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[LOGO]
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Three Months Ended September 30, 1996)
<PAGE>
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:
September 30, 1996 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
State of jurisdiction: I.R.S. Employer No:
DELAWARE 13-3495199
Address of Principal Executive Officer:
418 Preston Street
Ottawa, Ontario
Canada, K1S 4N2
Telephone No.: (613) 563-4073
Registrant has filed all reports under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.:
YES
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TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
Three months ended September 30, 1996
INDEX
PAGE
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, September 30, 1996 1
Statement of Income - September 30, 1996 2
Statement of Cash Flows, September 30, 1996 3
Statement of Stockholder's Equity 4
Notes to Financial Statements 5 to 15
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 16 to 18
PART 11 Other Information - Items 1 to 6 19
Signatures 20
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TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30 SEPTEMBER JUNE 30
NOTE 1996 1996 1995 1995
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- --------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Bank --- --- --- 59,765
Accounts Receivable 481,101 384,570 639,897 461,647
Prepaid Expenses 128,812 206,826 223,620 186,836
Construction work in process 182,139 352,198 120,147 58,726
Current portion of notes receivable 252,743 312,633 330,312 302,500
---------- ---------- ---------- ----------
1,044,795 1,256,227 1,313,976 1,069,474
STORES HELD FOR RESALE 0 660,373 503,659 546,215
NOTES RECEIVABLE 3 1,017,376 892,517 347,019 338,135
CAPITAL ASSETS 4 697,919 193,836 252,453 268,294
ADVERTISING COMMITMENT 10,228 19,310 60,724 66,768
DEFERRED EMPORIUM COSTS 542,085 228,113 148,825 162,355
FRANCHISE RIGHTS 5 10,097,587 10,274,780 10,812,103 10,983,566
---------- ---------- ---------- ----------
13,409,990 13,525,156 13,438,759 13,434,807
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 278,179 187,218 1,369 ---
Accounts payable and accrued liabilities 1,105,839 1,479,357 1,439,816 1,520,307
Current portion of long-term debt 275,651 180,371 720,000 733,500
---------- ---------- ---------- ----------
1,659,669 1,846,946 2,161,185 2,253,807
LEASE SECURITY DEPOSITS 245,302 234,989 251,208 221,589
LONG-TERM DEBT 62,085,996 2,044,364 1,568,779 1,517,925
DEFERRED REVENUE --- --- 18,253 18,079
---------- ---------- ---------- ----------
2,331,298 2,279,353 1,838,240 1,757,593
NON-CONTROLLING INTEREST 8 --- --- 232,000 232,000
---------- ---------- ---------- ----------
3,990,967 4,126,299 4,231,425 4,243,400
---------- ---------- ---------- ----------
CONTINGENCIES 9
STOCKHOLDERS EQUITY
CAPITAL STOCK 10
Preferred:
Authorized - 10,000,000 non-voting, cumulative shares,
dividends at US $.04 per share, redeemable at option
of company at US $1.00 per share par value US $.50 3,732,779 3,732,779 3,732,779 3,732,779
Common:
Authorized - 33,333,333 shares par value US $0.001
Issued - 19,024,599 common shares 19,025 19,025 20,742 20,742
Additional paid - in capital 10,757,739 10,757,739 10,555,028 10,555,028
---------- ---------- ---------- ----------
14,509,543 14,509,543 14,308,549 14,308,549
---------- ---------- ---------- ----------
Deficit (5,090,520) (5,110,686) (5,101,215) (5,117,142)
---------- ---------- ---------- ----------
9,419,023 9,398,857 9,207,334 9,191,407
---------- ---------- ---------- ----------
13,409,990 13,525,156 13,438,759 13,434,807
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
1
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TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTER ENDED FOR THE FISCAL QUARTER ENDED
----------------------------- -----------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
NOTE 1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C> <C>
REVENUES
Royalties 419,812 435,480 419,812 435,480
Franchising 15,973 61,075 15,973 61,075
Supplier Incentives, Commissions & Other 315,625 349,500 315,625 349,500
Sales of managed Franchise Stores 106,542 548,050 106,542 548,050
Proprietary products 105,332 --- 105,332 ---
------- --------- ------- ---------
963,284 1,394,105 963,284 1,394,105
------- --------- ------- ---------
COST AND EXPENSES
Regional operations 135,211 131,205 135,211 131,205
Franchising 17,179 22,453 17,179 22,453
Head office and administration 264,930 371,536 264,930 371,536
Managed franchise stores 115,504 581,398 115,504 581,398
Proprietary products 96,667 --- 96,667 ---
------- --------- ------- ---------
629,491 1,106,592 629,491 1,106,592
------- --------- ------- ---------
E.B.I.T.D 333,793 287,513 333,793 287,513
Interest expense 39,882 59,324 39,882 59,324
Depreciation and Amortization 273,745 212,262 273,745 212,262
------- --------- ------- ---------
313,627 271,586 313,627 271,586
------- --------- ------- ---------
NET INCOME FOR THE PERIOD 20,166 15,927 20,166 15,927
------- --------- ------- ---------
Earnings per share 0.00 0.00 0.00 0.00
------- --------- ------- ---------
------- --------- ------- ---------
</TABLE>
2
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TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTER ENDED FOR THE FISCAL QUARTER ENDED
----------------------------- -----------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 20,166 15,927 20,166 15,927
ITEMS NOT AFFECTING CASH
Depreciation & Amortization 273,745 212,262 273,745 212,262
Interest expense related to annual accretion 0 18,750 0 18,750
Changes in non-cash operating working capital items (221,976) (356,946) (221,976) (356,946)
-------- -------- -------- --------
71,935 (110,007) 71,935 (110,007)
-------- -------- -------- --------
FINANCING
Bank Indebtedness 90,961 1,369 90,961 1,369
Long - term debt 136,912 37,354 136,912 37,354
-------- -------- -------- --------
227,873 38,723 227,873 38,723
-------- -------- -------- --------
INVESTING
Issue of notes receivable, net of repayments (64,969) (36,696) (64,969) (36,696)
Purchase of capital & other assets (600,635) (72,911) (600,635) (72,911)
Deferred cost (313,972) --- (313,972) ---
Advertising commitment 9,082 6,044 9,082 6,044
Security deposits 10,313 29,619 10,313 29,619
Non-Controlling interest accretion 0 0 0 0
Managed franchise stores held for resale 660,373 42,556 660,373 42,556
Deferred revenue 0 174 0 174
-------- -------- -------- --------
(299,808) (31,214) (299,808) (31,214)
-------- -------- -------- --------
NET GENERATED CASH (OUTFLOW) 0 (102,498) 0 (102,498)
CASH POSITION, BEGINNING OF PERIOD 0 59,765 0 59,765
-------- -------- -------- --------
CASH POSITION, END OF PERIOD 0 (42,733) 0 (42,733)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
3
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TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD ENDED SEPTEMBER 30, 1996 AND JUNE 30, 1996, 1995, 1994, 1993
<TABLE>
<CAPTION>
REDEEMABLE, CONVERTIBLE
---PREFERRED SHARES--- ----COMMON SHARES----
----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
- ----------------------------------------------------------------------------------------------------------------------
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1993 --- --- 18,500,887 9,793,182 (5,411,575) 4,381,607
Common shares issued on conversion
of minority interest special shares 1,619,760 894,108 --- 894,108
Conversion of Royal Bank of Canada
subordinated debenture to preferred shares 5,409,825 3,732,779 3,732,779
Warrants exercised --- --- 621,295 270,077 --- 270,077
Share issue costs --- --- --- (381,597) --- (381,597)
Net income for the year --- --- --- --- 187,432 187,432
--------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1994 5,409,825 3,732,779 20,741,942 10,575,770 (5,224,143) 9,084,406
Net income for the year --- --- --- --- 107,211 107,211
--------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1995 5,409,825 3,732,779 20,741,942 10,575,770 (5,116,932) 9,191,617
Common shares issued 350,000 350 350
Cancellation of common shares (2,067,344) (2,067) (2,067)
Share issue costs (29,289) (29,289)
Redemption of non-controlling interest 0
in subsidiary 232,000 232,000
Net income for the year --- --- --- --- 6,246 6,246
--------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1996 5,409,825 3,732,779 19,024,598 10,776,764 (5,110,686) 9,398,857
Net income for the period --- --- --- --- 20,166 20,166
--------- --------- ---------- ---------- ---------- ---------
Balance September 30, 1996 5,409,825 3,732,779 19,024,598 10,776,764 (5,090,520) 9,419,023
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
</TABLE>
4
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1996
(CANADIAN DOLLARS)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
These consolidated financial statements comprise the accounts of the
Company and its wholly - owned subsidiaries. All intercompany transactions
and balances have been eliminated in these consolidated financial
statements, which include the accounts of the Company and its subsidiaries
from the date of acquisition as follows:
* Treats Inc.
* Treats Ontario Inc.
* Chocolate Gourmet Treats Limited
* Accounting & Consulting Inc.
* Treats International Inc.
* Triadon Investment Group Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (which also conform in
all material respects with generally accepted accounting principles in the
United States) and include the following significant accounting policies:
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5
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REVENUE RECOGNITION
Franchise revenue arises on the sale of national, area and store
franchises. Franchise store revenue is recognized as income when the
respective purchase and sale agreements have been signed, the funds have
been received, all material conditions relating to the sale have been
substantially completed by the Company and the franchise store has
commenced operations. Revenue from national and area franchise
agreements is recognized when the area development agreement has been
signed and all substantial obligations of the Company have been completed.
When payment for the sale of a national or area franchise is based on a
contract over a period longer than twelve months, the Company recognizes
revenue based on the assessment of collectibility. The total contract
is recorded as deferred revenue, and revenue recognition commences when
payments in excess of 25% of the total contract have been received and
management has ascertained that there is a sufficient level of certainty
that the balance of the contract is collectible.
Deposits that are non-refundable under the franchising agreement are
recognized as franchising revenue when received.
Royalties are recognized when they are earned, based on a percentage of the
franchisees' sales on a weekly basis.
Supplier incentives are recognized in the period to which the apply.
6
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FRANCHISE STORES HELD FOR RESALE
Franchise stores held for resale are valued at the lower of cost and net
realizable value.
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost less accumulated amortization.
Amortization is provided for at rates intended to write off the
assets over their estimated economic lives, as follows:
Furniture and fixtures - 5 years straight-line
Machinery and equipment - 5 years straight-line
Reference books - 5 years straight-line
FRANCHISE RIGHTS
Franchise rights are being carried at cost less accumulated amortization.
Amortization is provided for on the straight-line basis over 20 years.
DEFERRED ISSUE COSTS
Deferred issue costs represent fees incurred in connection with the
preparation of regulatory filings for the issue of capital stock. These
costs are charged to capital stock in the period the stock is issued.
DEFERRED DEVELOPMENT COSTS
Deferred development costs are amortized on the straight-line basis over 3
years.
DEFERRED EMPORIUM COSTS
The Coffee Emporium project was completed on June 30, 1996 and the costs
are being amortized on a straight-line basis over three years commencing
July 1, 1996.
7
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SEPTEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONT'D)
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are translated using the temporal method.
Under this method, monetary assets and liabilities as well as non-monetary
items carried at market value are translated at year-end exchange rates.
Other non-monetary assets and liabilities are translated at exchange rates
prevailing at the transaction dates. Revenues and expenses are translated
at average rates prevailing during the year.
Gains or losses resulting from exchange translation are included in income.
EARNINGS PER SHARE
Net earnings per share are calculated using the daily weighted average
number of common shares outstanding during the fiscal year plus the
net additional number of shares which would be issuable upon the
exercise of stock options, assuming that the Company used the proceeds
received to purchase additional shares at market value.
3. NOTES RECEIVABLE
Notes receivable are due from franchisees with interest at varying rates
and repayable in scheduled instalments.
$ $
Notes receivable, net of allowance
for doubtful accounts of Nil (1996 - nil) 1,270,119 1,205,150
Less current portion (252,743) (312,633)
--------- ---------
1,017,376 982,517
--------- ---------
--------- ---------
8
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SEPTEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
4. CAPITAL ASSETS ACCUMULATED
COST AMORTIZATION --- NET BOOK VALUE --
$ $ $ $
Stores & Equipment 542,028 23,734 518,294 0
Furniture and fixtures 201,103 198,193 2,910 237,000
Machinery and equipment 478,315 306,556 171,759 187,803
Reference books 25,966 21,013 4,953 5,796
--------- ------- ------- -------
1,247,412 549,496 697,916 193,836
--------- ------- ------- -------
--------- ------- ------- -------
5. ADVERTISING COMMITMENT
The Company receives prescribed amounts from franchisees to fund and
develop advertising and promotion campaigns regionally and nationally.
The funds collected, net of costs incurred, are recorded as a liability for
future advertising and promotion. During fiscal 1996 advertising and
promotion costs incurred exceeded funds collected.
6. FRANCHISE RIGHTS
$ $
Franchise rights 14,175,609 14,175,609
Accumulated amortization (4,078,022) (3,900,829)
---------- ----------
10,097,587 10,274,780
---------- ----------
---------- ----------
The company obtained an independent appraisal dated August 28, 1996 from
Scott, Rankin, Gordon & Gardiner, Chartered Accountants. substantiating a
valuation of franchise rights in excess of $10,000,000 as at June 30, 1996.
9
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SEPTEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
7. LONG - TERM DEBT $ $
3193853 Canada Inc.
term loan, repayable in 66 monthly instalments
of $10,000 plus interest at prime plus 2.5% due
March 2001, secured by a general security
agreement, general assignment of book debts
and franchise rights, pledge of all the shares in
subsidiary and associated companies. 608,000 608,000
Royal Bank of Canada Subordinate debenture,
Subordinated debenture, bearing interest at 8%
per annum, payable in 60 monthly instalments, due
June 30, 2001. 1,129,562 1,129,562
Business Development Bank of Canada
Term loan, repayable in 50 monthly instalments
of $2,001 plus interest at prime plus 4.0%, due
June 23, 2000. 90,000 96,000
Other long-term debt, non-interest bearing,
without specific terms of repayment. 538,269 391,173
--------- ---------
2,365,831 2,224,735
Less current portion (275,651) (180,371)
--------- ---------
2,090,180 2,044,364
--------- ---------
--------- ---------
10
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SEPTEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
LONG-TERM DEBT (CONT'D)
Interest expense for the year to date related to long-term debt was $39,882
(1995 - $59,324)
The minimum future principle repayments required over the next five years
are as follows:
$
1997 180,371
1998 618,906
1999 340,371
2000 447,525
2001 637,562
---------
2,224,735
---------
---------
8. NON-CONTROLLING INTEREST IN SUBSIDIARY
$ $
200,000 authorized and issued preferred shares
of Treats International Inc. ---- ----
---------- --------
The preferred shares of Treats International Inc., a U.S. subsidiary, were
issued during the 1991 fiscal year in connection with the acquisition of
the U.S. franchise rights. The preferred shares are convertible into 5% of
the common shares of Treats International Inc. on a fully diluted basis at
any time prior to November 2, 1995. On June 26, 1996 by resolution of the
Board of Directors of Treats International Inc., the 200,000 preferred
shares of Treats International Inc. were cancelled and returned to
treasury. The shares were cancelled due to non-compliance of agreements
with the non-controlling stockholder.
11
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9. COMMITMENTS AND CONTINGENCIES
(a) The Company is a defendant in the following civil litigation:
( i) Triadon Investment Group Inc., a subsidiary
company, was named in an action by a bank
and judgement was awarded against the
subsidiary for $119,353. As the subsidiary
company is inactive and without assets, no
provision has been recorded in respect of
this judgement.
(ii) The Company is also a defendant in several
actions arising in the normal course of
business, the final outcome of which cannot
be determined at this time. Any settlement in
regard of these actions will be recorded in
the statements of income in the fiscal year
the settlement occurs.
(b) Certain franchise stores occupy their premises under lease arrangements
wherein the Company is primarily responsible for performance under the
lease. The aggregate rental obligations under these leases and various
leases for office space over the next five years are as follows:
LEASES
ASSIGNED TO LEASES
FRANCHISE STORES ASSIGNED TO LEASES FOR
HELD FOR RESALE FRANCHISEES OFFICE SPACE
$ $ $
1997 70,313 3,260,086 96,174
1998 70,313 2,770,986 96,174
1999 54,000 2,260,763 96,174
2000 54,000 2,082,315 96,174
2001 --- 1,437,131 32,058
The total rental obligation subsequent to year 2001, based on current
leases assigned to franchisees amounts to $4,160,000.
12
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10. CAPITAL STOCK
RESERVED SHARES - JUNE 30, 1994
On June 30, 1994 Tricapital Management Limited exercised its outstanding
warrants and reserved shares to acquire 621,295 common shares for
consideration of $270,077 (U.S. $195,708).
STOCK ISSUE - DEBT RESTRUCTURING - JUNE 30, 1994
The Company concluded its negotiations under a private placement offering
to restructure its debt and capital, effective June 30, 1994, as follows:
Royal Bank of Canada, in consideration for retiring the outstanding
debenture of $4,732,779 issued a subordinated debenture of $1,000,000
adjusted for $150,000 accretion to $850,000 and was issued 5,409,825
non-voting series A preference shares for the balance. These shares are
redeemable at the option of the Company at a price of U.S. $1 per share at
any time. The shares carry a cumulative 5.5% cash dividend payable
quarterly in arrears. At the option of the holder the dividend may be paid
in the form of common shares of the Company. The shares are convertible at
the option of the holder at U.S. $.60 per share.
SPECIAL SHARES CONVERTED TO COMMON SHARES
As part of the restructuring, effective June 30, 1994, the 4,500,000
special shares of Treats inc. held by the Royal Bank of Canada were
accreted back to the $45 aggregate issue price. The Royal Bank of Canada
converted its special shares into 1,619,760 common shares of the Company.
ISSUANCE OF SHARE
The company has issued 350,000 Common Shares pursuant to the debt
restructuring on June 30, 1994. The Royal Bank Capital Corporation
received an additional 350,000 common shares at nominal consideration as
the Company was unsuccessful in raising U.S. $4 million in new equity by
June 30, 1995.
13
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10. CAPITAL STOCK (CONT'D)
CANCELLATION OF COMMON SHARES - JANUARY 4, 1996
Pursuant to a resolution of the Board of Directors, the Transfer Agent of
record was instructed to cancel and return to treasury the 2,067,344 common
shares held by Tricapital Management Limited. The shares were originally
issued pursuant to a debt restructuring with Tricapital Management Limited.
The restructuring did not proceed as outlined and accordingly these shares
were cancelled.
11. RELATED PARTY TRANSACTIONS
(a) The Royal Bank of Canada and its subsidiary, Royal Bank Capital
Corporation, are registered holders of 37.9% of the issued stock. The
Royal Bank of Canada hold a subordinated debenture (see note 7).
Interest expense related to the debenture was
$23,310 (1995 - $19,945).
Undeclared dividends for July 1, 1994 to September 30, 1996 on the
preferred shares owned by the Royal Bank are $461,931.
(b) Accounts and notes receivable include nil (1995 - $45,374) due from a
franchisee related to the President of the Company.
(c) The Company leases its office premises at an annual cost of
approximately $100,000 from a company which is 100% owned by the
family of the President. The family owns approximately 32.6% of the
common stock of the Company.
(d) Under a loan agreement, the Company has advanced $160,000 to certain
officers to fund the purchase of company stock.
(e) During the last fiscal year, the term debt owed to the Standard
Chartered Bank was acquired by 3193853 Canada Inc. the President of
which, is a family member of the Chief Executive Officer of the
Company.
14
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SEPTEMBER JUNE
1996 1996
- --------------------------------------------------------------------------------
12. INCOME TAXES
Income taxes have not been provided for as the consolidated group of
companies have tax losses of $3,868,776 available to offset taxable income.
These losses expire as follows:
$
1998 2,097,008
1999 910,753
2000 799,837
2001 61,178
---------
3,868,776
---------
---------
13. EARNINGS PER SHARE
Primary earnings per share 0.00 0.00
---------- ----------
Weighted average number of
shares outstanding 19,996,498 20,741,942
---------- ----------
---------- ----------
The calculation of fully diluted earnings per share assumes that, if a
dilutive effect is produced, all convertible securities have been
converted, all shares to be issued under contractual commitments have been
issued and all outstanding options have been exercised at the later of the
beginning of the fiscal period and the option issue date. The calculation
includes an allowance for imputed earnings derived from the investment of
funds which are assumed to have been received. Fully diluted earnings per
share are not presented as they are anti-dilutive.
15
<PAGE>
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The system-wide retail sales for the three months ended September 30, 1996
were $6,627,000 compared to $7,468,000 a decrease of $841,000 or 11.3% for
the same three month period last year.
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 SEPTEMBER
-----------------------
1996 1995
------ ------
Net Sales . . . . . . . . . . . . . . . . . 100.0% 100.0%
Royalties. . . . . . . . . . . . . . . . . . 43.6 31.2
Franchising. . . . . . . . . . . . . . . . . 1.7 4.4
Supplier Incentives, commissions & other . . 32.8 25.1
Proprietary products . . . . . . . . . . . . 10.9 0.0
Sales of managed franchises stores . . . . . 11.1 39.3
Regional operations. . . . . . . . . . . . . 14.0 9.4
Franchising. . . . . . . . . . . . . . . . . 1.8 1.6
Head office and administration . . . . . . . 27.5 26.7
Proprietary products . . . . . . . . . . . . 10.0 0.0
Managed franchise stores . . . . . . . . . . 12.0 41.7
------ ------
65.3% 79.4%
------ ------
EBITD. . . . . . . . . . . . . . . . . . . . 34.7% 20.6%
------ ------
Interest expense . . . . . . . . . . . . . . 4.1 4.3
Depreciation and Amortization. . . . . . . . 28.4 15.2
------ ------
NET INCOME . . . . . . . . . . . . . . . . . 2.1% 1.1%
------ ------
------ ------
16
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QUARTER ENDED SEPTEMBER 30, 1996 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995.
Total revenue for the quarter ended September 30, 1996 decreased $430,000
or 30.9% to $963,000 from $1,363,000 for the same period last year. The
decrease in revenue resulted primarily from:
* The sales of managed franchises stores decreased by $442,000 as a
result of management's decision to divest itself from most
corporately managed stores.
* Royalties decreased $15,000 or 3.6% to $419,000 compared to
$435,000 for the same period last year.
* Supplier incentives decreased $34,000 or 9.7% to $315,000
compared to $349,000 for the same period last year.
* Franchising decreased $45,000 or 73.8% to 16,000 compared to
$61,000 for the same period last year.
* In the fiscal year ended June 30, 1996 the Company commenced
purchasing certain proprietary products directly from
manufacturers and selling the proprietary products to
distributors for distribution to the franchised and company
managed locations. Revenues from those sales were $105,000.
Expenses for the quarter ended September 30, 1996 decreased $477,000 or
43.1% to $629,000 from $1,106,000 for the same period last year. The
decrease in expenses relate to the following:
* Cost associated with managed franchised stores decreased $466,000
a direct result of the decrease in the number of corporately
managed stores.
* Head Office and Administration cost decreased $107,000 or 28.7%
to $265,000 from $372,000 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 which commenced last fiscal year was $96,000.
* Interest expense decreased by $19,000 or 32.8% to $40,000 from
$59,000 last year. The decrease is a result of the difference
between a debenture held by Royal Bank of Canada and its fair
market value having been completely amortized.
* Net income for the quarter ended September 30, 1996 was $20,000
compared to a net income of $16,000 for the same period last
year.
17
<PAGE>
WORKING CAPITAL
The working capital deficit at the end of the period was $615,000 compared to a
working capital deficit of $847,000 for the same period last year. This
improvement of $232,000 in the working capital deficit was achieved through cash
flow from operations and negotiations with the Company's major lenders. During
the year the term debt owed to the Standard Chartered Bank was acquired by a
company owned by a group of private investors. A person related to the
President and Chief Executive Officer of the Company is associated with the
investor group. Also the Company completed an agreement with the Royal Bank of
Canada to reschedule the payment of its debenture. The debenture was due
October 31, 1996. The bank has agreed to reschedule the debt payments and
accrued interest.
LIQUIDITY AND CASH FLOW
During the quarter the operating cash flow was $72,000 compared to an outflow of
$(110,000) for the same quarter of the last fiscal year. This is the result of
a reduction in interest expense. An increase in depreciation and amortization
and a decrease in non-cash operating working capital changes.
18
<PAGE>
PART 11 OTHER INFORMATION
Item 1 Legal Proceedings - See notes to Financial Statements
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Securities Holders - None
Item 5 Other Information
The Buy/Sell agreement between TIEI, Paul J. Gibson and Royal Bank
Capital Corporation a wholly owned subsidiary of the Royal Bank of
Canada, expired on June 24, 1996 without either party exercising its
option. The Company, its President & C.E.O. and Royal Bank of Canada
continue to discuss a number of options which would result in the
Company receiving funds in the form of new equity or long term debt.
There is no certainty as to the outcome of these ongoing discussions.
Item 6 Exhibits and Reports on Form 8-K - None
Exhibit 27 - Financial Data Schedule
19
<PAGE>
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 September 30, 1996.
The result of operation for the period ended September 30, 1996 are not
necessarily indicative of the results of the entire year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
By: /S/ PAUL J. GIBSON
- ---------------------------------------- November 29, 1996
Paul J. Gibson, Chief Executive Officer
By: /S/ JOHN A. DEKNATEL
- ----------------------------------------- November 29, 1996
John A. Deknatel, Chief Operating Officer
By: /S/ FRANCOIS TURCOT
- ----------------------------------------- November 29, 1996
Francois Turcot, Director of Finance
20
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