[TREATS LOGO]
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Three Months Ended December 31, 2000)
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, 2000 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
932 Center Circle, Suite 1000
Altamonte Springs, Florida 32714
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, 2000
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1 Balance Sheet, December 31, 2000...............................................................1
Statement of Income - December 31, 2000........................................................2
Statement of Cash Flows, December 31, 2000 ....................................................3
Statement of Stockholder's Equity..............................................................4
Notes to Financial Statements............................................................5 to 15
ITEM 2 Management's Discussion and Analysis
of the Statement of Income..............................................................16 to 20
PART II Other Information - Items 1 to 6..............................................................21
Signatures....................................................................................22
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
DECEMBER 31 JUNE 30 DECEMBER 31 JUNE 30
NOTE 2000 2000 1999 1999
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
ASSETS
CURRENT ASSETS
Cash 21,868. 115,811. 278,834. 5,014.
Accounts Receivable 277,745. 157,753. 412,002. 202,544.
Prepaid Expenses 236,443. 292,381. 120,698. 174,328.
Construction work in process 349,481. 242,492. 70,390. 151,283.
Current portion of notes receivable 170,000. 159,289. 187,660. 213,234.
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1,055,537. 967,726. 1,069,584. 746,403.
FRANCHISES HELD FOR RESALE 279,265. 265,049. 0. 0.
NOTES RECEIVABLE 3 873,211. 717,362. 689,124. 525,593.
CAPITAL ASSETS 5 1,251,088. 1,263,780. 1,296,389. 1,347,994.
INVESTMENT IN PUBLIC COMPANY 4 45,735. 45,735. 93,351. 93,351.
FRANCHISE RIGHTS 6 2,890,000. 3,060,000. 3,230,000. 3,400,000.
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6,394,836. 6,319,652. 6,378,448. 6,113,341.
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LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 367,248. 449,995. 649,631. 611,528.
Current portion of long-term debt 373,630. 396,930. 2,744,126. 2,743,495.
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740,878. 846,925. 3,393,757. 3,355,023.
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LONG-TERM DEBT 7 3,254,217. 3,431,947. 1,616,937. 1,736,770.
LEASE SECURITY DEPOSITS 246,343. 229,863. 229,376. 212,212.
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4,241,438. 4,508,735. 5,240,070. 5,304,005.
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CONTINGENCIES 8
STOCKHOLDERS EQUITY
CAPITAL STOCK 9
Preferred:
Authorized, 4,590,175 (1999 - 10,000,000), non-voting
cumulative shares
Issued, nil (1999 - 5,409,825) series A shares 0. 0. 3,732,779. 3,732,779.
Common:
Authorized, 25,000,000 (1999 - 33,333,333) shares, par
value U.S. $0.001
Issued - 15,426,692 (1999 - 19,024,598) shares 15,426. 46,280. 19,025. 19,025.
Additional paid - in capital 15,666,874. 15,636,020. 10,757,739. 10,757,739.
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15,682,300. 15,682,300. 14,509,543. 14,509,543.
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Deficit (13,528,902.) (13,871,383.) (13,371,165.) (13,700,207.)
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2,153,398. 1,810,917. 1,138,378. 809,336.
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6,394,836. 6,319,652. 6,378,448. 6,113,341.
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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 2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Royalties 561,174. 561,245. 994,427. 985,739.
Sales of managed franchise stores 319,762. 65,908. 793,643. 187,787.
Supplier Incentives, Commissions & Other 200,697. 260,355. 476,491. 487,799.
Franchising 41,271. 10,000. 51,954. 56,806.
Proprietary products 147,178. 124,595. 268,880. 227,983.
Construction revenues 0. 22,500. 42,000. 97,500.
------------------------------------------------------------------------
1,270,082. 1,044,603. 2,627,395. 2,043,614.
------------------------------------------------------------------------
COST AND EXPENSES
Head office and administration 469,677. 470,283. 882,856. 882,650.
Managed franchise stores 359,716. 97,341. 812,139. 227,311.
Proprietary products 124,557. 106,363. 228,431. 200,824.
Construction expenses 0. 20,000. 34,500. 33,960.
Interest expense 23,621. 76,638. 52,914. 144,025.
Depreciation and Amortization 161,891. 112,900. 274,074. 225,802.
------------------------------------------------------------------------
1,139,462. 883,525. 2,284,914. 1,714,572.
------------------------------------------------------------------------
NET INCOME FOR THE PERIOD 130,620. 161,078. 342,481. 329,042.
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings per share 11 0.01 0.01 0.02 0.02
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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
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 130,620. 161,078. 342,481. 329,042.
ITEMS NOT AFFECTING CASH:
Depreciation & Amortization 161,891. 112,900. 274,074. 225,802.
Changes in non-cash operating working capital items (64,099.) 149,876. (253,790.) (36,832.)
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228,412. 423,854. 362,765. 518,012.
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FINANCING
Repayment of Long-term debt (110,582.) (68,097.) (201,030.) (119,202.)
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(110,582.) (68,097.) (201,030.) (119,202.)
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INVESTING
Issue of notes receivable, net of repayments (134,389.) (84,823.) (166,560.) (137,957.)
Purchase of capital assets (87,283.) (1,782.) (91,382.) (4,197.)
Advertising commitment 0. (9,577.) 0. 0.
Security deposits 20,710. 105. 16,480. 17,164.
Franchises stores held for resale 0. 0. (14,216.) 0.
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(200,962.) (76,923.) (255,678.) (124,990.)
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NET GENERATED CASH (OUTFLOW) (83,132.) (278,834.) (93,943.) 273,820.
CASH POSITION, BEGINNING OF PERIOD 105,000. 0. 115,811. 5,014.
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CASH POSITION, END OF PERIOD 21,868. 278,834. 21,868. 278,834.
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3
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
---PREFERRED SHARES--- --------------COMMON SHARES------------
1 FOR 3
SHARES AMOUNT SHARES AMOUNT REVERSE SPLIT DEFICIT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 5,409,825. 3,732,779. 19,024,598. 10,776,764. 6,341,608. (4,960,696.) 9,548,847.
Net income for the year 0. 0. 0. 0. 0. 205,533. 205,533.
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Balance June 30, 1998 5,409,825. 3,732,779. 19,024,598. 10,776,764. 6,341,608. (4,755,163.) 9,754,380.
Net loss for the year 0. 0. 0. 0. 0. (8,945,044.) (8,945,044.)
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Balance June 30, 1999 5,409,825. 3,732,779. 19,024,598. 10,776,764. 6,341,608. (13,700,207.) 809,336.
Conversion of preference
shares into common shares (5,409,825.) (3,732,779.) 20,737,661. 3,732,779. 6,912,554. 0. 0.
Conversion of dividends
into common shares 0. 0. 6,517,590. 1,172,757. 2,172,530. 0. 1,172,757.
Net income for the year 0. 0. 0. 0. 0. 1,001,581. 1,001,581.
Dividends 0. 0. 0. 0. 0. (1,172,757.) (1,172,757.)
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Balance June 30, 2000 0. 0. 46,279,849. 15,682,300. 15,426,692. (13,871,383.) 1,810,917.
Net income for the period 0. 0. 0. 0. 0. 342,481. 342,481.
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Balance December 31, 2000 0. 0. 46,279,849. 15,682,300 15,426,692. (13,528,902.) 2,153,398.
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4
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2000
(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, 2000
(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, 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 or all substantial obligations of the Company have been
completed.
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. When evidence indicates a permanent
decline in value, the investment is written down.
6
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2000
(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.
BASIC EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are calculated using the daily weighted
average number of common shares outstanding during the fiscal year.
7
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
3. NOTES RECEIVABLE
Notes receivable are due from franchisees with interest rates varying
from 6% to 8% and repayable in scheduled instalments which mature from
July 1999 to June 2020.
JUNE
JUNE 2000
- -----------------------------------------------------------------------------------------------------------------------------------
$ $
Notes receivable, net of allowance for doubtful
accounts of nil (2000 - nil) 1,043,211. 876,651.
Less current portion 170,000. 159,289.
------------------------------
873,211. 717,362.
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------------------------------
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 the 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. As of June
30, 2000 the Company has not converted any of its preferences shares.
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 2000 fiscal year.
8
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
5. CAPITAL ASSETS
JUNE
2000 2000
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION ---- NET BOOK VALUE ----
$ $ $ $
Land 457,884. 0. 457,884. 457,884.
Building 625,000. 78,125. 546,875. 562,500.
Furniture, fixtures and equipment 827,456. 744,882. 82,574. 46,891.
Corporate owned stores reacquired
from franchisees 218,700. 109,350. 109,350. 131,220.
Corporate owned store equipment
reacquired from former
franchisees 108,809. 54,404. 54,404. 65,285.
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2,237,849. 986,761. 1,251,088. 1,263,780.
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6. FRANCHISE RIGHTS
$ $
Franchise rights 3,400,000. 3,400,000.
Accumulated amortization (510,000.) (340,000.)
----------------------------
2,890,000. 3,060,000.
----------------------------
----------------------------
The Company obtained and independent appraisal from Scott Rankin,
Gordon & Gardiner, Chartered Accountants, substantiating a valuation of
franchise rights in the amount of $3,060,000 as at June 30, 2000.
9
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT
JUNE
2000 2000
- -----------------------------------------------------------------------------------------------------------------------------------
$ $
Business Development Bank of Canada Term loan, repayable in 47
monthly instalments of $4,200 plus interest at 11%, 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 130,200. 155,400.
Appleford Capital Inc. (formerly 3193853 Canada Inc.)
Term loan, bearing interest at 0% per annum, payable $52,000
per annum in the first two years, $72,800 in the next two
years and the balance due April, 2005, 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) 1,164,962. 1,178,462.
Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.)
Term loan, bearing interest at 0% per annum, payable
principal and interest of $130,000 to March 2004, $162,500
per annum, for the next three years and the balance due
March 2007, secured by a general assignment of book debts
and franchise rights, pledge of all the shares in subsidiary
and associated companies (see note (b) below) 1,120,636. 1,171,117.
P. Murphy in trust
Mortgage bearing interest at 7% payable in 212 bi-weekly
instalments of $1,000 on interest and principal, due August
2008, secured by land and building at 418 Street, Ottawa,
Ontario and a General Security Agreement 154,284. 161,758.
----------- -----------
Carried forward 2,570,082. 2,666,737.
10
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT (cont'd)
JUNE
2000 2000
- -----------------------------------------------------------------------------------------------------------------------------------
$ $
Brought forward 2,570,082. 2,666,737.
D. Crawford
Term loan, repayable in 70 bi-weekly instalments of $1,000 of
principal and interest at 10%, due March 2003,
secured by a General Security Agreement 52,351. 62,467.
Bank of Nova Scotia
Term loan unsecured, repayable in 21 monthly instalments of
$774 plus interest at prime plus 2%, due July 9, 2002 11,605. 16,247.
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at 6.8% per annum payable in 80
monthly instalments of $4,999 on interest and principal, due
March 2007, secured by land and building at 418 Preston Street
in Ottawa, Ontario 305,645. 325,012.
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2002 54,553. 63,303.
Legal settlements, non-interest-bearing, principal
only including 8% imputed interest of $257,073,
payments of $93,000 annually, with various terms
of repayment ending in 2006, (see note 8) 633,611. 695,111.
----------- -----------
3,627,847. 3,828,877.
Less current portion (373,630.) (396,930.)
----------- -----------
3,254,217. 3,431,947.
----------- -----------
----------- -----------
11
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT (cont'd)
(a) On July 2, 2000, Appleford Capital Inc. (formerly 3193853 Canada
Inc.) amended the interest of the loan from 4% to 0%.
(b) On July 2, 2000, Riverdale Capital Group Inc. (formerly 3722121
Canada Inc.), a corporation with 9% of the outstanding common shares
owned by the Chief Executive Officer of the Company and 36% by family
members of the Chief Executive Officer of the Company amended the
interest of the debenture from 4% to 0%.
The minimum future principal repayments required over the next five
years are as follows:
$
2001 373,630.
2002 372,281.
2003 370,375.
2004 319,644.
2005 334,472.
Subsequent 1,857,444.
----------
3,627,846.
----------
----------
8. COMMITMENTS AND CONTINGENCIES
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 $988,800, which was reflected in the statement
of income in the fiscal year ending June 30, 1999.
As a result of legal settlement in the prior years, an amount was
provided based on those judgements. In the current year, the Company
has reversed $261,211 of this amount, as it believes it will not be
paid.
As management is of the opinion that the outcome of 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, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES (CONT'D)
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
2001 2,877,121.
2002 2,300,771.
2003 1,946,179.
2004 1,633,394.
2005 1,258,352.
Later Years 2,175,526.
-----------
Total minimum payments* 12,191,343.
-----------
-----------
* Minimum payments have not been reduced by
minimum sublease rentals for $11,487,431 due in
future under non-cancellable subleases.
YEAR ENDING JUNE 30, 2001
$
Minimum rentals 2,877,121.
Less: sublease rentals (2,720,833.)
-----------
156,288.
===========
13
- --------------------------------------------------------------------------------
9. CAPITAL STOCK
On July 10, 2000 the Company amended its share capital structure as
follows:
CLASS NUMBER OF AUTHORIZED SHARES PAR VALUE NUMBER OF SHARES ISSUED
BEFORE AFTER BEFORE AFTER
1 FOR 3 1 FOR 3 1 FOR 3 1 FOR 3
REVERSE SPLIT REVERSE SPLIT REVERSE SPLIT REVERSE SPLIT
Common 75,000,000 25,000,000 $.001 U.S. 46,279,849. 15,426,692.
Preference 10,000,000 10,000,000 $.500 U.S. 0. 0.
10. RELATED PARTY TRANSACTIONS
(a) Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.), a
corporation with 9% of the outstanding common shares owned by
the Chief Executive Officer of the Company and 36% by family
members of the Chief Executive Officer of the Company amended
the interest of the debenture from 4% to 0%.
11. BASIC EARNINGS (LOSS) PER SHARE DECEMBER JUNE 2000 2000
December June
2000 2000
$ $
Basic earnings (loss) per share 0.02 0.04
===========================
Weighted average number of
common shares outstanding 15,426,692. 24,702,775.
===========================
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.
Fully diluted earnings per share are not presented as they are
anti-dilutive.
14
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
12. INCOME TAXES
The Company has utilized its tax losses to reduce its taxable income to
nil. The Company has a non-capital loss of $100,000 which expires on
June 30, 2006.
13. 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 approximates
their fair value because the interest rates approximate market rates.
The carrying amounts of the term loans to related parties 10(a) and do
not approximate their fair value because the term loans do not bear
interest.
The fair values of the term loans due to related parties are not
determinable, as these amounts are interest-free and, accordingly, can
not be ascertained with reference to similar debt with arm's length
parties.
15
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
PART I
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SAFE HARBOR STATEMENT
Certain statements in this Form 10-Q, including anticipated store openings,
planned capital expenditures and trends in or expectations regarding the
Company's operations, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on currently available operating, financial and competitive information,
and are subject to various and sometimes numerous risks and uncertainties.
Actual future results and trends may differ significantly.
Factors which may impact future results, include, but are not limited to, raw
materials pricing and availability, changes in economic conditions, the
competitive environment of the quick-service industry, the continued ability of
the Company and its franchisees to obtain suitable locations at reasonable lease
rates, the Company's ability to successfully execute business plans, the effect
of legal proceedings, and other risks whether detailed in this Form10-Q and in
the Company's 10-K filings, or unforeseen.
GENERAL
During the 3 month period ending December 31, 2000, Treats International
Enterprises, Inc. ("TIEI" or the "Company") through its wholly owned
subsidiaries derived 44.2% of its Revenue from royalties, 25.2% from retail
sales of corporately managed stores, 15.8% from supplier incentives, commissions
and other, 3.2% from franchise activities, 11.6% from the sale of certain
proprietary products.
Revenue increased $225,000 or 22% to $1,270,000 from $1,045,000 compared to the
corresponding period in fiscal 1999. This was primarily the result of an
increase in the number of corporately managed stores.
Cost and expenses showed a increase of 29% or $256,000 from $883,000 to
$1,139,000. This was also primarily the result of the increase in corporately
managed locations.
Consequently net income for the Quarter ended December 31, 2000 was $131,000
compared to $161,000 for the corresponding period in fiscal 1999. No provision
has been made for taxes as a result of a tax loss carry forward.
It is anticipated that 2 new locations will open in the last two quarters of
fiscal 2001. The Company's fiscal year end is the Saturday closest to June 30.
The 2000 fiscal year end had 53 weeks. The fiscal year ending June 30, 2001 will
include 52 weeks of operation.
16
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
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MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
GENERAL (CONT'D)
On July 2, 2000, the Company filed an application with the Securities and
Exchange Commission to revise its share capital structure and had a 1 for 3
reverse split. As a result, the issued share capital of the Company subsequent
to year end is 15,426,692. The financial statements reflect the effect of the
reverse split and the basic earnings per share.
On July 2, 2000, Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.)
("Riverdale") holder of a subordinated debenture amended the terms of the
debenture by adjusting the interest rate to 0%. Riverdale had acquired and
restructured the debt instrument from the Royal Bank of Canada and its wholly
owned subsidiaries in March of 2000 as described in detail in the Company's 8-K
and 10-K filings.
Appleford Capital Inc. (formerly 3193853 Canada Inc.) holder of a secured term
loan, bearing interest at 4% per annum, payable $52,000 per annum in the first
two years, $72,800 in the next two years and the balance due April, 2005,
secured by a general security agreement, general assignment of book debts and
franchise rights and pledge of all the shares in subsidiary and associated
companies, amended on July 2, 2000 the terms of the term loans which became
interest free.
The Company's management sees these recent developments as very positive for the
long term future of TIEI and is currently reviewing what other steps it might
take to amend its capital structure with a view to position itself for growth
opportunities in Canada which may include acquisitions and/or mergers and/or
joined venture agreements.
17
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
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MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
The following table sets forth for the periods indicated certain items from the
consolidated statement of income expressed as a percentage of net sales:
FOR THE FISCAL QUARTER ENDED
DECEMBER 31 DECEMBER 31
2000 1999
Net sales.................................................................100.0 % 100.0 %
Royalties..................................................................44.2 % 53.7 %
Supplier incentives, commissions & other...................................15.8 % 24.9 %
Sales of managed franchises stores.........................................25.2 % 6.3 %
Proprietary products.......................................................11.6 % 11.9 %
Construction revenues.......................................................0.0 % 2.2 %
Franchising.................................................................3.2 % 1.0 %
Head office and administration............................................(37.0)% (45.0)%
Managed franchise stores..................................................(28.3)% (9.3)%
Proprietary products.......................................................(9.8)% (10.2)%
Construction expenses......................................................(0.0)% (1.9)%
------ -----
E.B.I.T.D.A...............................................................24.89 % 33.56 %
------ -----
Interest expense...........................................................(1.9)% (7.3)%
Depreciation and amortization.......................................... ..(12.7)% (10.8)%
------ -----
Net Income.................................................................10.3 % 15.4 %
------ -----
------ -----
18
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED DECEMBER 31, 2000 COMPARED TO QUARTER ENDED DECEMBER 31, 1999.
Total revenue for the quarter ended December 31, 2000 increased
$225,000 or 21.6% to $1,270,000 from $1,045,000 for the same period
last year. The increase in revenue resulted primarily from:
* The sales of managed franchises stores increased by $254,000
or 385.2% to $320,000 compared to $66,000 for the same period
last year.
* Royalty revenue remained stable at $561,000.
* Supplier incentives decreased $60,000 or 22.9% to $201,000
compared to $261,000 for the same period last year.
* Franchising increased $31,000 to $41,000 compared to $10,000
for the same period last year.
* Proprietary products revenues increased $23,000 or 18.1% to
$147,000 from $124,000 for the same period last year.
Expenses for the quarter ended December 31, 2000 increased $256,000 or
29.0% to $1,139,000 from $883,000 for the same period last year. The
increase in expenses relate to the following:
* Cost associated with managed franchised stores increased
$262,000 of 269.5% to $360,000 compared to $98,000 for the
same period last year.
* Head Office and Administration cost decreased $1,000 or 0.1%
to $470,000 from $471,000 for the same period last year.
* The cost of purchasing certain proprietary products for resale
to distributors increased $18,000 or 17.1% to $125,000 from
$107,000 for the same period last year.
* Depreciation and amortization increased $49,000 or 43.4% to
$162,000 from $113,000 for the same period last year.
* Interest expense decreased $53,000 or 69.2% to $24,000 from
$79,000 for the same period last year.
19
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED DECEMBER 31, 2000 COMPARED TO QUARTER ENDED DECEMBER 31, 1999
(CONT'D)
* Net income for the quarter ended December 31, 2000 was
$131,000 compared to a net income of $161,000 for the same
period last year.
WORKING CAPITAL
The working capital at the end of the period was $315,000 compared to a working
capital deficit of $2,324,000 for the same period last year. This is primarily
due to the decrease of current portion of the long term debt.
LIQUIDITY AND CASH FLOW
During the quarter the operating inflow was $228,000 compared to an outflow of
$424,000 for the same quarter of the last fiscal year. This is the result of a
decrease in non-cash operating working capital items.
20
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
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PART II OTHER INFORMATION
Item 1 Legal Proceedings - See note 8 to the 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 - One
21
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT DECEMBER 31, 2000
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
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, 2000.
The result of operation for the period ended December 31, 2000 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 14, 2001
------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel February 14, 2001
------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot February 14, 2001
------------------------------------
Francois Turcot, Director of Finance
22