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TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Nine Months Ended March 31, 1996)
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, 1996 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
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, 1996
INDEX
PAGE
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, March 31, 1996 1
Statement of Income - March 31, 1996 2
Statement of Cash Flows, March 31, 1996 3
Statement of Stockholder's Equity 4
Notes to Financial Statements 5 to 17
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 18 to 20
PART 11 Other Information - Items 1 to 6 21 to 22
Signatures 23
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
MARCH 31 JUNE 30 MARCH 31 JUNE 30
NOTE 1996 1995 1995 1994
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
CURRENT ASSETS
Bank --- 59,764 --- 243,004
Accounts Receivable 759,168 461,650 703,917 261,672
Prepaid Expenses 174,194 186,839 131,814 130,191
Construction work in process 966,595 58,725 156,666 72,014
Current portion of notes receivable 317,944 302,502 288,523 283,607
---------- ---------- ---------- ----------
2,217,901 1,069,480 1,280,920 990,488
BAKERIES HELD FOR RESALE 425,374 546,214 622,868 468,297
NOTES RECEIVABLE 3 247,939 338,136 262,564 330,366
CAPITAL ASSETS 4 296,182 268,293 230,240 209,501
ADVERTISING COMMITMENT 45,221 66,770 87,264 117,886
DEFERRED EMPORIUM COSTS 121,766 162,355 --- ---
FRANCHISE RIGHTS 5 10,451,976 10,983,567 11,160,058 11,691,641
DEFERRED COSTS --- --- 18,050 ---
---------- ---------- ---------- ----------
13,806,359 13,434,815 13,661,964 13,808,179
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
CURRENT LIABILITIES
Bank indebtedness 149,703 --- 73,628 ---
Accounts payable and accrued liabilities 1,635,616 1,520,307 1,701,501 1,665,582
Current portion of long-term debt 390,264 733,500 816,160 590,924
---------- ---------- ---------- ----------
2,175,583 2,253,807 2,591,289 2,256,506
LEASE SECURITY DEPOSITS 251,561 221,589 237,776 219,306
LONG-TERM DEBT 6 2,049,647 1,517,924 1,348,384 1,903,475
DEFERRED REVENUE 18,954 18,079 116,227 112,486
---------- ---------- ---------- ----------
2,320,162 1,757,592 1,702,387 2,235,267
NON-CONTROLLING INTEREST 8 232,000 232,000 232,000 232,000
---------- ---------- ---------- ----------
4,727,745 4,243,399 4,525,676 4,723,773
---------- ---------- ---------- ----------
CONTINGENCIES 9
STOCKHOLDERS EQUITY
CAPITAL STOCK 10
Preferred:
Authorized - 10,000,000 non-voting, cumulative shares,
dividends at US $.04 per share, redeemable at option
of company at US $1.00 per share par value US $.50 3,732,779 3,732,779 3,732,779 3,732,779
Common:
Authorized - 33,333,333 shares par value US $0.001
Issued - 19,024,599 common shares 19,025 20,742 20,742 20,742
Additional paid - in capital 10,555,028 10,555,028 10,555,028 10,555,028
---------- ---------- ---------- ----------
14,306,832 14,308,549 14,308,549 14,308,549
---------- ---------- ---------- ----------
Deficit (5,228,218) (5,117,133) (5,172,261) (5,224,143)
---------- ---------- ---------- ----------
Total stockholders' Equity 9,078,614 9,191,416 9,136,288 9,084,406
---------- ---------- ---------- ----------
13,806,359 13,434,815 13,661,964 13,808,179
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE THREE QUARTERS ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
NOTE 1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
REVENUES
Royalties 464,558 505,993 1,443,587 1,563,021
Franchising 203 22,458 68,403 157,161
Supplier Incentives, Commissions & Other 303,913 294,900 850,737 791,397
Sales of managed bakeries 608,199 310,991 1,839,124 1,087,875
Paper product sales 145,530 N/A 200,232 N/A
---------- ---------- ---------- ----------
1,522,403 1,134,342 4,402,083 3,599,454
COST AND EXPENSES
Regional operations 140,309 121,106 422,587 333,941
Franchising 32,598 45,237 86,358 122,994
Head office and administration 441,568 377,079 1,160,449 1,132,432
Managed bakeries 607,853 348,791 1,836,408 1,162,963
Interest expense 68,490 70,814 190,072 204,273
Depreciation and Amortization 216,578 198,378 641,102 590,969
Paper products 127,951 N/A 176,192 N/A
---------- ---------- ---------- ----------
1,635,347 1,161,405 4,513,168 3,547,572
---------- ---------- ---------- ----------
(112,944) (27,063) (111,085) 51,882
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per share
(0.01) (0.00) (0.01) 0.00
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
2
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE THREE QUARTERS ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
$ $ $ $
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) (112,944) (27,063) (111,085) 51,882
Items not affecting cash
Depreciation 39,383 21,183 109,517 59,384
Amortization 177,195 177,195 531,585 531,585
Interest expense related to annual accretion 18,750 18,750 56,250 56,250
Changes in operating working capital items (130,302) (79,657) (1,078,613) (647,183)
--------- -------- ----------- ---------
( 7,918) 110,408 (492,346) 51,918
--------- -------- --------- -------
FINANCING
Bank Indebtedness 149,703 73,628 224,703 73,628
Repayment of long - term debt (42,078) (169,519) 132,237 (386,105)
--------- --------- -------- ---------
107,625 ( 95,891) 356,940 (312,477)
--------- --------- -------- ---------
INVESTING
Issue of notes receivable, net of repayments 2,090 6,500 74,755 62,887
Purchase of property and equipment (87,247) (7,747) (96,811) (81,616)
Deferred issue cost --- (7,083) --- (16,550)
Advertising commitment 7,872 14,141 21,549 30,623
Security deposits 3,550 3,830 29,972 18,470
Bakeries held for resale (25,972) (31,303) 46,177 3,741
-------- -------- -------- ---------
(99,707) (21,662) 75,642 17,555
-------- -------- -------- ---------
NET GENERATED CASH (OUTFLOW) 0 (7,145) (59,764) (243,004)
CASH POSITION, BEGINNING OF PERIOD 0 7,145 59,764 243,004
-------- -------- -------- ---------
CASH POSITION, END OF PERIOD 0 0 0 0
-------- -------- -------- ---------
-------- -------- -------- ---------
3
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE QUARTERS ENDED MARCH 31, 1996 AND THE YEARS
ENDED JUNE 30, 1995, 1994, 1993, 1992
Redeemable, Convertible - - - - - - Common Shares - - - - -
Preferred Shares 1 for 3 Deficit
Shares Amount Shares Amount Reverse split
- ------------------------------------------------------------------------------------------------------------------------------------
$ $ $
Balance June 30, 1992 --- --- 39,552,796 8,428,695 13,184,265 (5,469,687)
Issue for cash --- --- 100,000 373,920 33,333 ---
Warrants exercised --- --- 13,890,000 1,823,063 4,630,000 ---
Warrants exercised --- --- 1,959,868 180,579 653,289 ---
Share issue costs --- --- --- (1,013,075) --- ---
Net income for the year --- --- --- --- --- 58,112
------------------------------------------------------------------------------------
Balance June 30, 1993 --- --- 55,502,664 9,793,182 18,500,888 (5,411,575)
Dividend declared on special shares
Conversion of accrued dividend
to common shares --- --- --- 894,108 1,619,760 ---
Conversion of subordinated debenture
to preferred shares 5,409,825 3,732,779
Warrants exercised --- --- --- 270,077 621,295 ---
Share issue costs --- --- --- (381,597) --- ---
Net income for the year --- --- --- --- --- 187,432
------------------------------------------------------------------------------------
Balance June 30, 1994 5,409,825 3,732,779 55,502,664 10,575,770 20,741,943 (5,224,143)
Net income for the year --- --- --- --- --- 107,010
------------------------------------------------------------------------------------
Balance June 30, 1995 5,409,825 3,732,779 55,502,664 10,575,770 20,741,943 (5,117,133)
Issue for cash - Sept 30/95 --- --- --- 350 350,000 ---
Shares cancelled - returned to treasury --- --- --- (2,067) (2,067,344) ---
Net loss for the period --- --- --- --- --- (111,085)
------------------------------------------------------------------------------------
Balance March 31, 1996 5,409,825 3,732,779 55,502,664 10,574,053 19,024,599 (5,228,218)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
4
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
These consolidated financial statements comprise the accounts of the
Company and its wholly - owned subsidiaries. All intercompany transactions
and balances have been eliminated in these consolidated financial
statements, which include the accounts of the Company and its subsidiaries
from the date of acquisition as follows:
- Treats Inc.
- Treats Ontario Inc.
- Chocolate Gourmet Treats Limited
- Accounting & Consulting Inc.
- Treats International Inc.
- Triadon Investment Group Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (which also conform in
all material respects with generally accepted accounting principles in the
United States) and include the following significant accounting policies:
REVENUE RECOGNITION
Franchise revenue arises on the sale of national, area and restaurant
franchises. Restaurant franchise revenue is recognized as income when the
respective purchase and sale agreements have been signed, the funds have
been received, all material conditions relating to the sale have been
substantially completed by the Company and the restaurant 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.
5
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION (CONT'D)
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 collectability. 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 the apply.
RESTAURANTS HELD FOR RESALE
Restaurants held for resale are valued at the lower of cost and net
realizable value.
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:
Furniture and fixtures - 5 years straight-line
Machinery and equipment - 5 years straight-line
Reference books - 5 years straight-line
FRANCHISE RIGHTS
Franchise rights are being carried at cost less accumulated amortization.
Amortization is provided for on the straight-line basis over 20 years.
6
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
March June
1996 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
DEFERRED ISSUE COSTS
Deferred issue costs represent fees incurred in connection with the
preparation of regulatory filings for the issue of capital stock. These
costs are charged to capital stock in the period the stock is issued.
DEFERRED EMPORIUM COSTS
As the project the Coffee Emporium was substantially completed as at June
30, 1995, the costs are being amortized on a straight-line basis over three
years commencing July 1, 1995.
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are translated using the temporal method.
Under this method, monetary assets and liabilities as well as non-monetary
items carried at market value are translated at year-end exchange rates.
Other non-monetary assets and liabilities are translated at exchange rates
prevailing at the transaction dates. Revenues and expenses are translated
at average rates prevailing during the year.
Gains or losses resulting from exchange translation are included in income.
EARNINGS PER SHARE
Net earnings per share are calculated using the daily weighted average
number of common shares outstanding during the fiscal year plus the net
additional number of shares which would be issuable upon the exercise of
stock options, assuming that the Company used the proceeds received to
purchase additional shares at market value.
3. NOTES RECEIVABLE
Notes receivable are due from franchisees with interest at varying rates
and repayable in scheduled instalments.
$ $
Notes receivable, net of allowance
for doubtful accounts of Nil (1994 - nil) 565,883 640,632
Less current portion (317,944) (302,499)
--------- ---------
247,939 338,133
--------- ---------
--------- ---------
7
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
March June
1996 1995
4. CAPITAL ASSETS ACCUMULATED
COST AMORTIZATION -- NET BOOK VALUE --
$ $ $ $
Furniture and fixtures 198,370 195,720 2,650 5,356
Machinery and equipment 472,021 247,364 224,657 253,766
Reference books 25,966 18,484 7,482 9,167
-------- -------- -------- -------
696,357 461,568 234,789 268,289
5. ADVERTISING COMMITMENT
The Company receives prescribed amounts from franchisees to fund and
develop advertising and promotion campaigns regionally and nationally. The
funds collected, net of costs incurred, are recorded as a liability for
future advertising and promotion. During fiscal 1995 advertising costs
incurred exceeded funds collected. The funds are expected to be received
within the next fiscal year.
6. FRANCHISE RIGHTS
$ $
Franchise rights 14,177,565 14,177,565
Accumulated amortization (3,725,589) (3,194,004)
----------- -----------
10,451,976 10,983,561
---------- ----------
---------- ----------
As part of the stock-issue and restructuring on June 30, 1994, the Company
acquired the minority interest of Treats Inc. Franchise rights include
$894,108 representing the excess consideration paid over the stated value
of the shares.
8
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
March June
1996 1995
- ---------------------------------------------------------------------------------------------------------
7. LONG - TERM DEBT $ $
Standard Chartered Bank of Canada term loan, repayable in
increasing monthly instalments plus interest at prime plus
2.5%, due January 1, 1996, secured by a general security
agreement, general assignment of book debts and franchise
rights, pledge of all the shares in subsidiary and
associated companies. --- 673,500
3193853 Canada Inc. term loan, repayable in 66 monthly instalments
of $10,000 plus interest at prime plus 2.5%, secured
by a general security agreement, general assignment of book
debts and franchise rights, pledge of all the shares in
subsidiary and associated companies. 646,000 ---
Royal Bank of Canada Subordinate debenture, bearing interest
at 8% per annum, payable in 70 monthly installments 1,110,812 925,000
(See Note 14) Subsequent Event
Bank Development of Canada term loan, repayable in 50 monthly
installments of $2,000 plus interest at prime plus 4.0% 100,000 ---
Other long-term debt, non-interest bearing, without specific
terms of repayment 583,099 652,927
--------- ---------
2,439,911 2,251,427
Less current portion (390,264) (733,500)
--------- ---------
2,049,647 1,517,927
--------- ---------
--------- ---------
Interest expense for the year to date related to long-term debt was
$190,072. (1995 - $204,273).
9
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
March June
1996 1995
7. LONG - TERM DEBT (CONT'D) $ $
The minimum future principle repayments required over the next five years
are as follows:
$
1996 390,264
1997 340,000
1998 340,000
1999 400,000
2000 + 969,647
---------
2,439,911
---------
---------
8. NON-CONTROLLING INTEREST IN SUBSIDIARIES
200,000 authorized and issued preferred
shares of Treats International Inc. 232,000 232,000
--------------------
--------------------
The preferred shares of Treats International Inc., a U.S. subsidiary, were
issued during the 1991 fiscal year in connection with the acquisition of
the U.S. franchise rights. The preferred shares are convertible into 5% of
the common shares of Treats International Inc. on a fully diluted basis at
any time prior to November 2, 1995. Treats International Inc. may redeem
the preferred shares for U.S. $250,000 any time after November 2, 1992.
10
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
9. COMMITMENTS AND CONTINGENCIES
(a) The Company is a defendant in the following civil litigation:
( i) Triadon Investment Group Inc., a subsidiary company, was named
in an action by a bank and judgement was awarded against the
subsidiary for $119,353. As the subsidiary company is inactive
and without assets, no provision has been recorded in respect
of this judgement.
(ii) The Company is also a defendant in several actions arising in
the normal course of business, the final outcome of which
cannot be determined at this time. An aggregate provision of
approximately $378,740 has been recorded.
Any settlement in regard of the above actions in excess of amounts provided
will be recorded in the statement of income in the fiscal year the
settlement occurs.
(b) Certain franchised restaurants occupy their premises under lease
arrangements wherein the Company is primarily responsible for
performance under the lease. These leases are assigned to the
franchisee, who becomes directly responsible for the contractual
obligations under the lease. The aggregate rental obligations under
these leases and various leases for office space over the next five
years are as follows:
LEASES ASSIGNED LEASES
TO RESTAURANTS ASSIGNED TO LEASES FOR
HELD FOR RESALE FRANCHISEES OFFICE SPACE
$ $ $
1996 287,048 3,419,557 96,175
1997 242,498 2,990,445 96,174
1998 196,913 2,416,493 96,174
1999 180,599 1,914,607 96,174
2000 180,599 1,914,607 32,058
11
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
10. CAPITAL STOCK
REVERSE STOCK SPLIT - JUNE 10, 1993
On June 10, 1993, by consent of the holders of the majority of the
outstanding shares of the common stock, the Company filed an amendment to
its Certificate of Incorporation to reverse split the common stock, 1 for 3
effective June 21, 1993.
STOCK ISSUE - SEPTEMBER 30, 1992
On September 30, 1992 the Company issued 33,333 common shares for cash
consideration of $373,920 (U.S. $300,000). This equity was provided by
Austin Bernet, Inc., a related party at that time.
STOCK ISSUE - FEBRUARY 5, 1993
On February 5, 1993, Treats International Enterprises, Inc. concluded a
private sale transaction with Austin Bernet Inc. and other entities which
may be affiliated with the latter, pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These holders of 2,315,000 Class A
warrants and 2,315,000 Class B warrants (issued with the initial public
offering), exercised those warrants for a cash consideration of $1,823,063.
On the close of business February 5, 1993 unexercised warrants expired.
The above private sale allowed all Class A warrant holders to exercise
their Class A warrants at $0.27 for one share of the Company's common stock
and all Class B warrant holders to exercise their Class B warrants at $0.36
for one share of the Company's common stock. This resulted in the issue of
4,630,000 common shares for net proceed of $1,823,063 (U.S.$1,458,450).
Each share bears a restrictive legend prohibiting the resale of the share
of common stock, except where the resale is pursuant to the registration
under the Securities Act or an applicable exemption therefrom: such as,
compliance with the requirements of Rule 144 promulgated by the Securities
Exchange Commission under the U.S. Securities Act.
These same shares were sold on June 10, 1994 by Austin Bernet Inc. to a
company controlled by the President and Chief Executive Officer.
12
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
10. CAPITAL STOCK (CONT'D)
STOCK ISSUE - JUNE 8, 1993
On June 8, 1993 the following shares were issued to Tricapital Management
Limited from reserved shares:
NO. OF SHARES
-------------
Common shares with a fair value of U.S. $29,764 were issued
at nominal cost of U.S. $1 as part of the Tricapital success
fees related to the February 5, 1993 warrant exercise. 94,490
171,300 shares were issued pursuant to the Tricapital interim
financing agreement as follows:
January 31, 1992 1% of 12,500,000
acquisition of @ U.S. $0.20
Treats Inc. 125,000
February 5, 1993 1% of 4,630,000
warrant exercise @ U.S. $0.20 46,300
In addition, 387,500 common shares were issued for fair
value of U.S. $77,539 and nominal consideration of U.S. $1
pursuant to the Tricapital interim financing agreement of
January 31, 1992. The agreement called for 1 share to be
issued for every $1 of debt outstanding July 3, 1992 when
the Tricapital loan became subordinated to the RBCC debenture. 387,500
-------
Total shares issued 653,290
-------
-------
Total fair value consideration recorded is U.S. $141,579.
13
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
10. CAPITAL STOCK (CONT'D)
RESERVED SHARES - JUNE 30, 1993
In connection with the January 31, 1992 acquisition of Treats Inc., the
following was reserved for Tricapital Management Limited.
CONSIDERATION NO. OF SHARES
------------- -------------
(U.S.)
Share purchase warrants at U.S. $.315
expiring January 31, 1995 $142,811 453,368
In connection with the February 5, 1993
warrant exercise, shares were reserved for
Tricapital Management Limited $ 52,897 167,927
----------- -------
$195,708 621,295
----------- -------
----------- -------
In connection with the January 31, 1992 acquisition of Treats Inc., 333,333
common share purchase warrants (for U.S. $.45 expired February 15, 1994)
were allotted to Tricapital Management Limited. These warrants were
allowed to expire.
On June 30, 1994 Tricapital Management Limited exercised its warrants
expiring January 31, 1995, and its warrants reserved in connection with the
February 5, 1993 warrant exercise for a total of 621,295 common shares for
consideration of $270,077 (U.S.$195,708). All other warrants expired.
14
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
10. CAPITAL STOCK (CONT'D)
STOCK ISSUE - DEBT RESTRUCTURING - JUNE 30, 1994
The Company concluded its negotiations under a private placement offering
to restructure its debt and capital, effective June 30, 1994, as follows:
Royal bank of Canada, in consideration for retiring the outstanding
debenture of $4,732,779, issued a subordinated debenture of $1,000,000
adjusted for $150,000 accretion to $850,000 (see note 7) and was issued
5,409,825 non-voting series A preference shares for the balance. These
shares are redeemable at the option of the Company at a price of U.S. $1
per share at any time. The shares carry a cumulative 5.5% cash dividend
payable quarterly in arrears. At the option of the holder the dividend may
be paid in the form of common shares of the Company. The shares are
convertible at the option of the holder at U.S. $.60 per share unless a new
investor invests a minimum of U.S. $4 million in common equity prior to
June 30, 1995, where the conversion price will be equal to the price set by
the new investor. In the event that the debenture is repaid in full prior
to August 31, 1995 and 50% of the preferred shares are redeemed by the
Company by August 31, 1995, then the issuer can cause the Royal Bank of
Canada to convert the remaining series A preference shares into common
shares.
SPECIAL SHARES CONVERTED TO COMMON SHARES
As part of the restructuring, effective June 30, 1994, the 4,500,000
special shares of Treats Inc. held by the Royal Bank of Canada were
accreted back to the $45 aggregate issue price. The Royal Bank of Canada
converted its special shares into 1,619,760 common shares of the Company.
RESERVED SHARES
The Company has issued 350,000 common shares pursuant to the debt
restructuring on June 30, 1994. The Royal Bank Capital Corporation
received an additional 350,000 common shares at nominal consideration as
the Company has been unsuccessful in raising U.S. $4 million in new equity
by June 30, 1995.
15
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
11. RELATED PARTY TRANSACTIONS
(a) The Royal Bank of Canada and its subsidiary, Royal Bank Capital
Corporation, are registered holders of 34.1% of the issued stock. As part
of the restructuring effective June 30, 1994 (see note 7) the Royal Bank
of Canada converted its existing subordinated debenture into preference
shares and issued a debenture (see note 7). The carrying value of the
debenture was discounted to reflect the relative fair value of the debt and
the shares. The discount of $150,000 is being amortized on a straight-line
basis over the life of the debt and results in an annual charge to interest
expense of $75,000.00.
Undeclared dividends on the preferred shares owned by the Royal Bank July
1, 1994 to March 31, 1996 are $359,280.
(b) Interest expense related to the previous debenture referred to in (a) was
$18,750 for the quarter (1994 - $18,750).
(c) Accounts and notes receivable include $45,374 (1994 - $43,591) due from a
franchisee related to the President and Chief Executive Officer of the
Company.
(d) The Company leases its office premises at an annual cost of approximately
$100,000 from a company which is 100% owned by the family of the President.
The family owns approximately 34% of the common stock of the Company.
(e) The Company has advanced $160,000 to certain officers, under a loan
agreement, to fund the purchase of company stock.
(f) During the year the term debt owed to the Standard Chartered Bank was
acquired by a company owned by a group of private investors. A person
related to the President and Chief Executive Officer of the Company is
associated with the investor group.
16
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as at March 31, 1996
(Canadian dollars)
March June
1996 1995
---------- ----------
12. INCOME TAXES
Income taxes have not been provided for as the consolidated group of
companies have tax losses of $3,916,774 available to offset taxable income.
These losses expire as follows:
1997 47,998
1998 2,097,008
1999 910,753
2000 799,837
2001 1,178
---------
3,916,774
---------
---------
13. EARNINGS PER SHARE
Primary earnings (loss) per share 0.00 0.00
---------- ----------
Weighted average number of
shares outstanding 19,024,599 20,741,943
---------- ----------
---------- ----------
The calculation of fully diluted earnings per 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. The calculation
includes an allowance for imputed earnings derived from the investment of
funds which are assumed to have been received. Fully diluted earnings per
share are not presented as they are anti-dilutive.
17
TREATS INTERNATIONAL ENTERPRISES, INC.
March 31, 1996
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
The retail sales for all units in the franchise system, for the nine months
ended March 31, 1996, were $23,262,000 compared to $23,660,000 for the same nine
month period last year.
During the nine months, eleven units were closed and eleven units were opened.
Total revenue increased $242,531, or 21.4%, for the three months ended March 31,
1996, to $1,522,403 compared to $1,134,342 for the same period last year. Total
revenues, year to date, increased 16.7%, compared to the same nine month period
last year, to $4,402,083.
Managed retail operations increased during the period and account for the
majority of the revenue increase. Management is striving to refranchise these
units and a resultant decline in revenues will be incurred in the next fiscal
year. The revenues generated by managed retail operations increased $297,208,
or 95.6%, to $608,199, for the quarter ended March 31, 1996, compared to
$310,991 for the same quarter last year. Revenue from managed restaurants for
the nine months, year to date, increased $751,249, or 69.1%, to $1,839,124 over
the same period last year. The number of managed stores fluctuated between 12
to 13, in the current year, compared to 8 to 16 units last year.
Franchising revenues, for the three months ended March 31, 1996, decreased
($22,255), or (99.1%), over the same quarter last year to $203. This activity
has brought the year to date franchising revenues to $68,403, for the nine
months ended March 31, 1996, compared to $157,161 last year. This decline in
franchising activity is a direct result of restrictions on marketing resulting
from the cash flow limitations. The restructuring of our term debt in the
fiscal period, just completed, will allow for increased effort in the franchise
marketing department.
Royalty revenues, for the three months, decreased ($41,435) or (8.2%), over the
same quarter last year, to $464,558. Year to date royalties declined
($119,434), or (7.6%), at $1,443,587 compared to $1,563,021 for the same nine
months last year.
Revenue from supplier incentives, commissions and other increased $9,013, or
3.1%, to $303,913, for the quarter ended March 31, 1996, compared to $294,900
for the same quarter last year. Overall, for the year to date, supplier
incentives, commissions and other revenues are $59,340, or 7.5%, at $850,737
compared to $791,397 for the same nine months of last fiscal year.
18
TREATS INTERNATIONAL ENTERPRISES, INC.
March 31, 1996
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
Total costs and expenses, for the quarter ended March 31, 1996, were $1,635,347
compared to $1,161,405 for the same period last year. This is a net increase of
$473,942, or 40.8%, compared to the third quarter of last fiscal year. Overall,
the total cost for the nine months ended March 31, 1996, were $4,513,168
compared to $3,547,572 for the same period last year. This increase was
$965,576 or 27.2%. The increase in cost is detailed as follows:
- - The major contribution to the cost increase is associated with the managed
retail units. Costs have increased proportionately with the increase in
managed units. The cost for the third quarter, ended March 31, 1996, were
$607,853 compared to $348,791 for the same quarter last year. The nine
month period costs were $1,836,408 compared to $1,162,963 for the same nine
months of last fiscal year. This was a $673,445 increase, or 57.9% for
the operation year to date.
- - Franchising costs were $(12,639) less for the quarter and $(36,636) less in
comparison to the same nine months last year.
- - Head office expenses increased slightly in the quarter ended March 31, 1996
and year to date, they have been held to a $28,017, or 2.5%, increase for
the 9 months ended March 31, 1996 compared to the same nine months last
fiscal year.
- - Interest expense, for the three months ended March 31, 1996, was ($2,324),
or (3.3%), less than for the same quarter last year. The year to date
interest charges are $(14,201), or (7.0%), less than last year nine month
charges.
WORKING CAPITAL
The working capital at the end of the period was $42,318 compared to a working
capital deficit of $1,184,327 at June 30, 1995. This improvement of $1,226,645
in the working capital during the year was achieved through cash flow from
operations and negotiations with the Company's major lendors.
During the year the term debt owed to the Standard Chartered Bank was acquired
by a company owned by a group of private investors. A person related to the
President and Chief Executive Officer of the Company is associated with the
investor group.
Also the Company completed an agreement with the Royal Bank of Canada to
reschedule the payment of its debenture. The debenture was due October 31,
1996. The bank has agreed to reschedule the debt payments and accrued interest.
19
TREATS INTERNATIONAL ENTERPRISES, INC.
March 31, 1996
LIQUIDITY AND CASH FLOW
During the quarter the operating cash outflow was ($7,918) compared to an
outflow of $(492,346) for the same quarter of the last fiscal year.
On March 02, 1996, the Company arranged new banking facilities with the Bank of
Nova Scotia which provides for a $150,000.00 line of credit in conjunction with
a term loan granted by the Federal Business Development Bank of Canada of
$100,000.00.
These new facilities when combined with the restructure of payment terms with
the Royal Bank and the term loan of the private investor group has given the
Company a positive working capital which places the future of the Company in a
more stable financial position. The Company has not paid all the principal or
interest payments due to the lenders since restructuring in October 1995. The
lenders continue to support management in their endeavour to raise further
equity.
The Company's business development continues to be restricted by lack of working
capital. Management is endeavouring to raise adequate new equity to provide the
funds necessary to increase marketing efforts.
To achieve this end Treats International Enterprises, Inc. and the President and
Chief Executive Officer of Treats International Enterprises, Inc., Mr. Paul J.
Gibson, and the Royal Bank Capital Corporation, a wholly owned subsidiary of the
Royal Bank of Canada, have on April 25, 1996 entered into a "Buy/Sell" agreement
based on the following parameters:
The Royal Bank of Canada and the Royal Bank Capital Corporation have agreed to
provide Treats International Enterprises, Inc. with an option to acquire for
cash consideration:
- 5,607,760 of the 7,207,760 Common Shares in Treats International
Enterprises, Inc. it holds.
- 5,409,825 (100%) of the non-voting series "A" Preference Shares it
holds.
- A C$1.135 million Subordinated Debenture.
In the event this transaction closes, the number of issued and outstanding
Common Shares of the Company will reduce from 19,024,599 to 13,416,839. The
holdings of the Royal Bank of Canada and the Royal Bank Capital Corporation in
Treats International Enterprises, Inc. will reduce from 37.9% to 11.9%.
In the event Treats International Enterprises, Inc. does not exercise its option
on or before June 24, 1996, the Royal Bank Capital Corporation has agreed to
acquire all of Mr. Paul J. Gibson and his immediate family's Common Share
holdings (6,196,348 Common Shares) in Treats International Enterprises, Inc.
20
TREATS INTERNATIONAL ENTERPRISES, INC.
March 31, 1996
PART 11 OTHER INFORMATION
Item 1 Legal Proceedings - See notes to Financial Statements
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Securities Holders - None
Item 5 Other Information
JANUARY 4, 1996 - SHARES HELD BY TRICAPITAL MANAGEMENT LIMITED
("TRICAPITAL") IN TREATS INTERNATIONAL ENTERPRISES, INC.
("TREATS") WERE RETURNED TO TREASURY.
The Board of Directors instructed its Transfer Agent of record,
to cancel the 2,067,344 common shares held by Tricapital and
return them to treasury.
FEBRUARY 1996 - ROYAL BANK CAPITAL CORPORATION PAYMENT SCHEDULE
RESTRUCTURED
The Company completed an agreement with the Royal Bank of Canada
to reschedule the payment of its debenture. The debenture was
due October 31, 1996. The bank has agreed to reschedule the debt
payments and accrued interest over a 5 year period.
ON MARCH 02, 1996, the Company completed arrangements with the
Federal Business Development Bank of Canada (FBDB) for a 5 year
term loan of $100,000.00 as a working capital top up loan in
conjunction with a line of credit of $150,000.00 from the Bank of
Nova Scotia. The Bank of Nova Scotia has priority over all
lenders but the Federal Business Development Bank loan is
subordinate to the other term loans and debentures.
21
TREATS INTERNATIONAL ENTERPRISES, INC.
March 31, 1996
PART 11 OTHER INFORMATION - ITEM 5 CONT'D
ON APRIL 25, 1996, Treats International Enterprises, Inc. and the
President and Chief Executive Officer of Treats International
Enterprises, Inc., Mr. Paul J. Gibson, and the Royal Bank Capital
Corporation, a wholly owned subsidiary of the Royal Bank of
Canada, entered into a "Buy/Sell" agreement based on the
following parameters:
The Royal Bank of Canada and the Royal Bank Capital Corporation
have agreed to provide Treats International Enterprises, Inc.
with an option to acquire for cash consideration:
- 5,607,760 of the 7,207,760 Common Shares in Treats
International Enterprises, Inc. it holds.
- 5,409,825 (100%) of the non-voting series "A" Preference
Shares it holds.
- A C$1.135 million Subordinated Debenture.
In the event this transaction closes, the number of issued and
outstanding Common Shares of the Company will reduce from
19,024,599 to 13,416,839. The holdings of the Royal Bank of
Canada and the Royal Bank Capital Corporation in Treats
International Enterprises, Inc. will reduce from 37.9% to 11.9%.
In the event Treats International Enterprises, Inc. does not
exercise its option on or before June 24, 1996, the Royal Bank
Capital Corporation has agreed to acquire all of Mr. Paul J.
Gibson and his immediate family's Common Share holdings
(6,196,348 Common Shares) in Treats International Enterprises,
Inc.
Item 6 Exhibits and Reports on Form 8-K - None
22
TREATS INTERNATIONAL ENTERPRISES, INC.
March 31, 1996
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 9 months ended March 31, 1996.
The result of operation for the period ended March 31, 1996 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 Gibson
----------------------------------
Paul Gibson, Chief Executive Officer
By: /s/ John Deknatel
----------------------------------
John Deknatel, Chief Operating Officer
By: /s/ David M. Dean
----------------------------------
David M. Dean, Chief Financial Officer
Date: June 5/96
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23