TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
Three months ended December 31, 1996
INDEX
PAGE
----
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, December 31, 1996 2
Statement of Income - December 31, 1996 3
Statement of Cash Flows, December 31, 1996 4
Statement of Stockholder's Equity 5
Notes to Financial Statements 6 to 15
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 16-19
PART 11 Other Information - Items 1 to 6 20
Signatures 21
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
DECEMBER 31 JUNE 30 DECEMBER 31 JUNE 30
NOTE 1996 1996 1995 1995
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -------------------------------------------------------------------------------------------------------------------------
$ $ $ $
ASSETS
CURRENT ASSETS
Bank --- --- --- 59,764
Accounts Receivable 595,847 384,570 778,608 461,650
Prepaid Expenses 99,677 206,826 255,268 186,839
Construction work in process 151,401 352,198 678,033 58,725
Current portion of Notes Receivable 252,743 312,633 330,757 302,502
---------- ---------- ---------- ----------
1,099,668 1,256,227 2,042,666 1,069,480
STORES HELD FOR RESALE 3,009 660,373 399,402 546,214
NOTES RECEIVABLE 3 998,588 892,517 237,216 338,136
CAPITAL ASSETS 4 652,184 193,836 234,789 268,293
ADVERTISING COMMITMENT --- 19,310 53,093 66,770
DEFERRED COSTS 505,860 228,113 135,295 162,355
FRANCHISE RIGHTS 5 9,920,391 10,274,780 10,629,171 10,983,567
---------- ---------- ---------- ----------
13,179,700 13,525,156 13,731,632 13,434,815
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 145,000 187,218 --- ---
Accounts payable and accrued liabilities 1,034,461 1,479,357 1,576,551 1,520,307
Current portion of Long-Term Debt 337,923 180,371 319,869 733,500
---------- ---------- ---------- ----------
1,517,384 1,846,946 1,896,420 2,253,807
LEASE SECURITY DEPOSITS 239,748 234,989 248,011 221,589
LONG-TERM DEBT 6 1,951,707 2,044,364 2,143,370 1,517,924
DEFERRED REVENUE --- --- 18,525 18,079
---------- ---------- ---------- ----------
2,191,455 2,279,353 2,409,906 1,757,592
NON-CONTROLLING INTEREST 8 --- --- 232,000 232,000
---------- ---------- ---------- ----------
3,708,839 4,126,299 4,538,326 4,243,399
---------- ---------- ---------- ----------
CONTINGENCIES 9
STOCKHOLDERS EQUITY
CAPITAL STOCK 10
Preferred: Authorized - 10,000,000 non-voting,
5.5% cash dividends payable quarterly in arrears,
redeemable at option of company at
US $1.00 per share par value US $.50
Issued - 5,409,825 preferred shares 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 19,025 21,092 20,742
Additional paid - in capital 10,757,739 10,757,739 10,555,028 10,555,028
---------- ---------- ---------- ----------
14,509,543 14,509,543 14,308,899 14,308,549
---------- ---------- ---------- ----------
Deficit (5,038,682) (5,110,686) (5,115,593) (5,117,133)
9,470,861 9,398,857 9,193,306 9,191,416
---------- ---------- ---------- ----------
13,179,700 13,525,156 13,731,632 13,434,815
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE SIX MONTH ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
NOTE 1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
REVENUES
Royalties 468,706 490,884 888,518 979,029
Franchising 2,747 7,125 18,720 68,200
Supplier Incentives, Commissions & Other 276,512 249,989 592,137 546,824
Sales of Corporately Managed Stores 72,302 682,875 178,844 1,230,925
Proprietary Products 166,031 54,702 271,363 54,702
------- --------- --------- ---------
986,298 1,485,575 1,949,582 2,879,680
------- --------- --------- ---------
COSTS AND EXPENSES
Franchising 3,638 31,307 20,817 53,760
Head Office and Administration 440,651 498,684 840,792 1,001,425
Corporately Managed Stores 46,328 647,157 161,832 1,228,555
Proprietary Products 132,122 48,294 228,789 48,294
------- --------- --------- ---------
622,739 1,225,442 1,252,230 2,332,034
------- --------- --------- ---------
E.B.I.T.D 363,559 260,133 697,352 547,646
Interest expense 38,161 62,258 78,043 121,582
Depreciation and Amortization 273,560 212,262 547,305 424,524
------- --------- --------- ---------
311,721 274,520 625,348 546,106
------- --------- --------- ---------
NET INCOME FOR THE PERIOD 51,838 (14,387) 72,004 1,540
------- --------- --------- ---------
Earnings per share 0.00 0.00 0.00 0.00
------- --------- --------- ---------
------- --------- --------- ---------
2
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE SIX MONTH ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
$ $ $ $
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 51,838 (14,387) 72,004 1,540
Items not affecting cash
Depreciation & Amortization 273,560 212,262 547,305 424,521
Interest expense related to annual accretion 0 18,750 0 37,500
Changes in non-cash operating working capital items (126,251) (591,160) (348,227) (948,101)
-------- ------- -------- -------
199,147 (374,535) 271,082 (484,540)
-------- ------- -------- -------
FINANCING
Bank Indebtedness (133,179) (1,361) (42,218) ---
Long - Term Debt (72,017) 155,710 64,895 174,315
-------- ------- -------- -------
(205,196) 154,349 22,677 174,315
-------- ------- -------- -------
INVESTING
Issue of Notes Receivable, net of repayments 18,788 109,358 (46,181) 72,666
Purchase of Capital & Other Assets (14,404) 1,864 (929,011) (9,561)
Advertising commitment 10,228 7,631 19,310 13,677
Security Deposits (5,554) (3,197) 4,759 26,422
Non-Controlling interest accretion 0 0 0 0
Corporately Managed Stores held for resale (3,009) 104,257 657,364 146,812
Deferred revenue 0 273 0 445
-------- ------- -------- -------
6,049 220,186 (293,759) 250,461
-------- ------- -------- -------
NET GENERATED CASH (OUTFLOW) 0 0 0 (59,764)
CASH POSITION, BEGINNING OF PERIOD 0 0 0 59,764
-------- ------- -------- -------
CASH POSITION, END OF PERIOD 0 0 0 0
-------- ------- -------- -------
-------- ------- -------- -------
3
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD ENDED DECEMBER 31, 1996 AND JUNE 30, 1996, 1995, 1994,1993
REDEEMABLE, CONVERTIBLE
---PREFERRED SHARES--- ---COMMON SHARES---
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
$ $ $
---------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1993 --- --- 18,500,887 9,793,182 (5,411,575) 4,381,607
Common shares issued on conversion 1,619,760 894,108 --- 894,108
of minority interest special shares
Conversion of Royal Bank of Canada 5,409,825 3,732,779 3,732,779
subordinated debenture to preferred shares
Warrants exercised --- --- 621,295 270,077 --- 270,077
Share issue costs --- --- --- (381,597) --- (381,597)
Net income for the year --- --- --- --- 187,432 187,432
---------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1994 5,409,825 3,732,779 20,741,942 10,575,770 (5,224,143) 9,084,406
Net income for the year --- --- --- --- 107,211 107,211
---------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1995 5,409,825 3,732,779 20,741,942 10,575,770 (5,116,932) 9,191,617
Common shares issued 350 350 350
Cancellation of common shares (2,067,344) (2,067) (2,067)
Share issue costs (29,289) (29,289)
Redemption of non-controlling interest
in subsidiary 232,000 232,000
Net income for the year --- --- --- --- 6,246 6,246
---------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1996 5,409,825 3,732,779 19,024,598 10,776,764 (5,110,686) 9,398,857
Net income for the period --- --- --- --- 72,004 72,004
---------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1996 5,409,825 3,732,779 19,024,598 10,776,764 (5,038,682) 9,470,861
---------- --------- ---------- ---------- ---------- ---------
---------- --------- ---------- ---------- ---------- ---------
4
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 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:
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.
5
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
REVENUE RECOGNITION
Franchise 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, the funds have
been received, all material conditions relating to the sale have been
substantially completed by the Company and the franchise store has
commenced operations. Revenue from national and area franchise
agreements is recognized when the area development agreement has been
signed and all substantial obligations of the Company have been
completed.
When payment for the sale of a national or area franchise is based on a
contract over a period longer than twelve months, the Company recognizes
revenue based on the assessment of collectibility. The total contract is
recorded as deferred revenue, and revenue recognition commences when
payments in excess of 25% of the total contract have been received and
management has ascertained that there is a sufficient level of certainty
that the balance of the contract is collectible.
Deposits that are non-refundable under the franchising agreement are
recognized as franchising revenue when received.
Royalties are recognized when they are earned, based on a percentage of
the franchisees' sales on a weekly basis.
Supplier incentives are recognized in the period to which the apply.
Sales of Corporately Managed Stores are recognized as they are
recorded.
Revenue from Proprietary products are recognized as they are recorded.
6
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FRANCHISE STORES HELD FOR RESALE
Franchise stores 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 a straight-line basis over
20 years.
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 DEVELOPMENT COSTS
Deferred development costs are amortized on a straight-line basis over
3 years.
DEFERRED EMPORIUM COSTS
The Coffee Emporium project was completed on June 30, 1996 and the
costs are being amortized on a straight-line basis over three years
commencing July 1, 1996.
7
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
DECEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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 (1996 - nil) 1,251,331 1,205,150
Less current portion (252,743) (312,633)
--------- ---------
998,588 982,517
--------- ---------
--------- ---------
8
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
DECEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
4. CAPITAL ASSETS
ACCUMULATED
COST AMORTIZATION -- NET BOOK VALUE --
Stores & Equipment $ 542,028. $ 47,468. $494,561. $ 0.
Furniture and fixtures 201,103. 198,252. 2,851. 237.
Machinery and equipment 476,937. 326,277. 150,660. 187,803.
Reference books 25,966. 21,856. 4,110. 5,796.
----------- --------- --------- ---------
$1,246,034. $593,853. $652,182. $193,836
----------- --------- --------- ---------
----------- --------- --------- ---------
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 1996 advertising
and promotion costs incurred exceeded funds collected.
6. FRANCHISE RIGHTS
$ $
Franchise rights 14,175,609 14,175,609
Accumulated amortization (4,255,218) (3,900,829)
---------- ----------
9,920,391 10,274,780
---------- ----------
---------- ----------
The company obtained an independent appraisal dated August 28, 1996
from Scott, Rankin, Gordon & Gardiner, Chartered Accountants.
substantiating a valuation of franchise rights in excess of $10,000,000 as
at June 30, 1996.
9
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
DECEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
7. LONG - TERM DEBT $ $
3193853 Canada Inc.
term loan, repayable in 66 monthly instalments
of $10,000 plus interest at prime plus 2.5% due
March 2001, secured by a general security
agreement, general assignment of book debts
and franchise rights, pledge of all the shares in
subsidiary and associated companies. 608,000 608,000
Royal Bank of Canada subordinate debenture,
bearing interest at 8%per annum, payable
in 60 monthly instalments, due June 30, 2001. 1,129,562 1,129,562
Business Development Bank of Canada
Term loan, repayable in 50 monthly instalments
of $2,001 plus interest at prime plus 4.0%, due
June 23, 2000. 86,000 96,000
Other long-term debt, non-interest bearing,
without specific terms of repayment. 451,188 391,173
--------- ---------
2,274,750 2,224,735
Less current portion (337,923) (180,371)
--------- ---------
1,936,827 2,044,364
--------- ---------
--------- ---------
10
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
DECEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
LONG-TERM DEBT (CONT'D)
Interest expense for the year to date related to long-term debt was
$78,043 (1995 - $121,582)
The minimum future principle repayments required over the next five
years are as follows:
$
1997 337,923
1998 447,424
1999 420,640
2000 492,125
2001 508,638
2002 68,000
---------
2,274,750
---------
---------
8. NON-CONTROLLING INTEREST IN SUBSIDIARY
$ $
200,000 authorized and issued preferred shares
of Treats International Inc. ---- ----
----- -----
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. On June
26, 1996 by resolution of the Board of Directors of Treats International
Inc., the 200,000 preferred shares of Treats International Inc. were
cancelled and returned to treasury. The shares were cancelled due to
non-compliance of agreements with the non-controlling stockholder.
11
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 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 the Royal Bank of Canada, the largest
common shareholder of the Company, 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. Any settlement in regard of
these actions will be recorded in the statements of income in the
fiscal year the settlement occurs.
(b) Certain franchise stores occupy their premises under lease
arrangements wherein the Company is primarily responsible for
performance 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 TO LEASES
FRANCHISE STORES ASSIGNED TO LEASES FOR
HELD FOR RESALE FRANCHISEES OFFICE SPACE
$ $ $
1997 70,313 3,260,086 96,174
1998 70,313 2,770,986 96,174
1999 54,000 2,260,763 96,174
2000 54,000 2,082,315 96,174
2001 --- 1,437,131 32,058
The total rental obligation subsequent to year 2001, based on current
leases assigned to franchisees amounts to $4,160,000.
12
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. CAPITAL STOCK
RESERVED SHARES - JUNE 30, 1994
On June 30, 1994 Tricapital Management Limited exercised its outstanding
warrants and reserved shares to acquire 621,295 common shares for
consideration of $270,077 (U.S. $195,708).
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 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 a price equal to the lower of the weighted
average trading price for TIEI for the previous 30 trading days using the
average exchange rate for the period and US$0.30 per share.
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.
ISSUANCE OF 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 was unsuccessful in raising U.S. $4 million in new equity by
June 30, 1995.
13
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. CAPITAL STOCK (CONT'D)
CANCELLATION OF COMMON SHARES - JANUARY 4, 1996
Pursuant to a resolution of the Board of Directors, the Transfer Agent
of record was instructed to cancel and return to treasury the 2,067,344
common shares held by Tricapital Management Limited. The shares were
originally issued pursuant to a debt restructuring with Tricapital
Management Limited. The restructuring did not proceed as outlined and
accordingly these shares were cancelled.
11. RELATED PARTY TRANSACTIONS
(a) The Royal Bank of Canada and its subsidiary, Royal Bank Capital
Corporation, are registered holders of 37.9% of the issued stock.
The Royal Bank of Canada holds a subordinated debenture (see note
7). Interest expense related to the debenture was $23,779 (1995 -
$19,945).
Undeclared dividends for July 1, 1994 to December 31, 1996 on the
preferred shares owned by the Royal Bank are $513,257.
(b) 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 32.6% of
the common stock of the Company.
(c) During the fiscal year ended June 30, 1995 under a loan agreement,
the Company has advanced $160,000 to certain officers to fund the
purchase of company stock.
(d) During the last fiscal year, the term debt owed to the Standard
Chartered Bank was acquired by 3193853 Canada Inc. the President of
which, is a family member of the Chief Executive Officer of the
Company.
14
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
DECEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
12. INCOME TAXES
Income taxes have not been provided for as the consolidated group of
companies have tax losses of $3,868,776 available to offset taxable income.
These losses expire as follows:
$
1998 2,097,008
1999 910,753
2000 799,837
2001 61,178
---------
3,868,776
---------
---------
13. EARNINGS PER SHARE
Primary earnings per share 0.00 0.00
---------- ----------
Weighted average number of
shares outstanding 19,996,498 20,741,942
---------- ----------
---------- ----------
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.
15
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The system-wide retail sales for the six months ended December 31,
1996 were $14,115,000 compared to $15,686,000 a decrease of $1,571,000 or
9.3% for the same six month period last year. The sales decline can be
attributed to a number of factors including the closure of several
locations due to non renewable lease agreements and to a public
transportation strike in the Ottawa region where the company has 27
franchised locations.
Royalty Revenue only declined by 4.5% as detailed in "Results of
Operations", below.
Management is encouraged by the result of its overhead reduction
measures resulting in a Net Income for the quarter ended December 31,
1996 of $51,838.00 compared to a loss of ($14,837.00) for the same
period last fiscal year. Management anticipates that this trend will
continue in the third and fourth quarters of this fiscal year ending
June 30, 1997.
16
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
RESULTS OF OPERATIONS
The following table sets fourth, for the periods indicated, certain
items from the consolidated statement of income, expressed as a percentage
of net sales:
SIX MONTHS ENDED DECEMBER 31
1996 1995
----------------------------
REVENUES
Royalties. . . . . . . . . . . . . . . . . . . . 45.6 34.0
Franchising. . . . . . . . . . . . . . . . . . . 1.0 2.4
Supplier Incentives, commissions & other . . . . 30.4 19.0
Proprietary products . . . . . . . . . . . . . . 13.9 1.9
Sales of Corporately managed stores. . . . . . . 9.2 42.7
--------------------
100.% 100.%
EXPENSES
Regional operations. . . . . . . . . . . . . . . (13.7) (9.8)
Franchising. . . . . . . . . . . . . . . . . . . (1.1) (1.9)
Head office and administration . . . . . . . . . (29.5) (25.0)
Proprietary products . . . . . . . . . . . . . . (11.6) (1.7)
Corporately Managed Stores . . . . . . . . . . . (8.3) (42.6)
--------------------
(64.2%) (81.0%)
--------------------
EBITDA . . . . . . . . . . . . . . . . . . . . . . . 35.8% 19.0%
--------------------
Interest expense . . . . . . . . . . . . . . . . . . (4.0) (4.2)
Depreciation and Amortization. . . . . . . . . . (28.1) (14.7)
--------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . 3.7% 0.1%
--------------------
--------------------
17
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
QUARTER ENDED DECEMBER 31, 1996 COMPARED TO QUARTER ENDED DECEMBER 31, 1995.
Total revenue for the quarter ended December 31, 1996 decreased
$499,000 or 33.6% to $986,000 from $1,485,000 for the same period last
year. The decrease in revenue resulted primarily from:
* The sales of corporately managed stores decreased by $610,000
as a result of management's decision to divest itself from
most corporately managed stores.
* Royalties decreased $22,000 or 4.5% to $469,000 compared to
$491,000 for the same period last year, primarily as a result
of the decline in system sales as noted in "General " above.
Supplier incentives increased $26,000 or 10.6% to $276,000
* compared to $250,000 for the same period last year.
Franchising decreased $4,000 or 61.4% to 3,000 compared to
* $7,000 for the same period last year.
In the fiscal year ended June 30, 1996 the Company commenced
* purchasing certain proprietary products directly from
manufacturers and selling proprietary products to distributors
for distribution to the franchised and corporately managed
locations. Revenues from those sales were $166,000.
Expenses for the quarter ended December 30, 1996 decreased $603,000 or
42.2% to $623,000 from $1,225,000 for the same period last year. The
decrease in expenses relate to the following:
* Cost associated with managed franchised stores decreased
$515,000 a direct result of the decrease in the number of
corporately managed stores.
* Head Office and Administration cost decreased $58,000 or 11.6%
to $441,000 from $499,000 for the same period last year. The
decreased in cost is a direct result of management's decision
to reduce corporate overheads. Management anticipates that
the decrease in Head Office and Administration will continue
throughout the 3rd and 4th quarter.
* The cost of purchasing certain proprietary products for resale
to distributors, which commenced last fiscal year, was $46,000.
18
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
EXPENSES FOR THE QUARTER ENDED DECEMBER 31, 1996 (CONT'D)
* Interest expense decreased by $24,000 or 38.7% to $38,000 from
$62,000 last year. The decrease is a result of the difference
between a debenture held by Royal Bank of Canada and its fair
market value having been completely amortized.
* Net income for the quarter ended December 31, 1996 was $52,000
compared to a loss of ($14,000) for the same period last year.
WORKING CAPITAL
The working capital deficit at the end of the period was $417,000 compared to a
working capital of $146,000 for the same period last year. This regression of
$563,000 in the working capital deficit was a result of management's decision to
capitalize some stores held for resale and depreciate them over the next 60
months.
LIQUIDITY AND CASH FLOW
During the quarter the operating cash flow was $199,147 compared to an outflow
of $(374,535) for the same quarter of the last fiscal year. This is the result
of a reduction in interest expense, an increase in depreciation and amortization
and a decrease in non-cash operating working capital.
19
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
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
The Buy/Sell agreement between TIEI, Paul J. Gibson and Royal Bank
Capital Corporation a wholly owned subsidiary of the Royal Bank
of Canada, expired on June 24, 1996 without either party exercising
its option. The Company, its President & C.E.O. and Royal Bank of
Canada continue to discuss a number of options which would result
in the Company receiving funds in the form of new equity or long
term debt. There is no certainty as to the outcome of these
ongoing discussions.
Item 6 Exhibits and Reports on Form 8-K - None
20
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996
(CANADIAN DOLLARS)
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results of operation
for the 6 months ended December 31, 1996.
The result of operation for the period ended December 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 J. Gibson February 12, 1997
------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel February 12, 1997
------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot February 12, 1997
------------------------------------
Francois Turcot, Director of Finance
21