<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE 3 MONTHS ENDED MARCH 31, 2000
------------------------
COMMISSION FILE NUMBER 0-21418
------------------------
TREATS INTERNATIONAL ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3495199
(State of jurisdiction) (IRS Employer Identification No.)
</TABLE>
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
1964 Howell Branch Road, Suite 206
Winter Park, Florida 32792
Telephone No.: (407) 673-1144
------------------------
Registrant has filed all reports under Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
THREE MONTHS ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I Financial Information
ITEM 1 Balance Sheet, March 31, 2000............................... 1
Statement of Income -- March 31, 2000....................... 2
Statement of Cash Flows -- March 31, 2000................... 3
Statement of Stockholder's Equity........................... 4
Notes to Financial Statements............................... 5
Management's Discussion and Analysis of the Statement of
ITEM 2 Income...................................................... 11
PART II Other Information -- Items 1 to 6........................... 15
Signatures.................................................. 16
</TABLE>
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, JUNE 30,
NOTE 2000 JUNE 30, 1999 1999 1998
-------- ------------ -------------- ----------- -----------
(unaudited) (audited) (unaudited) (audited)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................. $ 195,295 $ 5,014 $ -- $ 45,874
Accounts receivable.............................. 488,440 202,544 627,694 193,718
Prepaid expenses................................. 123,844 174,328 129,460 144,606
Construction work in process..................... 137,605 151,283 280,459 33,476
Current portion of notes receivable.............. 174,155 213,234 174,760 217,205
------------ ------------ ----------- -----------
1,119,339 746,403 1,212,373 634,879
FRANCHISE STORES HELD FOR RESALE................. -- -- 6,396 --
NOTES RECEIVABLE................................. 3 660,142 525,593 686,804 819,820
CAPITAL ASSETS................................... 5 1,283,140 1,347,994 2,003,294 2,020,533
ADVERTISING COMMITMENT........................... -- -- 148,982 94,576
DEFERRED COSTS................................... -- -- 172,069 268,566
INVESTMENT IN PUBLIC COMPANY..................... 4 93,351 93,351 1,617,912 1,617,912
FRANCHISE RIGHTS................................. 6 3,145,000 3,400,000 8,074,533 8,572,715
------------ ------------ ----------- -----------
$ 6,300,972 $ 6,113,341 $13,922,363 $14,029,001
============ ============ =========== ===========
LIABILITIES
CURRENT
Bank Indebtedness................................ $ -- $ -- $ 100,000 $ --
Accounts payable and accrued liabilities......... 330,867 611,528 768,335 953,620
Current portion of long-term debt................ 340,147 2,743,495 961,286 644,547
------------ ------------ ----------- -----------
671,014 3,355,023 1,829,621 1,598,167
------------ ------------ ----------- -----------
LONG-TERM DEBT................................... 7 3,828,643 1,736,770 1,936,652 2,438,073
LEASE SECURITY DEPOSITS.......................... 241,894 212,212 267,688 238,381
------------ ------------ ----------- -----------
$ 4,741,551 $ 5,304,005 $ 4,033,961 $ 4,274,621
------------ ------------ ----------- -----------
CONTINGENCIES.................................... 8
STOCKHOLDERS EQUITY
CAPITAL STOCK
Preferred:
Authorized, 10,000,000 non-voting, cumulative
shares, dividends at U.S. $.028 per share,
redeemable at option of company at U.S. $1
per share par value U.S. $.50................ $ 3,732,779 $ 3,732,779 $ 3,732,779 $ 3,732,779
Common:
Authorized, 33,333,333 shares, par value
U.S. $0.001
Issued -- 19,024,598 common shares........... 19,025 19,025 19,025 19,025
Additional paid-in capital....................... 10,757,739 10,757,739 10,757,739 10,757,739
------------ ------------ ----------- -----------
14,509,543 14,509,543 14,509,543 14,509,543
------------ ------------ ----------- -----------
Deficit.......................................... (12,950,122) (13,700,207) (4,621,141) (4,755,163)
------------ ------------ ----------- -----------
1,559,421 809,336 9,888,402 9,754,380
------------ ------------ ----------- -----------
$ 6,300,972 $ 6,113,341 $13,922,363 $14,029,001
============ ============ =========== ===========
</TABLE>
1
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE
FISCAL QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------- -------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
NOTE 2000 1999 2000 1999
-------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Royalties..................................... $ 494,927 $490,523 $1,480,666 $1,477,276
Sales of managed franchise stores............. 99,797 67,820 287,584 461,951
Supplier incentives, commissions and other.... 222,983 305,704 710,782 730,558
Franchising................................... 38,038 18,313 94,844 125,370
Proprietary products.......................... 126,068 105,856 354,051 343,370
Construction revenues......................... 353,431 -- 450,931 411,260
---------- -------- ---------- ----------
$1,335,244 $988,216 $3,378,858 $3,549,785
---------- -------- ---------- ----------
COST AND EXPENSES
Head office and administration................ $ 564,193 $449,092 $1,446,843 $1,321,249
Managed franchise stores...................... 142,480 83,179 369,791 527,709
Proprietary products.......................... 104,212 90,064 305,036 289,729
Construction expenses......................... 332,974 -- 366,934 330,360
Interest expense.............................. (342,560) 57,721 (198,535) 174,230
Depreciation and amortization................. 112,903 257,494 338,705 772,486
---------- -------- ---------- ----------
$ 595,394 $937,550 $2,309,966 $3,415,763
---------- -------- ---------- ----------
NET INCOME FOR THE PERIOD..................... $ 421,043 $ 50,666 $ 750,085 $ 134,022
========== ======== ========== ==========
Earnings per share............................ 11 $ 0.02 $ 0.00 $ 0.04 $ 0.01
========== ======== ========== ==========
</TABLE>
2
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE
FISCAL QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------- -------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net income for the period........................... $ 421,043 $ 50,666 $ 750,085 $ 134,022
Items not affecting cash:
Depreciation and amortization....................... 112,903 257,494 338,705 772,486
Changes in non-cash operating working capital
items............................................. (465,563) (268,368) (502,395) (809,129)
--------- -------- ---------- ----------
68,382 39,792 586,395 97,379
--------- -------- ---------- ----------
FINANCING
Bank indebtedness................................... -- (91,864) -- 100,000
Repayment of long-term debt......................... (192,273) (23,722) (311,475) (184,682)
--------- -------- ---------- ----------
(192,273) (115,586) (311,475) (84,682)
--------- -------- ---------- ----------
INVESTING
Issue of notes receivable, net of repayments........ 42,487 274,811 (95,470) 175,461
Purchase of capital assets.......................... (14,654) (199,719) (18,851) (202,538)
Advertising commitment.............................. -- (5,984) -- (54,406)
Security deposits................................... 12,518 13,082 29,682 29,307
Managed franchise stores held for resale............ -- (6,396) -- (6,396)
--------- -------- ---------- ----------
40,351 75,794 (84,639) (58,572)
--------- -------- ---------- ----------
NET GENERATED CASH (OUTFLOW)........................ (83,540) 0 190,281 (45,875)
CASH POSITION, BEGINNING OF PERIOD.................. 278,834 0 5,014 45,875
--------- -------- ---------- ----------
CASH POSITION, END OF PERIOD........................ $ 195,294 $ 0 $ 195,295 $ 0
========= ======== ========== ==========
</TABLE>
3
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
REDEEMABLE, CONVERTIBLE
PREFERRED SHARES COMMON SHARES
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996..... 5,409,825 $3,732,779 19,024,598 $10,776,764 (5,110,686) $ 9,398,857
Net income for the year.... -- -- -- -- 149,990 149,990
--------- ---------- ---------- ----------- ----------- -----------
Balance, June 30, 1997..... 5,409,825 3,732,779 19,024,598 10,776,764 (4,960,696) 9,548,847
Net income for the year.... -- -- -- -- 205,533 205,533
--------- ---------- ---------- ----------- ----------- -----------
Balance June 30, 1998...... 5,409,825 3,732,779 19,024,598 10,776,764 (4,755,163) 9,754,380
Net 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
Net income for the
period................... -- -- -- -- 750,085 750,085
--------- ---------- ---------- ----------- ----------- -----------
Balance March 31, 2000..... 5,409,825 $3,732,779 19,024,598 $10,776,764 (12,950,122) $ 1,559,421
========= ========== ========== =========== =========== ===========
</TABLE>
4
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2000
(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.
REVENUE RECOGNITION
Franchise fees and construction revenue arises on the sale of national, area
and store franchises. Franchise store revenue is recognized as income when
the respective purchase and sale agreements have been signed and all
material conditions relating to the sale have been substantially completed
by the Company or the franchise store has commenced operations. Revenue from
national and area franchise agreements is recognized when the area
development agreement has been signed and all substantial obligations of the
Company have been completed.
When payment for the sale of a national or area franchise is based on a
contract over a period longer than twelve months, the Company recognizes
revenue based on the assessment of collectibility. The total contract is
recorded as deferred revenue, and revenue recognition commences when
payments in excess of 25% of the total contract have been received and
management has ascertained that there is a sufficient level of certainty
that the balance of the contract is collectible.
Deposits that are non-refundable under the franchising agreement are
recognized as franchising revenue when received.
Royalties are recognized when they are earned, based on a percentage of the
franchisees' sales on a weekly basis.
Supplier incentives are recognized in the period to which they apply.
INVESTMENT IN PUBLIC COMPANY
The investment in public company is accounted for at cost. Under the cost
method, the investment is recorded at its original cost, and earnings from
the investment are recognized only to the extent of dividends received or
receivable.
5
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS AT MARCH 31, 2000
(CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost less accumulated amortization.
Amortization is provided for at rates intended to write off the assets over
their estimated economic lives, as follows:
<TABLE>
<S> <C>
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
</TABLE>
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.
EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share are calculated using the daily weighted
average number of common shares outstanding during the fiscal year plus the
net additional number of shares which would be issuable upon the exercise of
stock options, assuming that the Company used the proceeds received to
purchase additional shares at market value.
ADVERTISING COMMITMENT
The Company receives prescribed amounts from franchisees to fund and develop
advertising and promotion campaigns regionally and nationally. The funds
collected, net of costs incurred, are recorded as an asset/liability for
future advertising and promotion.
3. NOTES RECEIVABLE
Notes receivable are due from franchisees with varying interest rates
repayable in scheduled instalments which mature from July 1999 to
June 2020.
<TABLE>
<CAPTION>
MARCH JUNE
2000 1999
--------- ---------
<S> <C> <C>
Notes receivable, net of allowance for doubtful accounts of
nil (1999 -- nil)......................................... $ 834,297 $ 738,827
Less current portion........................................ (174,155) (213,234)
--------- ---------
$ 660,142 $ 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 "A" convertible preference shares in EMC Group Inc., a U.S. public
company incorporated in the State of Florida, via a management buy-out by
former employees of the company. The investment has been recorded at the
cost of equipment and franchise rights transferred to EMC Group Inc. 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 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.
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 1999 fiscal year.
6
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS AT MARCH 31, 2000
(CANADIAN DOLLARS)
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
NET BOOK VALUE
-----------------------
ACCUMULATED MARCH JUNE
COST AMORTIZATION 2000 1999
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Land........................................................ $ 457,884 $ -- $ 457,884 $ 457,885
Building.................................................... 625,000 52,599 572,401 602,106
Furniture, fixtures and equipment........................... 727,531 687,558 39,974 25,996
Corporate owned stores reacquired from franchisees.......... 218,700 76,545 142,155 174,960
Corporate owned store equipment reacquired from former
franchisees............................................... 108,809 38,083 70,726 87,047
---------- -------- ---------- ----------
$2,137,924 $854,785 $1,283,140 $1,347,994
========== ======== ========== ==========
</TABLE>
6. FRANCHISE RIGHTS
<TABLE>
<CAPTION>
MARCH JUNE
2000 1999
---------- ----------
<S> <C> <C>
Franchise rights............................................ $3,400,000 $3,400,000
Accumulated amortization.................................... (255,000) --
---------- ----------
$3,145,000 $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 $3,400,000 as at June 30, 1999.
7
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS AT MARCH 31, 2000
(CANADIAN DOLLARS)
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 2000 JUNE 1999
----------- -----------
<S> <C> <C>
Business Development Bank of Canada
Term loan, repayable in 47 monthly instalments of $4,200
plus interest at prime plus 2%, due July 23, 2003, secured
by a general secuity 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......... $ 168,000 $ 200,000
3193853 Canada Inc.
Term loan at 4% interest, repayable in weekly instalments,
due December 2005, secured by a general security
agreement, general assignment of book debts and franchise
rights, pledge of all the shares in subsidiary and
associated................................................ 1,179,703 1,180,824
P. Murphy In Trust
Mortgage bearing interest at 7% payable in bi-weekly
instalments, due August 2008, secured by land and building
at 418 Preston Street, Ottawa, Ontario and a General
Security Agreement........................................ 165,675 171,955
D. Crawford
Mortgage being interest at 10% payable in bi-weekly
instalments, due March 2003, secured by a General Security
Agreement................................................. 66,969 81,085
3722121 Canada Inc.
Subordinated debenture, bearing interest at 4%, payable in
weekly instalments, due February 2008, secured by a
general security agreement, general assignment of book
debts and franchise rights, pledge of all the shares in
subsidiary and associated companies....................... 1,193,411 --
Royal Bank Capital Corporation
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 50 monthly instalments of $2,000
plus interest at prime plus 4%, due June 23, 2000, secured
by a general security agreement, general assignment of
books debts and franchise rights, pledge of all the shares
in subsidiary and associated companies.................... 6,000 24,000
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at 5.9% per annum payable in
monthly instalments, due March 2007, secured by land and
building at 418 Preston Street in Ottawa, Ontario......... 337,507 360,987
Other long-term debt
Non-interest bearing, with various terms of repayment
ending in 2002............................................ 68,203 81,852
Legal settlements, non-interest-bearing, principal only
including 8% imputed interest of $520,637, payments of
$175,000 annually, with various terms of repayment ending
in 2006, see note 8(a).................................... 983,322 1,250,000
---------- -----------
4,168,790 4,480,265
Less current portion........................................ (340,147) (2,743,495)
---------- -----------
$3,828,643 $ 1,736,770
========== ===========
</TABLE>
8
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS AT MARCH 31, 2000
(CANADIAN DOLLARS)
7. LONG-TERM DEBT (CONTINUED)
The minimum future principal repayments required over the next five years
are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 88,353
2001........................................................ 322,316
2002........................................................ 322,090
2003........................................................ 344,966
2004........................................................ 285,801
2005........................................................ 314,598
Subsequent.................................................. 2,490,666
----------
$4,168,790
==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
(a) 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 of June 30, 1999.
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.
(b) The Company has lease commitments for corporate-owned stores and office
premises. The Company also, as the franchisor, is the lessee in most of
the 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>
2000........................................................ $ 2,849,462
2001........................................................ 2,435,259
2002........................................................ 1,845,700
2003........................................................ 1,428,400
2004........................................................ 1,121,205
Later Years................................................. 1,888,300
-----------
Total minimum payments*..................................... $11,568,326
===========
</TABLE>
-----------------------
* Minimum payments have not been reduced by minimum sublease rentals for
$10,726,677 due in future under non-cancellable subleases.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Minimum rentals............................................. $ 2,849,462 $ 2,872,597
Less: sublease rentals...................................... (2,697,852) (2,721,987)
----------- -----------
$ 151,610 $ 150,610
=========== ===========
</TABLE>
9. RELATED PARTY TRANSACTIONS
(a) In the 1998 fiscal year, the Company has purchased its office premises,
land and building at 418 Preston Street, Ottawa, from a trust of which
the beneficiaries are the family of the Chief Executive Officer of the
Company whose family owns approximately 32.6% of the common stock of
the Company.
(b) The President of 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 $35,424 (1999 -- $50,657).
9
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS AT MARCH 31, 2000
(CANADIAN DOLLARS)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Accounts payable includes $24,825 owed to 764719 Ontario Inc. whose
owner is a member of the family of the Chief Executive Officer of
the Company.
10. RESTRUCTURING COST
In conjunction with the permanent decline in the value of the investment in
EMC Group Inc. (note 4), management has formalized a plan whereby the
Company will not enter into the U.S. market and will focus expansion
strictly in Canada. Accordingly, as there is no longer a value attributable
to the U.S. franchise rights, a valuation based on this plan resulted in a
write-down of the franchise rights in the 1999 fiscal year.
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:
<TABLE>
<S> <C> <C>
Franchise rights............................................ $ -- $ 5,228,388
Stores and equipment reacquired from franchisees............ -- 978,210
----------- -----------
$ -- $ 6,206,598
=========== ===========
</TABLE>
11. EARNINGS (LOSS) PER SHARE
<TABLE>
<S> <C> <C>
Primary earnings (loss) per share........................... $ 0.04 $ (0.47)
=========== ===========
Weighted average number of common shares outstanding........ $19,024,598 $19,024,598
=========== ===========
</TABLE>
The calculation of fully diluted earnings per common share assumes that, if
a dilutive effect is produced, all convertible securities have been
converted, all shares to be issued under contractual commitments have been
issued and all outstanding options have been exercised at the later of the
beginning of the fiscal period and the option issue date. If all conversions
had occurred, the Company would have had to increase its maximum authorized
common shares. Fully diluted earnings per share are not presented as they
are anti-dilutive.
12. FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts of accounts receivable, short-term notes receivable and
accounts payable and accrued liabilities approximates their fair value
because of the short-term maturities of these items.
The carrying amount of the long-term notes receivable, long-term
subordinated debenture and term loans approximates their fair value because
the interest rates approximate market rates.
The fair values of the other long-term debt due to non-arm's length parties
are not determinable, as these amounts are interest-free and due on demand,
and, accordingly, cannot be ascertained with reference to similar debt with
arm's length parties.
10
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2000
(CANADIAN DOLLARS)
PART I
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT
Certain statements in this Form 10-Q, 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-Q and in the
Company's 10-K filings, or unforeseen.
GENERAL
During the 3 month period ending March 31, 2000, Treats International
Enterprises, Inc. ("TIEI" or the "Company") through its wholly-owned
subsidiaries derived 37.1% of its Revenue from royalties, 7.5% from retail sales
of corporately managed stores, 16.7% from supplier incentives, commissions and
other, 2.8% from franchise activities, 9.4% from the sale of certain proprietary
products and 26.5% from construction revenue. The Company has continued to show
positive trends resulting in Net Income for the Quarter ended March 31, 2000 of
$421,000 compared to $50,700 for the corresponding period in fiscal 1999.
Similarly the year-to-date Net Income for the three quarters in the current
fiscal year shows Net Income of $750,100 compared to $134,000 for the
corresponding 3 quarters in fiscal 1999. No provision has been made for taxes as
a result of a tax loss carry-forward. The Company's management believes that
this trend will continue. It is anticipated that 4 new locations will open in
the last quarter of fiscal 2000.
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.
On February 29, 2000, the Company was notified by 3722121 Canada Inc.,
("3722121") 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 3722121 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 3722121.
Specifically 3722121 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 with
accrued undeclared dividend of $1,163,000 and 7,207,760 common shares.
3722121 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. 3722121 charged a
one-time 6.25% administration fee. This gain in interest expense was accounted
for by a credit of $281,000 to Interest expense.
11
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2000 (CONTINUED)
(CANADIAN DOLLARS)
This transaction resolved a number of issues which were before the courts
and TIEI and RBCC executed mutual releases pertaining to those actions.
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 -- FOR THE QUARTER ENDED MARCH 31, 2000, COMPARED TO THE
QUARTER ENDED MARCH 31, 1999.
REVENUE. Total revenue for the quarter ended March 31, 2000 increased
$347,000 or 35.1% to $1,335,200 from $988,200 for the corresponding period in
fiscal 1999. This was primarily due to Construction revenue of $353,000 compared
to $ nil for the corresponding period. Other factors which impacted
revenue were:
- A 47.1% gain in the Sales of managed franchised stores to $99,800 from
$67,800 for the corresponding period as a result of the number of stores
currently managed by the Company.
- A $20,200 (19.1%) increase in the revenue from the sale of
Proprietary products.
- An increase in Franchising revenue of $19,700 to $38,000 from $18,300 for
the same period in the corresponding period in fiscal 1999.
- A decrease in Supplier Incentives, commissions and other of $82,700 or
(27.1%) to $223,000 from $305,700 for the same period in fiscal 1999 as a
result of - .
EXPENSES. Expenses for the quarter ended March 31, 2000 decreased $23,300
or (2.5%) to $914,200 from $937,500 for the corresponding period in fiscal 1999.
The primary reason was a one-time reversal of interest expense in the amount of
$400,300 to ($342,600) from $57,700 primarily as a result 3722121's adjustment
of the interest owing on the subordinated debenture it acquired from RBCC as
described in more detail above. Excluding this one-time reversal of interest
expense, expenses increased $377,000 or 42.8% to $1,256800 from $880,000 for the
corresponding period in fiscal 1999. The primary reasons for this increase was
an increase in Construction expenses of $353,000 to $353,000 from $ nil for the
corresponding period in fiscal 1999 as well as an increase in Head office and
administration expenses of $95,000 or 21.2% to $544,200 from $449,100 for the
corresponding period in fiscal 1999. This was primary due to a increase of
$72,000 to expenses of stores under management contract. Other factors which
impacted the Company's expenses were:
- a $59,300 increase in operating expenses of Managed franchise stores as a
result of the number of stores currently managed by the Company.
- a 15.7% increase in the cost of purchasing Proprietary products to
$104,200 from $90,100 for the same period last year.
- A $114,600 (56.2%) decrease in Depreciation and amortization to $112,900
from $257,500 as a result of the Company's decision to write down its
franchise rights at the end of its last fiscal year, June 30, 1999.
12
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2000 (CONTINUED)
(CANADIAN DOLLARS)
The following table sets fourth for the periods indicated certain items from
the consolidated statement of income expressed as a percentage of net sales:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales................................................... 100.0 % 100.0 %
Royalties................................................... 37.1 % 49.6 %
Franchising................................................. 2.8 % 1.9 %
Supplier incentives, commissions and other.................. 16.7 % 30.9 %
Proprietary products........................................ 9.4 % 10.7 %
Sales of managed franchises stores.......................... 7.5 % 6.9 %
Construction revenues....................................... 26.5 % 0.0 %
Head office and administration.............................. (40.8)% (45.4)%
Proprietary products........................................ (7.8)% (9.1)%
Managed franchise stores.................................... (10.7)% (8.4)%
Construction expenses....................................... (26.4)% (0.0)%
E.B.I.T.D.A................................................. 14.3 % 37.0 %
------- -------
Interest expense............................................ 25.7 % (5.8)%
Depreciation and amortization............................... (8.5)% (26.1)%
------- -------
Net Income.................................................. 31.5 % 5.1 %
======= =======
</TABLE>
WORKING CAPITAL
The working capital at the end of the period was $448,000 compared to a
working capital deficit of $617,000 for the corresponding quarter in fiscal
1999. The primary reason for the significant change in the working capital
resulted from the recent transaction in which 3722121 acquired the holdings and
debt held by RBCC in Treats and the subsequent restructuring of the terms and
conditions of the debt instrument.
LIQUIDITY AND CASH FLOW
During the quarter the operating cash inflow was $68,000 compared to an
inflow of $40,000 for the corresponding quarter last fiscal year. This was
primarily the result of an increase in non-cash operating working capital items,
a significant portion was attributable to the transaction between 3722121 and
RBCC. No significant capital expenditures are planned for the next quarter and
the Company expects that the cash flow from operations for the next quarter will
be adequate to meet its obligations.
RAW MATERIALS PRICING AND AVAILABILITY
The Company enters into fixed price purchasing contracts which, with the
exception of coffee, are usually for a period of one year. The Company purchases
coffee contracts on a periodic basis. The supply and cost of coffee are,
however, subject to significant and unpredictable volatility as a result of
climatic, political and economic conditions as well as the impact of commodity
trading. To further protect against major price fluctuations in world green
coffee pricing the Company from time to time purchases future coffee contracts
so that it can average the cost price over a longer period of time.
13
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2000 (CONTINUED)
(CANADIAN DOLLARS)
Bakery mixes are manufactured and supplied by the Quaker Oats Company of
Canada based on bi-annual contracts. The Company does not anticipate any supply
problems, however, it is possible that supplies are interrupted as a result of
labour unrest or acts of God.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, Financial Accounting Standard Number 133 -- "Accounting for
Derivative Instruments and Hedging Activities" was issued. The statement is
effective for all quarters of fiscal years beginning after June 15, 2000. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities in the financial statements at fair
value. Currently this requirement would not impact the Company's
financial statements.
14
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2000 (CONTINUED)
(CANADIAN DOLLARS)
PART II OTHER INFORMATION
Item 1 Legal Proceedings -- See note 8(a) to the Financial Statements
Item 2 Changes in Securities -- None
Item 3 Defaults Upon Senior Securities -- None
Item 4 Submission of Matters to a Vote of Securities Holders -- None
Item 5 Other Information -- None
Item 6 Exhibits and Reports on Form 8-K -- One
The Company filed one report on Form 8-K during the third quarter. The
form 8-K, filed on March 2, 2000 announced the acquisition by 3722121
Canada Inc., 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 in the Company.
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results of operation
for the 3 months ended March 31, 2000.
The result of operation for the period ended March 31, 2000 are not
necessarily indicative of the results of the entire year.
15
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT MARCH 31, 2000
(CANADIAN DOLLARS)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
TREATS INTERNATIONAL ENTERPRISES, INC.
</TABLE>
<TABLE>
<CAPTION>
NAME DATE
---- ----
<C> <S> <C>
/s/ PAUL J. GIBSON
------------------------------------------- Chief Executive Officer May 18, 2000
Paul J. Gibson
/s/ JOHN A. DEKNATEL
------------------------------------------- Chief Operating Officer May 18, 2000
John A. Deknatel
/s/ FRANCOIS TURCOT
------------------------------------------- Director of Finance May 18, 2000
Francois Turcot
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 132
<SECURITIES> 0
<RECEIVABLES> 897
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 759
<PP&E> 3,066
<DEPRECIATION> 753
<TOTAL-ASSETS> 4,273
<CURRENT-LIABILITIES> 455
<BONDS> 2,761
0
2,532
<COMMON> 13
<OTHER-SE> 9,840
<TOTAL-LIABILITY-AND-EQUITY> 1,058
<SALES> 0
<TOTAL-REVENUES> 906
<CGS> 0
<TOTAL-COSTS> 620
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (232)
<INCOME-PRETAX> 286
<INCOME-TAX> 0
<INCOME-CONTINUING> 286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 286
<EPS-BASIC> 0.015
<EPS-DILUTED> 0.000
</TABLE>
