<PAGE>
[LOGO]
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Three Months Ended September 30, 1998)
<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 30,1998 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
State of jurisdiction: I.R.S. Employer No:
DELAWARE 13-3495199
ADDRESS OF PRINCIPAL EXECUTIVE OFFICER:
418 Preston Street
Ottawa, Ontario
Canada, K1S 4N2
Telephone No.: (613) 563-4073
U.S. ADDRESS OF TREATS INTERNATIONAL ENTERPRISES, INC.
c/o Vincent J. Profaci
Attorney at Law
J.A. Jurgens, P.A.
1964 Howell Branch Road, Suite 206
Winter Park, Florida 32792
Telephone No.: (407) 673-1144
Registrant has filed all reports under Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months and has been
subject to such filing requirements for the past 90 days.:
YES
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
Three months ended September 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, September 30, 1998 1
Statement of Income - September 30, 1998 2
Statement of Cash Flows, September 30, 1998 3
Statement of Stockholder's Equity 4
Notes to Financial Statements 5 to 17
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 18 to 20
PART 11 Other Information - Items 1 to 6 21
Signatures 22
</TABLE>
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30 SEPTEMBER JUNE 30
NOTE 1998 1998 1997 1997
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash 0. 45,874. 0. 0.
Accounts Receivable 418,226. 193,718. 405,324. 254,852.
Prepaid Expenses 167,089. 144,606. 110,161. 152,705.
Construction work in process 406,529. 33,476. 111,156. 22,074.
Current portion of notes receivable 172,945. 217,205. 272,225. 188,714.
--------------------------------------------------------------------
1,164,789. 634,879. 898,866. 618,345.
STORES HELD FOR RESALE 0. 0. 167,993. 149,924.
NOTES RECEIVABLE 3 846,163. 819,820. 1,361,943. 1,438,528.
CAPITAL ASSETS 4 1,949,090. 2,020,533. 618,941. 652,860.
ADVERTISING COMMITMENT 5 119,970. 94,576. 0. 0.
DEFERRED COSTS 236,401. 268,566. 422,362. 462,715.
INVESTMENT IN PUBLIC COMPANY 1,617,912. 1,617,912. 0.
FRANCHISE RIGHTS 6 8,406,654. 8,572,715. 9,388,806. 9,565,999.
--------------------------------------------------------------------
14,340,980. 14,029,001. 12,858,911. 12,888,371.
--------------------------------------------------------------------
--------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 46,330. 0. 150,000. 102,232.
Accounts payable and accrued liabilities 1,210,828. 953,620. 774,189. 863,778.
Current portion of long-term debt 719,604. 644,547. 503,000. 435,649.
--------------------------------------------------------------------
1,976,762. 1,598,167. 1,427,189. 1,401,659.
--------------------------------------------------------------------
LONG-TERM DEBT 2,338,647. 2,438,073. 1,622,517. 1,703,074.
LEASE SECURITY DEPOSITS 7 246,783. 238,381. 237,999. 234,791.
--------------------------------------------------------------------
4,562,192. 4,274,621. 3,287,705. 3,339,524.
--------------------------------------------------------------------
CONTINGENCIES 9
STOCKHOLDERS EQUITY
CAPITAL STOCK 10
Preferred:
Authorized - 10,000,000 non-voting, cumulative shares,
dividends at US $.04 per share, redeemable at option
of company at US $1.00 per share par value US $.50 3,732,779. 3,732,779. 3,732,779. 3,732,779.
Common:
Authorized - 33,333,333 shares par value US $0.001
Issued - 20,741,942 common shares 19,025. 19,025. 19,025. 19,025.
Additional paid - in capital 10,757,739. 10,757,739. 10,757,739. 10,757,739.
--------------------------------------------------------------------
14,509,543. 14,509,543. 14,509,543. 14,509,543.
--------------------------------------------------------------------
Deficit (4,730,755.) (4,755,163.) (4,938,337.) (4,960,696.)
--------------------------------------------------------------------
9,778,788. 9,754,380. 9,571,206. 9,548,847.
--------------------------------------------------------------------
14,340,980. 14,029,001. 12,858,911. 12,888,371.
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
1
<PAGE>
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 1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C> <C>
REVENUES
Royalties 455,890. 444,173. 455,890. 444,173.
Sales of managed franchise stores 177,313. 140,075. 177,313. 140,075.
Supplier Incentives, Commissions & Other 254,401. 251,416. 254,401. 251,416.
Franchising 84,000. 130,498. 84,000. 130,498.
Proprietary products 91,531. 102,254. 91,531. 102,254.
Construction revenues 294,875. 325,127. 294,875. 325,127.
----------------------------------------------------------------------
1,358,010. 1,393,543. 1,358,010. 1,393,543.
----------------------------------------------------------------------
COST AND EXPENSES
Regional operations and franchising 199,887. 198,387. 199,887. 198,387.
Head office and administration 234,256. 320,091. 234,256. 320,091.
Managed franchise stores 211,391. 134,931. 211,391. 134,931.
Proprietary products 80,015. 90,623. 80,015. 90,623.
Construction expenses 294,875. 325,074. 294,875. 325,074.
Interest expense 55,682. 39,432. 55,682. 39,432.
Depreciation and Amortization 257,496. 262,646. 257,496. 262,646.
----------------------------------------------------------------------
1,333,602 1,371,184. 1,333,602. 1,371,184.
----------------------------------------------------------------------
NET INCOME FOR THE PERIOD 24,408. 22,359. 24,408. 22,359.
----------------------------------------------------------------------
----------------------------------------------------------------------
Earnings per share 12 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
2
<PAGE>
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
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 24,408. 22,359. 24,408. 22,359.
ITEMS NOT AFFECTING CASH
Depreciation & Amortization 257,496. 262,646. 257,496. 262,646.
Changes in non-cash operating working capital items (348,847.) (288,940.) (348,847.) (288,940.)
-----------------------------------------------------------------
(66,943.) (3,935.) (66,943.) (3,935.)
-----------------------------------------------------------------
FINANCING
Bank Indebtedness 46,330. 47,768. 46,330. 47,768.
Repayment of Long-term debt (24,369.) (13,206.) (24,369.) (13,206.)
-----------------------------------------------------------------
21,961. 34,562. 21,961. 34,562.
-----------------------------------------------------------------
INVESTING
Issue of notes receivable, net of repayments 17,917. (6,926.) 17,917. (6,926.)
Purchase of capital & other assets (1,816.) (8,840.) (1,816.) (8,840.)
Advertising commitment (25,394.) 0. (25,394.) 0.
Security deposits 8,402. 3,208. 8,402. 3,208.
Managed franchise stores held for resale 0. (18,069.) 0. (18,069.)
-----------------------------------------------------------------
(892.) (30,627.) (892.) (30,627.)
NET GENERATED CASH (OUTFLOW) (45,874.) 0. (45,874.) 0.
CASH POSITION, BEGINNING OF PERIOD 45,874. 0. 45,874. 0.
-----------------------------------------------------------------
CASH POSITION, END OF PERIOD 0. 0. 0. 0.
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
3
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
REDEEMABLE, CONVERTIBLE
---PREFERRED SHARES--- ---COMMON SHARES---
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 5,409,825 3,732,779 20,741,942 10,575,770 (5,116,932) 9,191,617
Common shares issued - - 350,000 350 - 350
Cancellation of common shares - - (2,067,344) (2,067) - (2,067)
Share issue costs - - - (29,289) - (29,289)
Redemption of non-controlling
interest in subsidiary - - - 232,000 - 232,000
Net income for the year - - - - 6,246 6,246
Balance, June 30, 1996 5,409,825 3,732,779 19,024,598 10,776,764 (5,110,686) 9,398,857
Net income for the year - - - - 149,990 149,990
--------------------------------------------------------------------------------------
Balance, June 30, 1997 5,409,825 3,732,779 19,024,598 10,776,764 (4,960,696) 9,548,847
Net income for the year - - - - 205,533 205,533
--------------------------------------------------------------------------------------
Balance June 30, 1998 5,409,825 3,732,779 19,024,598 10,776,764 (4,755,163) 9,754,380
--------------------------------------------------------------------------------------
Net income for the period - - - - 24,408 24,408
--------------------------------------------------------------------------------------
Balance September 30, 1998 5,409,825 3,732,779 19,024,598 10,776,764 (4,730,755) 9,778,788
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
These consolidated financial statements comprise the accounts of
the Company and its wholly - owned subsidiaries from the date of
acquisition, as follows:
* Treats Inc.
* Treats Ontario Inc.
* Chocolate Gourmet Treats Limited
* Treats Canada Corporation (formerly Accounting and Consulting Inc.)
* Treats International Inc.
On June 26, 1998, Triadon Investment Group Inc. and Treats Canada
Corporation amalgamated and has continued operating under the
Treats Canada Corporation name.
All intercompany transactions and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in
Canada (which also conform in all material respects with
accounting principles generally accepted in the United States)
and include the following significant accounting policies.
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. These
estimates are reviewed periodically, and, as adjustments become
necessary, they are reported in earnings in the period in which
they become known.
5
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Franchise fees and construction revenue arises on the sale of
national, area and store franchises. Franchise store revenue is
recognized as income when the respective purchase and sale
agreements have been signed, all material conditions relating to
the sale have been substantially completed by the Company or the
franchise store has commenced operations. Revenue from national
and area franchise agreements is recognized when the area
development agreement has been signed and all substantial
obligations of the Company have been completed.
When payment for the sale of a national or area franchise is
based on a contract over a period longer than twelve months, the
Company recognizes revenue based on the assessment of
collectibility. The total contract is recorded as deferred
revenue, and revenue recognition commences when payments in
excess of 25% of the total contract have been received and
management has ascertained that there is a sufficient level of
certainty that the balance of the contract is collectible.
Deposits that are non-refundable under the franchising agreement
are recognized as franchising revenue when received.
Royalties are recognized when they are earned, based on a
percentage of the franchisees' sales on a weekly basis.
Supplier incentives are recognized in the period to which they
apply.
INVESTMENT IN PUBLIC COMPANY
The investment in public company is accounted for at cost. Under
the cost method, the investment is recorded at its original cost,
and earnings from the investment are recognized only to the
extent of dividends received or receivable.
6
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FRANCHISE STORES HELD FOR RESALE
Franchise stores held for resale are valued at the lower of cost
and net realizable value.
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost less accumulated
amortization. Amortization is provided for at rates intended to
write off the assets over their estimated economic lives, as
follows:
Building - 20 years straight-line
Furniture, fixtures and equipment - 5 years straight-line
Reference books - 5 years straight-line
Corporate owned stores reacquired
from franchisees - 5 years straight-line
Corporate owned store equipment
reacquired from former
franchisees - 5 years straight-line
FRANCHISE RIGHTS
Franchise rights are being carried at cost less accumulated
amortization. Amortization is provided for on a straight-line
basis over 20 years.
DEFERRED COSTS
Deferred costs consist of a consulting contract with a former
officer of the Company expiring in 2003.
7
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
June
1998 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
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.
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Notes receivable, net of allowance
for doubtful accounts of Nil (1998 - nil) 1,019,108 1,037,025
Less current portion (172,945) (217,205)
-------------------------
846,163 819,820
-------------------------
-------------------------
</TABLE>
8
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
June
1998 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
4. INVESTMENT IN PUBLIC COMPANY
During the year, the Company sold the U.S. area rights for
consideration of 2,800,000 class "A" convertible preference
shares in EMC Group Inc., a U.S. public company incorporated in
the State of Florida via a management buy out by former employees
of the company. The investment has been recorded at the cost of
equipment and franchise rights transferred to EMC Group Inc. The
preference shares are convertible to common stock for the
equivalent of US$2,800,000 based on average market value of the
common stock for the 60 days prior to the date of conversion,
subject to approval of the board of directors of EMC Group Inc.
EMC Group Inc. will only permit the conversion of preferred
shares to common shares of EMC Group Inc. as long as the
conversion does not exceed 10% of the total number of outstanding
common shares of EMC Group Inc. The market value of the shares
is not readily determinable as the common shares are not
significantly traded on the NASD bulletin board, the liquidity of
the shares is limited.
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
ACCUMULATED
COST AMORTIZATION ---- NET BOOK VALUE ----
$ $ $ $
<S> <C> <C> <C> <C>
Land 625,000 - 625,000 625,000
Building 457,885 5,723 452,162 457,885
Furniture, fixtures and equipment 685,647 650,234 35,413 51,348
Reference books 25,966 25,966 - -
Corporate owned stores
reacquired from franchisees 735,757 60,339 675,418 712,206
Corporate owned store
equipment reacquired from
former franchisees 261,302 100,273 161,029 174,094
---------------------------------------------------------
2,791,557 842,535 1,949,022 2,020,533
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
9
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
June
1998 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
6. ADVERTISING COMMITMENT
The Company received prescribed amounts from franchisees to fund
and develop advertising and promotion campaigns regionally and
nationally. The funds collected, net of costs incurred, are
recorded as an asset/liability for future advertising and
promotion.
7. FRANCHISE RIGHTS
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Franchise rights 13,284,863 13,284,863
Accumulated amortization (4,878,209) (4,712,148)
8,406,654 8,572,715
</TABLE>
The Company obtained an independent appraisal dated December 14,
1998 from Scott, Rankin, Gordon & Gardiner, Chartered
Accountants, substantiating a valuation of franchise rights in
excess of $8,500,000 as at June 30, 1998.
8. LONG - TERM DEBT
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
3193853 Canada Inc.
Term loan, repayable in 102 monthly instalments
of $10,000 plus interest at 6% per annum, due
June 1, 2008, secured by a general security
agreement, general assignment of book debts
and franchise rights, pledge of all the shares in
subsidiary and associated companies. 1,025,000 1,025,000
(see note (a) below)
Royal Bank of Canada
Subordinated debenture bearing interest at 8%
per annum, payable in 60 monthly instalments, due
June 30, 2001, secured by a general security
agreement, general assignment of book debts
and franchise rights, pledge of all the shares in
subsidiary and associated companies. 1,129,562 1,129,562
(see note(a) below)
------------------------
Carried forward 2,154,562 2,154,562
</TABLE>
10
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
June
1998 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
8. LONG-TERM DEBT (CONT'D)
$ $
<S> <C> <C>
Brought forward 2,154,562 2,154,562
Business Development Bank of Canada
Term loan, repayable in 50 monthly instalments
of $2,000 plus interest at prime plus 4%, due
June 23, 2000, secured by a general security
agreement, general assignment of books debts
and franchise rights, pledge of all the shares in
subsidiary and associated companies. 42,000 48,000
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at 5.9% per annum
payable in 105 monthly installments of $4,884
on interest and principal, secured by land and
building at 418 Preston Street in Ottawa, Ontario 388,335 398,149
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2004 473,354 481,909
------------------------
3,058,251 3,082,620
Less current portion (719,604) (644,547)
------------------------
2,338,647 2,438,073
------------------------
------------------------
</TABLE>
(a) As of December 1998, 3193853 Canada Inc. and Royal Bank
Capital Corporation have waived the defaults on the
non-payment of all principal and interest pursuant to the
loan agreements. As it is management's belief that the
lenders will not demand payment within the coming year, it
has consequently presented the debt as long term in the
financial statements.
11
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
8. LONG-TERM DEBT (CONT'D)
Interest expense for the year related to long-term debt was $55,682
(1997 - $39,432).
The minimum future principal repayments required over the next five
years are as follows:
<TABLE>
<CAPTION>
$
<C> <C>
1999 644,604
2000 450,514
2001 526,490
2002 330,221
2003 319,265
Subsequent 787,157
---------
3,058,251
---------
---------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
(a) The Company is a defendant in several actions arising in
the normal course of business. The Company has made offers to
settle some of the claims but to date they have not been
accepted. Judgements issued against the Company on some of the
claims in the amount of $504,571 are all under appeal.
Management is of the opinion that, as the outcome of the
claims, counterclaims or appeals is not determinable at
this time, no provision for any potential losses should be
included in these financial statements.
12
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONT'D)
(b) The Company has lease commitments for corporate-owned
stores and office premises. The Company also, as the
franchisor, is the lessee in most of the franchisee's lease
agreements. The Company enters into sublease agreements
with individual franchisees, whereby the franchisee assumes
responsibility for and makes lease payments directly to the
landlord. The aggregate rental obligations under these
leases, over the next five years are as follows:
<TABLE>
<CAPTION>
$
<S> <C>
Year ending June 30
1999 2,727,550
2000 2,503,426
2001 2,045,075
2002 1,464,328
2003 1,049,059
Later Years 1,900,007
----------
Total minimum payments* 11,689,445
----------
----------
</TABLE>
* Minimum payments have not been reduced by minimum sublease
rentals for $10,968,230 due in future under noncancellable
sublease.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
1999 1998
$ $
<S> <C>
Minimum rentals 2,727,550 2,923,180
Less: Sublease rentals (2,578,854) (2,674,484)
------------------------------
148,696 248,696
------------------------------
------------------------------
</TABLE>
13
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONT'D)
(c) The Company has been assessed interest and penalties on
provincial capital taxes amounting to $40,000 which the
company is currently appealing under the tax fairness
provisions of the Income Tax Act. The assessments have not
been reflected in the financial statements as management
feels that they will be reversed.
10. CAPITAL STOCK
CANCELLATION OF COMMON SHARES - JANUARY 4, 1996
Pursuant to a resolution of the Board of Directors, the Transfer
Agent of record was instructed to cancel and return to treasury
the 2,067,344 of the common shares held by Tricapital Management
Limited. The shares were originally issued pursuant to a debt
restructuring with Tricapital Management Limited. The
restructuring did not proceed as outlined and accordingly these
shares were cancelled.
CONVERSION PRIVILEGES - DECEMBER 31, 1996
In the event that dividends on the Preferred Series A shares
fall five quarters in arrears or the shares are not redeemed by
December 31, 1996, then the conversion price will be adjusted so
that the preferred shares will be convertible into common shares
of the Company at a price equal to the lower of the weighted
average trading price of the Company's shares for the previous 30
trading days using the average exchange rate for the period and
U.S.$0.30 per share. As of June 30, 1998 the preferred
shareholder, The Royal Bank of Canada did not exercise the
option.
14
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
(a) The Royal Bank of Canada and its subsidiary, Royal Bank
Capital Corporation, are registered holders of 37.9% of the
common stock. The Royal Bank Capital Corporation holds a
subordinated debenture (see note 8) for which the related
interest expense was $27,321
(1997 - $25,233).
Undeclared dividends for July 1, 1994 to June 30, 1998 on the
preferred shares owned by the Royal Bank are $872,537.
(b) The Company has purchased the office premises, land and
building at 418 Preston Street, Ottawa from a trust of which
the beneficiaries are the family of the Chief Executive
Officer of the Company. The family owns approximately 32.6%
of the common stock of the Company. The payment of the
purchase price of $1,082,885 - fair market value determined
pursuant to an independent review by Royal LePage - was
satisfied by the assumption of a mortgage and loans of
$665,885 and the balance of $417,000 by way of increase in
the term loan due to 3103853 Canada Inc. (note 8).
(c) During fiscal 1996, the term debt owed to the Standard
Chartered Bank was acquired by 3193853 Canada Inc. whose
President is a member of the family of the Chief Executive
Officer of the Company. The related interest expense was
$16,738 (1997 - $nil).
(d) Accounts payable includes $33,115 owed to 764719 Ontario Inc.
whose owner is a member of the family of the Chief Executive
Officer of the Company.
15
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
1998 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
12. INCOME TAXES
No provision has been made for income taxes as the consolidated
group of companies have non capital losses carried forward of
approximately $100,000 available to offset taxable income. These
losses will expire as follows:
<TABLE>
<CAPTION>
$
<S> <C>
2000 50,000
2001 50,000
-------
100,000
-------
-------
</TABLE>
13. EARNINGS (LOSS) PER SHARE
<TABLE>
<S> <C> <C>
Primary earnings (loss) per share 0.00 0.01
-----------------------
Weighted average number of common shares outstanding 19,024,598 19,024,598
-----------------------
-----------------------
</TABLE>
The calculation of fully diluted earnings per common share assumes
that, if a dilutive effect is produced, all convertible securities
have been converted, all shares to be issued under contractual
commitments have been issued and all outstanding options have been
exercised at the later of the beginning of the fiscal period and
the option issue date. If all conversions (see note10) had
occurred, the Company would have had to increase its maximum
authorized common shares. Fully diluted earnings per share are not
presented as they are anti-dilutive.
16
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts of accounts receivable, short-term notes
receivable and accounts payable and accrued liabilities
approximates their fair value because of the short-term maturities
of these items.
The carrying amount of the long-term notes receivable, long-term
subordinated debenture and term loans approximates their fair
value because the interest rates approximate market rates.
The fair values of the other long-term debt due to non-arm's
length parties are not determinable, as these amounts are
interest-free and due on demand, and, accordingly, cannot be
ascertained with reference to similar debt with arm's length
parties.
15. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use
two digits rather than four to identify a year. Date-sensitive
systems may recognize the year 2000 as 1900 or some other date,
resulting in errors when information using year 2000 dates is
processed. In addition, similar problems may arise in some
systems which use certain dates 1999 to represent something other
than a date. The effects of the Year 2000 Issue may be
experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspect of the Year 2000
Issue affecting the entity, including those related to the efforts
of customers, suppliers, or other third parties, will be fully
resolved.
16. COMPARATIVE FIGURES
Certain of prior year's figures have been reclassified to conform
with the current year's presentation.
17
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The system-wide retail sales for the three months ended September
30, 1998 were $5,560,000 compared to $5,894,000 a decrease of
$334,000 or 5.7% for the same three month period last year. The
sales decline can be attributed to the Company's decision to close
down 7 locations during the past twelve months. The units closed
down were primarily non-performing locations or locations were the
Company could not establish satisfactory lease terms with the
landlord.
RESULTS OF OPERATION
The following table sets fourth for the periods indicated certain
items from the consolidated statement of income expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
Quarter ended September
1997 1996
-----------------------
<S> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Royalties. . . . . . . . . . . . . . . . . . . . . . . . . . 33.6 31.9
Franchising. . . . . . . . . . . . . . . . . . . . . . . . . 6.2 9.4
Supplier Incentives, commissions & other . . . . . . . . . . 18.7 18.0
Proprietary products . . . . . . . . . . . . . . . . . . . . 6.7 7.3
Sales of managed franchises stores . . . . . . . . . . . . . 13.1 10.1
Construction revenues. . . . . . . . . . . . . . . . . . . . 21.7 23.3
Regional operations and franchising. . . . . . . . . . . . . (14.7) (14.2)
Head office and administration . . . . . . . . . . . . . . . (17.2) (23.0)
Proprietary products . . . . . . . . . . . . . . . . . . . . (5.9) (6.5)
Managed franchise stores . . . . . . . . . . . . . . . . . . (15.6) (9.7)
Construction expenses. . . . . . . . . . . . . . . . . . . . (21.7) (23.3)
-----------------
EBITD. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.9% 23.3%
-----------------
Interest expense . . . . . . . . . . . . . . . . . . . . . . (4.1) (2.8)
Depreciation and Amortization. . . . . . . . . . . . . . . . (19.0) (18.8)
-----------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . 1.8% 1.6%
-----------------
-----------------
</TABLE>
18
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997.
Total revenue for the quarter ended September 30, 1998 decreased
$36,000 or 2.5% to $1,358,000 from $1,392,000 for the same period
last year. The decrease in revenue resulted primarily from:
* The sales of managed franchises stores increased by
$37,000 or 26.6% to $177,000 compared to $140,000 for
the same period last year.
* Royalties increased $12,000 or 2.6% to $456,000 compared
to $444,000 for the same period last year.
* Supplier incentives increased $3,000 or 1.2% to $254,000
compared to $251,000 for the same period last year.
* Franchising decreased $46,000 or 35.6% to 84,000
compared to $130,000 for the same period last year.
* Proprietary products revenues decreased $11,000 or 10.5%
to $92,000 from $103,000 for the same period last year.
Expenses for the quarter ended September 30, 1998 decreased
$38,000 or 2.7% to $1,333,000 from $1,371,000 for the same period
last year. The increase in expenses relate to the following:
* Cost associated with managed franchised stores increased
$77,000 of 56.7% to $211,000 compared to $144, 000 for
the same period last year.
* Head Office and Administration cost decreased $86,000 or
26.8% to $234,000 from $320,000 for the same period last
year.
* The cost of purchasing certain proprietary products for
resale to distributors was $80,000.
19
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997.
(CONT'D)
* Interest expense increased by $16,000 or 41.2% to
$56,000 from $39,000 last year. Due to the increase in
the Long Term Debt. (See Note 11b, Page 15)
* Net income for the quarter ended September 30, 1998 was
$24,000 compared to a net income of $22,000 for the same
period last year.
WORKING CAPITAL
The working capital deficit at the end of the period was $812,000
compared to a working capital deficit of $528,000 for the same period
last year.
LIQUIDITY AND CASH FLOW
During the quarter the operating outflow was $67,000 compared to an
outflow of $4,000 for the same quarter of the last fiscal year. This
is the result of a decrease in non-cash operating working capital
items.
20
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
PART 11 OTHER INFORMATION
Item 1 Legal Proceedings - See notes to Financial Statements
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Securities Holders - None
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K - None
21
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1998
(CANADIAN DOLLARS)
The information furnished herein reflects all adjustments which are, in
the opinion of management, necessary to a fair statement of the results
of operation for the 3 months ended September 30, 1998.
The result of operation for the period ended September 30, 1998 are not
necessarily indicative of the results of the entire year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
By: /s/ Paul J. Gibson February 24, 1998
------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel February 24, 1998
------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot February 24, 1998
------------------------------------
Francois Turcot, Director of Finance
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 978
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 793
<PP&E> 12,384
<DEPRECIATION> 4,072
<TOTAL-ASSETS> 9,762
<CURRENT-LIABILITIES> 1,346
<BONDS> 1,760
0
2,541
<COMMON> 13
<OTHER-SE> 9,877
<TOTAL-LIABILITY-AND-EQUITY> 6,657
<SALES> 0
<TOTAL-REVENUES> 924
<CGS> 0
<TOTAL-COSTS> 908
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 17
<INCOME-TAX> 0
<INCOME-CONTINUING> 17
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000
</TABLE>