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 February 28, 2002
[ ] 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 April 15, 2002: 5,924,829 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 Statement of Cash Flows
February 28, 2002 and February 28, 2001........................ 3
Consolidated Balance Sheets as of
February 28, 2002 and May 31, 2001............................. 4
Consolidated Statements of Operations
for the nine month periods
ended February 28, 2002 and 2001 .............................. 6
Consolidated Statements of Operations
for the three month periods
ended February 28, 2002 and 2001............................... 7
Consolidated Statements of Stockholders'
deficit and Comprehensive Income
as of May 31, 2001, and February 28, 2002...................... 8
Notes to Financial Statements (unaudited).............................. 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 11
PART II
Item 1 - Legal Proceedings............................................. 13
Item 2 - Changes in Securities and Use of Proceeds..................... 13
Item 3 - Defaults Upon Senior Securities............................... 14
Item 4 - Submission of Matters to a Vote of Security Holders........... 14
Item 6 - Exhibits and Reports on Form 8-K.............................. 14
2
PART I
Item 1- Financial Information (unaudited)
DONINI INC.
Consolidated Statements of Cash Flows
Nine-months ended February 28, 2002 and 2001
(expressed in United States dollars)
====================================================================================
Cash flows from operating activities:
Net (loss) income $(886,019) $ 13,597
Adjustments for:
Non cash stock based compensation 546,546 -
Depreciation 45,092 26,050
Foreign exchange - (1,105)
Net increase in allowance for
doubtful accounts - 819
Changes in operating working capital items:
Accounts receivable (44,296) (41,828)
Sales taxes receivable 16,539 1,320
Inventories (222) 612
Prepaid expenses (52) (12,846)
Accounts payable and accrued liabilities 226,990 (11,399)
- ------------------------------------------------------------------------------------
(95,422) (24,780)
Cash flows from financing activities:
Bank Indebtedness 125,771 (2,065)
(Decrease) increase in due to employee (638) 2,197
Repayment of loans (59,613) (10,030)
Proceeds from loans 186,296 480,068
Proceeds from long-term debt 43,188 (166,063)
Repayment of long-term debt (15,711) -
Repayment of obligations under capital lease - (3,856)
Increase in additional paid-in capital 605 13
Due from shareholder (216,830) -
- ------------------------------------------------------------------------------------
63,068 300,264
Cash flows from investing activities:
Increase in balance of sales receivable (105,270) (163,583)
Repayment of balance of sales receivable 101,219 43,562
Acquisition of fixed assets (48,506) (23,211)
Assets held for resale 84,911 (132,252)
- ------------------------------------------------------------------------------------
32,354 (275,484)
Net change in cash - -
Cash, beginning of period - -
===============================================================================
Cash, end of period - -
-------------------------------------------------------------------------------
3
DONINI INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
=================================================================================
February 28, May 31,
2002 2001
- ---------------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable, net of allowance for
doubtful accounts $ 93,273 $ 51,940
Sales taxes receivable 22,142 39,908
Current portion of balance of sales receivable 98,284 90,421
Due from shareholder 190,233 0
Inventories 20,029 24,296
Prepaid expenses 17,899 8,175
Assets held for resale 79,276 169,065
----------------------------------------------------------------------------
521,136 383,805
Balance of sales receivable 191,819 207,546
Fixed assets 401,031 397,617
Trade marks 12,130 12,375
- ---------------------------------------------------------------------------------
$1,126,116 $1,001,343
=================================================================================
4
============================================================================================
February 28, May 31,
2002 2001
- --------------------------------------------------------------------------------------------
Liabilities and Shareholders' Deficit
Current liabilities:
Bank indebtedness $ 325,984 $ 211,185
Accounts payable and accrued liabilities 1,247,102 1,054,188
Due to an employee, non-interest bearing and unsecured 26,620 28,370
Loans payable 176,139 54,351
Due to shareholder - 22,445
Current portion of long-term debt 80,275 84,162
- --------------------------------------------------------------------------------------------
1,856,120 1,454,701
Long-term debt 197,713 171,459
Shareholders' deficit:
Common stock, $0.001 par value:
100,000,000 shares authorized,
17,773,937 and 15,158,937 shares issued
and outstanding at February 28, 2002 and
May 31, 2001 respectively 17,774 15,159
Additional paid in capital 3,127,165 2,572,629
Deficit (4,219,113) (3,333,094)
Accumulated other comprehensive income:
Cumulative currency translation adjustment 146,457 120,489
- --------------------------------------------------------------------------------------------
Total shareholders' deficit (927,717) (624,817)
- --------------------------------------------------------------------------------------------
$ 1,126,116 $ 1,001,343
============================================================================================
See accompanying notes to consolidated financial statements.
5
DONINI INC.
Consolidated Statements of Operations
Nine months period ended February 28, 2002
and 2001 (Expressed in United States dollars)
============================================================================
2002 2001
Revenues:
Sales $ 650,181 $ 695,980
Royalties and other related revenues 466,850 499,378
Order processing fees 180,195 190,644
Interest Income 15,764 15,810
-----------------------------------------------------------------------
1,312,990 1,401,812
Cost of goods sold 494,830 461,092
Cost of supplies to franchises 3,617 30,337
============================== ------------ ------------
498,447 491,429
------------ ------------
814,543 910,383
Costs and expenses:
Advertising and promotion 558,400 305,968
General and administrative expenses 996,188 499,787
Depreciation 45,092 26,050
Interest expense 100,882 88,162
-----------------------------------------------------------------------
1,700,562 919,967
-----------------------------------------------------------------------
Net loss $ (886,019) $ (9,584)
=======================================================================
Loss per share-Basic $0.05 $0.001
=======================================================================
Weighted Average Shares Outstanding 16,364,779 10,000,000
See accompanying notes to consolidated financial statements.
6
DONINI INC.
Consolidated Statements of Operations
Three months period ended February 28, 2002 and 2001
(Expressed in United States dollars)
================================================================================
2002 2001
Revenues:
Sales $ 201,761 $ 302,361
Royalties and other related revenues 155,555 171,072
Order processing fees 57,326 64,159
Interest Income 4,448 4,046
---------------------------------------------------------------------------
419,090 541,628
Cost of goods sold 152,536 210,598
Cost of supplies to franchises 394 3,209
============================== ------------ ------------
152,930 213,807
------------ ------------
266,160 327,821
Costs and expenses:
Advertising and promotion 123,379 125,298
General and administrative expenses 443,911 166,994
Depreciation 15,241 8,553
Interest expense 34,088 48,915
---------------------------------------------------------------------------
616,619 349,760
---------------------------------------------------------------------------
Net loss $ (350,459) $ (21,939)
================================================================================
Loss per share - Basic $0.02 $0.002
================================================================================
Weighted Average Shares Outstanding 16,399,318 10,000,000
See accompanying notes to consolidated financial statements.
7
DONINI INC.
Consolidated Statement of Stockholders' Deficit and Comprehensive Income
Nine months period ended February 2002
(expressed in United States dollars)
====================================================================================================================================
Additional Accumulated
Common paid in comprehensive
Stock capital Deficit income Total
- ------------------------------------------------------------------------------------------------------------------------------------
May 31, 2001 $ 15,159 $ 2,572,629 $(3,333,094) $ 120,489 $ (624,817)
Net loss (886,019) (886,019)
Foreign currency adjustment 25,968 25,968
-----------
Total comprehensive income (1,484,868)
Compensation expense 2,065 430,456 432,521
Stock options exercised 550 124,080 124,630
- ------------------------------------------------------------------------------------------------------------------------------------
February 28, 2002 $ 17,774 $ 3,127,165 $(4,219,113) $ 146,457 $ (927,717)
====================================================================================================================================
8
DONINI, INC. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Preparation
The interim financial statements included herein have been prepared by the
Company without audit. These statements reflect all adjustments, which are, in
the opinion of management, necessary to present fairly the financial position as
of February 28, 2002, and the results of operations and cash flows for the
period then ended. All such adjustments are of normal and recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjuction with the financial statements and notes for the fiscal
year ended May 31, 2001.
2. Common Stock and Stock Options
(a) Summary of common stock outstanding:
A summary of the common shares outstanding and transactions since June 1, 2001
is detailed as follows:
Number of shares Amount
---------------- ------
Balance outstanding June 1, 2001 15,158,937 $ 15,159
Issue of common shares for services rendered 2,065,000 2,065
Conversion of stock options issued to employee 550,000 550
Balance outstanding at February 28, 2002 17,773,937 $ 17,774
Due to an arrangement with a third party to provide services to the Company
55,000 shares of common stock were issued in January 2002. Also in January 2002,
975,000 shares were issued to a company controlled by an executive for services
rendered. These shares are included in the table above. The estimated fair value
of the shares issued amounted to $232,935 of which $222,935 has been recorded as
compensation expense and $10,000 as prepaid consulting expenses.
(b) Stock options
During the nine months ended February 28, 2002 the following changes occurred in
outstanding stock options.
Options outstanding at May 31, 2001 9,235,000
Options granted 975,000
Options exercised 550,000
Options outstanding at February 28, 2002 9,660,000
9
(c) Subsequent event - stock split
On March 5, 2002 the Board of Directors approved a reverse split of 1 for 3 and
as it occurred after the end of the third quarter it has not been reflected in
these financial statements.
3. Loans Payable:
On January 10, 2002 a subsidiary of the Company borrowed $ 67,104.00 (Cdn. $
107,500.00) from a third party. The loan bears interest at 18% per annum and is
repayable in fifty -two weekly payments of principal and interest of $ 1,413
(Cdn $ 2,263), commencing on January 22, 2002. The loan is secured by all the
assets of the subsidiary and a personal guarantee of a shareholder. The creditor
has a priority of rank on the subsidiary's existing mortgages on its balance of
sales receivable.
4. 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 report that the Company has incurred
significant operating losses which were aggravated in 2001 due to costs
associated with the recapitalization, product development and compensation, has
a deficit in shareholders' equity and a working capital deficit at February 28,
2002. In addition, the company requires additional financing to meet its current
obligations.
The above matters raise doubt as to its ability to continue as a going concern.
The company's ability to continue as a going concern will depend on its return
to profitable operations and the ability to obtain additional financing. Should
the going concern assumption not be appropriate, significant adjustments may be
necessary to the recorded amounts of assets and liabilities.
In order to meet that challenge, the Company has adopted a plan to secure
additional capital funding by engaging the services of an investment banker to
raise an additional $2,000,000 of equity and/or debt financing through the
issuance of common stock, convertible debentures or a combination thereof. In
addition, the Company has secured further commitments from its existing and new
customers for additional installations at their food services facilities to
provide ready made frozen pizza and is seeking to finance this future growth
through equipment leasing arrangements. Finally, the Company has adopted various
streamlining and cost control measures to ensure that optimal profit margins are
realized and that existing resources are maximized.
10
PART I
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Pizza Donini Inc. supports twenty-nine (29) franchised pizza outlets. At
February 28, 2002 Pizza Donini Inc. also owned three (3) additional locations
that are being held with the intention to sell as Donini franchises. All
locations are in Greater Montreal.
In the first half of fiscal 2002 the Company began offering for sale its fully
topped ready-to-use self-rising crust, frozen pizza in twenty-seven (27)
in-store restaurants of Zellers, Inc. in Quebec, plus one (1) Bay cafeteria in
downtown Montreal and seven (7) in-store restaurants of Zellers Inc. in
Winnipeg, Manitoba. In addition, there are four (4) other business to business
relationships. During the second quarter of fiscal 2002, a contract was signed
to service seven (7) kiosks under the brand name of Pizza Donini at the Molson
Center, which is a 20,000 seat arena for N.H.L. hockey games and many other
events.
Pizza Donini Inc. is further developing its B2B (business to business)
distribution network of fully-topped, ready-to-use, self-rising crust, frozen
pizza to foodservice 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 two other operating subsidiaries, Pizado Foods (2001) Inc. (Pizado)
and Pizza Donini.Com Inc. Pizado sells raw food products and other supplies to
Donini 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, from
a single telephone number, to the closest franchisee.
For the nine months ended February 28, 2002 franchise operations accounted for
approximately 49% of the Company's total revenues, while the sale of wholesale
food products equaled approximately 50% and the remaining revenues accounted for
1%. These percentages are identical to the same fiscal 2001 period.
During the first nine months of fiscal 2002 Company revenues were $1,312,990 as
compared to $1,401,812 for the same period in 2001, a decrease of $88,822 or
6.3%. The decline in revenues reflects an overall decline in business since the
September 11 tragedy. Cost of goods sold for the nine months ended February 28,
2002 was $498,447 or 76.7% as compared to $491,429 or 70.6% for the same period
in fiscal 2001. The increase in the cost of goods sold percentage was due to the
change of the sales mix, in further developing the business-to-business and the
wholesale distribution network.
During the three months ended February 28, 2002 Company revenues were $419,090
as compared to $541,628 for the same period in 2001, a decrease of $122,538 or
22.6%. Cost of Goods sold for the three months ended February 28, 2002 was
$152,930 or 75.8% as compared to $213,807 or 70.7% for the same period in fiscal
2001. The decline in revenues and the increase in the cost of goods sold in the
third quarter was a result of the same issues noted above. The September 11
tragedy took its toll on the food service industry and the Company is just
getting back to normal. Sales are steadily increasing and will be back on track
before the end of this fiscal period.
11
Net loss increased by $ 876,435 from $ 9,584 during the first nine months of
fiscal 2001 to $ 886,019 for the same period in 2002. The increase in net loss
is primarily due to increases in advertising and promotion and general and
administrative expenses of $252,000 and $496,000 respectively. The increase in
advertising and promotion expenses included $ 268,000 of non-cash stock based
compensation for services rendered in connection with the expansion of the
business-to-business operations. The increase in general and administrative
expenses included non-cash based compensation of $279,000, business-to-business
operation costs of $ 50,000, additional salary costs of $ 32,000, travel costs
of $32,000 and officers and directors liability insurance of $26,000. The
increased cost of borrowing amounted to $13,000.
Net loss increased by $ 328,520 from $ 21,939 during the three months ended
February 28, 2001 to $ 350,459 for the same period in 2002. The increase is
primarily related to an increase in general and administrative expenses of $
276,917. The increase includes $ 220,000 of non-cash stock based compensation.
Working capital deficit during this period increased from $ 1,070,896 at May 31,
2001 to $ 1,334,984 at February 28, 2002. Total assets increased from $1,001,343
as of May 31, 2001 to $ 1,126,116 as of February 28, 2002.
Management believes that the results reflected above are due to increased
management focus on the wholesale food products markets and additional costs
associated with its combination with Donini, Inc. 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 also believes that operating profits have been lowered due to the
investment in new products.
The Company maintains that its liquidity will improve marginally with improved
earnings, but will not be sufficient to allow it to expand its operations to any
significant degree. The Company has adopted a plan to secure additional capital
funding by engaging the services of an investment banker to raise an additional
$ 2,000,000 of equity and/or debt financing through the issuance of common
stock, convertible debentures or a combination thereof. In addition, the Company
has secured further commitments from its existing and new customers for
additional installations at their food service facilities to provide fully
topped ready-to-use self-rising crust frozen pizza and is seeking to finance
this future growth through equipment leasing arrangements. The Company has
maintained its liquidity through the third quarter of fiscal 2002 through net
borrowings in short and long-term debt of approximately $ 126,000.
Critical Accounting Policy
The Company's revenues are derived from the sale of franchises and related
royalties and processing fees, and the sale of frozen ready-made pizza, frozen
and refrigerated sauces and pizza dough. The sale of franchises usually result
in a balance of sale receivable. Royalties and order processing fees are based
on the sales of the individual franchises, therefore the ultimate collection of
the Company's receivables will depend on the viability of the operations of each
franchise. The Company monitors the franchises' operations through weekly
reports from its call center and the franchisees
12
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
We are presently a party in the following legal proceedings:
161324 Canada Inc. vs. Do-Rest Inc. and Pizza Donini Inc.
This action was instituted in April 1998 in an attempt to void the sale and
transfer of trademarks from Do-Rest Inc. (formerly Donini Restaurants Inc.) to
Pizza Donini Inc. and to have Pizza Donini Inc. declared jointly and severally
liable for a claim in excess of $400,000 against Do-Rest Inc. a former
subsidiary of Pizza Donini Inc. 161324 Canada Inc. was a former franchisee of
Do-Rest Inc. which is no longer an operating company. The parties have agreed
that no action will be taken by 161324 Canada Inc. on this matter until a
decision has been rendered on the damages claim by 161324 Canada Inc.
161324 Canada Inc. vs. Do-Rest Inc.
This action was instituted by a franchisee, 161324 Canada Inc. against its
franchisor, Do-Rest Inc. (formerly Donini Restaurants Inc.). The franchisee
sought in excess of $ 400,000 in damages, however in May of 1998 the action was
dismissed by the Superior Court of Quebec. An appeal has been taken and a
hearing date is not expected before February 2003. Legal counsel for Do-Rest
Inc. has expressed confidence that the appeal will be dismissed thus causing the
matter referenced above against our subsidiary Pizza Donini Inc. for joint and
several liability to be dismissed as well.
National Bank of Greece (Canada) vs. Pizza Donini Inc.
This is an action by a former banker against our subsidiary Pizza Donini Inc.
for repayment of a loan originally due in March 2003. Pizza Donini Inc. 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 interest is
approximately $ 58,000. We believe this matter will be settled for an amount
less that the sum sought. The amount of this claim has been reported as a
liability in the financial statements of the Company.
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 February
28, 2002 was 17,773,937. In January 2002 55,000 common shares were sold to a
third party at $0.01 per share pursuant to an option given to the third party
for services to be rendered. In addition, 975,000 common shares were issued to a
company controlled by an executive for services rendered. On March 5, 2002 the
Board of Directors approved a reverse split of 1 for 3 and as it occurred after
the end of the third quarter it has not been reflected in these financial
statements.
13
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
During the quarter ended February 28, 2002 no reports were filed
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: April 15, 2002 /s/ Peter Deros
--------------------------------------
Peter Deros, President
14