<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, 1999
Commission file number 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
DELAWARE 13-3495199
418 Preston St., 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 COMMISION
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
J.A. Jurgens, P.A.
1964 Howell Branch Road, Suite 206
Winter Park, Florida 32792
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. [X]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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is U.S. $112,579. The aggregate market value was computed by
reference to the average bid and asked prices as of November 23, 1999.
(U.S.$0.02)
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 19,024,598
- ------------------------------ ------------------------------------------
Title of Class Shares outstanding at November 30, 1999
DOCUMENTS INCORPORATED BY REFERENCE
3
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TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
INDEX PAGE
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<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 - 23
Item 7-A Quantitative and Qualitative disclosure about
market risk. 23
Item 8 Financial Statements and Supplementary Data 23 - 44
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 45
PART III
Item 10 Directors and Executive Officers of the Registrant 46
Item 11 Executive Compensation 47
Item 12 Security Ownership of Certain Beneficial Owners and
Management 48 - 49
Item 13 Certain Relationships and Related Transactions 50
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 51 - 53
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES 54
SIGNATURES 55
</TABLE>
4
<PAGE>
ITEM 1. BUSINESS
GENERAL
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, gourmet and specialty coffees, related food and beverage products in
retail stores (Micro Bakeries) 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. 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 June 30, 1999 there are 121 retail units in North America utilizing the
Treats System: 117 of these units are owned and operated by franchisees; 4
are corporately managed. It franchises and operates these outlets in all
provinces with the exception of Manitoba.
The Company grants both single unit franchises and area development
franchises throughout Canada. 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, normally 250 - 500 square feet in size with no seating area of
its own, the Treats Bakery Cafe, normally 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 in high pedestrian traffic areas, where high
visibility prevails.
For substantially all single store franchises in Canada, the Company or one
of its subsidiaries has entered into a lease (the "Head Lease") with the
relevant landlord and the location is sub-leased at the same cost to the
franchisee. 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
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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. The collateral assignment means the Company does not have all
the rights and obligations associated with entering into the Head Lease. It
gives 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 and was organized in 1988.
INDUSTRY OVERVIEW
The market for muffins, cookies and related 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 fast-food franchising. The snack food or "break" food
market-segment is experiencing continuous growth and the "Specialty Coffee"
segment is enjoying unprecedented growth.
Management believes this growth has been driven by a much greater consumer
awareness and appreciation of gourmet 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 small compared to the improvement in product quality and
taste. In the Coffee Bar segment a number of large national chains have
established a strong presence in North America. The most significant chains
are: Starbucks with approximately 1,300 corporately owned locations, Second
Cup with 380 locations and Gloria Jean's with 220 locations. However there
are a plethora of other large chains with strong regional and niche presence.
6
<PAGE>
ITEM 1. BUSINESS (CONT'D)
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 proven 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 continued growth and expansion.
In Canada, the Specialty Baking segment is dominated by two major chains:
Treats (120 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
successfully competed in Canada because of its strong commitment to quality,
a significant operational support program and a very strong emphasis on
Coffee.
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.
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
150 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 continued 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 3.0 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 shop category traffic
growth increased by 49%, 11%, 19% and 16%, annually, from 1995 through 1998.
7
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ITEM 1. BUSINESS (CONT'D)
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 2 franchised stores were opened during 1998-1999. 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.
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.
8
<PAGE>
ITEM 1. BUSINESS (CONT'D)
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.
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.
9
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ITEM 1. BUSINESS (CONT'D)
COMPETITION
The coffee and muffin industries 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 and will continue
to be competitive. The competition in the muffin and cookie 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, 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, 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.
EMPLOYEES
At June 30, 1999, the Company had 29 employees, of whom 14 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 labor organization.
The Company believes that its employee relations are good.
10
<PAGE>
ITEM 2 PROPERTIES
N - A
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 $1,250,000, which has been reflected in the statement of income.
As management is of the opinion that the balance of 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
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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, 1999 was 1,259 and at June
30, 1998, was 1,241. 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.
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, 1997 0.020 0.020 0.060 0.060
December 31, 1997 0.020 0.020 0.060 0.060
March 31, 1998 0.020 0.020 0.060 0.060
June 30, 1998 0.020 0.020 0.060 0.060
September 30, 1998 0.020 0.020 0.020 0.020
December 31, 1998 0.020 0.020 0.020 0.020
March 31, 1999 0.020 0.020 0.020 0.020
June 30, 1999 0.020 0.020 0.020 0.020
</TABLE>
12
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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, 1999, have been converted
into U.S. dollars, at the prevailing rate of exchange.
<TABLE>
<CAPTION>
AS AT JUNE 30
1999 1999 1998 1997 1996 1995
-------------------------------------------------------------------------
(US)(1) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash $ 3. $ 5. $ 46. $ -- $ -- $ 60.
Current Assets $ 501. 746. 635. 618. 1,256. 1,069.
Franchise Rights $ 2,281. 3,400. 8,573. 9,566. 10,275. 10,984.
Total Assets $ 4,101. 6,113. 14,029. 12,888. 13,525. 13,435.
Current Liabilities $ 2,251. 3,355. 3,202. 1,402. 1,847. 2,254.
Working Capital (Deficit) $(1,750.) (2,609.) (2,567.) (783.) (591.) (1,185.)
Long Term Liabilities $ 1,308. 1,949. 1,073. 1,938. 2,279. 1,758.
Non-Controlling Interest -- -- -- -- -- 232.
Stockholders' Equity $ 543. 809. 9,754. 9,549. 9,399. 9,192.
</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, 1999 Conversion rate: One (1) (US) Dollar
equals: $1.4905
13
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ITEM 6 SELECTED FINANCIAL DATA (CONT'D)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30
1999 1999 1998 1997 1996 1995
-------------------------------------------------------------------------
(U.S.)(1) (IN THOUSANDS, EXCEPT FOR PER SHARE AND RESTAURANT DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue
Royalties $1,212. $1,807. $1,783. $1,781. $1,968. $1,947.
Supplier incentives
commission and other $ 678. 1,010. 1,097. 1,026. 1,071. 1,001.
Sales of managed franchise stores $ 463. 690. 817. 608. 2,106. 1,579.
Proprietary products $ 291. 433. 449. 511. 341. --
Franchise fees $ 90. 134. 218. 200. 265. 351.
Construction Revenue $ 276. 412. 613. 503. 610. --
-----------------------------------------------------------------------
Total $3,010. 4,486. 4,977. 4,629. 6,361. 4,878.
-----------------------------------------------------------------------
Expenses
Head office administration $1,456. $2,170. $2,192. $1,894. $2,163. $1,850.
Managed franchise stores $ 444. 662. 714. 473. 2,079. 1,687.
Amortization $ 142. 212. 818. 987. 839. 789.
Franchising $ 1. 1. 7. 25. 121. 168.
Interest $ 165. 246. 111. 157. 249. 276.
Proprietary products $ 250. 372. 397. 440. 294. --
Construction Expenses $ 221. 330. 532. 503. 610. --
Restructuring costs $4,164. 6,207. -- -- -- --
Write-down of investments in public company $1,023. 1,525. -- -- -- --
Legal settlements $ 839. 1,250. -- -- -- --
Bad debts - notes receivable $ 307. 457. -- -- -- --
----------------------------------------------------------------------------
Total $9,012. 13,432. 4,771. 4,479. 6,355. 4,771.
----------------------------------------------------------------------------
Income before income taxes (6,002.) (8,946.) 206. 150. 6. 107.
Income taxes -- -- -- -- -- --
----------------------------------------------------------------------------
Net Income (6,002.) (8,946.) 206. 150. 6. 107.
============================================================================
Avg. No. of Shares Outstanding (2) 19,024. 19,024. 19,024. 19,024. 19,996. 20,742.
Earnings per Share (0,32.) (0,47.) 0,01. 0,00. 0,00. 0,00.
-----------------------------------------------------------------------------
Number of Treats units in Chain 121. 121. 132. 141. 160. 163.
</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, 1999
Conversion rate: One (1) (US) Dollar equals: 1.4905
(2) The Company has 19,024,598 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, 1999).
14
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
(All amounts are in Canadian $ unless otherwise noted)
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.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
15
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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.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
16
<PAGE>
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.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
17
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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.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
18
<PAGE>
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 91% of the franchise owners use this
method to make their weekly payments. By the end of this fiscal year
the Company expects that 100% of all franchise owners will have been
converted to the direct transfer system.
The Company continued to renovate existing stores using the new design
criteria developed in the previous fiscal year. These renovations have
in virtually every instance resulted in increased sales performance.
During the year, after extensive testing, a new line of premium cookies
was introduced under the "TreatSations." label (Trade Mark registration
for TreatSations is pending.) While the introduction of the initial
line of TreatSations products was not as successful as Management had
anticipated, the Company intends to continue to introduce new products
using the TreatSations mark of quality. In January of 2000 the Company
will introduce the second component of the TreatSations line, a variety
of oatmeal bars.
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.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
19
<PAGE>
(All amounts are in Canadian $ unless otherwise noted)
GENERAL
- THE YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30,
1997
System-wide retail sales for the twelve months ended June 30, 1998 were
$24,667,000 compared to $26,903,000 a decrease of $2,236,000 or 8.31%
for the same period last year. The sales decline can be attributed to
the Company's decision to close down 7 locations during the past twelve
months. The units closed down were primarily non-performing locations
or locations where the Company could not establish satisfactory lease
terms with the landlord.
RESULTS OF OPERATIONS
Total revenue for the year ended June 30, 1998 increased $348,000 or
7.5% to $4,977,000 from $4,629,000 for the same period last year. The
increase in revenue resulted primarily from:
- The sales of corporately managed stores increased by $209,000 or
34.3% to $816,000 from $607,000 for the same period last year.
- Royalties increased $3,000 or 0.14% to $1,783,000 compared to
$1,780,000 for the same period last year. (see note on Head
office and administration expenses, below)
- Supplier incentives increased $71,000 or 6.9% to $1,097,000
compared to $1,026,000 the same period last year.
- Franchising increased $18,000 or 8.9% to $218,000 compared to
$200,000 for the same period last year.
- Proprietary products sold to distributors for distribution to the
franchised and corporately managed locations decreased $62,000 or
12.2% to $449,000 compared to $511,000 for the same period last
year.
- In the fiscal year ended June 30, 1998 The Company amended its
policy regarding the construction and renovation of stores. The
revenues from constructions are recognized when the agreements
are signed or the funds as been received. Revenues from
construction were $613,000.
20
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
Expenses for the year ended June 30, 1998 increased $292,000 or 6.5% to
$4,771,000 from $4,479,000 for the same period last year. The increase
in expenses relate to the following:
- Costs associated with Managed franchised stores increased
$240,000 a direct result of the increase in the number of
corporately managed stores.
- Head office and administration expenses increased $298,000 or
15.7% to $2,192,000 from $1,894,000 for the same period last
year. The increase is a direct result of the Company's decision
to amend its policy with respect to royalty discounts. The
difference between the actual amount paid and the amount required
under the franchise agreement is credited to royalty revenue and
charged to Head office expenses as a discount on royalties. The
amount charged for royalty discount in the fiscal year was
$384,000.
- The cost of purchasing certain proprietary products for resale to
distributors decreased $43,000 or 9.8% to $397,000 from $440,000
for the same period last year.
- Interest expense decreased by $46,000 or 29% to $111,000 from
$157,000 last year. This decrease is a direct result of 3193853
Canada Inc. having waived any interest payment required for
fiscal 1998. (see note 8 page 28-30)
- The cost of construction and renovation of stores was $532,000.
- Net income for the year ended June 30, 1998 was $206,000 compared
to a net income of $150,000 for the same period last year an
increase of 37.3%.
CAPITAL RESOURCES - June 30, 1998
The Company's projected capital asset requirements for the current
fiscal year, are not very demanding.
21
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
LIQUIDITY AND CASH FLOW - June 30, 1998
The working capital deficit at the year end decreased by $1,784,000 to
$(2,567,000). This was primarily due to an increase of $1,814,000 in
the current portion of the long-term debt.
The cash flow from operations during fiscal 1998 increased by $140,000
or 13.6% to $1,175,000 compared to $1,035,000 in the previous fiscal
year.
DEBT TO EQUITY:
The ratio of debt to equity as at June 30, 1998 was .44 to 1 compared
to .35 to 1 in the previous fiscal year.
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.
A new line of sandwiches was introduced under the "Baguette Express"
banner. Sandwiches are now available at a large number of Treats
locations served on a variety of breads including a "baked fresh on
site" baguette loaf. A Trade Mark for the new sandwich line has been
applied for.
During the year extensive testing of a new line of premium baked goods
and as a result the company plans to roll out a new line of cookies in
the current fiscal year. The premium line of baked goods will be
identified as "TreatSations." Trade Mark registration for TreatSations
is pending.
The Company has received several enquiries about opportunities to
franchise the Treats concept outside of North America. In June the
Company entered into a National Licensing Agreement for Chile and
Argentina.
22
<PAGE>
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
IN THE YEAR (CONT'D)
In December 1998 the EMC Group, Inc. from Lakeland, Florida acquired
the National License to franchise the Treats concept throughout the
United States. The president of EMC Group is a former Vice President of
the Company.
ITEM 7-A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
n/a
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TREATS INTERNATIONAL ENTERPRISES, INC.
Consolidated Financial Statements 1999 compared to 1998 Page 24 to 44
23
<PAGE>
FINANCIAL
STATEMENTS
CONSOLIDATED
TREATS INTERNATIONAL
ENTERPRISES, INC
June 30, 1999 and 1998
24
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
INDEX
Page
26 Auditors' Report
27 - 28 Consolidated Balance Sheets
29 Consolidated Statements of Income and Deficit
30 Consolidated Statements of Cash Flows
31 Consolidated Statements of Stockholders' Equity
32 - 44 Notes to the Consolidated Financial Statements
25
<PAGE>
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
TREATS INTERNATIONAL ENTERPRISES, INC.
We have audited the consolidated balance sheets of TREATS INTERNATIONAL
ENTERPRISES, INC. as at June 30, 1999 and 1998 and the consolidated
statements of income and deficit, cash flows and stockholders' equity for the
years ended June 30, 1999, 1998 and 1997. 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 audit.
We conducted our audit 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,
1999 and 1998 and the results of its operations and its cash flows for the
years ended June 30, 1999, 1998 and 1997 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
October 29, 1999
26
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NOTE 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
$ $
<S> <C> <C> <C>
ASSETS
CURRENT
Accounts receivable 202,544 193,718
Current portion of notes receivable 213,234 217,205
Prepaid expenses 174,328 144,606
Construction work in process 151,283 33,476
Cash 5,014 45,874
-----------------------------------
746,403 634,879
DEFERRED COSTS - 268,566
NOTES RECEIVABLE 3 525,593 819,820
INVESTMENT IN PUBLIC COMPANY 4 93,351 1,617,912
CAPITAL ASSETS 5 1,347,994 2,020,533
ADVERTISING COMMITMENT - 94,576
FRANCHISE RIGHTS 6 3,400,000 8,572,715
-----------------------------------
6,113,341 14,029,001
-----------------------------------
-----------------------------------
</TABLE>
Approved on behalf of the Board:
Director
-------------------------------
See the accompanying notes
27
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NOTE 1999 1998
- -------------------------------------------------------------------------------------------------------------------
$ $
<S> <C> <C> <C>
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 611,528 953,620
Current portion of long-term debt 2,743,495 2,249,109
--------------------------------------------
3,355,023 3,202,729
LONG-TERM DEBT 7 1,736,770 833,511
LEASE SECURITY DEPOSITS 212,212 238,381
--------------------------------------------
5,304,005 4,274,621
--------------------------------------------
COMMITMENTS AND CONTINGENCIES 8
STOCKHOLDERS' EQUITY
CAPITAL STOCK
Preferred
Authorized, 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, 5,409,825 series A shares 3,732,779 3,732,779
Common
Authorized, 33,333,333 shares, par value
U.S. $0.001
Issued , 19,024,598 shares 19,025 19,025
Additional paid-in capital 10,757,739 10,757,739
--------------------------------------------
14,509,543 14,509,543
DEFICIT (13,700,207) (4,755,163)
--------------------------------------------
809,336 9,754,380
--------------------------------------------
6,113,341 14,029,001
--------------------------------------------
--------------------------------------------
</TABLE>
See the accompanying notes
28
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT
YEARS ENDED JUNE 30. 1999, 1998 AND 1997
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NOTE 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
$ $ $
<S> <C> <C> <C> <C>
REVENUES
Royalties 1,807,184 1,783,428 1,780,872
Supplier incentives and other 1,009,898 1,097,316 1,026,046
Sales of managed franchise stores 690,139 816,648 607,752
Proprietary products 433,391 448,634 511,052
Construction 411,260 612,915 503,521
Franchising 134,373 217,941 200,019
--------------------------------------------
4,486,245 4,976,882 4,629,262
--------------------------------------------
EXPENSES
Restructuring costs 10 6,206,598 - -
Head office and administration 2,169,717 2,192,004 1,893,869
Write -down of investment in public
company 4 1,524,561 - -
Legal settlements 8 1,250,000 - -
Managed franchise stores 661,788 714,357 474,128
Bad debts - notes receivable 3 457,245 - -
Construction expenses 330,360 531,796 503,521
Proprietary products 372,415 396,566 439,714
Interest on long-term debt 246,005 111,163 156,716
Franchising 1,375 7,337 24,817
Amortization
Capital assets 138,523 745,424 889,083
Deferred costs 72,702 72,702 97,424
--------------------------------------------
13,431,289 4,771,349 4,479,272
--------------------------------------------
NET INCOME (LOSS) FOR THE YEAR (8,945,044) 205,533 149,990
DEFICIT, BEGINNING OF YEAR (4,755,163) (4,960,686) (5,110,686)
--------------------------------------------
DEFICIT, END OF YEAR (13,700,207) (4,755,163) (4,960,696)
--------------------------------------------
--------------------------------------------
EARNINGS (LOSS) PER SHARE 11 (0.47) 0.01 0.00
--------------------------------------------
--------------------------------------------
</TABLE>
See the accompanying notes
29
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1999, 1998 AND 1997
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
$ $ $
<S> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES
OPERATING
Net income (loss) for the year (8,945,044) 205,533 149,990
Items not affecting cash
Amortization
Capital assets 138,523 745,424 889,083
Deferred costs 72,702 72,702 97,424
Capital assets (419,418) (412,062) (353,414)
Franchise stores held for resale - 412,062 353,414
Write -down of franchise rights 5,228,388 - -
Write -down of investment in public company 1,524,561 - -
Write -down of capital assets 978,210 - -
Bad debts - notes receivable 457,245 - -
Write off of deferred costs 195,864 - -
----------------------------------------------
(768,969) 1,023,659 1,136,497
Changes in non-cash operating items (524,612) 151,263 (101,814)
----------------------------------------------
(1,293,581) 1,174,922 1,034,683
----------------------------------------------
FINANCING
Long-term debt 1,397,645 943,897 (86,012)
Bank indebtedness - (102,232) (84,986)
----------------------------------------------
1,397,645 841,665 (170,998)
----------------------------------------------
INVESTING
Franchise stores held for resale - (269,981) (19,210)
Deferred costs - 32,742 (332,026)
Notes receivable (159,047) 590,217 (422,092)
Investment in public company - (1,617,912) -
Purchase of capital assets (24,779) (1,082,885) (109,667)
Proceeds on disposal of capital assets and franchise rights - 471,682 -
Advertising commitment 94,576 (94,576) 19,310
Purchase of franchise rights (55,674) - -
----------------------------------------------
(144,924) (1,970,713) (863,685)
----------------------------------------------
NET CASH INFLOW (OUTFLOW) (40,860) 45,874 -
CASH POSITION, BEGINNING OF YEAR 45,874 - -
----------------------------------------------
CASH POSITION, END OF YEAR 5,014 45,874 -
----------------------------------------------
----------------------------------------------
</TABLE>
See the accompanying notes
30
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 10)
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
----- 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
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
See the accompanying notes
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31
<PAGE>
JUNE 30, 1999 AND 1998
(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.
32
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Franchise fees and construction revenue arises on the sale of national,
area and store franchises. Franchise store revenue is recognized as
income when the respective purchase and sale agreements have been
signed, all material conditions relating to the sale have been
substantially completed by the Company or the franchise store has
commenced operations. Revenue from national and area franchise
agreements is recognized when the area development agreement has been
signed 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.
TREATS INTERNATIONAL ENTERPRISES, INC.
33
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(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.
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.
TREATS INTERNATIONAL ENTERPRISES, INC.
34
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 1998 to June 2020.
$ $
Notes receivable, net of allowance for doubtful
accounts of nil (1998 - nil) 738,827 1,037,025
Less current portion (213,234) (217,205)
------------------------------------
525,593 819,820
------------------------------------
------------------------------------
</TABLE>
During the year, the Company wrote off $457,245 of notes, due to the
closing of unprofitable stores (note 10).
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 current fiscal year.
TREATS INTERNATIONAL ENTERPRISES, INC.
35
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
5. CAPITAL ASSETS ACCUMULATED
COST AMORTIZATION ---- NET BOOK VALUE ----
$ $ $ $
<S> <C> <C> <C> <C>
Land 457,885 - 457,885 457,885
Building 625,000 22,894 602,106 625,000
Furniture, fixtures and equipment 708,679 682,683 25,996 51,348
Corporate owned stores reacquired
from franchisees 218,700 43,740 174,960 712,206
Corporate owned store equipment
reacquired from former
franchisees 108,809 21,762 87,047 174,094
---------------------------------------------------------------------
2,119,073 771,079 1,347,994 2,020,533
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
6. FRANCHISE RIGHTS
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Franchise rights (see note 10) 3,400,000 13,284,863
Accumulated amortization - (4,712,148)
--------------------------------
3,400,000 8,572,715
--------------------------------
--------------------------------
</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.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
36
<PAGE>
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
7. LONG - TERM DEBT $ $
<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 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 200,000 -
3193853 Canada Inc.
Term loan, repayable in 59 monthly instalments of $20,000 plus
interest at 10% per annum, due July 1, 2004, 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) 1,180,824 1,025,000
J. Laverty
Mortgage bearing interest at 7% payable in 261 monthly instalments
of $1,335 on interest and principal, due June 2019, secured by land
and building at 418 Street, Ottawa, Ontario and a General Security
Agreement 171,955 175,793
D Crawford
Term loan, repayable in 48 monthly instalments of $2,000 of
principal and interest at 10%, due March 2003,
secured by a General Security Agreement 81,085 91,942
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 (see note (a) below) 1,129,562 1,129,562
---------------------------
Carried forward 2,763,426 2,422,297
</TABLE>
37
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D) $ $
<S> <C> <C>
Brought forward 2,763,426 2,422,297
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 48,000
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at 5.9% per annum payable in 105
monthly instalments of $4,884 on interest and principal, due
March 2007, secured by land and building at 418 Preston Street
in Ottawa, Ontario 360,987 398,149
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2002 81,852 214,174
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) 1,250,000 -
-----------------------------
4,480,265 3,082,620
Less current portion (2,743,495) (2,249,109)
1,736,770 833,511
-----------------------------
-----------------------------
</TABLE>
38
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D)
(a) The Company is in default of their loan covenants with
3193853 Canada Inc. and Royal Bank Capital Corporation.
3193853 Canada inc. and Royal Bank Capital have not waived
their rights to call the term loan and subordinated
debenture at a future date and accordingly the debt are
classified as current.
Interest expense for the year related to long-term debt was $246,005
(1998 - $111,163).
The minimum future principal repayments required over the next five
years are as follows:
$
2000 2,743,495
2001 318,032
2002 300,710
2003 305,173
2004 247,000
Subsequent 565,855
------------
4,480,265
------------
------------
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.
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.
39
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES (CONT'D)
(b) The Company has lease commitments for corporate-owned stores and
office premises. The Company also, as the franchisor, is the lessee
in most of the 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>
$
<S> <C>
Year ending June 30
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>
40
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
- ----------------------------------------------------------------------------
9. RELATED PARTY TRANSACTIONS
(a) The Royal Bank of Canada and its subsidiary, Royal Bank Capital
Corporation, are registered holders of 37.9% of the common stock.
The Royal Bank Capital Corporation holds a subordinated debenture
(see note 7) for which the related interest expense was $112,620
(1998 - $104,012).
Undeclared dividends for July 1, 1994 to June 30, 1999 on the
preferred shares owned by the Royal Bank are $1,026,515.
(b) 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.
(c) 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 $77,890
(1998 - $nil).
(d) Accounts payable includes $34,726 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 (see note 6).
41
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
1999 1998
- -----------------------------------------------------------------------------
10. RESTRUCTURING COST (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:
<TABLE>
<CAPTION>
$
<S> <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 (0.47) 0.01
========================
Weighted average number of common
shares outstanding 19,024,598 19,024,598
========================
</TABLE>
The calculation of fully diluted earnings per common share assumes that,
if a dilutive effect is produced, all convertible securities have been
converted, all shares to be issued under contractual commitments have
been issued and all outstanding options have been exercised at the later
of the beginning of the fiscal period and the option issue date. If all
conversions 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.
TREATS INTERNATIONAL ENTERPRISES, INC.
42
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
- ----------------------------------------------------------------------------
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.
13. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates 1999
to represent something other than a date. The effects of the Year 2000
Issue may be experienced before, on, or after January 1, 2000, and, if
not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspect of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
14. COMPARATIVE FIGURES
Prior years figures have been reclassified to conform with the current
year's presentation.
TREATS INTERNATIONAL ENTERPRISES, INC.
43
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(CANADIAN DOLLARS)
- ----------------------------------------------------------------------------
15. MANAGEMENT PLAN
As disclosed in the financial statements, the Company has incurred a
net loss for the year in the amount of $8,945,044 compromised largely
of non-cash write-downs as reflected in the statement of cash flows
and in note 10. Management feels 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) in arriving at the valuation of franchise
rights.
As well, the Company is in violation of certain debt covenants as
discussed in note 7. While the lenders have never indicated an
intention to demand payments as they have the right to do, the relevant
long-term debt has been classified as a current liability the
accompanying balance sheet. 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.
44
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
- ----------------------------------------------------------------------------
- No Disagreements or changes.
45
<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.
The Directors of the Company are elected annually by the shareholders and the
Officers are appointed annually by the Board of Directors.
The Company intends to expand the Board to five Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Paul J. Gibson 44 President, C.E.O. and Director
John A. Deknatel 52 Chief Operating Officer
Peter-Mark Bennet 42 Director
Francois Turcot 39 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.
46
<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>
U.S. ($)
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) $182,000.
</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.
47
<PAGE>
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth as of the date of November 30, 1999, 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>
PRINCIPAL SHAREHOLDERS & OFFICERS Effective November 30, 1999
- ---------------------------------
# Shares of %
Common stock Ownership
Registered
--------------------------------
<S> <C> <C> <C>
Paul Gibson Intrust (1) 960,049. 5.05%
418 Preston Street
Ottawa, Ontario (K1S 4N2)
John Deknatel 131,121. .69%
418 Preston Street
Ottawa, Ontario (K1S 4N2)
Access Investment Group Ltd. (2) 5,060,285. 26.60%
Sassoon House
Nassau, Bahamas
Francois Turcot 36,458. .19%
418 Preston Street
Ottawa, Ontario (K1S 4N2)
-----------------------------
Officers & Directors as a group 6,187,913. 32.53%
=============================
OWNERS IN EXCESS OF 5%
- ----------------------
Royal Bank / RBCC (3) 7,207,760. 37.89%
200 Bay Street, 13th Floor
Toronto, Ontario (M5J 2J5)
</TABLE>
48
<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. Gibson
and his immediate family.
3. RBCC is a wholly owned subsidiary of the Royal Bank of Canada. The
Royal Bank of Canada is a widely held Canadian Chartered Bank. To the
best of The Company's knowledge, no one entity controls more than 10%
of all outstanding shares of the Royal Bank of Canada.
The shares are convertible at the option of the holder at a price equal
to the lower of the weighted average trading price for TIEI for the
previous 30 trading days using the average exchange rate for the period
and US $0.30 per share.
<TABLE>
<CAPTION>
SHARES
------------
<S> <C> <C>
Current Holdings RBCC/Royal Bank 7,207,760.
POTENTIAL CONVERSION OF PREFERRED SHARES
AND DIVIDEND.
Preferred Shares $3,732,779 @ $0.03 124,425,967.
Dividend to June 30, 1999 $1,026,514 @ $0.03 34,217,133
------------
Fully diluted ownership of RBCC/Royal Bank (1) 165,850,860.
============
</TABLE>
(1) MAXIMUM SHARES AVAILABLE = 33,333,333
49
<PAGE>
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
(a) The Royal Bank of Canada and its subsidiary, Royal Bank
Capital Corporation, are registered holders of 37.9% of the
common stock. The Royal Bank Capital Corporation holds a
subordinated debenture (see note 7) for which the related
interest expense was $112,620 (1998 - $104,012).
Undeclared dividends for July 1, 1994 to June 30, 1999 on the
preferred shares owned by the Royal Bank are $1,026,515.
(b) The President of 319853 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 $77,890 (1998 - $nil).
(c) Accounts payable includes $34,726 owed to 764719 Ontario Inc.
whose owner is a member of the family of the Chief Executive
Officer of the Company.
50
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
INDEX
<TABLE>
<S> <C>
- - Computation of Earnings Per Share -
U.S. GAAP - Treasury Share Method Page 51
- - Computation of Earnings Per Share -
Treasury Share Method Page 52
- - Auditors' Report on Financial Statement Schedules Page 53
</TABLE>
51
<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
1998 1999 1999 1999 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE - U.S. GAAP
- --------------------------------------
Net earnings $24,408. $59,340. $50,666. ($9,079,458.) ($8,945,044.) $205,533.
Cumulative dividends (51,326.) (51,326.) (51,326.) (51,326.) ($205,304.) ($205,304.)
------------------------------------------------------------------------------------
Net earnings after cumulative
dividends ($26,918.) $8,014. ($660.) ($9,130,784.) ($9,150,348.) $229.
====================================================================================
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. 0. 0. 0.
------------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end of
the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
------------------------------------------------------------------------------------
Treasury Common Shares assumed
purchased from proceeds of issue 0. 0. 0. 0. 0. 0.
BASIC EARNINGS PER SHARE ($0.0014) $0.00004 ($0.0000) ($0.4799) ($0.4810) $0.0000
====================================================================================
FULLY DILUTED EARNINGS PER SHARE -
U.S. GAAP
- ----------------------------------
Net earnings as reported
Less: Cumulative dividends ($26,918.) $8,014. ($660.) ($9,130,784.) ($9,150,348.) $229.
====================================================================================
After tax imputed earnings from the
investment of funds received through
dilution $0 $0 $0 $0 $0 $0
Adjusted net earnings ($26,918.) $8,014. ($660.) ($9,130,784.) ($9,150,348.) $229.
Weighted average number of Common
Shares outstanding at the end of
the period 19,024,598. 19,024,598. 19,024,598 19,024,598. 19,024,598. 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. 14,308,735. 14,308,735. 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. 33,333,333. 33,333,333. 33,333,333.
------------------------------------------------------------------------------------
Fully diluted earnings per share ($0.0008) $0.0002 ($0.0000) ($0.2739) ($0.2745) $0.0000
====================================================================================
</TABLE>
52
<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
1998 1999 1999 1999 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
- ------------------------
Net earnings $24,408. $59,340. $50,666. ($9,079,458.) ($8,945,044.) $205,533.
Cumulative dividends (51,326.) (51,326.) (51,326.) (51,326.) ($205,304.) ($205,304.)
------------------------------------------------------------------------------------
Net earnings after cumulative
dividends ($26,918.) $8,014. ($660.) ($9,130,784.) ($9,150,348.) $229.
====================================================================================
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. 0. 0. 0.
------------------------------------------------------------------------------------
Weighted average number of Common
Shares outstanding at the end of
the period 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598. 19,024,598.
------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE ($0.0014) $0.0004 ($0.0000) ($0.4799) ($0.4810) $0.0000
====================================================================================
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
Net earnings before imputed earnings
Less: Cumulative dividends ($26,918.) $8,014. ($660.) ($9,130,784.) ($9,150,348.) $229.
====================================================================================
After tax imputed earnings from the
investment of funds received through
dilution $0. $0. $0. $0. $0. $0.
Adjusted net earnings
Less: Cumulative dividends ($26,918.) $8,014. ($660.) ($9,130,784.) ($9,150,348.) $229.
Weighted average number of Common
Shares outstanding at the end of
the period 19,024,598. 19,024,598. 19,024,598 19,024,598. 19,024,598. 19,024,598.
Weighted average Common Stock
equivalents based on conversion of
Warrants and Stock Options 14,308,735. 14,308,735. 14,308,735. 14,308,735. 14,308,735. 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. 33,333,333. 33,333,333. 33,333,333.
------------------------------------------------------------------------------------
Fully diluted earnings per share ($0.0008) $0.0002 ($0.0000) ($0.2739) ($0.2745) $0.0000
====================================================================================
</TABLE>
53
<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, 1999, 1998 and the consolidated statements of
income and deficit, cash flow and stockholders' equity for the years the year
ended June 30, 1999, 1998 and 1997 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, 1999
54
<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.
December 30, 1999 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.
December 30, 1999 By: \s\
-----------------------------------
JOHN DEKNATEL
Chief Operating Officer
December 30, 1999 By: \s\
-----------------------------------
FRANCOIS TURCOT
Director of Finance
55
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 632
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 501
<PP&E> 3,248
<DEPRECIATION> 517
<TOTAL-ASSETS> 4,102
<CURRENT-LIABILITIES> 2,251
<BONDS> 1,308
0
2,504
<COMMON> 13
<OTHER-SE> 9,735
<TOTAL-LIABILITY-AND-EQUITY> 543
<SALES> 0
<TOTAL-REVENUES> 3,010
<CGS> 0
<TOTAL-COSTS> 9,011
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> (6,001)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,001)
<DISCONTINUED> 0
<EXTRAORDINARY> (6,332)
<CHANGES> 0
<NET-INCOME> (6,001)
<EPS-BASIC> (.470)
<EPS-DILUTED> (.470)
</TABLE>
