<PAGE>
[LOGO]
TREATS INTERNATIONAL ENTERPRISES, INC.
FORM 10-Q
COMMISSION FILE NO: 0-21418
(For The Three Months Ended September 30, 1999)
<PAGE>
Form 10-Q
SECURITIES & EXCHANGE COMMISSION
--------------------------------
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 TO 15 (D)
-------------------------------------------------
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------
For the 3 months ended Commission File No:
September 30, 1999 0-21418
TREATS INTERNATIONAL ENTERPRISES, INC.
State of jurisdiction: I.R.S. Employer No:
DELAWARE 13-3495199
ADDRESS OF PRINCIPAL EXECUTIVE OFFICER:
418 Preston Street
Ottawa, Ontario
Canada, K1S 4N2
Telephone No.: (613) 563-4073
U.S. ADDRESS OF TREATS INTERNATIONAL ENTERPRISES, INC.
c/o Vincent J. Profaci
Attorney at Law
J.A. Jurgens, P.A.
1964 Howell Branch Road, Suite 206
Winter Park, Florida 32792
Telephone No.: (407) 673-1144
Registrant has filed all reports under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months and has been subject to
such filing requirements for the past 90 days.:
YES
---
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
10-Q
Three months ended September 30, 1999
INDEX
PAGE
PART 1 FINANCIAL INFORMATION
ITEM 1 Balance Sheet, September 30, 1999 1
Statement of Income - September 30, 1999 2
Statement of Cash Flows, September 30, 1999 3
Statement of Stockholder's Equity 4
Notes to Financial Statements 5 to 16
ITEM 2 Management's Discussion and Analysis
of the Statement of Income 17 to 19
PART 11 Other Information - Items 1 to 6 20
Signatures 21
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30 SEPTEMBER 30 JUNE 30
NOTE 1999 1999 1998 1998
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash 0. 5,014. 0. 45,874.
Accounts Receivable 318,398. 202,544. 418,226. 193,718.
Prepaid Expenses 208,165. 174,328. 167,089. 144,606.
Construction work in process 185,715. 151,283. 406,529. 33,476.
Current portion of notes receivable 215,000. 213,234. 172,945. 217,205.
----------------------------------------------------------------------
927,278. 746,403. 1,164,789. 634,879.
NOTES RECEIVABLE 3 576,961. 525,593. 846,163. 819,820.
CAPITAL ASSETS 5 1,322,507. 1,347,994. 1,949,090. 2,020,533.
ADVERTISING COMMITMENT 2 9,398. 0. 119,970. 94,576.
DEFERRED COSTS 0. 0. 236,401. 268,566.
INVESTMENT IN PUBLIC COMPANY 4 93,351. 93,351. 1,617,912. 1,617,912.
FRANCHISE RIGHTS 6 3,315,000. 3,400,000. 8,406,654. 8,572,715.
----------------------------------------------------------------------
6,244,495. 6,113,341. 14,340,980. 14,029,001.
----------------------------------------------------------------------
----------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 608,943. 611,528. 1,213,828. 953,620.
Current portion of long-term debt 2,744,245. 2,743,495. 719,604. 2,249,109.
----------------------------------------------------------------------
3,353,188. 3,355,023. 1,930,432. 3,202,729.
----------------------------------------------------------------------
LONG-TERM DEBT 7 1,684,915. 1,736,770. 2,384,977. 833,511.
LEASE SECURITY DEPOSITS 229,271. 212,212. 246,783. 238,381.
----------------------------------------------------------------------
5,267,374. 5,304,005. 4,562,192. 4,274,621.
----------------------------------------------------------------------
CONTINGENCIES
STOCKHOLDERS EQUITY
CAPITAL STOCK
Preferred:
Authorized - 10,000,000 non-voting, cumulative shares,
dividends at US $.028 per
share, redeemable at option
of company at US $1.00 per share par value US $.50 3,732,779. 3,732,779. 3,732,779. 3,732,779.
Common:
Authorized - 33,333,333 shares par value US $0.001
Issued - 19,024,598 common shares 19,025. 19,025. 19,025. 19,025.
Additional paid - in capital 10,757,739. 10,757,739. 10,757,739. 10,757,739.
---------------------------------------------------------------------
14,509,543. 14,509,543. 14,509,543. 14,509,543.
---------------------------------------------------------------------
Deficit (13,532,422.) (13,700,207.) (4,730,755.) (4,755,163.)
---------------------------------------------------------------------
977,121. 809,336. 9,778,788. 9,754,380.
---------------------------------------------------------------------
6,244,495. 6,113,341. 14,340,980. 14,029,001.
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
1
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTER ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
NOTE 1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C>
REVENUES
Royalties 424,494. 455,890. 424,494. 455,890.
Sales of managed franchise stores 121,879. 177,313. 121,879. 177,313.
Supplier Incentives, Commissions & Other 227,444. 254,401. 227,444. 254,401.
Franchising 46,805. 84,000. 46,805. 84,000.
Proprietary products 103,388. 91,531. 103,388. 91,531.
Construction revenues 75,000. 294,875. 75,000. 294,875.
-------------------------------------------------------------------
999,011 1,358,010. 999,011. 1,358,010.
-------------------------------------------------------------------
COST AND EXPENSES
Regional operations and franchising 172,274. 199,887. 172,274. 199,887.
Head office and administration 240,093. 234,256. 240,093. 234,256.
Managed franchise stores 129,970. 211,391. 129,970. 211,391.
Proprietary products 94,641. 80,015. 94,641. 80,015.
Construction expenses 13,960. 294,875. 13,960. 294,875.
Interest expense 67,387. 55,682. 67,387. 55,682.
Depreciation and Amortization 112,902. 257,496. 112,902. 257,496.
-------------------------------------------------------------------
831,227. 1,333,602. 831,227. 1,333,602.
-------------------------------------------------------------------
NET INCOME FOR THE PERIOD 167,785. 24,408. 167,785. 24,408.
-------------------------------------------------------------------
-------------------------------------------------------------------
Earnings per share 11 0.01 0.00 0.01 0.00.
-------------------------------------------------------------------
-------------------------------------------------------------------
</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
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Profit (Loss) 167,785. 24,408. 167,785. 24,408.
ITEMS NOT AFFECTING CASH
Depreciation & Amortization 112,902. 257,496. 112,902. 257,496.
Changes in non-cash operating working capital items (186,708.) (362,836.) (218,648.) (362,836.)
-------------------------------------------------------------------
93,978 (80,932.) 62,038. (80,932.)
-------------------------------------------------------------------
FINANCING
Repayment of Long-term debt (51,105.) 21,961. (19,165.) 21,961.
-------------------------------------------------------------------
(51,105.) 21.961. (19,165.) 21,961.
-------------------------------------------------------------------
INVESTING
Issue of notes receivable, net of repayments (53,134.) 17,917. (53,134.) 17,917.
Purchase of capital assets (2,414.) (19,993.) (2,414.) (19,993.)
Deferred costs 0. 32,165 0. 32,165.
Advertising commitment (9,398.) (25,394.) (9,398.) (25,394.)
Security deposits 17,059. 8,402. 17,059. 8,402.
-------------------------------------------------------------------
(47,887.) 13,097. (47,887.) 13,097.
-------------------------------------------------------------------
NET GENERATED CASH (OUTFLOW) (5,014.) (45,874.) (5,014.) (45,874.)
CASH POSITION, BEGINNING OF PERIOD 5,014. 45,874. 5,014. 45,874.
-------------------------------------------------------------------
CASH POSITION, END OF PERIOD 0. (0.) 0. (0.)
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
3
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
REDEEMABLE, CONVERTIBLE
---PREFERRED SHARES--- ---COMMON SHARES---
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 5,409,825 3,732,779 19,024,598 10,776,764 (5,110,686) 9,398,857
Net income for the year - - - - 149,990 49,990
-------------------------------------------------------------------------------
Balance, June 30, 1997 5,409,825 3,732,779 19,024,598 10,776,764 (4,960,696) 9,548,847
Net income for the year - - - - 205,533 205,533
-------------------------------------------------------------------------------
Balance June 30, 1998 5,409,825 3,732,779 19,024,598 10,776,764 (4,755,163) 9,754,380
Net income for the year - - - - (8,945,044) (8,945,044)
--------------------------------------------------------------------------------
Balance June 30, 1999 5,409,825 3,732,779 19,024,598 10,776,764 (13,700,207) 809,336
Net income for the period - - - - 167,784 167,784
--------------------------------------------------------------------------------
Balance September 30, 1999 5,409,825 3,732,779 19,024,598 10,776,764 (13,532,423) 977,121
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
These consolidated financial statements comprise the accounts of the
Company and its wholly - owned subsidiaries, as follows:
- Treats Inc.
- Treats Ontario Inc.
- Chocolate Gourmet Treats Limited
- Treats Canada Corporation
All intercompany transactions and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (which also
conform in all material respects with accounting principles generally
accepted in the United States) and include the following significant
accounting policies.
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. These estimates are reviewed
periodically, and, as adjustments become necessary, they are reported
in earnings in the period in which they become known.
5
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Franchise fees and construction revenue arises on the sale of
national, area and store franchises. Franchise store revenue is
recognized as income when the respective purchase and sale agreements
have been signed and all material conditions relating to the sale
have been substantially completed by the Company or the franchise
store has commenced operations. Revenue from national and area
franchise agreements is recognized when the area development
agreement has been signed and all substantial obligations of the
Company have been completed.
When payment for the sale of a national or area franchise is based on
a contract over a period longer than twelve months, the Company
recognizes revenue based on the assessment of collectibility. The
total contract is recorded as deferred revenue, and revenue
recognition commences when payments in excess of 25% of the total
contract have been received and management has ascertained that there
is a sufficient level of certainty that the balance of the contract
is collectible.
Deposits that are non-refundable under the franchising agreement are
recognized as franchising revenue when received.
Royalties are recognized when they are earned, based on a percentage
of the franchisees' sales on a weekly basis.
Supplier incentives are recognized in the period to which they apply.
INVESTMENT IN PUBLIC COMPANY
The investment in public company is accounted for at cost. Under the
cost method, the investment is recorded at its original cost, and
earnings from the investment are recognized only to the extent of
dividends received or receivable.
6
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost less accumulated amortization.
Amortization is provided for at rates intended to write off the assets
over their estimated economic lives, as follows:
Building - 20 years straight-line
Furniture, fixtures and equipment - 5 years straight-line
Corporate owned stores reacquired
from franchisees - 5 years straight-line
Corporate owned store equipment
reacquired from former
franchisees - 5 years straight-line
FRANCHISE RIGHTS
Franchise rights are carried at the lower of cost less accumulated
amortization, and fair market value. Amortization is provided for on
the straight-line basis over 10 years.
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.
7
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<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 1999 to June 2020.
$ $
Notes receivable, net of allowance for doubtful
accounts of nil (1998 - nil) 791,961 738,827
Less current portion (215,000) (213,234)
---------------------------------------------
576,961 525,593
---------------------------------------------
---------------------------------------------
</TABLE>
4 INVESTMENT IN PUBLIC COMPANY
In 1998 the Company sold the U.S. area rights for consideration of
2,800,000 class "A" convertible preference shares in EMC Group Inc.,
a U.S. public company incorporated in the State of Florida, via a
management buy-out by former employees of the company. The investment
has been recorded at the cost of equipment and franchise rights
transferred to EMC Group Inc. based on the available information at
the time of the sale.
The preference shares are convertible to common stock for the
equivalent of US$2,800,000 based on average market value of the
common stock for the 60 days prior to the date of conversion, subject
to approval of the board of directors of EMC Group Inc. EMC Group
Inc. will only permit the conversion of preferred shares to common
shares of EMC Group Inc as long as the conversion does not exceed 10%
of the total number of outstanding common shares of EMC Group Inc.
Contrary to the agreement with the Company, since incorporation, EMC
Group Inc. has not raised sufficient capital, nor has it made any
significant additional store openings. In addition, EMC Group Inc.
has not been profitable and management does not anticipate an
improvement in operations in the U.S. in the foreseeable future.
Based on the above, management believes that there has been a
permanent impairment in value, and the asset has been written down to
its market value in the 1999 fiscal year.
8
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
1999 1999
- ----------------------------------------------------------------------------------------
5. CAPITAL ASSETS ACCUMULATED
COST AMORTIZATION ----NET BOOK VALUE----
$ $ $ $
<S> <C> <C> <C> <C>
Land 457,885 - 457,885 457,885
Building 625,000 32,796 592,204 602,106
Furniture, fixtures and equipment 708,679 684,309 24,370 25,996
Corporate owned stores reacquired
from franchisees 218,000 54,675 164,025 174,960
Corporate owned store equipment
reacquired from former
franchisees 108,809 27,202 81,607 87,047
--------------------------------------------------
2,119,073 787,982 1,320,090 1,347,994
--------------------------------------------------
--------------------------------------------------
</TABLE>
6. FRANCHISE RIGHTS
<TABLE>
<CAPTION>
$ $
<S> <C> <C>
Franchise rights 3,400,000 3,400,000
Accumulated amortization (85,000) -
-----------------------
3,315,000 3,400,000
-----------------------
</TABLE>
The Company obtained an independent appraisal from Scott Rankin, Gordon
& Gardiner, Chartered Accountants, substantiating a valuation of
franchise rights in the amount of $3,400,000 as at June 30, 1999.
9
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
1999 1999
- ---------------------------------------------------------------------------------------------------------------------------
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 193,200 200,000
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 1,180,824
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 170,978 171,955
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 78,480 81,085
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 2,753,044 2,763,426
</TABLE>
10
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE
1999 1999
- ---------------------------------------------------------------------------------------------------------------------------
7. LONG - TERM DEBT (CONT'D) $ $
<S> <C> <C>
Brought forward 2,753,044 2,763,426
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 18,000 24,000
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 352,814 360,987
Other long-term debt
Non-interest bearing, with various terms of
repayment ending in 2002 77,302 81,852
Legal settlements, non-interest-bearing, principal
only including 8% imputed interest of $520,637,
payments of $175,000 annually, with various terms
of repayment ending in 2006, see note 8 (a) 1,228,000 1,250,000
-------------------------------------------
4,429,160 4,480,265
Less current portion (2,744,245) (2,743,495)
-------------------------------------------
1,684,915 1,736,770
-------------------------------------------
-------------------------------------------
</TABLE>
11
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(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 quarter related to long-term debt was $67,387
(1999 - $55,682).
The minimum future principal repayments required over the next five
years are as follows:
$
2000 2,744,245
2001 318,032
2002 300,710
2003 305,173
2004 247,000
Subsequent 514,000
----------
4,429,160
----------
----------
8. COMMITMENTS AND CONTINGENCIES
(a) The Company is a defendant in several actions arising in the
normal course of business. The Company settled most claims
subject to certain terms in the amount of $1,250,000, which
has been reflected in the statement of income of June 30,
1999.
As management is of the opinion that the remaining claims,
counterclaims or appeals is not determinable at this time,
no additional provision has been recorded.
12
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(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:
$
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
----------
----------
- 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>
13
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(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 $29,582 (1999 - $27,321).
Undeclared dividends for July 1, 1994 to September 30, 1999
on the preferred shares owned by the Royal Bank are
$1,077,841.
(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 $23,708 (1999 - $16,738).
(d) Accounts payable includes $31,426 owed to 764719 Ontario Inc.
whose owner is a member of the family of the Chief Executive
Officer of the Company.
10. RESTRUCTURING COST
In conjunction with the permanent decline in the value of the
investment in EMC Group Inc. (note 4), management has formalized a
plan whereby the Company will not enter into the U.S. market and will
focus expansion strictly in Canada. Accordingly, as there is no
longer a value attributable to the U.S. franchise rights, a valuation
based on this plan resulted in a write -down of the franchise rights
in the 1999 fiscal year.
14
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
JUNE
1999 1999
- -------------------------------------------------------------------------------
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> <C>
Franchise rights -- 5,228,388
Stores and equipment reacquired from franchisees -- 978,210
----------------------------
-- 6,206,598
----------------------------
----------------------------
11. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share 0.01 (0.47)
----------------------------
----------------------------
Weighted average number of common shares outstanding 19,024,598 19,024,598
----------------------------
----------------------------
</TABLE>
The calculation of fully diluted earnings per common share assumes
that, if a dilutive effect is produced, all convertible securities
have been converted, all shares to be issued under contractual
commitments have been issued and all outstanding options have been
exercised at the later of the beginning of the fiscal period and the
option issue date. If all conversions had occurred, the Company
would have had to increase its maximum authorized common shares.
Fully diluted earnings per share are not presented as they are
anti-dilutive.
15
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 1999
(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.
16
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
PART 1
Item 2
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
System-wide retail sales for the three months ended September 30,
1999 were $5,218,000 compared to $5,398,000 a decrease of $180,000
or 3.3% for the same three month period last year. The sales decline
can be attributed to the Company's decision to close down 13
locations during the past twelve months. The units closed down were
primarily non-performing locations or locations were the Company
could not establish satisfactory lease terms with the landlord,
during the past fiscal year. On average same store sales showed an
increase in sales performance in excess of 2%.
RESULTS OF OPERATION
The following table sets fourth for the periods indicated certain
items from the consolidated statement of income expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
1999 1998
---------------------------
<S> <C> <C>
Net Sales ........................................ 100.0% 100.0%
Royalties ........................................ 42.5 33.6
Supplier Incentives and other .................... 22.8 18.7
Sales of managed franchises stores ............... 12.2 13.1
Proprietary products ............................. 10.3 6.7
Construction revenues ............................ 7.5 21.7
Franchising ...................................... 4.7 6.2
Head office and administration ................... (24.0) (17.2)
Regional operations and franchising .............. (17.2) (14.7)
Managed franchise stores ......................... (13.0) (15.6)
Proprietary products ............................. (9.5) (5.9)
Construction expenses ............................ (1.4) (21.7)
---------------------------
E.B.I.T.D.A ...................................... 34.9%. 24.9%
---------------------------
Interest expense ................................. (6.7) (4.1)
Depreciation and Amortization .................... (11.3) (19.0)
---------------------------
NET INCOME ....................................... 16.9% 1.8%
---------------------------
---------------------------
</TABLE>
17
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998.
Total revenue for the quarter ended September 30, 1999 decreased
$359,000 or 26.4% to $999,000 from $1,358,000 for the same period last
year. The decrease in revenue resulted primarily from:
- The sales of managed franchises stores decreased
by $55,000 or 31.3% to $122,000 compared to
$177,000 for the same period last year.
- Royalties decreased $31,000 or 6 .9% to $424,000
compared to $455,000 for the same period last year.
- Supplier incentives increased $27,000 or 10.6% to
$277,000 compared to $254,000 for the same period
last year.
- Franchising decreased $37,000 to $47,000 compared to
$84,000 for the same period last year.
- Proprietary products revenues increased $12,000 or
13.0% to $103,000 from $91 ,000 for the same period
last year.
Expenses for the quarter ended September 30, 1999 decreased $502,000
or 37.7% to $831,000 from $1,333,000 for the same period last year.
The decrease in expenses relate to the following:
- Cost associated with managed franchised stores
decreased $81,000 of 38.5% to $130,000 compared to
$211,000 for the same period last year.
- Head Office and Administration cost increased
$6,000 or 2.5% to $240,000 from $234,000 for the
same period last year.
- The cost of purchasing certain proprietary
products for resale to distributors increased
$15,000 or 18.3% to $95,000 from $80,000 for the
same period last year.
18
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D)
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30,
1998.(CONT'D)
- Interest expense increased by $12,000 or 21.0% to
$67,000 from $40,000 last year. As a result of the
increase in the Long Term Debt.
- Net income for the quarter ended September 30, 1999
was $168,000 compared to a net income of $25,000 for
the same period last year.
WORKING CAPITAL
The working capital deficit at the end of the period was $2,426,000 compared to
a working capital deficit of $2,265,000 for the same period last year. This is
primarily due to the increase of current portion of the long term debt.
LIQUIDITY AND CASH FLOW
During the quarter the operating inflow was $94,000 compared to an outflow of
$81,000 for the same quarter of the last fiscal year. This is the result of a
decrease in non-cash operating working capital items.
19
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
PART 11 OTHER INFORMATION
Item 1 Legal Proceedings - See notes 9(a) to Financial Statements
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Securities Holders - None
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K - None
20
<PAGE>
TREATS INTERNATIONAL ENTERPRISES, INC.
AS AT SEPTEMBER 30, 1999
(CANADIAN DOLLARS)
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results of
operation for the 3 months ended September 30, 1999.
The result of operation for the period ended September 30, 1999 are not
necessarily indicative of the results of the entire year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
By: /s/ Paul J. Gibson January 18, 2000
--------------------------------------------
Paul J. Gibson, Chief Executive Officer
By: /s/ John A. Deknatel January 18, 2000
--------------------------------------------
John A. Deknatel, Chief Operating Officer
By: /s/ Francois Turcot January 18, 2000
--------------------------------------------
Francois Turcot, Director of Finance
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 762
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 636
<PP&E> 3,245
<DEPRECIATION> 606
<TOTAL-ASSETS> 4,284
<CURRENT-LIABILITIES> 2,300
<BONDS> 1,313
0
2,561
<COMMON> 13
<OTHER-SE> 9,954
<TOTAL-LIABILITY-AND-EQUITY> 670
<SALES> 0
<TOTAL-REVENUES> 685
<CGS> 0
<TOTAL-COSTS> 570
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 115
<INCOME-TAX> 0
<INCOME-CONTINUING> 115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115
<EPS-BASIC> 0.006
<EPS-DILUTED> 0.000
</TABLE>
