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TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Three Months Ended December 31, 1999)
Form 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 TO 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 3 months ended Commission File No:
December 31, 1999 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
State of jurisdiction: I.R.S. Employer No:
DELAWARE 13-3495199
ADDRESS OF PRINCIPAL EXECUTIVE OFFICER:
418 Preston Street
Ottawa, Ontario
Canada, K1S 4N2
Telephone No.: (613) 563-4073
U.S. ADDRESS OF TREATS INTERNATIONAL ENTERPRISES, INC.
c/o Vincent J. Profaci
Attorney at Law
1964 Howell Branch Road, Suite 206
Winter Park, Florida 32792
Telephone No.: (407) 673-1144
Registrant has filed all reports under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.:
YES
TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
Three months ended December 31, 1999
INDEX
PAGE
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, December 31, 1999 1
Statement of Income - December 31, 1999 2
Statement of Cash Flows, December 31, 1999 3
Statement of Stockholder's Equity 4
Notes to Financial Statements 5 to 16
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 17 to 19
PART 11 Other Information - Items 1 to 6 20
Signatures 21
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
DECEMBER 31 JUNE 30 DECEMBER 31 JUNE 30
NOTE 1999 1999 1998 1998
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
ASSETS
CURRENT ASSETS
Cash 278,834. 5,014. - 45,874.
Accounts Receivable 412,002. 202,544. 514,641. 193,718.
Prepaid Expenses 120,698. 174,328. 103,916. 144,606.
Construction work in process 70,390. 151,283. 452,433. 33,476.
Current portion of notes receivable 187,660. 213,234. 208,455. 217,205.
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1,069,584. 746,403. 1,279,445. 634,879.
NOTES RECEIVABLE 3 689,124. 525,593. 927,920. 819,820.
CAPITAL ASSETS 5 1,296,389. 1,347,994. 1,876,834. 2,020,533.
ADVERTISING COMMITMENT 2 - - 142,998. 94,576.
DEFERRED COSTS - - 204,235. 268,566.
INVESTMENT IN PUBLIC COMPANY 4 93,351. 93,351. 1,617,912. 1,617,912.
FRANCHISE RIGHTS 6 3,230,000. 3,400,000. 8,240,593. 8,572,715.
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6,378,448. 6,113,341. 14,289,937. 14,029,001.
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LIABILITIES
CURRENT LIABILITIES
Bank Indebtedness - - 191,864. -
Accounts payable and accrued liabilities 649,631. 611,528. 969,558. 953,620.
Current portion of long-term debt 2,744,126. 2,743,495. 2,201,981. 2,249,109.
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3,393,757. 3,355,023. 3,363,403. 3,202,729.
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LONG-TERM DEBT 7 1,616,937. 1,736,770. 833,800. 833,511.
LEASE SECURITY DEPOSITS 229,376. 212,212. 254,606. 238,381.
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5,240,070. 5,304,005. 4,451,809. 4,274,621.
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CONTINGENCIES
STOCKHOLDERS EQUITY
CAPITAL STOCK
Preferred:
Authorized - 10,000,000 non-voting, cumulative shares,
dividends at US $.028 per share, redeemable at option
of company at US $1.00 per share par value US $.50 3,732,779. 3,732,779. 3,732,779. 3,732,779.
Common:
Authorized - 33,333,333 shares par value US $0.001
Issued - 19,024,598 common shares 19,025. 19,025. 19,025. 19,025.
Additional paid - in capital 10,757,739. 10,757,739. 10,757,739. 10,757,739.
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14,509,543. 14,509,543. 14,509,543. 14,509,543.
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Deficit (13,371,165.) (13,700,207.) (4,671,415.) (4,755,163.)
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1,138,378. 809,336. 9,838,128. 9,754,380.
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6,378,448. 6,113,341. 14,289,937. 14,029,001.
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1
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
NOTE 1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
REVENUES
Royalties 561,245. 530,862. 985,739. 986,752.
Sales of managed franchise stores 65,908. 216,818. 187,787. 394,131.
Supplier Incentives, Commissions & Other 260,355. 170,454. 487,799. 424,855.
Franchising 10,000. 23,057. 56,806. 107,057.
Proprietary products 124,595. 145,984. 227,983. 237,515.
Construction revenues 22,500. 116,385. 97,500. 411,260.
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1,044,603. 1,203,560. 2,043,614. 2,561,570.
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COST AND EXPENSES
Head office and administration 470,283. 437,625. 882,650. 871,768.
Managed franchise stores 97,341. 233,139. 227,311. 444,530.
Proprietary products 106,363. 119,650. 200,824. 199,665.
Construction expenses 20,000. 35,485. 33,960 330,360.
Interest expense 76,638. 60,827. 144,025. 116,509.
Depreciation and Amortization 112,900. 257,494. 225,802. 514,990.
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883,525. 1,144,220. 1,714,572. 2,477,822.
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NET INCOME FOR THE PERIOD 161,078. 59,340. 329,042. 83,748.
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Earnings per share 11 0.01 0.00 0.02 0.00
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2
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 161,078. 59,340. 329,042. 83,748.
ITEMS NOT AFFECTING CASH
Depreciation & Amortization 112,900. 257,494. 225,802. 514,990.
Changes in non-cash operating working capital items 149,876. (306,425.) (36,832.) (655,272.)
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423,854 10,409. 518,012. (56,534.)
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FINANCING
Bank Indebtedness -- 145,534. -- 191,864.
Repayment of Long-term debt (68,097.) (22,470.) (119,202.) (46,839.)
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(68,097.) 123,064. (119,202.) 145,025.
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INVESTING
Issue of notes receivable, net of repayments (84,823.) (117,267.) (137,957.) (99,350.)
Purchase of capital assets (1,782.) (1,003.) (4,197.) (2,819.)
Deferred costs -- -- -- --
Advertising commitment (9,398.) (23,028.) -- (48,421.)
Security deposits 105. 7,825. 17,164. 16,225.
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(77,103.) (133,473.) (124,990.) (134,365.)
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NET GENERATED CASH (OUTFLOW) (278,654.) 0. 273,820. (45,874.)
CASH POSITION, BEGINNING OF PERIOD 0. 0. 5,014. 45,874.
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CASH POSITION, END OF PERIOD 278,654. 0. 278,834. 0.
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3
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
REDEEMABLE, CONVERTIBLE
---PREFERRED SHARES--- ---COMMON SHARES---
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
- --------------------------------------------------------------------------------------------------------------------------
$ $ $
Balance, June 30, 1996 5,409,825 3,732,779 19,024,598 10,776,764 (5,110,686) 9,398,857
Net income for the year -- -- -- -- 149,990 149,990
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Balance, June 30, 1997 5,409,825 3,732,779 19,024,598 10,776,764 (4,960,696) 9,548,847
Net income for the year -- -- -- -- 205,533 205,533
------------------------------------------------------------------------------------------
Balance June 30, 1998 5,409,825 3,732,779 19,024,598 10,776,764 (4,755,163) 9,754,380
Net income for the year -- -- -- -- (8,945,044) (8,945,044)
------------------------------------------------------------------------------------------
Balance June 30, 1999 5,409,825 3,732,779 19,024,598 10,776,764 (13,700,207) 809,336
Net income for the period -- -- -- -- 329,042 329,042
------------------------------------------------------------------------------------------
Balance December 31, 1999 5,409,825 3,732,779 19,024,598 10,776,764 (13,371,165) 1,138,378
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4
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
These consolidated financial statements comprise the accounts of the
Company and its wholly-owned subsidiaries, as follows:
* Treats Inc.
* Treats Ontario Inc.
* Chocolate Gourmet Treats Limited
* Treats Canada Corporation
All intercompany transactions and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (which also
conform in all material respects with accounting principles generally
accepted in the United States) and include the following significant
accounting policies.
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. These estimates are reviewed periodically, and, as
adjustments become necessary, they are reported in earnings in the
period in which they become known.
5
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Franchise fees and construction revenue arises on the sale of national,
area and store franchises. Franchise store revenue is recognized as
income when the respective purchase and sale agreements have been signed
and all material conditions relating to the sale have been substantially
completed by the Company or the franchise store has commenced
operations. Revenue from national and area franchise agreements is
recognized when the area development agreement has been signed and all
substantial obligations of the Company have been completed.
When payment for the sale of a national or area franchise is based on a
contract over a period longer than twelve months, the Company recognizes
revenue based on the assessment of collectibility. The total contract is
recorded as deferred revenue, and revenue recognition commences when
payments in excess of 25% of the total contract have been received and
management has ascertained that there is a sufficient level of certainty
that the balance of the contract is collectible.
Deposits that are non-refundable under the franchising agreement are
recognized as franchising revenue when received.
Royalties are recognized when they are earned, based on a percentage of
the franchisees' sales on a weekly basis.
Supplier incentives are recognized in the period to which they apply.
INVESTMENT IN PUBLIC COMPANY
The investment in public company is accounted for at cost. Under the
cost method, the investment is recorded at its original cost, and
earnings from the investment are recognized only to the extent of
dividends received or receivable.
6
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost less accumulated amortization.
Amortization is provided for at rates intended to write off the assets
over their estimated economic lives, as follows:
Building - 20 years straight-line
Furniture, fixtures and equipment - 5 years straight-line
Corporate owned stores reacquired
from franchisees - 5 years straight-line
Corporate owned store equipment
reacquired from former
franchisees - 5 years straight-line
FRANCHISE RIGHTS
Franchise rights are carried at the lower of cost less accumulated
amortization, and fair market value. Amortization is provided for on the
straight-line basis over 10 years.
EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share are calculated using the daily weighted
average number of common shares outstanding during the fiscal year plus
the net additional number of shares which would be issuable upon the
exercise of stock options, assuming that the Company used the proceeds
received to purchase additional shares at market value.
ADVERTISING COMMITMENT
The Company receives prescribed amounts from franchisees to fund and
develop advertising and promotion campaigns regionally and nationally.
The funds collected, net of costs incurred, are recorded as an
asset/liability for future advertising and promotion.
7
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
3. NOTES RECEIVABLE
Notes receivable are due from franchisees with varying interest rates
repayable in scheduled instalments which mature from July 1999 to June
2020.
$ $
Notes receivable, net of allowance for doubtful
accounts of nil (1998 - nil) 876,784 738,827
Less current portion (187,660) (213,234)
--------------------------------
689,124 525,593
--------------------------------
--------------------------------
4 INVESTMENT IN PUBLIC COMPANY
In 1998 the Company sold the U.S. area rights for consideration of
2,800,000 class "A" convertible preference shares in EMC Group Inc., a
U.S. public company incorporated in the State of Florida, via a
management buy-out by former employees of the company. The investment
has been recorded at the cost of equipment and franchise rights
transferred to EMC Group Inc. based on the available information at the
time of the sale.
The preference shares are convertible to common stock for the equivalent
of US$2,800,000 based on average market value of the common stock for
the 60 days prior to the date of conversion, subject to approval of the
board of directors of EMC Group Inc. EMC Group Inc. will only permit the
conversion of preferred shares to common shares of EMC Group Inc as long
as the conversion does not exceed 10% of the total number of outstanding
common shares of EMC Group Inc.
Contrary to the agreement with the Company, since incorporation, EMC
Group Inc. has not raised sufficient capital, nor has it made any
significant additional store openings. In addition, EMC Group Inc. has
not been profitable and management does not anticipate an improvement in
operations in the U.S. in the foreseeable future. Based on the above,
management believes that there has been a permanent impairment in value,
and the asset has been written down to its market value in the 1999
fiscal year.
8
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
JUNE
1999 1999
- -------------------------------------------------------------------------------------------------
5. CAPITAL ASSETS
ACCUMULATED
COST AMORTIZATION -- NET BOOK VALUE --
$ $ $ $
Land 457,885 -- 457,885 457,885
Building 625,000 42,697 582,303 602,106
Furniture, fixtures and equipment 712,879 685,933 26,945 25,996
Corporate owned stores reacquired
from franchisees 218,700 65,610 153,090 174,960
Corporate owned store equipment
reacquired from former
franchisees 108,809 32,643 76,166 87,047
---------------------------------------------------
2,123,271 826,883 1,296,388 1,347,994
---------------------------------------------------
---------------------------------------------------
6. FRANCHISE RIGHTS
$ $
Franchise rights 3,400,000 3,400,000
Accumulated amortization (170,000) --
------------------------
3,230,000 3,400,000
------------------------
------------------------
The Company obtained an independent appraisal from Scott Rankin, Gordon
& Gardiner, Chartered Accountants, substantiating a valuation of
franchise rights in the amount of $3,400,000 as at June 30, 1999.
9
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
JUNE
1999 1999
- ---------------------------------------------------------------------------------------------------------------------
7. LONG-TERM DEBT $ $
Business Development Bank of Canada
Term loan, repayable in 47 monthly
instalments of $4,200 plus interest at prime plus 2%, due July 23,
2003, secured by a general security agreement, second mortgage on
the land and building at 418 Preston Street, and a personal
guarantee of up to 50% by one of the shareholders 180,600 200,000
3193853 Canada Inc.
Term loan, repayable in 59 monthly instalments of $20,000 plus
interest at 10% per annum, due July 1, 2004, secured by a general
security agreement, general assignment of book debts and franchise
rights, pledge of all the shares in subsidiary and associated
companies (see note (a) below) 1,180,824 1,180,824
J. Laverty
Mortgage bearing interest at 7% payable in 261 monthly instalments
of $1,335 on interest and principal, due June 2019, secured by land
and building at 418 Street, Ottawa, Ontario and a General Security
Agreement 169,951 171,955
D Crawford
Term loan, repayable in 48 monthly instalments of $2,000 of
principal and interest at 10%, due March 2003,
secured by a General Security Agreement 72,092 81,085
Royal Bank Capital Corporation
Subordinated debenture, bearing interest at 8% per annum, payable
in 60 monthly instalments, due June 30, 2001, secured by a general
security agreement, general assignment of book debts and franchise
rights, pledge of all the shares in subsidiary and associated
companies
(see note (a) below) 1,129,562 1,129,562
-------------------------------------
Carried forward 2,733,029 2,763,426
10
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
JUNE
1999 1999
- -------------------------------------------------------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D) $ $
Brought forward 2,733,029 2,763,426
Business Development Bank of Canada
Term loan, repayable in 47 monthly
instalments of $2,000 plus interest at prime plus 4%, due July 23,
2003, secured by a general security agreement, general assignment
of books debts and franchise rights, pledge of all the shares in
subsidiary and associated companies 12,000 24,000
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at
5.9% per annum payable in 105 monthly instalments of $4,884 on
interest and principal, due March 2007, secured by land and
building at 418 Preston Street in
Ottawa, Ontario 343,681 360,987
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2002 73,102 81,852
Legal settlements, non-interest-bearing, principal
only including 8% imputed interest of $520,637,
payments of $175,000 annually, with various terms
of repayment ending in 2006, see note 8 (a) 1,199,250 1,250,000
-----------------------------------------
4,361,062 4,480,265
Less current portion (2,744,126) (2,743,495)
-----------------------------------------
1,616,936 1,736,770
-----------------------------------------
-----------------------------------------
11
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D)
(a) The Company is in default of their loan covenants with
3193853 Canada Inc. and Royal Bank Capital Corporation.
3193853 Canada inc. and Royal Bank Capital have not waived
their rights to call the term loan and subordinated
debenture at a future date and accordingly the debt are
classified as current.
Interest expense for the quarter ended December 31, 1999 related to
long-term debt was $76,638 (1998 - $60,827).
The minimum future principal repayments required over the next five
years are as follows:
$
2000 2,549,914
2001 204,062
2002 207,740
2003 180,203
2004 130,458
Subsequent 1,088,686
----------
4,361,062
----------
----------
8. COMMITMENTS AND CONTINGENCIES
(a) The Company is a defendant in several actions arising in the
normal course of business. The Company settled most claims
subject to certain terms in the amount of $1,250,000, which
has been reflected in the statement of income of June 30,
1999.
As management is of the opinion that the remaining claims,
counterclaims or appeals is not determinable at this time, no
additional provision has been recorded.
12
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES (CONT'D)
(b) The Company has lease commitments for corporate-owned stores
and office premises. The Company also, as the franchisor, is
the lessee in most of the franchisees' lease agreements. The
Company enters into sublease agreements with individual
franchisees, whereby the franchisee assumes responsibility
for, and makes lease payments directly to, the landlord. The
aggregate rental obligations under these leases over the next
five years are as follows:
$
Year ending June 30
2000 2,849,462
2001 2,435,259
2002 1,845,700
2003 1,428,400
2004 1,121,205
Later Years 1,888,300
----------
Total minimum payments* 11,568,326
----------
----------
* Minimum payments have not been reduced by minimum sublease
rentals for $10,726,677 due in future under non-cancellable
subleases.
YEAR ENDING JUNE 30,
2000 1999
$ $
Minimum rentals 2,849,462 2,872,597
Less: sublease rentals (2,697,852) (2,721,987)
-----------------------------
151,610 150,610
-----------------------------
-----------------------------
13
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
9. RELATED PARTY TRANSACTIONS
a) The Royal Bank of Canada and its subsidiary, Royal Bank
Capital Corporation, are registered holders of 37.9% of the
common stock. The Royal Bank Capital Corporation holds a
subordinated debenture (see note 7) for which the related
interest expense was $30,176 (1998 - $27,870).
Undeclared dividends for July 1, 1994 to December 31, 1999 on
the preferred shares owned by the Royal Bank are $1,129,166.
(b) In the 1998 fiscal year, the Company has purchased its office
premises, land and building at 418 Preston Street, Ottawa,
from a trust of which the beneficiaries are the family of the
Chief Executive Officer of the Company whose family owns
approximately 32.6% of the common stock of the Company.
(c) The President of 3193853 Canada Inc. with whom the Company
has a term loan payable, is a member of the family of the
Chief Executive Officer of the Company. The related interest
expense was $24,183 (1998 - $16,831).
(d) Accounts payable includes $28,126 owed to 764719 Ontario Inc.
whose owner is a member of the family of the Chief Executive
Officer of the Company.
10. RESTRUCTURING COST
In conjunction with the permanent decline in the value of the investment
in EMC Group Inc. (note 4), management has formalized a plan whereby the
Company will not enter into the U.S. market and will focus expansion
strictly in Canada. Accordingly, as there is no longer a value
attributable to the U.S. franchise rights, a valuation based on this
plan resulted in a write-down of the franchise rights in the 1999
fiscal year.
14
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
JUNE
1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
10. RESTRUCTURING COST(CONT'D)
In addition, management has permanently closed unprofitable stores it
reacquired from franchisees in Canada. Accordingly, capital assets were
written down to their estimated fair market value.
The write-downs have been recorded as non-cash restructuring costs,
allocated as follows:
$ $
Franchise rights - 5,228,388
Stores and equipment reacquired from franchisees - 978,210
---------------------------------------------
- 6,206,598
---------------------------------------------
---------------------------------------------
11. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share 0.01 (0.47)
---------------------------------------------
Weighted average number of common shares outstanding 19,024,598 19,024,598
---------------------------------------------
---------------------------------------------
The calculation of fully diluted earnings per common share assumes
that, if a dilutive effect is produced, all convertible securities have
been converted, all shares to be issued under contractual commitments
have been issued and all outstanding options have been exercised at the
later of the beginning of the fiscal period and the option issue date.
If all conversions had occurred, the Company would have had to increase
its maximum authorized common shares. Fully diluted earnings per share
are not presented as they are anti-dilutive.
15
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
12. FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts of accounts receivable, short-term notes
receivable and accounts payable and accrued liabilities approximates
their fair value because of the short-term maturities of these items.
The carrying amount of the long-term notes receivable, long-term
subordinated debenture and term loans approximates their fair value
because the interest rates approximate market rates.
The fair values of the other long-term debt due to non-arm's length
parties are not determinable, as these amounts are interest-free and
due on demand, and, accordingly, cannot be ascertained with reference
to similar debt with arm's length parties.
13. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates 1999
to represent something other than a date. The effects of the Year 2000
Issue may be experienced before, on, or after January 1, 2000, and, if
not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspect of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
14. COMPARATIVE FIGURES
Prior years figures have been reclassified to conform with the current
year's presentation.
16
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
System-wide retail sales for the six months ended December 31, 1999
were $11,140,000 compared to $11,727,000 a decrease of $587,000 or 5.1%
for the same six month period last year. The sales decline can be
attributed to the Company's decision to close down 13 locations during
the past twelve months. The units closed down were primarily
non-performing locations or locations were the Company could not
establish satisfactory lease terms with the landlord, during the past
fiscal year. On average same store sales showed an increase in sales
performance in excess of 2%.
RESULTS OF OPERATION
The following table sets fourth for the periods indicated certain items
from the consolidated statement of income expressed as a percentage of
net sales:
QUARTER ENDED SEPTEMBER 30,
1999 1998
---------------------------
Net Sales ........................ 100.0 % 100.0 %
Royalties ........................ 53.7 % 44.1 %
Sales of managed franchises stores 6.3 % 18.0 %
Supplier Incentives and other .... 24.9 % 14.2 %
Franchising ...................... 1.0 % 1.9 %
Proprietary products ............. 11.9 % 12.1 %
Construction revenues ............ 2.2 % 9.7 %
Head office and administration ... (45.0)% (36.4)%
Managed franchise stores ......... (9.3)% (19.4)%
Proprietary products ............. (10.2)% (9.9)%
Construction expenses ............ (1.9)% (2.9)%
---------------------------
E.B.I.T.D.A ...................... 33.56 % 31.38 %
---------------------------
Interest expense ................. (7.3)% (5.1)%
Depreciation and Amortization .... (10.8)% (21.4)%
---------------------------
NET INCOME ....................... 15.4 4.9 %
---------------------------
---------------------------
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TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED DECEMBER 31, 1999 COMPARED TO QUARTER ENDED DECEMBER 31, 1998.
Total revenue for the quarter ended December 31, 1999 decreased
$159,000 or 13.2% to $1,044,000 from $1,203,000 for the same period
last year. The decrease in revenue resulted primarily from:
* Royalties increased $30,000 or 5.7% to $561,000
compared to $531,000 for the same period last year.
* Supplier incentives increased $90,000 or 52.7% to
$260,000 compared to $170,000 for the same period
last year.
* The sales of managed franchises stores decreased by
$151,000 or 69.6% to $66,000 compared to $217,000 for
the same period last year.
* Proprietary products revenues decreased $21,000 or
14.7% to $125,000 from $146 ,000 for the same period
last year.
* Franchising decreased $13,000 or 56.6% to $10,000
compared to $23,000 for the same period last year.
Expenses for the quarter ended December 31, 1999 decreased $261,000 or
22.8% to $883,000 from $1,144,000 for the same period last year. The
decrease in expenses relate to the following:
* Cost associated with managed franchised stores
decreased $136,000 of 58.2% to $97,000 compared to
$233,000 for the same period last year.
* The cost of purchasing certain proprietary products
for resale to distributors increased $13,000 or 11.1%
to $106,000 from $119,000 for the same period last
year.
* Head Office and Administration cost increased $33,000
or 7.5% to $470,000 from $437,000 for the same period
last year.
18
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED DECEMBER 31, 1999 COMPARED TO QUARTER ENDED DECEMBER 31,
1998.(CONT'D)
* Interest expense increased by $16,000 or 26.0% to
$77,000 from $61,000 last year. As a result of the
increase in the Long Term Debt.
* Net income for the quarter ended December 31, 1999
was $161,000 compared to a net income of $59,000 for
the same period last year.
WORKING CAPITAL
The working capital deficit at the end of the period was $2,324,000 compared to
a working capital deficit of $2,084,000 for the same period last year. This is
primarily due to the increase of current portion of the long term debt.
LIQUIDITY AND CASH FLOW
During the quarter the operating inflow was $424,000 compared to an inflow of
$10,000 for the same quarter of the last fiscal year. This is the result of a
decrease in non-cash operating working capital items.
19
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 1999
(CANADIAN DOLLARS)
PART 11 OTHER INFORMATION
Item 1 Legal Proceedings - See notes 8 (a) to Financial Statements
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Securities Holders - None
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K - None
20
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results of operation
for the 3 months ended December 31, 1999.
The result of operation for the period ended December 31, 1999 are not
necessarily indicative of the results of the entire year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
By: /s/ Paul J. Gibson February 22, 2000
------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel February 22, 2000
------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot February 22, 2000
------------------------------------
Francois Turcot, Director of Finance
21