UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 15 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-21418
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TREATS INTERNATIONAL ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3495199
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
418 Preston St., Ottawa, Ontario, Canada K1S 4N2
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (613) 563-4073
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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- ------------------------- -------------------------------------------
Securities registered pursuant to section 12(g) of the Act:
(Title of class)
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Common Stock $.001 par value
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(Title of class)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part 111 of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is U.S. $112,579. The aggregate market value was computed by
reference to the average bid and asked prices as of December 28, 1998.
(U.S.$0.02)
It was assumed for determination of affiliates, that all principal shareholders
over 10% and officers are affiliated.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock $.001 par value 19,024,598
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Title of Class Shares outstanding at Jan 31, 1999
DOCUMENTS INCORPORATED BY REFERENCE
2
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1998
INDEX PAGE
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PART I
Item 1 Business 4 -5
Item 2 Properties 5
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a Vote of Security Holders 5
PART II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters 6
Item 6 Selected Financial Data 7 - 8
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
Item 7-A Quantitative and Qualitative disclosure about
market risk. 14
Item 8 Financial Statements and Supplementary Data 14 - 35
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 36
PART III
Item 10 Directors and Executive Officers of the Registrant 37
Item 11 Executive Compensation 38
Item 12 Security Ownership of Certain Beneficial Owners and
Management 39 - 40
Item 13 Certain Relationships and Related Transactions 41
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 42 - 44
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES 45
SIGNATURES 46
3
PART I
ITEM 1 BUSINESS
Treats International Enterprises, Inc. (the"Company") is an international
franchisor carrying on the business of selling the right to market the Treats
System. The Treats System entails the preparation and sale of cookies, muffins,
gourmet and specialty coffees, related food and beverage products in retail
stores using a system and methodology of marketing developed and designed by The
Company and identified by the trademark TREATS.
The Company operates its business through its wholly-owned subsidiary Treats
Inc. Treats Inc. is the parent company to a number of other entities,
specifically:
CHOCOLATE GOURMET TREATS LIMITED ("CGTL")
TREATS ONTARIO INC.
TREATS INTERNATIONAL INC.
TREATS CANADA CORPORATION (FORMERLY ACCOUNTING
AND CONSULTING INC)
As at October 31, 1998 there are 135 retail units in North America utilizing the
Treats System. 129 of these units are owned and operated by franchisees; 6 are
corporately managed. 132 units are located in Canada and 3 are located in the
United States.
The Company grants both single unit franchises and area development franchises
throughout Canada and the United States. While there are currently no
operations outside of North America, it is the Company's intention to sell
National Licenses in the future. The Company has taken no steps to comply with
any other International government franchise regulatory agencies.
The Company markets essentially three variations on the Treats concept. The
Treats Bakery, normally 250 - 500 square feet in size with no seating area of
its own, the Treats Bakery Cafe, normally 500 - 2,000 square feet in size with
its own seating arrangement and the Treats International Coffee Emporium,
normally 500 - 2,000 square feet with its own seating arrangements. Treats
stores are found in a variety of locations including office complexes, shopping
malls, mixed use properties (commercial location with a shopping area), street
front locations, transportation terminals and universities. The Company seeks
locations or sites in high pedestrian traffic areas, where high visibility
prevails.
For substantially all single store franchises in Canada, the Company or one of
its subsidiaries has entered into a lease (the "Head Lease") with the relevant
landlord and the location is sub-leased at the same cost to the franchisee. The
Head Lease is the lease agreement between the landlord and the entity which
signs it ("Tenant"). The Tenant is bound by the terms and conditions thereof.
4
ITEM 1 BUSINESS (CONT'D)
Generally for stores opened by an Area Franchisee, the Area Franchisee enters
into the head lease directly and the head lease is collaterally assigned to the
Company. The collateral assignment means the Company does not have all the
rights and obligations associated with entering into the Head Lease. It gives
the Company the right, but not the obligation, to assume the franchisee's
position under the Head Lease if the franchisee defaults under its obligations
under the Area Franchise Agreement with the Company. Franchisee in this context
means the person who enters into the Franchise Agreement in a location covered
under an Area Franchise Agreement.
Treats' franchisees prepare their baked goods on site daily in order to ensure
wholesomeness and to attract customers with provocative fresh baked smells. The
Company's principal products are prepared according to proprietary recipes in
many cases using dry mixes which have been manufactured to the Company's
specifications by the Quaker Oats Company of Canada.
ITEM 2 PROPERTIES
The Company has purchased the land and building at 418 Preston Street, Ottawa
from a trust of which the beneficiaries are the family of the Chief Executive
Officer of the Company.
ITEM 3 LEGAL PROCEEDINGS
The Company is a defendant in several actions arising in the normal course of
business. The Company has made offers to settle some of the claims but to date
they have not been accepted. Judgements issued against the Company on some of
the claims in the amount of $504,571 are all under appeal.
Management is of the opinion that, as the outcome of the claims, counterclaims
or appeals is not determinable at this time, no provision for any potential
losses should be included in these financial statements.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders in the fourth quarter.
5
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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The Company's securities, primarily the Units, Stock and Warrants, have been
quoted in the over-the-counter market since August 1989. The number of record
holders of The Company's Common Stock at June 30, 1998 was 1,241 and at June 30,
1997, was 1,234. Management does not know the number of beneficial holders of
the shares of Common Stock. Commencing in January 1992, the Common Stock has
been quoted separately. Management has no knowledge whether the volume of
trading since January 31, 1992 constitutes an active market or whether an active
market will develop.
Through December 31, 1991, the high and low bid and asked prices for The
Company's Units were reported in the NASDAQ pink sheets.
Starting February 1992 to June 21, 1993, the Common Stock was quoted on the
computerized bulletin board of NASDAQ under the symbol TRTN.
As of June 21, 1993, the Common Stock has been quoted on the computerized
bulletin board of NASDAQ under the symbol TIEI.
The following table set forth the high and low bid and asked prices for The
Company's stock. Prices represent quotations between dealers without adjustment
for retail mark-ups, markdowns or commissions, and may not represent actual
transactions.
Quarter Ended High Bid Low Bid High Asked Low Asked
- ------------- -------- ------- ---------- ---------
(US $) (US $) (US $) (US $)
September 30, 1996 0.0625 0.0625 0.1875 0.1875
December 31, 1996 0.030 0.030 0.060 0.060
March 31, 1997 0.030 0.030 0.060 0.060
June 30, 1997 0.020 0.020 0.060 0.060
September 30, 1997 0.020 0.020 0.060 0.060
December 31, 1997 0.020 0.020 0.060 0.060
March 31, 1998 0.020 0.020 0.060 0.060
June 30, 1998 0.020 0.020 0.060 0.060
6
ITEM 6 SELECTED FINANCIAL DATA
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The following chart of selected financial data of the Company for five fiscal
years are derived from the consolidated financial statements of the Company.
The Company presents its financial results in Canadian dollars. For the
convenience of the reader, the results for the year ended June 30, 1998, have
been converted into U.S. dollars, at the prevailing rate of exchange.
AS AT JUNE 30
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1998 1998 1997 1996 1995 1994
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(US)(1) ( IN THOUSANDS )
CONSOLIDATED BALANCE SHEET DATA:
Cash $ ---- $ ---- $ ---- $ ---- $ 60. $ 243.
Current Assets 432. 635. 618. 1,256. 1,069. 990.
Franchise Rights 5,836. 8,573. 9,566. 10,275. 10,984. 11,692.
Total Assets 9,550. 14,029. 12,888. 13,525. 13,435. 13,808.
Current Liabilities 1,088. 1,598. 1,402. 1,847. 2,254. 2,257.
Working Capital (Deficit) (656.) (963.) (783.) (591.) (1,185.) (1,267.)
Long Term Liabilities 1,822. 2,677. 1,938. 2,279. 1,758. 2,234.
Non-Controlling Interest ---- ---- ---- ---- 232. 232.
Stockholders' Equity 6,640. 9,754. 9,549. 9,399. 9,192. 9,084.
( 1 ) The Company's financial results are expressed in Canadian
Dollars. For the convenience of the reader only, the results for
the last fiscal year have been converted into United States
Dollars at the Bank of Canada rate on: June 30, 1998
Conversion rate: One (1) (US) Dollar equals: $1.4690
7
ITEM 6 SELECTED FINANCIAL DATA (CONT'D)
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FOR THE YEAR ENDED JUNE 30
1998 1998 1997 1996 1995 1994
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(U.S.)(1) (IN THOUSANDS, EXCEPT FOR PER SHARE AND RESTAURANT DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue
Royalties $ 1,214. $ 1,783. $ 1,781. $ 1,968. $ 1,947. $2,001.
Supplier incentives
commission and other 747. 1,097. 1,026. 1,071. 1,001. 1,024.
Sales of managed franchise stores 556. 817. 608. 2,106. 1,579. 812.
Proprietary products 306. 449. 511. 341. ---- ----
Franchise fees 148. 218. 200. 265. 351. 272.
Construction Revenue 417. 613. 503. 610. ---- ----
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Total 3,388. 4,977. 4,629. 6,361. 4,878. 4,109.
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Expenses
Head office administration $1,492. $ 2,192. $ 1,894. $ 2,163. $ 1,850. $ 1,878.
Managed franchise stores 486. 714. 473. 2,079. 1,687. 832.
Amortization 557. 818. 987. 839. 789. 767.
Franchising 5. 7. 25. 121. 168. 230.
Interest 76. 111. 157. 249. 276. 215.
Proprietary products 270. 397. 440. 294. ---- ----
Construction Expenses 362. 532. 503. 610. ---- ----
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Total 3,248. 4,771. 4,479. 6,355. 4,771. 3,922.
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Income before income taxes 140. 206. 150. 6. 107. 187.
Income taxes ---- ---- ---- ---- ---- ----
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Net Income 140. 206. 150. 6. 107. 187.
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Avg. No. of Shares Outstanding (2) 19,024. 19,024. 19,024. 19,996. 20,742. 18,507.
Earnings per Share 0,01. 0,01. 0,00. 0,00. 0,00. 0,01.
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Number of Treats units in Chain 135. 135. 142. 166. 171. 164.
( 1 ) The Company's financial results are expressed in Canadian
Dollars. For the convenience of the reader only, the results for
the last fiscal year have been converted into United States
Dollars at the Bank of Canada rate on: June 30, 1998
Conversion rate: One (1) (US) Dollar equals: 1.469
( 2 ) The Company has 19,024,598 shares outstanding. Net profit (loss)
per share is calculated based on the weighted average number of
shares outstanding for the period. (see Note 13, June 30, 1998,
see note 12, June 30, 1997).
8
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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(All amounts are in Canadian $ unless otherwise noted)
GENERAL
- THE YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
System-wide retail sales for the twelve months ended June 30, 1998 were
$24,667,000 compared to $26,903,000 a decrease of $2,236,000 or 8.31% for
the same period last year. The sales decline can be attributed to the
Company's decision to close down 7 locations during the past twelve months.
The units closed down were primarily non-performing locations or locations
where the Company could not establish satisfactory lease terms with the
landlord.
RESULTS OF OPERATIONS
Total revenue for the year ended June 30, 1998 increased $348,000 or 7.5%
to $4,977,000 from $4,629,000 for the same period last year. The increase
in revenue resulted primarily from:
- The sales of corporately managed stores increased by $209,000 or 34.3%
to $816,000 from $607,000 for the same period last year.
- Royalties increased $3,000 or 0.14% to $1,783,000 compared to
$1,780,000 for the same period last year. (see note on Head office and
administration expenses, below)
- Supplier incentives increased $71,000 or 6.9% to $1,097,000 compared
to $1,026,000 the same period last year.
- Franchising increased $18,000 or 8.9% to $218,000 compared to $200,000
for the same period last year.
- Proprietary products sold to distributors for distribution to the
franchised and corporately managed locations decreased $62,000 or
12.2% to $449,000 compared to $511,000 for the same period last year.
- In the fiscal year ended June 30, 1998 The Company amended its policy
regarding the construction and renovation of stores. The revenues
from constructions are recognized when the agreements are signed or
the funds as been received. Revenues from construction were $613,000.
9
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONT'D)
Expenses for the year ended June 30, 1998 increased $292,000 or 6.5% to
$4,771,000 from $4,479,000 for the same period last year. The increase in
expenses relate to the following:
- Costs associated with Managed franchised stores increased $240,000 a
direct result of the increase in the number of corporately managed
stores.
- Head office and administration expenses increased $298,000 or 15.7% to
$2,192,000 from $1,894,000 for the same period last year. The
increase is a direct result of the Company's decision to amend its
policy with respect to royalty discounts. The difference between the
actual amount paid and the amount required under the franchise
agreement is credited to royalty revenue and charged to Head office
expenses as a discount on royalties. The amount charged for royalty
discount in the fiscal year was $384,000.
- The cost of purchasing certain proprietary products for resale to
distributors decreased $43,000 or 9.8% to $397,000 from $440,000
for the same period last year.
- Interest expense decreased by $46,000 or 29% to $111,000 from $157,000
last year. This decrease is a direct result of 3193853 Canada Inc.
having waived any interest payment required for fiscal 1998. (see note
8 page 28-30)
- The cost of construction and renovation of stores was $532,000.
- Net income for the year ended June 30, 1998 was $206,000 compared to a
net income of $150,000 for the same period last year an increase of
37.3%.
CAPITAL RESOURCES - June 30, 1998
The Company's projected capital asset requirements for the current fiscal
year, are not very demanding.
LIQUIDITY AND CASH FLOW - June 30, 1998
The working capital deficit at the year end increased by $180,000 to
$(963,000). This was primarily due to an increase of $209,000 in the
current portion of the long-term debt.
The cash flow from operations during fiscal 1998 increased by $140,000 or
13.6% to $1,175,000 compared to $1,035,000 in the previous fiscal year.
DEBT TO EQUITY:
The ratio of debt to equity as at June 30, 1998 was .44 to 1 compared to
.35 to 1 in the previous fiscal year.
10
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
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LIQUIDITY AND CASH FLOW (CONT'D)
IN THE YEAR:
The implementation of the "direct bank transfer" system which automatically
withdraws royalty, advertising fund and receivable payments from franchise
owners' bank accounts on a weekly basis has continued over the year.
Currently 78% of the franchise owners use this method to make their weekly
payments. By the end of this fiscal year the Company expects that more
than 95% of all franchise owners will have been converted to the direct
transfer system.
The Company also introduced a new design appearance for its stores. The
new look has been well received by customers, landlords and franchise
owners. The updated interior and exterior decor provides for a more
comfortable and relaxing atmosphere.
A new line of sandwiches was introduced under the "Baguette Express"
banner. Sandwiches are now available at a large number of Treats locations
served on a variety of breads including a "baked fresh on site" baguette
loaf. A Trade Mark for the new sandwich line has been applied for.
During the year extensive testing of a new line of premium baked goods and
as a result the company plans to roll out a new line of cookies in the
current fiscal year. The premium line of baked goods will be identified as
"TreatSations." Trade Mark registration for TreatSations is pending.
The Company has received several enquiries about opportunities to franchise
the Treats concept outside of North America. In June the Company entered
into a National Licensing Agreement for Chile and Argentina.
In December the EMC Group, Inc. from Lakeland, Florida acquired the
National License to franchise the Treats concept throughout the United
States. The president of EMC Group is a former Vice President of the
Company.
The Company has upgraded most of its computer hardware and software as part
of an effort to ensure that the Company will be able to address any issues
pertaining to the Year 2000. The Year 2000 issue arises because many
computerized systems use two digits rather than four to identify a year.
The Company is making every effort to make sure that there will be no
significant impact on operations as a result of any Year 2000 issue however
it is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company, including those related to the efforts of entities
the Company does business with or any third parties, will be fully
resolved.
11
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
- --------------------------------------------------------------------------------
(All amounts are in Canadian $ unless otherwise noted)
GENERAL
- THE YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996.
System-wide retail sales for the twelve months ended June 30, 1997 were
$26,903,000 compared to $30,270,000 a decrease of $3,367,000 or 11.1% for
the same period last year. The sales decline can be attributed to The
Company's decision to close down 24 locations during the past twelve
months. Ten of these locations were in the Ottawa region. The Company had a
contract to supply commissary baked goods to these locations through a
relationship with a contract catering company. The catering company in
question was sold to a company with a controlling interest in a direct
competitor of Treats International Enterprises, Inc. and The Company
elected to discontinue the relationship. The other units closed down were
primarily non-performing locations or locations were The Company could not
establish satisfactory lease terms with the landlord.
RESULTS OF OPERATIONS
Total revenue for the year ended June 30, 1997 decreased $1,732,000 or
27.2% to $4,629,000 from $6,362,000 for the same period last year. The
decrease in revenue resulted primarily from:
- The sales of corporately managed stores decreased by $1,498,000 as a
result of management's decision to divest itself from most corporately
managed stores. This represents 86.4% of the decline in total revenue
for the year.
- Royalties decreased $187,000 or 9.5% to $1,781,000 compared to
$1,968,000 for the same period last year, primarily as a result of the
decline in system sales as noted in "General" above.
- Supplier incentives decreased $45,000 or 4.2% to $1,026,000 compared
to $1,071,000 the same period last year.
- Franchising decreased $65,000 or 24.5% to $200,000 compared to
$265,000 for the same period last year.
- Proprietary products sold to distributors for distribution to the
franchised and corporately managed locations increased $170,000 or
49.9% to $511,000 compared to $341,000 for the same period last year.
12
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
- ----------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONT'D)
Expenses for the year ended June 30, 1997 decreased $1,876,000 or 29.5% to
$4,479,000 from $6,355,000 for the same period last year. The decrease in
expenses relate to the following:
- Costs associated with Managed franchised stores decreased $1,605,000 a
direct result of the decrease in the number of corporately managed
stores.
- Head office and administration expenses decreased $269,000 or 12.4% to
$1,894,000 from $2,163,000 for the same period last year. The
decreased in cost is a direct result of management's decision to
reduce corporate overheads.
- The cost of purchasing certain proprietary products for resale to
distributors increased $146,000 or 49.7% to $440,000 from $294,000 for
the same period last year.
- Interest expense decreased by $92,000 or 36.9% to $157,000 from
$249,000 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 year ended June 30, 1997 was $150,000 compared to a
net income of $6,000 for the same period last year.
CAPITAL RESOURCES - June 30, 1997
The Company's capital asset requirements, as stated in the past, are not
very demanding. Funds are needed to upgrade the reporting system from
franchisees. The present system is adequate at this time but new electronic
sales recording equipment will improve the royalty collection through improved
control as well as improved management information system data collection.
LIQUIDITY AND CASH FLOW - June 30, 1997
The working capital deficit at the year end increased by $192,000 to
$(783,000). This was primarily due to an increase of $255,278 in the
current portion of the long-term debt Accounts payable and accrued
liabilities declined by $616,000 and Long-Term declined by $86,000.
The cash flow from operations during fiscal 1997 increased significantly by
$378,000 or 57.5% to $1,035,000 compared to $657,000 in the previous fiscal
year.
13
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
- -----------------------------------------------------------------------------
LIQUIDITY AND CASH FLOW (CONT'D)
DEBT TO EQUITY:
The ratio of debt to equity as at June 30, 1997 was .35 to 1. This compares
to .26 to 1 in the previous fiscal year.
The liquidity is adequate for the coming year's operations.
IN THE YEAR:
The Company commenced implementation of a new system of direct bank
transfer for royalty, ad fund and notes receivable. To date 53% of all
franchise owners have been converted to this new, significantly more
efficient, method of weekly and monthly payments. The Company anticipated
that by the end of the current fiscal year virtually all franchisees will
remit their payments using the new system.
During the year The Company successfully introduced a line of New York
style Bagels throughout the system (where permitted by Use Clauses in Lease
Agreements). It also commenced an extensive test of a completely revamped
sandwich program and in July of this year approved roll out of the new
sandwich program in 60% of its locations. It is anticipated that the roll
out will be completed by December 1998.
The Company also concluded a new two year contract with the Quaker Oats
Company of Canada to supply its proprietary bakery mixes.
ITEM 7-A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
n/a
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TREATS INTERNATIONAL ENTERPRISES, INC.
Consolidated Financial Statements 1998 compared to 1997 Page 15 to 35
14
FINANCIAL
STATEMENTS
CONSOLIDATED
TREATS INTERNATIONAL
ENTERPRISES, INC.
June 30, 1998 and 1997
---------
15
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(CANADIAN DOLLARS)
INDEX
PAGE
17 Auditors' Report
18 - 19 Consolidated Balance Sheets
20 Consolidated Statements of Income and
Deficit
21 Consolidated Statements of Cash Flow
22 Consolidated Statements of Stockholders'
Equity
23 - 36 Notes to the Consolidated Financial
Statements
16
AUDITORS REPORT
TO THE SHAREHOLDERS OF
TREATS INTERNATIONAL ENTERPRISES, INC.
We have audited the consolidated balance sheets of TREATS INTERNATIONAL
ENTERPRISES, INC. as at June 30, 1998 and 1997 and the consolidated statements
of income and deficit, cash flows and of stockholders' equity for the years
ended June 30, 1998, 1997 and 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 1998 and
1997 and the results of its operations and its cash flows for the years ended
June 30, 1998, 1997 and 1996 in accordance with accounting principles generally
accepted in Canada (which also conform in all material respects with accounting
principles generally accepted in the United States).
Chartered Accountants
Toronto, Canada
17
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 AND 1997
(CANADIAN DOLLARS)
NOTE 1998 1997
- ----------------------------------------------------------------------------------------------------
$ $
ASSETS
CURRENT
Accounts receivable 193,718 254,852
Current portion of notes receivable 217,205 188,714
Prepaid expenses 144,606 152,705
Construction work in process 33,476 22,074
Cash
45,874 -
-------------------------
634,879 618,345
FRANCHISE STORES HELD FOR RESALE - 149,924
DEFERRED COSTS 268,566 462,715
NOTES RECEIVABLE 3 819,820 1,438,528
INVESTMENT IN PUBLIC COMPANY 4 1,617,912 -
CAPITAL ASSETS 5 2,020,533 652,860
ADVERTISING COMMITMENT 6 94,576 -
FRANCHISE RIGHTS 7 8,572,715 9,565,999
-------------------------
14,029,001 12,888,371
-------------------------
-------------------------
Approved on behalf of the Board:
Director
-------------------------
Director
-------------------------
See the accompanying notes
18
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 AND 1997
(CANADIAN DOLLARS)
NOTE 1998 1997
- ----------------------------------------------------------------------------------------
$ $
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 953,620 863,778
Current portion of long-term debt 644,547 435,649
Bank indebtedness - 102,232
--------------------------
1,598,167 1,401,659
LONG-TERM DEBT 8 2,438,073 1,703,074
LEASE SECURITY DEPOSITS 238,381 234,791
--------------------------
4,274,621 3,339,524
--------------------------
COMMITMENTS AND CONTINGENCIES 9
STOCKHOLDERS EQUITY
CAPITAL STOCK 10
Preferred
Authorized , 10,000,000 non-voting, cumulative
shares, dividends at U.S.$.028 per share(Cdn.$.041
per share),redeemable at option of Company at
U.S.$1. per share, par value U.S.$0.50
Issued, 5,409,825 series A shares 3,732,779 3,732,779
Common
Authorized, 33,333,333 shares, par value
US $0.001
Issued , 19,024,598 shares 19,025 19,025
Additional paid - in capital 10,757,739 10,757,739
--------------------------
14,509,543 14,509,543
DEFICIT (4,755,163) (4,960,696)
--------------------------
9,754,380 9,548,847
--------------------------
14,029,001 12,888,371
--------------------------
--------------------------
See the accompanying notes
19
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT
YEAR ENDED JUNE 30. 1998, 1997 AND 1996
(CANADIAN DOLLARS)
NOTE 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
$ $ $
REVENUES
Sales of managed franchise stores 816,648 607,752 2,106,368
Royalties 1,783,428 1,780,872 1,968,120
Supplier incentives, commissions and other 1,097,316 1,026,046 1,070,944
Proprietary products 448,634 511,052 341,229
Franchising 217,941 200,019 264,713
Construction revenue 612,915 503,521 610,318
-----------------------------------------
4,976,882 4,629,262 6,361,692
-----------------------------------------
EXPENSES
Head office and administration 2,192,004 1,893,869 2,163,015
Managed franchise stores 714,357 474,128 2,079,390
Construction expenses 531,796 503,521 610,318
Proprietary products 396,566 439,714 293,743
Interest on long-term debt 111,163 156,716 248,793
Franchising 7,337 24,817 120,936
Amortization
Capital assets and franchise rights 745,424 889,083 839,251
Deferred costs 72,702 97,424 -
-----------------------------------------
4,771,349 4,479,272 6,355,446
-----------------------------------------
NET INCOME FOR THE YEAR 12 205,533 149,990 6,246
DEFICIT, BEGINNING OF YEAR (4,960,696) (5,110,686) (5,116,932)
-----------------------------------------
DEFICIT, END OF YEAR (4,755,163) (4,960,696) (5,110,686)
-----------------------------------------
EARNINGS (LOSS) PER SHARE 13 0.01 0.00 0.00
-----------------------------------------
-----------------------------------------
See the accompanying notes
20
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1998, 1997 AND 1996
(CANADIAN DOLLARS)
1998 1997 1996
- ------------------------------------------------------------------------------------------------
$ $ $
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES
OPERATING
Net income for the year 205,533 149,990 6,246
Items not affecting cash
Amortization
Capital assets and franchise rights 745,424 889,083 839,251
Deferred costs 72,702 97,424 -
Capital assets (412,062) (353,414) -
Franchise stores held for resale 412,062 353,414 -
Interest expense related to annual accretion of
Royal Bank of Canada subordinated debenture - - 75,000
----------------------------------------
1,023,659 1,136,497 920,497
Changes in non-cash operating working capital items 151,263 (101,814) (263,714)
----------------------------------------
1,174,922 1,034,683 656,783
----------------------------------------
FINANCING
Long-term debt 943,897 (86,012) (101,692)
Bank indebtedness (102,232) (84,986) 187,218
Issue of common shares - - 350
Cancellation of common shares - - (2,067)
Deferred revenue - - (18,079)
Share issue costs - - (29,289)
Redemption of non-controlling interest in
subsidiary - - 232,000
----------------------------------------
841,665 (170,998) 268,441
----------------------------------------
INVESTING
Franchise stores held for resale (269,981) (19,210) 62,089
Deferred costs 32,742 (332,026) (65,759)
Notes receivable 590,217 (422,092) (564,518)
Investment in public company (1,617,912) - (232,000)
Purchase of capital assets (1,082,885) (109,667) (232,258)
Proceeds on disposal of capital asset and
franchise rights 471,682 - -
Advertising commitment (94,576) 19,310 47,458
----------------------------------------
(1,970,713) (863,685) (984,988)
----------------------------------------
NET CASH INFLOW (OUTFLOW) 45,874 - (59,764)
CASH POSITION, BEGINNING OF YEAR - - 59,764
----------------------------------------
CASH POSITION, END OF YEAR 45,874 - -
----------------------------------------
----------------------------------------
See the accompanying notes
21
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 10)
YEAR ENDED JUNE 30, 1998, 1997 AND 1996
(CANADIAN DOLLARS)
---- Preferred shares --- ---- Common shares ---
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
$ $ $
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 year - - - - 149,990 149,990
-------------------------------------------------------------------------------------
Balance, June 30, 1997 5,409,825 3,732,779 19,024,598 10,776,764 (4,960,696) 9,548,847
Net income for the year - - - - 205,533 205,533
-------------------------------------------------------------------------------------
Balance June 30, 1998 5,409,825 3,732,779 19,024,598 10,776,764 (4,755,163) 9,754,380
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
See the accompanying notes
22
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
These consolidated financial statements comprise the accounts of the
Company and its wholly - owned subsidiaries from the date of acquisition,
as follows:
* Treats Inc.
* Treats Ontario Inc.
* Chocolate Gourmet Treats Limited
* Treats Canada Corporation (formerly Accounting and Consulting Inc.)
* Treats International Inc.
On June 26, 1998, Triadon Investment Group Inc. and Treats Canada
Corporation amalgamated and has continued operating under the Treats Canada
Corporation name.
All intercompany transactions and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (which also conform in
all material respects with accounting principles generally accepted in the
United States) and include the following significant accounting policies.
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. These estimates are reviewed periodically, and, as adjustments
become necessary, they are reported in earnings in the period in which they
become known.
23
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Franchise fees and construction revenue arises on the sale of national,
area and store franchises. Franchise store revenue is recognized as income
when the respective purchase and sale agreements have been signed, all
material conditions relating to the sale have been substantially completed
by the Company or the franchise store has commenced operations. Revenue
from national and area franchise agreements is recognized when the area
development agreement has been signed 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 they apply.
INVESTMENT IN PUBLIC COMPANY
The investment in public company is accounted for at cost. Under the cost
method, the investment is recorded at its original cost, and earnings from
the investment are recognized only to the extent of dividends received or
receivable.
24
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( 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:
Building - 20 years straight-line
Furniture, fixtures and equipment - 5 years straight-line
Reference books - 5 years straight-line
Corporate owned stores reacquired
from franchisees - 5 years straight-line
Corporate owned store equipment
reacquired from former
franchisees - 5 years straight-line
FRANCHISE RIGHTS
Franchise rights are being carried at cost less accumulated amortization.
Amortization is provided for on a straight-line basis over 20 years.
DEFERRED COSTS
Deferred costs consist of a consulting contract with a former officer of
the Company expiring in 2003.
25
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
1998 1997
- -----------------------------------------------------------------------------
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 (LOSS) PER SHARE
Net earnings (loss) 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 rates varying from
6% to 8% and repayable in scheduled instalments which mature from July 1997
to June 2020.
$ $
Notes receivable, net of allowance
for doubtful accounts of Nil (1997 - nil) 1,037,025 1,627,242
Less current portion (217,205) (188,714)
---------------------
819,820 1,438,528
---------------------
---------------------
26
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
1998 1997
- -----------------------------------------------------------------------------
4. INVESTMENT IN PUBLIC COMPANY
During the year, the Company sold the U.S. area rights for consideration of
2,800,000 class "A" convertible preference shares in EMC Group Inc., a U.S.
public company incorporated in the State of Florida via a management buy
out by former employees of the company. The investment has been recorded
at the cost of equipment and franchise rights transferred to EMC Group Inc.
The preference shares are convertible to common stock for the equivalent of
US$2,800,000 based on average market value of the common stock for the 60
days prior to the date of conversion, subject to approval of the board of
directors of EMC Group Inc. EMC Group Inc. will only permit the conversion
of preferred shares to common shares of EMC Group Inc. as long as the
conversion does not exceed 10% of the total number of outstanding common
shares of EMC Group Inc. The market value of the shares is not readily
determinable as the common shares are not significantly traded on the NASD
bulletin board, the liquidity of the shares is limited.
5. CAPITAL ASSETS
ACCUMULATED
COST AMORTIZATION ---- NET BOOK VALUE ----
$ $ $ $
Land 625,000 - 625,000 -
Building 457,885 - 457,885 -
Furniture, fixtures and equipment 683,900 632,552 51,348 120,817
Reference books 25,966 25,966 - 2,425
Corporate owned stores
reacquired from franchisees 735,757 23,551 712,206 303,264
Corporate owned store
equipment reacquired from
former franchisees 261,302 87,208 174,094 226,354
------------------------------------------------------
2,789,810 769,277 2,020,533 652,860
------------------------------------------------------
------------------------------------------------------
27
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
1998 1997
- -----------------------------------------------------------------------------
6. ADVERTISING COMMITMENT
The Company received 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 an asset/liability
for future advertising and promotion.
7. FRANCHISE RIGHTS
$ $
Franchise rights 13,284,863 14,175,609
Accumulated amortization (4,712,148) (4,609,610)
--------------------------
8,572,715 9,565,999
--------------------------
--------------------------
The Company obtained an independent appraisal dated December 14, 1998 from
Scott, Rankin, Gordon & Gardiner, Chartered Accountants, substantiating a
valuation of franchise rights in excess of $8,500,000 as at June 30, 1998.
8. LONG - TERM DEBT
$ $
3193853 Canada Inc.
Term loan, repayable in 102 monthly instalments
of $10,000 plus interest at 6% per annum, due
June 1, 2008, secured by a general security
agreement, general assignment of book debts
and franchise rights, pledge of all the shares in
subsidiary and associated companies. 1,025,000 608,000
(see note (a) below)
Royal Bank of Canada
Subordinated debenture bearing interest at 8%
per annum, payable in 60 monthly instalments, due
June 30, 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. 1,129,562 1,129,562
----------------------
(see note(a) below)
Carried forward 2,154,562 1,737,562
28
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
1998 1997
- -----------------------------------------------------------------------------
8. LONG-TERM DEBT (CONT'D)
$ $
Brought forward 2,154,562 1,737,562
Business Development Bank of Canada
Term loan, repayable in 50 monthly instalments
of $2,000 plus interest at prime plus 4%, due
June 23, 2000, secured by a general security
agreement, general assignment of books debts
and franchise rights, pledge of all the shares in
subsidiary and associated companies. 48,000 72,000
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at 5.9% per annum
payable in 105 monthly installments of $4,884
on interest and principal, secured by land and
building at 418 Preston Street in Ottawa, Ontario 398,149 -
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2004 481,909 329,161
----------------------------
3,082,620 2,138,723
Less current portion (644,547) (435,649)
----------------------------
2,438,073 1,703,074
----------------------------
----------------------------
(a) As of December 1998, 3193853 Canada Inc. and Royal Bank Capital
Corporation have waived the defaults on the non-payment of all
principal and interest pursuant to the loan agreements. As it is
management's belief that the lenders will not demand payment within
the coming year, it has consequently presented the debt as long term
in the financial statements.
29
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
8. LONG-TERM DEBT (CONT'D)
Interest expense for the year related to long-term debt was $111,167 (1997 -
$156,716) which includes a provision for interest on the Royal Bank Capital
Corporation loan, but not on 3193853 Canada Inc. which has permanently waived
the payments for the 1998 fiscal year.
The minimum future principal repayments required over the next five years are as
follows:
$
1999 644,547
2000 456,514
2001 526,490
2002 330,221
2003 319,265
Subsequent 805,583
---------
3,082,620
---------
---------
9. COMMITMENTS AND CONTINGENCIES
(a) The Company is a defendant in several actions arising in the normal
course of business. The Company has made offers to settle some of
the claims but to date they have not been accepted. Judgements
issued against the Company on some of the claims in the amount of
$504,571 are all under appeal.
Management is of the opinion that, as the outcome of the claims,
counterclaims or appeals is not determinable at this time, no
provision for any potential losses should be included in these
financial statements.
30
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONT'D)
(b) The Company has lease commitments for corporate-owned stores and
office premises. The Company also, as the franchisor, is the lessee in
most of the franchisee's lease agreements. The Company enters into
sublease agreements with individual franchisees, whereby the
franchisee assumes responsibility for and makes lease payments
directly to the landlord. The aggregate rental obligations under these
leases, over the next five years are as follows:
$
Year ending June 30
1999 2,727,550
2000 2,503,426
2001 2,045,075
2002 1,464,328
2003 1,049,059
Later Years 1,900,007
----------
Total minimum payments* 11,689,445
----------
----------
* Minimum payments have not been reduced by minimum sublease rentals for
$10,968,230 due in future under noncancellable sublease.
YEAR ENDING JUNE 30,
1999 1998
$ $
Minimum rentals 2,727,550 2,923,180
Less: Sublease rentals (2,578,854) (2,674,484)
-------------------------
148,696 248,696
-------------------------
-------------------------
31
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONT'D)
(c) The Company has been assessed interest and penalties on provincial
capital taxes amounting to $40,000 which the company is currently
appealing under the tax fairness provisions of the Income Tax Act.
The assessments have not been reflected in the financial statements as
management feels that they will be reversed.
10. CAPITAL STOCK
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 of the
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.
CONVERSION PRIVILEGES - DECEMBER 31, 1996
In the event that dividends on the Preferred Series A shares fall five
quarters in arrears or the shares are not redeemed by December 31, 1996,
then the conversion price will be adjusted so that the preferred shares
will be convertible into common shares of the Company at a price equal to
the lower of the weighted average trading price of the Company's shares for
the previous 30 trading days using the average exchange rate for the period
and U.S.$0.30 per share. As of June 30, 1998 the preferred shareholder, The
Royal Bank of Canada did not exercise the option.
32
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
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 common stock. The
Royal Bank Capital Corporation holds a subordinated debenture (see
note 8) for which the related interest expense was $104,012
(1997 - $96,075).
Undeclared dividends for July 1, 1994 to June 30, 1998 on the
preferred shares owned by the Royal Bank are $821,211.
(b) The Company leased its office premises at an annual cost of
approximately $100,000 from a company which is wholly owned by the
family of the Chief Executive Officer of the Company. The family owns
approximately 32.6% of the common stock of the Company.
(c) The Company has purchased the above office premises, land and building
at 418 Preston Street, Ottawa from a trust of which the beneficiaries
are the family of the Chief Executive Officer of the Company. The
payment of the purchase price of $1,082,885 - fair market value
determined pursuant to an independent review by Royal LePage - was
satisfied by the assumption of a mortgage and loans of $665,885 and
the balance of $417,000 by way of increase in the term loan due to
3103853 Canada Inc. (note 8).
(d) During fiscal 1996, the term debt owed to the Standard Chartered Bank
was acquired by 3193853 Canada Inc. whose President is a member of
the family of the Chief Executive Officer of the Company. The related
interest expense was $nil (1997 - $47,574).
(e) Accounts payable includes $33,115 owed to 764719 Ontario Inc. whose
owner is a member of the family of the Chief Executive Officer of the
Company.
33
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
1998 1997
- -----------------------------------------------------------------------------
12. INCOME TAXES
No provision has been made for income taxes as the consolidated group of
companies have non capital losses carried forward of approximately $100,000
available to offset taxable income. These losses will expire as follows:
$
2000 50,000
2001 50,000
-------
100,000
-------
-------
13. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share 0.01 0.00
-----------------------
Weighted average number of common shares outstanding 19,024,598 19,024,598
-----------------------
-----------------------
The calculation of fully diluted earnings per common share assumes that, if
a dilutive effect is produced, all convertible securities have been
converted, all shares to be issued under contractual commitments have been
issued and all outstanding options have been exercised at the later of the
beginning of the fiscal period and the option issue date. If all
conversions (see note10) had occurred, the Company would have had to
increase its maximum authorized common shares. Fully diluted earnings per
share are not presented as they are anti-dilutive.
34
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
( CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts of accounts receivable, short-term notes receivable
and accounts payable and accrued liabilities approximates their fair value
because of the short-term maturities of these items.
The carrying amount of the long-term notes receivable, long-term
subordinated debenture and term loans approximates their fair value
because the interest rates approximate market rates.
The fair values of the other long-term debt due to non-arm's length parties
are not determinable, as these amounts are interest-free and due on demand,
and, accordingly, cannot be ascertained with reference to similar debt with
arm's length parties.
15. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspect of the Year 2000 Issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
16. COMPARATIVE FIGURES
Certain of prior year's figures have been reclassified to conform with the
current year's presentation.
35
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
- -----------------------------------------------------------------------------
- No Disagreements or changes.
36
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the names of the Company's Directors and Officers. The
Directors of the Company are elected annually by the shareholders and the
Officers are appointed annually by the Board of Directors. The Company intends
to expand the Board to five Directors.
NAME AGE POSITION
Paul J. Gibson 43 President, C.E.O. and Director
John A. Deknatel 51 Chief Operating Officer and Director
Peter-Mark Bennett 41 Director
Francois Turcot 38 Director of Finance
PAUL J. GIBSON
Mr. Gibson is President, C.E.O. Chairman of the Board of The Company. Mr.
Gibson has served as President and C.E.O. of TCC since its formation in 1988 and
of Treats Inc. since July 1990. Mr. Gibson also serves in various capacities of
The Company's wholly owned subsidiaries. From its formation in 1986 until the
amalgamation of certain companies in 1993, he was President and C.E.O. of TMG, a
predecessor company of Treats Inc.
JOHN A. DEKNATEL
Mr. Deknatel is C.O.O. and Director of The Company. He also serves in various
capacities for The Company's wholly owned subsidiaries. Prior to joining The
Company in 1991, Mr. Deknatel served as Vice President and General Manager of
Manchu Wok U.S.A., a division of Scott's Hospitality, of Toronto, Ontario.
PETER-MARK BENNETT
Mr. Bennett was appointed Director December 16, 1994. Mr. Bennett is Director
of Marketing of Neptec Design Group Ltd. of Ottawa. From July 1994 to July 1997
Mr. Bennett was Director of Operations for Network Xcellence Ltd. in Ottawa.
From July 1990 to June 1992 he was Vice-President of Treats Inc. Prior to July
1990 he was Managing Director of Widely Held Northern Investments Ltd.
FRANCOIS TURCOT
Mr. Turcot has been Comptroller of The Company since May 1991 and has been
promoted to Director of Finance in August 1996. Prior to joining The Company,
Mr. Turcot held the position of Comptroller with a Transport Company in Hull,
Quebec. From October 1986 to November 1989, Mr. Turcot was Comptroller at the
Ramada Hotel in Hull, Quebec.
37
ITEM 11 EXECUTIVE COMPENSATION
Set forth in the table below, is the cash compensation paid to the C.E.O. of The
Company and the total to all Executive Officers as a group:
U.S. ($)
CAPACITIES IN CASH
Name of Individual WHICH SERVED COMPENSATION
- ------------------ -------------------------------------
Paul J. Gibson Chairman and Chief
Executive Officer $78,000.
Executive officers
as a group (3 people) $182,000.
- - There are no options or warrants granted to the present officers.
EMPLOYMENT AGREEMENT
On February 14, 1997 by way of a resolution of the Board of Directors severances
for the three 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.
38
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth as of the date of October 31, 1998, the number and
percentage owned of record and beneficially, by each Officer and Director of The
Company and by any other person owning 5% or more of the outstanding shares.
PRINCIPAL SHAREHOLDERS & OFFICERS
Effective October 31, 1998
--------------------------
# Shares of %
Common stock Ownership
Registered
--------------------------------
Paul Gibson Intrust (1) 960,049. 5.05%
418 Preston Street
Ottawa, Ontario(K1S 4N2)
John Deknatel 131,121. .69%
418 Preston Street
Ottawa, Ontario(K1S 4N2)
Access Investment Group Ltd. (2) 5,060,285. 26.60%
Sassoon House
Nassau, Bahamas
Francois Turcot 36,458. .19%
418 Preston Street
Ottawa, Ontario(K1S 4N2)
--------------------------
Officers & Directors as a group 6,187,913. 32.53%
--------------------------
--------------------------
OWNERS IN EXCESS OF 5%
Royal Bank / RBCC (3) 7,207,760. 37.89%
200 Bay Street, 13th Floor
Toronto, Ontario(M5J 2J5)
39
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONT'D)
NOTES
1. Paul J. Gibson may be deemed to be a promoter as such terms are defined
under the Securities Act of 1933.
2. Access Investment Group Ltd. is a company controlled by Mr. P. Gibson and
his immediate family.
3. RBCC is a wholly owned subsidiary of the Royal Bank of Canada. The Royal
Bank of Canada is a widely held Canadian Chartered Bank. To the best of
The Company's knowledge, no one entity controls more than 10% of all
outstanding shares of the Royal Bank of Canada.
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.
SHARES
------------
Current Holdings RBCC/Royal Bank 7,207,760.
POTENTIAL CONVERSION OF PREFERRED SHARES
AND DIVIDEND.
Preferred Shares $ 3,732,779 @ $0.03 124,425,967.
Dividend to June 30, 1998 $ 821,211 @ $0.03 27,373,700.
-----------
Fully diluted ownership of RBCC/Royal Bank (1) 159,007,427.
-----------
-----------
(1) MAXIMUM SHARES AVAILABLE = 33,333,333
40
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPITAL STOCK
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 2,067,344 of the
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.
CONVERSION PRIVILEGES - DECEMBER 31, 1996
In the event the dividends fall five quarters into arrears or the shares
are not redeemed by December 31, 1996, then the conversion price will be
adjusted so that the preferred shares will be convertible into common
shares of The Company at a price equal to the lower of the weighted average
trading price for of The Company for the previous 30 trading days using the
average exchange rate for the period and US$0.30 per share. As of June 30,
1998 the preferred shareholder, The Royal Bank of Canada did not exercise
the option.
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 Capital Corporation holds a subordinated debenture for
which the related interest expense was $104,012 ($96,075).
Undeclared dividends for July 1, 1994 to June 30, 1998 on the
preferred shares owned by the Royal Bank are $821,211.
(b) The Company leased its office premises at an annual cost of
approximately $100,000 from a company which is wholly owned by the
family of the Chief Executive Officer of the Company. The family owns
approximately 32.6% of the common stock of the Company.
(c) The Company has purchased the above office premises, land and building
at 418 Preston Street, Ottawa from a trust of which the beneficiaries
are the family of the Chief Executive Officer of the Company. The
payment of the purchase price of $1,082,885 - fair market value
determined pursuant to an independent review by Royal LePage - was
satisfied by the assumption of a mortgage and loans of $665,885 and
the balance of $417,000 by way of increase in the term loan due to
3193853 Canada Inc.
(d) During fiscal 1996, the term debt owed to the Standard Chartered Bank
was acquired by 3193853 Canada Inc. whose President is a family member
of the Chief Executive Officer of the Company.
(e) Accounts payable includes an amount of $33,115 owed to 764719 Ontario
Inc., whose owner is a family member of the Chief Executive Officer of
the Company.
41
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
INDEX
- -----
- - Computation of Earnings Per Share -
U.S. GAAP - Treasury Share Method Page 44
- - Computation of Earnings Per Share -
Treasury Share Method Page 45
- - Auditors' Report on Financial Statement Schedules Page 46
42
ITEM 14 SCHEDULES (CONT'D)
COMPUTATION OF EARNINGS PER SHARE - U.S. GAAP - TREASURY SHARE METHOD
FOR THE QUARTER ENDED FOR THE FISCAL YEAR ENDED
---------------------- -------------------------
SEPTEMBER DECEMBER MARCH JUNE JUNE JUNE
-----------------------------------------------------------------------------------
1997 1997 1998 1998 1998 1997
PRIMARY EARNINGS PER SHARE - U.S. GAAP
Net earnings $ 22,359. $ 54,836. $ 53,143. $ 75,195. $ 205,533 $ 149,990.
Cumulative dividends (667,233.) (51,326.) (51,326.) (51,326.) (821,211.) (615,908.)
----------------------------------------------------------------------------------
Net earnings after cumulative dividends ($644,874.) $ 3,510. $ 1,817. $ 23,869. ($615,678). ($ 465,918.)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Common Shares outstanding at the
beginning of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
Weighted average number of Common
Shares issued during the period 0. 0. 0. 0. 0. 0.
----------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
----------------------------------------------------------------------------------
Treasury Common Shares assumed purchased
from proceeds of issue 0. 0. 0. 0. 0. 0.
BASIC EARNINGS PER SHARE ($0.0339) $0.00002 $0.0001 $0.0013 ($0.0324) ($0.0245)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE - U.S. GAAP
Net earnings as reported
Less: Cumulative dividends ($ 644,874.) $ 3,510. $1,817. $23,869. ($615,678.) ($465,918.)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the
end of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
Weighted average Common Stock
equivalent based on conversion of
Warrants and Stock Options 14,308,735. 14,308,735. 14,308,735. 14,308,735. 14,308,735. 14,308,735.
----------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end of the period 33,333,333. 33,333,333. 33,333,333. 33,333,333. 33,333,333. 33,333,333.
----------------------------------------------------------------------------------
Fully diluted earnings per share ($0.0193) $0.0001 $0.0001 $0.0007 ($0.0185) ($0.0140)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
43
ITEM 14 SCHEDULES (CONT'D)
COMPUTATION OF EARNINGS PER SHARE - TREASURY SHARE METHOD
FOR THE QUARTER ENDED FOR THE FISCAL YEAR ENDED
--------------------- -------------------------
SEPTEMBER DECEMBER MARCH JUNE JUNE JUNE
-----------------------------------------------------------------------------------
1997 1997 1998 1998 1998 1997
BASIC EARNINGS PER SHARE
Net earnings $ 22,359. $ 54,836. $53,143. $ 75,195. $205,533. $ 149,990.
Cumulative dividends (667,233.) (51,326.) (51,326.) (51,326.) (821,211.) (615,908.)
---------------------------------------------------------------------------------
Net earnings after cumulative dividends ($644,874.) $3,510. $ 1,817. $ 23,869. ($615,678.) ($465,918.)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Common Shares outstanding at the
beginning of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
Weighted average number of Common
Shares issued(cancelled)during the period 0. 0. 0. 0. 0. 0.
---------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
---------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE ($0.0339) $0.0002 $0.0001 $0.0013 ($0.0324) ($0.0245)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE
Net earnings before imputed earnings
Less: Cumulative dividends ($ 644,874.) $ 3,510. $ 1,817. $ 23,869. ($ 615,678). ($465,918.)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
equivalents based on conversion of
Warrants and Stock Options. 14,308,735. 14,308,735. 14,308,735. 14,308,735. 14,308,735. 14,308,735.
---------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end of the period 33,333,333. 33,333,333. 33,333,333. 33,333,333. 33,333,333. 33,333,333.
---------------------------------------------------------------------------------
Fully diluted earnings per share ($0.0193) $0.0001 $0.0001 $0.0007 ( $0.0185) ($0.0140)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
44
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
TO THE BOARD OF DIRECTORS OF
TREATS INTERNATIONAL ENTERPRISES INC.
We have audited the consolidated balance sheet of Treats International
Enterprises Inc. as at June 30, 1998, 1997 and the consolidated statements of
income and deficit, cash flow and stockholders' equity for the years the year
ended June 30, 1998, 1997 and 1996 and have issued our report thereon dated
November 12, 1998; such consolidated financial statements and our report thereon
are included elsewhere herein. Our examinations also comprehended the financial
statement schedules of Treats International Enterprises Inc. listed in item 14
in its Report on Form 10-K. In our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements,
present fairly in all material respects the information shown therein.
Horwath Orenstein
Chartered Accountants
November 12, 1998
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
February 19, 1999 By: \S\
--------------------------------
PAUL J. GIBSON
Chairman of the Board
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
February 19, 1999 By: \S\
--------------------------------
JOHN DEKNATEL
Chief Operating Officer
February 19, 1999 By: \S\
--------------------------------
FRANCOIS TURCOT
Director of Finance
46