-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MblHvVGDghrPrB95juiheE01J76To3wY+DibpaQmZjfDLuf1mHcV4g57XJjBwMSF Tkkq8Z9J0nnP3LcXmGnbCw== 0000912057-02-005449.txt : 20020414 0000912057-02-005449.hdr.sgml : 20020414 ACCESSION NUMBER: 0000912057-02-005449 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TREATS INTERNATIONAL ENTERPRISES INC CENTRAL INDEX KEY: 0000842906 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 133495199 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21418 FILM NUMBER: 02539565 BUSINESS ADDRESS: STREET 1: 418 PRESTON STREET CITY: OTTAWA ONTARIO CANAD STATE: A6 BUSINESS PHONE: 6135634073 MAIL ADDRESS: STREET 1: 418 PRESTON ST CITY: OTTAWA ONTARIO STATE: A6 FORMER COMPANY: FORMER CONFORMED NAME: S L RESOURCES INC DATE OF NAME CHANGE: 19920224 10-Q 1 a2070575z10-q.txt FORM 10-Q - 26 PAGES [TREATS LOGO HERE] TREATS INTERNATIONAL ENTERPRISES, INC. FORM 10-Q COMMISSION FILE NO: 0-21418 (For The Three Months Ended December 31, 2001) 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: December 31, 2001 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 --- TREATS INTERNATIONAL ENTERPRISES, INC. 10-Q Three months ended December 31, 2001 INDEX PAGE PART I FINANCIAL INFORMATION ITEM 1 Balance Sheet, December 31, 2001......................................1 Statement of Income - December 31, 2001...............................2 Statement of Cash Flows, December 31, 2001 ...........................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 21 PART II Other Information - Items 1 to 6.....................................22 Signatures...........................................................23 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED BALANCE SHEET (EXPRESSED IN CANADIAN DOLLARS)
DECEMBER 31 JUNE 30 DECEMBER 31 JUNE 30 NOTE 2001 2001 2000 2000 (UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED) - ----------------------------------------------------------------------------------------------------------------------------------- $ $ $ $ ASSETS CURRENT ASSETS Cash - 135,882 21,868 115,811 Accounts Receivable 316,596 167,050 277,745 157,753 Prepaid Expenses 188,959 147,741 236,443 292,381 Construction work in process 142,127 106,710 349,481 242,492 Current portion of notes receivable 189,340 173,302 170,000 159,289 --------------------------------------------------------------- 837,022 730,685 1,055,537 967,726 FRANCHISES HELD FOR RESALE - - 279,265 265,049 NOTES RECEIVABLE 3 963,838 823,470 873,211 717,362 CAPITAL ASSETS 5 1,413,655 1,488,000 1,251,088 1,263,780 INVESTMENT IN PUBLIC COMPANY 4 45,735 45,735 45,735 45,735 FRANCHISE RIGHTS 6 2,550,000 2,720,000 2,890,000 3,060,000 --------------------------------------------------------------- 5,810,250 5,807,890 6,394,836 6,319,652 =============================================================== LIABILITIES CURRENT LIABILITIES Bank Indebtedness 108,898 - - - Accounts payable and accrued liabilities 438,362 496,143 367,248 449,995 Current portion of long-term debt 239,469 238,436 373,630 396,930 --------------------------------------------------------------- 786,729 734,579 740,878 846,925 --------------------------------------------------------------- LONG-TERM DEBT 7 2,911,408 3,053,465 3,254,217 3,431,947 LEASE SECURITY DEPOSITS 204,104 195,226 246,343 229,863 --------------------------------------------------------------- 3,902,241 3,983,270 4,241,438 4,508,735 --------------------------------------------------------------- CONTINGENCIES 8 STOCKHOLDERS EQUITY CAPITAL STOCK 9 Common: Authorized, 25,000,000 (2000 - 25,000,000) shares, par value U.S. $0.001 Issued - 15,426,692 (2000 - 15,426,692) shares 46,280 46,280 15,426 46,280 Additional paid - in capital 15,636,020 15,636,020 15,666,874 15,636,020 --------------------------------------------------------------- 15,682,300 15,682,300 15,682,300 15,682,300 --------------------------------------------------------------- Deficit (13,774,291) (13,857,680) (13,528,902) (13,871,383) --------------------------------------------------------------- 1,908,009 1,824,620 2,153,398 1,810,917 --------------------------------------------------------------- 5,810,250 5,807,890 6,394,836 6,319,652 ===============================================================
1 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED STATEMENT OF INCOME (EXPRESSED IN CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE SIX MONTHS ENDED DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 NOTE 2001 2000 2001 2000 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------------- REVENUES Royalties 413,478 382,671 768,804 816,426 Sales of managed franchise stores 262,027 319,762 474,239 793,643 Supplier Incentives, Commissions & Other 163,490 200,697 382,566 476,491 Franchising 31,657 41,271 70,742 51,954 Proprietary products 110,802 147,178 210,017 268,880 Construction revenues 126,290 0 126,290 42,000 --------------------------------------------------------------- 1,107,744 1,091,579 2,032,658 2,449,394 --------------------------------------------------------------- COST AND EXPENSES Head office and administration 429,071 291,174 830,816 704,855 Managed franchise stores 241,301 359,716 497,522 812,139 Proprietary products 102,682 124,557 190,871 228,431 Construction expenses 111,076 0 111,076 34,500 Interest expense 30,811 23,621 53,823 52,914 Depreciation and Amortization 132,732 161,891 265,161 274,074 --------------------------------------------------------------- 1,047,673 960,959 1,949,269 2,106,913 --------------------------------------------------------------- NET INCOME FOR THE PERIOD 60,071 130,620 83,389 342,481 =============================================================== Earnings per share 13 0.0 0.01 0.0 0.02 ===============================================================
2 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (EXPRESSED IN CANADIAN DOLLARS)
FOR THE FISCAL QUARTER ENDED FOR THE SIX MONTHS ENDED DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 2001 2000 2001 2000 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------------- NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Profit (Loss) 60,071 130,620 83,389 342,481 Items not affecting cash: - ------------------------- Depreciation & Amortization 132,732 161,891 265,161 274,074 Changes in non-cash operating working capital items (109,682) (64,099) (283,962) (253,790) --------------------------------------------------------------- 83,121 228,412 (64,588) 362,765 --------------------------------------------------------------- FINANCING Bank Indebtedness 108,898 0 108,898 0 Repayment of Long-term debt (73,090) (110,582) (141,024) (201,030) --------------------------------------------------------------- 35,808 (110,582) (32,126) (201,030) --------------------------------------------------------------- INVESTING Issue of notes receivable, net of repayments (111,322) (134,389) (156,406) (166,560) Purchase of capital assets (14,726) (87,283) (20,816) (91,382) Security deposits 7,119 20,710 8,878 16,480 Managed franchise stores held for resale 0 0 0 (14,216) --------------------------------------------------------------- (118,929) (200,962) (168,344) (255,678) --------------------------------------------------------------- NET GENERATED CASH (OUTFLOW) (0) (83,132) (135,882) (93,943) CASH POSITION, BEGINNING OF PERIOD 0 105,000 135,882 115,811 --------------------------------------------------------------- CASH POSITION, END OF PERIOD 0 21,868 0 21,868 ===============================================================
3 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS)
---PREFERRED SHARES--- --------------COMMON SHARES------------ SHARES AMOUNT SHARES 1:3 REVERSE AMOUNT DEFICIT TOTAL STOCK SPLIT - ----------------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1999 5,409,825 3,732,779 19,024,598 6,341,558 10,776,764 (13,700,207) 809,336 Conversion of preference shares into common shares (5,409,825) (3,732,77) 20,737,661 6,912,579 3,732,779 0 0 Conversion of dividends into common shares 0 0 6,517,590 2,172,555 1,172,757 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 15,426,692 15,682,300 (13,871,383) 1,810,917 Net income for the period 0 0 0 0 0 13,703 13,703 ----------------------------------------------------------------------------------------------------- Balance June 30, 2001 0 0 46,279,849 15,426,692 15,682,300 (13,857,680) 1,824,620 Net income for the period 0 0 0 0 0 83,389 83,389 ----------------------------------------------------------------------------------------------------- Balance December 31, 2001 0 0 46,279,849 15,426,692 15,682,300 (13,774,291) 1,908,009 =====================================================================================================
4 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS Treats International Enterprises, Inc. (the "Company"), incorporated under the laws of the state of Delaware, is an international franchisor carrying on the business of selling the right to market the Treats System. The Treats System entails the preparation and sale of cookies, muffins and other specialty coffees as well as food and beverage products in retail stores using a system and methodology of marketing developed and designed by the Company and identified by the trademark TREATS. As at December 31, 2001, there are 105 retail units in Canada utilizing the Treats System. 100 of these units are owned and operated by franchisees; 5 are corporately managed. 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. PRINCIPLES OF CONSOLIDATION 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. 5 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles in Canada 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. The most significant estimates included in these financial statements are the valuations of accounts receivable and notes receivable and the amortization on capital assets and franchise rights. Actual results could differ from those estimates. 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. 6 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) REVENUE RECOGNITION (CONT'D) Supplier incentives are recognized in the period to which they apply. LONG TERM INVESTMENTS Long term investments are recorded at cost. Where there has been a loss in value of an investment that is other than a temporary decline, the investment is written down to recognize a loss, which is included in the determination of income. CAPITAL ASSETS AND AMORTIZATION Capital assets are recorded at cost less accumulated amortization. Amortization is provided for at rates intended to write off the assets over their estimated economic lives, as follows: Building - 20 years straight-line Furniture, fixtures and equipment - 5 years straight-line Corporate owned stores reacquired from franchisees - 5 years straight-line Corporate owned store equipment reacquired from former franchisees - 5 years straight-line FRANCHISE RIGHTS Franchise rights are carried at the lower of cost less accumulated amortization, and fair market value. Amortization is provided for on the straight-line basis over 10 years. BASIC EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share are calculated using the daily weighted average number of common shares outstanding during the fiscal year. 7 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) FUTURE INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. This method requires recognition of future income tax assets and liabilities for the expected future income tax consequences of events that have been included in the financial statements or income tax returns using current income tax rates. Future tax assets, if any, are recognized only the extent that, in the opinion of management, it is more likely than not that the future income tax assets will be realized. Future income tax assets and liability are adjusted for the effects of changes in tax laws and notes on the date of the enactment or substantive enactment. 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 2001 to June 2020.
DECEMBER JUNE 2001 2001 $ $ Notes receivable, net of allowance for doubtful accounts of nil (2000 - nil) 1,153,856 996,772 Less current portion (189,340) (173,302) -------------------------------------- 963,838 823,470 ======================================
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 employee of the Company. During 1999 and 2000, this investment was written down by $1,572,000. On June 18, 2001, the Company agreed to convert its 2,800,000 class "A" convertible preference shares for 200,000 common shares. As at the date of the auditor's report, the shares of EMC were trading at $.03 U.S., however, management believes that there has not been a further permanent decline in value and accordingly, the investment has not been written down below its current carrying amount. 8 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 5. CAPITAL ASSETS
ACCUMULATED COST AMORTIZATION --- NET BOOK VALUE --- DECEMBER JUNE 2001 2001 Land 457,885 N/A 457,885 457,885 Building 625,000 109,375 515,625 531,250 Furniture, fixtures and equipment 855,762 777,670 78,092 74,196 Corporate owned stores reacquired from franchisees 373,162 92,987 280,175 305,474 Corporate owned stores equipment reacquired from franchisees 252,990 171,111 81,880 119,195 ---------------------------------------------------------------- 2,564,800 1,151,143 1,413,656 1,488,000 ================================================================
6. FRANCHISE RIGHTS
Franchise rights 3,400,000 3,400,000 Accumulated amortization (850,000) (680,000) ------------------------------------- 2,550,000 2,720,000 =====================================
The Company obtained an independent estimate of value from Scott, Rankin, Gordon & Gardiner, Chartered Accountants, supporting a valuation of franchise rights in an amount in excess of carrying values. 9 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - --------------------------------------------------------------------------------
DECEMBER JUNE 7. LONG-TERM DEBT 2001 2001 $ $ Business Development Bank of Canada Term loan, payable in 60 monthly instalments of $1,960 plus interest at 10.4%, due March 23, 2006, 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 99,960 111,720 Appleford Capital Inc. Term loan, bearing interest at 0% per annum, payable $5,800 per annum in the first year, $78,000 in the next two years and the balance due May 2008, secured by a general security agreement, general assignment of book debts and franchise rights, pledge of all the shares in subsidiary and associated companies (see note (a) below) 1,115,662 1,118,863 Riverdale Capital Group Inc. Term loan, bearing interest at 0% per annum, payable principal and interest of $74,100 to June 2002, $130,000 per annum, for the next three years and the balance due March 2008, 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) 1,042,692 1,086,542 P. Murphy in trust Mortgage bearing interest at 7% payable in 26 bi-weekly instalments of $500 on interest and principal, to June 2002, 190 bi-weekly instalments of $1,000 on interest and principal, due October 2009, secured by land and building at 418 Preston Street, Ottawa, Ontario and a General Security Agreement 149,045 151,094 ---------------------------------- Carried forward 2,407,360 2,468,219
10 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - --------------------------------------------------------------------------------
DECEMBER JUNE 7. LONG-TERM DEBT (CONT'D) 2001 2001 $ $ Brought forward 2,407,360 2,468,219 D. Crawford Term loan, repayable in 26 bi-weekly instalments of $500 of principal and interest at 10%, due June 2002, and 40 bi-weekly instalments of $1,000 of principal and interest, due January 2004, secured by a General Security Agreement 41,457 45,773 Bank of Nova Scotia Term loan unsecured, repayable in 9 monthly instalments of $774 plus interest at prime plus 2%, due March 9, 2002 2,321 6,963 La Caisse Populaire St. Charles Ltee Mortgage, bearing interest at 8.5% per annum payable in 780 weekly instalments of $671 on interest and principal, due January 2016, secured by land and building at 418 Preston Street in Ottawa, Ontario 289,444 295,004 Other long-term debt Non-interest bearing, with various terms of repayment ending in 2005 52,719 64,766 Legal settlements, non-interest-bearing, payments of $104,000 annually, with various terms of payment ending in 2007 357,576 411,176 ---------------------------------- 3,150,877 3,291,901 Less current portion (239,469) (238,436) ---------------------------------- 2,911,408 3,053,465 ==================================
11 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 7. LONG-TERM DEBT (CONT'D) (a) On July 2, 2000, Appleford Capital Inc., amended the terms of the loan which became interest-free. (b) On July 2, 2000, Riverdale Capital Group Inc., a corporation with 9% of its outstanding common shares owned by the Chief Executive Officer of the Company and 40% by family members of the Chief Executive Officer of the Company, amended the terms of the loan which became interest-free. Interest expense for the year related to long-term debt was $104,720 (2000 - $99,016, 1999 - $246,005). The minimum future principal repayments required over the next five years are as follows:
$ 2002 239,469 2003 354,356 2004 345,575 2005 345,995 2006 304,014 Thereafter 1,561,468 --------- 3,150,877 =========
8. COMMITMENTS AND CONTINGENCIES Two judgements in the total amount of $127,463 were issued against two of the Company's wholly owned subsidiaries. Judgement in the amount of $73,628 is against a subsidiary company with no assets. It is managements' opinion that a co-judgement of $53,835 will be settled whereby, the co-defendant and/or a third party not related to the Company and its wholly owned subsidiaries will be responsible for the judgement and accordingly, no provision has been recorded. 12 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 8. COMMITMENTS AND CONTINGENCIES (CONT'D) The Company is a defendant in several actions brought by former franchisees, including a former franchisee of a former national licensor, and landlords arising in the normal course of business. The Company has counterclaimed these actions and management is of the opinion that these claims are without merit. As the outcome of these claims is not determinable at this time, these financial statements do not include a provision for potential losses. Liabilities, if any, resulting from these claims in subsequent years will be recorded as the expenses are incurred. 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, $ 2002 2,729,190 2003 2,345,486 2004 2,073,184 2005 1,667,675 2006 1,291,978 Thereafter 1,767,143 ---------- Total minimum payments* 11,874,656 ==========
* Minimum payments have not been reduced by minimum sublease rentals for $11,033,048 due in future under non-cancellable subleases.
Year ending June 30, 2002 $ Minimum rentals 2,729,190 Less: sublease rentals (2,550,384) --------- 178,806 =========
13 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 9. CAPITAL STOCK On July 10, 2000, the Company's Board of Directors authorized a 1:3 reverse stock split of the common stock. On July 2, 2000, the Company advised the OTC Bulleting Board Coordinator, NASDAQ Market Operations, accordingly. As a result of the reverse split, the original 75,000,000 shares of the Company's common stock issued were reduced to 25,000,000 shares. Par value of the common stock remained $0.001 U.S. per share. The effect of the reverse stock split has been recognized retroactively in the stockholders' equity accounts on the balance sheet as of June 30, 2001, and in all share and per share data in the accompanying financial statements.
CLASS NUMBER OF SHARES NUMBER OF AUTHORIZED PAR VALUE SHARES ISSUED Common 25,000,000 $.001 U.S. 15,426,692 Preference 10,000,000 $.500 U.S. -
10. ADVERTISING COSTS The costs of advertising, promotion and marketing programs are charged to head office and administrative expenses in the year incurred. Total advertising costs for the years ended June 30, 2001 and June 30, 2000 were $36,731 and $94,882, respectively, and are included in the accompanying statements of income and deficit. 11. RELATED PARTY TRANSACTIONS (a) On July 2, 2000, Riverdale Capital Group Inc., a corporation with 9% of its outstanding common shares owned by the Chief Executive Officer of the Company and 40% by family members of the Chief Executive Officer of the Company, amended the term of the term loan which became interest-free in prior years, interest of $16,117 for 2000 and nil for 1999 were paid to this Company. In addition, management fees of $25,000 were paid during the current year to this company. 14 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 11. RELATED PARTY TRANSACTIONS (CONT'D) (b) The office premises, land and building at 418 Preston Street, Ottawa, was purchased from a trust in 1998, of which the beneficiaries are the family of the Chief Executive Officer of the Company whose family owns approximately 47.20% of the common stock of the Company. This real estate was recorded in capital assets in 1998 based on the exchange amount (note 5). (c) Included in accounts payable is an amount due to the Chief Executive Officer in the amount of $45,488 (2000 - nil). 12. INCOME TAXES The Company has utilized approximately $50,000 of its non-capital losses to reduce its current income taxes as to nil. In addition, the Company has approximately $100,000 of non-capital losses available to offset against future taxable income expiring in 2008. The potential benefit of this loss will be recognized in income when it is more likely, than not that such benefit will be realized. 13. BASIC EARNINGS (LOSS) PER SHARE
DECEMBER DECEMBER 2001 2000 $ $ Basic earnings (loss) per share 0.00 0.02 ================================ Weighted average number of common shares outstanding 15,426,692 15,426,692 ================================
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. 15 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- 14. 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 from franchisees approximates their fair value because the interest rates approximate market rates. The carrying amounts of certain long term debts do not approximate their fair value because they do not bear interest (notes 7 and 11 (a)). 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. Lease security deposits are not current and in most cases have no defined maturity. The carrying value and the fair value of these deposits are assumed to be equal. CREDIT RISKS Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable from franchisees. The Company sells its products to franchisees, at times extending credit for such sales. Exposure to losses on receivables is principally dependant on each franchisee's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. 15. COMPARATIVE FIGURES Prior year's figures have been reclassified to conform with the current year's presentation. 16 TREATS INTERNATIONAL ENTERPRISES, INC. AS AT DECEMBER 31, 2001 (EXPRESSED IN 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 December 31, 2001, Treats International Enterprises, Inc. ("TIEI" or the "Company") through its wholly owned subsidiaries derived 37.3% of its Revenue from royalties, 23.7% from retail sales of corporately managed stores, 14.8% from supplier incentives, commissions and other, 2.9% from franchise activities, 10.0% from the sale of certain proprietary products, 11.4% from construction revenues. Revenue increased $16,000 or 1.5% to $1,108,000 from $1,092,000 compared to the corresponding period in fiscal 2000. Cost and expenses increased $87,000 or 9.0% to $1,048,000 from $961,000. This was primarily the result of an increase in the expenses of the construction expenses. Consequently net income for the Quarter ended December 31, 2001 was $60,000 compared to $130,000 for the corresponding period in fiscal 2000. 17 TREATS INTERNATIONAL ENTERPRISES, INC. AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D) GENERAL (CONT'D) It is anticipated that 3 new locations will be completely renovated in the third quarter of the fiscal year 2002.The Company's fiscal year end is the Saturday closest to June 30. The 2001 fiscal year end had 52 weeks. The fiscal year ending June 30, 2002 will include 52 weeks of operation. The Company successfully renegotiated supply agreements with its two major suppliers, The Quaker Oats Company of Canada, for bakery mixes, and Nestle Canada, for roasted coffee. Additionally, several smaller agreements were also renewed. The Company was successful in revising the distribution channels in Canada completing the change over of distributors prior to December 31, 2001. 18 TREATS INTERNATIONAL ENTERPRISES, INC. AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D) RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain items from the consolidated statement of income expressed as a percentage of net sales:
FOR THE FISCAL QUARTER ENDED DECEMBER 31 DECEMBER 31 2001 2000 (UNAUDITED) (UNAUDITED) Net sales 100.0 % 100.0 % Royalties 37.3 % 35.1 % Supplier incentives, commissions & other 14.8 % 18.4 % Sales of managed franchises stores 23.7 % 29.3 % Proprietary products 10.0 % 13.5 % Construction revenues 11.4 % 0.0 % Franchising 2.9 % 3.8 % Head office and administration (38.7)% (26.7)% Managed franchise stores (21.8)% (33.0)% Proprietary products (9.3)% (11.4)% Construction expenses (10.0)% (0.0)% ------------------------------- E.B.I.T.D.A. 20.2 % 28.96 % Interest expense (2.8)% (2.2)% Depreciation and amortization (12.0)% (14.8)% ------------------------------- Net Income 5.4 % 12.0 % ===============================
19 TREATS INTERNATIONAL ENTERPRISES, INC. AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D) QUARTER ENDED DECEMBER 31, 2001 COMPARED TO QUARTER ENDED DECEMBER 31, 2000 Total revenue for the quarter ended December 31, 2001 increased $16,000 or 1.5% to $1,108,000 from $1,092,000 for the same period last year. The increase in revenue resulted primarily from: * The sales of managed franchises stores decreased $58,000 or 18.4% to $262,000 compared to $320,000 for the same period last year. * Royalty revenue increased $31,000 or 8.1% to $414,000 compared to $383,000 for the same period last year. * Supplier incentives decreased $37,000 or 18.5% to $163,000 compared to $200,000 for the same period last year. * Franchising decreased $10,000 or 23.3% to $32,000 compared to $42,000 for the same period last year. * Proprietary products revenues decreased $37,000 or 24.7% to $111,000 from $148,000 for the same period last year. * Construction revenues were $126,000 for the period. Expenses for the quarter ended December 31, 2001 increased $87,000 or 9.0% to $1,048,000 from $1,096,000 for the same period last year. The decrease in expenses relate to the following: * Cost associated with managed franchised stores decreased $118,000 or 32.9% to $241,000 compared to $359,000 for the same period last year. * Head Office and Administration cost increased $137,000 or 47.4% to $429,000 from $292,000 for the same period last year. * The cost of purchasing certain proprietary products for resale to distributors decreased $22,000 or 17.6% to $103,000 from $125,000 for the same period last year. * Depreciation and amortization increased $29,000 or 18.0% to $133,000 from $162,000 for the same period last year. 20 TREATS INTERNATIONAL ENTERPRISES, INC. AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- * Interest expense increased $7,000 or 30.4% to $31,000 from $24,000 for the same period last year. MANAGEMENT DISCUSSION AND ANALYSIS (CONT'D) QUARTER ENDED DECEMBER 31, 2001 COMPARED TO QUARTER ENDED DECEMBER 31, 2000 (CONT'D) * Net income for the quarter ended December 31, 2001 was $60,000 compared to a net income of $130,000 for the same period last year. WORKING CAPITAL The working capital at the end of the period was $50,000 compared to a working capital of $314,000 for the same period last year. LIQUIDITY AND CASH FLOW During the quarter the operating outflow was $83,000 compared to an inflow of $228,000 for the same quarter of the last fiscal year. This is the result of a decrease in non-cash operating working capital items. 21 TREATS INTERNATIONAL ENTERPRISES, INC. AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- PART II OTHER INFORMATION 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 The Company filed one report on Form 8-K, on February 11, 2002, announcing that Riverdale Capital Group Inc., ("Riverdale") is the holder of a certain Debenture Agreement ("Debenture") between a wholly owned subsidiary of Treats International Enterprises, Inc. ("TIEI") and Riverdale. On January 10, 2002 Riverdale notified TIEI that it wishes, pursuant to the terms and conditions of the Debenture, to exercise its right to collect Royalties and Service Fees in the Province of Quebec, Canada, effective February 8, 2002. As required TIEI has notified its franchise owners that all Royalties and Service Fees must be paid to Riverdale. 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 December 31, 2001. The result of operation for the period ended December 31, 2001 are not necessarily indicative of the results of the entire year. 22 TREATS INTERNATIONAL ENTERPRISES, INC. AS AT DECEMBER 31, 2001 (EXPRESSED IN CANADIAN DOLLARS) - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TREATS INTERNATIONAL ENTERPRISES, INC. By: /s/ Paul J. Gibson February 13, 2002 -------------------------------------- Paul J. Gibson, Chief Executive Officer By: /s/ John A. Deknatel February 13, 2002 ------------------------------------ John A. Deknatel, Chief Operating Officer By: /s/ Francois Turcot February 13, 2002 ------------------------------------- Francois Turcot, Director of Finance 23 -----END PRIVACY-ENHANCED MESSAGE-----