<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: JUNE 30, 2000
-------------
Commission file number 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
DELAWARE 13-3495199
418 Preston Street, Ottawa, Ontario, Canada
K1S 4N2
(613) 563-4073
Securities registered pursuant to Section 12(g) of the Act. Common Stock $.001
par value
<PAGE>
FORM 10-K
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
TREATS INTERNATIONAL ENTERPRISES, INC.
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
Vincent J. Profaci, P.A.
932 Center Circle, Suite 1000
Altamonte Springs, Florida 32714
United States of America
Telephone No.: (407) 673-1144
<PAGE>
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [/] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part 111 of this
Form 10-K or any amendment to this Form 10-K. [/]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is U.S. $2,539,813. The aggregate market value was computed by
reference to the average bid and asked prices as of October 18, 2000. (U.S.
$0.38)
It was assumed for determination of affiliates, that all principal
shareholders over 10% and officers are affiliated.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common Stock $.001 par value 15,426,692
------------------------------- --------------------------------------
Title of Class Shares outstanding at October 18, 2000
DOCUMENTS INCORPORATED BY REFERENCE
3
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C> <C>
PART I
Item 1 Business.................................................................5 - 10
Item 2 Properties...................................................................11
Item 3 Legal Proceedings............................................................11
Item 4 Submission of Matters to a Vote of Security Holders..........................11
PART II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters..............................................12
Item 6 Selected Financial Data.................................................13 - 14
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................15 - 26
Item 7-A Quantitative and Qualitative Disclosure about
Market Risk..................................................................27
Item 8 Financial Statements and Supplementary Data.............................27 - 48
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................49
PART III
Item 10 Directors and Executive Officers of the Registrant...........................50
Item 11 Executive Compensation.......................................................51
Item 12 Security Ownership of Certain Beneficial Owners
and Management..........................................................52 - 53
Item 13 Certain Relationships and Related Transactions...............................54
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.....................................................55 - 57
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES..............................................58
SIGNATURES.....................................................................................59
</TABLE>
4
<PAGE>
PART I
ITEM 1. BUSINESS
Treats International Enterprises, Inc. (the "Company") is an international
franchisor carrying on the business of selling the right to market the Treats
System. The Treats System entails the preparation and sale of cookies,
muffins and other specialty bakery items, gourmet and specialty coffees as
well as related food and beverage products in retail stores using a system
and methodology of marketing developed and designed by the Company and
identified by the trademark TREATS.
The Company operates its business through its wholly-owned subsidiary
Treats Inc. Treats Inc. ("IT") is the parent company to a number of other
entities, specifically:
CHOCOLATE GOURMET TREATS LIMITED ("CGTL")
TREATS ONTARIO INC.("TOI")
TREATS CANADA CORPORATION ("TCC")
As at September 30, 2000, there are 110 retail units in North America
utilizing the Treats System. 99 of these units are owned and operated by
franchisees; 11 are corporately managed.
The Company grants both single unit franchises and area development
franchises throughout Canada and the United States. While there are currently
no operations outside of North America, it is the Company's intention to sell
National Licenses in the future. The Company has taken no steps to comply
with any other International government franchise regulatory agencies.
The Company markets essentially three variations on the Treats concept. The
Treats Bakery, usually 250 - 500 square feet in size with no seating area of
its own, the Treats Bakery Cafe, commonly 500 - 2,000 square feet in size
with its own seating arrangement and the Treats International Coffee
Emporium, normally 500 - 2,000 square feet with its own seating arrangements.
Treats stores are found in a variety of locations including office complexes,
shopping malls, mixed use properties (commercial location with a shopping
area), street front locations, transportation terminals and universities. The
Company seeks locations or sites with significant pedestrian traffic, where
high visibility prevails.
For substantially all single store franchises in Canada, one of the Company's
subsidiaries has entered into a lease ("Head Lease") with the relevant
landlord and the location is sub-leased at the same terms, including rental
rates, to the franchise owner. The Head Lease is the lease agreement between
the landlord and the entity which signs it ("Tenant"). The Tenant is bound by
the terms and conditions thereof.
5
<PAGE>
ITEM 1. BUSINESS (CONT'D)
Generally for stores opened by an Area Franchisee, the Area Franchisee enters
into the Head Lease directly and the Head Lease is collaterally assigned to
the Company or one of its subsidiaries. The collateral assignment means the
Company does not have all the rights and obligations associated with entering
into the Head Lease. It does, however, give the Company the right, but not
the obligation, to assume the franchisee's position under the Head Lease if
the franchisee defaults under its obligations under the Area Franchise
Agreement with the Company. Franchisee in this context means the person who
enters into the Franchise Agreement in a location covered under an Area
Franchise Agreement.
Treats' franchisees prepare their baked goods on site daily in order to
ensure wholesomeness and to attract customers with provocative fresh baked
smells. The Company's principal products are prepared according to
proprietary recipes in many cases using dry mixes which have been
manufactured to the Company's specifications by the Quaker Oats Company of
Canada and coffees blended to Treats specifications by Nestle Canada. The
Company has no vertical integration with any of the companies manufacturing
its bakery mixes and coffee blends. Its proprietary products are primarily
sold to the franchised stores only although the Company is in the process of
examining other retail opportunities using E-Commerce.
The Company is a Delaware corporation, organized in 1988.
INDUSTRY OVERVIEW
The market for muffins, cookies and related specialty baked goods as well as
coffee products, including gourmet and specialty coffees is large, fragmented
and growing. The Specialty Coffee/Specialty Baking franchise concept has been
a successful addition to the quick service segment of food franchising. The
quick service market-segment continues to grow.
Management believes this growth has been driven by a much greater consumer
awareness and appreciation of gourmet and specialty coffee and fresh baked
goods as a result of their increasing availability as well as the increase in
demand for all fresh premium food products where the price differential from
the commercial brands is relatively small compared to the perceived
improvement in product quality and taste.
In Canada, the Specialty Baking segment is dominated by two major chains:
Treats (115 plus locations) and MMMarvellous MMMuffins (100 plus locations).
Several smaller concepts operate regionally and a number of US Franchisors,
including Mrs. Fields Cookies have a national presence in Canada. Treats has
competed in this segment in Canada since 1977 always with a strong commitment
to quality, a significant operational support program and a very strong
emphasis on Coffee.
In the Specialty Coffee segment a number of large national chains have
established a strong presence in North America. The most significant chains
are: Starbucks with approximately 3,500 corporately
6
<PAGE>
ITEM 1. BUSINESS (CONT'D)
owned, licensed and joint-venture locations, Diedrich Coffee Co. with
approximately 400 locations under a variety of brand names, including Gloria
Jeans and Second Cup with approximately 380 locations. However there are a
many other large chains with strong regional and niche presence.
While these competitors have already established a significant presence, they
have also created a rapidly expanding market for coffee related concepts.
Treats has a unique concept and a operating methodology that will allow it to
compete favourably. Treats' strong emphasis on Specialty, Gourmet and
Flavoured Coffees in both existing and new Treats locations, positions the
concept for growth and expansion.
Specialty coffee sales as a percentage of total coffee sales in North America
have been increasing steadily. According to the National Coffee Association,
sales of specialty coffee grew from approximately 17% to almost 30% of total
coffee sales in the United States from 1989 through 1997. According to the
National Coffee Association's 2000 study, 54% of Americans drink coffee every
day. On average they drink 3.1 cups per day. The North American coffee market
consists of three distinct product categories: (1) commercial ground roast,
mass-merchandised coffee and (2) specialty coffees, which include gourmet
coffees (premium grade arabica coffees sold in whole bean and ground form)
and (3) premium coffees (upscale coffees mass-marketed by the leading coffee
companies).
Treats believes that several factors have contributed to the increase in
demand for gourmet coffee including:
-- greater consumer awareness of gourmet coffee as a result of its
increased availability and significant market awareness of some of
the larger coffee concept chains;
-- increased quality awareness by consumers;
-- increased demand for all premium food products, including gourmet
coffee; and
-- the decline in alcoholic beverage consumption.
The Specialty Coffee Association of America estimates that the number of
specialty coffee beverage outlets in North America had increased to over
10,000 by the end of 1999. The Company believes that, even with the continued
growth in the number of specialty coffee stores, the market is fragmented
and, with the exception of Starbucks and a few other smaller chains, remains
relatively unbranded.
Finally it must be recognized that there are many other concepts which
compete in a very similar environment and market as Treats. The most
significant of these concepts are the donut chains, which in Canada is
dominated by Tim Horton's.
7
<PAGE>
ITEM 1. BUSINESS (CONT'D)
THE FLOUR MARKET - BAKED GOODS
The dominant factor for the continued growth in the baked goods market in
North America is the health and diet conscious consumer seeking foods that
are nutritious and fun to eat. New bakery products continue to be introduced
at a rate which exceeds that of the overall food industry.
The North American per capita flour products consumption has risen from an
average of 118 Lbs. in 1984 to 130 Lbs. in 1990 and is forecasted to reach
199 Lbs. by the year 2000. With "in-store" and wholesale bakery products
accounting for most of the gains in the traditional baking products, (3%
growth per annum) Treats is well positioned for growth.
THE COFFEE MARKET
According to the National Coffee Association's 1998 National Coffee Drinking
Trends report, approximately 65% of all consumers (age 10+) drink coffee on a
weekly basis, they drink an average of 3.3 cups per day, and the overall
number of coffee drinkers has grown approximately 20%. The gourmet coffee
segment of the industry has experienced strong growth over the past decade
and is expected to continue to grow through the end of the century. Research
from CREST, a market research firm, indicates specialty coffee shop category
traffic growth increased by 49%, 11%, 19% and 16%, annually, from 1995
through 1998.
TRAINING AND DEVELOPMENT
The Company's strategy is to place strong emphasis on identifying and
retaining qualified franchisees and employees, and invest substantial
resources in training them in customer service, beverage and food
preparation, and sales skills. The Company believes that the friendliness,
speed and consistency of service and the product knowledge of the Company's
franchisees and employees are critical factors in developing the Company's
quality brand identity and to building a loyal customer base.
EXPANSION
A total of 3 franchised stores were opened and 9 stores were closed during
1999-2000. The Company plans to open approximately 8 franchised stores in
Canada in the current fiscal year, primarily in existing markets. The Company
has adopted a policy of not developing stores for its own operation and is in
the process of franchising all stores currently operated by the Company.
The ability of the Company to open new stores is affected by a number of
factors. These factors include, the ability to attract suitable and qualified
franchise owners, constraints among other things, selection and availability
of suitable store locations, negotiation of suitable lease or financing
terms, and construction of stores. Accordingly, there can be no assurance
that the Company will be able to meet planned growth targets.
8
<PAGE>
ITEM 1. BUSINESS (CONT'D)
The Company's expansion strategy is to cluster stores in targeted markets,
thereby increasing consumer awareness and enabling the Company to take
advantage of operational, distribution and advertising efficiencies. The
Company believes that market penetration through the opening of multiple
stores within a particular market should result in increased average store
sales in that market. In determining which new markets to develop, the
Company considers many factors, including its existing store base, the size
of the market, demographic and population trends, competition, availability
and cost of real estate, and the ability to supply product efficiently.
RAW MATERIALS
The Company and its franchisees have not experienced any material shortages
of food, equipment, fixtures or other products which are necessary to
restaurant operations. The Company anticipates no such shortages of products
and, in any event, alternate suppliers are available.
TRADEMARKS AND SERVICE MARKS
The Company's rights in its trademarks and service marks are a significant
part of its business. The Company is the owner of the following Trade Marks:
-- TREETS
-- CHOCOLATE GOURMET TREATS
-- CHOCOLATE GOURMET TREATS & design
-- LESBONS TREATS
-- TREATS & design
-- TREATS
-- TREATS BAKERY CAFE
-- NOBODY TREATS YOU BETTER
-- MONOGRAM COOKIES
-- TREATS BAKERY AND YOGURT EMPORIUM
-- CREPE ETC.
-- TREATS FROZEN YOGURT...HALF THE CALORIES, TWICE THE FUN
-- TREATS INTERNATIONAL COFFEE EMPORIUM & design
-- TREATSATIONS
-- BAGUETTE EXPRESS
-- TREATS (Word)
These trademarks are registered in Canada and some of these trademarks are
registered in foreign countries including the U.S.A.
9
<PAGE>
ITEM 1. BUSINESS (CONT'D)
The Company is aware of a number of companies which use various combinations
of the word Treats in their names and/or services, none of which, either
individually or in the aggregate, are considered to materially impair the use
by the Company of its mark. It is the Company's policy to vigorously oppose
any infringement of its trademarks. The Company generally intends to renew
trademarks and service marks which expire.
SEASONALITY
The Company's business is moderately seasonal. Average restaurant sales are
normally higher during the fall and spring months than during the summer
months.
RESEARCH AND DEVELOPMENT
The Company conducts ongoing development of new menu items and test markets
such items, as well as new company-developed food marketing aids, in selected
outlets. Although such research and development activities are important to
our business, the amounts that have been expended for these activities has
not been material.
COMPETITION
The quick service segment including the specialty bakery/specialty coffee
segment are intensely competitive and there are many well established
competitors with substantially greater financial and other resources than the
Company. Although competition in the specialty coffee market is currently
fragmented, the Company continues to be competitive. The competition in the
specialty bakery market is also fragmented. The Company competes and, in the
future will continue to compete with MMMarvelous MMMuffins, Company's Coming,
Tim Horton's, a host of bagel concepts and other donut concepts. Current
competitors or one or more new major competitors with substantially greater
financial, marketing, and operating resources than the Company could enter
the market at any time and compete directly against the Company. In addition,
in virtually every major metropolitan area in which the Company operates or
expects to enter, local or regional competitors already exist. The Company's
coffee beverages compete directly with all restaurant and beverage outlets
that serve coffee and a growing number of espresso stands, carts and stores.
The Company's bakery products compete directly against all restaurant and
bakery outlets that serve muffins, cookies and bagels, and other baked goods
including the bakery section of supermarkets. The Company believes that its
customers choose among retailers primarily on the basis of product quality,
service and convenience and, to a lesser extent, on price. The Company also
expects that competition for suitable sites for new stores will be intense.
The Company competes against other specialty retailers and restaurants for
these sites, and there can be no assurance that management will be able to
continue to secure adequate sites at acceptable rent levels. The Company also
competes with many franchisors of restaurants and other business concepts
with respect to the sale of franchises.
10
<PAGE>
ITEM 1. BUSINESS (CONT'D)
EMPLOYEES
At June 30, 2000, the Company had 68 employees, of whom 53 were store
personnel and 15 were corporate personnel. Most store personnel work part
time and are paid on an hourly basis. The Company has never experienced a
work stoppage and its employees are not represented by a labour organization.
The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company owns the land and building of its head office at 418 Preston
Street, Ottawa.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several actions arising in the normal course of
business. The Company settled most claims subject to certain terms in the
amount of $988,800 which was reflected in the statement of income in the
fiscal year ending June 30, 1999.
As a result of legal settlement in the prior years, an amount was provided
based on those judgements. In the current year, the Company has reversed
$261,211 of this amount, as it believes it will not be paid.
As management is of the opinion that the outcome of the remaining claims,
counterclaims or appeals is not determinable at this time, no additional
provision has been recorded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders in the fourth quarter.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------------------------------------
The Company's securities, primarily the Units, Stock and Warrants, have been
quoted in the over-the-counter market since August 1989. The number of record
holders of The Company's Common Stock at June 30, 2000 was 1,522 and at June
30, 1999, was 1,259. Management does not know the number of beneficial
holders of the shares of Common Stock. Commencing in January 1992, the Common
Stock has been quoted separately. Management has no knowledge whether the
volume of trading since January 31, 1992 constitutes an active market or
whether an active market will develop.
Through December 31, 1991, the high and low bid and asked prices for The
Company's Units were reported in the NASDAQ pink sheets.
Starting February 1992 to June 21, 1993, the Common Stock was quoted on the
computerized bulletin board of NASDAQ under the symbol TRTN.
As of June 21, 1993, the Common Stock has been quoted on the computerized
bulletin board of NASDAQ under the symbol TIEI.
As of July 10, 2000, subsequent to a 1 for 3 reverse stock split, the Common
Stock has been quoted on the computerized bulletin board of NASDAQ under the
symbol TRIE.
The following table set forth the high and low bid and asked prices for The
Company's stock. Prices represent quotations between dealers without
adjustment for retail mark-ups, markdowns or commissions, and may not
represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH BID LOW BID HIGH ASKED LOW ASKED
(US $) (US $) (US $) (US$)
------------- -------- ------- ---------- ---------
<S> <C> <C> <C> <C>
September 30, 1999 0.02 0.02 0.02 0.02
December 30, 1999 0.13 0.13 0.20 0.20
March 30, 2000 0.14 0.14 0.18 0.18
June 30, 2000 0.12 0.12 0.16 0.16
July 7, 2000 0.12 0.12 0.20 0.20
As of July 10, 2000, subsequent to a 1 for 3 reverse stock split, the Common Stock has been quoted on the computerized bulletin
board of NASDAQ under the symbol TRIE.
July 18, 2000 0.31 0.31 0.53 0.53
September 30, 2000 0.19 0.19 0.50 0.50
</TABLE>
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------------------------------------------------
The following chart of selected financial data of the Company for five fiscal
years are derived from the consolidated financial statements of the Company.
The Company presents its financial results in Canadian dollars. For the
convenience of the reader, the results for the year ended June 30, 2000, have
been converted into U.S. dollars, at the prevailing rate of exchange.
<TABLE>
<CAPTION>
AS AT JUNE 30
2000 2000 1999 1998 1997 1996
------------------------------------------------------------------------
(US) (1) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash $78. $116. 5. 46. - -
Current Assets $653. $968. 746. 635. 618. 1,256.
Franchise Rights $2,064. $3,060. 3,400. 8,573. 9,566. 10,275.
Total Assets $4,262. $6,320. 6,113. 14,029. 12,888. 13,525.
Current Liabilities $571. $847. 3,355. 3,202. 1,402. 1,847.
Working Capital (Deficit) $82. $121. (2,609.) (2,567.) (783.) (591.)
Long Term Liabilities $2,470. $3,662. 1,949. 1,073. 1,938. 2,279.
Non-Controlling Interest - - - - - -
Stockholders' Equity $1,221. $1,811. 809. 9,754. 9,549. 9,399.
</TABLE>
( 1 ) The Company's financial results are expressed in Canadian
Dollars. For the convenience of the reader only, the results
for the last fiscal year have been converted into United
States Dollars at the Bank of Canada rate on: June 30, 2000.
Conversion rate: One (1) (US) Dollar equals: $1.4828
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS AT JUNE 30
2000 2000 1999 1998 1997 1996
-------------------------------------------------------------------------
(US)(1) (IN THOUSANDS, EXCEPT FOR PER SHARE AND RESTAURANT DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
REVENUE
Royalties $1,228. $1,821. $ 1,807. $ 1,783. $ 1,781. $ 1,968.
Supplier incentives,
commission and other $803. 1,190. 1,010. 1,097. 1,026. 1,071.
Sales of managed franchise stores $465. 690. 690. 817. 608. 2,106.
Proprietary products $299. 443. 433. 449. 511. 341.
Franchise fees $118. 175. 134. 218. 200. 265.
Construction Revenue $91. 135. 412. 613. 503. 610.
-------------------------------------------------------------------------
Total $3,004. 4,454. 4,486. 4,977. 4,629. 6,361.
-------------------------------------------------------------------------
EXPENSES
Head office administration $1,477. 2,190. $ 2,170. $ 2,192. $ 1,894. $ 2,163.
Managed franchise stores $468. 694. 662. 714. 473. 2,079.
Amortization $305. 452. 212. 818. 987. 839.
Franchising - - 1. 7. 25. 121.
Interest ($117.) (174.) 246. 111. 157. 249.
Proprietary products $261. 387. 372. 397. 440. 294.
Construction Expenses $78. 116. 330. 532. 503. 610.
Restructuring costs - - 6,207. - - -
Write-down of investments in
public company $32. 48. 1,525. - - -
Legal settlements ($176.) (261.) 1,250. - - -
Bad debts - notes receivable - - 457. - - -
-------------------------------------------------------------------------
Total 2,328. 3,452. 13,432. 4,771. 4,479. 6,355.
-------------------------------------------------------------------------
Income before income taxes 676. 1,002. (8,946.) 206. 150. 6.
Income taxes - - - - - -
-------------------------------------------------------------------------
Net Income 676. 1,002. (8,946.) 206. 150. 6.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Avg. No. of Shares Outstanding (2) 24,703. 24,703. 19,024. 19,024. 19,024. 19,996.
Earnings per Share 0.03 0.04 (0,47) 0,01. 0,00. 0,00.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of Treats units in Chain 115. 115. 121. 132. 141. 160.
</TABLE>
( 1 ) The Company's financial results are expressed in Canadian
Dollars. For the convenience of the reader only, the results
for the last fiscal year have been converted into United States
Dollars at the Bank of Canada rate on: June 30, 2000 Conversion
rate: One (1) (US) Dollar equals: 1.4828
( 2 ) The Company has 46,279,849 shares outstanding. Net profit
(loss) per share is calculated based on the weighted average
number of shares outstanding for the period. (see Note 11, June
30, 2000)
14
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
(All amounts are in Canadian $ unless otherwise stated)
SAFE HARBOR STATEMENT
Certain statements in this Form 10-K, including anticipated store
openings, planned capital expenditures and trends in or expectations
regarding the Company's operations, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on currently available
operating, financial and competitive information, and are subject to
various and sometimes numerous risks and uncertainties. Actual future
results and trends may differ significantly.
Factors which may impact future results, include, but are not limited
to, raw materials pricing and availability, changes in economic
conditions, the competitive environment of the quick-service industry,
the continued ability of the Company and its franchisees to obtain
suitable locations at reasonable lease rates, the Company's ability to
successfully execute business plans, the effect of legal proceedings,
and other risks whether detailed in this Form 10-K and in the
Company's 10-Q filings, or unforeseen.
GENERAL
-- THE YEAR ENDED JUNE 30, 2000 COMPARED TO THE YEAR ENDED
JUNE 30, 1999
During the 12 month period ending June 30, 2000, Treats International
Enterprises, Inc. ("TIEI" or the "Company") through its wholly owned
subsidiaries derived 41% of its Revenue from royalties, 16% from
retail sales of corporately managed stores, 26% from supplier
incentives, commissions and other, 4% from franchising activities, 10%
from the sale of certain proprietary products and 3% from construction
revenue.
The Company has continued, in the 4th quarter, to show positive trends
resulting in Net Income for the Fiscal Year ended June 30, 2000 of
$1,002,000 compared to a Loss of $8,945,000 for fiscal 1999. It should
be noted however that the significant loss incurred by the Company for
the previous fiscal year was the result of certain management
decisions which are described in detail in Management's Discussion and
Analysis of Financial Condition and Results of Operations for the
fiscal year ended June 30, 1999 on pages 23 and 24.
The Company's fiscal year end is the Saturday closest to June 30. The
1999 fiscal year end had 52 weeks. The fiscal year ending June 30,
2000 will include 53 weeks of operation.
15
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
-------------------------------------------------------------------------------
GENERAL (CONT'D)
On February 29, 2000, the Company was notified by Riverdale Capital
Group Inc. (formerly 3722121 Canada Inc.), (ARiverdale") a company
incorporated under the laws of Canada that it had acquired the
holdings of the Royal Bank of Canada and its wholly owned subsidiary
The Royal Bank Capital Corporation (collectively "RBCC") in TIEI. RBCC
was until that time the single largest shareholder of TIEI as well as
it largest creditor.
Shareholders of Riverdale include Mr. Paul J. Gibson, President and
Chief Executive Officer of TIEI, John A. Deknatel, Chief Operating
Officer of TIEI, and a number of other common shareholders in TIEI.
Neither Mr. Gibson nor Mr. Deknatel are officers or directors of
Riverdale.
Specifically Riverdale acquired from RBCC a subordinated debenture in
the amount of $1,129,562 plus accrued and unpaid interest of
approximately $370,000 as well as 5,409,825 non-voting, convertible,
series A preference shares and accrued dividend and 7,207,760 common
shares.
Riverdale has notified TIEI that it has restructured the terms and
conditions of the debt instrument it acquired by forgiving the accrued
and unpaid interest and adjusting the interest rate from 8% to 4% per
annum. This gain in interest expense was accounted for by a one-time
credit of $273,000 to Interest expense on the Income Statement. The
debenture is due on March 1, 2007.
In May of 2000, Riverdale notified the Company that it intended to
exercise the conversion rights of the Series A preference shares and
accrued dividend it had acquired in the transaction with RBC based on
the original formula contemplated in the conversion rights. As a
result the Company issued 27,255,251 common stock to Riverdale. This
increased the number of issued and outstanding shares from slightly
more than 19,000,000 to approximately 46,280,000 common shares.
On May 4, 2000 the majority of the shareholders of the Company,
representing 59.7% of the issued and outstanding shares of the
Company, consented to a 1 for 3 reverse split of the Company's common
stock. The transaction was subsequently approved by the Board of
Directors on May 8, 2000. The 1 for 3 reverse split became effective
on July 10, 2000. The current number of issued and outstanding common
shares is 15,426,692.
This transaction resolved a number of issues which were before the
courts and TIEI and RBCC executed mutual releases pertaining to those
actions.
16
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
-------------------------------------------------------------------------------
GENERAL (CONT'D)
The Company's management sees these recent developments as very
positive for the long term future of TIEI and is currently reviewing
what other steps it might take to amend its capital structure with a
view to position itself for growth opportunities in Canada.
RESULTS OF OPERATIONS
REVENUE. Revenue for the year ended June 30, 2000 decreased $32,000 or
0.7% to $4,454,000 from $4,486,000 for the same period last year. The
decrease in revenue can be primarily attributed to a decreased of
$276,000 in the construction revenue. Other factors which impacted
revenue were:
-- Royalties increased $14,000 or 0.8% to $1,821,000 compared to
$1,807,000 for the same period last year.
-- Supplier incentives increased $180,000 or 17.8% to $1,190,000
compared to $1,010,000 for the same period last year.
-- Franchising increased $41,000 or 30.5% to $175,000 compared to
$134,000 for the same period last year.
-- Proprietary products sold to distributors for distribution to
the franchised and corporately managed locations increased
$10,000 or 2.2% to $443,000 compared to $433,000 for the same
period last year.
17
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
EXPENSES. Expenses for the fiscal year ended June 30, 2000 decreased
by $9,980,000. There are a number of unusual events that caused this
variance.
In the fiscal year ended June 30, 1999 the Company had unusual
expenses in the amount of $8,945,000 as a result of the Company's
decision to write down the value of its Franchise Rights, its
investment in a public Company, and the value of stores and equipment
acquired from franchisees. In addition the Company in that year made a
significant one-time provisions for legal settlements and bad debts.
Some of these transactions resulted in a lower than usual amortization
expense in the year ended June 30, 1999. This is described in more
detail in the MD & A for the year ended June 30, 1999 in this section
page (23).
As described in detail above, the holdings of the Royal Bank of Canada
in the Company were acquired by Riverdale Capital Group Inc. (formerly
3722121 Canada Inc.) in the fiscal year ended June 30, 2000. This
transaction resulted, inter-alia, that a portion of interest owing on
a debenture was reversed. This one-time reversal of interest expense
amounted to $273,000.
Excluding the unusual events described above, for the fiscal year
ended June 30, 2000 expenses decreased $146,000. This was primarily
the result of a decreased of $214,000 in the construction expenses.
Additionally expenses were impacted by the following factors:
-- Cost associated with Managed franchised stores increased $32,000
or 4.9% to $694,000 from $662,000 as a direct result of the
increase in the number of corporately managed stores.
-- Head office and administration expenses increased $21,000 or 1.0%
to $2,190,000 from $2,170,000 for the same period last year.
-- The cost of purchasing certain proprietary products for resale
to distributors increased $15,000 or 3.9% to $387,000 compared
to $372,000 for the same period last year.
18
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
CAPITAL RESOURCES - June 30, 2000
The Company's projected capital asset requirements for the current
fiscal year, are not very demanding.
LIQUIDITY AND CASH FLOW - June 30, 2000
The working capital at the year end was $121,000 compared to a working
capital deficit of $2,609,000 for the same period last year. The
primary reason for the significant change in the working capital
resulted from the recent transaction in which Riverdale Capital Group
Inc. (formerly 3722121 Canada Inc.) acquired the holdings and debt by
RBCC in Treats and the subsequent restructuring of the terms and
conditions of the debt instrument.
The cash flow from operations during fiscal 2000 increased by $759,000
to $1,240,000 compared to $481,000 in the previous fiscal year this was
primarily due to the Company incurring a net loss for the year ended
June 30, 1999 in the amount of $8,945,000 compromised largely of
non-cash write-downs as reflected in the statement of cash flows (see
page 34).
DEBT TO EQUITY RATIO:
The ratio of debt to equity as at June 30, 2000 was 2.49 to 1
compared to 6.56 to 1 in the previous fiscal year.
19
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
IN THE YEAR:
In February the Company was notified by Riverdale Capital Group Inc.
(formerly 3722121 Canada Inc.), ("Riverdale") that it had acquired the
holdings of the Royal Bank of Canada and its wholly owned subsidiary
("RBCC") in TIEI. RBCC was until that time the single largest
shareholder of TIEI as well as it largest creditor. Specifically
Riverdale acquired from RBCC a subordinated debenture in the amount of
$1,129,562 plus accrued and unpaid interest of approximately $370,000
as well as 5,409,825 non-voting, convertible, series A preference
shares and 7,207,760 common shares.
This transaction resolved a number of issues which were before the
courts and TIEI and RBCC executed mutual releases pertaining to those
actions.
Riverdale restructured the terms and conditions of the debt instrument
it acquired by forgiving the accrued and unpaid interest and adjusting
the interest rate from 8% to 4% per annum and exercised the conversion
rights on the preference shares and accrued dividend it acquired. This
resulted in the number of issued and outstanding common shares of the
Company to increase from approximately 19 million to almost 46.3
million common shares.
In May of 2000, Riverdale notified the Company that it intended to
exercise the conversion rights of the Series A preference shares it had
acquired in the transaction with RBC based on the original formula
contemplated in the conversion rights. As a result the Company issued
27,255,251 common stock to Riverdale. This increased the number of
issued and outstanding shares from slightly more than 19,000,000 to
approximately 46,280,000 common shares. The Company's common stock
underwent a 1 for 3 reverse split at the end of June, resulting in
approximately 15.4 million issued and outstanding common shares.
The implementation of the "direct bank transfer" system which
automatically withdraws royalty, advertising fund and receivable
payments from franchise owners' bank accounts on a weekly basis has
continued over the year. Virtually all franchise owners now use this
system to make weekly payments of royalties, ad fund contributions and
promissory note installments.
20
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
The Company continued to actively encourage franchise owners to update
the appearance of existing stores using the new design criteria
developed. This year 6 stores underwent renovations. These renovations
have in virtually every instance resulted in increased sales
performance. The company intends to continue to actively encourage
franchise owners to adopt the new design criteria.
In January of 2000 the Company introduced the second component of the
TreatSations line, a variety of oatmeal bars. Even though the test
results were very positive, the introduction of the new line was not
well received and the Company has ceased to actively promote the new
line of oatmeal bars. The Company intends to continue to develop high
end products under the TreatSations banner.
The Company terminated the National Licensing Agreement for Chile and
Argentina it had entered into because of non-performance.
21
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(All amounts are in Canadian $ unless otherwise stated)
GENERAL
-- THE YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
System-wide retail sales for the twelve months ended June 30, 1999 were
$24,121,000 compared to $24,667,000 a decrease of $546,000 or 2.2% for
the same period last year. The Company closed down 13 primarily
non-performing locations or locations where the Company could not
establish satisfactory lease terms with the landlord, during the past
fiscal year. On average same store sales showed an increase in sales
performance in excess of 5%.
RESULTS OF OPERATIONS
Total revenue for the year ended June 30, 1999 decreased $491,000 or
9.9% to $4,486,000 from $4,977,000 for the same period last year. The
decrease in revenue resulted primarily from:
-- The sales of corporately managed stores decreased by $127,000 or
15.5% to $690,000 from $817,000 for the same period last year.
This is the result of the company's ongoing commitment to divest
itself from corporately owned locations.
-- Royalties increased $24,000 or 1.3% to $1,807,000 compared to
$1,783,000 for the same period last year.
-- Supplier incentives decreased $87,000 or 7.9% to $1,010,000
compared to $1,097,000 the same period last year.
-- Franchising decreased $84,000 or 38.5% to $134,000 compared to
$218,000 for the same period last year.
-- Proprietary products sold to distributors for distribution to
the franchised and corporately managed locations decreased
$16,000 or 3.6% to $433,000 compared to $449,000 for the same
period last year.
-- Revenues from construction decreased $202,000 or 33.0% to $411,000
compared to $613,000 for the same period last year.
22
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
The Company made a number of fiscal decisions in the past fiscal year
that have significantly impacted expenses and as a direct consequence
the profitability of the Company. All of these changes were one-time
charges and most represent non-cash charges. (See Management Plan note
15, page 43). The total increase in expenses is $8,660,000. However
excluding the one-time charges which are described in detail below, the
Company's expenses decreased by $778,000 or 16.3%. The variance in
expenses relate to the following:
-- Costs associated with Managed franchised stores decreased
$52,000 or 7.3% to $662,000 from $714,000 as a direct result of
the decrease in the number of corporately managed stores.
-- Head office and administration expenses decreased $22,000 or 1.0%
to $2,170,000 from $2,192,000 for the same period last year.
-- The cost of purchasing certain proprietary products for resale
to distributors decreased $25,000 or 6.3% to $372,000 from
$397,000 for the same period last year.
-- The cost of construction and renovation of stores decreased by
$202,000 or 38.0% to $330,000 compared to $532,000 for the same
period last year.
-- As a result of the write-down of franchise rights to their
estimated fair market value, amortization was $nil compared to
$664,000 in the previous year.
-- Interest expense increased by $135,000 or 121.6% to $246,000
from $111,000 last year. This was the result of interest on a
mortgage on the building which houses the offices of the Company
and which the Company acquired. In addition the Company recorded
interest on a loan from 3193853 Canada Inc. In the previous year
the interest portion of the funds owed to 3193853 Canada Inc.
had been forgiven.
-- There was a write-down of $1,525,000 of an investment in a US
public company which had acquired the rights to develop the
Treats concept in the U.S.A. for consideration of convertible
preference shares. That company, however, has not been
profitable, has not raised sufficient capital nor has it made
the required number of new store openings. Management does not
believe that there will be any improvement in the foreseeable
future and that the asset has been permanently impaired.
23
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
-- In addition, management has permanently closed unprofitable
stores it reacquired from franchisees in Canada. Accordingly,
capital assets were written down to their estimated fair market
value.
The write-downs have been recorded as non-cash restructuring costs, allocated
as follows:
$
Franchise rights 5,228,388
Stores and equipment reacquired from franchisees 978,210
---------
6,206,598
---------
---------
-- The Company is a defendant in several actions arising in the
normal course of business. The Company settled most claims
subject to certain terms in the amount of $1,250,000, which has
been reflected in the statement of income. As management is of
the opinion that the remaining claims, counterclaims or appeals
is not determinable at this time, no additional provision has
been recorded.
CAPITAL RESOURCES - June 30, 1999
The Company's projected capital asset requirements for the current
fiscal year, are not very demanding and the Company does not anticipate
having trouble meeting any of its obligations arising out of the normal
course of business.
24
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
LIQUIDITY AND CASH FLOW - June 30, 1999
The working capital deficit at the year end increased by $41,000 to
$(2,609,000). This was primarily due to the Company being in default of
their loan covenants with 3193853 Canada Inc. and the Royal Bank of
Canada. In addition, 3193853 Canada Inc. and the Royal Bank of Canada
have not waived their rights to call the term loan and subordinated
debenture at a future date and accordingly the debts are classified as
current. (See note 7 (a) page 38)
The cash flow from operations during fiscal 1999 decreased by
$2,469,000 to $(1,294,000) compared to $1,175,000 in the previous
fiscal year this was primarily due to the Company incurring a net loss
for the year in the amount of $8,945,000 compromised largely of
non-cash write-downs as reflected in the statement of cash flows (see
page 29) and in note 10 (see page 40-41). Management believes that
these are one-time write-downs and will not be repeated in future
years. As well the Company has taken actions to close a number of
locations that were unprofitable and not considered likely to become
profitable in the near future, and to reduce general and administrative
expenses. Management has prepared cash flow projections for the next
five years indicating positive cash flows and profitability. The
projected cash flows were not audited, reviewed or compiled by the
auditors, but were used by the independent appraiser (see note 6 page
35) in arriving at the valuation of franchise rights.
As well, Management is actively pursuing alternative financing to
replace the subordinated debenture and term loan with more favourable
terms.
Accordingly, based on actions taken and the company's operating plans
for the year, the company expects that it will have sufficient cash to
be able to continue operations and meet its long-term obligations due
within the next fiscal year. (See note 15, Management Plan, page 43)
DEBT TO EQUITY - June 30, 1999
-- As a result of the write-downs described above, as well as in
various notes to the audited financial statements included, the
debt to equity ratio is not included, as the ratio does not
represent meaningful information.
25
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
IN THE YEAR:
The implementation of the "direct bank transfer" system which
automatically withdraws royalty, advertising fund and receivable
payments from franchise owners' bank accounts on a weekly basis has
continued over the year. Currently 78% of the franchise owners use this
method to make their weekly payments. By the end of this fiscal year
the Company expects that more than 95% of all franchise owners will
have been converted to the direct transfer system.
The Company also introduced a new design appearance for its stores. The
new look has been well received by customers, landlords and franchise
owners. The updated interior and exterior decor provides for a more
comfortable and relaxing atmosphere.
The Company has upgraded most of its computer hardware and software as
part of an effort to ensure that the Company will be able to address
any issues pertaining to the Year 2000. The Year 2000 issue arises
because many computerized systems use two digits rather than four to
identify a year. The Company is making every effort to make sure that
there will be no significant impact on operations as a result of any
Year 2000 issue however it is not possible to be certain that all
aspects of the Year 2000 issue affecting the Company, including those
related to the efforts of entities the Company does business with or
any third parties, will be fully resolved.
The Company renewed its long standing contract with Quaker Oats of
Canada to supply all of its dry bakery mixes.
26
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
ITEM 7-A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has a line of credit of $150,000 with its financial
institution where the interest rate is fixed to the prime
interest rate charged which fluctuates weekly. There are no
commodity price risks.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TREATS INTERNATIONAL ENTERPRISES, INC.
Consolidated Financial Statements 2000 compared to 1999
Page 28 to 48
27
<PAGE>
FINANCIAL
STATEMENTS
CONSOLIDATED
TREATS INTERNATIONAL
ENTERPRISES, INC
June 30, 2000 and 1999
28
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
INDEX
Page
30 Auditors' Report
31 - 32 Consolidated Balance Sheets
33 Consolidated Statements of Income and Deficit
34 Consolidated Statements of Cash Flows
35 Consolidated Statements of Stockholders' Equity
36 - 48 Notes to the Consolidated Financial Statements
29
<PAGE>
AUDITORS' REPORT
TO THE STOCKHOLDERS OF
TREATS INTERNATIONAL ENTERPRISES, INC.
We have audited the consolidated balance sheets of TREATS INTERNATIONAL
ENTERPRISES, INC. as at June 30, 2000 and 1999 and the consolidated
statements of income and deficit, cash flows and stockholders' equity for the
years ended June 30, 2000, 1999 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at June 30,
2000 and 1999 and the results of its operations and its cash flows for the
years ended June 30, 2000, 1999 and 1998 in accordance with accounting
principles generally accepted in Canada (which also conform in all material
respects with accounting principles generally accepted in the United States).
Chartered Accountants
Toronto, Canada
September 7, 2000
30
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NOTE 2000 1999
---- ---- ----
$ $
<S> <C> <C> <C>
ASSETS
CURRENT
Accounts receivable 157,753 202,544
Current portion of notes receivable 159,289 213,234
Prepaid expenses 292,381 174,328
Construction work in process 242,492 151,283
Cash 115,811 5,014
--------- ---------
967,726 746,403
FRANCHISES HELD FOR RESALE 265,049 -
NOTES RECEIVABLE 3 717,362 525,593
INVESTMENT IN PUBLIC COMPANY 4 45,735 93,351
CAPITAL ASSETS 5 1,263,780 1,347,994
FRANCHISE RIGHTS 6 3,060,000 3,400,000
--------- ---------
6,319,652 6,113,341
--------- ---------
--------- ---------
</TABLE>
Approved on behalf of the Board:
____________________________Director
See the accompanying notes
31
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NOTE 2000 1999
---- ---- ----
$ $
<S> <C> <C> <C>
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 449,995 611,528
Current portion of long-term debt 396,930 2,743,495
--------- ---------
846,925 3,355,023
LONG-TERM DEBT 7 3,431,947 1,736,770
LEASE SECURITY DEPOSITS 229,863 212,212
--------- ---------
4,508,735 5,304,005
--------- ---------
COMMITMENTS AND CONTINGENCIES 8
STOCKHOLDERS' EQUITY
CAPITAL STOCK 9
Preferred
Authorized, 4,590,175 (1999-10,000,000),
non-voting, cumulative shares,
dividends at U.S.$.028 per share
(Cdn.$.041 per share), redeemable
at option of Company at U.S.$1
per share, par value U.S.$0.50
Issued, nil (1999-5,409,825) series A shares - 3,732,779
Common
Authorized, 75,000,000 (1999 - 33,333,333) shares,
par value U.S. $0.001
Issued, 46,279,849 (1999 - 19,024,598) shares 46,280 19,025
Additional paid-in capital 15,636,020 10,757,739
---------- -----------
15,682,300 14,509,543
DEFICIT (13,871,383) (13,700,207)
---------- -----------
1,810,917 809,336
6,319,652 6,113,341
---------- -----------
---------- -----------
</TABLE>
32
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT
YEARS ENDED JUNE 30. 2000, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NOTE 2000 1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ $ $
REVENUES
Royalties 1,821,128 1,807,184 1,783,428
Supplier incentives and other 1,189,879 1,009,898 1,097,316
Sales of managed franchise stores 690,036 690,139 816,648
Proprietary products 442,953 433,391 448,634
Construction 135,256 411,260 612,915
Franchise fees 175,383 134,373 217,941
-----------------------------------------------
4,454,635 4,486,245 4,976,882
-----------------------------------------------
EXPENSES
Head office and administration 2,190,659 2,169,717 2,192,004
Managed franchise stores 694,490 661,788 714,357
Proprietary products 386,811 372,415 396,566
Construction expenses 116,231 330,360 531,796
Interest on long-term debt 99,016 246,005 111,163
Write-down of investment in public
company 4 47,616 1,524,561 -
Franchising 1,250 1,375 7,337
Bad debts - notes receivable - 457,245 -
Restructuring costs - 6,206,598 -
Legal settlements 8 (261,211) 1,250,000 -
Interest forgiveness 7 (273,414) - -
Amortization
Capital assets and franchise rights 451,606 138,523 745,424
Deferred costs - 72,702 72,702
-----------------------------------------------
3,453,054 13,431,289 4,771,349
-----------------------------------------------
NET INCOME (LOSS) FOR THE YEAR 12 1,001,581 (8,945,044) 205,533
DEFICIT, BEGINNING OF YEAR (13,700,207) (4,755,163) (4,960,696)
DIVIDENDS (1,172,757) - -
-----------------------------------------------
DEFICIT, END OF YEAR (13,871,383) (13,700,207) (4,755,163)
-----------------------------------------------
-----------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE 11 0.04 (0.47) 0.01
-----------------------------------------------
-----------------------------------------------
</TABLE>
See the accompanying notes
33
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 2000, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ $ $
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES
OPERATING
Net income (loss) for the year 1,001,581 (8,945,044) 205,533
Items not affecting cash
Amortization
Capital assets and franchise rights 451,606 138,523 745,424
Deferred costs - 72,702 72,702
Capital assets - (419,418) (412,062)
Franchise stores held for resale - - 412,062
Write down of franchise rights - 5,228,388 -
Write down of investment in public company 47,616 1,524,561 -
Write down of capital assets - 978,210 -
Bad debts - notes receivable - 457,245 -
Write off of deferred costs - 195,864 -
Legal settlements (261,211) 1,250,000 -
-----------------------------------------------
1,239,592 481,031 1,023,659
Changes in non-cash operating items (308,351) (524,612) 151,263
-----------------------------------------------
931,241 (43,581) 1,174,922
-----------------------------------------------
FINANCING
Long-term debt (390,177) 147,645 943,897
Bank indebtedness - - (102,232)
Dividends (1,172,757) - -
-----------------------------------------------
(1,562,934) 147,645 841,665
-----------------------------------------------
INVESTING
Franchise stores held for resale (265,049) - (269,981)
Deferred costs - - 32,742
Notes receivable (137,824) (159,047) 590,217
Investment in public company - - (1,617,912)
Purchase of capital assets (27,394) (24,779) (1,082,885)
Proceeds on disposal of capital assets and franchise rights - - 471,682
Advertising commitment - 94,576 (94,576)
Purchase of franchise rights - (55,674) -
Conversion of preference shares into common (3,732,779) - -
Issuance of common shares 4,905,536 - -
-----------------------------------------------
742,490 (144,924) (1,970,713)
-----------------------------------------------
NET CASH INFLOW (OUTFLOW) 110,797 (40,860) 45,874
CASH POSITION, BEGINNING OF YEAR 5,014 45,874 -
-----------------------------------------------
CASH POSITION, END OF YEAR 115,811 5,014 45,874
-----------------------------------------------
-----------------------------------------------
</TABLE>
See the accompanying notes
34
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
---- PREFERRED SHARES -------- COMMON SHARES ----
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $
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 loss for the year - - - - (8,945,044) (8,945,044)
-----------------------------------------------------------------------------------------
Balance, June 30, 1999 5,409,825 3,732,779 19,024,598 10,776,764 (13,700,207) 809,336
Conversion of preference shares
into common shares (5,409,825) (3,732,779) 20,737,661 3,732,779 - -
Conversion of dividends into
common shares - - 6,517,590 1,172,757 - 1,172,757
Net income for the year - - - - 1,001,581 1,001,581
Dividends - - - - (1,172,757) (1,172,757)
-----------------------------------------------------------------------------------------
Balance, June 30, 2000 - - 46,279,849 15,682,300 (13,871,383) 1,810,917
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
See the accompanying notes
35
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
These consolidated financial statements comprise the accounts of the
Company and its wholly-owned subsidiaries, as follows:
- Treats Inc.
- Treats Ontario Inc.
- Chocolate Gourmet Treats Limited
- 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.
36
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 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, 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 or 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. When evidence indicates a permanent
decline in value, the investment is written down.
37
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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
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 carried at the lower of cost less accumulated
amortization, and fair market value. Amortization is provided for on
the straight-line basis over 10 years.
BASIC EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are calculated using the daily weighted
average number of common shares outstanding during the fiscal year.
38
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------
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 1999 to June 2020.
$ $
<S> <C> <C>
Notes receivable, net of allowance for doubtful
accounts of nil (1999 - nil) 876,651 738,827
Less current portion (159,289) (213,234)
--------------------
717,362 525,593
====================
</TABLE>
4. INVESTMENT IN PUBLIC COMPANY
In 1998, the Company sold the U.S. area rights for consideration of
2,800,000 class "AA" 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. based on the available information at the
time of the sale.
The preference shares are convertible to common stock for the
equivalent of US$2,800,000 based on the 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. As of June
30, 2000 the Company has not converted any of its preferences shares.
Contrary to the agreement with the Company, since incorporation, EMC
Group Inc. has not raised sufficient capital, nor has it made any
significant additional store openings. In addition, EMC Group Inc. has
not been profitable and management does not anticipate an improvement
in operations in the U.S. in the foreseeable future. Based on the
above, management believes that there has been a permanent impairment
in value, and the asset has been written down to its market value in
the current fiscal year.
39
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------
5. CAPITAL ASSETS
ACCUMULATED
COST AMORTIZATION --- NET BOOK VALUE ---
$ $ $ $
<S> <C> <C> <C> <C>
Land 457,885 - 457,885 457,885
Building 625,000 62,500 562,500 602,106
Furniture, fixtures and equipment 736,073 689,183 46,890 25,996
Corporate owned stores reacquired
from franchisees 218,700 87,480 131,220 174,960
Corporate owned store equipment
reacquired from former
franchisees 108,809 43,524 65,285 87,047
-----------------------------------------------------
2,146,467 882,687 1,263,780 1,347,994
=====================================================
</TABLE>
6. FRANCHISE RIGHTS
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Franchise rights 3,400,000 3,400,000
Accumulated amortization 340,000 -
---------------------------------
3,060,000 3,400,000
=================================
</TABLE>
The Company obtained an independent appraisal from Scott
Rankin, Gordon & Gardiner,Chartered Accountants,
substantiating a valuation of franchise rights in the amount
of $3,060,000 as at June 30, 2000.
40
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
7. LONG-TERM DEBT
$ $
Business Development Bank of Canada Term loan, repayable in 47
monthly instalments of $4,200 plus interest at 11%, due July
23, 2003, secured by a general security agreement, second
mortgage on the land and building at 418 Preston Street, and
a personal guarantee of up to 50% by one of the shareholders 155,400 200,000
Appleford Capital Inc. (formerly 3193853 Canada Inc.)
Term loan, bearing interest at 4% per annum, payable $52,000
per annum in the first two years, $72,800 in the next two
years and the balance due April, 2005, 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) 1,178,462 1,180,824
Riverdale Capital Inc. (formerly 3722121 Canada Inc.)
Term loan, bearing interest at 4% per annum, payable
principal and interest of $130,000 to March 2004, $162,500
per annum, for the next three years and the balance due
March 2007, secured by a general assignment of book debts
and franchise rights, pledge of all the shares in subsidiary
and associated companies (see note (b) below) 1,171,117 -
P. Murphy in trust
Mortgage bearing interest at 7% payable in 212 bi-weekly
instalments of $1,000 on interest and principal, due August
2008, secured by land and building at 418 Street, Ottawa,
Ontario and a General Security Agreement 161,758 171,955
-----------------------
Carried forward 2,666,737 1,552,779
</TABLE>
41
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
7. LONG-TERM DEBT (CONT'D)
$ $
Brought forward 2,666,737 1,552,779
D. Crawford
Term loan, repayable in 70 bi-weekly instalments of $1,000
of principal and interest at 10%, due March 2003, secured by
a General Security Agreement 62,467 81,085
Bank of Nova Scotia
Term loan unsecured, repayable in 21 monthly instalments of
$774 plus interest at prime plus 2%, due July 9, 2002 16,247 -
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
Business Development Bank of Canada
Term loan, repayable in 47 monthly instalments of $2,000
plus interest at prime plus 4%, due July 23, 2003, secured
by a general security agreement, general assignment of
books debts and franchise rights, pledge of all the shares
in subsidiary and associated companies - 24,000
LaCaisse Populaire St. Charles Ltee
Mortgage, bearing interest at 6.8% per annum payable in 80
monthly instalments of $4,999 on interest and principal, due
March 2007, secured by land and building at 418 Preston
Street in Ottawa, Ontario 325,012 360,987
-----------------------
Carried forward 3,070,463 3,148,413
</TABLE>
42
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
7. LONG-TERM DEBT (CONT'D)
$ $
Brought forward 3,070,463 3,148,413
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2002 63,303 81,852
Legal settlements, non-interest-bearing, principal
only including 8% imputed interest of $257,073,
payments of $93,000 annually, with various terms
of repayment ending in 2006, (see note 8) 695,111 1,250,000
-----------------------
3,828,877 4,480,265
Less current portion (396,930) (2,743,495)
-----------------------
3,431,947 1,736,770
-----------------------
-----------------------
</TABLE>
(a) On March 1, 2000, Appleford Capital Inc. (formerly 3193853
Canada Inc.), whose President is a member of the family of the
Chief Executive Officer of the Company amended the interest of
the loan to 4%.
(b) On March 1, 2000, Riverdale Capital Group Inc. (formerly
3722121 Canada Inc.), a corporation with 9% of the outstanding
common shares owned by the Chief Executive Officer of the
Company and 53% by family members of the Chief Executive
Officer of the Company, acquired the subordinated debenture of
the Royal Bank of Canada and forgave the interest portion of
the debenture in the amount of $273,414. Riverdale Capital
Group Inc. issued a new debenture in the amount of $1,200,000.
43
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D)
Interest expense for the year related to long-term debt was $99,016.
The minimum future principal repayments required over the next five
years are as follows:
<TABLE>
<CAPTION>
$
<S> <C>
2001 396,930
2002 372,281
2003 380,491
2004 319,644
2005 334,472
Subsequent 2,025,059
---------
3,828,877
---------
---------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in several actions arising in the
normal course of business. The Company settled most claims
subject to certain terms in the amount of $988,800, which
was reflected in the statement of income in the fiscal year
ending June 30, 1999.
As a result of legal settlement in the prior years, an
amount was provided based on those judgements. In the
current year, the Company has reversed $261,211 of this
amount, as it believes it will not be paid.
As management is of the opinion that the outcome of the
remaining claims, counterclaims or appeals is not
determinable at this time, no additional provision has been
recorded.
44
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES (CONT'D)
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 franchisees' 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>
Year ending June 30 $
<S> <C>
2001 2,877,121
2002 2,300,771
2003 1,946,179
2004 1,633,394
2005 1,258,352
Later Years 2,175,526
----------
Total minimum payments* 12,191,343
----------
----------
</TABLE>
* Minimum payments have not been reduced by minimum
sublease rentals for $11,487,431 due in future under
non-cancellable subleases.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, 2001
$
<S> <C>
Minimum rentals 2,877,121
Less: sublease rentals (2,720,833)
----------
156,288
----------
----------
</TABLE>
45
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
9. CAPITAL STOCK
On April 14, 2000 the Company amended its share capital structure as
follows:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES NUMBER OF
AUTHORIZED PAR VALUE SHARES ISSUED
<S> <C> <C> <C>
Common 75,000,000 $.001 U.S. 46,279,849
Preference 10,000,000 $.500 U.S. -
</TABLE>
The Company issued dividends of $1,172,757 on the preference shares
held by Riverdale Capital Group Inc. The dividends were converted
into 6,517,590 common shares of the Company. The Company also
converted its 5,409,825 series A preference shares into 20,737,661
common shares of the Company, in accordance with the debenture
agreement dated June 30, 1994.
10. RELATED PARTY TRANSACTIONS
(a) Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.),
a corporation with 9% of the outstanding common shares owned
by the Chief Executive Officer of the Company and 53% by
family members of the Chief Executive Officer of the
Company, acquired the debenture of Royal Bank of Canada and
forgave interest in the amount of $273,414.
(b) The President of Appleford Capital Inc. (formerly 3193853
Canada Inc.) with whom the Company has a term loan payable,
is a member of the family of the Chief Executive Officer
of the Company. The related interest expense was $13,222
(1999 - $nil). Appleford Capital Inc. forgave interest
payable of $35,423.
46
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
10. RELATED PARTY TRANSACTIONS (CONT'D)
(c) The Company owed $21,525 to 764719 Ontario Inc. whose owner
is a member of the family of the Chief Executive Officer of
the Company. The debt was forgiven during the year.
(d) The office premises, land and building at 418 Preston
Street, Ottawa, was purchased from a trust of which the
beneficiaries are the family of the Chief Officer of the
Company whose family owns approximately 56.10% of the common
stock of the Company.
11. BASIC EARNINGS (LOSS) PER SHARE
$ $
Basic earnings (loss) per share 0.04 (0.47)
-----------------------
Weighted average number of common shares outstanding 24,702,775 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. Fully diluted earnings per share are not
presented as they are anti-dilutive.
12. INCOME TAXES
The Company has utilized its tax losses to reduce its taxable
income to nil. The Company has a non-capital loss of $100,000
which expires on June 30, 2006.
47
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(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 approximates
their fair value because the interest rates approximate market
rates.
The carrying amounts of the term loans to related parties (10(a)
and (b) do not approximate their fair value because the term loans
do not bear interest (note 14).
The fair values of the term loans due to related parties are not
determinable, as these amounts are interest-free and, accordingly,
can not be ascertained with reference to similar debt with arm's
length parties.
14. SUBSEQUENT EVENT
On July 2, 2000, the Company filed an application with the
Securities and Exchange Commission to revise its share capital
structure and had a 1 for 3 reverse split. As a result, the issued
share capital of the Company subsequent to year end is 15,426,692.
These financial statements do not reflect the effect of the
reverse split and the basic earnings per share on a post-split is
$.06.
On July 2, 2000, Riverdale Capital Group Inc. and Appleford Capital
Inc. amended the terms of the term loans which became interest free.
Accordingly the fair values of these term loans are not disclosed at
June 30, 2000.
15. COMPARATIVE FIGURES
Prior year's figures have been reclassified to conform with the
current year's presentation.
48
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
--------------------------------------------------------------------------------
- No Disagreements or changes.
49
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------------------------------
The following sets forth the names of the Company's Directors and Officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Paul J. Gibson 45 President, C.E.O. and Director
John A. Deknatel 53 Chief Operating Officer
Peter-Mark Bennet 43 Director
Francois Turcot 40 Director of Finance
</TABLE>
PAUL J. GIBSON
Mr. Gibson is President, C.E.O. Chairman of the Board of The Company. Mr.
Gibson has served as President and C.E.O. of TCC since its formation in 1988
and of Treats Inc. since July 1990. Mr. Gibson also serves in various
capacities of The Company's wholly owned subsidiaries. From its formation in
1986 until the amalgamation of certain companies in 1993, he was President
and C.E.O. of TMG, a predecessor company of Treats Inc.
JOHN A. DEKNATEL
Mr. Deknatel is C.O.O. of The Company. He also serves in various capacities
for The Company's wholly owned subsidiaries. Prior to joining The Company in
1991, Mr. Deknatel served as Vice President and General Manager of Manchu Wok
U.S.A., a division of Scott's Hospitality, of Toronto, Ontario.
PETER-MARK BENNETT
Mr. Bennett was appointed Director December 16, 1994. Since 1998 he has
served TELUS Advanced Communications (Calgary) as Manager of Internetworking
Services. From August 1997 to October 1998 Mr. Bennett was Director of
Marketing for Neptec Design Group Ltd. of Ottawa. From July 1994 to July 1997
Mr. Bennett was Director of Operations for Network Xcellence Ltd. (Ottawa).
From July 1990 to June 1992 he was Vice-President of Treats Inc. Prior to
July 1990 he was Managing Director of Widely Held Northern & Eastern
Investments Ltd.
FRANCOIS TURCOT
Mr. Turcot has been Comptroller of The Company since May 1991 and has been
promoted to Director of Finance in August 1996. Prior to joining The Company,
Mr. Turcot held the position of Comptroller with a Transport Company in Hull,
Quebec. From October 1986 to November 1989, Mr. Turcot was Comptroller at the
Ramada Hotel in Hull, Quebec.
50
<PAGE>
ITEM 11 EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------
Set forth in the table below, is the cash compensation paid to the C.E.O.
of the Company and the total to all Executive Officers as a group:
<TABLE>
<CAPTION>
US ($)
CAPACITIES IN CASH
NAME OF INDIVIDUAL WHICH SERVED COMPENSATION
------------------ ------------- ------------
<S> <C> <C>
Paul J. Gibson Chairman and Chief
Executive Officer $78,000.
Executive officers as a group (3 people) $187,000.
</TABLE>
- There are no options or warrants granted to the present officers.
EMPLOYMENT AGREEMENT
On February 14, 1997 by way of a resolution of the Board of Directors
severances for the three officers of The Company were amended to reflect the
years of service, specifically 2 months of base compensation for every year
of service. Once a Senior Officer reached 5 years of consecutive service,
they are entitled to a minimum of 2 years compensation.
51
<PAGE>
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------
The following sets forth as of the date of October 18, 2000, the number and
percentage owned of record and beneficially, by each Officer and Director of the
Company and by any other person owning 5% or more of the outstanding shares.
<TABLE>
<CAPTION>
EFFECTIVE OCTOBER 18, 2000
# Shares of
Common stock %
PRINCIPAL SHAREHOLDERS & OFFICERS Registered Ownership
--------------------------------- -------------------------------
<S> <C>
Paul Gibson Intrust (1) 287,847. 1.87%
418 Preston Street
Ottawa, Ontario (K1S 4N2)
John Deknatel 43,708. .28%
418 Preston Street
Ottawa, Ontario (K1S 4N2)
Access Investment Group Ltd. (2) 1,686,763. 10.93%
Sassoon House
Nassau, Bahamas
Francois Turcot 3,125. 0.02%
418 Preston Street
Ottawa, Ontario (K1S 4N2)
-------------------------------
Officers & Directors as a group 2,021,443. 13.10%
-------------------------------
-------------------------------
OWNERS IN EXCESS OF 5%
882793 Ontario Ltd. In Trust (3) 5,738,333. 37.20%
c/o Toronto Dominion Greenline
Toronto, Ontario, Canada
Ray Mac Leod In Trust 1,066,667. 6.91%
RR#1m Finch, ON, Canada
</TABLE>
52
<PAGE>
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONT'D)
--------------------------------------------------------------------------------
NOTES
1. Paul J. Gibson may be deemed to be a promoter as such terms are defined
under the Securities Act of 1933.
2. Access Investment Group Ltd. is a company controlled by Mr. P. J. Gibson
and his immediate family.
3. 882793 Ontario Ltd is a company whose President is a member of the family
of the Chief Executive Officer of the Company.
53
<PAGE>
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------
RELATED PARTY TRANSACTIONS
(a) Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.), a
corporation with 9% of the outstanding common shares owned by the
Chief Executive Officer of the Company and 53% by family members of
the Chief Executive Officer of the Company, acquired the debenture
of Royal Bank of Canada and forgave interest in the amount of
$273,414.
(b) The President of Appleford Capital Inc. (formerly 3193853 Canada
Inc.) with whom the Company has a term loan payable, is a member of
the family of the Chief Executive Officer of the Company. The
related interest expense was $13,222 (1999 - $nil). Appleford
Capital Inc. forgave interest payable of $35,423.
(c) The Company owed $21,525 owed to 764719 Ontario Inc. whose owner is
a member of the family of the Chief Executive Officer of the
Company. The debt was forgiven during the year.
(d) The office premises, land and building at 418 Preston Street,
Ottawa, was purchased from a trust of which the beneficiaries are
the family of the Chief Officer of the Company whose family owns
approximately 56.10% of the common stock of the Company.
54
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
------------------------------------------------------------------------------
INDEX
- Computation of Earnings Per Share -
U.S. GAAP - Treasury Share Method.....................Page 56
- Computation of Earnings Per Share -
Treasury Share Method..................................Page 57
- Auditors' Report on Financial Statement Schedules...............Page 58
55
<PAGE>
ITEM 14 SCHEDULES (CONT'D)
COMPUTATION OF EARNINGS PER SHARE - U.S. GAAP - TREASURY SHARE METHOD
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTER ENDED FOR THE FISCAL YEAR ENDED
-------------------------------------------------------------------------------------------
SEPTEMBER DECEMBER MARCH JUNE JUNE JUNE
1999 1999 2000 2000 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE - U.S. GAAP
Net earnings $ 167,964. $161,078. $ 421,043. $254,716. $ 1,004,801. ($8,945,044.)
Cumulative dividends (51,326.) (51,326.) (43,591.) 0. (146,243.) (205,304.)
-------------------------------------------------------------------------------------------
Net earnings after cumulative dividends ($116,638.) $109,752. $377,452. $254,716. $ 858,558. ($9,150,348.)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Common Shares outstanding at the
beginning of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
Weighted average number of Common
Shares issued during the period 0. 0. 0. 5,678,177. 5,678,177. 0.
-------------------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end of
the period 19,024,598. 19,024,598. 19,024,598. 24,702,775. 24,702,775. 19,024,598.
-------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.0061 $0.0058 $0.0198 $0.0103 $0.0348 ($0.4810)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE - U.S. GAAP
Net earnings as reported
Less: Cumulative dividends $116,638. $109,752. $377,452. $254,716. $858,558. ($9,150,348.)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
After tax imputed earnings from the
investment of funds received
through dilution $0. $0. $0. $0. $0. $0.
Adjusted net earnings $116,638. $109,752. $377,452. $254,716. $858,558. ($9,150,348.)
Weighted average number of Common
Shares outstanding at the end
of the period 19,024,598. 19,024,598. 19,024,598. 24,702,775. 24,702,775. 19,024,598.
Weighted average Common Stock
equivalent based on conversion of
Warrants and Stock Options 14,308,735. 14,308,735. 14,308,735. 0. 0. 14,308,735.
Weighted average number of Common
Shares outstanding at the
end of the period 33,333,333. 33,333,333. 33,333,333. 24,702,775. 24,702,775. 33,333,333.
-------------------------------------------------------------------------------------------
Fully diluted earnings per share $0.0035 $0.0033 $0.0113 $0.0103 $0.0348 ($0.2745)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
ITEM 14 SCHEDULES (CONT'D)
COMPUTATION OF EARNINGS PER SHARE - U.S. GAAP - TREASURY SHARE METHOD
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTER ENDED FOR THE FISCAL YEAR ENDED
-------------------------------------------------------------------------------------------
SEPTEMBER DECEMBER MARCH JUNE JUNE JUNE
1999 1999 2000 2000 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings $167,964. $161,078. $421,043. $254,716. $1,004,801. ($8,945,044.)
Cumulative dividends (51,326.) (51,326.) (43,591.) 0. ($146,243.) ($205,304.)
-------------------------------------------------------------------------------------------
Net earnings after cumulative dividends $116,638. $109,752. $377,452. $254,716. $ 858,558. ($9,150,348.)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Common Shares outstanding at the
beginning of the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
Weighted average number of Common
Shares issued (cancelled)
during the period 0. 0. 0. 5,678,177. 5,678,177. 0.
-------------------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end
of the period 19,024,598. 19,024,598. 19,024,598. 24,702,775. 24,702,775. 19,024,598.
-------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.0061 $0.0058 $0.0198 $0.0103 $0.0348 ($0.4810)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE
Net earnings before imputed earnings
Less: Cumulative dividends $116,638. $109,752. $377,452. $254,716. $858,558. ($9,150,348.)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
After tax imputed earnings from the
investment of funds received
through dilution $0. $0. $0. $0. $0. $0.
Adjusted net earnings
Less: Cumulative dividends $116,638. $109,752. $377,452. $254,716. $858,558. ($9,150,348.)
Weighted average number of Common
Shares outstanding at the
end of the period 19,024,598. 19,024,598. 19,024,598. 24,702,775. 24,702,775. 19,024,598.
Weighed average Common Stock
equivalents based on conversion of
Warrants and Stock Options 14,308,735. 14,308,735. 14,308,735. 0. 0. 14,308,735.
-------------------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the
end of the period 33,333,333. 33,333,333. 33,333,333. 24,702,775. 24,702,775. 33,333,333.
Fully diluted earnings per share $0.0035 $0.0033 $0.0113 $0.0103 $0.0348 ($0.2745)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
TO THE BOARD OF DIRECTORS OF
TREATS INTERNATIONAL ENTERPRISES INC.
We have audited the consolidated balance sheet of Treats International
Enterprises Inc. as at June 30, 2000, 1999 and the consolidated statements of
income and deficit, cash flow and stockholders' equity for the years ended June
30, 2000, 1999 and 1998 and have issued our report thereon dated October 29,
1999; such consolidated financial statements and our report thereon are included
elsewhere herein. Our examinations also comprehended the financial statement
schedules of Treats International Enterprises Inc. listed in Item 14 in its
Report on Form 10-K. In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements, present
fairly in all material respects the information shown therein.
Horwath Orenstein LLP
Chartered Accountants
October 29, 2000
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
October 30, 2000
By: /s/
-----------------------------------
PAUL J. GIBSON
Chairman of the Board
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
October 30, 2000
By: /s/
-----------------------------------
JOHN DEKNATEL
Chief Operating Officer
October 30, 2000
By: /s/
-----------------------------------
FRANCOIS TURCOT
Director of Finance
59
