100% valuation allowance for the net operating loss carry forward for the Company. It is not currently possible to determine the expiration dates of the individual net operating loss years. The current year income will be fully offset by prior years net operating losses. Note G - Stockholder's Equity On August 31, 1999 a wholly owned subsidiary of the company purchase NYB in a reverse acquisition merger. For accounting purposes NYB is the accounting acquirer and the company is the target. The stockholder's equity of NYB has been restated to give effect to the legal structure of the company. Uptown Restaurant Group, Inc. Notes to the Consolidated Financial Statements December 31, 1999 Note G - Stockholders Equity cont. Two investors purchased 1,700,000 shares of common stock each in September 22, 1999 for a total of $850,000. One other investor purchased warrants to purchase 3,000,000 shares of common stock for $200,000. In connection with these transactions, 269,500 shares of common stock and warrants to purchase 485,000 shares of common stock were issued as compensation for arranging the transaction. The company has Series B Preferred Stock, which pays cumulative dividends at a 10% annual rate based on the stock's face value of $10 per share. The Series B Preferred has a liquidation preference of $10 per share plus unpaid cumulative dividends and is nonvoting, except in limited situations. At the Company's option, the Series B Preferred can be redeemed in whole or in part at any time at $10 per share plus cumulative unpaid dividends. At the holder's option, the Series B Preferred can be converted at any time into publicly traded preferred stock issued by the Company at a conversion rate of one share of Series B Preferred for each share of publicly traded preferred stock. The Company previously issued 113,500 shares of non-voting Series B Redeemable, Convertible, Preferred Stock. Of those shares, 112,500 have been converted into three shares of the company's common stock for each share of the Series B Preferred Stock. At December 31, 1999, dividends in arrears on this preferred stock totaled $103,677. Subsequent to the reverse acquisition merger, the company issued 537,883 shares of common stock in lieu of payment of outstanding debt of $575,068 to a shareholder and director of the company. Common stock was issued to five individuals upon the exercise of common stock purchase warrants. There were 45,750 shares issued in exchange for $4,574. Note H - Pro Forma Financial Statements Early in 1999 the board members and shareholders of the Company decided to shut down the four remaining stores of Wrapsters. Thus, substantially all the operations for the period on January 4, 1999 through acquisition date of August 31, 1999 would be considered costs from discontinuing operations. Pro forma financial statements should only include income from ongoing operations. To provide information for revenue and expense for the short time the Company had stores not designated for closure would not be useful. Therefore, those pro forma financial statements are not present. NYB Foods, Inc. Financial Statements March 31, 1999 Table of Contents Page No. I. Independent Auditor's Report 1 II. Financial Statements Balance Sheet 2 Statement of Income and Retained Earnings 3 Statement of Cash Flows 4-5 III. Notes to the Financial Statements 6-9 James E. Raftery, CPA, PC 946 S. Stapley Drive, Suite 103 (480)835-1040 Mesa, Arizona 85204 FAX (480)835-8832 INDEPENDENT AUDITOR'S REPORT To the Shareholders NYB Foods, Inc. I have audited the accompanying balance sheet of NYB Foods, Inc. as of March 31, 1999 and 1998, and the related statements of income and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted the audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and of the 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. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NYB Foods, Inc. as of March 31, 1999 and 1998, and the results of its operations for the years then ended in conformity with generally accepted accounting principles. James E. Raftery, CPA Mesa, Arizona July 10, 1999 Member, American Institute of Certified Public Accountants and Arizona Society of Certified Public Accountants NYB FOODS, INC. BALANCE SHEET March 31, 1999 1998 ASSETS Current Assets Cash $68,808 $24,191 Accounts receivable, net of allowance of $20,000 for 1999 64,054 35,630 Inventory (Note A) 1,857 - Prepaid expenses 201,875 137,250 Advances to related parties (Note B) 229,459 122,963 Note receivable (Note C and K) 58,191 - Deferred tax benefit (Note A and G) - 13,826 Total Current Assets 624,244 333,860 Property and Equipment (Note A and D) 105,986 8,549 Other Assets Franchise documentation 40,000 40,000 Note receivable (Note C) 16,809 - Refundable deposits 2,066 2,094 Organizational costs, net of amortization 50 100 58,925 42,194 $789,155 $384,603 LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable and accrued expenses $ 28,762 $ 1,214 Commissions payable 15,580 21,365 Loan (Note B) 2,762 10,751 Note payable (Note F) 5,501 - Deferred tax liability (Note A and G) 3,673 - Deferred revenue (Note A) 633,500 324,500 Total Current Liabilities 689,778 357,830 Long Term Liabilities Note Payable (Note F) 4,192 - Total Liabilities 693,970 357,830 Equity Common stock, 20,000,000 shares of no par value authorized; 4,900,000 shares issued and outstanding (Note H) 81,631 81,631 Retained earnings 13,554 (54,858) 95,185 26,773 $789,155 $384,603 The accompanying notes are an integral part of this financial statement. NYB FOODS, INC. STATEMENT OF INCOME AND RETAINED EARNINGS Years Ended March 31, 1999 1998 Revenue $769,936 $420,571 Operating Expenses 760,621 458,417 Net Income from Operations 9,315 (37,846) Other Income and (Expense) Miscellaneous Income (Note K) 100,599 11,219 Miscellaneous Expense (Note K) (35,031) - Interest Income 12,606 7,475 Interest Expense (1,577) - 76,597 18,694 Net Income Before Taxes and Discontinued Operations 85,912 (19,152) Loss From Discontinued Operations (Note J) - (7,645) Net Income (Loss) Before Taxes 85,912 (26,797) Provision for Taxes Deferred tax benefit (expense) (Note A and G) (17,500) 6,455 Net Income (Loss) 68,412 (20,342) Accumulated Deficit, beginning of year (54,858) (34,516) Retained Earnings, end of year $ 13,554 $(54,858) The accompanying notes are an integral part of this financial statement NYB FOODS, INC. STATEMENT OF CASH FLOWS Years Ended March 31, 1999 1998 Cash Flow From Operating Activities Cash received from customers $741,508 $413,846 Cash paid to employees and suppliers (496,404) (341,106) Miscellaneous income 25,599 11,219 Miscellaneous expense (35,031) - Interest expense (1,577) - Net Cash Provided (Used) By Operating Activities 234,095 83,959 Cash Flow From Investing Activities Investments (93,887) (34,367) Acquisition of equipment (105,284) (7,762) Net Cash Provided (Used) By Investing Activities (199,171) (42,129) Cash Flow From Financing Activities Proceeds from notes payable 9,693 (19,000) Net Increase (Decrease) in Cash 44,617 22,830 Beginning cash balance 24,191 1,361 Ending cash balance $ 68,808 $ 24,191 The accompanying notes are an integral part of this financial statement 1999 1998 Reconciliation Of Net Income (loss) To Cash Provided (used) by Operating Activities Net (Loss) $ 68,412 $(20,342) Adjustments to reconcile net income to cash provided (used) by operating activities Depreciation 7,845 1,252 Amortization 50 50 Loss from discontinued operations - 7,645 (Increase) decrease in operating assets Accounts receivable (28,424) (14,200) Interest receivable (12,607) (7,475) Inventory (1,857) - Prepaid expenses (64,625) (60,750) Note receivable (75,000) - Deferred tax benefit - (6,455) Refundable deposits 28 (478) Increase (decrease) in operating liabilities Accounts payable 12,901 20,375 Deferred tax liability 17,499 - Accrued expenses 8,862 - Income tax payable - - Deferred revenue 309,000 164,500 Advance (7,989) (163) Net Cash Provided (Used) by Operating Activities $234,095 $ 83,959 The accompanying notes are an integral part of this financial statement NYB FOODS, INC. NOTES TO THE FINANCIAL STATEMENTS March 31, 1999 NOTE A - SAY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of NYB Foods, Inc. (NYB) is presented to assist in understanding the Corporation's financial statements. The financial statements and notes are the representation of the Corporation's management, who are responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. 1. Nature of Business NYB was incorporated in the state of Colorado on April 21, 1995 and maintains its principal place of business in Mesa, Arizona. The Corporation's principal business activity is that of a franchiser granting qualified persons franchises for the operation of quick serve restaurants that operate under the name New York Burrito Gourmet Wraps. 2. Deferred Revenue Income from initial franchise fees is deferred and recognized when the franchisee commences operations. At March 31, 1999, thirty-six stores were sold but not opened, however six have begun operations in the subsequent fiscal year at which time the initial franchise fee will be recognized as revenue. 3. Property and Equipment Property and equipment are carried at cost. Depreciation of property and equipment is provided using the straight-line method for financial reporting purposes over a estimated useful life of five, seven and thirty nine years. Depreciation expense for the years ended March 31, 1999 and 1998 was $7,845 and $1,252, respectively. 4. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between basis of equipment for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for capital losses that are not available to offset future income taxes. 5. Cash and Cash Equivalents For purposes of the statement of cash flows, the Corporation considers all short term debt securities purchased with a maturity of three months or less to be cash equivalents. 6. Reclassifications Certain accounts in the prior-year financial statements have been reclassified for comparative purposes to conform with the presentation in the current-year financial statements. NYB FOODS, INC. NOTES TO THE FINANCIAL STATEMENTS March 31, 1999 NOTE A - SAY OF SIGNIFICANT ACCOUNTING POLICIES CONT: 7. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reporting amounts and disclosures. Accordingly, actual results could differ from those estimates. 8. Inventories Inventory consists of spices, sauces, and packaging supplies, valued at lower of cost or market, on a first in, first out basis. 9. Prepaid Expenses Income from initial franchise fees is deferred and recognized when the franchisee commences operations. (Note A-2) Development agent commissions are paid when franchise fees are received and for matching purposes are recognized when the franchisee commences operations. NOTE B - ADVANCES TO RELATED PARTIES An unsecured note receivable, bearing interest at 8% per annum from a majority shareholder: 1999 1998 Loan $206,854 $112,963 Accrued interest 22,605 10,000 $229,459 $122,963 Interest income related to this note for the years ended March 31, 1999 and 1998 was $12,606 and $7,475, respectively. The Corporation uses a credit card that is issued to a shareholder. As of March 31, 1999 and 1998, the balance owing was $2,762 and $10,751, respectively. NOTE C- NOTES RECEIVABLE Note receivable (Note K), secured by all contract rights, accounts receivable, and title and interest in and to all New York Burrito franchise restraurants within the state of California. The note receivable bears interest at 8% per annum and is payable in fifteen equal installments of $5,678 $ 75,000 Less current portion 58,191 16,809 NYB FOODS, INC NOTES TO THE FINANCIAL STATEMENTS March 31, 1999 NOTE D - PROPERTY AND EQUOPMENT Property and equipment are summarized by major classification as follows: 1999 1998 Equipment $ 45,930 $ 9,273 Training Facility 68,268 - Leasehold Improvement 1,157 800 115,355 10,073 Less: Accumulated Depreciation (9,369) (1,524) $105,986 $ 8,549 NOTE E - LEASE OBLIGATIONS The Corporation conducts its operations from facilities in both Colorado and Arizona under operating leases. Future minimum rental payments required for the operating leases are as follows: 1999 1998 Year Ended March 31, 1999 $ - $14,026 2000 $63,204 $14,480 2001 $63,204 $ 2,426 2002 $33,612 $ - 2003 $27,694 $ - 2004 $20,771 $ - Rental expense for the years ended March 31, 1999 and 1998 was $15,600 and $16,099, respectively. NOTE F- NOTE PAYABLE Notes payable consisted of the following at March 31,: 1999 1998 Note payable in monthly installments of $9,693 $ - $470.08, including interest at a rate of 18.50% per annum, secured by vehicle Less current maturities 5,501 - $4,192 $ - NYB FOODS, INC. NOTES TO THE FINANCIAL STATEMENTS March 31, 1999 NOTE G - INCOME TAXES The Corporation has loss carryforwards totaling $68,482 which will be fully absorbed in the current year. An elective tax rate of 20% was used in the calculation of the deferred tax benefit in 1998. A valuation allowance was not considered due to the improved performance & anticipated net income for subsequent years. The provisions for income taxes consist of the following components: 1999 1998 Federal income tax expense $22,630 $ - State income tax expense 6,227 - Deferred tax (benefit) expense 16,645 $(6,455) $45,502 $(6,455) The deferred tax liability is associated with the use of accelerated depreciation methods for income tax purposes. NOTE H- STOCKHOLDER'S EQUITY On April 16, 1997, the number of authorized shares of common stock was increased from 5,000,000 to 20,000,000. On May 17, 1997, 2,500,000 shares of outstanding common stock split at a rate of 1.356. In addition, 1,510,000 shares of common stock were issued. NOTE I - CONTINGENCIES Subsequent to March 31, 1998, the Corporation filed an arbitration action of $50,000 against Gourmet Wrapps, LLC and Glen Grishkowsky for breach of a Development Agreement and damages resulting therefrom. The arbitrator found in favor of NYB Foods, Inc., and awarded the Corporation $19,500. NOTE J- DISCONTINUED OPERATIONS In May 1997, the Corporation sold its investment in the franchise store located in Mesa, Arizona. The franchise was sold for $25,000. The Corporation recognized a loss of $7,645 and $65,225 at March 31, 1998. NOTE K- MISCELLANEOUS ITEMS Miscellaneous expense includes a settlement in October 1998 with a landlord in the amount of $30,000 for unsettled rent payments. Miscellaneous income includes the sale of California royalty rights to a corporation for $100,000; $25,000 cash and a note for $75,000 (Note C). Porter Keadle Moore, LLP REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Wrapsters, Inc. We have audited the accompanying balance sheet of Wrapsters, Inc. as of January 3, 1999 and the related statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wrapsters, Inc. as of January 3, 1999, and the results of its operations and its cash flows for the year then ended. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8, the Company has experienced significant net losses since inception, has been unable to generate positive cumulative cash flows from operations, and, at January 3, 1999, has a significant working capital deficiency. These facts raise substantial doubt about the Company's ability to continue as a going concern. Note 8 also describes management's plans to alleviate these financial concerns. Thefinancial statements do not include any adjustments that might result from this uncertainty. Porter Keadle Moore, LLP Atlanta, Georgia August 31, 1999 Certified Public Accountants Suite 1800 235 Peachtree Street NE Atlanta, Georgia 30303 Phone 404-588-4200 Fax 404-588-4222 WRAPSTERS, INC. Financial Statements January 3, 1999 (with Independent Accountants' Report thereon) WRAPSTERS, INC. Balance Sheet January 3,1999 Assets Current assets: Cash $ 26,046 Inventory 9,919 Due from stockholder 1,154 Total current assets 37,119 Property and equipment, net 271,920 Other assets 33,390 $ 342,429 Liabilities and Stockholders' Equity (Deficit) Current liabilities: Accounts payable and accrued expenses $ 286,475 Deferred franchise fees 50,000 Note payable 20,000 Notes payable to affiliates 521,876 Total current liabilities 878,351 Commitments and contingencies (see note 7) Stockholders' equity (deficit): Series B redeemable convertible preferred stock; no par value, 113,500 shares authorized, issued and outstanding (liquidation preference of $1,232,952) 990,594 Common stock; no par value, 25,000,000 shares authorized, 7,990,480 shares issued and outstanding 19,741 Accumulated deficit (1,546,257) Total stockholders' equity (deficit) (535,922) $ 342,429 See accompanying notes to financial statements. WRAPSTERS, INC. Statement of Operations For the Year Ended January 3,1999 Revenue: Restaurant sales revenue $ 315,026 Other income 27,472 Total revenue 342,498 Operating expenses: Food, beverages and paper 124,944 Payroll and benefits 521,595 Occupancy 161,979 Other operating 571,406 Total operating expenses 1,379,924 Other expenses: Interest expense 37,783 Loss on store closings 207,473 Total other expenses 245,256 Net loss $(1,282,682) Basic and diluted loss per common share $ (0.17) See accompanying notes to financial statements. WRAPSTERS, INC. Statement of Changes in Stockholders' Equity (Deficit) For the Year Ended January 3, 1999 Members' Preferred Stock Common Stock Accumulated Equity Shares Amount Shares Amount Deficit Total Wrapsters, LC (see Note 1): Balance, December 31, 1997 $418,624 - - - - (263,575) 155,049 Capital contributions 30,000 - - - - - 30,000 Net loss - - - - - (80,528) (80,528) Balance immediately before merger 448,624 - - - - (344,103) 104,521 Wrapsters, Inc. (see Note 1): Conversion of members' equity to note payable (428,883) - - - - - (428,883) Issuance of common stock (19,741) - - 7,600,000 19,741 - - Existing HAI stockholders - - - 390,480 - - - Issue Series B preferred stock - 113,500 990,594 - - - 990,594 Net loss post merger - - - - - (1,202,154) (1,202,154) Balance, January 3, 1999 $ - 113,500 990,594 7,990,480 19,741 (1,546,257) (535,922) See accompanying notes to financial statements. WRAPSTERS, INC. Statement of Cash Flows For the Year Ended January 3, 1999 Cash flows from operating activities: Net loss $ (1,282,682) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 40,459 Loss on store closings 207,472 Change in operating assets and liabilities: Accounts receivable (1,154) Other assets (20,300) Inventory (4,961) Accounts payable and accrued expenses 206,894 Deferred franchise fees 50,000 Net cash used by operating activities 804,272 Cash flows from investing activities: Proceeds from disposal of property and equipment 16,500 Purchases of property and equipment 353,386 Net cash used by investing activities 336,886 Cash flows from financing activities: Proceeds from notes payable to affiliate 92,993 Proceeds from note payable 10,000 Capital contribution 30,000 Issuance of Series B preferred stock 990,594 Net cash provided by financing activities 1,123,587 Net change in cash (17,571) Cash, beginning of year 43,617 Cash, end of year $ 26,046 Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 588 Noncash investing and financing activities: Equity converted to debt $ 428,883 Conversion of limited liability corporation interest into common stock $ 19,741 See accompanying notes to financial statement. WRAPSTERS, INC. Notes to Financial Statements (1) Summary of Significant Accounting Policies Company Background and Nature of Operations On February 19, 1998, Wrapsters, Inc. (the "Company") was formed by the merger of Wrapsters, L.C., a Florida limited liability company, with HAI Enterprises, Inc. ("HAI"), a Colorado corporation. Wrapsters, L.C. was formed on June 6, 1997 and operated two quick services restaurants in Boca Raton, Florida specializing in freshly prepared, healthy flour tortilla wraps, fruit smoothies and other related menu items. HAI was formed February 23, 1996 and had no significant assets, liabilities or operations at the time of the merger. HAI was the surviving entity from the merger and immediately changed its name to Wrapsters, Inc. The merger was effected by exchanging total members' equity in Wrapsters, L.C. for 3,800,000 shares of HAI no par or stated value common stock and issuing a note payable to one of the members in the amount of $428,883 (see Note 4). For accounting purposes, this merger was accounted for as a purchase transaction, and since the previous HAI stockholders only controlled 4.9% of the Company's common stock following the merger while the previous members of Wrapsters, L.C. owned 50% of the Company following the merger, this transaction is considered a reverse merger and Wrapsters, L.C. is considered to be the surviving entity. No goodwill or other intangible assets resulted from this merger. Following the merger, the Company opened five more stores during 1998 and closed three stores during the year. At January 3, 1999, the Company was operating four stores, three located in Atlanta, Georgia and one located in Arlington, Virginia. Basis of Presentation and Fiscal Year The Company operates on a 52/53-week fiscal year ending on the Sunday closest to December, 31 of each year. Accordingly, the financial statements presented ended on January 3, 1999. All general references to years relate to fiscal years unless otherwise noted. The financial statements are prepared in accordance with generally accepted accounting principles ("GAAP"). In preparing financial statements in accordance with GAAP, management is required to make certain estimates. Actual results could vary from those estimates. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of food, beverages, paper products and supplies. Property and Equipment Property and equipment is recorded at cost, less accumulated depreciation. Major additions and improvements are charged to the property accounts while replacements, maintenance and repairs which do not improve or extend the life of respective assets are expensed currently. When property is retired or otherwise disposed, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized. Depreciation is computed using the straight-line method. The following represents the useful lives over which the assets are depreciated: Leasehold improvements Life of lease Furniture, fixtures and equipment 7 years Signage 7 years Computer equipment 3 years Revenue Recognition Revenue is recognized in the period for which related food and beverage products are sold. Initial fees from the awarding of individual franchises are deferred and recorded as revenue when the franchised restaurant is opened WRAPSTERS, INC. Notes to Financial Statements, continued (1) Summary of Significant Accounting Policies, continued Pre-Opening Costs Pre-opening costs are incurred before a restaurant is opened and consist primarily of wages and salaries, hourly employee recruiting, license fees, meals, lodging and travel plus the cost of hiring and training the management teams. Pre-opening costs are expensed as incurred. Advertising Costs The Company expenses all advertising costs as incurred. Loss on Store Closings When the Company closes a store, management determines whether the estimated net realizable value of property and equipment held at the store that will not be transferred to another location but which will be sold or otherwise disposed exceeds the assets' carrying value. To the extent that the estimated net realizable value is less than the carrying value, the related loss is immediately accrued. Likewise, management estimates the total net future lease payments, including estimated lease settlement payments, that will be paid before the Company can negotiate a release from the lease and accrues a loss for this amount. Income Taxes Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company's assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. At January 3, 1999, the Company's only significant deferred tax attribute was its net operating loss since inception, and this deferred tax asset has been fully reserved. Earnings (Loss) Per Common Share The Company is required to report on the face of the statement of operations the income (loss) per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants. Basic earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share. The Company excludes the potentially dilutive securities from the calculation of loss per share because their inclusion is anti-dilutive since the Company is operating at a loss. Due to the merger, the Company believes the most meaningful presentation is to treat all common shares outstanding immediately following the merger as outstanding for the entire year. The following table summarizes the calculation of basic and dilutive loss per share: Net loss $ (1,282,682) Less dividends on Series B preferred stock (97,952) Net loss attributable to common stockholders $ (1,380,634) Weighted average common shares outstanding 7,990,480 Basic and dilutive loss per common share $ (0.17) WRAPSTERS, INC. Notes to Financial Statements, continued (2) Property and Equipment Property and equipment at January 3, 1999 is summarized as follows: Leasehold improvements $ 114,560 Furniture, fixtures and equipment 139,004 Signage 31,372 Computer equipment 5,727 290,663 Less accumulated depreciation 18,743 Net property and equipment $ 271,920 Depreciation expense amounted to $40,459 fiscal 1998. (3) Note Payable Notes payable consists of a $20,000 revolving line of credit with a bank. The line of credit bears interest at 2% above the lender's index rate, as defined, is guaranteed by the two of the Company's stockholders and is collateralized by substantially all assets of the Company. The line of credit is due on demand. (4) Notes Payable to Affiliates In connection with the merger discussed in Note 1, $428,883 of members' equity belonging to one of the two members of Wrapsters, L.C. was converted into an unsecured promissory note in that amount. The note bears interests at 10% per year. Provisions in the promissory note state that the principal balance and all accrued interest must be repaid upon the earlier to occur of either August 20, 1999 or the receipt by the Company of any financing subsequent to the merger and the related stock sale described in Note 5 in the amount of at least $1,000,000. The principal balance is to be repaid at the option of the holder in either cash or the Company's registered common stock valued at the lesser of $1.00 per share or 80% of the market price of the Company's common stock at the time of conversion. If the Company does not repay this note by the maturity date, the interest rate converts to the maximum amount allowed by law in the state of Florida. The Company has issued a convertible secured note to one of its stockholders. This note allows the Company to borrow up to $150,000, bears interest at 7% per year and is collateralized by all assets of the Company not already encumbered by the note payable discussed in Note 3. The note plus all accrued interest are due May 31, 1999 and are payable at the holder's option in either cash or the Company's common stock valued at the lesser of $1.00 per share or 80% of the market price of the Company's common stock at the time of conversion. If the Company does not repay this note by the maturity date, the interest rate converts to 18% per year. At January 3, 1999, $84,000 was outstanding on this note. This note was not repaid at maturity (see note 9). As a condition of the convertible secured note, the President of the Company agreed to reduce the cash portion of his salary by one-half with the other half being taken in the form of an unsecured promissory note with the same terms and conditions as the convertible secured note, except for the lack of any security interest. At January 3, 1999, $8,993 was outstanding on this salary deferral note. (5) Capital Structure and Transactions As described in Note 1, Wrapsters, L.C. operated as a limited liability company prior to the merger with HAI. As such, Wrapsters, L.C. had no outstanding equity securities. Its equity was embodied in the members' equity account. Upon the merger, the members' equity interests were exchanged for 3,800,000 shares of the Company's common stock and for an unsecured promissory note. Simultaneous with the merger, the Company sold 3,800,000 shares of its common stock and 113,500 shares of Series B preferred stock ("Series B Preferred") to an affiliate for $1,000,000 less offering costs of $9,406. For accounting purposes, management has attributed all the proceeds to the Series B Preferred based upon the cumulative dividend rights, redemption and conversion features and the liquidation preference in the Series B Preferred and management's belief that the common stock essentially had no significant value at that time. WRAPSTERS, INC. Notes to Financial Statements, continued (5) Capital Structure and Transactions, continued The Series B Preferred pays cumulative dividends at a 10% annual rate based on the stock's face value of $10 per share. The Series B Preferred has a liquidation preference of $10 per share plus unpaid cumulative dividends and is nonvoting, except in limited situations. At the Company's option, the Series B Preferred can be redeemed in whole or in part at any time at $10 per share plus cumulative unpaid dividends. At the holder's option, the Series B Preferred can be converted at any time into publicly traded preferred stock issued by the Company at a conversion rate of one share of Series B Preferred for each share of publicly traded preferred stock. At January 3, 1999, dividends in arrears on this preferred stock totalled $97,952. (6) Stock Options and Warrants On September 3, 1998, the Company adopted the 1998 Stock Compensation Plan, which reserves an aggregate of 800,000 shares of the Company's common stock for issuance to certain officers, directors, employees and advisors in the form of either incentive stock options or non-qualified stock options, within certain limitations specified in the plan document. Options granted under this plan must be granted at a minimum of the fair market value at the date of grant and the Company can, in its discretion issue simultaneously alternative stock appreciation rights. In that case, the optionee can choose whether to exercise the option or the stock appreciation right. Options must be exercised within a period of no more than ten years from the plan's inception. During fiscal 1998, all options granted pursuant to this plan vested in no more than three years and are exercisable for a period of five years. The following summarizes stock option activity related to this plan through January 3, 1999: Exercise Shares Price Options granted 157,500 $ 1.00 Options canceled 7,500 1.00 Options outstanding at January 3, 1999 150,000 $ 1.00 At January 3, 1999, options on 136,668 shares were exercisable and all options had weighted average remaining contractual life of approximately four and two-thirds years. The Company accounts for stock options pursuant to Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation cost has been recognized in connection with these options. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require, entities to compute the fair value of options at the date of grant and to recognize such costs as compensation expense immediately if there is no vesting period or ratably over the vesting period of the options. The Company has chosen not to adopt the cost recognition principles of SFAS No. 123. Had compensation cost been determined based upon the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net loss and loss per share would not have been effected to any measurable degree based on management's use of the minimum value method with the following weighted average grant date assumptions used for grants in 1998: fair value of the underlying stock of $0.01, dividend yield of 0%, risk free interest rate of 5.5% and an expected life of five years. All of these options will be terminated in connection with the NYB Foods, Inc. transaction discussed in note 9. WRAPSTERS, INC. Notes to Financial Statements, continued (7) Commitments and Contingencies Leases The Company leases certain store locations and equipment pursuant to operating leases with initial terms ranging from three to five years, with renewal options of up to five years. Future minimum lease payments (which do not include amounts payable by the Company for maintenance costs, real estate taxes and insurance, or contingent rentals payable on a percentage of sales in excess of stipulated amounts for the store locations) under noncancelable operating leases, including leases on the three stores that were closed during 1998, at January 3, 1999 are as follows: Fiscal Year Ended 1999 $ 149,000 2000 151,000 2001 113,000 2002 73,000 2003 47,000 Total minimum lease payments $ 533,000 The Company incurred rent expense during fiscal 1998 of approximately $119,000. Employment Agreements Effective February 20, 1998, the Company entered into employment agreements with its president, its Board chairman, and its Board vice chairman. The employment agreements specified certain salaries and other benefits that would be paid in exchange for their services to the Company. The agreements were for one year terms and two of them expired in February 1999 and were not renewed; however, the Company is continuing to honor these agreements as though they had been renewed. The agreement with the vice chairman of the Board was modified on July 8, 1998 to become effective on the date that individual was able to bring to the Company financing of at least $750,000 and would then run for a term of three years from that date. The financing has not yet been received, so the term has not yet begun. These employment agreements will be terminated in connection with the NYB Foods, Inc. transaction discussed in Note 9. Litigation During 1998, the Company sold one franchise to an individual for a franchise fee of $50,000. A dispute subsequently arose and the individual filed suit against the Company in connection with that franchise. The Company is negotiating a settlement with that individual and believes it is probable that a settlement will be reached that will not involve any significant costs to the Company. The franchise fee has been deferred pending resolution of this matter. Litigation against the Company has commenced seeking eviction and possible monetary damages against the Company in connection with leases on two closed stores. Additionally, future similar litigation is possible in connection with leases on other closed stores. At this time, management cannot reasonably estimate any possible losses resulting from these matters. The 1998 financial statements do not include any loss provision in connection with the above matters. (8) Going Concern Considerations At January 3, 1999, the Company had an accumulated deficit of $1,546,257, incurred a net loss during 1998 of $1,282,682, had negative cash flows from operations of $804,272 and had negative working capital of $841,232. Since that date, the Company has continued to loss money and has closed all but two of its stores (see Note 9). Management is negotiating with certain parties to merge the Company in an effort to strengthen its financial position and operations, and they believe the financing available to them from affiliates as well as negotiations with certain suppliers will enable the Company to continue operations until a transaction is consummated that will strengthen its financial position (see Note 9). The financial statements do not reflect any adjustments that may be necessary in the event the Company does not successfully consummate such a merger transaction. WRAPSTERS, INC. Notes to Financial Statements, continued (9) Subsequent Events During 1999, the Company closed its two Florida stores leaving only the two stores in Atlanta, Georgia in operation. The Company is also contemplating closing the two remaining stores. On August 31, 1999, the Company executed an Agreement and Plan of Reorganization with NYB Foods, Inc. ("NYB") and NYB Acquisitions Corp. ("Acquisitions") a newly formed, wholly owned subsidiary of the Company, whereby all 4,900,000 previously outstanding shares of NYB will be exchanged for $500,000 and 7,500,000 newly issued shares of the Company's common stock, and NYB will be merged with and into Acquisitions with Acquisitions being the surviving entity. In connection with this agreement, two of the Company's existing shareholders will surrender 1,250,000 shares of Company common stock they own to the Company. Additionally, all notes payable to affiliates will be converted to common stock of the Company at a rate of one share of common stock for each dollar of indebtedness or will be repaid in full, and all Series B preferred stock will be converted to the Company's common stock at a rate of three shares of common stock for each share of preferred stock. As a part of the merger, the Company will contribute $200,000 to Acquisitions for its working capital from a private placement to be closed simultaneously with the merger, and the Company will commit to raise an additional $1,000,000 of capital for working capital purposes within six months of the closing of this merger. This merger is expected to close during the fourth quarter of 1999. PART II - INFORMATION NOT REQUIRED IN PROSPECTUS INDEMNIFICATION OF DIRECTORS AND OFFICERS Colorado statutes and the Articles of Incorporation of the Issuer provide for indemnification of officers and directors and for limitation on their liability, as follows: Colorado Revised Statutes Section 7-108-401: General standards of conduct for directors and officers. (1) Each director shall discharge his or her duties as a director, including his or her duties as a member of a committee, and each officer with discretionary authority shall discharge his or her duties under that authority: (a) In good faith; (b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) In a manner he or she reasonably believes to be in the best interests of the corporation. (2) In discharging his or her duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (a) One or more officers or employees of the corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented; (b) Legal counsel, a public accountant, or another person as to matters the director or officer reasonably believes are within such person's professional or expert competence; or (c) In the case of a director, a committee of the board or directors of which the director is not a member if the director reasonably believes the committee merits confidence. (3) A director or officer is not acting in good faith if he or she has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (2) of this section unwarranted. (4) A director or officer is not liable as such to the corporation or its shareholders for any action he or she takes or omits to take as a director or officer, as the case may be, if, in connection with such action or omission, he or she performed the duties of the position in compliance with this section. Colorado Revised Statutes Section 7-108-402: Limitation of certain liabilities of directors and officers. (1) If so provided in the articles of incorporation, the corporation shall eliminate or limit the personal liability of a director to the corporation or to its shareholders for monetary damages for breach of fiduciary duty as a director; except that any such provision shall not eliminate or limit the liability of a director to the corporation or to its shareholders for monetary damages for any breach of the director's duty of loyalty to the corporation or to its shareholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, acts specified in section 7-108-403, or any transaction from which the director directly or indirectly derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director to the corporation or to its shareholders for monetary damages for any act or omission occurring before the date when such provision becomes effective. (2) No director or officer shall be personally liable for any injury to person or property arising out of a tort committed by an employee unless such director or officer was personally involved in the situation giving rise to the litigation or unless such director or officer committed a criminal offense in connection with such situation. The protection afforded in this subsection (2) shall not restrict other common-law protections and rights that a director or officer may have. This subsection (2) shall not restrict the corporation's right to eliminate or limit the personal liability of a director to the corporation or to its shareholders for monetary damages for breach of fiduciary duty as a director as provided in subsection (1) of this section. Colorado Revised Statutes Section 7-108-403: Liability of directors for unlawful distributions. (1) A director who votes for or assents to a distribution made in violation of section 7-106-401 or the articles of incorporation is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating said section or the articles of incorporation if it is established that the director did not perform the director's duties in compliance with section 7-108-401. In any proceeding commenced under this section, a director shall have all of the defenses ordinarily available to a director. (2) A director held liable under subsection (1) of this section for an unlawful distribution is entitled to contribution: (a) From every other director who could be held liable under subsection (1) of this section for the unlawful distribution; and (b) From each shareholder who accepted the distribution knowing the distribution was made in violation of section 7-106-401 or the articles of incorporation, the amount of the contribution from such shareholder being the amount of the distribution to that shareholder that exceeds what could have been distributed to that shareholder without violating said section or the articles of incorporation. Colorado Revised Statutes Section 7-108-501: Conflicting interest transaction. (1)(a) As used in this section, "conflicting interest transaction" means any of the following: (i) A loan or other assistance by the corporation to a director of the corporation or to an entity in which a director of the corporation is a director or officer or has a financial interest; (ii) A guaranty by a corporation of an obligation of a director of the corporation or of an obligation of an entity in which a director of the corporation is a director or officer or has a financial interest; or (iii) A contract or transaction between a corporation and a director of the corporation or between the corporation and an entity in which a director of the corporation is a director or officer or has a financial interest. (b) "Conflicting interest transaction" shall not include any transaction between a corporation and another entity that owns, directly or indirectly, all of the outstanding shares of the corporation or all of the outstanding shares or other equity interests of which are owned, directly or indirectly, by the corporation. (2) No conflicting interest transaction shall be void or voidable or be enjoined, set aside, or give rise to an award of damages or other sanctions in a proceeding by a shareholder or by or in the right of the corporation, solely because the conflicting interest transaction involves a director of the corporation or an entity in which a director of the corporation is a director or officer or has a financial interest or solely because the director is present at or participates in the meeting of the corporation's board of directors or of the committee of the board of directors which authorizes, approves, or ratifies the conflicting interest transaction or solely because the director's vote is counted for such purpose if: (a) The material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes, approves, or ratifies the conflicting interest transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or (b) The material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the shareholders entitled to vote thereon, and the conflicting interest transaction is specifically authorized, approved, or ratified in good faith by a vote of the shareholders; or (c) The conflicting interest transaction is fair to the corporation. (3) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes, approves, or ratifies the conflicting interest transaction. (4) A board of directors or a committee thereof shall not authorize a loan, by the corporation to a director of the corporation or to an entity in which a director of the corporation is a director or officer or has a financial interest, or a guaranty, by the corporation of an obligation of an obligation of a director of the corporation or of an obligation of an entity in which a director of the corporation is a director or officer or has a financial interest, pursuant to paragraph (a) of subsection (2) of this section until at least ten days after written notice of the proposed authorization of the loan or guaranty has been given to the shareholders who would be entitled to vote therein if the issue of the loan or guaranty were submitted to a vote of the shareholders. Colorado Revised Statutes Section 7-109-102: Authority to indemnify directors. (1) Except as provided in subsection (4) of this section, a corporation may indemnify a person made a party to a proceeding because the person is or was a director against liability incurred in the proceeding if: (a) The person conducted himself or herself in good faith; and (b) The person reasonably believed: (i) In the case of conduct in an official capacity with the corporation, that his or her conduct was in the corporation's best interests; and (ii) In all other cases, that his or her conduct was at least not opposed to the corporation's best interests; and (c) In the case of any criminal proceeding, the person had no reasonable cause to believe his or her conduct was unlawful. (2) A director's conduct with respect to an employee benefit plan for a purpose the director reasonably believed to be in the interests of the participants in or beneficiaries of the plan is conduct that satisfies the requirement of subparagraph (II) of paragraph (b) of subsection (1) of this section. A director's conduct with respect to an employee benefit plan for a purpose that the director did not reasonably believe to be in the interests of the participants in or beneficiaries of the plan shall be deemed not to satisfy the requirements of paragraph (a) of subsection (1) of this section. (3) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this section. (4) A corporation may not indemnify a director under this section: (a) In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (b) In connection with any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which proceeding the director was adjudged liable on the basis that he or she derived an improper personal benefit. (5) Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. Colorado Revised Statutes Section 7-109-103: Mandatory indemnification of directors. Unless limited by its articles of incorporation, a corporation shall indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because the person is or was a director, against reasonable expenses incurred by him or her in connection with the proceeding. Colorado Revised Statutes Section 7-109-104: Advance of expenses to directors. (1) A corporation may pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of the final disposition of the proceeding if: (a) The director furnishes to the corporation a written affirmation of the director's good faith belief that he or she has met the standard of conduct described in section 7-109-102; (b) The director furnishes to the corporation a written undertaking, executed personally or on the director's behalf, to repay the advance if it is ultimately determined that he or she did not meet the standard of conduct; and (c) A determination is made that the facts then known to those making the determination would not preclude indemnification under this article. (2) The undertaking required by paragraph (b) of subsection (1) of this section shall be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment. (3) Determinations and authorizations of payments under this section shall be made in the manner specified in section 7-109-106. Colorado Revised Statutes Section 7-109-105: Court-ordered indemnification of directors. (1) Unless otherwise provided in the articles of incorporation, a director who is or was a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court considers necessary, may order indemnification in the following manner: (a) If it determines that the director is entitled to mandatory i ndemnification under section 7-109-103, the court shall order indemnification, in which case the court shall also order the corporation to pay the director's reasonable expenses incurred to obtain court-ordered indemnification. (b) If it determines that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director met the standard of conduct set forth in section 7-109-102(1) or was adjudged liable in the circumstances described in section 7-109-102(4), the court may order such indemnification as the court deems proper; except that the indemnification with respect to any proceeding in which liability shall have been adjudged in the circumstances described in section 7-109-102(4) is limited to reasonable expenses incurred in connection with the proceeding and reasonable expenses incurred to obtain court-ordered indemnification. Colorado Revised Statutes Section 7-109-106: Determination and authorization of indemnification of directors. (1) A corporation may not indemnify a director under section 7-109-102 unless authorized in the specific case after a determination has been made that indemnification of the director is permissible in the circumstances because the director has met the standard of conduct set forth in section 7-109-102. A corporation shall not advance expenses to a director under section 7-109-104 unless authorized in the specific case after the written affirmation and undertaking required by section 7-109-104(1)(a) and (1)(b) are received and the determination required by section 7-109-104(1)(c) has been made. (2) The determinations required by subsection (1) of this section shall be made: (a) By the board of directors by a majority vote of those present at a meeting at which a quorum is present, and only those directors not parties to the proceeding shall be counted in satisfying the quorum; or (b) If a quorum cannot be obtained, by a majority vote of a committee of the board of directors designated by the board of directors, which committee shall consist of two or more directors not parties to the proceeding; except that directors who are parties to the proceeding may participate in the designation of directors for the committee. (3) If a quorum cannot be obtained as contemplated in paragraph (a) of subsection (2) of this section, and a committee cannot be established under paragraph (b) of subsection (2) of this section, or, even if a quorum is obtained or a committee is designated, if a majority of the directors constituting such quorum or such committee so directs, the determination required to be made by subsection (1) of this section shall be made: (a) By independent legal counsel selected by a vote of the board of directors or the committee in the manner specified in paragraph (a) or (b) of subsection (2) of this section or, if a quorum of the full board cannot be obtained and a committee cannot be established, by independent legal counsel selected by a majority vote of the full board of directors; or (b) By the shareholders. (4) Authorization of indemnification and advance of expenses shall be made in the same manner as the determination that indemnification or advance of expenses is permissible; except that, if the determination that indemnification or advance of expenses is permissible is made by independent legal counsel, authorization of indemnification and advance of expenses shall be made by the body that selected such counsel. Colorado Revised Statutes Section 7-109-107: Indemnification of officers, employees, fiduciaries, and agents. (1) Unless otherwise provided in the articles of incorporation: (a) An officer is entitled to mandatory indemnification under section 7-109-103, and is entitled to apply for court-ordered indemnification under section 7-109-105, in each case to the same extent as a director; (b) A corporation may indemnify and advance expenses to an officer, employee, fiduciary, or agent of the corporation to the same extent as to a director; and (c) A corporation may also indemnify and advance expenses to an officer, employee, fiduciary, or agent who is not a director to a greater extent, if not inconsistent with public policy, and if provided for by its bylaws, general or specific action of its board of directors or shareholders, or contract. Colorado Revised Statutes Section 7-109-108: Insurance. A corporation may purchase and maintain insurance on behalf of a person who is or was a director, officer, employee, fiduciary, or agent of the corporation, or who, while a director, officer, employee, fiduciary, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary, or agent of another domestic or foreign corporation or other person or of an employee benefit plan, against liability asserted against or incurred by the person in that capacity or arising from his or her status as a director, officer, employee, fiduciary, or agent, whether or not the corporation would have power to indemnify the person against the same liability under section 7-109-102, 7-109-103, or 7-109-107. Any such insurance may be procured from any insurance company designated by the board of directors, whether such insurance company is formed under the laws of this state or any other jurisdiction of the United States or elsewhere, including any insurance company in which the corporation has an equity or any other interest through stock ownership or otherwise. Colorado Revised Statutes Section 7-109-109: Limitation on indemnification of directors. (1) A provision treating a corporation's indemnification of, or advance of expenses to, directors that is contained in its articles of incorporation or bylaws, in a resolution of its shareholders or board of directors, or in a contract, except an insurance policy, or otherwise, is valid only to the extent the provision is not inconsistent with sections 7-109-101 to 7-109-108. If the articles of incorporation limit indemnification or advance of expenses, indemnification and advance of expenses are valid only to the extent not inconsistent with the articles of incorporation. (2) Sections 7-109-1-1 to 7-109-108 do not limit a corporation's power to pay or reimburse expenses incurred by a director in connection with an appearance as a witness in a proceeding at a time when he or she has not been made a named defendant or respondent in the proceeding. Colorado Revised Statutes Section 7-109-110: Notice to shareholders of indemnification of director. If a corporation indemnifies or advances expenses to a director under this article in connection with a proceeding by or in the right of the corporation, the corporation shall give written notice of the indemnification or advance to the shareholders with or before the notice of the next shareholders' meeting. If the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholder signs a writing consenting to such action. Article Seventh, Subsection (a), Articles of Incorporation: Conflicting Interest Transactions. As used in this paragraph, "conflicting interest transaction" means any of the following: (i) a loan or other assistance by the corporation to a director of the corporation or to an entity in which a director of the corporation is a director or officer or has a financial interest; (ii) a guaranty by the corporation of an obligation of a director of the corporation or of an obligation of an entity in which a director of the corporation is a director or officer or has a financial interest; or (iii) a contract or transaction between a corporation and a director of the corporation or between the corporation and an entity in which a director of the corporation is a director or officer or has a financial interest. No conflicting interest transaction shall be void or voidable, be enjoined, be set aside, or give rise to an award of damages or other sanctions in a proceeding by a shareholder or by or in the right of the corporation, solely because the conflicting interest transaction involves a director of the corporation or an entity in which a director of the corporation is a director or officer or has a financial interest, or solely because the director is present at or participates in the meeting of the corporation's board of directors or of the committee of the board of directors which authorizes, approves or ratifies the conflicting interest transaction or solely because the director's vote is counted for such purpose if: (A) the material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes, approves, or ratifies the conflicting interest transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or (B) the material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the shareholders entitled to vote thereon, and the conflicting interest transaction is specifically authorized, approved or ratified in good faith by a vote of the shareholders; or (c) a conflicting interest transaction is fair to the corporation as of the time it is authorized, approved or ratified by the board of directors, a committee thereof, or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes, approves or ratifies the conflicting interest transaction. Article Seventh, Subsection (b), Articles of Incorporation: Loans and Guaranties for the Benefit of Directors. Neither the board of directors nor any committee thereof shall authorize a loan by the corporation to a director of the corporation or to an entity in which a director of the corporation is a director or officer or has a financial interest, or a guaranty by the corporation of an obligation of an obligation of a director of the corporation or of an obligation of an entity in which a director of the corporation is a director or officer or has a financial interest, until at least ten days after written notice of the proposed authorization of the loan or guaranty has been given to the shareholders who would be entitled to vote thereon if the issue of the loan or guaranty were submitted to a vote of the shareholders. The requirements of this paragraph (b) are in addition to, and not in substitution for, the provisions of paragraph (a) of Article SEVENTH. Article Seventh, Subsection (c), Articles of Incorporation: The corporation shall indemnify, to the maximum extent permitted by law, any person who is or was a director, officer, agent, fiduciary or employee of the corporation against any claim, liability or expense arising against or incurred by such person made party to a proceeding because he is or was a director, officer, agent, fiduciary or employee of the corporation or because he is or was serving another entity or employee benefit plan as a director, officer, partner, trustee, employee, fiduciary or agent at the corporation's request. The corporation shall further have the authority to the maximum extent permitted by law to purchase and maintain insurance providing such indemnification. Article Seventh, Subsection (d), Articles of Incorporation: Limitation on Director's Liability. No director of this corporation shall have any personal liability for monetary damages to the corporation or its shareholders for breach of his fiduciary duty as a director, except that this provision shall not eliminate or limit the personal liability of a director to the corporation or its shareholders for monetary damages for: (i) any breach of the director's duty of loyalty to the corporation or its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) voting for or assenting to a distribution in violation of Colorado Revised Statutes Section 7-106-401 or the articles of incorporation if it is established that the director did not perform his duties in compliance with Colorado Revised Statutes Section 7-108-401, provided that the personal liability of a director in this circumstance shall be limited to the amount of the distribution which exceeds what could have been distributed without violation of Colorado Revised Statutes Section 7-106-401 or the articles of incorporation; or (iv) any transaction from which the director directly or indirectly derives an improper personal benefit. Nothing contained herein will be construed to deprive any director of his right to all defenses ordinarily available to a director nor will anything herein be construed to deprive any director of any right he may have for contribution from any other director or other person. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Registration Statement Filing Fees $ 2,207.00 State Registration Fees $ 2,000.00 Printing Costs $ 2,500.00 Legal Fees $ 15,000.00 Accounting Fees $ 7,500.00 Listing Fees $ 1,500.00 RECENT SALES OF UNREGISTERED SECURITIES 1. Prior to the acquisition of NYB Foods, Inc., in the merger with a wholly-owned subsidiary, Uptown issued 368,200 shares of common stock to five of its shareholders in connection with, and as consideration for, the shareholders making loans to Uptown. The following shares were issued on the dates indicated below: 25,000 shares issued to Robert Rynarzewski on June 3, 1999; 15,000 shares issued to Joseph Kostoff on June 3, 1999; 25,000 shares issued to Stanley Morton on June 3, 1999; 50,000 shares issued to Richard Wagner on June 3, 1999; 190,000 shares issued to Santa Cruz Holdings, Inc., on June 23, 1999; 60,000 shares issued to Richard Wagner on September 14, 1999; and 3,200 shares issued to Robert Rynarzewski on September 14, 1999. All the parties who received shares in the above transactions were shareholders of Uptown before the issuance of shares, and are all accredited investors. Therefore, the issuance of unregistered shares of common stock was exempt under Section 4(6) of the Securities Act of 1933. 2. In September of 1999, we sold 3,400,000 shares of our common stock for $850,000 to two shareholders, the Kazi Family Partnership, LP, and Dr. C.R. Joshi (each investor purchased 1,700,000 shares). Since the total offering price was less than $1,000,000, both offerees resided in California, and we had not raised capital in the past year under this exemption, the offering was exempt from registration under Regulation D, Rule 504, promulgated under Section 3(b) of the Securities Act of 1933. 3. At approximately the same time as the above sales of common shares, we issued 3,000,000 warrants to purchase common stock to Mohamad Khalifa, a resident of the United Emirates Republic, for $200,000.00. Since the purchaser was a resident of a foreign country, the sale was exempt from registration pursuant to Regulation S. 4. In early October, 1999, within two weeks of the above transactions, Uptown issued 7,500,000 unregistered shares of common stock and paid $500,000 for the acquisition of all the outstanding shares of NYB Foods, Inc., by one of its subsidiaries. At that time, Uptown had virtually no business, having previously closed all its Wrapsters restaurants, and the only assets it had consisted of the approximately $1,000,000 in cash received from the sale of common stock and warrants referred to above. Therefore, the "business" of Uptown would be the owning and operating of the NYB Foods subsidiary it was acquiring through merger. The five former NYB Foods shareholders were all sophisticated investors, had full access to all information they might request, acquired what amounted to controlling interest in Uptown, the offering was made only to the five NYB shareholders, and all share certificates issued bore restrictive legends. The individuals who received Uptown stock are: A. Robert D. Palmer, Jr., the founder and President of NYB Foods, and the new president and chairman of the board of directors of Uptown. Mr. Palmer has significant experience in financial and investment matters, having been the president of two publicly-traded companies, Grease Monkey and USA Fast Lube. In that connection, Mr. Palmer coordinated the legal disclosure and accounting process of registering shares of common stock, worked with the brokerage community in underwriting the offering, supervised the Securities Exchange Act of 1934 reporting, and negotiated the sale of controlling interest in each company. B. L. Bennett Berg was an original shareholder of NYB Foods, has been an owner of several businesses, and has consulted with numerous business owners concerning the structure, operations, financing and sale of their businesses. Mr. Berg has 25 years investing experience in both publicly-traded and closely- held business concerns. C. Gary Palmer has been an independent business man for 30 years, owning his own distributorship and manufacturer's representative firm. He is the brother of Robert Palmer, and has been privy to corporate operations and planning from inception. Mr. Palmer has 15 years experience in publicly-traded and closely-held business investing. D. Mary Jo Sheldon-DiVito is and accountant and attorney. Ms. Sheldon- DiVito was given access to any and all information concerning Uptown, and is a sophisticated investor since she is familiar with investments of the nature involved in this transaction and has substantial investment and business experience. E. Hank Rabin was given access to any and all information concerning Uptown, and is a sophisticated investor since he is familiar with investments of the nature involved in this transaction and has substantial investment and business experience. Based on the limited nature of the offering, being offered to five individuals, all of who were shareholders of the company acquired in the merger, the availability to them of information concerning Uptown, restrictive legends being affixed to the share certificates, the experience of the investors with this particular company and investments of this nature, and the general sophistication of the former NYB Foods shareholders, this offering was exempt from registration under Section 4(2) of the Securities Act of 1933. 5. There were certain other transactions that took place at the same time as the above-described merger and financings. These other transactions were contemplated as part of the over-all business combination and financing plan. A. Clyde E. Culp, III, a shareholder and former and present director of Uptown, was owed $428,883 under a promissory note. Mr. Culp exchanged that note for 428,883 shares of our common stock. Mr. Culp is an accredited investor, and therefore the offer and issuance of the shares to him was exempt from registration under Section 4(6) of the Securities Act of 1933. B. Santa Cruz Squeeze Holdings, Inc., a shareholder of Uptown, and the president of which is William Gallagher, a former director of Uptown and an individual who makes his living in the securities and investment industry, exhanged a promissory note in the principal amount of $109,000 for 109,000 shares of common stock. Santa Cruz is an accredited an accredited investor, and therefore the offer and issuance of the shares to it was exempt from registration under Section 4(6) of the Securities Act of 1933. C. Thirty individuals who owned shares of Series B Preferred stock in Uptown exchange their shares for common stock at the rate of three shares of common for each share of Series B Preferred. Since this transaction involved the exchange of one security for another from the same company, and no compensation was paid to anyone for soliciting the exchange, the transaction was exempt under Section 3(a)(10) of the Securities Act of 1933. The individuals who exchanged shares of their Series B Preferred Stock for common stock are as follows: Name Series B Shares Common Stock Shares Diane/William Bennett 2,500 7,500 Roger/Darcy Brooks 1,500 4,500 Donald Clark 1,500 4,500 John Cristakes 2,500 7,500 Don Drews 4,000 12,000 Frederick Garner 3,500 10,500 Norman/Barbara Glutzer 2,500 7,500 Jeffrey/Yolande Gottlieb 2,500 7,500 Dr. Michael Grear 2,500 7,500 Alan Haehle 1,000 3,000 Michael Henry 500 1,500 Robert Henry 500 1,500 Charles Kuhter 1,000 3,000 Dr. Ronald Lang 10,500 31,500 Stanley Morton 2,500 7,500 Thomas Murphy 1,000 3,000 Lewis/Mimi Myers 1,500 4,500 Margaret Sanderson 1,000 3,000 Dieter Schulz 500 1,500 Santa Cruz Squeeze, Inc. 2,500 7,500 Dr. Robert Stoltz 1,500 4,500 William Throolin/ Sharon Peterson 500 1,500 Thomas/Sandra Straetker 1,000 3,000 Michael Tucker 2,500 7,500 Bhagvan Vaghani 5,000 15,000 Dru/Dana Vowell 1,000 3,000 Kevin Vrba 500 1,500 Dr. Richard Wagner 53,500 160,500 Scott Weber 500 1,500 Alan Wilson 1,000 3,000 D. Five individuals and entities received shares of common stock and warrants as compensation for negotiating and coordinating the financing discussed above (the sale of the 3,400,000 shares of common stock for $850,000, and the sale of 3,000,000 common stock purchase warrants for $200,000). The recipients are as follows: (i) Mohamed Ghaus Khalifa received 201,250 shares of common stock and 144,000 common stock purchase warrants. Mr. Khalifa is a resident of the United Emirates Republic, and the issuance of shares and warrants to him are exempt under Regulation S. In addition, Mr. Khalifa has a net worth in excess of $1,000,000 and is therefore an accredited investor, exempting the issuance of 201,250 shares of common stock and 144,000 common stock purchase warrants under Section 4(6) of the Securities Act of 1933. (ii) DSF Capital, Inc., is a corporation owned by David Fromer, an individual with ten years experience in the securities and investment industry, and whose net worth is in excess of $1,000,000. The issuance of 24,750 shares of common stock and 161,000 common stock purchase warrants to DSF Capital, Inc., is exempt from registration under Section 4(6), as the corporation's sole owner is an accredited investor. (iii) Bicoastal Associates, Inc., is a coporation whose three owners are all securities attorneys. Two of the three owners are accredited investors, having annual incomes in excess of $200,000. The third owner, while not accredited, is a sophisticated investor, as are the other two owners, having several years' experience in the practice of securities law. In addition, the contracts for the purchase of common stock and warrants by the Kazi Family Partnership, L.P., Dr. C.R. Joshi, and Mohamed Ghaus Khalifa were drafted by the owners. Therefore, issuance of 37,250 shares of common stock and 100,000 common stock purchase warrants to Bicoastal Associates, Inc., were exempt from registration under Section 4(2) of the Securities Act of 1933. (iv) Man Chu Chow was issued 6,250 shares of common stock and 30,000 common stock purchase warrants. Mr. Chow was given access to any and all information concerning Uptown, and is a sophisticated investor since he is familiar with investments of the nature involved in this transaction and has substantial investment and business experience. Therefore, the issuance of shares to him was exempt under Section 4(2) of the Securities Act of 1933. (v) Pacific Basin, LLC, was issued 50,000 common stock purchase warrants. Pacific Basin is a limited liability company owned y two individuals, both of whom are accredited investors. Therefore, the issuance of warrants to Pacific Basin, LLC, was exempt from registration under Section 4(6) of the Securities Act of 1933. 6. Five individuals who had previously been issued common stock purchase warrants exercised them. Since these individuals were all security-holders of Uptown who exchanged their securities for another class of securities, and no compensation was paid to anyone for soliciting such exchange, the transactions were exempt from registration under Section 3(a)(10) of the Securities Act of 1933. The individuals who exercised their warrants at $.10 per share are as follows: Richard J. Babjak 3,813 shares of common stock Sean T, O'Keefe 21,000 shares of common stock Robert D. Yarosz 3,813 shares of common stock Anastasios Baharopoulos 3,000 shares of common stock John H. Mathues 14,124 shares of common stock 7. In November of 1999, Uptown issued 600,000 shares of its common stock to 1 Potato 2, Inc., in exchange for the transfer of substantially all of 1 Potato 2's assets to one of Uptown's subsidiaries. 1 Potato 2, Inc., requested that 10% of those shares, or 60,000, be issued to Robert Blessing, an individual who acted as a finder, for services rendered. This transaction is exempt under Section 4(2) of the Securities Act of 1933 due to the limited nature of the offering and the sophistication of the investors. 1 Potato 2, Inc., is a Minnesota corporation. It acquired 600,000 shares of our common stock in exchange for substantially all its assets, and then instructed that 60,000 of those shares be issued to Robert Blessing, a business broker who assisted in arranging for the asset purchase transaction. 1 Potato 2 gave up substantially all its assets in exchange for a pormissory note and shares in Uptown, the company that subsequently owned, through a wholly-owned subsidiary, the 1 Potato 2 assets. 1 Potato 2 was given access to any and all information concerning Uptown, and is a sophisticated investor in the sense that its shareholders have owed and operated the same assets for several years prior to the asset purchase, and are familiar with investments of the nature involved in this transaction and have substantial investment and business experience. Robert Blessing was also given access to any and all information concerning Uptown that he requested, and is a sophisticated investor since he is familiar with investments of the nature involved in this transaction, having analyzed and brokered businesses for several years, and has substantial investment and business experience. EXHIBITS 1. Plan of Merger 2. Statement of Merger 3. Agreement and Plan of Reorganization 4. Asset Purchase Agreement 5. Articles of Incorporation 6. Articles of Amendment to Articles of Incorporation 7. Articles of Amendment to Articles of Incorporation 8. Bylaws 9. Minutes of Board of Directors, January 28, 1998 10. Promissory Notes held by Shareholders 11. Opinion re: legality 12. Voting Agreement 13. Subsidiaries of the registrant 14. Consent of experts and counsel 15. Financial data schedule UNDERTAKINGS I. Amendment of Registration Statement. Uptown Restaurant Group, Inc., is registering securities under Rule 415 of the Securities Act of 1933 (Section 230.415 of Regulation S-B), and therefore, the Company hereby undertakes the following: (1) The Company will file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, and increase or decrease in volume of securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (Section 230.424(b) of Regulation S-B) if, in the aggregate, the changes in the volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) Upon being notified by a selling shareholder that a donee or pledgee is selling shares of our common stock, to disclose the names of such selling donees and pledgees. (2) The Company, for determining liability under the Securities Act, will treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering; and (3) The Company will file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. II. Indemnification. Uptown Restaurant Group, Inc., may request acceleration of the effective date of the registration statement under Rule 461 under the Securities Act, and therefore, the Issuer represents that, insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Issuer pursuant to the foregoing provisions, or otherwise, the Issuer has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Issuer of expenses incurred or paid by a director, officer or controlling person of the Issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Mesa, State of Arizona on May 15, 2000. UPTOWN RESTAURANT GROUP, INC. ROBERT D. PALMER, JR. By: Robert D. Palmer, Jr. Title: President and Chairman of the Board In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated: (Signature) L. BENNETT BERG (Title) Director (Date) 5/15/2000 (Signature) WILLIAM G. NORTON (Title) Director (Date) 5/15/2000 (Signature) ROBERT D. PALMER, JR. (Title) Director (Date) 5/15/2000 (Signature) HAROLD L. KESTENBAUM (Title) Director (Date) 5/15/2000 (Signature) CLYDE E. CULP, III (Title) Director (Date) 5/15/2000