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:
December 31,1998 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
State of jurisdiction: I.R.S. Employer No:
DELAWARE 13-3495199
ADDRESS OF PRINCIPAL EXECUTIVE OFFICER:
418 Preston Street
Ottawa, Ontario
Canada, K1S 4N2
Telephone No.: (613) 563-4073
U.S. ADDRESS OF TREATS INTERNATIONAL ENTERPRISES, INC.
c/o Vincent J. Profaci
Attorney at Law
J.A. Jurgens, P.A.
1964 Howell Branch Road, Suite 206
Winter Park, Florida 32792
Telephone No.: (407) 673-1144
Registrant has filed all reports under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.:
YES
---
TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
Three months ended December 31, 1998
INDEX
PAGE
----
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, December 31, 1998 1
Statement of Income - December 31, 1998 2
Statement of Cash Flows, December 31, 1998 3
Statement of Stockholder's Equity 4
Notes to Financial Statements 5 to 17
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 18 to 20
PART 11 Other Information - Items 1 to 6 21
Signatures 22
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
DECEMBER 31 JUNE 30 DECEMBER 31 JUNE 30
NOTE 1998 1998 1997 1997
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
ASSETS
CURRENT ASSETS
Cash 0. 45,874. 0. 0.
Accounts Receivable 514,641. 193,718. 555,547. 254,852.
Prepaid Expenses 103,916. 144,606. 121,271. 152,705.
Construction work in process 452,433. 33,476. 131,430. 22,074.
Current portion of notes receivable 208,455. 217,205. 182,210. 188,714.
----------------------------------------------------------------------------
1,279,445. 634,879. 990,458. 618,345.
STORES HELD FOR RESALE 0. 0. 170,765. 149,924.
NOTES RECEIVABLE 3 927,920. 819,820. 1,350,639. 1,438,528.
CAPITAL ASSETS 4 1,876,834. 2,020,533. 576,502. 652,860.
ADVERTISING COMMITMENT 5 142,998. 94,576. 0. 0.
DEFERRED COSTS 204,235. 268,566. 382,011. 462,715.
INVESTMENT IN PUBLIC COMPANY 1,617,912. 1,617,912. 0. 0.
FRANCHISE RIGHTS 6 8,240,593. 8,572,715. 9,211,611. 9,565,999.
----------------------------------------------------------------------------
14,289,937. 14,029,001. 12,681,986. 12,888,371.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 191,864. 0. 57,189. 102,232.
Accounts payable and accrued liabilities 969,558. 953,620. 648,629. 863,778.
Current portion of long-term debt 807,419. 644,547. 382,200. 435,649.
----------------------------------------------------------------------------
1,968,841. 1,598,167. 1,088,018. 1,401,659.
----------------------------------------------------------------------------
LONG-TERM DEBT 2,228,362. 2,438,073. 1,730,466. 1,703,074.
LEASE SECURITY DEPOSITS 7 254,606. 238,381. 237,459. 234,791.
----------------------------------------------------------------------------
4,451,809. 4,274,621. 3,055,943. 3,339,524.
----------------------------------------------------------------------------
CONTINGENCIES 9
STOCKHOLDERS EQUITY
CAPITAL STOCK 10
Preferred:
Authorized - 10,000,000 non-voting, cumulative shares,
dividends at US $.04 per share, redeemable at option
of company at US $1.00 per share par value US $.50 3,732,779. 3,732,779. 3,732,779. 3,732,779.
Common:
Authorized - 33,333,333 shares par value US $0.001
Issued - 20,741,942 common shares 19,025. 19,025. 19,025. 19,025.
Additional paid - in capital 10,757,739. 10,757,739. 10,757,739. 10,757,739.
----------------------------------------------------------------------------
14,509,543. 14,509,543. 14,509,543. 14,509,543.
----------------------------------------------------------------------------
Deficit (4,671,415.) (4,755,163.) (4,883,500.) (4,960,696.)
----------------------------------------------------------------------------
9,838,128. 9,754,380. 9,626,043. 9,548,847.
----------------------------------------------------------------------------
14,289,937. 14,029,001. 12,681,986. 12,888,371.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE FISCAL QUARTER ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
NOTE 1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
REVENUES
Royalties 530,862. 571,637. 986,752. 1,015,810.
Sales of managed franchise stores 216,818. 254,141. 394,131. 394,216.
Supplier Incentives, Commissions & Other 170,454. 304,499. 424,855. 555,915.
Franchising 23,057. 150. 107,057. 130,550.
Proprietary products 145,984. 135,500. 237,515. 237,754.
Construction revenues 116,385. 287,788. 411,260. 612,915.
----------------------------------------------------------------------------
1,203,560. 1,553,715. 2,561,570. 2,947,160.
----------------------------------------------------------------------------
COST AND EXPENSES
Regional operations and franchising 186,750. 284,981. 386,637. 483,270.
Head office and administration 250,875. 321,387. 485,131. 641,478.
Managed franchise stores 233,139. 248,717. 444,530. 383,648.
Proprietary products 119,650. 128,551. 199,665. 219,174.
Construction expenses 35,485. 212,058. 330,360. 537,132.
Interest expense 60,827. 39,533. 116,509. 78,965.
Depreciation and Amortization 257,494. 263,652. 514,990. 526,297.
----------------------------------------------------------------------------
1,144,220 1,498,879. 2,477,822. 2,869,964.
----------------------------------------------------------------------------
NET INCOME FOR THE PERIOD 59,340. 54,836. 83,748. 77,196.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share 12 0.00 0.00 0.00 0.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE FISCAL QUARTER ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
$ $ $ $
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 59,340. 54,836. 83,748. 77,196.
ITEMS NOT AFFECTING CASH
Depreciation & Amortization 257,494. 263,652. 514,990. 526,297.
Changes in non-cash operating working capital items (306,425.) (307,167.) (655,272.) (593,766.)
-------------------------------------------------------
(10,409.) (11,321.) (56,534.) (9,727.)
-------------------------------------------------------
FINANCING
Bank Indebtedness 145,534. (92,811.) 191,864. (45,043.)
Repayment of Long-term debt (22,470.) (12,851.) (46,839.) (26,057.)
-------------------------------------------------------
123,064. (105,662.) 145,025. (71,100.)
-------------------------------------------------------
INVESTING
Issue of notes receivable, net of repayments (117,267.) 101,319. (99,350.) (94,393.)
Purchase of capital & other assets (1,003.) (3,667.) (2,819.) (14,847.)
Deferred Cost 1. 0. 1. 0.
Advertising commitment (23,028.) (540.) (48,422.) 0.
Security deposits 7,823. (2,771.) 16,225. 2,668.
Managed franchise stores held for resale 0. 0. 0. (20,841.)
-------------------------------------------------------
(133,473.) (94,341.) (134,365.) (61,373.)
NET GENERATED CASH (OUTFLOW) 0. 0. (45,874.) 0.
CASH POSITION, BEGINNING OF PERIOD 0. 0. 45,874. 0.
-------------------------------------------------------
CASH POSITION, END OF PERIOD 0. 0. 0. 0.
-------------------------------------------------------
-------------------------------------------------------
3
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1997, 1996 AND 1995
REDEEMABLE, CONVERTIBLE
---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
---------------------------------------------------------------------------------------
Net income for the period - - - - 83,748 83,748
---------------------------------------------------------------------------------------
Balance December 31, 1998 5,409,825 3,732,779 19,024,598 10,776,764 (4,671,415) 9,838,128
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
4
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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.
5
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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.
6
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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.
7
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(CANADIAN DOLLARS)
JUNE
1998 1998
- --------------------------------------------------------------------------------
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 (1998 - nil) 1,136,375 1,037,025
Less current portion (208,455) (217,205)
--------------------------
927,920 819,820
--------------------------
--------------------------
8
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(CANADIAN DOLLARS)
JUNE
1998 1998
- --------------------------------------------------------------------------------
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 NET BOOK
COST AMORTIZATION ---- VALUE ----
$ $ $ $
Land 625,000 - 625,000 625,000
Building 457,885 11,447 446,438 457,885
Furniture, fixtures
and equipment 686,580 667,916 18,664 51,348
Reference books 25,966 25,966 - -
Corporate owned
stores reacquired
from franchisees 735,757 97,127 638,630 712,206
Corporate owned
store equipment
reacquired from
former franchisees 261,302 113,338 147,964 174,094
------------------------------------------------------
2,792,489 915,793 1,876,696 2,020,533
------------------------------------------------------
------------------------------------------------------
9
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(CANADIAN DOLLARS)
JUNE
1998 1998
- --------------------------------------------------------------------------------
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 13,284,863
Accumulated amortization (4,878,209) (4,712,148)
----------- -----------
8,406,654 8,572,715
----------- -----------
----------- -----------
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 1,025,000
(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 2,154,562
10
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(CANADIAN DOLLARS)
June
1998 1998
- --------------------------------------------------------------------------------
$ $
8. LONG-TERM DEBT (CONT'D)
Brought forward 2,154,562 2,154,562
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. 36,000 48,000
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 379,353 398,149
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2004 465,653 481,909
-----------------------
3,035,568 3,082,620
Less current portion (807,419) (644,547)
-----------------------
2,228,149 2,438,073
-----------------------
-----------------------
(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.
11
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONT'D)
Interest expense for the year related to long-term debt was $55,191 (1997
- $50,972).
The minimum future principal repayments required over the next five years
are as follows:
$
1999 644,796
2000 444,514
2001 526,490
2002 330,221
2003 319,218
Subsequent 770,329
---------
3,035,568
---------
---------
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.
12
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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
-----------------------------
-----------------------------
13
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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.
14
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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 $55,191 (1997 -
$50,972).
Undeclared dividends for July 1, 1994 to June 30, 1998 on the
preferred shares owned by the Royal Bank are $932,863.
(b) 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
family owns approximately 32.6% of the common stock 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).
(c) 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 $33,569 (1997 - $nil).
(d) 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.
(e) In the quarter ended December 31, 1998, 3193853 Canada Inc. whose
President is a member of the family of the Chief Executive Officer of
the Company provided a $115,000 short term working capital loan to the
Company. This liability is recorded in the Company's consolidated
financial statements as an accounts payable.
15
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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 note 10) 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.
16
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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.
17
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(CANADIAN DOLLARS)
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The system-wide retail sales for the six months ended December 31, 1998
were $12,177,000 compared to $12,748,000 a decrease of $571,000 or 4.5% for
the same six month 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 were the Company could not establish satisfactory lease terms
with the landlord.
RESULTS OF OPERATION
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 DECEMBER
1998 1997
----------------------
Net Sales .............................. 100.0% 100.0%
Royalties .............................. 44.1 36.8
Franchising ............................ 1.9 0.0
Supplier Incentives, commissions & other 14.2 19.6
Proprietary products ................... 12.1 8.7
Sales of managed franchises stores ..... 18.0 16.4
Construction revenues .................. 9.7 18.5
Regional operations and franchising .... (15.5) (18.3)
Head office and administration ......... (20.8) (20.7)
Proprietary products ................... (9.9) (8.3)
Managed franchise stores ............... (19.4) (16.0)
Construction expenses .................. (2.9) (13.6)
----------------------
EBITD .................................. 31.4% 23.0%
----------------------
Interest expense ....................... (5.1) (2.5)
Depreciation and Amortization .......... (21.4) (17.0)
----------------------
NET INCOME ............................. 4.9% 3.5%
----------------------
----------------------
18
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(CANADIAN DOLLARS)
QUARTER ENDED DECEMBER 31, 1998 COMPARED TO QUARTER ENDED DECEMBER 31, 1997.
Total revenue for the quarter ended December 31, 1998 decreased $350,000
or 22.5% to $1,204,000 from $1,554,000 for the same period last year. The
decrease in revenue resulted primarily from:
* The sales of managed franchises stores decreased by $37,000 or
14.7% to $217,000 compared to $254,000 for the same period last
year.
* Royalties decreased $41,000 or 7.1% to $531,000 compared to
$572,000 for the same period last year.
* Supplier incentives decreased $134,000 or 44.0% to $170,000
compared to $304,000 for the same period last year.
* Franchising increased $23,000 to 23,000 compared to $150 for the
same period last year.
* Proprietary products revenues increased $10,000 or 7.7% to
$146,000 from $136,000 for the same period last year.
* Construction revenues was $116,000 for the period.
Expenses for the quarter ended December 31, 1998 decreased $355,000 or
23.7% to $1,144,000 from $1,499,000 for the same period last year. The
decrease in expenses relate to the following:
* Cost associated with managed franchised stores decreased $16,000
of 6.3% to $233,000 compared to $249,000 for the same period last
year.
* Head Office and Administration cost decreased $71,000 or 21.9% to
$251,000 from $322,000 for the same period last year.
* The cost of purchasing certain proprietary products for resale to
distributors was $120,000.
* The cost of construction was $35,000.
19
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(CANADIAN DOLLARS)
QUARTER ENDED DECEMBER 31, 1998 COMPARED TO QUARTER ENDED DECEMBER 31, 1997.
(CONT'D)
* Interest expense increased by $21,000 or 53.9% to $61,000 from
$40,000 last year. Due to the increase in the Long Term Debt.
(See Note 11b, Page 15)
* Net income for the quarter ended December 31, 1998 was $59,000
compared to a net income of $55,000 for the same period last
year.
WORKING CAPITAL
The working capital deficit at the end of the period was $689,000 compared to
a working capital deficit of $98,000 for the same period last year.
LIQUIDITY AND CASH FLOW
During the quarter the operating inflow was $10,000 compared to an inflow of
$11,000 for the same quarter of the last fiscal year. This is the result of a
decrease in non-cash operating working capital items.
20
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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
Item 6 Exhibits and Reports on Form 8-K - None
21
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998
(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 3 months ended December 31, 1998.
The result of operation for the period ended December 31, 1998 are not
necessarily indicative of the results of the entire year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
By: /s/ Paul J. Gibson February 26, 1999
----------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel February 26, 1999
----------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot February 26, 1999
----------------------------------------
Francois Turcot, Director of Finance
22