10QSB 1 donini_1q05.txt FIRST QUARTER 2005 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended August 31, 2004 [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 0-32133 DONINI, INC. (Exact Name of Small Business Issuer as Specified in Its Charter) New Jersey 22-3768426 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4555 Boul. des Grandes Prairies, #30 St-Leonard, Montreal, Quebec, Canada H1R 1A5 (Address of Principal Executive Offices) (514) 327-6006 (Issuer's Telephone Number, Including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of each of the issuer's classes of common equity, as of August 31, 2003: 6,920,688 shares of common stock Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] Donini, Inc. (A Development Stage Company) TABLE OF CONTENTS PART I Page ---- Item 1 - Financial Information (unaudited) Donini, Inc. Consolidated Balance Sheet as of August 31, 2004 and May 31,2004..................................... 3 Consolidated Statements of Operations for the three month periods ended August 31, 2004 and 2003 ..................................... 4 Consolidated Statements of Cash Flows for the three month period ended August 31, 2004 and 2003 .................................... 5 Notes to Financial Statements (unaudited)............................. 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 8 PART II Item 1 - Legal Proceedings .............................................. 9 Item 2 - Changes in Securities and Use of Proceeds....................... 9 Item 3 - Defaults Upon Senior Securities................................. 9 Item 4 - Submission of Matters to a Vote of Security Holders............. 9 Item 6 - Exhibits and Reports on Form 8-K................................ 9 2 PART I ITEM 1- FINANCIAL INFORMATION (UNAUDITED) DONINI, INC. CONSOLIDATED BALANCE SHEET
August 31, May 31, ASSETS 2004 2004 ------ ------------ ------------ (Unaudited) (Audited) Current Assets: Cash $ 457,626 -- Accounts receivable, net 66,306 71,169 Inventories 13,790 14,412 Taxes receivables 13,104 8,134 Due from shareholder 158,232 -- Loan Receivable -- 16,570 Current portion of franchise sales receivables 18,975 26,118 Prepaid expenses 7,039 12,038 Assets held for resale 312,290 286,070 ------------ ------------ Total Current Assets 1,047,362 434,511 Property and Equipment (Net) 297,848 291,018 Franchise sales receivables 50,066 77,672 Trademarks 10,699 10,776 Unamortized loan finance cost 449,800 -- ------------ ------------ Total Assets $ 1,855,775 $ 813,977 ============ ============ LIABILITIES AND STOCKHOLDERS' (DEFICIT) --------------------------------------- Current Liabilities: Current portion of long-term debt $ 183,137 $ 245,932 Loans payable 287,718 357,592 Accounts payable and accrued liabilities 739,610 809,308 Due to shareholders -- 14,411 ------------ ------------ Total Current Liabilities 1,210,465 1,427,243 Long-Term Liabilities: Loans Payable 493,046 493,757 Note Payable secured 1,500,000 -- ------------ ------------ Total Liabilities 3,203,511 1,921,000 ------------ ------------ Stockholders' Equity(Deficit): Common stock ($.001 par value 100,000,000 shares authorized, 18,420,871 and 9,220,871 issued and outstanding August 31, 2004 and May 31, 2004 respectively 18,420 9,220 Additional paid-in capital 5,223,561 4,404,761 Foreign currency translation adjustment (59,074) (55,551) Accumulated deficit (6,530,643) (5,465,453) ------------ ------------ Total Stockholders' Equity(Deficit) (1,347,736) (1,107,023) ------------ ------------ Total Liabilities and Stockholders' Equity(Deficit) $ 1,855,775 $ 813,977 ============ ============
---------------------- See accompanying notes to consolidated financial statements. 3 DONINI, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) For the Three Months Ended August 31, ------------------------------ 2004 2003 ------------ ------------ Revenues: Sales $ 123,916 $ 206,432 Sale of stores 319,303 -- Royalties and other related revenues 80,494 82,769 Order processing fees 39,094 43,403 Initial franchise fees 33,809 21,810 ------------ ------------ Total Revenues 596,616 354,414 ------------ ------------ Cost of Goods Sold - Sales 78,124 130,669 Cost of Stores Sold 276,285 -- ------------ ------------ 354,409 130,669 ------------ ------------ 242,207 223,745 ------------ ------------ Costs and Expenses: General and administrative expenses 264,389 144,606 Advertising and promotion 64,468 61,933 Salaries 56,479 54,217 Interest expense 23,602 28,217 Depreciation and amortization 13,799 20,989 Compensation cost 828,000 -- Amortization of finance cost 60,000 -- ------------ ------------ Total Costs and Expenses 1,310,737 309,962 ------------ ------------ Income (Loss) from operations (1,068,530) (86,217) Other income (Expenses) 3,340 2,249 ------------ ------------ Net income (Loss) before income taxes (1,065,190) (83,968) ============ ============ Net (Loss) (1,065,190) (83,968) ------------ ------------ Earnings (Loss) per share Basic and diluted per share $ (0.07) $ (0.01) ============ ============ Basic and diluted weighed average common shares outstanding 13,820,871 6,920,688 ============ ============ ---------------------- See accompanying notes to consolidated financial statements. 4 DONINI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended August 31, ---------------------------- 2004 2003 ------------ ------------ Cash Flows from Operating Activities: Net (loss) $ (1,065,190) $ (83,968) Adjustments to reconcile net (loss) to cash (used in) operating activities: Compensation expense 828,000 Depreciation and amortization 13,799 20,989 Unamortized loan finance cost (449,800) -- Foreign translation adjustments (3,523) 15,589 Change in taxes receivables (4,970) 3,889 Change in operating assets and liabilities: Accounts receivable 4,863 (7,912) Inventories 622 (926) Loan receivable 16,570 Prepaid expenses 4,999 (2,476) Accounts payable and accrued liabilities (69,698) 71,506 ------------ ------------ Net cash provided by (used in) operating activities (724,328) 16,691 ------------ ------------ Cash Flows from Investing Activities: Increase in franchise sales receivable (38,080) (98) Proceeds from franchise sales receivable 72,829 16,571 Acquisition of fixed assets (20,552) Increase in assets held for resale (26,220) (10,556) ------------ ------------ Net cash provided by (used in) investing activities (12,023) 5,917 ------------ ------------ Cash Flows from Financing Activities: Due from shareholder (172,643) 7,219 Proceeds from loans payable 15,141 109,530 Principal payment of loans payable (85,015) (62,842) Proceeds from long-term debt 8,360 12,830 Principal (payment) of long-term debt (71,866) (88,309) Proceed from note payable secured 1,500,000 -- (Repayment) of deposit payable -- (1,035) ------------ ------------ Net cash provided by (used in) financing activities $ 1,193,977 $ (22,608) ------------ ------------ Net increase in Cash and Cash Equivalents 457,626 -- Cash and Cash Equivalents, beginning of period -- -- ------------ ------------ Cash and Cash Equivalents, end of period $ 457,626 $ -- ============ ============ Supplemental Disclosure of Cash Flow Information: Interest paid during the period $ 23,602 $ -- ============ ============ Income taxes paid during the period $ -- $ -- ============ ============ Supplemental Disclosure of Noncash Investing and Financing Activities: Common stock issued as compensation $ 828,000 $ -- ============ ============
-------------------- See accompanying notes to consolidated financial statements. 5 DONINI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) August 31, 2004 1. DESCRIPTION OF BUSINESS Donini, Inc. (formerly PRS Sub VI, Inc.) (the "Company") is incorporated in the State of New Jersey and through its wholly-owned subsidiary Pizza Donini Inc. (the "Subsidiary") and its subsidiaries, Pizado Foods (2001) Inc., Pizza Donini.Com Inc. and Doninico Inc., is the franchisor, manufacturer and distributor of frozen ready-made pizza, frozen and refrigerated sauces and pizza dough to franchise, retail and wholesale customers, and the operator of a call center for home delivery of pizza and other food products and operate company owned restaurants. The company has recently begun to expand its offerings to casual Italian dining services through its Resto-Bar concept. The Company's franchise outlets in Quebec, Canada operate under the trade name "Pizza Donini", which name is also primarily used for the distribution of the Company's frozen pizza to the food service industry. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Basis of Presentation ----------------------------------------------------- The accompanying financial statements consolidate the accounts of Donini, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts from prior years have been reclassified to conform to the current year presentation. The accompanying unaudited consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. However, in the opinion of management, all adjustments that are of a normal and recurring nature necessary to present fairly the results of operations, financial position and cash flows have been made. It is suggested that these statements be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-KSB for the year ended May 31, 2004. The statements of operations for the three months ended August 31, 2004 and 2003 are not necessarily indicative of results for the full year. Earnings (Loss) per Share ------------------------- The Company computes earnings or loss per share in accordance with the Financial Accounting Standards Board Statement No. 128 "Earnings Per Share" (SFAS 128) which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of options, warrants and convertible securities and thus is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is similar to the previous fully diluted earnings per share. Diluted earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock were exercised or converted into common stock. Diluted earnings per share is computed based upon the weighted average number of common shares and dilutive common equivalent shares outstanding. 6 DONINI INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) August 31, 2004 (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements -------------------------------- In January, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51", which provides guidance on the identification of and reporting for variable interest entities. Interpretation No. 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated. Interpretation No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Company does not expect the adoption of Interpretation No. 46 to have a significant impact on its future results of operations or financial position. In May, 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with characteristics of both Liabilities and Equity", (SFAS 150). SFAS 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities in statements of financial position (balance sheets). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective for the Company in the second quarter of the year ended May 31, 2004. The adoption of SFAS 150 had no impact on the Company's financial position or results of operations for the year ended May 31, 2004, and the Company does not expect the adoption of this pronouncement to have any impact on its future financial position or results of operations. 3. STOCKHOLDERS' EQUITY Capital ------- During the three months ended August 31, 2004 the Company issued 9,200,000 shares of its common stock, the Company recognized as compensatory costs the difference between the par value paid of $0.001 and the estimated fair market value of the stock issued totaling $828,000. The Company also granted options totaling 7,000,000, 500,000 of which were exercisable upon their grant until March 15, 2005 and 6,500,000 with future exercise dates commencing from October, 2004 till October, 2008 at exercise price of $0.001 for 600,000 and a price ranging from $0.02 to $0.05 for the remaining options. Due to the volatility and almost no market price of the Company's common stock the company recorded no expense as these options are not exercisable till future dates. 4. SUBSEQUENT EVENTS On October 1, 2004 the Company entered into an Exchange Agreement with an Investor whereby a convertible note dated June 7, 2004 of $1,500,000 was exchanged for a Secured Note of $1,540,000 due June 7, 2006 which note has a conversion right provided the market price of the Company's Common Stock is equal to or above $.60 per share. The note is secured by a first lien on certain of the Company's non real estate assets. The Company also granted the Investor warrants to purchase 500,000 shares of the Company's common stock until June 7, 2009 at 110% of the closing price on September 30, 2004. 7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Pizza Donini support twenty-two (22) franchised pizza outlets. At August 31 2004, Pizza Donini also owned five (5) additional locations that are being held with the intention of selling them as Donini franchises. All locations are in the Greater Montreal. Pizza Donini is further developing its B2B (business to business) distribution network of fully-topped, ready-to-use self-rising crust frozen pizza to food service customers and is in discussion with a number of potential customers such as department store cafeterias, other restaurants, hospitality and leisure venues, convenience stores, and contract caterers. In addition to generating revenues from its franchisees in the form of initial franchise fees and royalties, Pizza Donini Inc. revenues have also been generated by three other operation subsidiaries, Pizado Foods (2001) Inc. (`'Pizado''), Pizza Donini.Com Inc. and DoniniCo Inc. Pizado sells raw food products and other supplies to our franchisees and is offering selected products to other distributors and manufacturers. Pizado also intends to expand its distribution business. Pizza Donini.Com Inc. manages the call center that executes home delivery orders made from a single telephone number to the closest franchisee. DoniniCo Inc. repurchases existing Donini franchised restaurants and operates them, pending their resale to new franchisees. For the three months ended August 31, 2004, franchise and corporate operations accounted for approximately 78% of the Company's total revenues. The sale of wholesale food products equaled approximately 21% and the remaining miscellaneous revenues accounted for 1%. This compares to 42%, 57% and 1% respectively for the same period in fiscal 2003, which included sales of a store operated by the Company. This store has since been sold as a franchise. During the first quarter of fiscal 2005 Company revenues were $596,616 compared to $354,414 for the same period in 2004, a increase of $242,202 or 68.3%. Cost of goods sold for the three months ended August 31, 2004 was $78,124 or 63% as compared to $130,669 or 63% for the same period in fiscal 2004. The increase in revenues is primarily a result of sales of stores during this period of $319,303. Net income decreased from $(83,968) during the first three months of fiscal 2004 to ($1,065,190) for the same period in 2005. The decrease in net income is due to decrease in sales and increased administrative expenses as well as amortized finance costs, and primarily compensation costs of $828,000. Working capital deficit during this period decreased from $992,732 at May 31, 2004 to $163,103 at August 31, 2004. Total assets increased from $813,977 as of May 31, 2004 to $1,855,775 as of August 31, 2004. The Company maintains that its liquidity will continue to improve marginally with improved earnings, but will not be sufficient to allow it to expand its operations to any significant degree. 8 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The company is subject from time to time to litigation arising from the normal course of business. In management's opinion, any such contingencies are appropriately provided for or would not materially affect the Company's financial position or results of operations. Pizza Donini 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 Pizza Donini of trademarks by the former subsidiary null and void and to have Pizza Donini 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 $416,917, 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 July 2005. In the meantime, in the file against Pizza Donini, 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 Pizza Donini and to its former subsidiary is confident that the appeal will be dismissed in the original suit and therefore, the action against Pizza Donini will also be dismissed. No director, officer, or affiliate of the Company, or any associate of any of them, is a party to, or has a material interest in, any proceeding adverse to us. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS The total number of shares of Common Stock issued and outstanding as of August 31, 2004 was 18,420,871. ITEM 3 - DEFAULT UPON SENIOR SECURITIES Not applicable ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of the President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. 9 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DONINI, INC. Date: October 20, 2004 By: /s/ PETER DEROS -------------------------------- Peter Deros, President 10