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:
March 31, 2001 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 March 31, 2001
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1 Balance Sheet, March 31, 2001....................................................................................1
Statement of Income - March 31, 2001.............................................................................2
Statement of Cash Flows, March 31, 2001 .........................................................................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)
MARCH 31 JUNE 30 MARCH 31 JUNE 30
NOTE 2001 2000 2000 1999
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
ASSETS
CURRENT ASSETS
Cash - 115,811. 195,295. 5,014.
Accounts Receivable 353,451. 157,753. 488,440. 202,544.
Prepaid Expenses 375,812. 292,381. 123,844. 174,328.
Construction work in process 140,133. 242,492. 137,605. 151,283.
Current portion of notes receivable 178,114. 159,289. 174,155. 213,234.
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1,047,511. 967,726. 1,119,339. 746,403.
FRANCHISES HELD FOR RESALE 234,232. 265,049. 0. 0.
NOTES RECEIVABLE 3 931,130. 717,362. 660,142. 525,593.
CAPITAL ASSETS 5 1,382,405. 1,263,780. 1,283,140. 1,347,994.
INVESTMENT IN PUBLIC COMPANY 4 45,735. 45,735. 93,351. 93,351.
FRANCHISE RIGHTS 6 2,805,000. 3,060,000. 3,145,000. 3,400,000.
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6,446,012. 6,319,652. 6,300,972. 6,113,341.
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LIABILITIES
CURRENT LIABILITIES
Bank Indebtedness 127,456. - - -
Accounts payable and accrued liabilities 321,669. 449,995. 330,867. 611,528.
Current portion of long-term debt 353,091. 396,930. 340,147. 2,743,495.
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802,216. 846,925. 671,014. 3,355,023.
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LONG-TERM DEBT 7 3,184,286. 3,431,947. 3,828,643. 1,736,770.
LEASE SECURITY DEPOSITS 252,437. 229,863. 241,894. 212,212.
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4,238,939. 4,508,735. 4,741,551. 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 - - 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 (13,475,227.) (13,871,383.) (12,950,122.) (13,700,207.)
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2,207,073. 1,810,917. 1,559,421. 809,336.
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6,446,012. 6,319,652. 6,300,972. 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 NINE MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
NOTE 2001 2000 2001 2000
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Royalties 500,091. 494,927. 1,494,518. 1,480,666.
Sales of managed franchise stores 159,770. 99,797. 953,413. 287,584.
Supplier Incentives, Commissions & Other 255,727. 222,983. 732,218. 710,782.
Franchising 19,795. 38,038. 71,749. 94,844.
Proprietary products 102,477. 126,068. 371,357. 354,051.
Construction revenues 33,000. 353,431. 75,000. 450,931.
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1,070,860. 1,335,244. 3,698,255. 3,378,858.
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COST AND EXPENSES
Head office and administration 539,866. 564,193. 1,422,722. 1,446,843.
Managed franchise stores 198,763. 142,480. 1,010,902. 369,791.
Proprietary products 95,579. 104,212. 324,010. 305,036.
Construction expenses 12,000. 332,974. 46,500. 366,934.
Interest expense 25,013. (342,560.) 77,927. (198,535.)
Depreciation and Amortization 145,964. 112,903. 420,038. 338,705.
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1,017,185. 595,394. 3,302,099. 2,628,773.
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NET INCOME FOR THE PERIOD 53,675. 421,043. 396,156. 750,085.
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Earnings per share 11 0.00 0.01 0.03 0.04
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2
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE NINE MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
2001 2000 2001 2000
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 53,675. 421,043. 396,156. 750,085.
ITEMS NOT AFFECTING CASH:
Depreciation & Amortization 145,964. 112,903. 420,038. 338,705.
Changes in non-cash operating working capital items (51,307.) (465,563.) (305,097.) (502,395.)
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148,333. 68,383. 511,097. 586,395.
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FINANCING
Bank Indebtedness 127,456. 0. 127,456. 0.
Repayment of Long-term debt (90,470.) (192,273.) (291,500.) (311,475.)
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36,986. (192,273.) (164,044.) (311,475.)
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INVESTING
Issue of notes receivable, net of repayments (66,033.) (42,487.) (232,593.) (95,470.)
Purchase of capital assets (192,281.) (14,654.) (283,663.) (18,851.)
Security deposits 6,094. 12,518. 22,574. 29,682.
Managed franchise stores held for resale 45,033. 0. 30,817. 0.
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(207,187.) 40,351. (462,865.) (84,639.)
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NET GENERATED CASH (OUTFLOW) (21,868.) (83,539.) (115,811.) 190,281.
CASH POSITION, BEGINNING OF PERIOD 21,868. 278,834. 115,811. 5,014.
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CASH POSITION, END OF PERIOD 0. 195,295. 0. 195,295.
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3
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS AT MARCH 31, 2001
(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. 396,156. 396,156.
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Balance March 31, 2001 0. 0. 46,279,849. 15,682,300. 5,426,692. (13,475,227.) 2,207,073.
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4
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2001
(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 MARCH 31, 2001
(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 MARCH 31, 2001
(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 MARCH 31, 2001
(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.
$ $
Notes receivable, net of allowance for doubtful
accounts of nil (2000 - nil) 1,109,244. 876,651.
Less current portion 178,114. 159,289.
----------------------------
931,130. 717,362.
----------------------------
----------------------------
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 MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
5. CAPITAL ASSETS
ACCUMULATED
COST AMORTIZATION --- NET BOOK VALUE ---
JUNE
2001 2000
Land 457,884. N/A 457,884. 457,884.
Building 625,000. 85,937. 539,063. 562,500.
Furniture, fixtures and equipment 827,456. 752,815. 74,641. 46,891.
Corporate owned stores reacquired
from franchisees 218,700. 120,285. 98,415. 131,220.
Corporate owned stores equipment
reacquired from franchisees 301,089. 88,687. 212,403. 65,285.
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2,430,130. 1,047,725. 1,382,405. 1,263,780.
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6. FRANCHISE RIGHTS
Franchise rights 3,400,000. 3,400,000.
Accumulated amortization (595,000.) (340,000.)
-----------------------------
2,805,000. 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 MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
7. LONG - TERM DEBT
JUNE
2001 2000
Business Development Bank of Canada Term loan, repayable in 60 monthly
instalments of $1,960. plus interest at 10.4%, due March 23, 2006,
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 117,600. 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) 1,158,212. 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) 1,099,761. 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 151,747. 161,758.
-----------------------------------
Carried forward 2,527,320. 2,666,737.
10
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D)
JUNE
2001 2000
Brought forward 2,527,320. 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 47,694. 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 9,284. 16,247.
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at 8.5% per annum payable in 780 weekly
instalments of $670.60 of interest and principal, due January 2016,
secured by land and building at 418 Preston Street in
Ottawa, Ontario 297,566. 325,012.
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2002 49,652. 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) 605,861. 695,111.
--------------------------------------
3,537,377. 3,828,877.
Less current portion (353,091.) (396,930.)
--------------------------------------
3,184,286. 3,431,947.
-------------------------------------
-------------------------------------
11
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2001
(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 353,091.
2002 372,281.
2003 370,375.
2004 319,644.
2005 334,472.
Subsequent 1,787,514.
----------
3,537,377.
----------
----------
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 MARCH 31, 2001
(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
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
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
MARCH JUNE
2001 2000
$ $
Basic earnings (loss) per share 0.03 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 MARCH 31, 2001
(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 MARCH 31, 2001
(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 March 31, 2001, Treats International
Enterprises, Inc. ("TIEI" or the "Company") through its wholly owned
subsidiaries derived 46.7% of its Revenue from royalties, 14.9% from
retail sales of corporately managed stores, 23.9% from supplier
incentives, commissions and other, 1.8% from franchise activities, 9.6%
from the sale of certain proprietary products, 3.1% from construction
revenues.
Revenue decreased $264,000 or 19.8% to $1,071,000 from $1,335,000
compared to the corresponding period in fiscal 2000. This was primarily
the result of an decrease in the construction revenues.
Cost and expenses showed a increase of 11.3% or $103,000 from $914,000
to $1,017,000. This was primarily the result of the increase in
interest expense.
Consequently net income for the Quarter ended March 31, 2001 was
$54,000 compared to $421,000 for the corresponding period in fiscal
2000.
While net income declined significantly compared to the same period
last fiscal year, this is primarily the result of a one time,
non-recurring interest reversal of $342,560 posted in the third quarter
of the last fiscal year. EBITDA (Earnings before Interest, Taxes,
Depreciation and Amortization) in fact increased 17% ($33,000)
16
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
GENERAL (CONT'D)
from $191, 000 to $224,000. 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 quarter of
this fiscal year. The Company was successful in a tender for a location
at Grant MacEwan College in Edmonton, Alberta where its previous
agreement had expired. The Company was also successful in a tender for
a new Coffee Emporium location in the Student Union building at York
University in Toronto, Ontario. The Company had a franchised bakery
location in the food court, however its lease expired and was not
renewable. Future expansion plans call for locations in office and
mixed use locations as well as non-traditional locations such as
educational facilities and transportation terminals.
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.
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 MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
RESULTS OF OPERATIONS
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
MARCH 31 MARCH 31
2001 2000
Net sales.................................................................100.0 % 100.0 %
Royalties..................................................................46.7 % 37.1 %
Supplier incentives, commissions & other...................................23.9 % 16.7 %
Sales of managed franchises stores.........................................14.9 % 7.5 %
Proprietary products........................................................9.6 % 9.4 %
Construction revenues.......................................................3.1 % 26.5 %
Franchising.................................................................1.8 % 2.8 %
Head office and administration...........................................(50.4) % (40.8) %
Managed franchise stores.................................................(18.6) % (10.7) %
Proprietary products......................................................(8.9) % (7.8) %
Construction expenses.....................................................(1.1) % (26.4) %
--------------------------
E.B.I.T.D.A................................................................21.0 % 14.3 %
--------------------------
Interest expense..........................................................(2.3) % 25.7 %
--------------------------
Depreciation and amortization........................................... (13.6) % ( 8.5) %
--------------------------
Net Income................................................................. 5.0 % 31.5 %
--------------------------
--------------------------
18
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED MARCH 31, 2001 COMPARED TO QUARTER ENDED MARCH 31, 2000.
Total revenue for the quarter ended March 31, 2001 decreased
$264,000 or 19.8% to $1,071,000 from $1,335,000 for the same
period last year. The increase in revenue resulted primarily from:
* The sales of managed franchises stores increased by $60,000 or
60.1% to $160,000 compared to $100,000 for the same period last
year.
* Royalty revenue remained stable at $500,000.
* Supplier incentives increased $33,000 or 14.7% to $256,000
compared to $223,000 for the same period last year.
* Franchising decreased $18,000 to $20,000 compared to $38,000
for the same period last year.
* Proprietary products revenues decreased $24,000 or 18.7% to
$103,000 from $127,000 for the same period last year.
Expenses for the quarter ended March 31, 2001 increased $103,000
or 11.3% to $1,017,000 from $914,000 for the same period last
year. The increase in expenses relate to the following:
* Cost associated with managed franchised stores increased
$56,000 of 39.5% to $199,000 compared to $142,000 for the same
period last year.
* Head Office and Administration cost decreased $24,000 or 4.3%
to $540,000 from $564,000 for the same period last year.
* The cost of purchasing certain proprietary products for resale
to distributors decreased $8,000 or 8.3% to $96,000 from
$104,000 for the same period last year.
* Depreciation and amortization increased $33,000 or 29.3% to
$146,000 from $113,000 for the same period last year.
* Interest expense increased $366,000 to $25,000 from ($343,000)
for the same period last year.
19
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED MARCH 31, 2001 COMPARED TO QUARTER ENDED MARCH 31, 2000
(CONT'D)
* Net income for the quarter ended March 31, 2001 was $54,000
compared to a net income of $421,000 for the same period last
year.
As noted above, net income declined significantly compared to the
same period last year. This is the result of a one time,
non-recurring interest reversal of $342,560 posted in the third
quarter of the last fiscal year, together with a $33,000 increase
in Depreciation and Amortization.
EBITDA (Earnings before Interest, Taxes, Depreciation and
Amortization) in fact increased 17% ($33,000) from $191, 000 to
$224,000 for the third quarter of the Company's fiscal year. No
provision has been made for taxes as a result of a tax loss carry
forward.
WORKING CAPITAL
The working capital at the end of the period was $245,000 compared to a
working capital of $448,000 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 $148,000 compared to an
inflow of $68,000 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 MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
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 - None
Holders
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K - One
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 March 31, 2001.
The result of operation for the period ended March 31, 2001 are not
necessarily indicative of the results of the entire year.
21
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2001
(CANADIAN DOLLARS)
----------------------------------------------------------------------
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 May 18, 2001
--------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel May 18, 2001
------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot May 18, 2001
-------------------------------------
Francois Turcot, Director of Finance
22