U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended August 31, 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.
-----------------------------------------------------------------
(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 October 21, 2005: 27,711,205 shares of common stock
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Donini, Inc.
TABLE OF CONTENTS
PART I Page
----
Item 1 - Financial Information
Consolidated Balance Sheet as of August 31, 2005 (Unaudited)
and May 31,2005 (Audited) .......................................... 3
Consolidated Statements of Operations for the three months
ended August 31, 2005 and 2004 (Unaudited) ......................... 4
Consolidated Statements of Cash Flows for the three months
ended August 31, 2005 and 2004 (Unaudited).......................... 5
Notes to Consolidated Financial Statements ........................... 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations .................. 14
PART II
Item 1 - Legal Proceedings .............................................. 18
Item 2 - Changes in Securities and Use of Proceeds....................... 18
Item 3 - Defaults Upon Senior Securities................................. 18
Item 4 - Submission of Matters to a Vote of Security Holders............. 18
Item 6 - Exhibits and Reports on Form 8-K................................ 18
Certifications........................................................... 20-21
2
PART I
ITEM 1- FINANCIAL INFORMATION
DONINI, INC.
CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2005 2005
------------ ------------
(Unaudited) (Audited)
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 91,518 $ 120,185
Accounts receivables - net 69,707 61,054
Inventories 18,577 15,603
Taxes receivables 16,018 11,051
Prepaid expenses and other current assets 28,651 31,564
Assets held for resale 311,354 274,546
------------ ------------
Total Current Assets 535,825 514,003
Property and equipment - net 233,191 239,761
Investment in related company 99,000 99,000
Loan receivable 18,610 13,609
Deposits 2,274 2,151
Franchise sales receivables - net 24,530 30,933
Trademarks - net 10,369 10,454
------------ ------------
Total Assets $ 923,799 $ 909,911
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current Liabilities:
Accounts payables and accrued liabilities $ 1,215,527 $ 1,121,345
Current portion of long-term debt 704,131 668,967
Convertible note payable - net of issuance costs
of $171,483 1,241,017 --
Loans payable - related parties 361,542 149,131
Loans payable - others 105,961 95,972
------------ ------------
Total Current Liabilities 3,628,178 2,035,415
Long-Term Liabilities:
Loans payable - related parties - net of current portion 100,000 100,000
Long-term debt - net of current portion 27,985 27,985
Convertible note payable - net of issuance costs
of $228,645 -- 1,141,355
------------ ------------
Total Liabilities 3,756,163 3,304,755
------------ ------------
Contingencies
Stockholders' Deficit:
Common stock ($.001 par value 100,000,000 shares
authorized, 27,711,205 issued and outstanding 27,711 27,711
Additional paid-in capital 6,133,760 6,101,760
Common stock issued as collateral for note payable (672,000) (640,000)
Accumulated deficit (8,170,699) (7,779,835)
Foreign currency translation adjustment (151,136) (104,480)
------------ ------------
Total Stockholders' Deficit (2,832,364) (2,394,844)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 923,799 $ 909,911
============ ============
- ---------------
The accompanying notes are an integral part of these financial statements.
3
DONINI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
August 31,
---------------------------
2005 2004
------------ ------------
(Restated)
Revenues:
Sales $ 117,881 $ 123,916
Royalties and other related revenues 58,641 67,694
Order processing fees 34,977 39,094
Initial franchise fees -- 33,809
------------ ------------
Total Revenues 211,499 264,513
Cost of Goods Sold 76,778 78,124
------------ ------------
Gross Profit 134,721 186,389
------------ ------------
Costs and Expenses:
General and administrative expenses 197,717 221,331
Advertising and promotion 106,217 51,668
Salaries 61,661 56,479
Product and market development 24,856 43,058
Stock-based compensation costs -- 826,600
Depreciation and amortization 15,262 13,799
Amortization of finance costs 57,161 38,107
------------ ------------
Total Costs and Expenses 462,874 1,251,042
------------ ------------
Loss from Operations (328,153) (1,064,653)
Interest Expense (63,111) (48,602)
Other Income 400 3,340
Gain on sale of assets held for resale -- 43,018
------------ ------------
Net Loss $ (390,864) $ (1,066,897)
============ ============
Loss Per Share
Basic and diluted loss per share $ (0.02) $ (0.15)
============ ============
Basic and diluted weighted average
common shares outstanding 18,911,205 6,920,871
============ ============
- ------------
The accompanying notes are an integral part of these financial statements.
4
DONINI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
August 31,
---------------------------
2005 2004
------------ ------------
(Restated)
Cash Flows from Operating Activities:
Net loss $ (390,864) $ (1,068,297)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 72,423 51,906
Amortization of convertible note interest 42,500 25,000
Common stock issued as compensation
and services rendered -- 826,600
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (8,653) 4,863
Inventories (2,974) 622
Taxes receivables (4,967) (4,970)
Prepaid expenses and other current assets 2,913 4,999
Deposits (123) --
Increase (decrease) in:
Accounts payable and accrued liabilities 94,182 (69,698)
------------ ------------
Net cash used in operating activities (195,563) (228,975)
------------ ------------
Cash Flows from Investing Activities:
Net (proceeds) repayment on loan receivable (5,001) 16,570
Increase (decrease) in franchise sales receivables 6,403 (38,080)
Net proceeds (acquisition) of assets held for resale (21,060) (26,220)
Acquisition of property and equipment (8,606) (20,551)
Proceeds from franchise sales receivables -- 72,829
Stockholder loans receivable -- (171,243)
------------ ------------
Net cash used in
investing activities (28,264) (166,695)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from loans payable 226,506 15,141
Principal payments on loans payable (6,266) (85,015)
Principal payments on long term-debt (4,815) (71,867)
Proceeds from long term-debt -- 8,360
Proceeds from convertible note payable -- 1,200,000
Acquisition costs related to convertible note payable -- (209,800)
------------ ------------
Net cash provided by
financing activities 215,425 856,819
------------ ------------
Effect of Foreign Currency Translation (20,265) (3,523)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (28,667) 457,626
Cash and Cash Equivalents - beginning of period 120,185 --
------------ ------------
Cash and Cash Equivalents - end of period $ 91,518 $ 457,626
============ ============
5
DONINI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(CONTINUED)
For the Three Months Ended
August 31,
---------------------------
2005 2004
------------ ------------
(Restated)
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 5,643 $ 23,602
============ ============
Income taxes paid during the period $ -- $ --
============ ============
Supplemental Disclosure of Noncash Activities:
Warrants issued in connection with
convertible note $ -- $ 247,490
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2005 and 2004
1. DESCRIPTION OF BUSINESS
Donini, Inc. (the "Company") is incorporated in the State of New
Jersey. Pizza Donini Inc. ("PDI"), a wholly-owned subsidiary of the Company
operates a franchise management company in the Greater Montreal area. The
Company's franchise outlets operate under the trade name "Pizza Donini", which
name is also primarily used for the distribution of the Company's frozen pizza
to the food service industry. PDI holds twenty-three (23) locations. At August
31, 2005, nineteen (19) were franchised and four (4) others were being held by
PDI with the intention of selling them as Pizza Donini franchises. All outlets
are in Greater Montreal.
As franchisor, PDI supplies the franchisees, through its wholly-owned
subsidiary Pizado Foods (2001) Inc. ("Pizado"), with the dough and sauces used
in the preparation of Pizza Donini recipes. Pizado also supplies a separate
product line of pizza dough and sauces to other restaurants and distributors in
the Province of Quebec. In connection with frozen pizza wholesale orders, the
Company employs subcontractors to produce its products.
Pizza Donini.Com Inc. ("Donini.Com"), a wholly-owned subsidiary of PDI,
operates a call center that executes home delivery through one central telephone
number. The call center dispatches telephone orders to the closest franchisee
for prompt delivery. Donini.Com has also embarked on the development of an
internet-based order taking and processing program. DoniniCo Inc. ("DoniniCo"),
a wholly-owned subsidiary of PDI, repurchases existing Donini franchised
restaurants and operates them, pending their resale to new franchisees.
During February 2005, the Company entered into a joint venture
agreement whereby the Company effectively owns 36.6% of a U.S. based entity
called Pronto Donini, LLC (Pronto). The purpose of this entity is to help expand
its Donini products into the U.S. market. Pronto will operate a Donini Resto-Bar
business. The business was not in operation as of August 31, 2005.
The investment in Pronto Donini, LLC is carried at equity, adjusted for
the Company's proportionate share of Pronto's undistributed earnings or losses.
Going Concern
- -------------
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 reflect that the
Company has incurred significant operating losses, has a deficit in
stockholders' equity and a working capital deficit at August 31, 2005. In
addition, the Company will require additional financing to meet its future
obligations. These matters raise substantial doubt as to the Company's ability
to continue as a going concern. The Company's ability to continue as a going
concern will depend on its attaining profitable operations and the ability to
obtain additional financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts of and classification of liabilities that might be
necessary in the event the Company cannot continue its existence.
In order to secure additional capital funding, the Company has engaged
the services of a financial consultant to assist on a "best efforts" basis to
raise an additional $5,000,000 of equity and/or debt financing through the
issuance of common stock, convertible debentures or a combination thereof. In
addition, the Company continues to attempt to secure commitments from its
customers for additional installations at their food services facilities to
provide ready made frozen pizza, including its new products such as the new
microwaveable pizza and seeks to finance its future growth partly through
equipment leasing arrangements and other means. The Company also continues to
implement various cost control measures to attempt to achieve optimal profit
margins and to improve the revenue potential of its franchises. In the event
that additional capital is raised, part of the proceeds will be used for these
purpose. It is anticipated that any cash shortfalls that might arise will be
funded by the officers and management of the Company.
7
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2005 and 2004
1. DESCRIPTION OF BUSINESS (Continued)
Restatement
- -----------
The 2004 statements of operations and cash flows were restated to correct the
following:
1. To record warrants issued in connection with the issuance of the
convertible notes (see Note 3). The value of the warrants totaled $247,490.
2. To increase the amortization of unamortized finance costs in the amount of
$3,107.
3. To reduce stock-based compensation costs in the amount of $1,400.
The effect of the restatement was to increase the net loss of the Company by
$1,707.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
- -----------------------------------------------------
The accompanying financial statements consolidate the accounts of
Donini, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain amounts
from prior years have been reclassified to conform to the current year
presentation.
The accompanying unaudited consolidated financial statements 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 the Company for the years ended May 31,
2005 and 2004 included in its Annual Report on Form 10-K for the fiscal year
ended May 31, 2005. Operating results for the three months ended August 31, 2005
are not necessarily indicative of the results that may be expected for the year
ending May 31, 2006.
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.
Assets Held for Resale
- ----------------------
Assets held for resale consist of franchise equipment reacquired by the
Company and are recorded at the lower of cost and net realizable value.
8
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2005 and 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) per Share
- -------------------------
The Company computes earnings or loss per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share reflect the potential dilution that could occur if
securities or other agreements to issue common stock were exercised or converted
into common stock, only in the periods in which the effect is dilutive. The
following securities have been excluded from the calculation of net loss per
share, as their effect would be antidilutive.
2005 2004
------- -------
Options (weighted average) 300,000 231,522
Warrants (weighted average) 550,000 508,152
Common shares issued as collateral for the convertible note payable totaling
8,400,000 shares have been excluded from the weighted average number of shares
outstanding for 2005.
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company has elected to follow Accounting Principles Board Opinion
No. 25, (APB 25) "Accounting for Stock Issued to Employees" in accounting for
options and warrants granted to its employees. Under APB 25, when the exercise
price of the Company's options or warrants equals or is above the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Stock options and warrants granted to non-employees are recorded at
their fair value, as determined in accordance with Financial Accounting
Standards Board Statement No. 123, (SFAS 123) "Accounting for Stock Based
Compensation" and Emerging Issues Task Force Consensus No. 96-18, and recognized
over the related service period.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment," which replaces SFAS 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), and supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). SFAS 123(R) requires
companies to recognize in their income statement the grant-date fair value of
stock options and other equity-based compensation issued to employees. The
Company is required to adopt SFAS 123(R) beginning January 1, 2006. Grant-date
fair value will be determined using one of two acceptable valuation models. This
Standard requires that compensation expense for most equity-based awards be
recognized over the requisite service period, usually the vesting period; while
compensation expense for liability-based awards (those usually settled in cash
rather than stock) be re-measured to fair-value at each balance sheet date until
the award is settled. The Standard also provides guidance as to the accounting
treatment for income taxes related to such compensation costs, as well as
transition issues related to adopting the new Standard.
9
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2005 and 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Stock-Based Compensation (Continued)
- ---------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Only stock
options granted after September 30, 1995 have been included for the Company's
pro forma information as follows:
2005 2004
------------ ------------
(Restated)
Net Loss - as reported $ (390,864) $ (1,066,897)
Less: Total compensation expense
determined under fair value based
method - net of tax effect 38,477 131,923
------------ ------------
Pro Forma Net Loss $ (429,341) $ (1,198,820)
============ ============
Pro Forma Loss Per Share:
Basic and Diluted $ (0.02) $ (0.17)
============ ============
For the purpose of providing pro forma disclosures, the fair value of
stock options granted were estimated using the Black-Sholes option pricing model
with the following weighted-average assumptions used for grants in 2005 and
2004, respectively: a risk-free rate of 2.56% and 1.32%, an expected life of 2
years in both years, an expected volatility of 372% and 248% and no expected
dividends.
Recent Accounting Pronouncements
- --------------------------------
In May 2005, the FASB issued FASB Statement No. 154, "Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting
Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements" ("SFAS 154"). SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It establishes,
unless impracticable, retrospective application as the required method for
reporting a change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. SFAS 154 also
provides guidance for determining whether retrospective application of a change
in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The provisions of SFAS 154 are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of
SFAS 154 is not expected to have a material impact on the Company's financial
position or results of operations.
10
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2005 and 2004
3. CONVERTIBLE NOTE PAYABLE
On June 7, 2004, the Company entered into a Security Purchase Agreement
with Global Capital Funding Group, L.P. ("Global") whereby Global purchased a
$1,500,000 convertible note ("Note") for $1,200,000. The Note matured on June 7,
2007 and was secured by the Company's accounts receivable, inventory, property
and equipment and general intangibles.
In connection with the Agreement, the Company issued a warrant to
Global to purchase 500,000 shares of common stock as additional finance costs.
In addition, the Company issued a warrant to an unrelated corporation to
purchase 50,000 shares of common stock as a finder's fee. Both warrants are
exercisable at $.495 per share and expire on June 7, 2009.
On October 1, 2004, the Company and Global entered into an Exchange
Agreement whereby the Note was exchanged for a new note ("New Note") in the
amount of $1,540,000. The New Note matures on June 7, 2006 and is secured by a
first lien on the Company's non-real estate assets and the issuance and pledge
of 8,400,000 shares of common stock. The effective interest rate on the New Note
is approximately 13%.
Other terms under the New Note are as follows:
1. As long as there is no event of default (as defined), the Company may, at
its option, prepay the New Note at a price equal to the outstanding principal
amount of the New Note, $40,000 of liquidating damages and all accrued and
unpaid interest.
2. Global has the right to convert the New Note into shares of common stock
upon an event of default (as defined) or at any time following June 7, 2005 at
the following conversion price - (a) Principal amount being converted together
with the accrued and unpaid interest through the date of conversion divided by
(b) 100% of the three lowest bid prices during the twenty (20) trading days
immediately preceding the date of conversion. Global can only convert (other
than due to an event of default) if the price of the Company's common stock is
equal to or greater than $.60 per share at the time of conversion.
The balance owed under the New Note is as follows:
August 31, May 31,
2005 2005
------------ ------------
(Unaudited) (Audited)
Balance owed at maturity $ 1,540,000 $ 1,540,000
Unamortized finance costs (171,483) (228,645)
Unamortized interest (127,500) (170,000)
------------ ------------
$ 1,241,017 $ 1,141,355
============ ============
Interest incurred amounted to $42,500 for the three months ended August 31,
2005.
11
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2005 and 2004
4. RELATED PARTY TRANSACTIONS
Loans Payable
- -------------
Loans payable - related parties consist of the following:
August 31, May 31,
2005 2005
------------ ------------
(Unaudited) (Audited)
8% stockholder loan, interest payable quarterly
with principal and accrued and unpaid
interest due January 1, 2007 $ 100,000 $ 100,000
12% stockholder loan, guaranteed by
the President of the Company, payable in twelve
monthly installments of C$5,568 (US$4,690)
The loan is past due 52,734 49,873
12% stockholder loan, guaranteed by the President
of the Company 15,563 14,719
Non-interest bearing stockholder and director loans 293,249 84,539
------------ ------------
461,546 249,131
Less: Current portion 361,546 149,131
------------ ------------
$ 100,000 $ 100,000
============ ============
Other
- -----
The Company's President, who is also its chief executive officer and a
principal stockholder, has made personal guarantees on certain obligations of
the Company and pledged 300,000 shares of his Company stock as collateral for a
bank demand note with a balance of approximately $243,000 as of August 31, 2005.
12
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2005 and 2004
5. CONTINGENCIES
Litigation
- ----------
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 an order from the Court declaring 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.
This action stems from a separate suit filed by the former franchisee
against the former subsidiary, in the amount of C$637,000 (approximately
US$535,000) 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 December 2005. In the meantime, in the suit against PDI, 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.
Other
- -----
The Company and its President are guarantors on a five-year 8%
promissory note ("Note") of $250,000 made by a non-affiliated person to a
franchisee of the Company. The Note is payable in monthly installments of $5,054
including interest commencing in October 2004 through September 2009. Other
terms of the Note include:
1. The Note is secured by a subordinated interest in all of the assets of the
franchisee.
2. If an event of default occurs, the lender, at his option, can demand
immediate payment of any and all amounts then owing or to become owing.
As of August 31, 2005, the franchisee has not made any of the required monthly
installments. The Company has made interest payments on behalf of the franchisee
totaling approximately $18,300. Such amounts have been classified as loan
receivable on the balance sheet. Although the Note is in default, the lender has
not demanded immediate payment of all amounts owed and owing.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements and Associated Risks
The various sections of the MD&A include certain "forward-looking
statements" within the meaning of that term in Section 13 or 15(d) of the
Securities Act of 1934, and Section 21E of the Exchange Act, including, among
others, those statements preceded by, followed by or including the words
"believes," "expects," "anticipates" or similar expressions.
These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Our actual
results could differ materially from these forward-looking statements. In
addition to the other risks described in the "Factors That May Affect Future
Results" discussion under Item 6, Management's Discussion and Analysis of
Financial Condition and Results of Operations in Part II of this Report,
important factors to consider in evaluating such forward-looking statements
include:
o changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the market,
o our ability to raise sufficient capital to meet operating
requirements,
o various competitive factors that may prevent us from competing
successfully in the marketplace, and
o changes in external competitive market factors or in our internal
budgeting process which might impact trends in our results of
operations.
In light of these risks and uncertainties, there can be no assurances
that the events contemplated by the forward-looking statements contained in this
Report will, in fact, occur.
Overview
At August 31, 2005, PDI supports twenty-three (23) pizza outlets.
Nineteen (19) were franchised and four (4) locations represent outlets at which
the Company has terminated franchises due to under performance by the
franchisees. All locations feature a moderately priced Italian menu with its
traditional and gourmet pizzas, submarine sandwiches, pasta dishes, fries,
chicken wings, salads and desserts.
The Company operates one (1) Resto-Bar and has commenced plans to
locate at least one (1) Resto-Bar in the U.S. and one (1) more in Montreal
during calendar 2005 as either franchise or company-owned units. In addition to
the traditional Donini menu, the Resto-Bar offers an expanded menu featuring a
selection of veal and chicken dishes, appetizers, a new selection of pasta
dishes, foccaccia and ciabatta sandwiches as well as a breakfast menu, wine,
beer and cocktails.
PDI is further developing its B2B (business to business) distribution
network of fully-topped, ready-to-use self-rising crust frozen pizza to food
service customers and is in discussion with a number of potential customers such
as department store cafeterias, other restaurants, hospitality and leisure
venues, convenience stores, and contract caterers. The Company has also
completed the development of its frozen microwaveable pizza. A truly
pizzeria-tasting pizza coming out of a microwave. This new product is an
extension of the Company's frozen pizza line.
In addition to generating revenues from its franchisees in the form of
initial franchise fees and royalties, revenues have also been generated by three
other operation subsidiaries, Pizado, Donini.Com and DoniniCo. 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. Donini.Com. manages the call center that executes
home delivery orders made from a single telephone number to the closest
franchisee. DoniniCo. repurchases existing Donini franchised restaurants and
operates them, pending their resale to new franchisees.
14
Going Concern
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 reflect that the
Company has incurred significant operating losses, has a deficit in
stockholders' equity and a working capital deficit at August 31, 2005. In
addition, the Company will require additional financing to meet its future
obligations. These matters raise substantial doubt as to the Company's ability
to continue as a going concern. The Company's ability to continue as a going
concern will depend on its attaining profitable operations and the ability to
obtain additional financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts of and classification of liabilities that might be
necessary in the event the Company cannot continue its existence.
In order to secure additional capital funding, the Company has engaged
the services of a financial consultant to assist on a "best efforts" basis to
raise an additional $5,000,000 of equity and/or debt financing through the
issuance of common stock, convertible debentures or a combination thereof. In
addition, the Company continues to attempt to secure commitments from its
customers for additional installations at their food services facilities to
provide ready made frozen pizza, including its new products such as the new
microwaveable pizza and seeks to finance its future growth partly through
equipment leasing arrangements and other means. The Company also continues to
implement various cost control measures to attempt to achieve optimal profit
margins and to improve the revenue potential of its franchises. In the event
that additional capital is raised part of the proceeds will be used for these
purposes. It is anticipated that any cash shortfalls will be funded by the
officers and management of the Company.
Significant Accounting Policies
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in our financial statements and the accompanying
notes. The amounts of assets and liabilities reported in our balance sheets and
the amounts of revenues and expenses reported for each of our fiscal periods are
affected by estimates and assumptions which are used for, but not limited to,
the accounting for allowance for doubtful accounts, fair market values of
marketable securities, asset impairments, inventory and income taxes. Actual
results could differ from these estimates.
The following critical accounting policies are significantly affected
by judgments, assumptions and estimates used in the preparation of the financial
statements.
Revenue Recognition
Franchise agreements provide the terms of the arrangement between PDI
and the franchisee. The franchise agreements may or may not require the
franchisee to pay an initial, nonrefundable 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 based on a percentage of the franchisees' sales generated by
the call center. These revenues are recorded as earned, with an appropriate
provision for estimated uncollectible amounts.
Initial fees are recognized as revenue when PDI 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.
Refranchising gains include gains on sales of company-operated
restaurants to new and existing franchisees and the related initial franchise
fees, if any. Gains on subsequent restaurant franchising 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.
Revenue from sales of frozen pizza, dough and sauces are recorded upon
shipment.
15
Assets Held for Resale
Assets held for resale consist of franchise equipment reacquired by the
Company and are recorded at the lower of cost and net realizable value.
Results of Operations
Revenues
For the three months ended August 31, 2005, franchise and corporate
operations accounted for approximately 44% of the Company's operating revenues.
The sale of food products equaled approximately 55% and the remaining
miscellaneous revenues accounted for 1%. This compares to 54%, 45% and 1%
respectively for the same period in fiscal 2005. Sales of food products are
relatively stable from fiscal 2005 to fiscal 2006.
During fiscal 2006, our consolidated revenues decreased $53,014 or 20%
to $211,499 from 2005 revenues of $264,513. Cost of goods sold for fiscal 2006
was $76,778 or 36.3% as compared to $78,124 or 29.5% for fiscal 2005. Product
sales decreased primarily due to the Company having fewer franchised outlets (19
in fiscal 2006 versus 22 during fiscal 2005). In addition, fiscal 2005 revenues
included the operating sales of Company-owned stores which have since been sold
as franchises and initial franchise fees in the amount of $33,809.
Costs and Expenses
Costs and expenses totaled $462,874 in fiscal 2006 and $1,251,042 in
fiscal 2005 and included the following:
General and Administrative Expenses
General and administrative expenses include payroll and payroll taxes,
office and occupancy expenses, professional, legal and accounting fees and
consulting fees and services. General and administrative expenses totaled
$197,717 in fiscal 2006 and $221,331 in fiscal 2005, a decrease of $23,614
(10.6%). The decrease was primarily due to a decrease in office and
administrative expenses and a decrease in bad debt expenses.
Advertising and Promotion
Advertising and promotion costs totaled $106,217 in fiscal 2006 versus
$51,668 in fiscal 2005. The Company substantially increased its advertising and
promotional activities in an attempt to increase sales.
Product and Market Development
Product and market development costs totaled $24,856 in fiscal 2006
versus $43,058 in fiscal 2005. These costs include costs relating to
microwaveable pizza, Resto-Bar and the B2B business.
Stock Based Compensation
Stock based compensation amounted to $826,600 in fiscal 2005. The
Company issued 9,200,000 shares of common stock to employees and various vendors
for services rendered in fiscal 2005.
Amortization of Finance Costs
Amortization amounted to $57,161 in fiscal 2006 and $38,107 in fiscal
2005 and relates to the costs incurred of issuing the convertible note payable
("Note") to Global Capital Funding Group, L.P. ("Global").
Other Income and Expenses
Other income and expenses include the following:
16
Interest Expense
Interest amounted to $63,111 in fiscal 2006 versus $48,602 in fiscal
2005, an increase of $14,509. The primary reason for the increase was interest
incurred on the Note to Global totaling $42,500 in fiscal 2006 and $25,000 in
fiscal 2005.
Other Items
In 2005, the Company sold assets held for resale and earned $43,018.
Liquidity and Capital Resources
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 reflect that the
Company has incurred significant operating losses, has a deficit in
stockholders' equity and a working capital deficit at August 31, 2005. In
addition, the Company will require additional financing to meet its future
obligations. These matters raise substantial doubt as to the Company's ability
to continue as a going concern. The Company's ability to continue as a going
concern will depend on its attaining profitable operations and the ability to
obtain additional financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts of and classification of liabilities that might be
necessary in the event the Company cannot continue its existence.
In order to secure additional capital funding, the Company has engaged
the services of a financial consultant to assist on a "best efforts" basis to
raise an additional $5,000,000 of equity and/or debt financing through the
issuance of common stock, convertible debentures or a combination thereof. In
addition, the Company continues to attempt to secure commitments from its
customers for additional installations at their food services facilities to
provide ready made frozen pizza, including its new products such as the new
microwaveable pizza and seeks to finance its future growth partly through
equipment leasing arrangements and other means. The Company also continues to
implement various cost control measures to attempt to achieve optimal profit
margins and to improve the revenue potential of its franchises. In the event
that additional capital is raised, part of the proceeds will be used for these
purposes. It is anticipated that any cash shortfalls will be funded by the
officers and management of the Company.
At August 31, 2005, the Company had cash of $91,518. Net cash used in
operating activities amounted to $195,563 in fiscal 2006 and $228,975 in fiscal
2005. The primary reason for the decreases were the net losses incurred for the
periods, net of non-cash expenses.
Cash used in investing activities amounted to $28,264 in fiscal 2006
and included the acquisition of assets held for resale of approximately $21,060.
Cash used in investing activities in fiscal 2005 amounted to $166,695 and
included loans to a stockholder of approximately $171,200.
Cash provided by financing activities amounted to $215,425 in fiscal
2006 and $856,819 in fiscal 2005. In fiscal 2006, the Company received loans
from related parties of approximately $226,500. In fiscal 2005, the Company
received approximately $1 million net from the Note issued to Global net of the
repayments of various loans payable and long-term debt.
Off-Balance Sheet Arrangements
The Company and its President are guarantors on a five-year 8%
promissory note ("Note") of $250,000 made by a non-affiliated person to a
franchisee of the Company. The Note is payable in monthly installments of $5,054
including interest commencing in October 2004 through September 2009. Other
terms of the Note include:
1. The Note is secured by a subordinated interest in all of the assets of the
franchisee.
2. If an event of default occurs, the lender, at his option, can demand
immediate payment of any and all amounts then owing or to become owing.
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As of August 31, 2005, the franchisee has not made any of the required
monthly installments. The Company has made interest payments on behalf of the
franchisee totaling approximately $18,300. Such amounts have been classified as
loan receivable on the balance sheet. Although the Note is in default, the
lender has not demanded immediate payment of all amounts owed and owing.
We do not have any other off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues and expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
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.
This action stems from a separate suit filed by the former franchisee against
the former subsidiary, in the amount of C$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 December 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
No changes have occurred during the three month ended August 31, 2005.
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
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
DONINI, INC.
Date: October 21, 2005 By: /s/ PETER DEROS
-------------------------------------
Peter Deros, President
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