<PAGE>
Form 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 TO 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 3 months ended Commission File No:
September 30, 2000 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
State of jurisdiction: I.R.S. Employer No:
DELAWARE 13-3495199
ADDRESS OF PRINCIPAL EXECUTIVE OFFICER:
418 Preston Street
Ottawa, Ontario
Canada, K1S 4N2
Telephone No.: (613) 563-4073
U.S. ADDRESS OF TREATS INTERNATIONAL ENTERPRISES, INC.
c/o Vincent J. Profaci
Attorney at Law
932 Center Circle, Suite 1000
Altamonte Springs, Florida 32714
Telephone No.: (407) 673-1144
Registrant has filed all reports under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.:
YES
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
Three months ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Balance Sheet, September 30, 2000.....................................1
Statement of Income - September 30, 2000..............................2
Statement of Cash Flows, September 30, 2000 ..........................3
Statement of Stockholder's Equity.....................................4
Notes to Financial Statements...................................5 to 15
ITEM 2 Management's Discussion and Analysis
of the Statement of Income............................16 to 20
PART II Other Information - Items 1 to 6.....................................21
Signatures...........................................................22
</TABLE>
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30 SEPTEMBER 30 JUNE 30
NOTE 2000 2000 1999 1999
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash 105,000. 115,811. 0. 5,014.
Accounts Receivable 291,338. 157,753. 318,398. 202,544.
Prepaid Expenses 230,319. 292,381. 208,165. 174,328.
Construction work in process 270,722. 242,492. 185,715. 151,283.
Current portion of notes receivable 160,587. 159,289. 215,000. 213,234.
-------------------------------------------------------------------
1,057,966. 967,726. 927,278. 746,403.
FRANCHISED HELD FOR RESALE 279,265. 265,049. 0. 0.
NOTES RECEIVABLE 3 748,235. 717,362. 576,961. 525,593.
CAPITAL ASSETS 5 1,240,696. 1,263,780. 1,322,507. 1,347,994.
ADVERTISING COMMITMENT 2 0. 0. 9,398. 0.
INVESTMENT IN PUBLIC COMPANY 4 45,735. 45,735. 93,351. 93,351.
FRANCHISE RIGHTS 6 2,975,000. 3,060,000. 3,315,000. 3,400,000.
-------------------------------------------------------------------
6,346,897. 6,319,652. 6,244,495. 6,113,341.
-------------------------------------------------------------------
-------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 360,057. 449,995. 608,943. 611,528.
Current portion of long-term debt 384,430. 396,930. 2,744,245. 2,743,495.
-------------------------------------------------------------------
744,487. 846,925. 3,353,188. 3,355,023.
-------------------------------------------------------------------
LONG-TERM DEBT 7 3,353,999. 3,431,947. 1,684,915. 1,736,770.
LEASE SECURITY DEPOSITS 225,633. 229,863. 229,271. 212,212.
-------------------------------------------------------------------
4,324,119. 4,508,735. 5,267,374. 5,304,005.
-------------------------------------------------------------------
CONTINGENCIES 8
STOCKHOLDERS EQUITY
CAPITAL STOCK 9
Preferred:
Authorized, 4,590,175 (1999 - 10,000,000), non-voting
cumulative shares
Issued, nil (1999 - 5,409,825) series A shares 0. 0. 3,732,779. 3,732,779.
Common:
Authorized, 25,000,000 (1999 - 333,333,333) shares, par
value U.S. $0.001
Issued - 15,426,692 (1999 - 19,024,598) shares 46,280. 46,280. 19,025. 19,025.
Additional paid - in capital 15,636,020. 15,636,020. 10,757,739. 10,757,739.
-------------------------------------------------------------------
15,682,300. 15,682,300. 14,509,543. 14,509,543.
-------------------------------------------------------------------
Deficit (13,659,522.) (13,871,383.) (13,532,422.) (13,700,207.)
-------------------------------------------------------------------
2,022,778. 1,810,917. 977,121. 809,336.
-------------------------------------------------------------------
6,346,897. 6,319,652. 6,244,495. 6,113,341.
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
1
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTER ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
NOTE 2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Royalties 433,253. 424,494. 433,253. 424,494.
Sales of managed franchise stores 473,881. 121,879. 473,881. 121,879.
Supplier Incentives, Commissions & Other 275,794. 227,444. 275,794. 227,444.
Franchising 10,683. 46,805. 10,683. 46,805.
Proprietary products 121,702. 103,388. 121,702. 103,388.
Construction revenues 42,000. 75,000. 42,000. 75,000.
-------------------------------------------------------------------
1,357,313. 999,011. 1,357,313. 999,011.
-------------------------------------------------------------------
COST AND EXPENSES
Regional operations and franchising 167,484. 172,274. 167,484. 172,274.
Head office and administration 245,695. 240,093. 245,695. 240,093.
Managed franchise stores 452,423. 129,970. 452,423. 129,970.
Proprietary products 103,874. 94,641. 103,874. 94,641.
Construction expenses 34,500. 13,960. 34,500. 13,960.
Interest expense 29,293. 67,387. 29,293. 67,387.
Depreciation and Amortization 112,183. 112,902. 112,183. 112,902.
1,145,452. 831,226. 1,145,452. 831,227.
-------------------------------------------------------------------
NET INCOME FOR THE PERIOD 211,861. 167,785. 211,861. 167,785.
-------------------------------------------------------------------
-------------------------------------------------------------------
Earnings per share 11 0.01 0.01 0.01 0.01
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
2
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTER ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 211,861. 167,785. 211,861. 167,785.
ITEMS NOT AFFECTING CASH:
Depreciation & Amortization 112,183. 112,902. 112,183. 112,902.
Changes in non-cash operating working capital items (189,691.) (362,836.) (242,163.) (218,648.)
-------------------------------------------------------------------
134,353. (82,150.) 81,881. 62,038.
-------------------------------------------------------------------
FINANCING
Repayment of Long-term debt (90,448.) 21,961. (37,976.) (19,165.)
-------------------------------------------------------------------
(90,448.) 21,961. (37,976.) (19,165.)
-------------------------------------------------------------------
INVESTING
Issue of notes receivable, net of repayments (32,171.) 17,917. (32,171.) (53,134.)
Purchase of capital assets (4,099.) 124,602. (4,099.) (2,414.)
Deferred costs 0. 32,165. 0. 0.
Advertising commitment 0. (25,394.) 0. (9,398.)
Security deposits (4,230.) 8,402. (4,230.) 17,059.
Franchise stores held for resale (14,216.) 0. (14,216.) 0.
-------------------------------------------------------------------
(54,716.) 157,691. (54,716.) (47,887.)
-------------------------------------------------------------------
NET GENERATED CASH (OUTFLOW) (10,811.) 97,502. (10,811.) (5,014.)
CASH POSITION, BEGINNING OF PERIOD 115,811 45,874 115,811. 5,014.
-------------------------------------------------------------------
CASH POSITION, END OF PERIOD 105,000 143,376 105,000. 0.
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
3
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
---PREFERRED SHARES--- ---COMMON SHARES---
1 FOR 3
SHARES AMOUNT SHARES AMOUNT REVERSE SPLIT DEFICIT TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 5,409,825. 3,732,779. 19,024,598. 10,776,764. 6,341,608. (4,960,696.) 9,548,847.
Net income for the year 0. 0. 0. 0. 0. 205,533. 205,533.
--------------------------------------------------------------------------------------------------------
Balance June 30, 1998 5,409,825. 3,732,779. 19,024,598. 10,776,764. 6,341,608. (4,755,163.) 9,754,380.
Net loss for the year 0. 0. 0. 0. 0. (8,945,044.) (8,945,044.)
--------------------------------------------------------------------------------------------------------
Balance June 30, 1999 5,409,825. 3,732,779. 19,024,598. 10,776,764. 6,341,608. (13,700,207.) 809,336.
Conversion of preference
shares into common shares (5,409,825.) (3,732,779.) 20,737,661. 3,732,779. 6,912,554. 0. 0.
Conversion of dividends
into common shares 0. 0. 6,517,590. 1,172,757. 2,172,530. 0. 1,172,757.
Net income for the year 0. 0. 0. 0. 0. 1,001,581. 1,001,581.
Dividends 0. 0. 0. 0. 0. (1,172,757.) (1,172,757.)
--------------------------------------------------------------------------------------------------------
Balance June 30, 2000 0. 0. 46,279,849. 15,682,300. 15,426,692. (13,871,383.) 1,810,917.
Net income for the period 0. 0. 0. 0. 0. 211,861. 211,861.
--------------------------------------------------------------------------------------------------------
Balance September 30, 2000 0. 0. 46,279,849. 15,682,300. 15,426,692. (13,659,522.) 2,022,778.
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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.
5
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(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.
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.
6
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(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:
<TABLE>
<CAPTION>
<S> <C> <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.
BASIC EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are calculated using the daily weighted
average number of common shares outstanding during the fiscal year.
7
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
3. NOTES RECEIVABLE
Notes receivable are due from franchisees with interest rates
varying from 6% to 8% and repayable in scheduled instalments
which mature from July 1999 to June 2020.
<TABLE>
<CAPTION>
JUNE
2000 1999
<S> <C> <C>
$ $
Notes receivable, net of allowance for doubtful
accounts of nil (2000 - nil) 908,822. 876,651.
Less current portion 160,587. 159,289.
------------------------------------
748,235. 717,362.
------------------------------------
------------------------------------
</TABLE>
4. INVESTMENT IN PUBLIC COMPANY
In 1998, the Company sold the U.S. area rights for
consideration of 2,800,000 class "AA" convertible preference
shares in EMC Group Inc., a U.S. public company incorporated
in the State of Florida, via a management buy-out by former
employees of the company. The investment has been recorded at
the cost of equipment and franchise rights transferred to EMC
Group Inc. based on the available information at the time of
the sale.
The preference shares are convertible to common stock for the
equivalent of US$2,800,000 based on the average market value
of the common stock for the 60 days prior to the date of
conversion, subject to approval of the board of directors of
EMC Group Inc. EMC Group Inc. will only permit the conversion
of preferred shares to common shares of EMC Group Inc. as long
as the conversion does not exceed 10% of the total number of
outstanding common shares of EMC Group Inc. As of June 30,
2000 the Company has not converted any of its preferences
shares.
Contrary to the agreement with the Company, since
incorporation, EMC Group Inc. has not raised sufficient
capital, nor has it made any significant additional store
openings. In addition, EMC Group Inc. has not been profitable
and management does not anticipate an improvement in
operations in the U.S. in the foreseeable future. Based on the
above, management believes that there has been a permanent
impairment in value, and the asset has been written down to
its market value in the 2000 fiscal year.
8
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
ACCUMULATED
COST AMORTIZATION ---- NET BOOK VALUE ---
$ $ $ $
<S> <C> <C> <C> <C>
Land 457,885. 0. 457,884. 457,885.
Building 625,000. 70,313. 554,687. 562,500.
Furniture, fixtures and equipment 740,172. 692,179. 47,993. 46,890.
Corporate owned stores reacquired
from franchisees 218,700. 98,415. 120,285. 131,220.
Corporate owned store equipment
reacquired from former
franchisees 2,150,565. 909,870. 59,845. 65,285.
--------------------------------------------------------------------
2,146,467. 882,687. 1,240,694. 1,263,780.
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
6. FRANCHISE RIGHTS
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Franchise rights 3,400,000. 3,400,000.
Accumulated amortization (425,000.) (340,000.)
------------------------------
2,975,000. 3,060,000.
------------------------------
------------------------------
</TABLE>
The Company obtained an independent appraisal from Scott
Rankin, Gordon & Gardiner, Chartered Accountants,
substantiating a valuation of franchise rights in the amount
of $3,060,000 as at June 30, 2000.
9
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
7. LONG - TERM DEBT
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Business Development Bank of Canada Term loan, repayable in 47
monthly instalments of $4,200 plus interest at 11%, due July
23, 2003, secured by a general security agreement, second
mortgage on the land and building at 418 Preston Street, and
a personal guarantee of up to 50% by one of the shareholders 142,800. 155,400.
Appleford Capital Inc. (formerly 3193853 Canada Inc.)
Term loan, bearing interest at 0% per annum, payable $52,000
per annum in the first two years, $72,800 in the next two
years and the balance due April, 2005, secured by a general
security agreement, general assignment of book debts and
franchise rights, pledge of all the shares in subsidiary and
associated companies (see note (a) below) 1,171,712. 1,178,462.
Riverdale Capital Inc. (formerly 3722121 Canada Inc.)
Term loan, bearing interest at 0% per annum, payable
principal and interest of $130,000 to March 2004, $162,500
per annum, for the next three years and the balance due
March 2007, secured by a general assignment of book debts
and franchise rights, pledge of all the shares in subsidiary
and associated companies (see note (b) below) 1,146,886. 1,171,117.
P. Murphy in trust
Mortgage bearing interest at 7% payable in 212 bi-weekly
instalments of $1,000 on interest and principal, due August
2008, secured by land and building at 418 Street, Ottawa,
Ontario and a General Security Agreement 158,341. 161,758.
------------------------------------
Carried forward 2,619,739. 2,666,737.
</TABLE>
10
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
7. LONG-TERM DEBT (CONT'D)
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Brought forward 2,619,739. 2,666,737.
D. Crawford
Term loan, repayable in 70 bi-weekly instalments of $1,000
of principal and interest at 10%, due March 2003,
secured by a General Security Agreement 57,082 62,467.
Bank of Nova Scotia
Term loan unsecured, repayable in 21 monthly instalments of
$774 plus interest at prime plus 2%, due July 9, 2002 13,926. 16,247.
La Caisse Populaire St. Charles Ltee
Mortgage, bearing interest at 6.8% per annum payable in 80
monthly instalments of $4,999 on interest and principal, due
March 2007, secured by land and building at 418 Preston
Street in Ottawa, Ontario 315,468. 325,012.
Other long-term debt
Non-interest bearing, with various terms of repayment
ending in 2002 59,103. 63,303.
Legal settlements, non-interest-bearing, principal only
including 8% imputed interest of $257,073, payments of
$93,000 annually, with various terms of repayment
ending in 2006 (see note 8) 673,111. 695,111.
------------------------
3,738,429. 3,828,877.
Less current portion (384,430.) (396,930.)
------------------------
3,353,999. 3,431,947.
------------------------
------------------------
</TABLE>
11
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
7. LONG-TERM DEBT (CONT'D)
(a) On July 2, 2000, Appleford Capital Inc. (formerly 3193853
Canada Inc.) amended the interest of the loan from 4% to 0%.
(b) On July 2, 2000, Riverdale Capital Group Inc. (formerly
3722121 Canada Inc.), a corporation with 9% of the
outstanding common shares owned by the Chief Executive Officer
of the Company and 36% by family members of the Chief
Executive Officer of the Company amended the interest of the
debenture from 4% to 0%.
The minimum future principal repayments required over the
next five years are as follows:
<TABLE>
<CAPTION>
$
<S> <C>
2001 384,430.
2002 372,281.
2003 380,491.
2004 319,644.
2005 334,472.
Subsequent 1,947,111.
---------
3,738,429.
---------
---------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in several actions arising in the
normal course of business. The Company settled most claims
subject to certain terms in the amount of $988,800, which
was reflected in the statement of income in the fiscal year
ending June 30, 1999.
As a result of legal settlement in the prior years, an
amount was provided based on those judgements. In the
current year, the Company has reversed $261,211 of this
amount, as it believes it will not be paid.
As management is of the opinion that the outcome of the
remaining claims, counterclaims or appeals is not
determinable at this time, no additional provision has been
recorded.
12
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
8. COMMITMENTS AND CONTINGENCIES (CONT'D)
The Company has lease commitments for corporate-owned stores
and office premises. The Company also, as the franchisor, is
the lessee in most of the franchisees' lease agreements. The
Company enters into sublease agreements with individual
franchisees, whereby the franchisee assumes responsibility
for, and makes lease payments directly to, the landlord. The
aggregate rental obligations under these leases over the
next five years are as follows:
<TABLE>
<CAPTION>
Year ending June 30 $
<S> <C>
2001 2,877,121.
2002 2,300,771.
2003 1,946,179.
2004 1,633,394.
2005 1,258,352.
Later Years 2,175,526.
------------
Total minimum payments* 12,191,343.
------------
------------
</TABLE>
* Minimum payments have not been reduced by
minimum sublease rentals for $11,487,431 due
in future under non-cancellable subleases.
YEAR ENDING JUNE 30, 2001
<TABLE>
<CAPTION>
$
<S> <C>
Minimum rentals 2,877,121.
Less: sublease rentals (2,720,833.)
-----------------
156,288.
-----------------
-----------------
</TABLE>
13
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
9. CAPITAL STOCK
On July 10, 2000 the Company amended its share capital
structure as follows:
<TABLE>
<CAPTION>
CLASS NUMBER OF AUTHORIZED SHARES PAR VALUE NUMBER OF SHARES ISSUED
BEFORE AFTER BEFORE AFTER
1 FOR 3 1 FOR 3 1 FOR 3 1 FOR 3
REVERSE SPLIT REVERSE SPLIT REVERSE SPLIT REVERSE SPLIT
<S> <C> <C> <C> <C> <C>
Common 75,000,000 25,000,000 $.001 U.S. 46,279,849. 15,426,692.
Preference 10,000,000 10,000,000 $.500 U.S. 0. 0.
</TABLE>
10. RELATED PARTY TRANSACTIONS
(a) Riverdale Capital Group Inc. (formerly 3722121
Canada Inc.), a corporation with 9% of the
outstanding common shares owned by the Chief
Executive Officer of the Company and 36% by family
members of the Chief Executive Officer of the
Company amended the interest of the debenture
from 4% to 0%.
11. BASIC EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
June
2000 1999
$ $
<S> <C> <C>
Basic earnings (loss) per share 0.01 0.04
------------------------------
------------------------------
Weighted average number of common shares outstanding 15,426,692. 24,702,775.
------------------------------
------------------------------
</TABLE>
The calculation of fully diluted earnings per common share
assumes that, if a dilutive effect is produced, all
convertible securities have been converted, all shares to
be issued under contractual commitments have been issued
and all outstanding options have been exercised at the
later of the beginning of the fiscal period and the option
issue date. Fully diluted earnings per share are not
presented as they are anti-dilutive.
14
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
12. INCOME TAXES
The Company has utilized its tax losses to reduce its
taxable income to nil. The Company has a non-capital loss
of $100,000 which expires on June 30, 2006.
13. FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts of accounts receivable, short-term
notes receivable and accounts payable and accrued
liabilities approximates their fair value because of the
short-term maturities of these items.
The carrying amount of the long-term notes receivable
approximates their fair value because the interest rates
approximate market rates.
The carrying amounts of the term loans to related parties
(10(a) do not approximate their fair value because
the term loans do not bear interest.
The fair values of the term loans due to related parties
are not determinable, as these amounts are interest-free
and, accordingly, can not be ascertained with reference to
similar debt with arm's length parties.
15
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 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 September 30, 2000, Treats International
Enterprises, Inc. ("TIEI" or the "Company") through its wholly owned
subsidiaries derived 31.9% of its Revenue from royalties, 34.9% from retail
sales of corporately managed stores, 20.3% from supplier incentives, commissions
and other, 0.8% from franchise activities, 9.0% from the sale of certain
proprietary products and 3.1% from construction revenue.
Net Income for the Quarter ended September 30, 2000 was $212,000 compared to
$168,000 for the corresponding period 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 10 new locations will open in the last three quarters of fiscal
2001. The Company's fiscal year end is the Saturday closest to June 30. The 2000
fiscal year end had 53 weeks. The fiscal year ending June 30, 2001 will include
52 weeks of operation.
16
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
GENERAL (CONT'D)
On July 2, 2000, the Company filed an application with the Securities and
Exchange Commission to revise its share capital structure and had a 1 for 3
reverse split. As a result, the issued share capital of the Company subsequent
to year end is 15,426,692. The financial statements reflect the effect of the
reverse split and the basic earnings per share.
On July 2, 2000, Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.)
("Riverdale") holder of a subordinated debenture amended the terms of the
debenture by adjusting the interest rate to 0%. Riverdale had acquired and
restructured the debt instrument from the Royal Bank of Canada and its wholly
owned subsidiaries in March of 2000 as described in detail in the Company's 8-K
and 10-K filings.
Appleford Capital Inc. (formerly 3193853 Canada Inc.) holder of a secured term
loan, bearing interest at 4% per annum, payable $52,000 per annum in the first
two years, $72,800 in the next two years and the balance due April, 2005,
secured by a general security agreement, general assignment of book debts and
franchise rights and pledge of all the shares in subsidiary and associated
companies, amended on July 2, 2000 the terms of the term loans which became
interest free.
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 which may include acquisitions and/or mergers and/or
joint venture agreements.
17
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
The following table sets forth for the periods indicated certain items from the
consolidated statement of income expressed as a percentage of net sales:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30
1999 2000
<S> <C> <C>
Net sales.................................................................100.0 % 100.0 %
Royalties..................................................................31.9 % 42.5 %
Supplier incentives, commissions & other...................................20.3 % 22.8 %
Sales of managed franchises stores.........................................34.9 % 12.2 %
Proprietary products........................................................9.0 % 10.3 %
Construction revenues.......................................................3.1 % 7.5 %
Franchising.................................................................0.8 % 4.7 %
Head office and administration............................................(18.1)% (24.0)%
Regional operations and franchising.......................................(12.3)% (17.2)%
Managed franchise stores..................................................(33.3)% (13.0)%
Proprietary products.......................................................(7.7)% (9.5)%
Construction expenses......................................................(2.5)% (1.4)%
------------------------
E.B.I.T.D.A................................................................26.0 % 34.9 %
------------------------
Interest expense...........................................................(2.2)% (6.7)%
Depreciation and amortization............................................. (8.3)% (11.3)%
------------------------
Net Income.................................................................15.6 % 16.9 %
------------------------
------------------------
</TABLE>
18
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999.
Total revenue for the quarter ended September 30, 2000
increased $358,000 or 35.9% to $1,357,000 from $999,000 for
the same period last year. The increase in revenue resulted
primarily from:
* The sales of managed franchises stores increased by
$352,000 or 288.8% to $474,000 compared to $122,000
for the same period last year.
* Royalties increased $9,000 or 2.1% to $433,000 compared to
$424,000 for the same period last year.
* Supplier incentives increased $48,000 or 21.3% to $276,000
compared to $228,000 for the same period last year.
* Franchising decreased $36,000 to $11,000 compared to
$47,000 for the same period last year.
* Proprietary products revenues increased $18,000 or 17.7% to
$122,000 from $104,000 for the same period last year.
Expenses for the quarter ended September 30, 2000 increased
$314,000 or 37.8% to $1,145,000 from $831,000 for the same
period last year. The decrease in expenses relate to the
following:
* Cost associated with managed franchised stores increased
$322,000 of 248.1% to $452,000 compared to $130,000 for
the same period last year.
* Head Office and Administration cost increased $6,000 or
2.3% to $246,000 from $240,000 for the same period last
year.
* The cost of purchasing certain proprietary products for
resale to distributors increased $9,000 or 9.8% to
$104,000 from $95,000 for the same period last year.
19
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999.
(CONT'D)
* Net income for the quarter ended September 30, 2000 was
$212,000 compared to a net income of $168,000 for the same
period last year.
WORKING CAPITAL
The working capital at the end of the period was $314,000 compared to a working
capital deficit of $2,425,000 for the same period last year. This is primarily
due to the decrease of current portion of the long term debt.
LIQUIDITY AND CASH FLOW
During the quarter the operating inflow was $134,000 compared to an outflow of
$82,000 for the same quarter of the last fiscal year. This is the result of a
decrease in non-cash operating working capital items.
20
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
PART II OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Legal Proceedings - See note 8 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
</TABLE>
21
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 2000
(CANADIAN DOLLARS)
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results of operation
for the 3 months ended September 30, 2000.
The result of operation for the period ended September 30, 2000 are not
necessarily indicative of the results of the entire year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
By: /s/ PAUL J. GIBSON November 10, 2000
------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ JOHN A. DEKNATEL November 10, 2000
------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ FRANCOIS TURCOT November 10, 2000
------------------------------
Francois Turcot, Director of Finance
22
<PAGE>
