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, 2005
[ ] 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.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
New Jersey 22-3768426
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(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
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(Address of Principal Executive Offices)
(514) 327-6006
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(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 February 28, 2005: 27,711,205 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
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Item 1 - Financial Information (unaudited)
Donini, Inc.
Condensed Consolidated Balance Sheet as of
February 28, 2005 and May 31,2004 .................................. 3
Condensed Consolidated Statements of Operations
for the nine month periods
ended February 28, 2005 and February 29, 2004 ...................... 4
Condensed Consolidated Statements of Cash Flows
for the nine month period ended
February 28, 2005 and February 29, 2004 ........................... 5
Notes to Condensed Consolidated 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 .............................................. 8
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.
CONDENSED CONSOLIDATED BALANCE SHEET
February 28, May 31,
ASSETS 2005 2004
- ------ ------------ ------------
(Unaudited) (Audited)
Current Assets:
Cash $ 257,620 $ --
Accounts receivable, net 70,203 71,169
Inventories 35,562 14,412
Taxes receivables 11,326 8,134
Due from shareholder 143,171 --
Loan receivable 8,333 16,570
Current portion of franchise sales receivables 26,825 26,118
Prepaid expenses 8,465 12,038
Assets held for resale 257,497 286,070
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Total Current Assets 819,002 434,511
Property and equipment (net) 270,986 291,018
Franchise sales receivables 58,151 77,672
Trademarks 10,530 10,776
Unamortized loan finance cost 369,800 --
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Total Assets $ 1,528,469 $ 813,977
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LIABILITIES AND STOCKHOLDERS' (DEFICIT)
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Current Liabilities:
Current portion of long-term debt $ 199,460 $ 245,932
Loans payable 319,436 357,592
Accounts payable and accrued liabilities 859,318 809,308
Due to shareholders -- 14,411
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Total Current Liabilities 1,378,214 1,427,243
Long-Term Liabilities:
Long-Term Debt 511,215 493,757
Note Payable secured 1,540,000 --
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Total Liabilities 3,429,429 1,921,000
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Stockholders' Equity(Deficit):
Common stock ($.001 par value 100,000,000 shares
authorized, 27,711,205 and 9,220,871 issued and
outstanding February 28, 2005 and May 31, 2004 respectively 18,420 9,220
Additional paid-in capital 5,223,561 4,404,761
Foreign currency translation adjustment (116,788) (55,551)
Accumulated deficit (7,026,153) (5,465,453)
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Total Stockholders' Equity(Deficit) (1,900,960) (1,107,023)
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Total Liabilities and Stockholders' Equity (Deficit) $ 1,528,469 $ 813,977
============ ============
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See accompanying notes to consolidated financial statements.
3
DONINI, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
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February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues:
Sales $ 127,423 $ 187,574 387,058 571,199
Royalties and other related revenues 66,437 160,595 237,935 392,119
Order processing fees 43,189 51,187 124,895 136,897
Initial franchise fees 847 19,064 55,202 59,675
------------ ------------ ------------ ------------
Total Revenues 237,896 418,420 805,090 1,159,890
------------ ------------ ------------ ------------
Cost of Goods Sold 76,464 126,231 238,078 380,650
------------ ------------ ------------ ------------
Gross Profit 161,432 292,189 567,012 779,240
------------ ------------ ------------ ------------
Costs and Expenses:
General and administrative expenses 86,034 182,952 683,506 460,781
Advertising and promotion 48,749 55,820 150,454 161,948
Salaries 51,902 57,990 153,127 168,946
Interest expense 25,003 21,202 73,184 65,514
Depreciation and amortization 13,511 7,584 44,066 58,728
Product development 86,395 -- 98,251 --
Compensation cost -- -- 828,000 --
Amortization of finance cost 60,000 -- 180,000 --
------------ ------------ ------------ ------------
Total Costs and Expenses 371,594 325,548 2,210,588 915,917
------------ ------------ ------------ ------------
Income (Loss) from operations (210,162) (33,359) (1,643,576) (136,677)
Other income (Expenses) 54 1,007 3,506 4,151
Gain on sale of capital assets 32,031 -- 79,370 --
------------ ------------ ------------ ------------
Net income (Loss) before income taxes (178,077) (32,352) (1,560,700) (132,526)
Provision for income taxes -- -- -- --
Net (Loss) (178,077) (32,352) (1,560,700) (132,526)
------------ ------------ ------------ ------------
Earnings (Loss) per share
Basic and diluted per share (0.01) (0.01) $ (0.07) $ (0.03)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 27,711,205 6,920,688 22,703,316 6,920,688
============ ============ ============ ============
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See accompanying notes to consolidated financial statements.
4
DONINI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
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February 28, February 29,
2005 2004
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Cash Flows from Operating Activities:
Net (loss) $ (1,560,700) $ (132,526)
Adjustments to reconcile net (loss) to cash (used in)
operating activities:
Compensation expense 828,000 --
Depreciation and amortization 44,066 58,728
Unamotized loan finance costs (369,800) --
Foreign translation adjustments (61,237) (30,096)
Change in taxes receivables (3,192) 174
Gain in disposition of capitalized property and equipment -- (8,727)
Change in operating assets and liabilities:
Accounts receivable, net 966 (71,392)
Inventories (21,150) 10,149
Loan receivable 8,237 --
Prepaid expenses 3,573 6,544
Accounts payable and accrued liabilities 50,010 109,440
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Net cash (used in) provided by
operating acivities (1,081,227) (57,706)
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Cash Flows from Investing Activities:
Increase in franchise sales receivable
Proceeds from franchise sales receivable (56,754) (118)
Repayment from franchise sales receivable 75,568 22,296
Decrease (Increase) in assets held for resale 28,573 (64,550)
Capitalized property and equipment (23,788) (7,742)
Proceeds of disposition capitalized property and equipment -- 123,715
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Net cash (used in) provided by
investing acivities 23,599 73,601
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Cash Flows from Financing Activities:
Due from shareholder (157,582) 947
Proceeds from loans payable 160,614 253,342
Principal payment of loans payable (198,770) (142,811)
Proceeds from long-term debt 46,753 13,309
Principal payment from long-term debt (75,767) (139,753)
Proceeds from note payable secured 1,540,000 --
Proceed from deposit -- (929)
Repayment of deposit payable -- --
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Net cash (used in) provided by
financing acivities 1,315,248 (15,895)
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Net Increase in Cash and Cash Equivalents 257,620 --
Cash and Cash Equivalents, beginning of period -- --
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Cash and Cash Equivalents, end of period 257,620 $ --
============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 73,184 $ 65,514
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Income taxes paid during the period $ -- $ --
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Supplemental Disclosure of Noncash Investing and
Financing Activities:
Common stock issued as compensation $ 828,000 $ --
============ ============
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See accompanying notes to consolidated financial statements.
5
DONINI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 28, 2005
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 the operator of
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 products to the food service industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
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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 reflect all
adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the financial position and results
of operations for the interim periods presented. The consolidated financial
statements are unaudited and are subject to such year-end adjustments as may be
considered appropriate and should be read in conjunction with the historical
consolidated financial statements of Donini, Inc. years ended May 31, 2004, 2003
and 2002, included in Donini, Inc.'s Annual Report on Form 10-K for the fiscal
year ended May 31, 2004. Operating results for the nine-month period ended
February 28, 2005 are not necessarily indicative of the results that may be
expected for the year ending May 31, 2005.
These consolidated financial statements have been prepared in accordance with US
GAAP and under the same accounting principles as the consolidated financial
statements included in the Annual Report on Form 10-K. Certain information and
footnote disclosures related thereto normally included in the financial
statements prepared in accordance with US GAAP have been omitted in accordance
with Rule 10-01 of Regulation S-X.
The statements of operations for the nine months ended February 28, 2005 and
February 29, 2004 are not necessarily indicative of results for the full year.
Earnings (Loss) per Share
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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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 28, 2005
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
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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.
Inventories consists of food supplies on a FIFO basis and advertising materials.
3. STOCKHOLDERS' EQUITY
Capital
- -------
The total number of shares of Common Stock issued and outstanding as of February
28, 2005 was 27,711,205 of which 8,000,000 are pledged by the Company as
security for a loan.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Pizza Donini supports twenty (20) franchised pizza outlets. As of February 28,
2005, Pizza Donini also owns five (5) additional locations that are being held
for resale as Donini franchises. All locations are in the Greater Montreal Area.
The Company also has one franchise unit operating as a Resto-Bar in Montreal.
The Resto-Bar is a bar/restaurant featuring a moderately priced Italian menu
with its traditional and gourmet pizzas, submarine sandwiches, an expanded menu
of veal and chicken dishes, appetizers, a new selection of pasta dishes,
foccaccia and ciabatta sandwiches, as well as a breakfast menu. The Company has
also commenced plans to locate at least two outlets in the U.S. during calendar
2005 as either franchise or Company owned units.
Pizza Donini is further developing its B2B (business to business) and retail
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. The Company has
also completed the development of its frozen microwaveable pizza as an extension
of the Company's frozen pizza line.
7
DONINI INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 28, 2005
(Continued)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. (Continued)
In addition to generating revenues from its franchisees in the form of initial
franchise fees and royalties, Pizza Donini Inc.'s revenues have also been
generated by three other 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 nine months ended February 28, 2005, franchise and corporate operations
accounted for approximately 51% of the Company's operating revenues. The sale of
food products equaled approximately 48% and the remaining miscellaneous revenues
accounted for 1%. This compares to 50%, 49% and 1% respectively for the same
period in fiscal 2004. Sales of food products were higher in fiscal 2004 because
it included the operating sales of Company owned stores which have since been
sold as franchises.
Revenues for the third quarter of fiscal 2005 were $805,090 compared to
$1,159,890 for the same period in 2004. Cost of goods sold for the nine months
ended February 28, 2005 was $238,078 or 62% of sales revenues as compared to
$380,650 or 66% for the same period in fiscal 2004. Product sales decreased by
$184,141 during this period due primarily to fewer outlets.
Net income decreased from $(132,526) during the first nine months of fiscal 2004
to ($1,560,700) for the same period in 2005. The decrease in net income is due
to a decrease in sales and an increase in administrative expenses, amortized
finance costs, and compensation costs of $828,000.
Working capital deficit during this period decreased from $992,732 on May 31,
2004 to $559,212 on February 28, 2005. Total assets increased from $813,977 as
of May 31, 2004 to $1,528,469 as of February 28, 2005.
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.
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 a declaration that the transfer and sale to
Pizza Donini of trademarks by the former subsidiary is null and void and to have
Pizza Donini declared jointly and severally liable for a claim of the former
franchisee against the former subsidiary.
8
DONINI INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 28, 2005
(Continued)
ITEM 1 - LEGAL PROCEEDINGS (Continued)
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 case 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
our company.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the nine months ended February 28, 2005 the Company issued 9,200,000
shares of its common stock, the Company recognized as a compensation expense the
difference between the par value paid of $0.001 per share and the estimated fair
market value of the stock issued totaling $828,000.
The Company also granted options totaling 3,500,000 shares of common stock,
500,000 of which are exercisable as of the date of the grant until June 7, 2009
and 3,000,000 are exercisable at various future exercise dates commencing
October, 2005 until October, 2007 at exercise prices ranging from $0.08 to $0.16
for the remaining options.
Due to the volatility and limited trading on the Company's common stock, the
Company recorded no expense as these options are not exercisable until future
dates.
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 and by the pledge of 8,000,000 shares of
common stock. 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.
On December 1, 2004, the Company paid a 5% stock dividend to all shareholders of
record as of November 15, 2004 and issued a total of 1,290,334 shares of common
stock to stockholders.
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
Not applicable
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: April 15, 2005 By: /s/ PETER DEROS
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Peter Deros, President