EXHIBIT C
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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-