EX-99.C 4 0004.txt CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT C kpmg Consolidated Financial Statements of PIZZA DONINI INC. Years ended May 31, 2000, 1999 and 1998 AUDITORS' REPORT To the Board of Directors We have audited the consolidated balance sheets of Pizza Donini Inc. as at May 31, 2000 and 1999 and the consolidated statements of operations, deficit and cash flows for each of the years in the three-year period ended May~31, 2000. 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 audits. We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform an 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at May 31, 2000 and 1999 and the results of its operations and its cash flows for each of the years in the three-year period ended May 31, 2000, in accordance with United States generally accepted accounting principles. Chartered Accountants Montreal, Canada August 25, 2000, except as to note 17 (a), which is as of November 20, 2000, and note 17 (b), which is as of January 29, 2001 PIZZA DONINI INC. Consolidated Financial Statements Years ended May 31, 2000, 1999 and 1998 FINANCIAL STATEMENTS Consolidated Balance Sheets............................................ 1 Consolidated Statements of Operations.................................. 3 Consolidated Statements of Deficit..................................... 4 Consolidated Statements of Cash Flows.................................. 5 Notes to Consolidated Financial Statements............................. 6 PIZZA DONINI INC. Consolidated Balance Sheets May 31, 2000 and 1999 (expressed in Canadian dollars) ================================================================================ 2000 1999 -------------------------------------------------------------------------------- Assets Current assets: Accounts receivable, less allowance for doubtful accounts of $88,845; 1999 - $148,461 (note 3) $ 57,585 $ 36,898 Income taxes receivable 1,974 11,247 Current portion of balance of sales receivable (note 4) 83,380 88,086 Inventories 20,695 16,755 Prepaid expenses 30,046 22,736 Assets held for resale 64,452 72,500 --------------------------------------------------------------------------- Total current assets 258,132 248,222 Balance of sales receivable (note 4) 242,971 127,687 Fixed assets (note 5) 361,175 378,966 -------------------------------------------------------------------------------- $862,278 $754,875 ================================================================================ -1-
============================================================================================================= 2000 1999 ------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Deficit Current liabilities: Bank indebtedness (note 6) $ 74,187 $ 55,275 Accounts payable and accrued liabilities (note 7) 933,460 684,671 Due to an employee, non-interest bearing and unsecured 39,750 49,400 Loan payable (note 8) 15,000 20,000 Current portion of long-term debt (note 9) 205,614 70,216 Current portion of obligation under capital lease (note 10) 5,766 5,320 -------------------------------------------------------------------------------------------------------- Total current liabilities 1,273,777 884,882 Long-term debt, including $1,203,026 (1999 - $1,131,740) due to shareholders and related parties (note 9) 1,458,518 1,364,793 Obligations under capital lease (note 10) -- 7,480 Shareholders' deficit: Share capital: Preferred shares: Unlimited number of Class A, B and C non-voting shares authorized; no shares issued or outstanding Common shares: Class A - 1,000 voting, participating, without nominal or par value shares authorized; 1,000 shares issued and outstanding 1,000 1,000 Class B - 1,000 non-voting, participating, without nominal or par value shares authorized; 275 shares issued and outstanding 1,290,017 1,290,017 -------------------------------------------------------------------------------------------------------- 1,291,017 1,291,017 Deficit (3,161,034) (2,793,297) -------------------------------------------------------------------------------------------------------- Total shareholders' deficit (1,870,017) (1,502,280) Commitments (note 14) Contingent liabilities (note 15) ------------------------------------------------------------------------------------------------------------- $ 862,278 $ 754,875 =============================================================================================================
See accompanying notes to consolidated financial statements. -2-
PIZZA DONINI INC. Consolidated Statements of Operations Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ===================================================================================== 2000 1999 1998 ------------------------------------------------------------------------------------- Revenues: Sales $ 849,957 $ 732,247 $ 800,046 Royalties and other related revenues 764,626 911,059 936,349 Order processing fees 339,586 422,619 494,761 Initial franchise fees 75,500 55,000 155,458 Interest income 18,508 14,871 19,504 -------------------------------------------------------------------------------- 2,048,177 2,135,796 2,406,118 Cost of goods sold 539,711 490,613 522,876 Cost of supplies to franchises 131,911 -- -- ------------------------------------------------------------------------------------- 671,622 490,613 522,876 ------------------------------------------------------------------------------------- 1,376,555 1,645,183 1,883,242 Expenses: Advertising and promotion 444,352 411,911 497,890 Salaries 251,997 313,270 363,204 General and administration (note 11) 808,333 847,483 1,027,034 Interest expense 184,011 138,488 161,615 Depreciation 55,599 61,971 69,329 -------------------------------------------------------------------------------- 1,744,292 1,773,123 2,119,072 ------------------------------------------------------------------------------------- Loss before income taxes (367,737) (127,940) (235,830) Income tax recovery (note 12) -- 11,247 6,526 ------------------------------------------------------------------------------------- Net loss $ (367,737) $ (116,693) $ (229,304) ===================================================================================== Loss per share (note 2 (h)): Basic $ (288.42) $ (91.52) $ (179.85) =====================================================================================
See accompanying notes to consolidated financial statements. -3- PIZZA DONINI INC. Consolidated Statements of Deficit Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ====================================================================== 2000 1999 1998 ---------------------------------------------------------------------- Deficit, beginning of year $(2,793,297) $(2,676,604) $(2,447,300) Net loss (367,737) (116,693) (229,304) ---------------------------------------------------------------------- Deficit, end of year $(3,161,034) $(2,793,297) $(2,676,604) ====================================================================== See accompanying notes to consolidated financial statements. -4-
PIZZA DONINI INC. Consolidated Statements of Cash Flows Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ======================================================================================================== 2000 1999 1998 -------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(367,737) $(116,693) $(229,304) Adjustments for: Depreciation 55,599 61,971 69,329 Gain on disposal of fixed assets -- -- (323) Net increase (decrease) in allowance for doubtful accounts (59,616) 80,875 (60,385) Balance of sales receivable written off 32,133 159,358 178,057 Net change in operating working capital items: Accounts receivable 38,929 (19,502) 189,541 Income taxes receivable 9,273 (4,721) 10,676 Inventories (3,940) (1,563) 6,670 Prepaid expenses (7,310) 15,029 (15,567) Accounts payable and accrued liabilities 248,789 22,977 139,907 --------------------------------------------------------------------------------------------------- (53,880) 197,731 288,601 Cash flows from financing activities: Bank indebtedness 18,912 (69,517) 27,498 Proceeds from due to employee -- 49,400 -- Repayment of due to employee (9,650) -- -- Proceeds from loan payable -- -- 20,000 Repayment of loan payable (5,000) -- (11,247) Proceeds from long-term debt 297,488 174,252 98,164 Repayment of long-term debt (68,365) (297,597) (205,779) Repayment of obligations under capital lease (7,034) -- -- --------------------------------------------------------------------------------------------------- 226,351 (143,462) (71,364) Cash flows from investing activities: Increase in balance of sales receivable (225,000) (130,000) (167,500) Repayment of balance of sales receivable 82,289 68,920 31,277 Disposition of fixed assets -- -- 4,000 Acquisition of fixed assets (37,808) (8,724) (34,729) Assets held for resale 8,048 (465) (34,285) --------------------------------------------------------------------------------------------------- (172,471) (70,269) (201,237) -------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents -- (16,000) 16,000 Cash and cash equivalents, beginning of year -- 16,000 -- -------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ -- $ -- $ 16,000 ======================================================================================================== Supplemental cash flow information: Cash paid during the year for: Interest $ 52,798 $ 28,701 $ 27,650 Acquisition of fixed assets under a capital lease -- 12,800 -- ========================================================================================================
See accompanying notes to consolidated financial statements. -5- PIZZA DONINI INC. Notes to Consolidated Financial Statements Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ Pizza Donini Inc. was incorporated under the Canada Business Corporations Act and is the master franchisor, food and supply distributor and operator of a call center for home delivery order processing to a system of restaurants operating under the trade name "Pizza Donini" located in the Greater Montreal area, Quebec, Canada. 1. LIQUIDITY: The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern and that assets and liabilities have been recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. However, the accompanying financial statements show that the Company has incurred significant operating losses, has a deficit in shareholders' equity and a working capital deficit at May 31, 2000. On February 14, 2000, the Company entered into a consulting agreement with a third party ("Consultant") to provide financial resources, search and consulting services, corporate management consulting activities and marketing and promotion activities. Under the first part of this agreement the Consultant has undertaken to raise a minimum of US$2,000,000 in financing over a two-year period and assist in bringing the Company public on a United States stock exchange via a reverse take-over of an existing public shell company. The first US$500,000 was arranged directly by the Consultant and will be provided by a third party and represented by a convertible subordinated debenture of the Company. Through August 15, 2000, the Company has received US$450,000. See note 17 (b) for additional information. 2. SIGNIFICANT ACCOUNTING POLICIES: (a) Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. (b) Inventories: Inventories, which consist mainly of food and packaging materials, are stated at the lower of cost, applied on a first in, first out basis, and replacement cost. -6- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (c) Fixed assets: Fixed assets are recorded at cost. Depreciation is provided using the following methods and annual rates: ======================================================================= Asset Basis Rate/period ----------------------------------------------------------------------- Furniture and equipment Declining balance 10% to 20% Digital telephone system Declining balance 20% Computer equipment Declining balance 20% to 30% Computer software Straight-line 20% to 33% Leasehold improvements Straight line Term of the lease Equipment under capital lease Straight-line Term of the lease ======================================================================= (d) Impairment of long-lived assets: All long-lived assets are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. The depreciation or amortization periods for long-lived assets to be held and used are periodically evaluated to determine whether events or circumstances have occurred that warrant revision. (e) Revenue recognition: Franchise agreements provide the terms of the arrangement between the Company and the franchisee. The franchise agreements require the franchisee to pay an initial, non-refundable fee. Royalties and advertising revenues are based on a percentage of the sales of the franchisees according to the terms of the franchise agreement. Order processing fees for the operation of the call center are also based on a percentage of the franchisees' sales. These revenues are recorded as earned, with an appropriate provision for estimated uncollectable amounts. Initial fees are recognized as revenue when the Company has substantially performed all initial services required by the franchise agreement, which is generally upon opening. Direct costs incurred to secure and perform the required services under the franchise agreement are charged to expense as incurred. -7- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (e) Revenue recognition (continued): Refranchising gains include gains on sales of company-operated restaurants to new and existing franchisees and the related initial franchise fees. Gains on restaurant refranchisings are recognized when the sale transaction closes, the franchisee has a minimum amount of the purchase price in at-risk equity and the Company is satisfied that the franchisee can meet its financial obligations. Otherwise, refranchising gains are deferred until those criteria have been met. Sales of dough and sauces to the franchisees are recorded upon shipment. (f) Assets held for resale: Assets held for resale consist of franchise equipment purchased and are recorded at the lower of cost and net realizable value. (g) Balance of sales receivable: Balance of sales receivable represents amounts owing from franchise holders for the cost of a franchise and the related equipment included in each restaurant. Terms generally range up to five years with interest rates of 8% to 11%. (h) Earnings per share: Basic earnings per share is determined by dividing the weighted average number of Class A and Class B common shares outstanding during the period into net earnings (loss). The impact of the Company's convertible debentures was not included in the computation of earnings per share as it would be anti-dilutive. The number of Class B common shares excluded from the computation is 55 shares. (i) Advertising expenses: Costs of advertising are recorded as expenses when incurred. (j) Foreign currency translation: Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the exchange rates prevailing at the balance sheet date. Non-monetary items are translated at the rate of exchange prevailing at the date of the transaction. Translation gains or losses are included in net income. (k) Cash and cash equivalents: The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. -8- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (l) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (m) New pronouncements: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement #133, "Accounting for Derivative Investments and Hedging Activities" ("FASB 133") effective for fiscal years beginning after June 15, 1999, which has been extended to June 15, 2000. FASB 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. The adoption of this statement in 2001 is not expected to have a significant effect on the Company's financial statements. 3. ACCOUNTS RECEIVABLE: Detailed below is a summary of activity in the allowance for doubtful accounts: ======================================================================= Balance May 31, 1997 $ 127,971 Bad debts expense 29,134 Amounts written off (89,519) ----------------------------------------------------------------------- Balance May 31, 1998 67,586 Bad debts expense 141,582 Amounts written off (60,707) ----------------------------------------------------------------------- Balance May 31, 1999 148,461 Bad debts expense 59,674 Amounts written off (119,290) ----------------------------------------------------------------------- Balance May 31, 2000 $ 88,845 ======================================================================= -9-
PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 4. BALANCE OF SALES RECEIVABLE: ================================================================================================= 2000 1999 ------------------------------------------------------------------------------------------------- Balance of sale at 8%, receivable in monthly installments of $564 including interest commencing June 1998, due May 2001 and secured by a moveable hypothec $ 6,484 $ 13,423 Balance of sale at 8%, receivable in weekly installments of $225 including interest commencing May 1998, due April, 2002 and secured by a moveable hypothec 20,633 30,278 Balance of sale at 9%, receivable in weekly installments of $526 including interest commencing September 1998, due August 2003 and secured by a moveable hypothec 78,409 97,554 Balance of sale at 9%, receivable in weekly installments of $458 including interest commencing August 2000, due July 2004 and secured by a moveable hypothec 80,000 -- Balance of sale at 9%, receivable in weekly installments of $572 including interest commencing June 2000, due May 2004 and secured by a moveable hypothec 100,000 -- Balance of sale at 8%, receivable in weekly installments of $210 including interest commencing November 1999, due October 2004 and secured by a moveable hypothec 40,825 -- Balance of sale at 11%, receivable in monthly installments of $801 including interest due February 2001 and secured by a moveable hypothec -- 35,652 Balance of sale at 8%, receivable in monthly installments of $187 including interest commencing April 1999, due March 2004 and secured by a moveable hypothec -- 38,866 ------------------------------------------------------------------------------------------------- 326,351 215,773 Less current portion 83,380 88,086 ------------------------------------------------------------------------------------------------- $242,971 $127,687 =================================================================================================
A moveable hypothec referred to above is security on tangible and intangible property, except real estate. Refranchising gains (losses) included in the statement of operations are $53,963 in 2000; $53,079 in 1999 and ($38,009) in 1998. -10- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 5. FIXED ASSETS: ======================================================================== 2000 ------------------------------------------------------------------------ Accumulated Net book Cost depreciation value ------------------------------------------------------------------------ Furniture and equipment $ 362,285 $ 139,242 $ 223,043 Digital telephone system 70,000 42,412 27,588 Computer equipment 147,113 76,887 70,226 Computer software 56,655 34,481 22,174 Equipment under capital lease 14,000 1,750 12,250 Leasehold improvements 8,878 2,984 5,894 ------------------------------------------------------------------------ $ 658,931 $ 297,756 $ 361,175 ======================================================================== ======================================================================== 1999 ------------------------------------------------------------------------ Accumulated Net book Cost depreciation value ------------------------------------------------------------------------ Furniture and equipment $ 342,341 $ 112,586 $ 229,755 Digital telephone system 70,000 35,515 34,485 Computer equipment 129,248 63,482 65,766 Computer software 56,655 28,731 27,924 Equipment under capital lease 14,000 350 13,650 Leasehold improvements 8,877 1,491 7,386 ------------------------------------------------------------------------ $ 621,121 $ 242,155 $ 378,966 ======================================================================== 6. BANK INDEBTEDNESS: A subsidiary of the Company has a line of credit of $25,000 with a Canadian bank which is fully utilized at May 31, 2000 and May 31, 1999. Borrowings under the facility are at Canadian bank prime rate plus 3% and are secured by a moveable hypothec on the accounts receivable and inventory of the subsidiary, amounting to $33,223 and $20,695 respectively, at May 31, 2000 ($14,301 and $16,755 respectively, at May 31, 1999). The credit facility is subject to restrictions on the payment of dividends by the subsidiary and has an annual fee of $750 and a monthly monitoring fee of $50. As at May 31, 2000, the subsidiary has negative net assets. The effective interest rate on borrowings under the facility was 9.58% for 2000 (9.69% for 1999 and 8.65% for 1998). -11-
PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: ========================================================================================== 2000 1999 ------------------------------------------------------------------------------------------ Accounts payable - trade $431,268 $351,044 Accrued liabilities 148,393 36,481 Accrued payroll and related deductions 148,067 72,736 Other trade payable (i) 96,150 96,150 Construction costs payable 59,777 101,427 Sales tax payable 49,805 20,833 Deposits on franchises -- 6,000 ------------------------------------------------------------------------------------------ $933,460 $684,671 ========================================================================================== (i) The trade payable of $96,150 noted above is due to a supplier, is non-interest bearing, unsecured and is being repaid at the rate of $1,000 per week commencing October 3, 2000. As the amount is technically due on demand, it has been classified as a current liability. 8. LOAN PAYABLE: ========================================================================================== 2000 1999 ------------------------------------------------------------------------------------------ Demand loan payable unsecured, bearing interest at $200 per month ($250 in 1999) (effective interest rate of 16%; 15% in 1999) $ 15,000 $ 20,000 ========================================================================================== 9. LONG-TERM DEBT: ========================================================================================== 2000 1999 ------------------------------------------------------------------------------------------ Due to shareholders and related parties: Debentures issued to shareholders, bearing interest at 12.5%, due May 2002 $450,000 $450,000 Accrued interest on 12.5% debentures, without interest or repayment date 393,750 347,015 ------------------------------------------------------------------------------------------ Balance carried forward 843,750 797,015
-12-
PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 9. LONG-TERM DEBT (CONTINUED): =============================================================================================== 2000 1999 ----------------------------------------------------------------------------------------------- Balance brought forward $ 843,750 $ 797,015 Due to shareholders and related parties (continued): Non-interest bearing loan due to a relative of a shareholder issued in June 1991, payable within one year of lender's demand or convertible into 25 Class "B" common shares at the option of the lender 125,000 125,000 Loan payable to a shareholder, without interest or repayment date 84,276 59,725 Non-interest bearing loan due to a relative of a shareholder issued in June 1998, payable within one year of lender's demand or convertible into 30 Class "B" common shares at the option of the lender 150,000 150,000 ----------------------------------------------------------------------------------------------- 1,203,026 1,131,740 Other: Small business bank loan at prime plus 3%, repayable in monthly principal installments of $2,083 due July 2005 and secured by a moveable hypothec on equipment 129,167 156,250 Bank loan unsecured, bearing interest at a bank's prime rate plus 2%, repayable in monthly principal installments of $1,250, due March 2003 82,223 75,726 Convertible subordinated debenture, payable September 1, 2001 (US $100,000) (i) 149,250 -- Loan payable unsecured, bearing interest at 12%, repayable in monthly installments of $1,053 including interest, due July 2001 24,011 28,724 Term loan unsecured, bearing interest at prime plus 2%, repayable in monthly principal installments of $1,000, due November 2000 6,000 18,000 ----------------------------------------------------------------------------------------------- Balance carried forward 390,651 278,700
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PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 9. LONG-TERM DEBT (CONTINUED): ================================================================================================ 2000 1999 ------------------------------------------------------------------------------------------------ Balance brought forward $ 390,651 $ 278,700 Other (continued): Loan payable, secured by equipment, in weekly payments of principal and interest of $2,875, bearing interest at 46.4%, due December 2000 70,455 -- Loan payable bearing interest at 13%, repayable in semi-monthly installments of $949 including interest, due April 1999 -- 8,311 Loan payable in monthly installments of $2,140 including principal and interest at 11%, due July 1999 -- 16,258 -------------------------------------------------------------------------------------------- 461,106 303,269 ------------------------------------------------------------------------------------------------ Total long-term debt 1,664,132 1,435,009 Less current portion 205,614 70,216 ------------------------------------------------------------------------------------------------ $1,458,518 $1,364,793 ================================================================================================
(i) The debenture is convertible into 1,500,000 shares of the common stock to be received in connection with the acquisition of the majority of shares of a US public company referred to in note 1. Should the debenture not be converted, interest will be charged on an adjusted basis at an annual rate of 12%. (ii) Principal repayments of long-term debt due in the next five years as at May 31, 2000 shown below do not include debentures issued to shareholders and the accrued interest thereon, the non-interest bearing loans issued in June 1991 and June 1998 and the loan payable to shareholder, as all the creditors have agreed not to demand payment prior to June 1, 2001. ========================================================================== 2001 $ 205,614 2002 176,325 2003 25,000 2004 25,000 2005 25,000 Thereafter 4,167 ========================================================================== -14- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 9. LONG-TERM DEBT (CONTINUED): (iii) The table below presents the activity for the two years ended May 31, 2000 of the non-interest bearing loans to related parties and a shareholder included in long-term debt:
================================================================================== Non-interest Non-interest bearing loan bearing loan Non-interest issued in issued in bearing loan June 1991 June 1998 to a shareholder ---------------------------------------------------------------------------------- Balance, June 1, 1998 $ 125,000 $ 150,000 $ 99,719 Increase in loan -- -- 6,606 Repayments -- -- (46,600) ---------------------------------------------------------------------------------- Balance, May 31, 1999 125,000 150,000 59,725 Increase in loan -- -- 24,551 ---------------------------------------------------------------------------------- Balance, May 31, 2000 $ 125,000 $ 150,000 $ 84,276 ================================================================================== The average balance of the non-interest bearing loan to a shareholder was $72,195 in 2000, $79,840 in 1999 and $99,719 in 1998. 10. OBLIGATIONS UNDER CAPITAL LEASE: ========================================================================================== 2000 1999 ------------------------------------------------------------------------------------------ Obligations under capital lease payable in monthly installments of principal and interest commencing March 1999 of $586, maturing May 2001 $ 6,538 $15,845 Less imputed interest at 16.4% 772 3,045 ------------------------------------------------------------------------------------------ 5,766 12,800 Less current portion 5,766 5,320 ------------------------------------------------------------------------------------------ $ -- $ 7,480 ==========================================================================================
-15- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 11. GENERAL AND ADMINISTRATIVE EXPENSES: Details of general and administrative expenses are as follows:
=============================================================================== 2000 1999 1998 ------------------------------------------------------------------------------- Office and administrative $ 247,112 $ 254,701 $ 392,778 Professional fees 228,489 71,787 41,842 Bad debts 59,674 141,582 29,134 Balance of sales receivable written off 32,133 159,358 178,057 Amount due from former subsidiary written off -- -- 145,300 Rent 71,900 75,922 77,406 Telephone and utilities 52,749 68,455 71,994 Auto and truck 42,776 38,131 33,553 Product development costs 27,533 -- -- Insurance and taxes 23,210 18,078 33,815 Maintenance and supplies 22,757 19,469 23,155 ------------------------------------------------------------------------------- $ 808,333 $ 847,483 $1,027,034 ===============================================================================
12. INCOME TAXES: (i) As at May 31, 2000, the Company and its subsidiaries had $1,389,000 of losses for federal income tax purposes and $409,000 for Quebec income tax purposes available to carry forward to reduce future years taxable income expiring as follows: ==================================================================== Expiring Federal Quebec -------------------------------------------------------------------- 2003 $ 494,000 $ - 2004 142,000 - 2005 113,000 - 2006 220,000 - 2007 420,000 409,000 -------------------------------------------------------------------- $ 1,389,000 $ 409,000 ==================================================================== (ii) The income tax recovery shown in the years 1999 and 1998 result from claiming losses for cash credits for Quebec purposes only, under a special provincial government program. -16- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 12. INCOME TAXES (CONTINUED): (iii) Details of deferred income tax (assets) and liabilities are as follows: ============================================================= 2000 1999 ------------------------------------------------------------- Net operating losses carried forward $(277,800) $(193,800) Capital assets - differences between NET book value and undepreciated capital cost 5,200 13,200 ------------------------------------------------------------- Net deferred tax asset (272,600) (180,600) Less valuation allowance 272,600 180,600 ------------------------------------------------------------- Net deferred income taxes $ -- $ -- ============================================================= The valuation allowance increased by approximately $92,000 in 2000 due to the current year's operating loss. 13. RELATED PARTY TRANSACTIONS: Included in the statement of operations are the following transactions with shareholders: ========================================================================= 2000 1999 1998 ------------------------------------------------------------------------- Interest on debentures $ 56,250 $ 43,750 $ 37,500 ========================================================================= 14. COMMITMENTS: The Company has entered into operating leases for its premises and equipment with minimum annual rental payments as at May 31, 2000 approximately as follows: ========================================================================= 2001 $ 54,980 2002 32,590 2003 32,590 2004 13,600 ------------------------------------------------------------------------- -17- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 15. CONTINGENT LIABILITIES: The Company is subject to a number of lawsuits as detailed below: (a) The Company has been sued by a former franchise holder for $571,704 for cancellation of a license agreement and damages. The Company has countersued for $714,488. The Company has also been named in a claim by a financial institution against the same former franchisee as a defendant in warranty. The amount claimed is $45,000. While management believes that in both cases the claims are very weak, the outcome or an estimate of loss, if any, cannot be determined at this time. No amounts have been provided for in the financial statements for these items. (b) The Company was sued by a former franchisee of a former subsidiary who is seeking to obtain from the Court to declare the transfer and sale to the Company of trademarks by the former subsidiary null and void, and to have the Company declared jointly and severally liable for a claim of the former franchisee against the former subsidiary. This action stems from a separate suit filed by the former franchisee against the former subsidiary, in the amount of $637,000 which suit was dismissed by the Superior Court of Quebec on May 19, 1998. The former franchisee has appealed the original judgment of the lower court and legal counsel for the former subsidiary does not expect a hearing date before February 2002. In the meantime, in the file against the Company, there is an agreement between the attorneys of the parties to await the outcome of the decision of the Court of Appeal in the original proceedings prior to pursuing this action. Counsel to the Company and to the former subsidiary is confident that the appeal will be dismissed in the original suit and therefore, the action against the Company will also be dismissed. (c) The Company has been sued by its former banker for repayment of a loan originally due in March 2003. The Company is disputing certain fees charged by the bank, has counter sued and ceased making monthly payments on the loan. The amount of the loan, including accrued interest, amounts to $82,223 at May 31, 2000 and is included in long-term debt. 16. FINANCIAL INSTRUMENTS: (a) Fair value disclosures: Fair value estimates are made as of a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision. -18- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 16. FINANCIAL INSTRUMENTS (CONTINUED): (a) Fair value disclosures (continued): The Company has determined that the carrying value of its short-term financial assets and liabilities approximates their fair values as at May 31, 2000 because of the short-term maturity of those instruments. The carrying amounts of balance of sales receivable are reasonable estimates of their fair value. As a result of the Company's deteriorating credit quality due to its operating losses, its incremental borrowing rate at May 31, 2000 has increased substantially as evidenced by a loan bearing interest at 46.4%. The Company's pre-existing loans with interest ranging from 9% to 12.5% were entered into in preceding years. Accordingly, as a result of its high incremental borrowing rate, it is not practical to estimate fair value of the Company's long-term debt. (b) Credit risk: The Company's revenues are derived from its franchise operations. The Company regularly monitors its credit risk exposure to these customers and takes steps to mitigate the risk of loss. The Company does not have any concentration of credit risk with any of their customers. (c) Interest rate risk: The Company's balance of sales receivable are at fixed interest rates for fixed terms, minimizing exposure to interest rate fluctuations. The majority of the long-term debt is either non-interest bearing or at fixed rates, minimizing exposure to interest rate fluctuations. The Company also has short-term bank indebtedness which would expose the Company to interest rate risk through fluctuations in the prime interest rate. 17. SUBSEQUENT EVENTS: (a) On November 20, 2000, the litigation referred to in note 15 (a) was settled by a cash payment of $6,000. (b) On January 29, 2001, PRS Sub VI, Inc. ("PRS"), a New Jersey corporation, the shareholders of which include certain of the shareholders of the Company, purchased all of the issued and outstanding common shares of the Company for a nominal cash payment, and the assumption of long-term debt of $1,034,276, the assumption of the Company's obligations -19- PIZZA DONINI INC. Notes to Consolidated Financial Statements, Continued Years ended May 31, 2000, 1999 and 1998 (expressed in Canadian dollars) ================================================================================ 17. SUBSEQUENT EVENTS (CONTINUED): (b) (continued): under a convertible subordinated debenture of US$500,000, of which US$50,000 was received by the Company on September 1, 2000, referred to in note 1 and the assumption of the Company's obligations under the consulting agreement also referred to in note 1. PRS assumed the long-term debt, owed to certain shareholders and related parties in exchange for debentures of PRS, that are convertible, at the option of the holders, into one common stock of PRS for each Canadian dollar of debt outstanding. PRS assumed the Company's obligations for the convertible subordinated debenture referred to in note 1 in consideration of a convertible debenture of PRS which, upon satisfaction of certain conditions, may be converted, at the option of the holder, into common stock of PRS representing an equity interest in PRS of 15% on a fully diluted basis. In respect of the consulting agreement referred to in note 1, and subject to certain conditions, the Consultant shall be entitled to receive as compensation for the investment of US$500,000 referred to above, common stock of PRS representing an equity interest of 2 1/2% on a fully diluted basis, and upon the successful completion of a private placement of US$1,500,000 in convertible debentures of PRS, would be entitled to receive an additional equity interest of 7.5% of shares of common stock of PRS on a fully diluted basis. As at January 29, 2001, the Company had received firm commitments for US$1,750,000 to be used by the Company for working capital and expansion of its operations. -20- DONINI INC. Pro Forma Consolidated Balance Sheet (Unaudited) November 30, 2000 (Expressed in United States dollars) =========================================================================== Assets Current assets: Accounts receivable, less allowance for doubtful accounts of $68,670 $ 92,763 Current portion of balance of sales receivable 77,634 Inventories 13,933 Prepaid expenses 26,800 Assets held for resale 138,409 --------------------------------------------------------------------------- 349,539 Balance of sales receivable 221,183 Capital assets 226,220 --------------------------------------------------------------------------- $ 796,942 =========================================================================== -21- ================================================================================ Liabilities and Stockholders' Deficit Current liabilities: Bank indebtedness $ 23,950 Accounts payable and accrued liabilities 560,197 Due to an employee, non-interest bearing and unsecured 25,774 Current portion of long-term debt 653,009 ------------------------------------------------------------------------------ 1,262,930 Long-term debt, including $670,625 due to shareholders and related parties 736,530 Stockholders' deficit: Common stock, $0.001 par value: 100,000,000 shares authorized, 10,000,000 shares issued and outstanding 10,000 Contributed surplus 925,226 Deficit (2,266,239) Cumulative currency translation adjustment 128,495 ------------------------------------------------------------------------------ (1,202,518) ------------------------------------------------------------------------------ $ 796,942 ============================================================================== See accompanying note to unaudited pro forma consolidated balance sheet -22- DONINI INC. Note to Pro Forma Consolidated Balance Sheet (Unaudited) November 30, 2000 ================================================================================ RECAPITALIZATION: On January 18, 2001, as the first step in a corporate reorganization, certain shareholders of Pizza Donini Inc., a Canadian company, purchased 82% of the issued and outstanding common stock of PRS Sub VI, a New Jersey Corporation and changed its name to Donini Inc. (the "Company"). The Company at that time was an inactive publicly held company with no substantial assets or equity. On January 29, 2001, the Company purchased all of the issued and outstanding common shares of Pizza Donini Inc. for a nominal cash payment and the assumption of long-term debt of CDN$1,034,276, the assumption of the obligations under a convertible subordinated debenture of US$500,000 and the assumption of the obligations under a consulting agreement referred to in note 1 to the audited consolidated financial statements of Pizza Donini Inc. for the year ended May 31, 2000. Pizza Donini Inc. is considered the purchaser and continuing entity in these transactions and the accounting values of its shareholders' equity have been ascribed to the Company. The functional currency of Pizza Donini Inc. is Canadian dollars and its reporting currency is United States dollars. Its assets and liabilities have been translated into United States dollars using the exchange rate prevailing at the balance sheet date. The resulting currency translation adjustment is accumulated and reported as a separate component of stockholders' equity. -23-