[TREATS LOGO]
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Nine Months Ended March 31, 2002)
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 9 months ended Commission File No:
March 31, 2002 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
Nine months ended March 31, 2002
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1 Balance Sheet, March 31, 2002................................1
Statement of Income, March 31, 2002..........................2
Statement of Cash Flows, March 31, 2002 .....................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 21
PART II Other Information - Items 1 to 6............................22
Signatures..................................................23
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(EXPRESSED IN CANADIAN DOLLARS)
MARCH 31 JUNE 30 MARCH 31 JUNE 30
NOTE 2002 2001 2001 2000
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -------------------------------------------------------------------------------------------------------------------
$ $ $ $
ASSETS
CURRENT ASSETS
Cash - 135,882. - 115,811.
Accounts Receivable 452,828. 167,050. 353,451. 157,753.
Prepaid Expenses 253,420. 147,741. 375,812. 292,381.
Construction work in process 71,714. 106,710. 140,133. 242,492.
Current portion of notes receivable 223,659. 173,302. 178,114. 159,289.
--------------------------------------------------------
1,001,621. 730,685. 1,047,511. 967,726.
FRANCHISES HELD FOR RESALE - - 234,232. 265,049.
NOTES RECEIVABLE 3 937,116. 823,470. 931,130. 717,362.
CAPITAL ASSETS 4 1,373,608. 1,488,000. 1,382,405. 1,263,780.
INVESTMENT IN PUBLIC COMPANY 45,735. 45,735. 45,735. 45,735.
FRANCHISE RIGHTS 6 2,465,000. 2,720,000. 2,805,000. 3,060,000.
--------------------------------------------------------
5,823,080. 5,807,890. 6,446,012. 6,319,652.
========================================================
LIABILITIES
CURRENT LIABILITIES
Bank Indebtedness 111,319. - 127,456. -
Accounts payable and accrued liabilities 531,305 496,143. 321,669. 449,995.
Current portion of long-term debt 247,506. 238,436. 353,091. 396,930.
--------------------------------------------------------
890,130. 734,579. 802,216. 846,925.
--------------------------------------------------------
LONG-TERM DEBT 7 2,799,485. 3,053,465. 3,184,286. 3,431,947.
LEASE SECURITY DEPOSITS 215,685. 195,226. 252,437. 229,863.
--------------------------------------------------------
3,905,300. 3,983,270. 4,238,939. 4,508,735.
--------------------------------------------------------
CONTINGENCIES 9
STOCKHOLDERS EQUITY
CAPITAL STOCK 10
Common:
Authorized, 25,000,000 (2000 - 25,000,000) shares, par
value U.S. $0.001
Issued - 15,426,692 (2000 - 15,426,692) shares 46,280. 46,280. 46,280. 46,280.
--------------------------------------------------------
Additional paid - in capital 15,636,020. 15,636,020. 15,636,020. 15,636,020.
--------------------------------------------------------
15,682,300. 15,682,300. 15,682,300. 15,682,300.
--------------------------------------------------------
Deficit (13,764,520.) (13,857,680.) (13,475,227.) (13,871,383.)
--------------------------------------------------------
1,917,780 1,824,620. 2,207,073. 1,810,917.
--------------------------------------------------------
5,823,080. 5,807,890. 6,446,012. 6,319,652.
========================================================
1
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE NINE MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
NOTE 2002 2001 2002 2001
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
REVENUES
Royalties 356,265. 322,091. 1,125,069. 1,494,518.
Sales of managed franchise stores 0. 159,770. 474,239. 953,413.
Supplier Incentives, Commissions & Other 132,283. 255,727. 514,849. 732,218.
Franchising 33,617. 19,795. 104,359. 71,749.
Proprietary products 100,261. 102,477. 310,278. 371,357.
Construction revenues 0. 33,000. 126,290. 75,000.
--------------------------------------------------------------------
622,426. 892,860. 2,655,084. 3,698,255.
--------------------------------------------------------------------
COST AND EXPENSES
Head office and administration 371,833. 361,866. 1,202,649. 1,422,722.
Managed franchise stores 0. 198,763. 497,522. 1,010,902.
Proprietary products 85,531. 95,579. 276,402. 324,010.
Construction expenses 0. 12,000. 111,076. 46,500.
Interest expense 21,240. 25,013. 75,063. 77,927.
Depreciation and Amortization 134,051. 145,964. 399,212. 420,038.
--------------------------------------------------------------------
612,655. 839,185. 2,561,924. 3,302,099.
--------------------------------------------------------------------
NET INCOME FOR THE PERIOD 9,771. 53,675. 93,160. 396,156.
====================================================================
Earnings per share 13 0.0 0.01 0.0 0.02
====================================================================
2
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE NINE MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
2002 2001 2002 2001
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 9,771. 53,675 93,160. 396,156.
ITEMS NOT AFFECTING CASH:
Depreciation & Amortization 134,051. 145,964. 399,212. 420,038.
Changes in non-cash operating working capital items (37,337.) (51,307.) (321,299.) (305,097.)
--------------------------------------------------------------------
106,485. 148,333. 171,073. 511,097.
--------------------------------------------------------------------
FINANCING
Bank Indebtedness 2,421. 127,456. 111,319. 127,456.
Repayment of Long-term debt (103,886.) (90,470.) (244,910.) (291,500.)
--------------------------------------------------------------------
(101,465.) 36,986. (133,591.) (164,044.)
--------------------------------------------------------------------
INVESTING
Issue of notes receivable, net of repayments (7,597.) (66,033.) (164,003.) (232,593.)
Purchase of capital assets (9,004.) (192,281.) (29,820.) (283,663.)
Security deposits 11,581. 6,094. 20,459. 22,574.
Managed franchise stores held for resale 0. 45,033. 0. (30,817.)
--------------------------------------------------------------------
(5,020.) (207,187.) (173,364.) (462,865.)
--------------------------------------------------------------------
NET GENERATED CASH (OUTFLOW) (0.) (21,868.) (135,882.) (115,811.)
CASH POSITION, BEGINNING OF PERIOD 0. 21,868. 135,882. 115,811.
--------------------------------------------------------------------
CASH POSITION, END OF PERIOD 0. 0. 0. 0.
====================================================================
3
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
---PREFERRED SHARES--- --------------COMMON SHARES------------
SHARES AMOUNT SHARES 1:3 REVERSE AMOUNT DEFICIT TOTAL
STOCK SPLIT
- ------------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 5,409,825 3,732,779 19,024,598 6,341,558 10,776,764 (13,700,207) 809,336
Conversion of preference
shares into common shares (5,409,825) (3,732,779) 20,737,661. 6,912,579 3,732,779 0 0
Conversion of dividends
into common shares 0 0 6,517,590 2,172,555 1,172,757 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)
------------------------------------------------------------------------------------------------------
Balance June 30, 2000 0 0 46,279,849 15,426,692 15,682,300 (13,871,383) 1,810,917
Net income for the period 0 0 0 0 0 13,703 13,703
------------------------------------------------------------------------------------------------------
Balance June 30, 2001 0 0 46,279,849 15,426,692 15,682,300 (13,857,680) 1,824,620
Net income for the period 0 0 0 0 0 93,160 93,160
------------------------------------------------------------------------------------------------------
Balance March 31, 2002 0 0 46,279,849 15,426,692 15,682,300 (13,764,520) 1,917,780
======================================================================================================
4
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Treats International Enterprises, Inc. (the "Company"), incorporated
under the laws of the state of Delaware, is an international franchisor
carrying on the business of selling the right to market the Treats
System. The Treats System entails the preparation and sale of cookies,
muffins and other specialty coffees as well as food and beverage
products in retail stores using a system and methodology of marketing
developed and designed by the Company and identified by the trademark
TREATS. As at March 31, 2002, there are 104 retail units in Canada
utilizing the Treats System. All of these units are owned and operated
by franchisees.
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.
PRINCIPLES OF CONSOLIDATION
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.
5
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles in Canada 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.
The most significant estimates included in these financial statements
are the valuations of accounts receivable and notes receivable and the
amortization on capital assets and franchise rights. Actual results
could differ from those estimates.
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 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.
6
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION (CONT'D)
Supplier incentives are recognized in the period to which they apply.
LONG TERM INVESTMENTS
Long term investments are recorded at cost. Where there has been a loss
in value of an investment that is other than a temporary decline, the
investment is written down to recognize a loss, which is included in
the determination of income.
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, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FUTURE INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. This method requires recognition of future income tax
assets and liabilities for the expected future income tax consequences
of events that have been included in the financial statements or income
tax returns using current income tax rates. Future tax assets, if any,
are recognized only the extent that, in the opinion of management, it
is more likely than not that the future income tax assets will be
realized. Future income tax assets and liability are adjusted for the
effects of changes in tax laws and notes on the date of the enactment
or substantive enactment.
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 2001 to June 2020.
MARCH JUNE
2002 2001
$ $
Notes receivable, net of allowance for doubtful
accounts of nil (2001 - nil) 1,160,775. 996,772.
Less current portion (223,659.) (173,302.)
-----------------------------------------
937,116. 823,470.
=========================================
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 employee of the Company. During 1999 and
2000, this investment was written down by $1,572,000. On June 18, 2001,
the Company agreed to convert its 2,800,000 class "A" convertible
preference shares for 200,000 common shares. As at the date of the
auditor's report, the shares of EMC were trading at $.03 U.S., however,
management believes that there has not been a further permanent decline
in value and accordingly, the investment has not been written down
below its current carrying amount.
8
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
5. CAPITAL ASSETS
ACCUMULATED
COST AMORTIZATION --- NET BOOK VALUE ---
MARCH JUNE
2002 2001
Land 457,885. N/A 457,885. 457,885.
Building 625,000. 117,187. 507,813. 531,250.
Furniture, fixtures and equipment 864,764. 787,600. 77,164. 74,196.
Corporate owned stores reacquired
from franchisees 373,162. 105,637. 267,525. 305,474.
Corporate owned stores equipment
reacquired from franchisees 252,990. 189,769. 63,221. 119,195.
-----------------------------------------------------------------
2,573,800. 1,200,193. 1,373,608. 1,488,000.
=================================================================
6. FRANCHISE RIGHTS
Franchise rights 3,400,000. 3,400,000.
Accumulated amortization (935,000.) (680,000.)
----------------------------------
2,465,000. 2,720,000.
==================================
The Company obtained an independent estimate of value from Scott,
Rankin, Gordon & Gardiner, Chartered Accountants, supporting a
valuation of franchise rights in an amount in excess of carrying
values.
9
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT
MARCH JUNE
2002 2001
$ $
Business Development Bank of Canada
Term loan, payable 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 94,080 111,720
Appleford Capital Inc.
Term loan, bearing interest at 0% per annum, payable $5,800 per annum
in the first year, $78,000 in the next two years and the balance due
May 2008, 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) 1,115,662 1,118,863
Riverdale Capital Group Inc.
Term loan, bearing interest at 0% per annum, payable principal and
interest of $74,100 to June 2002, $130,000 per annum, for the next
three years and the balance due March 2008, 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 and 1,042,692 1,086,542
Part I-Item 2 (General))
P. Murphy in trust
Mortgage bearing interest at 7% payable in 26 bi-weekly instalments
of $500 on interest and principal, to June 2002, 190 bi-weekly
instalments of $1,000 on interest and principal, due October 2009,
secured by land and building at 418 Preston Street,
Ottawa, Ontario and a General Security Agreement 147,233 151,094
--------------------------------
Carried forward 2,407,360 2,468,219
10
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D)
MARCH JUNE
2002 2001
$ $
Brought forward 2,407,360 2,468,219
D. Crawford
Term loan, repayable in 26 bi-weekly instalments of $500 of
principal and interest at 10%, due June 2002, and 40 bi-weekly
instalments of $1,000 of principal and interest, due January 2004,
secured by a General Security Agreement 39,392 45,773
Bank of Nova Scotia
Term loan unsecured, repayable in monthly instalments of $774 plus
interest at prime plus 2%, due March 9, 2002 0 6,963
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at 8.5% per annum payable in 780 weekly
instalments of $671 on interest and principal, due January 2016,
secured by land and building at 418 Preston Street
in Ottawa, Ontario 286,096 295,004
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2005 46,936 64,766
Legal settlements, non-interest-bearing, payments
of $104,000 annually, with various terms
of payment ending in 2007 330,776 411,176
--------------------------------
3,110,877 3,291,901
Less current portion (239,469) (238,436)
--------------------------------
2,911,408 3,053,465
================================
11
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D)
(a) On July 2, 2000, Appleford Capital Inc., amended the terms of
the loan which became interest-free.
(b) On July 2, 2000, Riverdale Capital Group Inc., a corporation
with 9% of its outstanding common shares owned by the Chief
Executive Officer of the Company and 40% by family members of
the Chief Executive Officer of the Company, amended the terms
of the loan which became interest-free.
Interest expense for the year related to long-term debt was
$104,720 (2000 - $99,016, 1999 - $246,005).
The minimum future principal repayments required over the next
five years are as follows:
$
2002 239,469
2003 354,356
2004 345,575
2005 345,995
2006 304,014
Thereafter 1,561,468
---------
3,150,877
=========
8. COMMITMENTS AND CONTINGENCIES
Two judgements in the total amount of $127,463 were issued against two
of the Company's wholly owned subsidiaries. Judgement in the amount of
$73,628 is against a subsidiary company with no assets. It is
managements' opinion that a co-judgement of $53,835 will be settled
whereby, the co-defendant and/or a third party not related to the
Company and its wholly owned subsidiaries will be responsible for the
judgement and accordingly, no provision has been recorded.
12
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES (CONT'D)
The Company is a defendant in several actions brought by former
franchisees, including a former franchisee of a former national
licensor, and landlords arising in the normal course of business. The
Company has counterclaimed these actions and management is of the
opinion that these claims are without merit. As the outcome of these
claims is not determinable at this time, these financial statements do
not include a provision for potential losses. Liabilities, if any,
resulting from these claims in subsequent years will be recorded as the
expenses are incurred.
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, $
2002 2,729,190
2003 2,345,486
2004 2,073,184
2005 1,667,675
2006 1,291,978
Thereafter 1,767,143
----------
Total minimum payments* 11,874,656
==========
* Minimum payments have not been reduced by minimum sublease
rentals for $11,033,048 due in future under non-cancellable
subleases.
Year ending June 30, 2002 $
Minimum rentals 2,729,190
Less: sublease rentals (2,550,384)
----------
178,806
==========
13
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
9. CAPITAL STOCK
On July 10, 2000, the Company's Board of Directors authorized a 1:3
reverse stock split of the common stock. On July 2, 2000, the Company
advised the OTC Bulleting Board Coordinator, NASDAQ Market Operations,
accordingly. As a result of the reverse split, the original 75,000,000
shares of the Company's common stock issued were reduced to 25,000,000
shares. Par value of the common stock remained $0.001 U.S. per share.
The effect of the reverse stock split has been recognized retroactively
in the stockholders' equity accounts on the balance sheet as of June
30, 2001, and in all share and per share data in the accompanying
financial statements.
CLASS NUMBER OF SHARES NUMBER OF
AUTHORIZED PAR VALUE SHARES ISSUED
Common 25,000,000 $.001 U.S. 15,426,692
Preference 10,000,000 $.500 U.S. -
10. ADVERTISING COSTS
The costs of advertising, promotion and marketing programs are charged
to head office and administrative expenses in the year incurred. Total
advertising costs for the years ended June 30, 2001 and June 30, 2000
were $36,731 and $94,882, respectively, and are included in the
accompanying statements of income and deficit.
11. RELATED PARTY TRANSACTIONS
(a) On July 2, 2000, Riverdale Capital Group Inc., a corporation
with 9% of its outstanding common shares owned by the Chief
Executive Officer of the Company and 40% by family members of
the Chief Executive Officer of the Company, amended the term
of the term loan which became interest-free in prior years,
interest of $16,117 for 2000 and nil for 1999 were paid to
this Company. In addition, management fees of $25,000 were
paid during the current year to this company (see Part I,
Item 2 (General)).
14
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS (CONT'D)
(b) The office premises, land and building at 418 Preston Street,
Ottawa, was purchased from a trust in 1998, of which the
beneficiaries are the family of the Chief Executive Officer of
the Company whose family owns approximately 47.20% of the
common stock of the Company. This real estate was recorded in
capital assets in 1998 based on the exchange amount (note 5).
(c) Included in accounts payable is an amount due to the Chief
Executive Officer in the amount of $34,488 (2000 - nil).
12. INCOME TAXES
The Company has utilized approximately $50,000 of its non-capital
losses to reduce its current income taxes as to nil. In addition, the
Company has approximately $100,000 of non-capital losses available to
offset against future taxable income expiring in 2008. The potential
benefit of this loss will be recognized in income when it is more
likely, than not that such benefit will be realized.
13. BASIC EARNINGS (LOSS) PER SHARE
MARCH MARCH
2002 2001
$ $
Basic earnings (loss) per share 0.00 0.00
=============================
Weighted average number of common shares outstanding 15,426,692 15,426,692
=============================
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.
15
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
14. 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 from franchisees
approximates their fair value because the interest rates approximate
market rates.
The carrying amounts of certain long term debts do not approximate
their fair value because they do not bear interest (notes 7 and 11
(a)).
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.
Lease security deposits are not current and in most cases have no
defined maturity. The carrying value and the fair value of these
deposits are assumed to be equal.
CREDIT RISKS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable from franchisees. The Company sells its products to
franchisees, at times extending credit for such sales. Exposure to
losses on receivables is principally dependant on each franchisee's
financial condition. The Company monitors its exposure for credit
losses and maintains allowance for anticipated losses.
15. COMPARATIVE FIGURES
Prior year's figures have been reclassified to conform with the current
year's presentation.
16
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2002
(EXPRESSED IN 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 9 month period ending March 31, 2002, Treats International
Enterprises, Inc. ("TIEI" or the "Company") through its wholly owned
subsidiaries derived 57.2% of its Revenue from royalties, 0.0% from
retail sales of corporately managed stores, 21.3% from supplier
incentives, commissions and other, 5.4% from franchise activities,
16.1% from the sale of certain proprietary products, 0.0% from
construction revenues.
Revenue decreased $270,000 or 30.3% to $622,000 from $8922,000
compared to the corresponding period in fiscal 2001.
Cost and expenses decreased $227,000 or 27.0% to $613,000 from
$840,000. This was primarily the result of the Company's decision to
sell the corporate stores.
Consequently net income for the Quarter ended March 31, 2002 was
$10,000 compared to $54,000 for the corresponding period in fiscal
2001.
17
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
GENERAL (CONT'D)
It is anticipated that 3 new locations will be completely renovated in
the fourth quarter of the fiscal year 2002. The Company's fiscal year
end is the Saturday closest to June 30. The 2001 fiscal year end had
52 weeks. The fiscal year ending June 30, 2002 will include 52 weeks
of operation.
The Company successfully renegotiated supply agreements with its two
major suppliers, The Quaker Oats Company of Canada, for bakery mixes,
and Nestle Canada, for roasted coffee. Additionally, several smaller
agreements were also renewed. The Company was successful in revising
the distribution channels in Canada completing the change over of
distributors prior to December 31, 2001.
On January 10, 2002, Riverdale notified TIEI that it wishes,
pursuant to the terms and conditions of the Debenture, to exercise
its right to collect Royalties and Service Fees in the Province of
Quebec, Canada, effective February 8, 2002. As required, TIEI has
notified its franchise owners that all Royalties and Service Fees
must be paid to Riverdale.
18
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2002
(EXPRESSED IN 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
2002 2001
(UNAUDITED) (UNAUDITED)
Net sales............................................................... 100.0% 100.0%
Royalties............................................................... 57.2% 36.1%
Supplier incentives, commissions & other................................ 21.3% 28.6%
Sales of managed franchises stores...................................... 0.0% 17.9%
Proprietary products.................................................... 16.1% 11.5%
Construction revenues................................................... 0.0% 3.7%
Franchising............................................................. 5.4% 2.2%
Head office and administration.......................................... 59.7% 40.5%
Managed franchise stores................................................ 0.0% 22.3%
Proprietary products.................................................... 13.7% 10.7%
Construction expenses................................................... 0.0% 1.3%
-----------------------------
E.B.I.T.D.A............................................................. 26.5% 25.2%
Interest expense........................................................ 3.4% 2.8%
Depreciation and amortization........................................... 21.5% 16.3%
-----------------------------
Net Income.............................................................. 1.6% 6.0%
=============================
19
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH 31, 2001
Total revenue for the quarter ended March 31, 2002 decreased $270,000
or 30.3% to $622,000 from $892,000 for the same period last year. The
decrease in revenue resulted primarily from:
* The sales of managed franchises stores decreased $160,000 to
$0 compared to $160,000 for the same period last year. This
was primarily the result of the sale of all corporate stores
and the discontinuance of managed stores.
* Royalty revenue increased $34,000 or 10.6% to $414,000
compared to $383,000 for the same period last year.
* Supplier incentives decreased $123,000 or 48.3% to $134,000
compared to $257,000 for the same period last year.
* Franchising increased $14,000 or 69.8% to $32,000 compared to
$42,000 for the same period last year.
* Proprietary products revenues decreased $2,000 or 2.2% to
$100,000 from $102,000 for the same period last year.
Expenses for the quarter ended March 31, 2002 decreased $227,000 or
27.0% to $613,000 from $840,000 for the same period last year. The
decrease in expenses relate to the following:
* Cost associated with managed franchised stores decreased
$199,000 to $0 compared to $199,000 due to the sale of all
corporate stores and the discontinuance of managed stores.
* Head Office and Administration cost increased $10,000 or 2.8%
to $372,000 from $362,000 for the same period last year.
* The cost of purchasing certain proprietary products for resale
to distributors decreased $10,000 or 10.5% to $85,000 from
$95,000 for the same period last year.
* Depreciation and amortization decreased $12,000 or 8.2% to
$134,000 from $146,000 for the same period last year.
* Interest expense decreased $4,000 or15.1% to $21,000 from
$25,000 for the same period last year.
20
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2002
(EXPRESSED IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH 31, 2001
(CONT'D)
* Net income for the quarter ended March 31, 2002 was $10,000
compared to a net income of $54,000 for the same period last
year.
WORKING CAPITAL
The working capital at the end of the period was $111,000 compared to a
working capital of $245,000 for the same period last year.
LIQUIDITY AND CASH FLOW
During the quarter the operating outflow was $106,000 compared to an
inflow of $148,000 for the same quarter of the last fiscal year. This
is the result of a decrease in non-cash operating working capital
items.
21
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2002
(EXPRESSED IN 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 Holders - None
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K - None
22
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2002
(EXPRESSED IN 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 June 10, 2002
--------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ JOHN A. DEKNATEL June 10, 2002
--------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ FRANCOIS TURCOT June 10, 2002
-------------------------------------
Francois Turcot, Director of Finance
23