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TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Three Months Ended March 31, 1997)
Form 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 TO 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 3 months ended Commission File No:
March 31,1997 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
Three months ended March 31, 1997
INDEX
PAGE
----
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, March 31, 1997 2
Statement of Income - March 31, 1997 3
Statement of Cash Flows, March 31, 1997 4
Statement of Stockholder's Equity 5
Notes to Financial Statements 6 to 16
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 17 to 20
PART 11 Other Information - Items 1 to 6 21
Signatures 22
1
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
MARCH 31 JUNE 30 MARCH 31 JUNE 30
NOTE 1997 1996 1996 1995
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
$ $ $ $
ASSETS
CURRENT ASSETS
Bank --- --- --- 59,764.
Accounts Receivable 568,076. 384,570. 759,168. 461,650.
Prepaid Expenses 113,922. 206,826. 174,194. 186,839.
Construction work in process 144,132. 352,198. 966,595. 58,725.
Current portion of Notes Receivable 252,709. 312,633. 317,944. 302,502.
------------------------------------------------------------
1,078,839. 1,256,227. 2,217,901. 1,069,480.
STORES HELD FOR RESALE 3,009. 660,373. 425,374. 546,214.
NOTES RECEIVABLE 3 995,476. 892,517. 247,939. 338,136.
CAPITAL ASSETS 4 619,951. 193,836. 296,182. 268,293.
ADVERTISING COMMITMENT 5 --- 19,310. 45,221. 66,770.
DEFERRED COSTS 510,677. 228,113. 121,766. 162,355.
FRANCHISE RIGHTS 6 9,743,196. 10,274,780. 10,451,976. 10,983,567.
------------------------------------------------------------
12,951,148. 13,525,156. 13,806,359. 13,434,815.
-------------------------------------------------------------
-------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 150,000. 187,218. 149,703. ---
Accounts payable and accrued liabilities 732,817. 1,479,357. 1,635,616. 1,520,307.
Current portion of Long-Term Debt 376,488. 180,371. 390,264. 733,500.
------------------------------------------------------------
1,259,305. 1,846,946. 2,175,583. 2,253,807.
LEASE SECURITY DEPOSITS 245,758. 234,989. 251,561. 221,589.
LONG-TERM DEBT 7 1,925,598. 2,044,364. 2,049,647. 1,517,924.
DEFERRED REVENUE --- --- 18,954. 18,079.
2,171,356. 2,279,353. 2,320,162. 1,757,592.
NON-CONTROLLING INTEREST 8 --- --- 232,000. 232,000.
------------------------------------------------------------
3,430,661. 4,126,299. 4,727,745. 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 - 19,024,598 common shares 19,025. 19,025. 19,025. 20,742.
Additional paid - in capital 10,757,739. 10,757,739. 10,555,028. 10,555,028.
--------------------------------------------------------------
14,509,543. 14,509,543. 14,306,832. 14,308,549.
--------------------------------------------------------------
Deficit (4,989,056.) (5,110,686.) (5,228,218.) (5,117,133.)
9,520,487. 9,398,857. 9,078,614. 9,191,416.
--------------------------------------------------------------
12,951,148. 13,525,156. 13,806,359. 13,434,815.
--------------------------------------------------------------
--------------------------------------------------------------
2
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE NINE MONTH ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
NOTE 1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
$ $ $ $
REVENUES
Royalties 420,688. 464,558. 1,309,206. 1,389,937.
Franchising 51,000. 45,203. 110,970. 167,838.
Supplier Incentives, Commissions & Other 254,283. 258,913. 805,170. 804,952.
Sales of Corporately Managed Stores 97,265. 608,199. 276,109. 1,839,124.
Proprietary Products 119,559. 145,530. 390,922. 200,232.
--------------------------------------------------------
942,795. 1,522,403. 2,892,377. 4,402,083.
--------------------------------------------------------
COSTS AND EXPENSES
Franchising 200. 32,598. 21,017. 86,358.
Head Office and Administration 365,728. 581,877. 1,206,520. 1,583,036.
Corporately Managed Stores 113,078. 607,853. 274,910. 1,836,408.
Proprietary Products 100,555. 127,951. 329,344. 176,192.
Interest Expense 7 39,730. 68,490. 117,773. 190,072.
Depreciation and Amortization 273,878. 216,578. 821,183. 641,102.
--------------------------------------------------------
893,169. 1,635,347. 2,770,747. 4,513,168.
----------------------------------------------------------
NET INCOME FOR THE PERIOD 49,626. (112,944.) 121,630. (111,085.)
----------------------------------------------------------
Earnings per share 0.00 (0.01) 0.01 (0.01)
----------------------------------------------------------
----------------------------------------------------------
3
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE NINE MONTH ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
$ $ $ $
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 49,626. (112,944.) 121,630. (111,085.)
Items not affecting cash
- ------------------------
Depreciation & Amortization 273,878. 216,578. 821,183. 641,102.
Interest expense related to annual accretion 0. 18,750. 0. 56,250.
Changes in non-cash operating working capital items (280,849.) (130,302.) (629,076.) (1,078,276.)
----------------------------------------------------------------
42,655. (7,918.) 313,737. (492,009.)
----------------------------------------------------------------
FINANCING
Bank Indebtedness 5,000. 149,703. (37,218.) 149,703.
Long - Term Debt 12,456. (42,078.) 77,351. 132,237.
----------------------------------------------------------------
17,456. 107,625. 40,133. 281,940.
----------------------------------------------------------------
INVESTING
Issue of Notes Receivable, net of repayments 3,146. 2,090. (43,035.) 74,755.
Purchase of Capital & Other Assets (69,267.) (87,247.) (998,278.) (96,811.)
Advertising commitment 0. 7,872. 19,310. 21,549.
Security Deposits 6,010. 3,550. 10,769. 29,972.
Corporately Managed Stores held for resale 0. (25,972.) 657,364. 120,840.
----------------------------------------------------------------
(60,111.) (99,707.) (353,870.) 150,305.
----------------------------------------------------------------
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.
----------------------------------------------------------------
----------------------------------------------------------------
4
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD ENDED MARCH 31, 1997 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 350,000. 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 --- --- --- --- 121,630. 121,630.
---------------------------------------------------------------------------------
Balance March 31, 1997 5,409,825. 3,732,779. 19,024,598. 10,776,764. (4,989,056.) 9,520,487.
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
5
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(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.
6
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(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.
7
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
STORES HELD FOR RESALE
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.
8
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
MARCH JUNE
1997 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) 1,248,185. 1,205,150.
Less current portion (252,709.) (312,633.)
---------------------------
995,476. 892,517.
---------------------------
---------------------------
9
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
MARCH JUNE
1997 1996
- ---------------------------------------------------------------------------------------
4. CAPITAL ASSETS ACCUMULATED
COST AMORTIZATION -- NET BOOK VALUE --
Stores and Equipment $ 542,028. $ 71,197. $470,831. $ 0.
Furniture and fixtures 212,893. 198,311. 14,582. 237.
Computer and equipment 477,269. 345,998. 131,271. 187,803.
Reference books 25,966. 22,698. 3,267. 5,796.
-------------------------------------------------------
$1,258,156. $638,204. $619,951. $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.
6. FRANCHISE RIGHTS
$ $
Franchise rights 14,175,609. 14,175,609.
Accumulated amortization (4,432,391.) (3,900,829.)
--------------------------
9,743,196. 10,274,780.
--------------------------
--------------------------
In compliance with SFAS 121,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.
10
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
MARCH JUNE
1997 1996
- ------------------------------------------------------------------------------------
7. LONG - TERM DEBT $ $
3193853 Canada Inc., Term loan,
bearing interest at 8.0% per annnum, payable
in 66 monthly instalments, 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 $2,000 plus interest at prime plus 4.0%, due
June 23, 2000. 78,000. 96,000.
Other Long-Term debt, non-interest bearing,
without specific terms of repayment. 486,524. 391,173.
---------------------------
2,302,086. 2,224,735.
Less current portion (376,488.) (180,371.)
---------------------------
1,925,598. 2,044,364.
---------------------------
---------------------------
11
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
MARCH JUNE
1997 1996
- --------------------------------------------------------------------------------
LONG-TERM DEBT (CONT'D)
Year to date Interest expense related to long-term debt was $117,773 (1996
- $190,072)
The minimum future principal repayments required over the next five years
are as follows:
$
1997 408,421.
1998 464,765.
1999 421,322.
2000 486,125.
2001 483,453.
2002 38,000.
----------------
2,302,086.
----------------
----------------
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.
12
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
(a) The Company is a defendant in the following civil litigation:
The Company is 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:
Year ending December 31:
$
1997 3,413,234.
1998 2,924,134.
1999 2,397,597.
2000 2,219,149.
2001 1,485,849.
Later Years 2,553,699.
-----------------
Total minimum payments* 14,993,663.
-----------------
-----------------
Year ending December 31
-----------------------
Minimum rentals 3,413,234. 3,473,705.
Less: Sublease rentals (3,235,792.) (3,307,217.)
------------------------------
177,443. 166,488.
------------------------------
------------------------------
* Minimum payments have not been reduced by minimum sublease rentals
of $14,229,080 due in future under noncancelable sublease
13
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(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.
14
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(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 $70,989 (1996 -
$61,654).
Undeclared dividends for July 1, 1994 to March 31, 1997 on the
preferred shares owned by the Royal Bank are $564,583.
(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. This loan will be fully repaid as of June 30, 1997.
(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.
15
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
MARCH JUNE
1997 1996
- -------------------------------------------------------------------------------
12. INCOME TAXES
Income taxes have not been provided for as the consolidated group of
companies have tax losses of $2,257,567 available to offset taxable income.
These losses expire as follows:
$
1997 732,235.
1998 874,812.
1999 126,015.
2000 463,327.
2001 61,178.
-------------
2,257,567.
-------------
-------------
13. EARNINGS PER SHARE
Primary earnings per share (year to date) 0.01 0.00
-------------------------------
Weighted average number of
shares outstanding 19,024,598 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.
16
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The system-wide retail sales for the nine months ending March 31, 1997 were
$20,622,000 compared to $23,262,000 a decrease of $2,640,000 or 9.3% for
the same nine month period last year. The sales decline can be attributed
to a number of factors including the closure of fifteen locations in the
Ottawa region which the Company supplied cookies. These locations were
owned by one corporate entity which was sold to one of the Company's
competitors, the Company elected to discontinue the relationship.
Royalty Revenue only declined by 5.8% 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 March 31,
1997 of $49,626 compared to a loss of ($112,887) for the same period
last fiscal year. Management anticipates that this trend will
continue in the fourth quarter of this fiscal year ending June 30,
1997.
17
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(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:
QUARTER ENDED MARCH 31 NINE MONTHS ENDED MARCH 31
1997 1996 1997 1996
--------------------------------------------------
REVENUES
Royalties 44.6 30.5 45.3 31.6
Supplier Incentives, commissions & other 27.0 17.0 27.8 18.3
Proprietary products 12.7 9.6 13.5 4.5
Sales of Corporately managed stores 10.3 39.9 9.5 41.8
Franchising 5.4 3.0 3.9 3.8
---------------------------------------------
Net Sales 100.0% 100.0% 100.0% 100.0%
EXPENSES
Franchising. (0.0) (2.1) (0.7) (2.0)
Head office and administration (38.8) (38.2) (41.7) (36.0)
Proprietary products (10.7) (8.4) (11.4) (4.0)
Corporately Managed Stores (12.0) (39.9) (9.5) (41.7)
Interest expense (4.2) (4.5) (4.1) (4.3)
Depreciation and Amortization (29.0) (14.2) (28.4) (14.6)
---------------------------------------------
(94.7)% (107.3)% (95.8)% (102.6)%
---------------------------------------------
Net Income 5.3% (7.3)% 4.2% (2.6)%
---------------------------------------------
---------------------------------------------
18
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996.
Total revenue for the quarter ended March 31, 1997 decreased $580,000 or
38.1% to $943,000 from $1,523,000 for the same period last year. The
decrease in revenue resulted primarily from:
* The sales of corporately managed stores decreased by $511,000 as
a result of management's decision to divest itself from most
corporately managed stores.
* Royalties decreased $44,000 or 9.4% to $421,000 compared to
$465,000 for the same period last year, primarily as a result of
the decline in system sales as noted in
"General " above.
* Supplier incentives decreased $5,000 or 1.8% to $254,000 compared
to $259,000 for the same period last year.
* Franchising increased $6,000 or 12.8% to 51,000 compared to
$45,000 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 $120,000.
Expenses for the quarter ended March 31, 1997 decreased $742,000 or 45.4%
to $893,000 from $1,635,000 for the same period last year. The decrease in
expenses relate to the following:
* Cost associated with managed franchised stores decreased $495,000
a direct result of the decrease in the number of corporately
managed stores.
* Head Office and Administration cost decreased $216,000 or 37.1%
to $366,000 from $582,000 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 4th quarter.
* The cost of purchasing certain proprietary products for resale to
distributors, which commenced last fiscal year, was $101,000.
19
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(CANADIAN DOLLARS)
EXPENSES FOR THE QUARTER ENDED DECEMBER 31, 1996 (CONT'D)
* Interest expense decreased by $29,000 or 42.0% to $40,000 from
$69,000 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 March 31, 1997 was $50,000
compared to a loss of ($113,000) for the same period last year.
WORKING CAPITAL
The working capital deficit at the end of the period was $180,000 compared to a
working capital of $42,000 for the same period last year. This regression of
$222,000 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 $42,655 compared to an outflow of
$(7,861) 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 increase in non-cash operating working capital.
20
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(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
i) The Royal Bank of Canada and its wholly owned subsidiary The Royal
Bank Capital Corporation (collectively "RBCC"), Treats International
Enterprises Inc. and Paul J. Gibson, President and Chief Executive
Officer of Treats International Enterprises Inc. and his immediate
family (Collectively "Gibson"), entered on April 8, 1997 into a
Memorandum of Understanding. The Memorandum documents the agreement,
terms and conditions under which each of RBCC and Gibson have agreed
upon a price for which they would be prepared to either (1) buy out
the Gibson interests or RBCC interests respectively, or (2) sell the
RBCC interests or Gibson interests respectively.
The Memorandum of Understanding will expire on July 7, 1997.
Treats International Enterprises, Inc. has subsequently engaged Hill
Thompson Capital Markets, Inc. of New York, NY to represent the
Company.
The above noted transactions are subject to any regulatory approvals
required.
ii) On February 14, 1997 by way of a resolution of the Board of
Directors severances for the four officers of the Company were amended
to reflect the years of service, specifically 2 months of base
compensation for every year of service. Once a Senior Officer reached
5 years of consecutive service, they are entitled to a minimum of 2
years compensation based on the final year of service.
Item 6 Exhibits and Reports on Form 8-K - None
21
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1997
(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 nine months ended March 31, 1997.
The result of operation for the period ended March 31, 1997 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 May 09, 1997
---------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel May 09, 1997
---------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot May 09, 1997
---------------------------------------
Francois Turcot, Director of Finance
22