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[LOGO]
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Three Months Ended September 30, 1997)
<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 30,1997 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
--------------------------------------
State of jurisdiction: I.R.S. Employer No:
DELAWARE 13-3495199
ADDRESS OF PRINCIPAL EXECUTIVE OFFICER:
418 Preston Street
Ottawa, Ontario
Canada, K1S 4N2
Telephone No.: (613) 563-4073
U.S. ADDRESS OF TREATS INTERNATIONAL ENTERPRISES, INC.
c/o Vincent J. Profaci
Attorney at Law
J.A. Jurgens, P.A.
1964 Howell Branch Road, Suite 206
Winter Park, Florida 32792
Telephone No.: (407) 673-1144
Registrant has filed all reports under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months and has been subject to
such filing requirements for the past 90 days.:
YES
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<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
Three months ended September 30, 1997
INDEX
PAGE
----
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, September 30, 1997 1
Statement of Income - September 30, 1997 2
Statement of Cash Flows, September 30, 1997 3
Statement of Stockholder's Equity 4
Notes to Financial Statements 5 to 16
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 17 to 19
PART 11 Other Information - Items 1 to 6 20
Signatures 21
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
September 30 June 30 September June 30
Note 1997 1997 1996 1996
(Unaudited) (Audited) (Unaudited) (Audited)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ $ $ $
ASSETS
CURRENT ASSETS
Accounts Receivable 405,324. 254,852. 481,101. 384,570.
Prepaid Expenses 110,161. 152,705. 128,812. 206,826.
Construction work in process 111,156. 22,074. 182,139. 352,198.
Current portion of notes receivable 272,225. 188,714. 252,743. 312,633.
--------------------------------------------------------------
898,866. 618,345. 1,044,795. 1,256,227.
STORES HELD FOR RESALE 167,993. 149,924. 0. 484,128.
NOTES RECEIVABLE 3 1,361,943. 1,438,528. 1,017,376. 892,517.
CAPITAL ASSETS 4 618,941. 652,860. 697,919. 370,081.
ADVERTISING COMMITMENT 5 0. 0. 10,228. 19,310.
DEFERRED COSTS 422,362. 462,715. 542,085. 228,113.
FRANCHISE RIGHTS 6 9,388,806. 9,565,999. 10,097,587. 10,274,780.
--------------------------------------------------------------
12,858,911. 12,888,371. 13,409,990. 13,525,156.
--------------------------------------------------------------
--------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 150,000. 102,232. 278,179. 187,218.
Accounts payable and accrued liabilities 774,189. 863,778. 1,105,839. 1,479,357.
Current portion of long-term debt 503,000. 435,649. 275,651. 180,371.
--------------------------------------------------------------
1,427,189. 1,401,659. 1,659,669. 1,846,946.
--------------------------------------------------------------
LONG-TERM DEBT 1,622,517. 1,703,074. 2,085,996. 2,044,364.
LEASE SECURITY DEPOSITS 7 237,999. 234,791. 245,302. 234,989.
--------------------------------------------------------------
3,287,705. 3,339,524. 3,990,967. 4,126,299.
--------------------------------------------------------------
CONTINGENCIES 9
STOCKHOLDERS EQUITY
CAPITAL STOCK 10
Preferred:
Authorized - 10,000,000 non-voting, cumulative shares,
dividends at US $.04 per share, redeemable at option
of company at US $1.00 per share par value US $.50 3,732,779. 3,732,779. 3,732,779. 3,732,779.
Common:
Authorized - 33,333,333 shares par value US $0.001
Issued - 20,741,942 common shares 19,025. 19,025. 19,025. 19,025.
Additional paid - in capital 10,757,739. 10,757,739. 10,757,739. 10,757,739.
--------------------------------------------------------------
14,509,543. 14,509,543. 14,509,543. 14,509,543.
--------------------------------------------------------------
Deficit (4,938,337.) (4,960,696.) (5,090,520.) (5,110,686.)
--------------------------------------------------------------
9,571,206. 9,548,847. 9,419,023. 9,398,857.
--------------------------------------------------------------
12,858,911. 12,888,371. 13,409,990. 13,525,156.
--------------------------------------------------------------
--------------------------------------------------------------
</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 1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ $ $ $
REVENUES
Royalties 444,173. 419,812. 444,173. 419,812.
Sales of managed franchise stores 140,075. 106,542. 140,075. 106,542.
Supplier Incentives, Commissions & Other 251,416. 294,375. 251,416. 294,375.
Franchising 130,498. 37,223. 130,498. 37,223.
Proprietary products 102,254. 105,332. 102,254. 105,332.
Construction revenues 325,127. -- 325,127. --
-------------------------------------------------------
1,393,543. 963,284. 1,393,543. 963,284.
-------------------------------------------------------
COST AND EXPENSES
Regional operations and franchising 198,387. 152,390. 198,387. 152,390.
Head office and administration 320,091. 278,430. 320,091. 278,430.
Managed franchise stores 134,931. 115,504. 134,931. 115,504.
Proprietary products 90,623. 96,667. 90,623. 96,667.
Construction expenses 325,074. -- 325,074. --
Interest expense 39,432. 39,882. 39,432. 39,882.
Depreciation and Amortization 262,646. 260,245. 262,646. 260,245.
-------------------------------------------------------
1,371,184. 943,118. 1,371,184. 943,118.
-------------------------------------------------------
NET INCOME FOR THE PERIOD 22,359. 20,166. 22,359. 20,166.
-------------------------------------------------------
-------------------------------------------------------
Earnings per share 12 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
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ $ $ $
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 22,359. 20,166. 22,359. 20,166.
ITEMS NOT AFFECTING CASH
Depreciation & Amortization 262,646. 260,245. 262,646. 260,245.
Changes in non-cash operating working capital items (288,940.) (208,476.) (288,940.) (208,476.)
------------------------------------------------------
(3,935.) 71,935. (3,935.) 71,935.
------------------------------------------------------
FINANCING
Bank Indebtedness 47,768. 90,961. 47,768. 90,961.
Repayment of Long-term debt (13,206.) 136,912. (13,206.) 136,912.
------------------------------------------------------
34,562. 227,873. 34,562. 227,873.
------------------------------------------------------
INVESTING
Issue of notes receivable, net of repayments (6,926.) (64,969.) (6,926.) (64,969.)
Purchase of capital & other assets (8,840.) (600,635.) (8,840.) (600,635.)
Deferred cost 0. (313,972.) 0. (313,972.)
Advertising commitment 0. 9,082. 0. 9,082.
Security deposits 3,208. 10,313. 3,208. 10,313.
Managed franchise stores held for resale (18,069.) 660,373. (18,069.) 660,373.
------------------------------------------------------
(30,627.) (299,808.) (30,627.) (299,808.)
NET GENERATED CASH (OUTFLOW) 0. 0. 0. 0.
CASH POSITION, BEGINNING OF PERIOD 0. 0. 0. 0.
------------------------------------------------------
CASH POSITION, END OF PERIOD 0. 0. 0. 0.
------------------------------------------------------
------------------------------------------------------
</TABLE>
3
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TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Redeemable, Convertible
---Preferred Shares--- ---Common Shares---
Shares Amount Shares Amount Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 inc.ome for the year -- -- -- -- 107,211. 107,211.
--------------------------------------------------------------------------------------
5,409,825. 3,732,779. 20,741,942. 10,575,770. (5,116,932.) 9,191,617.
Common shares issued 350,000. 350. 350.
Cancellation of common shares (2,067,344.) (2,067.) (2,067.)
Share issue costs (29,289.) (29,289.)
Redemption of non-controlling interest
in subsidiary 232,000. 232,000.
Net income for the year -- -- -- -- 6,246. 6,246.
--------------------------------------------------------------------------------------
Balance June 30, 1996 5,409,825. 3,732,779. 19,024,598. 10,776,764. (5,110,686.) 9,398,857.
Net income for the year -- -- -- -- 149,990. 149,990.
--------------------------------------------------------------------------------------
Balance June 30, 1997 5,409,825. 3,732,779. 19,024,598. 10,776,764. (4,960,696.) 9,548,847.
Net income for the period -- -- -- -- 22,359. 22,359.
--------------------------------------------------------------------------------------
Balance September 30, 1997 5,409,825. 3,732,779. 19,024,598. 10,776,764. (4,938,337.) 9,571,206.
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
4
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
These consolidated financial statements comprise the accounts of the
Company and its wholly - owned subsidiaries. All intercompany transactions
and balances have been eliminated in these consolidated financial
statements, which include the accounts of the Company and its subsidiaries
from the date of acquisition as follows:
* Treats Inc.
* Treats Ontario Inc.
* Chocolate Gourmet Treats Limited
* Accounting & Consulting Inc.
* Treats International Inc.
* Triadon Investment Group Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (which also conform in
all material respects with generally accepted accounting principles in the
United States) and include the following significant accounting policies:
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. These estimates are reviewed periodically, and, as adjustments
become necessary, they are reported in earnings in the period in which they
become known.
5
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(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, 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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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FRANCHISE STORES HELD FOR RESALE
Franchise stores held for resale are valued at the lower of cost and net
realizable value.
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost less accumulated amortization.
Amortization is provided for at rates intended to write off the assets over
their estimated economic lives, as follows:
Furniture and fixtures - 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 the 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.
7
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
September June
1997 1997
- -----------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONT'D)
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are translated using the temporal method.
Under this method, monetary assets and liabilities as well as non-monetary
items carried at market value are translated at year-end exchange rates.
Other non-monetary assets and liabilities are translated at exchange rates
prevailing at the transaction dates. Revenues and expenses are translated
at average rates prevailing during the year.
Gains or losses resulting from exchange translation are included in income.
EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share are calculated using the daily weighted
average number of common shares outstanding during the fiscal year plus the
net additional number of shares which would be issuable upon the exercise
of stock options, assuming that the Company used the proceeds received to
purchase additional shares at market value.
3. NOTES RECEIVABLE
Notes receivable are due from franchisees with interest rates varying from
6% to 8% and repayable in scheduled instalments which mature from July 1997
to June 2020.
Notes receivable, net of allowance
for doubtful accounts of Nil (1996 - nil) 1,634,168. 1,627,242.
Less current portion (272,225.) (188,714.)
-------------------------
1,361,943. 1,438,528.
-------------------------
-------------------------
8
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
September June
1997 1997
- -------------------------------------------------------------------------------
4. CAPITAL ASSETS Accumulated
Cost Amortization -- Net book Value --
$ $ $ $
Furniture, fixtures
and equipment 695,816. 589,782. 106,034. 120,817.
Reference books 25,966. 24,147. 1,819. 2,425.
Corporate owned stores
reacquired from franchisees 359,732. 70,008. 289,724. 303,264.
Corporate owned store
equipment reacquired from
former franchisees 265,632. 44,268. 221,364. 226,354.
----------------------------------------------
1,347,146. 728,205. 618,941. 652,860.
----------------------------------------------
----------------------------------------------
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
assets/liability for future advertising and promotion.
6. FRANCHISE RIGHTS
$ $
Franchise rights 14,175,609. 14,175,609.
Accumulated amortization (4,786,802.) (4,609,610.)
-------------------------
9,388,807. 9,565,999.
-------------------------
-------------------------
9
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
September June
1997 1997
- --------------------------------------------------------------------------------------
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.
<S> <C> <C>
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
Subordinate 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 4.0%, 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. 66,000. 72,000.
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2002. 321,955. 329,161.
-----------------------
2,125,517. 2,138,723.
Less current portion (503,000.) (435,649.)
-----------------------
1,622,517. 1,703,074.
-----------------------
-----------------------
</TABLE>
10
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
LONG-TERM DEBT (CONT'D)
Interest expense for the year related to long-term debt was $39,432 (1996 -
$39,882)
The minimum future principle repayments required over the next five years
are as follows:
$
1998 427,250
1999 390,218
2000 423,000
2001 461,753
2002 415,296
Subsequent 8,000
---------
2,125,517
---------
---------
8. COMMITMENTS AND CONTINGENCIES
(a) The company is a defendant in the following civil litigation:
The Company is a defendant in several actions arising in the
normal course of business, the final outcome of which cannot be
determined at this time. Any settlement in regard of these actions
will be recorded in the statements of income in the fiscal year
the settlement occurs.
11
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(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.
-------------------------
-------------------------
12
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(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's shares for
the previous 30 trading days using the average exchange rate for the period
and U.S.$0.30 per share. As of June 30, 1997 the preferred shareholder, The
Royal Bank of Canada did not exercise the option.
13
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(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 $25,231 (1996 -
$23,310).
Undeclared dividends for July 1, 1994 to September 30, 1997 on the
preferred shares owned by the Royal Bank are $667,234.
(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.
14
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(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 September September
1997 1996
Primary earnings (loss) per share 0.00 (0.00)
--------------------------
Weighted average number of common
shares outstanding 19,024,598. 19,024,598.
--------------------------
--------------------------
The calculation of fully diluted earnings per common share assumes that, if a
dilutive effect is produced, all convertible securities have been converted, all
shares to be issued under contractual commitments have been issued and all
outstanding options have been exercised at the later of the beginning of the
fiscal period and the option issue date. 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.
15
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TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(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 terms loans approximates their fair value
because the interest rates approximate market rates.
The fair values of the other long-term debt due to non-arm's length parties
are not determinable, as these amounts are interest-free and due on demand,
and, accordingly, cannot be ascertained with reference to similar debt with
arm's length parties.
14. COMPARATIVE FIGURES
Certain of prior year's figures have been reclassified to conform with the
current year's presentation.
16
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The system-wide retail sales for the three months ended September 30, 1997
were $5,894,000 compared to $6,627,000 a decrease of $733,000 or 11.1% for
the same three month 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 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
1997 1996
-----------------------
Net Sales................................... 100.0% 100.0%
Royalties................................... 31.9 43.6
Franchising................................. 9.4 3.8
Supplier Incentives, commissions & other.... 18.0 30.6
Proprietary products........................ 7.3 10.9
Sales of managed franchises stores.......... 10.1 11.1
Construction revenues....................... 23.3
Regional operations and franchising......... (14.2) (15.8)
Head office and administration.............. (23.0) (28.9)
Proprietary products........................ (6.5) (10.0)
Managed franchise stores.................... (9.7) (12.0)
Construction expenses....................... (23.3) --
-----------------------
EBITD....................................... 23.3% 33.3%
-----------------------
Interest expense............................ (2.8) (4.1)
Depreciation and Amortization............... (18.8) (27.0)
-----------------------
NET INCOME.................................. 1.7% 2.2%
-----------------------
-----------------------
17
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996.
Total revenue for the quarter ended September 30, 1997 increased $430,000
or 44.7% to $1,393,000 from $963,000 for the same period last year. The
increase 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 increased $24,000 or 5.8% to $443,000
compared to $419,000 for the same period last year.
* Supplier incentives decreased $43,000 or 14.6% to
$251,000 compared to $294,000 for the same period last year.
* Franchising increased $93,000 or 250.6% to 130,000
compared to $37,000 for the same period last year.
* Proprietary products revenues decreased $3,000 or 2.9%
to $102,000 from $105,000 for the same period last year.
* In the fiscal year ended June 30, 1998 the Company
amended is policy regarding the construction and renovation of
stores. The revenues from constructions are recognized when the
agreements are signed or the funds as been received. Revenues
from construction were $325,000.
Expenses for the quarter ended September 30, 1997 increased $426,000 or
66.3% to $1,069,000 from $643,000 for the same period last year. The
increase in expenses relate to the following:
* Cost associated with managed franchised stores
increased $19,000 a direct result of the increase in the number
of corporately managed stores.
* Head Office and Administration cost increased $41,000
or 15.0% to $320,000 from $279,000 for the same period last year.
* The cost of purchasing certain proprietary products for
resale to distributors.
* Interest expense decreased by $450 or 1.1% to $39,430
from $39,880 last year.
18
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30,
1996.(CONT'D)
* The cost of construction which commenced this fiscal
year was $325,000.
* Net income for the quarter ended September 30, 1997 was
$22,000 compared to a net income of $20,000 for the same period
last year.
WORKING CAPITAL
The working capital deficit at the end of the period was $528,000 compared to a
working capital deficit of $615,000 for the same period last year. This
improvement of $87,000 in the working capital deficit was achieved through cash
flow from operations.
LIQUIDITY AND CASH FLOW
During the quarter the operating outflow was $4,000 compared to an inflow of
$(72,000) for the same quarter of the last fiscal year. This is the result of a
decrease in non-cash operating working capital items.
19
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
PART 11 OTHER INFORMATION
Item 1 Legal Proceedings - See notes to Financial Statements
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Securities Holders - None
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K - None
20
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1997
(CANADIAN DOLLARS)
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results of operation
for the 3 months ended September 30, 1997.
The result of operation for the period ended September 30, 1997 are not
necessarily indicative of the results of the entire year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
By: /s/ Paul J. Gibson January 20, 1998
- -----------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel January 20, 1998
- ------------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot January 20, 1998
- ---------------------------------------
Francois Turcot, Director of Finance
21
