-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NV5TN2hhMCrfE4okKvcQy9NGjnZUNDRQDdAVZlFhujX5DO40rFPt/uW9QkjXcun5 YOLdZO8swId6E9vOrRk84w== 0001019056-01-000184.txt : 20010330 0001019056-01-000184.hdr.sgml : 20010330 ACCESSION NUMBER: 0001019056-01-000184 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010326 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRS SUB VI INC CENTRAL INDEX KEY: 0001129900 STANDARD INDUSTRIAL CLASSIFICATION: 6770 IRS NUMBER: 223768426 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-32133 FILM NUMBER: 1578608 BUSINESS ADDRESS: STREET 1: 425 EAGLE ROCK AVENUE STREET 2: SUITE 200 CITY: ROSELAND STATE: NJ ZIP: 07068 BUSINESS PHONE: 9732264600 MAIL ADDRESS: STREET 1: 425 EAGLE ROCK AVENUE STREET 2: SUITE 200 CITY: ROSELAND STATE: NJ ZIP: 07068 FORMER COMPANY: FORMER CONFORMED NAME: PRS SUB VI INC DATE OF NAME CHANGE: 20001213 8-K 1 0001.txt FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ================================================================================ FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ================================================================================ DATE OF REPORT: March 26, 2001 DONINI, INC. (formerly PRS Sub VI, Inc.) (Exact name of Registrant as specified in its Charter) NEW JERSEY (State or Other Jurisdiction of Incorporation) (Commission File Number) 22-3768426 (IRS Employer Identification Number) 425 Eagle Rock Avenue Roseland, New Jersey 07068 (Address of Principal Executive offices) (Zip Code) (973) 226-4600 Registrant's Telephone Number, Including Area Code ITEM 1. CHANGES IN CONTROL OF REGISTRANT. On January 18, 2001 certain shareholders of Pizza Donini Inc. ("Pizza Donini") a company organized under the laws of the Province of Quebec, Canada, acquired eighty-two percent (82%) of the outstanding shares of the Company on condition that the parties cause a combination between the Company and an entity with an excess of $1 million in assets and the Company receive two years of certified financial statements from said entity. On January 29, 2001, the parties entered into an agreement pursuant to which the Company agreed to assume all liabilities of Pizza Donini subject to certain conditions including the delivery by Pizza Donini of two years of certified financial statements. Pursuant to the terms of this agreement, on February 19, 2001, the last remaining condition in both agreements was satisfied with the delivery and receipt of the certified financial statements. As a result, the former owners of Pizza Donini as a group own 82% of the outstanding stock of the Company and the Company owns 100% of the Common Stock Pizza Donini. As of this date, the Company has 10,000,000 shares of Common Stock issued and outstanding. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. DESCRIPTION OF BUSINESS. On February 19, 2001, the Company completed the acquisition of all the outstanding shares of Company Stock of Pizza Donini. Pizza Donini was organized in 1987 and at present operates a franchise management company supporting over thirty franchised pizza outlets in the Greater Montreal area. As franchisor, Pizza Donini supplies the franchisees, through its wholly owned subsidiary Pizado Foods (2001) Inc. ("Pizado") with the dough and sauces used in the preparation of Pizza Donini recipes. Pizado also supplies a separate product line of pizza dough and sauces to other restaurants in the Greater Montreal area. In addition to supplying its franchisees with food supplies, Pizza Donini also provides various forms of marketing support. In addition to traditional radio, print and direct mail advertising, it operates, through another wholly owned subsidiary, PizzaDonini.Com Inc., a call center that executes home delivery through one central telephone number. The call center dispatches telephone orders to the closest franchisee for prompt delivery. 2 In addition to expanding its existing base of franchised outlets, Pizza Donini intends to move into retail grocery distribution by targeting such customers as supermarkets and mass merchandise stores. It also plans to expand its efforts into alternative business-to-business (B2B) distribution channels to sell to such customers as department store cafeterias and other restaurants. In this regard, Pizza Donini developed a line of frozen, ready-to-use pizza products with self-rising crust capable of being prepared, freezer to table, in six to eight minutes. MANAGEMENT'S DISCUSSION AND ANALYSIS. Pizza Donini supports thirty-two (32) pizza outlets. At May 31, 2000 twenty-nine (29) were franchised and three (3) were company owned. The Company maintains up to five (5) company owned stores, which are typically in the process of renovation with the intention to sell as Pizza Donini franchises. All outlets are in Greater Montreal. In addition, Pizza Donini has recently entered into an agreement with Zellers Inc., a national merchandise chain, to offer for sale Pizza Donini products in twenty five (25) of its in store restaurants within its department stores, all in the Province of Quebec as a one year test project. The Company is hopeful that it will be able to expand this operation after the first year into the entire Zeller's chain, which consists of approximately 250 outlets throughout Canada. In addition to generating revenues from its franchisees in the form of initial franchise fees and royalties, Pizza Donini revenues have also been generated by two operating subsidiaries, Pizado Foods (2001) Inc. ("Pizado") and Pizza Donini.Com Inc. Pizado intends to expand its business by marketing its own brand of Pizza Donini frozen pizza to retail grocery outlets including mass merchandise stores and supermarkets. Pizza Donini.Com Inc. manages the call center that executes home delivery orders to the closest franchisee. Pizza Donini is in process of developing the B2B (business to business) distribution of a fully-topped, frozen pizza product to foodservice customers such as department store cafeterias, other restaurants, hospitality and leisure venues, convenience stores, and contract caterers. In fiscal 2000 franchise operations accounted for approximately 58% of the Company's total revenues, while the sale of wholesale food products equaled approximately 41% and the remaining revenues accounted for 1%. This compares to 65%, 34% and 1% respectively for fiscal 1999. The change in sales mix resulted primarily from increased management focus on the wholesale food products markets. 3 During the last fiscal year Pizza Donini experienced a decline in revenues. Sales for fiscal year ending May 31, 2000 were $1,390,917 a decrease of $23,621 over fiscal year 1999 sales of $1,414,538. This decrease occurred as a result of Management closing certain unprofitable pizza outlets and focusing on opening new outlets with better locations and stronger franchisees. Working capital deficit during this period increased from $435,475 at May 31, 1999 to $679,162 at May 31, 2000. Total assets increased from $516,335 as of May 31, 1999 to $576,605 as of May 31, 2000. Net profits (losses) decreased from $(77,286) during the period ended May31, 1999, to $(249,730) at May 31, 2000. For the six months ended November 30, 2000, sales were $862,291 compared to $584,249 for the same period ending November 30, 1999. During the same periods net income was $12,386, compared to a loss of $(117,366) respectively. Management believes the above is a result of improved profitability and operations of existing franchisees and increases in wholesale food products revenues. Total assets increased $220,337 during the six months ended November 30, 2000 to $796,942. This increase is primarily a result of store upgrades. Management believes that the results reflected above are due to a continuing effort to improve cost controls, the elimination of various marginal pizza outlets, the acquisition of more potentially profitable locations, and the marketing and development expenses relating to establishing a brand name. In addition, Management believes that its investment into its centralized call center and other marketing efforts of Pizza Donini.Com Inc. and its development of a high quality product line will result in future expansion and increased profitability. Management believes that operating profits have been lowered due to the investment into new products, and market development but expects the recent increase during the six months ended November 30, 2000 in sales and profits to continue during this fiscal year and into the next two fiscal years. 4 The Company maintains that its liquidity will improve marginally with improved earnings, but will not be sufficient to allow it to expand its operating to any significant degree without an infusion of additional equity capital or debt. Pizza Donini has maintained its liquidity through net borrowings (repayments) in short and long term debt of approximately $60,000, ($123,000) and ($59,000) for the years ended May 31, 1999, 2000 and the six months ended November 30, 2000 respectively. In addition, Pizza Donini issued subordinated debentures in the amounts of $100,000 and $400,000 during the year ended May 31, 2000 and the six months ended November 30, 2000 respectively. RISK FACTORS. 1. No Significant History of Earnings. Although organized and operating since 1987 the Company's operating subsidiary Pizza Donini Inc. has only recently made a profit and has an accumulated deficit from prior operations. 2. Low Profit Margins Characterize the Food Industry. In the past, the food industry, including the restaurant business, has been characterized by low profit margins and even though the Company has introduced certain cost saving measures and is benefiting from certain economies of size, the Company will still be faced with the need to further implement cost controls and expand its operations to improve its profitability. 3. Dependence on Key Personnel. The Company is highly dependent on its key management personnel and executives, particularly Messrs Peter Deros, Denis Paquette, Theo Kalaitzis and Sarkis Tsaoussian, the loss of any one of whom could have a substantial and adverse effect upon the Company's operations and finances. In addition, if the Company expands its operations, as its business plan contemplates, it will need to attract and retain additional qualified management personnel at compensation levels it can afford. The Company has only limited key man life insurance on its officers and directors. There can be no assurance any additional policies will be available to the Company on commercially reasonable terms, if at all. 5 4. Limited Public Market. To date there has been no public market for the Company's common stock. There can be no assurance that an active and reliable public market will develop or, if developed, that such market will be sustained. As a result, investors may find it difficult to liquidate their investment in the Company should they desire to do so. The Company intends to apply to have its common stock approved for quotation on the Nasdaq SmallCap Market. Even if the Company meets the minimum requirements to apply for inclusion in The Nasdaq SmallCap Market, there can be no assurance, that approval will be received or, if received, that the Company will meet the requirements for continued listing on the Nasdaq SmallCap Market. Further, Nasdaq reserves the right to withdraw or terminate a listing on the Nasdaq SmallCap Market at any time and for any reason in its discretion. Irrespective of whether or not the common stock is included in the Nasdaq SmallCap system, there is no assurance that any public market for the common stock will become active or liquid in the future. 5. Need for Additional Capital. The Company is dependent on its ability to raise additional capital in order to implement its business plan and to expand its operations. There are no assurances that any additional capital will be available when needed on commercially reasonable terms. 6. Control by Current Management and Stockholders. At present, and in the foreseeable future, the Company's officers and principal stockholders, control the election of the Board of Directors and therefore will be able to direct the executive and financial policies of the Company. 7. Substantial Competition. The food industry is highly competitive and is dominated by several large public multinational food companies including several which dominate the pizza market. In addition there are a great number of independently owned single or small multi location chains, many of which compete with the Company in its present market area. The ability of the Company to succeed will depend on its ability to maintain and improve its competitive position. 6 8. No Dividends. The Company has not in the past paid any dividends, on its common stock and does not expect to pay any dividends in the foreseeable future. The payment of any dividend will be at the discretion of the Board of Directors and will depend on the Company's future operations, future capital needs and financial condition. 9. Limitation of Liability of Directors and Officers. The Company's Certificate of Incorporation and or bylaws provide that to the extent permitted by New Jersey Law, officers and Directors will not be personally liable to its shareholders for monetary damages under certain circumstances. 10. Company's Products Subject to Changing Consumer Tastes. Although the Company recently had an independent market research firm conduct a survey, which ascertained that its products compared favorably to its present competitors, there can be no assurance that the public's taste will remain attracted to the Company's products. In order to maintain its favorable consumer acceptance the Company will have to maintain its high quality of products and competitive prices. DESCRIPTION OF PROPERTY. The Company does not own any real estate, but through its subsidiaries it leases five locations. Pizado Foods (2001) Inc. leases 6,518 square feet on a five-year lease expiring October 2003, which it uses as production facilities and administrative offices. In addition, Pizza Donini.com Inc. leases 1,560 square feet on a three-year lease expiring May 2004, which it uses as its call center. Pizza Donini Inc. leases four restaurant facilities: 800 square feet on a one-year lease; 450 square feet on a five-year lease expiring February 2005; 700 square feet on a five-year lease ending May 2005 and 2000 square feet on a four-year lease expiring December 2004. All lease rates are considered by Management to be at market and none is leased from an affiliate. EMPLOYEES. The Company has a total of approximately 50 employees of whom 5 are executives, 10 are clerical and administrative, 10 are manufacturing and 25 are sales and marketing. One officer of the Company receives a salary in excess of $50,000 (US) per year. No Director is compensated for his/her services rendered as a member of the Board of Directors, however the Company intends to reimburse its Directors for reasonable expenses incurred in connection with their directorship. 7 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information as of March 15, 2001, with respect to security ownership of Management and persons known to the Company to be the beneficial owners of more than 5% of the common stock, $.001 par value of the Company. Except as noted, each person has sole voting power with respect to the shares shown. PRINCIPAL SHAREHOLDERS TABLE Name and Amount and Address of Nature of Title of Beneficial Beneficial Percent Class Owner Ownership of Class - - --------------------------------------------------------------------------- Common Peter Deros 1,576,000 15.8% 8220 Birnam Apt. 2 Montreal, Quebec H3N 2T9 Canada Common Ansbacher (Bahamas) 3,000,0001 30.0% Limited, Trustee of the Spartan Trust c/o Ansbacher (Bahamas) Limited Ansbacher House Bank Lane P.O. Box N-7768 Nassau, Bahamas Common William L. Mouris, 3,000,0002 30.0% Trustee of the Deros Family Trust 204 Whitemud Business Park 9622-42 Avenue Edmonton, Alberta T6E 5Y4 Canada Common Theo Kalaitzis 19,500 .2% 12 Garland Dollard Des Ormeaux Quebec H9G 2B6 Canada Common Sarkis Tsaoussian 9,750 .1% 561 Carleton Chomedey, Laval Quebec H7W 4R1 Canada --------- --------- Total 7,605,250 76.1% 8 - - ---------- (1) Ownership of these shares was transferred from Maria Asimakopoulos to a Trust pursuant to a Deed of Settlement dated March 9, 2001by way of a gift. Peter Deros and members of his family and relatives are discretionary beneficiaries of the Trust. (2) Ownership of these shares was transferred from Rocco Sgambetterra to the Trust pursuant to a Deed of Settlement dated March 1, 2001by way of a gift. Peter Deros and members of his family and relatives are discretionary beneficiaries of the Trust. ITEM 3. BANKRUPTCY OR RECEIVERSHIP. Not applicable. ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT. There has been no change in the accountant of the Company. The financial statements accompanying this report have been audited by KPMG, the independent auditors for the Company's wholly owned operating subsidiary, Pizza Donini Inc. ITEM 5. OTHER EVENTS The Registrant has undergone the following significant events: On February 6, 2001, the Company amended its Certificate of Incorporation changing its name from PRS Sub VI, Inc. to Donini, Inc. and increasing its authorized shares of Common Stock from 10,000,000 to 100,000,000, par value $.001. 9 ITEM 6. RESIGNATION OF OFFICERS AND DIRECTORS. At a meeting of the Board of Directors held February 20, 2001, John Frohling resigned as President and Chairman of the Board of Directors of the Company and Linda Pellegrino resigned as Secretary, Treasurer and Director of the Company, effective February 23, 2001. In accordance with the Company's By-Laws, the Directors elected Peter Deros, President, Chief Executive Officer, Treasurer and Director, Catherine Pantoulous Secretary and Terence Byrne Director, which appointments took effect February 23, 2001. The following sets forth, as of March 1, 2001, the names and ages of all directors and executive officers of the Company; the date when each director was appointed; and all positions and offices in the Company held by each. Each director will hold office until the next annual meeting of shareholders and until his or her successor has been elected and qualified: DATE OFFICES APPOINTED NAME AGE HELD DIRECTOR - - ----------------- ------ --------- ---------- Terence Byrne 42 Director February 2001 Peter Deros 52 Director, President, February 2001 Chief Executive Officer and Treasurer BIOGRAPHIES OF DIRECTORS AND OFFICERS OF THE COMPANY. Set forth below are the names of the directors and officers of the Company, all positions and offices with the Company held, the period during which he has served as such, and the business experience during at least the last five years: PETER DEROS. Mr. Deros has been in the quick-service restaurant industry for 35 years, founded Pizza Donini in 1987 and has served as its President and Chief Executive Officer since inception. Prior to founding Pizza Donini, Mr. Deros was President and Chief Operating Officer of a highly successful public pizza chain. Under his leadership sales for this chain grew from $5 million to more than $50 million over a 12-year period. 10 TERENCE BYRNE. Mr. Byrne is a principal of T.T. Byrne Capital Investments an investment banking firm. Mr. Byrne has been involved in venture capital arena for most of the past decade and is advisor to the Bartholemew Venture Fund. Prior to this position, Mr. Byrne was the controlling shareholder, officer and director of Bartholemew & Byrne, Inc., a consulting firm specializing in corporate finance and general business consulting. Mr. Byrne has been a Director of the Company since February 23, 2001. CATHERINE PANTOULIS. Ms. Pantoulis graduated from Universite de Montreal, Faculty of Law in 1983 and has been a member of the Quebec Bar Association since 1984. At present she is associated with Kounadis Perreault, which serves as counsel to Pizza Donini Inc. Ms. Pantoulis has been Secretary of the Company since February 23, 2001. DENIS PAQUETTE. Mr. Paquette is Vice-President, Franchise Operations and Development for Pizza Donini Inc. and has worked in restaurant franchise development, operations and training for the last sixteen years. Prior to his association with Pizza Donini, Mr. Paquette was Vice President, Operations and Training for Sportscene Restaurants Inc., a publicly owned corporation, and one of Quebec's largest chain of theme restaurants. THEO KALAITZIS. Mr. Kalaitzis is President and Chief Operating Officer of Pizado Foods (2001) Inc. ("Pizado") He is responsible for the day-to-day supervision and supply of all franchise operations and for the management of Pizado's production facility. Mr. Kalaitzis joined Pizza Donini in 1987. Prior to this position, Mr. Kalaitzis held management positions with a multi-unit franchisee of A & W Food Services of Canada and operated his own restaurant. SARKIS TSAOUSSIAN. Mr. Tsaoussian is President and Chief Operating Officer of PizzaDonini.Com Inc., the Company's call center. Mr. Tsaoussian joined Pizza Donini in 1992 as a field supervisor and progressed through various more responsible positions until he was appointed to his current office in 1997. 11 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. Exhibit A. Amendment to Certificate of Incorporation effecting a change of the name of the Company and increasing the number of authorized shares of Common Stock. Exhibit B. Unit License Agreement by and between Pizza Donini Inc. and Zellers Inc. Exhibit C. Financial Statements of Pizza Donini Inc. Exhibit D. Financial Statements of Donini, Inc.(1) - - ----------------------------------- (1) Filed with the Securities and Exchange Commission on December 8, 2001 as an exhibit to the registration statement of the Registrant on Form 10-SB, Registration No. 000-32133, which exhibit is incorporated herein by reference. ITEM 8. CHANGE IN FISCAL YEAR. Not applicable. 12 ================================================================================ Signatures Pursuant to the requirements of the Securities Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Donini, Inc. March 26, 2001 By: /s/ Peter Deros ---------------------------------- President and Chief Executive Officer 13 EX-99.A 2 0002.txt EXHIBIT 99.A CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION * * * * * * * * * * * * * * * * PRS SUB VI INC., a corporation organized and existing under and by virtue of the "New Jersey Business Corporation Act", as amended (the "Law"), DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of PRS SUB VI INC., a resolution was duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Third Article thereof so that, as amended, said Article shall be and read as follows: (3) The aggregate number of shares which the corporation shall have the authority to issue is 100 Million shares each of which shall have $.001 par value. SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with N.J.S.A. 14A:9-2(4) of the Law at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That at a meeting of the Board of Directors of PRS SUB VI INC., a resolution was duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the First Article thereof so that, as amended, said Article shall be and read as follows: (1) The name of the corporation is Donini, Inc. FOURTH: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with N.J.S.A. 14A:9-2(4) of the Law at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. FIFTH: That said amendments were duly adopted in accordance with the provisions of the Law on January 19, 2001 with 9,073,966 shares voting in favor of the amendment and none voting against the amendment. IN WITNESS WHEREOF, said PRS SUB VI INC., has caused this certificate to be signed by John B. Frohling, its President, pursuant to the Law and attested by Linda Pellegrino, its Secretary, this 19th day of January, 2001. By: /s/ John B. Frohling -------------------- President ATTEST: By: /s/ Linda T. Pellegrino ----------------------- Secretary EX-99.B 3 0003.txt UNIT LICENSE AGREEMENT EXHIBIT B UNIT LICENSE AGREEMENT BY AND BETWEEN: PIZZA DONINI INC. body politic duly constituted according to Law, having its Head Office and principal place of business at 4555 des Grandes Prairies Blvd., Suite 30, H1R 1A5, in the City of St. Leonard, Province of Quebec, herein duly represented by Mr. Peter Deros, its representative, duly authorized for these purposes as he so declares, HEREINAFTER REFERRED TO AS "DONINI" AND: ZELLERS INC. body politic duly constituted according to Law, having its Head Office and principal place of business at 8925 Torbram Road, Brampton, Ontario, L6T 4G1, herein duly represented by Mr. Jeff Collins, its representative, duly authorized for these purposes as he so declares, HEREINAFTER CALLED THE "ZELLERS" WHEREAS ZELLERS wishes to offer Donini pizza and products for sale in its in-store Zellers restaurants throughout Quebec, under the following terms and conditions. 1. The preamble to the present Agreement shall form an integral part hereof as if it were recited at length herein for all legal purposes. 2. ZELLERS hereby agrees to offer for sale in twenty-five (25) mutually agreeable in-store restaurants within Quebec (the whole from those listed more fully in Schedule "A" annexed hereto), the Donini Products enumerated in Schedule "B" annexed hereto (or such other products as the parties shall agree from time to time) at such prices as shall be determined by the parties hereto at the time as the exact and sizes of the Products are determined, i.e. 9", 10", 12". The prices which DONINI sells the Donini Products to ZELLERS for the agreed locations shall thereafter remain unchanged during the initial one-year term of this Page 1 Agreement, save and except where there is an increase in the cost of raw materials to DONINI, which increase may be justified to ZELLERS. ZELLERS further agrees that it shall offer no other products similar to those listed in Schedule B at the agreed locations during the term hereof. Should the parties be satisfied with the progress of the project within Quebec under the terms hereof on or before the expiration of the term of this Agreement, ZELLERS shall grant to DONINI the right to sell the DONINI Products in its in-store Zellers restaurants throughout Canada, upon such terms and conditions as are mutually agreeable to the parties hereto. In any event, either party, in its sole and unfettered discretion, may decline to continue or expand the sale of Donini Products on or after the expiration of the term of this Agreement. 3. DONINI shall provide at its sole cost and expense for each in-store restaurant serving the DONINI Products the use of one (1) conveyor belt pizza oven currently costing $6,500.00, miscellaneous cutters and spatulas currently costing $500.00, 2 signs for the interior of the restaurant, currently costing $2,000.00, and all necessary electrical connections and installations for all of the above, as well as menus, table tents, flyers and other point of sale promotional material. The current cost of the equipment enumerated herein is exclusive of any sales taxes, including G.S.T and Q.S.T. 4. All equipment, signage and other items enumerated in paragraph 3 shall remain the property of DONINI and shall be provided to ZELLERS by DONINI to be used for the preparation and service of the DONINI Products and shall be returned to DONINI upon the termination of this Agreement in the condition in which they were delivered to ZELLERS, save and except reasonable wear and tear. ZELLERS hereby undertakes to insure the equipment for depreciated value, at the rate of 10% per year, naming DONINI or its nominee as an additional named insured, and to maintain and repair same as would a careful owner. ZELLERS shall be responsible for all damages to equipment provided herein to a maximum of $9,000.00 per Zellers store supplied by DONINI and for loss, theft, breakage, injuries and other claims in respect of the equipment provided hereunder. 5. DONINI shall install at its sole cost all necessary equipment in the ZELLERS stores listed in Schedule "A" within six (6) months of the signature of this Agreement, starting from the stores located in and around the City of Montreal and the surrounding areas and moving outward from the said areas. Page 2 6. DONINI shall provide training at its sole cost in its test kitchen at 4555 des Grandes Prairies Blvd., Suite 30, St. Leonard, Quebec, to management personnel designated by ZELLERS in respect of the use of the equipment and the storage, preparation and service of the DONINI Products. The management personnel so trained shall thereafter train all restaurant personnel. 7. ZELLERS and/or its designated distributor, affiliates or subsidiaries shall order all purchases of DONINI Products listed in Schedule "B" exclusively from DONINI and/or its designated broker, subsidiaries or affiliates (as may be designated by DONINI from time to time) and all orders shall be paid at the price established pursuant to paragraph 2 hereof on mutually agreeable terms and conditions. The Products ordered shall be delivered to ZELLERS or its designated distributor, affiliates or subsidiaries at a mutually agreeable central warehouse or distribution center in Quebec for distribution to the various individual outlets. 8. DONINI shall provide at its cost and expense, all advertising, press releases and other material promoting the DONINI Products in ZELLERS in-store restaurant, ("Advertising"). No Advertising shall be distributed or published without the prior written approval of ZELLERS. ZELLERS grants to DONINI a limited, non-exclusive, non-transferable, non-assignable license to use the ZELLERS name and logo set out in "C" (the "Trade-marks") for the purposes of the Advertising only and pursuant to the terms set out in Schedule "D" herein. 9. The term of this Agreement shall be a period of one (1) year following the completion of the installation of the equipment as provided in paragraph 5 hereof. Either party may terminate this Agreement prior to the expiry of the one (1) term provided above upon forwarding to the other party a written notice of termination at least ninety (90) days prior to the date of termination stipulated by the said party. Where ZELLERS shall approve of the sale of the DONINI Products throughout Canada, based on the results of the sales of the Products during the one-year term of this agreement as provided in paragraph 2 hereof, and conditional upon the acceptance of DONINI, the term of an agreement for sale of the Products throughout Canada shall be no less than three (3) years. In the event that DONINI shall not be granted the option to sell the DONINI Products throughout Canada, DONINI shall be entitled to remove all of the equipment installed pursuant to paragraph 5 of this Agreement, unless the parties shall otherwise agree, the whole at the option of DONINI. 10. DONINI shall permit the sale of DONINI Products to be eligible for participation in the existing ZELLERS Club-Z points promotional and/or Page 3 any other promotional program that may be adopted by ZELLERS. ZELLERS shall use its best efforts to promote or advertise the eligibility of the purchase of DONINI Products in any such programs. 11. The parties shall execute such further agreements, instruments or documents as may be necessary in order to give full force and effect to the foregoing. 12. ZELLERS shall not assign this Agreement, in whole or in part, without the prior written consent of DONINI, which consent shall not be unreasonable withheld. 13. This Agreement shall be interpreted in accordance with the laws of Quebec and any and all disputes shall be submitted to the appropriate courts in and for the district of Montreal. 14. This Agreement was drafted in English at the request of the parties hereto. La presente convention a ete redigee en anglais a la demande des parties aux presentes AND AFTER DUE READING HEREOF, THE PARTIES HAVE SIGNED THESE PRESENTS AT THE PLACES AND ON THE DATES INDICATED HEREINBELOW. SIGNED AT MONTREAL, QUEBEC, THIS 2ND DAY OF FEBRUARY 2001. PIZZA DONINI INC. /s/ PETER DEROS - - ---------------------------------- ---------------------- PER: MR. PETER DEROS WITNESS DULY AUTHORIZED FOR THESE PURPOSES SIGNED AT BRAMPTON, ONTARIO, THIS 15TH DAY OF FEBRUARY 2001. ZELLERS INC. /s/ JEFF COLLINS - - ---------------------------------- ---------------------- PER: MR. JEFF COLLINS WITNESS DULY AUTHORIZED FOR THESE PURPOSES Page 4 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
-13-
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- -----END PRIVACY-ENHANCED MESSAGE-----