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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, 1997
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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:
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(Title of class)
Common Stock $.001 par value
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(Title of class)
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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. $168,615.. The aggregate market value was computed by
reference to the average bid and asked prices as of October 3, 1997..
(U.S.$0.03)
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 June 30, 1997
DOCUMENTS INCORPORATED BY REFERENCE
2
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TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1997
INDEX PAGE
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PART 1
Item 1 Business 4 -5
Item 2 Properties 6
Item 3 Legal Proceedings 6
Item 4 Submission of Matters to a Vote of Security Holders 6
PART 11
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters 7 - 8
Item 6 Selected Financial Data 9 - 10
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 16
Item 7-A Quantitative and Qualitative disclosure about
market risk. 16
Item 8 Financial Statements and Supplementary Data 17 - 37
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 38
PART 111
Item 10 Directors and Executive Officers of the Registrant 39 - 40
Item 11 Executive Compensation 41
Item 12 Security Ownership of Certain Beneficial Owners and
Management 42 - 43
Item 13 Certain Relationships and Related Transactions 44
PART 1V
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 45 - 48
SIGNATURES 49
3
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PART 1
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 specialty coffees, and 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 operated 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.
TRIADON INVESTMENT GROUP INC. ("TIG")
ACCOUNTING AND CONSULTING INC.(1)
(1) Subsidiary of GGTL
As at September 30, 1997 there were 145 retail units in North America utilizing
the Treats System. 139 of these units are owned and operated by franchisees; 6
are corporately managed. 141 units are located in Canada and 4 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 is currently able to sell
franchises in most States of the United States with the exception of North
Dakota. The Company has taken no steps to comply with any other International
government franchise regulatory agencies.
4
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ITEM 1 BUSINESS (CONT'D)
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 Treats International Coffee Emporium varies
normally 500 - 2,000 square feet with its own seating arrangements. Treats
franchise 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.
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.
5
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ITEM 2 PROPERTIES
The Company at present owns no real properties.
LEASED PREMISES
The Company currently leases space for its head office in Ottawa, Canada.
The Company has a lease commitment until April 30, 2001. (See Related
Party Transactions Part 111 Item 13-b).
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 were issued against the
Company on some of the claims in the amount of $377,000 all of which are
under appeal.
As the outcome of either the claims, counterclaims or appeals is not
determinable at this time, these financial statements do not include a
provision for any potential losses.
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.
6
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PART 11
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, 1997 was 1,234 and at June 30,
1996, was 1,161. 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.
On June 10, 1993, the Company approved a 1 for 3 reverse split, effective on
June 21, 1993 and all prices set forth after June 21, 1993, are adjusted for the
reverse split.
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.
7
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ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (CONT'D)
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Quarter Ended High Bid Low Bid High Asked Low Asked
- ------------- -------- ------- ---------- ---------
(US $) (US $) (US $) (US $)
As of June 21, 1993, the Common Stock has been quoted on the computerized
bulletin board of NASDAQ under the symbol TIEI. Quotations are as follows:
September 30, 1995 0.1875 0.1875 0.3125 0.3125
December 31, 1995 0.125 0.125 0.3125 0.3125
March 31, 1996 0.1875 0.1875 0.3125 0.3125
June 30, 1996 0.1875 0.1875 0.3125 0.3125
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
8
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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, 1997, have
been converted into U.S. dollars, at the prevailing rate of exchange.
<TABLE>
<CAPTION>
AS AT JUNE 30
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1997 1997 1996 1995 1994 1993
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(US)(1) ( IN THOUSANDS )
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Cash $ ---- $ ---- $ ---- $ 60. $ 243. $ 5.
Current Assets 447. 618. 1,256. 1,069. 990. 907.
Franchise Rights 6,926. 9,566. 10,275. 10,984. 11,692. 11,462.
Total Assets 9,331. 12,888. 13,525. 13,435. 13,808. 13,149.
Current Liabilities 1,015. 1,402. 1,847. 2,254. 2,257. 2,552.
Working Capital (Deficit) (567.) (783.) (591.) (1,185.) (1,267.) (1,645.)
Long Term Liabilities 1,403. 1,938. 2,279. 1,758. 2,234. 4,819.
Non-Controlling Interest ---- ---- ---- 232. 232. 1,397.
Stockholders' Equity 6,914. 9,549. 9,399. 9,192. 9,084. 4,382.
</TABLE>
( 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, 1997
Conversion rate: One (1) (US) Dollar equals: $1.3812
9
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ITEM 6 SELECTED FINANCIAL DATA (CONT'D)
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30
1997 1997 1996 1995 1994 1993
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(U.S.)(1) (IN THOUSANDS, EXCEPT FOR PER SHARE AND RESTAURANT DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue
<S> <C> <C> <C> <C> <C> <C>
Royalties $ 1,219. $ 1,684. $ 1,842. $ 1,947. $2,001. $ 1,989.
Supplier incentives
commission and other 742. 1,026. 1,071. 1,001. 1,024. 966.
Sales of managed franchise stores 441. 608. 2,106. 1,579. 812. 523.
Proprietary products 370. 511. 341. ---- ---- ----
Franchise fees 145. 200. 265. 351. 272. 341.
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Total 2,917. 4,029. 5,625. 4,878. 4,109. 3,819.
Expenses
Head office administration $ 1,301. $ 1,797. $ 2,037. $ 1,850. $ 1,878. $ 1,796.
Managed franchise stores 342. 473. 2,079. 1,687. 832. 587.
Amortization 715. 987. 839. 789. 767. 755.
Franchising 18. 25. 121. 168. 230. 284.
Interest 114. 157. 249. 276. 215. 339.
Proprietary products 319. 440. 294. ---- ---- ----
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Total 2,809. 3,879. 5,619. 4,771. 3,922. 3,761.
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Income before income taxes 108. 150. 6. 107. 187. 58.
Income taxes ---- ---- ---- ---- ---- ----
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Net Income 108. 150. 6. 107. 187. 58.
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Avg No. of Shares Outstanding (2) 19,024. 19,024. 19,996. 20,742. 18,507. 12,273.
Earnings per Share 0,00. 0,00. 0,00. 0,00. 0,01. 0,00.
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Number of Treats units in Chain 142. 142. 166. 171. 164. 160.
Other concept ( closed ) 0. 0. 0. 0. 0. 1.
</TABLE>
( 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, 1997
Conversion rate: One (1) (US) Dollar equals: 1.3812
( 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 12, June 30, 1997,
see note 13, June 30, 1996).
10
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
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(All numbers 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 $1,596,000 or
28.4% to $4,029,000 from $5,625,000 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 94% of the decline in total revenue
for the year.
- Royalties decreased $158,000 or 8.6% to $1,684,000 compared to
$1,842,000 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.
11
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ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
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RESULTS OF OPERATIONS (CONT'D)
Expenses for the year ended June 30, 1997 decreased $1,740,000 or 31% to
$3,879,000 from $5,619,000 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 $240,000 or 11.8% to
$1,797.000 from $2,037,000 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.
12
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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)
DEBT TO EQUITY:
The ratio of debt to equity as at June 30, 1997 was .25 to 1. This compares
favourably to .26 to 1 in the previous fiscal year.
Liquidity is adequate for the coming years 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 1997.
The Company also concluded a new two year contract with the Quaker Oats
Company of Canada to supply its proprietary bakery mixes.
13
<PAGE>
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
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(All numbers are in Canadian $ unless otherwise noted)
GENERAL
- THE YEAR ENDED JUNE 30, 1996 COMPARED TO THE YEAR ENDED JUNE 30, 1995.
System-wide retail sales for the twelve months ended June 30, 1996 were
$30,269,836, a 2.0% decrease over sales of $30,893,698 for the previous
fiscal year.
While the Company has opened 9 new franchise locations during the past
fiscal year, the number of units has remained relatively static for a
number of reasons. The lack of working capital for development and
marketing support has had significant impact on the Company's plans for
growth.
In response to the success of concepts such as Starbucks, the Company has
developed a Treats concept with a strong focus on gourmet and specialty
coffees. To date the Company has opened and, or converted 11 locations of
this concept variation which have generally been very well received.
Concept development is complete as at June 30, 1996. The Company intends
to actively pursue new locations featuring the coffee Emporium concept.
RESULTS OF OPERATIONS
- THE YEAR ENDED JUNE 30, 1996 COMPARED TO THE YEAR ENDED JUNE 30, 1995.
Total revenue for the year ended June 30, 1996 was $5,625,000 compared to
$4,878,000 for the previous fiscal year. This increase of $747,000, or
15.3% resulted from:
- Sales of managed restaurants increased $527,000 or 33.4% to $2,106,000
for the year ended June 30, 1996 compared to $1,579,000 for the 12
months last year.
- Revenue from royalties for the year decreased $105,000 to $1,842,000
compared to $1,947,000 last year.
- Revenue from supplier incentives increased 19.25% in the twelve months
to $1,193,000 from $1,001,000 last year.
- Revenue from franchising has decreased 59.5% in the year to $142,000
compared to $352,000 last year.
- The Company in this year commenced purchasing certain proprietary
products directly from manufacturers, selling those products to
distributors for delivery to the Companies owned and franchised
stores. Revenues from those sales were $341,000.
14
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ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
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RESULTS OF OPERATIONS (CONT'D)
Expenses for the year ended June 30, 1996 increased $848,000 to $5,619,000
compared to $4,771,000 for the twelve months ended June 30, 1995. The net
increase in cost and expenses relate to the following:
- Franchising costs, which are marketing related, were 28.2% lower at
$121,000 compared to $168,000 for last year.
- Administration cost increased by 10.1% to $2,037,000 compared to
$1,850,000 for last year.
- Costs associated with managed restaurants' operations increased by
$393,000 or 23.3% from $1,687,000 to $2,080,000 year to year, a direct
result of the increase in the number of managed stores.
- Interest expense decreased by $27,000, or 9.8%, to $249,000 from
$276,000 for the 12 months last year.
- The cost of purchasing certain proprietary products for resale to
distributors introduced in this fiscal year was $294,000.
Net Income for the year ended June 30, 1996 was $6,000 compared to a net
income of $107,000 for the year ended June 30, 1995.
CAPITAL RESOURCES - June 30, 1996
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 for the time being but new
electronic sales recording equipment will improve the royalty collection
through improved control and more efficient collection.
LIQUIDITY AND CASH FLOW - June 30, 1996
The working capital deficit at the year end improved by $593,000 to
$(591,000) at June 30, 1996 compared to $(1,184,000) at June 30, 1995. The
June 30, 1995 working capital deficit position had also improved by $82,000
over the June 30, 1994 position.
The cash flow from operations during fiscal 1996 was $657,000 compared to
$585,000 in fiscal 1995.
15
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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)
DEBT TO EQUITY:
The ratio of debt to equity is constant at the end of the current financial
year. The ratio at June 30, 1996 was .26 to 1 compared to .3 to 1 as at
June 30, 1995.
IN THE YEAR:
The term loan facility of $673,500 with Standard Chartered Bank of Canada
which became due on January 1, 1996 was acquired by 3193853 Canada Inc.,
the president of which is a family member of the Chief Executive Officer of
the Company. The principal amount of $660,000, repayable in monthly
instalments of $10,000 plus interest at prime plus 2.5% is due in March
2001. The term loan balance at year end was $608,000.
The Company negotiated a term loan with the Business Development Bank of
Canada repayable in 50 monthly instalments of $2,000 plus interest at prime
plus 4%. The term loan balance at year end was $96,000, it is due on June
23, 2000.
On February 29, 1996 the Company arranged new banking facilities with the
Bank of Nova Scotia.
Effective January 31, 1996 a debenture held by the Royal Bank of Canada
which was due on October 31, 1996 was renegotiated to a due date of June
30, 2001. Principal payments in the fiscal year ending June 30, 1997 are
$10,000 per month plus interest at 8%. The balance of the debenture as at
June 30, 1996 was $1,129,562.
ITEM 7-A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- -------------------------------------------------------------------------------
n/a
16
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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TREATS INTERNATIONAL ENTERPRISES, INC.
Consolidated Financial Statements 1997 compared to 1996 Page 18 to 37
17
<PAGE>
CONSOLIDATED
FINANCIAL
STATEMENTS
TREATS INTERNATIONAL
ENTERPRISES, INC.
June 30, 1997 and 1996
18
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TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
INDEX
Page
20 Auditors' Report
21 - 22 Consolidated Balance Sheets
23 Consolidated Statements of Income and Deficit
24 Consolidated Statements of Cash Flow
25 Consolidated Statements of Stockholders' Equity
26 - 37 Notes to the Consolidated Financial Statements
19
<PAGE>
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, 1997 and 1996 and the consolidated statements
of income and deficit, cash flow and of stockholders' equity for the years ended
June 30, 1997, 1996 and 1995. 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, 1997 and
1996 and the results of its operations and its cash flow for the years ended
June 30, 1997, 1996 and 1995 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
August 27, 1997
20
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TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
NOTE 1997 1996
- -------------------------------------------------------------------------------
$ $
ASSETS
CURRENT
Accounts receivable 254,852. 384,570 .
Prepaid expenses 152,705. 206,826 .
Construction work in process 22,074. 352,198 .
Current portion of notes receivable 188,714. 312,633 .
-----------------------------
618,345. 1,256,227 .
FRANCHISE STORES HELD FOR RESALE 149,924. 484,128 .
DEFERRED COSTS 462,715. 228,113 .
NOTES RECEIVABLE 3 1,438,528. 892,517 .
CAPITAL ASSETS 4 652,860. 370,081 .
ADVERTISING COMMITMENT 5 ---- 19,310 .
FRANCHISE RIGHTS 6 9,565,999. 10,274,780 .
-----------------------------
12,888,371. 13,525,156 .
-----------------------------
-----------------------------
Approved on behalf of the Board;
Director
---------------------------------
Director
---------------------------------
See the accompanying notes
21
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
NOTE 1997 1996
- -------------------------------------------------------------------------------
$ $
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 863,778. 1,479,357 .
Current portion of long-term debt 435,649. 180,371 .
Bank indebtedness 102,232. 187,218 .
-----------------------------
1,401,659. 1,846,946 .
LONG-TERM DEBT 7 1,703,074. 2,044,364 .
LEASE SECURITY DEPOSITS 234,791. 234,989 .
-----------------------------
3,339,524. 4,126,299 .
-----------------------------
COMMITMENTS AND CONTINGENCIES 8
STOCKHOLDERS EQUITY
CAPITAL STOCK 9
Preferred:
Authorized - 10,000,000 non-voting,
cumulative shares, dividends at U.S.$.028 per
share (Cdn.$0.38 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 (4,960,696.) (5,110,686).
-----------------------------
9,548,847. 9,398,857 .
-----------------------------
12,888,371. 13,525,156 .
-----------------------------
-----------------------------
Approved on behalf of the Board;
Director
---------------------------------
Director
---------------------------------
See the accompanying notes
22
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT
YEAR ENDED JUNE 30. 1997, 1996 AND 1995
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NOTE 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
$ $ $
<S> <C> <C> <C>
REVENUES
Sales of managed franchise stores 607,752. 2,106,368. 1,579,323.
Royalties 1,683,665. 1,841,848. 1,946,830.
Supplier incentives, commissions and other 1,026,046. 1,070,944. 1,000,781.
Proprietary products 511,052. 341,229. ----
Franchising 200,019. 264,713. 351,532.
------------------------------------------------------
4,028,534. 5,625,102. 4,878,466.
------------------------------------------------------
EXPENSES
Managed franchise stores 474,128. 2,079,390. 1,687,363.
Head office and administration 1,796,662. 2,036,743. 1,850,134.
Proprietary products 439,714. 293,743. ----
Interest on long-term debt 156,716. 248,793. 276,045.
Franchising 24,817. 120,936. 168,366.
Amortization
Capital assets and franchise rights 889,083. 839,251. 789,347.
Deferred costs 97,424. ---- ----
------------------------------------------------------------
3,878,544. 5,618,856. 4,771,255.
------------------------------------------------------------
NET INCOME FOR THE YEAR 11 149,990. 6,246. 107,211.
DEFICIT, BEGINNING OF YEAR (5,110,686.) (5,116,932.) (5,224,143.)
------------------------------------------------------------
DEFICIT, END OF YEAR (4,960,696.) (5,110,686.) (5,116,932.)
------------------------------------------------------------
EARNINGS (LOSS) PER SHARE 12 0.00 (0.01) 0.00
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
See the accompanying notes
23
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED JUNE 30, 1997, 1996 AND 1995
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
$ $ $
<S> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES
OPERATING
Net income for the year 149,990. 6,246. 107,211.
Items not affecting cash
Amortization
Capital assets and franchise rights 889,083. 839,251. 789,347.
Deferred costs 97,424. ---- ----
Capital assets (353,414.) ---- ----
Franchise stores held for resale 353,414. ---- ----
Interest expense related to annual
accretion of Royal Bank of Canada
subordinated debenture ---- 75,000. 75,000.
----------------------------------------------------------
1,136,497. 920,497. 971,558.
Changes in non-cash operating working
capital items (101,814.) (263,714.) (386,541.)
----------------------------------------------------------
1,034,683. 656,783. 585,017.
----------------------------------------------------------
FINANCING
Long-term debt (86,012.) (101,692.) (317,977.)
Bank indebtednes (84,986.) 187,218. ----
Issue of common shares ---- 350. ----
Cancellation of common shares ---- (2,067.) ----
Deferred revenue ---- (18,079.) (94,406.)
Share issue costs ---- (29,289.) ----
Redemption of non-controlling interest
in subsidiary ---- 232,000. ----
----------------------------------------------------------
(170,998.) 268,441. (412,383.)
----------------------------------------------------------
INVESTING
Advertising commitment 19,310. 47,458. 51,118.
Notes receivable (422,092.) (564,518.) (26,659.)
Deferred costs (332,026.) (65,759.) (162,354.)
Purchase of capital assets (109,667.). (232,258.) (140,059.)
Franchise stores held for resale (19,210.) 62,089. (77,921.)
Non-controlling interest in subsidiaries ---- (232,000.) ----
----------------------------------------------------------
(863,685.) (984,988.) (355,875.)
----------------------------------------------------------
NET CASH INFLOW (OUTFLOW) ---- (59,764.) (183,241.)
CASH POSITION, BEGINNING OF YEAR ---- 59,764. 243,005.
----------------------------------------------------------
CASH POSITION, END OF YEAR ---- ---- 59,764.
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
See the accompanying notes
24
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(NOTE 9)
YEAR ENDED JUNE 30, 1997, 1996 AND 1995
(Canadian dollars)
<TABLE>
<CAPTION>
----- PREFERRED SHARES --- ---- COMMON SHARES ---
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
$ $ $
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 5,409,825. 3,732,779. 20,741,942. 10,575,770. (5,224,143.) 9,084,406.
Net income for the year ---- ---- ---- ---- 107,211. 107,211.
------------------------------------------------------------------------------------------
Balance, June 30, 1995 5,409,825. 3,732,779. 20,741,942. 10,575,770. (5,116,932.) 9,191,617.
Common shares issued ---- ---- 350,000. 350. ---- 350.
Cancellation of common shares ---- ---- (2,067,344.) (2,067.) ---- (2,067.)
Share issue costs ---- ---- ---- (29,289.) ---- (29,289.)
Redemption of non-controlling
interest in subsidiary ---- ---- ---- 232,000. ---- 232,000.
Net income for the year ---- ---- ---- ---- 6,246. 6,246.
------------------------------------------------------------------------------------------
Balance, June 30, 1996 5,409,825. 3,732,779. 19,024,598. 10,776,764. (5,110,686.) 9,398,857.
Net income for the 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.
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
See the accompanying notes
25
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(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
* Accounting & Consulting Inc.
* Treats International Inc.
* Triadon Investment Group Inc.
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.
26
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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, 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 they apply.
27
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FRANCHISE STORES HELD FOR RESALE
Franchise stores held for resale are valued at the lower of cost and net
realizable value.
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost less accumulated amortization.
Amortization is provided for at rates intended to write off the assets over
their estimated economic lives, as follows:
Furniture, 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) The Coffee Emporium project, which was completed on June 30, 1996;
the costs are being amortized on a straight-line basis over three
years commencing July 1, 1996.
(b) A consulting contract with a former officer of the Company expiring in
2002.
28
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
1997 1996
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are translated using the temporal method.
Under this method, monetary assets and liabilities as well as non-monetary
items carried at market value are translated at year-end exchange rates.
Other non-monetary assets and liabilities are translated at exchange rates
prevailing at the transaction dates. Revenues and expenses are translated
at average rates prevailing during the year.
Gains or losses resulting from exchange translation are included in income.
EARNINGS (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 (1996 - nil) 1,627,242. 1,205,150.
Less current portion (188,714.) (312,633.)
-----------------------------
1,438,528. 892,517.
-----------------------------
-----------------------------
29
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------
4. CAPITAL ASSETS
ACCUMULATED
COST AMORTIZATION -- NET BOOK VALUE --
<S> <C> <C> <C> <C>
Furniture, fixtures
and equipment $ 691,299. $ 570,482. $ 120,817. $188,040.
Reference books 25,966. 23,541. 2,425. 5,796.
Corporate owned stores
reacquired from franchisees 359,732. 56,468. 303,264. ----
Corporate owned store
equipment reacquired from
former franchisees 261,302. 34,948. 226,354. 176,245.
------------------------------------------------------------
$1,338,299. 685,439. 652,860. 370,081.
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
5. 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.
6. FRANCHISE RIGHTS
$ $
Franchise rights 14,175,609. 14,175,609.
Accumulated amortization (4,609,610.) (3,900,829.)
------------------------------
9,565,999. 10,274,780.
------------------------------
------------------------------
30
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
1997 1996
- --------------------------------------------------------------------------------
6. FRANCHISE RIGHTS (CONT'D)
The company obtained an independent appraisal dated October 9, 1997 from
Scott, Rankin, Gordon & Gardiner, Chartered Accountants, substantiating a
valuation of franchise rights in excess of $9,500,000 as at June 30, 1997.
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.
(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)
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. 72,000. 96,000.
Other long-term debt
Non-interest bearing,
with various terms of repayment ending in 2002 329,161. 391,173.
------------------------
2,138,723. 2,224,735.
Less current portion (435,649.) (180,371.)
------------------------
1,703,074. 2,044,364.
------------------------
------------------------
31
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D)
(a) 3193853 Canada Inc. and the Royal Bank of Canada have waived the
defaults pursuant to the loan agreements which includes the
non-payment of all principal and interest payments in the year.
Interest expense for the year related to long-term debt was $156,716
(1996 - $248,793)
The minimum future principal repayments required over the next five years
are as follows:
$
1998 435,649.
1999 365,527.
2000 414,125.
2001 480,125.
2002 435,297.
Subsequent 8,000.
----------
2,138,723.
----------
----------
8. 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 were issued
against the Company on some of the claims in the amount of $377,000 are
all under appeal.
As the outcome of the claims, counterclaims or appeals is not
determinable at this time, these financial statements do not include
a provision for any potential losses.
32
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. 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:
$
1998 2,871,744.
1999 2,345,207.
2000 2,166,759.
2001 1,433,459.
2002 824,984.
Later Years 1,519,154.
--------------
Total minimum payments* 11,161,307.
--------------
--------------
* Minimum payments have not been reduced by minimum sublease
rentals for $10,574,167 due in future under noncancelable
sublease.
YEAR ENDING JUNE 30,
1997 1998
$ $
Minimum rentals 3,360,844. 2,871,744.
Less: Sublease rentals (3,183,401.) (2,728,717.)
---------------------------
177,443. 143,027.
---------------------------
---------------------------
33
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
9. CAPITAL STOCK
ISSUANCE OF SHARES
At July 1, 1995 the Royal Bank Capital Corporation received 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.
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 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, 1997 the preferred shareholder, The
Royal Bank of Canada did not exercise the option.
34
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. 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 of Canada holds a subordinated debenture (see note 7) for
which the related interest expense was $96,075 (1996 - $84,484).
Undeclared dividends for July 1, 1994 to June 30, 1997 on the
preferred shares owned by the Royal Bank are $615,909.
(b) The Company leases its office premises at an annual cost of
approximately $100,000 from a company which is wholly owned by the
family of the President. The family owns approximately 32.6% of the
common stock of the Company.
(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 $47,574 (1996 - $35,457).
(d) Accounts payable includes $56,758 owed to 764719 Ontario Inc. whose
owner is a member of the family of the Chief Executive Officer of the
Company.
35
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
- ----------------------------------------------------------------------------
11. INCOME TAXES
No provision has been made for income taxes as the consolidated group of
companies have non capital losses carried forward of $1,141,638 available
to offset taxable income. These losses will expire as follows:
$
1998 527,433.
1999 89,700.
2000 463,327.
2001 61,178.
-------------
1,141,638.
-------------
-------------
12. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share 0.00 (0.01)
--------------------------
Weighted average number of common
shares outstanding 19,024,598 19,996,498
--------------------------
--------------------------
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. The calculation includes an allowance
for imputed earnings derived from the investment of funds which are assumed to
have been received and is limited to the maximum authorized common stock
available. If all conversions (see note 9) 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.
36
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
13. 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 approximates 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.
14. COMPARATIVE FIGURES
Certain prior year's figures have been reclassified to conform with the
current year's presentation.
37
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------------------
- No Disagreements or changes.
38
<PAGE>
PART 111
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 42 President, C.E.O. and Director
John A. Deknatel 50 Chief Operating Officer and Director
Peter-Mark Bennett 40 Director
Erhard M. Sommer 59 Vice President, Operations
Francois Turcot 37 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.
39
<PAGE>
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT'D)
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.
ERHARD M. SOMMER
Mr. Sommer is Vice President of Operations of the Company. He has been the Vice
President of Operations of Treats International Enterprises, Inc., since its
formation in 1990. He was the Director of Operations of U.S.A. Treats, the
former National Licensor for the (US) in Somerset, New Jersey from January 1990
to October 1990. From March 1985 to January 1990, he was self-employed as a
Consultant in the food and hospitality industries. Mr. Sommer left the Company
on September 4, 1997 to pursue other interests.
FRANCOIS TURCOT
Mr. Turcot has been comptroller of the Company since May 1991 and has been
promoted to Director of Finance in August 1997. 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.
40
<PAGE>
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 $83,000.
Executive officers as a group (4 people) $236,000.
- - 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 four officers of the Company were amended to reflect the years of
service, specifically 2 months of base compensation for every year of service.
Once a Senior Officer reached 5 years of consecutive service, they are entitled
to a minimum of 2 years compensation.
41
<PAGE>
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth as of the date of October 31, 1997, 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, 1997
--------------------------
# 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
Erhard Sommer 186,042. .98%
418 Preston Street
Ottawa, Ontario(K1S 4N2)
Francois Turcot 36,458. .19%
418 Preston Street
Ottawa, Ontario(K1S 4N2)
----------------------------------
Officers & Directors as a group 6,373,955. 33.51%
----------------------------------
----------------------------------
OWNERS IN EXCESS OF 5%
Royal Bank / RBCC (3) 7,207,760. 37.89%
200 Bay Street, 13th Floor
Toronto, Ontario(M5J 2J5)
42
<PAGE>
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 $ 3,732,774 @ $.0414 90,163,623.
Dividend to June 30, 1997 $ 615,909 @ $.0414 14,877,029.
-------------
Fully diluted ownership of RBCC/Royal Bank (1) 112,248,412.
-------------
-------------
(1) MAXIMUM SHARES AVAILABLE = 33,333,333
43
<PAGE>
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPITAL STOCK
ISSUANCE OF SHARES
At July 1, 1995, The Royal Bank Capital Corporation received 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.
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,
1997 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 of Canada holds a subordinated debenture (see note 7) for
which the related interest expense was $96,075 (1996 - $84,484).
Undeclared dividends for July 1, 1994 to June 30, 1997 on the
preferred shares owned by the Royal Bank are $615,909.
(b) The Company leases its office premises at an annual cost of
approximately $100,000 from a company which is 100% owned by the
family of the President. The family owns approximately 32.6% of the
common stock of the Company.
(c) During 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.
(d) Accounts payable includes an amount of $56,758 arising from normal
course of business owed to 764719 Ontario Inc., whose owner is a
family member of the Chief Executive Officer of the Company.
44
<PAGE>
PART 1V
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 46
- - Computation of Earnings Per Share -
Treasury Share Method Page 47
- - Auditors' Report on Financial Statement Schedules Page 48
45
<PAGE>
ITEM 14 SCHEDULES (CONT'D)
COMPUTATION OF EARNINGS PER SHARE - U.S. GAAP - TREASURY SHARE METHOD
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE FISCAL YEAR ENDED
--------------------- -------------------------
SEPTEMBER DECEMBER MARCH JUNE JUNE JUNE
----------------------------------------------------------------------------------
1996 1996 1997 1997 1997 1996
<S> <C> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE - U.S. GAAP
Net earnings $ 20,166. $ 51,838. $ 49,626. $ 28,360. $149,990. $ 6,246.
Cumulative dividends (51,325.) (51,326.) (51,326.) (51,326.) (205,303.) (205,303.)
----------------------------------------------------------------------------------
Net earnings after cumulative dividends ($ 31,159.) $ 512. ($ 1,700.) ($ 22,966.) ($ 55,313.) ($199,057.)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Common Shares outstanding at the
beginning of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 20,741,942.
Weighted average number of Common
Shares issued during the period 0. 0. 0. 0. 0. (745,444.)
----------------------------------------------------------------------------------
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. 19,996,498.
----------------------------------------------------------------------------------
Treasury Common Shares assumed purchased
from proceeds of issue 0. 0. 0. 0. 0. 0.
BASIC EARNINGS PER SHARE ($0.0016) $0.0000 ($0.0001) ($0.0012) ($0.0029) ($0.0100)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE - U.S. GAAP
Net earnings as reported
Less: Cumulative dividends $(31,159). $ 512. $ (1,700). $(22,966). ($ 55,313.) ($199,057.)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
After tax imputed earnings from the
investment of funds received
through dilution 0. 0. 0. 0. 0. 0.
Adjusted net earnings $ (31,159). $ 512. $(1,700). $(22,966). ($ 55,313.) ($199,057.)
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. 19,996,498.
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. 5,061,837.
----------------------------------------------------------------------------------
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. 25,058,335.
----------------------------------------------------------------------------------
Fully diluted earnings per share ($0.0009) $0.0000 $0.0001 ($0.0007) ($0.0017) ($0.0079)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
ITEM 14 SCHEDULES (CONT'D)
COMPUTATION OF EARNINGS PER SHARE - TREASURY SHARE METHOD
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE FISCAL YEAR ENDED
--------------------- -------------------------
SEPTEMBER DECEMBER MARCH JUNE JUNE JUNE
----------------------------------------------------------------------------------
1996 1996 1997 1997 1997 1996
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings $ 20,166. $ 51,838. $ 49,626. $ 28,360. $149,990. $ 6,246.
Cumulative dividends (51,325.) (51,326.) (51,326.) (51,326.) (205,303.) (205,303.)
----------------------------------------------------------------------------------
Net earnings after cumulative dividends ($ 31,159.) $ 512. ($ 1,700.) ($ 22,966.) ($ 55,313.) ($199,057.)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Common Shares outstanding at the
beginning of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 20,741,942.
Weighted average number of Common
Shares issued(cancelled)during the period 0. 0. 0. 0. 0. (745,444.)
----------------------------------------------------------------------------------
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. 19,996,498.
----------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE ($0.0016) ($0.0000) ($0.0001) ($0.0012) ($0.0029) ($0.0100)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE
Net earnings before imputed earnings
Less: Cumulative dividends ($ 31,159.) $ 512. ($ 1,700.) ($ 22,966.) ($ 55,313.) ($199,057.)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
After tax imputed earnings from the
investment of funds received
through dilution 0. 0. 0. 0. 0. 0.
Adjusted net earnings
Less: Cumulative dividends ($ 31,159.) $ 512. ($ 1,700.) ($ 22,966.) ($ 55,313.) ($199,057.)
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. 19,996,498.
Weighted average Common Stock
equivalents based on conversion of
Warrants and Stock Options. 14,308,735. 14,308,735. 14,308,735. 14,308,735. 14,308,735. 5,061,837.
----------------------------------------------------------------------------------
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. 25,058,335.
----------------------------------------------------------------------------------
Fully diluted earnings per share ($0.0009) $0.0000 $0.0001 ($0.0007) ($0.0017) ($0.0079)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
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, 1997, 1996 and 1995 and the consolidated
statements of income and deficit, cash flow and stockholders' equity for the
years then ended and have issued our report thereon dated August 27, 1997; 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
August 27, 1997
48
<PAGE>
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.
November 12, 1997 By: /s/ Paul J.Gibson
--------------------------------
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.
November 12, 1997 By: /s/ Paul J.Gibson
--------------------------------
PAUL J. GIBSON
Chairman of the Board
President & Chief Executive Officer
November 12, 1997 By: /s/ Francois Turcot
--------------------------------
FRANCOIS TURCOT
Director of Finance
49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.3812
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,883
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 618
<PP&E> 10,369
<DEPRECIATION> 5,392
<TOTAL-ASSETS> 12,888
<CURRENT-LIABILITIES> 1,402
<BONDS> 1,938
0
3,733
<COMMON> 19
<OTHER-SE> 9,549
<TOTAL-LIABILITY-AND-EQUITY> 12,888
<SALES> 0
<TOTAL-REVENUES> 4,029
<CGS> 0
<TOTAL-COSTS> 2,735
<OTHER-EXPENSES> 987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157
<INCOME-PRETAX> 150
<INCOME-TAX> 0
<INCOME-CONTINUING> 150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.001)
</TABLE>
