<PAGE>
[LOGO]
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Three Months Ended March 31, 1999)
<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:
March 31, 1999 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 March 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, March 31, 1999 1
Statement of Income - March 31, 1999 2
Statement of Cash Flows, March 31, 1999 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
</TABLE>
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 MARCH 31 JUNE 30
NOTE 1999 1998 1998 1997
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash 0. 45,874. 0. 0.
Accounts Receivable 627,694. 193,718. 605,803. 254,852.
Prepaid Expenses 129,460. 144,606. 106,972. 152,705.
Construction work in process 280,459. 33,476. 318,390. 22,074.
Current portion of notes receivable 174,760. 217,205. 182,100. 188,714.
----------------------------------------------------------------------
1,212,373. 634,879. 1,213,265. 618,345.
STORES HELD FOR RESALE 6,396. 0. 170,839. 149,924.
NOTES RECEIVABLE 3 686,804. 819,820. 1,343,328. 1,438,528.
CAPITAL ASSETS 5 2,003,294. 2,020,533. 534,313. 652,860.
ADVERTISING COMMITMENT 6 148,982. 94,576. 0. 0.
DEFERRED COSTS 172,069. 268,566. 341,660. 462,715.
INVESTMENT IN PUBLIC COMPANY 4 1,617,912. 1,617,912. 0. 0.
FRANCHISE RIGHTS 7 8,074,533. 8,572,715. 9,034,416. 9,565,999.
----------------------------------------------------------------------
13,922,363. 14,029,001. 12,637,821. 12,888,371.
----------------------------------------------------------------------
----------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 100,000. 0. 38,490. 102,232.
Accounts payable and accrued liabilities 768,335. 953,620. 578,282. 863,778.
Current portion of long-term debt 961,286. 644,547. 427,200. 435,649.
----------------------------------------------------------------------
1,829,621. 1,598,167. 1,043,972. 1,401,659.
----------------------------------------------------------------------
LONG-TERM DEBT 8 1,936,652. 2,438,073. 1,674,817. 1,703,074.
LEASE SECURITY DEPOSITS 267,688. 238,381. 239,845. 234,791.
----------------------------------------------------------------------
4,033,961. 4,274,621. 2,958,634. 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 - 19,024,598 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 (4,621,141.) (4,755,163.) (4,830,356.) (4,960,696.)
----------------------------------------------------------------------
9,888,402. 9,754,380. 9,679,187. 9,548,847.
----------------------------------------------------------------------
13,922,363. 14,029,001. 12,637,821. 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 NINE MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
NOTE 1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C> <C>
REVENUES
Royalties 449,657. 553,043. 1,378,969. 1,342,300.
Sales of managed franchise stores 67,820. 97,610. 461,951. 491,827.
Supplier Incentives, Commissions & Other 346,570. 297,507. 828,865. 1,079,973.
Franchising 18,313. 15,000. 125,370. 145,550.
Proprietary products 105,856. 112,570. 343,370. 350,324.
Construction revenues 0. 30,000. 411,260. 642,915.
-----------------------------------------------------------------------
988,216. 1,105,730. 3,549,785. 4,052,889.
-----------------------------------------------------------------------
COST AND EXPENSES
Regional operations and franchising 500. 2,435. 1,375. 5,337.
Head office and administration 448,592. 535,794. 1,319,874. 1,657,637.
Managed franchise stores 83,179. 123,573. 527,709. 507,220.
Proprietary products 90,064. 86,288. 289,729. 305,460.
Construction expenses 0. 303. 330,360. 537,436.
Interest expense 57,721. 39,983. 174,230. 118,948.
Depreciation and Amortization 257,494. 264,211. 772,486. 790,509.
-----------------------------------------------------------------------
937,550. 1,052,587. 3,415,763. 3,922,547.
-----------------------------------------------------------------------
NET INCOME FOR THE PERIOD 50,666. 53,143. 134,022. 130,342.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Earnings per share 13 0.00 0.00 0.01 0.01.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
2
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTER ENDED FOR THE NINE MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 50,666. 53,143. 134,022. 130,342.
ITEMS NOT AFFECTING CASH
Depreciation & Amortization 257,494. 264,213. 772,486. 790,509.
Changes in non-cash operating working capital items (268,368.) (293,264.) (809,129.) (887,030.)
----------------------------------------------------------------
39,792. 24,092. 97,379. 33,821.
----------------------------------------------------------------
FINANCING
Bank Indebtedness (91,864.) (18,699.) 100,000. (63,742.)
Repayment of Long-term debt (23,722.) (10,649.) (184,682.) (36,706.)
----------------------------------------------------------------
(115,586.) (29,348.) (84,682.) (100,448.)
----------------------------------------------------------------
INVESTING
Issue of notes receivable, net of repayments 274,811. 7,421. 175,461. 101,814.
Purchase of capital & other assets (199,719.) (4,476.) (202,538.) (19,326.)
Advertising commitment (5,984.) 0. (54,406.) 0.
Security deposits 13,082. 2,386. 29,307. 5,054.
Managed franchise stores held for resale (6,396.) (75.) (6,396.) (20,915.)
----------------------------------------------------------------
75,794. 5,256. 58,571. 66,627.
NET GENERATED CASH (OUTFLOW) 0. 0. (45,874.) 0.
CASH POSITION, BEGINNING OF PERIOD 0. 0. 45,874. 0.
----------------------------------------------------------------
CASH POSITION, END OF PERIOD 0. 0. 0. 0.
----------------------------------------------------------------
----------------------------------------------------------------
</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, 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 - - - - 134,022 134,022
-----------------------------------------------------------------------------------------------
Balance March 31, 1999 5,409,825 3,732,779 19,024,598 10,776,764 (4,621,141) 9,888,402
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(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
* Treats International Inc.
On June 26, 1998, Triadon Investment Group Inc. and Treats Canada
Corporation amalgamated. The amalgamated entity continued to operate as
Treats Canada Corporation.
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 MARCH 31, 1999
(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 and 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 MARCH 31, 1999
(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:
<TABLE>
<S> <C> <C>
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
</TABLE>
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 MARCH 31, 1999
(CANADIAN DOLLARS)
JUNE
1999 1998
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are translated using the temporal method.
Under this method, monetary assets and liabilities as well as non-monetary
items carried at market value are translated at year-end exchange rates.
Other non-monetary assets and liabilities are translated at exchange rates
prevailing at the transaction dates. Revenues and expenses are translated
at average rates prevailing during the year.
Gains or losses resulting from exchange translation are included in income.
EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share are calculated using the daily weighted
average number of common shares outstanding during the fiscal year plus the
net additional number of shares which would be issuable upon the exercise
of stock options, assuming that the Company used the proceeds received to
purchase additional shares at market value.
3. NOTES RECEIVABLE
Notes receivable are due from franchisees with interest rates varying from
6% to 8% and repayable in scheduled instalments which mature from July 1997
to June 2020.
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Notes receivable, net of allowance
for doubtful accounts of Nil (1998 - nil) 861,564 1,037,025
Less current portion (174,760) (217,205)
--------------------------
686,804 819,820
--------------------------
--------------------------
</TABLE>
8
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(CANADIAN DOLLARS)
JUNE
1999 1998
- -------------------------------------------------------------------------------
4. INVESTMENT IN PUBLIC COMPANY
During the year, the Company sold the U.S. area rights for consideration of
2,800,000 class "A" convertible preference shares in EMC Group Inc., a U.S.
public company incorporated in the State of Florida via a management buy
out by former employees of the company. The investment has been recorded at
the cost of equipment and franchise rights transferred to EMC Group Inc.
The preference shares are convertible to common stock for the equivalent of
US$2,800,000 based on average market value of the common stock for the 60
days prior to the date of conversion, subject to approval of the board of
directors of EMC Group Inc. EMC Group Inc. will only permit the conversion
of preferred shares to common shares of EMC Group Inc. as long as the
conversion does not exceed 10% of the total number of outstanding common
shares of EMC Group Inc. The market value of the shares is not readily
determinable as the common shares are not significantly traded on the NASD
bulletin board, the liquidity of the shares is limited.
<TABLE>
<CAPTION>
5. CAPITAL ASSETS ACCUMULATED
COST AMORTIZATION ---- NET BOOK VALUE ----
$ $ $ $
<S> <C> <C> <C> <C>
Land 625,000 -
625,000 625,000
Building 457,885 17,171 440,714 457,885
Furniture, fixtures and equipment 690,564 685,599 4,965 51,348
Reference books 25,966 25,966 - -
Corporate owned stores
reacquired from franchisees 783,761 133,914 649,846 712,206
Corporate owned store
equipment reacquired from
former franchisees 408,962 126,194 282,768 174,094
----------------------------------------------------------
2,992,139 988,845 2,003,294 2,020,533
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
9
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(CANADIAN DOLLARS)
JUNE
1999 1998
- -------------------------------------------------------------------------------
6. ADVERTISING COMMITMENT
The Company received prescribed amounts from franchisees to fund and
develop advertising and promotion campaigns regionally and nationally. The
funds collected, net of costs incurred, are recorded as an asset/liability
for future advertising and promotion.
<TABLE>
<CAPTION>
7. FRANCHISE RIGHTS $ $
<S> <C> <C>
Franchise rights 13,284,863 13,284,863
Accumulated amortization (5,210,330) (4,712,148)
---------- ----------
8,074,533 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.
<TABLE>
<CAPTION>
8. LONG - TERM DEBT $ $
<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. (see note (a) below) 1,025,000 1,025,000
J.Laverty
Mortgage bearing interest at 7% payable in 261 monthly installments of
$1,335 on interest and principal, secured by land and building at 418
Preston Street, Ottawa, Ontario and a General Security Agreement 172,915 175,793
D. Crawford
Term Loan, repayable in 79 monthly installments of $1625.45 of
principal and interest at 10% secured by a General Security
Agreement 83,883 91,942
-------------------------
Carried forward 1,281,798 1,292,735
</TABLE>
10
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
1999 1998
- ----------------------------------------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONT'D)
<S> <C> <C>
$ $
Brought forward 1,281,798 1,292,735
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 30,000 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 370,179 398,149
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2002 86,402 214,173
---------------------------
2,897,941 3,082,620
Less current portion (961,286) (644,547)
---------------------------
1,936,655 2,438,073
---------------------------
---------------------------
</TABLE>
11
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONT'D)
(a) At this time 3193853 Canada Inc. and the Royal Bank of Canada are not
demanding repayment of their loans, 3193853 Canada Inc. and the Royal
Bank of Canada reserve their respective rights to do so at any time in
accordance with the terms and conditions of their respective security
agreements with the Company.
Interest expense for the year related to long-term debt was $174,230 (1998 -
$118,948).
The minimum future principal repayments required over the next five years are as
follows:
<TABLE>
<CAPTION>
$
<S> <C>
1999 646,287
2000 438,514
2001 526,490
2002 330,221
2003 389,960
Subsequent 566,469
---------
2,897,941
---------
---------
</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 MARCH 31, 1999
(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> <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 MARCH 31, 1999
(CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
10. CAPITAL STOCK
N/A
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 $83,620 (1998 -
$77,228).
Undeclared dividends for July 1, 1994 to March 31, 1999 on the
preferred shares owned by the Royal Bank are $975,189.
(b) The Company has purchased the 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 $50,652 (1998 - $nil).
(d) Accounts payable includes $35,638 owed to 764719 Ontario Inc. whose
owner is a member of the family of the Chief Executive Officer of the
Company.
(e) In the quarter ended December 31, 1998 pursuant to the terms and
conditions of the security agreements between 3193853 Canada Inc. and
Treats Inc., 3193853 whose President is a member of the family of the
Chief Executive Officer of the Company provided a working capital loan
to Treats Inc. As of March 31, 1999 the outstanding balance is
$81,000. This liability is recorded in the Company's consolidated
financial statements as an accounts payable.
14
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(CANADIAN DOLLARS)
1999 1997
- -------------------------------------------------------------------------------
12. INCOME TAXES
No provision has been made for income taxes as the consolidated group of
companies have non capital losses carried forward of approximately
$100,000 available to offset taxable income. These losses will expire as
follows:
<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 0.01 0.00
------------------------------
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.
15
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(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.
16
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(CANADIAN DOLLARS)
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
System-wide retail sales for the nine months ended March 31, 1999 were
$18,144,000 compared to $18,675,000 a decrease of $531,000 or 3.1% for the
same nine month period last year. The sales decline can be attributed to
the Company's decision to close down 13 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 MARCH 31,
1999 1998
-----------------------
<S> <C> <C>
Net Sales ................................... 100.0% 100.0%
Royalties ................................... 45.5 50.0
Franchising ................................. 1.9 1.4
Supplier Incentives, commissions & other .... 35.1 26.9
Proprietary products ........................ 10.7 10.2
Sales of managed franchises stores .......... 6.9 8.8
Construction revenues ....................... 0.0 2.7
Regional operations and franchising ......... (0.1) (0.2)
Head office and administration .............. (45.4) (48.5)
Proprietary products ........................ (9.1) (7.8)
Managed franchise stores .................... (8.4) (11.2)
Construction expenses ....................... (0.0) (0.0)
-----------------------
EBITD ....................................... 37.0% 32.3%
-----------------------
Interest expense ............................ (5.8) (3.6)
Depreciation and Amortization ............... (26.1) (23.9)
-----------------------
NET INCOME .................................. 5.1% 4.8%
-----------------------
-----------------------
</TABLE>
17
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(CANADIAN DOLLARS)
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998.
Total revenue for the quarter ended March 31, 1999 decreased $118,000 or
10.6% to $988,000 from $1,106,000 for the same period last year. The
decrease in revenue resulted primarily from:
* The sales of managed franchises stores decreased by $30,000 or
30.5% to $68,000 compared to $98,000 for the same period last
year.
* Royalties decreased $103,000 or 18.7% to $449,000 compared to
$552,000 for the same period last year.
* Supplier incentives increased $49,000 or 16.5% to $347,000
compared to $298,000 for the same period last year.
* Franchising increased $3,000 to 18,000 compared to $15,000 for
the same period last year.
* Proprietary products revenues decreased $7,000 or 6.0% to
$106,000 from $113,000 for the same period last year.
Expenses for the quarter ended March 31, 1999 decreased $115,000 or 10.9%
to $938,000 from $1,053,000 for the same period last year. The decrease in
expenses relate to the following:
* Cost associated with managed franchised stores decreased $40,000
of 32.7% to $83,000 compared to $123,000 for the same period last
year.
* Head Office and Administration cost decreased $87,000 or 16.7% to
$449,000 from $536,000 for the same period last year.
* The cost of purchasing certain proprietary products for resale to
distributors was $90,000.
18
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(CANADIAN DOLLARS)
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998.(CONT'D)
* Interest expense increased by $18,000 or 44.4% to $58,000 from
$40,000 last year. As a result of the increase in the Long Term
Debt. (See Note 11b, Page 14)
* Net income for the quarter ended March 31, 1999 was $51,000
compared to a net income of $53,000 for the same period last
year.
WORKING CAPITAL
The working capital deficit at the end of the period was $617,000 compared to a
working capital deficit of $169,000 for the same period last year. This is
primarily due to the increase of current portion of the long term debt.
LIQUIDITY AND CASH FLOW
During the quarter the operating inflow was $40,000 compared to an inflow of
$24,000 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 MARCH 31, 1999
(CANADIAN DOLLARS)
PART 11 OTHER INFORMATION
Item 1 Legal Proceedings - See notes 9(a) 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
Treats International Enterprises, Inc. (ATIEI@) and a group of common
shareholders (Athe Minority Shareholders@) on May 27, 1998 filed two actions in
Ontario Court (General Division), one of which is under the Class Proceeding
Act, 1992, against The Royal Bank of Canada and its wholly owned subsidiary The
Royal Bank Capital Corporation (collectively "RBCC"). In both actions TIEI and
the Minority Shareholders seek general damages in the amount of One Hundred
Million Dollars Canadian (C$100,000,000.) from RBCC.
RBCC is the single largest shareholder of TIEI as well as its largest creditor.
On January 19, 1999 representatives of TIEI, the Minority Shareholders, and RBCC
participated in mandatory mediation in Ottawa, Canada. As of March 31, 1999
TIEI, the Minority Shareholders and RBCC have not concluded a settlement
agreement. TIEI, the Minority Shareholders and RBCC have agreed to continue the
mediation process on May 11, 1999 in Toronto, Ontario, Canada.
Item 6 Exhibits and Reports on Form 8-K - None
20
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 1999
(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 March 31, 1999.
The result of operation for the period ended March 31, 1999 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 May 7, 1999
------------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ Peter-Mark Bennett May 7, 1999
------------------------------------------
Peter-Mark Bennett, Director
By: /s/ Francois Turcot May 7, 1999
------------------------------------------
Francois Turcot, Director of Finance
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,014
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 825
<PP&E> 12,521
<DEPRECIATION> 4,442
<TOTAL-ASSETS> 9,477
<CURRENT-LIABILITIES> 1,245
<BONDS> 1,501
0
2,541
<COMMON> 13
<OTHER-SE> 9,877
<TOTAL-LIABILITY-AND-EQUITY> 6,731
<SALES> 0
<TOTAL-REVENUES> 673
<CGS> 0
<TOTAL-COSTS> 638
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> 34
<INCOME-TAX> 0
<INCOME-CONTINUING> 34
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34
<EPS-PRIMARY> 0.003
<EPS-DILUTED> 0.000
</TABLE>
