ITEM 1. BUSINESS
Treats International Enterprises, Inc. (the "Company") is an international franchisor carrying on the business of selling the right to market the Treats System. The Treats System entails the preparation and sale of cookies, muffins and other specialty bakery items, gourmet and specialty coffees as well as related 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.
The Company operates its business through its wholly-owned subsidiary Treats Inc. Treats Inc. ("IT") is the parent company to a number of other entities, specifically:
CHOCOLATE GOURMET TREATS LIMITED ("CGTL") TREATS ONTARIO INC.("TOI") TREATS CANADA CORPORATION ("TCC")
As at September 30, 2000, there are 110 retail units in North America utilizing the Treats System. 99 of these units are owned and operated by franchisees; 11 are corporately managed.
The Company grants both single unit franchises and area development franchises throughout Canada and the United States. While there are currently no operations outside of North America, it is the Company's intention to sell National Licenses in the future. The Company has taken no steps to comply with any other International government franchise regulatory agencies.
The Company markets essentially three variations on the Treats concept. The Treats Bakery, usually 250 - 500 square feet in size with no seating area of its own, the Treats Bakery Cafe, commonly 500 - 2,000 square feet in size with its own seating arrangement and the Treats International Coffee Emporium, normally 500 - 2,000 square feet with its own seating arrangements. Treats stores are found in a variety of locations including office complexes, shopping malls, mixed use properties (commercial location with a shopping area), street front locations, transportation terminals and universities. The Company seeks locations or sites with significant pedestrian traffic, where high visibility prevails.
For substantially all single store franchises in Canada, one of the Company's subsidiaries has entered into a lease ("Head Lease") with the relevant landlord and the location is sub-leased at the same terms, including rental rates, to the franchise owner. The Head Lease is the lease agreement between the landlord and the entity which signs it ("Tenant"). The Tenant is bound by the terms and conditions thereof.
ITEM 1. BUSINESS (CONT'D)
Generally for stores opened by an Area Franchisee, the Area Franchisee enters into the Head Lease directly and the Head Lease is collaterally assigned to the Company or one of its subsidiaries. The collateral assignment means the Company does not have all the rights and obligations associated with entering into the Head Lease. It does, however, give the Company the right, but not the obligation, to assume the franchisee's position under the Head Lease if the franchisee defaults under its obligations under the Area Franchise Agreement with the Company. Franchisee in this context means the person who enters into the Franchise Agreement in a location covered under an Area Franchise Agreement.
Treats' franchisees prepare their baked goods on site daily in order to ensure wholesomeness and to attract customers with provocative fresh baked smells. The Company's principal products are prepared according to proprietary recipes in many cases using dry mixes which have been manufactured to the Company's specifications by the Quaker Oats Company of Canada and coffees blended to Treats specifications by Nestle Canada. The Company has no vertical integration with any of the companies manufacturing its bakery mixes and coffee blends. Its proprietary products are primarily sold to the franchised stores only although the Company is in the process of examining other retail opportunities using E-Commerce.
The Company is a Delaware corporation, organized in 1988.
INDUSTRY OVERVIEW
The market for muffins, cookies and related specialty baked goods as well as coffee products, including gourmet and specialty coffees is large, fragmented and growing. The Specialty Coffee/Specialty Baking franchise concept has been a successful addition to the quick service segment of food franchising. The quick service market-segment continues to grow.
Management believes this growth has been driven by a much greater consumer awareness and appreciation of gourmet and specialty coffee and fresh baked goods as a result of their increasing availability as well as the increase in demand for all fresh premium food products where the price differential from the commercial brands is relatively small compared to the perceived improvement in product quality and taste.
In Canada, the Specialty Baking segment is dominated by two major chains: Treats (115 plus locations) and MMMarvellous MMMuffins (100 plus locations). Several smaller concepts operate regionally and a number of US Franchisors, including Mrs. Fields Cookies have a national presence in Canada. Treats has competed in this segment in Canada since 1977 always with a strong commitment to quality, a significant operational support program and a very strong emphasis on Coffee.
In the Specialty Coffee segment a number of large national chains have established a strong presence in North America. The most significant chains are: Starbucks with approximately 3,500 corporately
ITEM 1. BUSINESS (CONT'D)
owned, licensed and joint-venture locations, Diedrich Coffee Co. with approximately 400 locations under a variety of brand names, including Gloria Jeans and Second Cup with approximately 380 locations. However there are a many other large chains with strong regional and niche presence.
While these competitors have already established a significant presence, they have also created a rapidly expanding market for coffee related concepts. Treats has a unique concept and a operating methodology that will allow it to compete favourably. Treats' strong emphasis on Specialty, Gourmet and Flavoured Coffees in both existing and new Treats locations, positions the concept for growth and expansion.
Specialty coffee sales as a percentage of total coffee sales in North America have been increasing steadily. According to the National Coffee Association, sales of specialty coffee grew from approximately 17% to almost 30% of total coffee sales in the United States from 1989 through 1997. According to the National Coffee Association's 2000 study, 54% of Americans drink coffee every day. On average they drink 3.1 cups per day. The North American coffee market consists of three distinct product categories: (1) commercial ground roast, mass-merchandised coffee and (2) specialty coffees, which include gourmet coffees (premium grade arabica coffees sold in whole bean and ground form) and (3) premium coffees (upscale coffees mass-marketed by the leading coffee companies).
Treats believes that several factors have contributed to the increase in demand for gourmet coffee including:
-- greater consumer awareness of gourmet coffee as a result of its increased availability and significant market awareness of some of the larger coffee concept chains;
-- increased quality awareness by consumers;
-- increased demand for all premium food products, including gourmet coffee; and
-- the decline in alcoholic beverage consumption.
The Specialty Coffee Association of America estimates that the number of specialty coffee beverage outlets in North America had increased to over 10,000 by the end of 1999. The Company believes that, even with the continued growth in the number of specialty coffee stores, the market is fragmented and, with the exception of Starbucks and a few other smaller chains, remains relatively unbranded.
Finally it must be recognized that there are many other concepts which compete in a very similar environment and market as Treats. The most significant of these concepts are the donut chains, which in Canada is dominated by Tim Horton's.
ITEM 1. BUSINESS (CONT'D)
THE FLOUR MARKET - BAKED GOODS
The dominant factor for the continued growth in the baked goods market in North America is the health and diet conscious consumer seeking foods that are nutritious and fun to eat. New bakery products continue to be introduced at a rate which exceeds that of the overall food industry.
The North American per capita flour products consumption has risen from an average of 118 Lbs. in 1984 to 130 Lbs. in 1990 and is forecasted to reach 199 Lbs. by the year 2000. With "in-store" and wholesale bakery products accounting for most of the gains in the traditional baking products, (3% growth per annum) Treats is well positioned for growth.
THE COFFEE MARKET
According to the National Coffee Association's 1998 National Coffee Drinking Trends report, approximately 65% of all consumers (age 10+) drink coffee on a weekly basis, they drink an average of 3.3 cups per day, and the overall number of coffee drinkers has grown approximately 20%. The gourmet coffee segment of the industry has experienced strong growth over the past decade and is expected to continue to grow through the end of the century. Research from CREST, a market research firm, indicates specialty coffee shop category traffic growth increased by 49%, 11%, 19% and 16%, annually, from 1995 through 1998.
TRAINING AND DEVELOPMENT
The Company's strategy is to place strong emphasis on identifying and retaining qualified franchisees and employees, and invest substantial resources in training them in customer service, beverage and food preparation, and sales skills. The Company believes that the friendliness, speed and consistency of service and the product knowledge of the Company's franchisees and employees are critical factors in developing the Company's quality brand identity and to building a loyal customer base.
EXPANSION
A total of 3 franchised stores were opened and 9 stores were closed during 1999-2000. The Company plans to open approximately 8 franchised stores in Canada in the current fiscal year, primarily in existing markets. The Company has adopted a policy of not developing stores for its own operation and is in the process of franchising all stores currently operated by the Company.
The ability of the Company to open new stores is affected by a number of factors. These factors include, the ability to attract suitable and qualified franchise owners, constraints among other things, selection and availability of suitable store locations, negotiation of suitable lease or financing terms, and construction of stores. Accordingly, there can be no assurance that the Company will be able to meet planned growth targets.
ITEM 1. BUSINESS (CONT'D)
The Company's expansion strategy is to cluster stores in targeted markets, thereby increasing consumer awareness and enabling the Company to take advantage of operational, distribution and advertising efficiencies. The Company believes that market penetration through the opening of multiple stores within a particular market should result in increased average store sales in that market. In determining which new markets to develop, the Company considers many factors, including its existing store base, the size of the market, demographic and population trends, competition, availability and cost of real estate, and the ability to supply product efficiently.
RAW MATERIALS
The Company and its franchisees have not experienced any material shortages of food, equipment, fixtures or other products which are necessary to restaurant operations. The Company anticipates no such shortages of products and, in any event, alternate suppliers are available.
TRADEMARKS AND SERVICE MARKS
The Company's rights in its trademarks and service marks are a significant part of its business. The Company is the owner of the following Trade Marks:
-- TREETS
-- CHOCOLATE GOURMET TREATS
-- CHOCOLATE GOURMET TREATS & design
-- LESBONS TREATS
-- TREATS & design
-- TREATS
-- TREATS BAKERY CAFE
-- NOBODY TREATS YOU BETTER
-- MONOGRAM COOKIES
-- TREATS BAKERY AND YOGURT EMPORIUM
-- CREPE ETC.
-- TREATS FROZEN YOGURT...HALF THE CALORIES, TWICE THE FUN
-- TREATS INTERNATIONAL COFFEE EMPORIUM & design
-- TREATSATIONS
-- BAGUETTE EXPRESS
-- TREATS (Word)
These trademarks are registered in Canada and some of these trademarks are registered in foreign countries including the U.S.A.
ITEM 1. BUSINESS (CONT'D)
The Company is aware of a number of companies which use various combinations of the word Treats in their names and/or services, none of which, either individually or in the aggregate, are considered to materially impair the use by the Company of its mark. It is the Company's policy to vigorously oppose any infringement of its trademarks. The Company generally intends to renew trademarks and service marks which expire.
SEASONALITY
The Company's business is moderately seasonal. Average restaurant sales are normally higher during the fall and spring months than during the summer months.
RESEARCH AND DEVELOPMENT
The Company conducts ongoing development of new menu items and test markets such items, as well as new company-developed food marketing aids, in selected outlets. Although such research and development activities are important to our business, the amounts that have been expended for these activities has not been material.
COMPETITION
The quick service segment including the specialty bakery/specialty coffee segment are intensely competitive and there are many well established competitors with substantially greater financial and other resources than the Company. Although competition in the specialty coffee market is currently fragmented, the Company continues to be competitive. The competition in the specialty bakery market is also fragmented. The Company competes and, in the future will continue to compete with MMMarvelous MMMuffins, Company's Coming, Tim Horton's, a host of bagel concepts and other donut concepts. Current competitors or one or more new major competitors with substantially greater financial, marketing, and operating resources than the Company could enter the market at any time and compete directly against the Company. In addition, in virtually every major metropolitan area in which the Company operates or expects to enter, local or regional competitors already exist. The Company's coffee beverages compete directly with all restaurant and beverage outlets that serve coffee and a growing number of espresso stands, carts and stores. The Company's bakery products compete directly against all restaurant and bakery outlets that serve muffins, cookies and bagels, and other baked goods including the bakery section of supermarkets. The Company believes that its customers choose among retailers primarily on the basis of product quality, service and convenience and, to a lesser extent, on price. The Company also expects that competition for suitable sites for new stores will be intense. The Company competes against other specialty retailers and restaurants for these sites, and there can be no assurance that management will be able to continue to secure adequate sites at acceptable rent levels. The Company also competes with many franchisors of restaurants and other business concepts with respect to the sale of franchises.
ITEM 1. BUSINESS (CONT'D)
EMPLOYEES
At June 30, 2000, the Company had 68 employees, of whom 53 were store personnel and 15 were corporate personnel. Most store personnel work part time and are paid on an hourly basis. The Company has never experienced a work stoppage and its employees are not represented by a labour organization. The Company believes that its employee relations are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns the land and building of its head office at 418 Preston Street, Ottawa.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several actions arising in the normal course of business. The Company settled most claims subject to certain terms in the amount of $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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders in the fourth quarter.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The Company's securities, primarily the Units, Stock and Warrants, have been quoted in the over-the-counter market since August 1989. The number of record holders of The Company's Common Stock at June 30, 2000 was 1,522 and at June 30, 1999, was 1,259. Management does not know the number of beneficial holders of the shares of Common Stock. Commencing in January 1992, the Common Stock has been quoted separately. Management has no knowledge whether the volume of trading since January 31, 1992 constitutes an active market or whether an active market will develop.
Through December 31, 1991, the high and low bid and asked prices for The Company's Units were reported in the NASDAQ pink sheets.
Starting February 1992 to June 21, 1993, the Common Stock was quoted on the computerized bulletin board of NASDAQ under the symbol TRTN.
As of June 21, 1993, the Common Stock has been quoted on the computerized bulletin board of NASDAQ under the symbol TIEI.
As of July 10, 2000, subsequent to a 1 for 3 reverse stock split, the Common Stock has been quoted on the computerized bulletin board of NASDAQ under the symbol TRIE.
The following table set forth the high and low bid and asked prices for The Company's stock. Prices represent quotations between dealers without adjustment for retail mark-ups, markdowns or commissions, and may not represent actual transactions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - -----------------------------------------------------------------
The following chart of selected financial data of the Company for five fiscal years are derived from the consolidated financial statements of the Company. The Company presents its financial results in Canadian dollars. For the convenience of the reader, the results for the year ended June 30, 2000, have been converted into U.S. dollars, at the prevailing rate of exchange.
( 1 ) The Company's financial results are expressed in Canadian Dollars. For the convenience of the reader only, the results for the last fiscal year have been converted into United States Dollars at the Bank of Canada rate on: June 30, 2000. Conversion rate: One (1) (US) Dollar equals: $1.4828
ITEM 6. SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------
( 1 ) The Company's financial results are expressed in Canadian Dollars. For the convenience of the reader only, the results for the last fiscal year have been converted into United States Dollars at the Bank of Canada rate on: June 30, 2000 Conversion rate: One (1) (US) Dollar equals: 1.4828
( 2 ) The Company has 46,279,849 shares outstanding. Net profit (loss) per share is calculated based on the weighted average number of shares outstanding for the period. (see Note 11, June 30, 2000)
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated)
SAFE HARBOR STATEMENT
Certain statements in this Form 10-K, 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-K and in the Company's 10-Q filings, or unforeseen.
GENERAL
-- THE YEAR ENDED JUNE 30, 2000 COMPARED TO THE YEAR ENDED JUNE 30, 1999
During the 12 month period ending June 30, 2000, Treats International Enterprises, Inc. ("TIEI" or the "Company") through its wholly owned subsidiaries derived 41% of its Revenue from royalties, 16% from retail sales of corporately managed stores, 26% from supplier incentives, commissions and other, 4% from franchising activities, 10% from the sale of certain proprietary products and 3% from construction revenue.
The Company has continued, in the 4th quarter, to show positive trends resulting in Net Income for the Fiscal Year ended June 30, 2000 of $1,002,000 compared to a Loss of $8,945,000 for fiscal 1999. It should be noted however that the significant loss incurred by the Company for the previous fiscal year was the result of certain management decisions which are described in detail in Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended June 30, 1999 on pages 23 and 24.
The Company's fiscal year end is the Saturday closest to June 30. The 1999 fiscal year end had 52 weeks. The fiscal year ending June 30, 2000 will include 53 weeks of operation.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) - -------------------------------------------------------------------------------
GENERAL (CONT'D)
On February 29, 2000, the Company was notified by Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.), (ARiverdale") a company incorporated under the laws of Canada that it had acquired the holdings of the Royal Bank of Canada and its wholly owned subsidiary The Royal Bank Capital Corporation (collectively "RBCC") in TIEI. RBCC was until that time the single largest shareholder of TIEI as well as it largest creditor.
Shareholders of Riverdale include Mr. Paul J. Gibson, President and Chief Executive Officer of TIEI, John A. Deknatel, Chief Operating Officer of TIEI, and a number of other common shareholders in TIEI. Neither Mr. Gibson nor Mr. Deknatel are officers or directors of Riverdale.
Specifically Riverdale acquired from RBCC a subordinated debenture in the amount of $1,129,562 plus accrued and unpaid interest of approximately $370,000 as well as 5,409,825 non-voting, convertible, series A preference shares and accrued dividend and 7,207,760 common shares.
Riverdale has notified TIEI that it has restructured the terms and conditions of the debt instrument it acquired by forgiving the accrued and unpaid interest and adjusting the interest rate from 8% to 4% per annum. This gain in interest expense was accounted for by a one-time credit of $273,000 to Interest expense on the Income Statement. The debenture is due on March 1, 2007.
In May of 2000, Riverdale notified the Company that it intended to exercise the conversion rights of the Series A preference shares and accrued dividend it had acquired in the transaction with RBC based on the original formula contemplated in the conversion rights. As a result the Company issued 27,255,251 common stock to Riverdale. This increased the number of issued and outstanding shares from slightly more than 19,000,000 to approximately 46,280,000 common shares.
On May 4, 2000 the majority of the shareholders of the Company, representing 59.7% of the issued and outstanding shares of the Company, consented to a 1 for 3 reverse split of the Company's common stock. The transaction was subsequently approved by the Board of Directors on May 8, 2000. The 1 for 3 reverse split became effective on July 10, 2000. The current number of issued and outstanding common shares is 15,426,692.
This transaction resolved a number of issues which were before the courts and TIEI and RBCC executed mutual releases pertaining to those actions.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) - -------------------------------------------------------------------------------
GENERAL (CONT'D)
The Company's management sees these recent developments as very positive for the long term future of TIEI and is currently reviewing what other steps it might take to amend its capital structure with a view to position itself for growth opportunities in Canada.
RESULTS OF OPERATIONS
REVENUE. Revenue for the year ended June 30, 2000 decreased $32,000 or 0.7% to $4,454,000 from $4,486,000 for the same period last year. The decrease in revenue can be primarily attributed to a decreased of $276,000 in the construction revenue. Other factors which impacted revenue were:
-- Royalties increased $14,000 or 0.8% to $1,821,000 compared to $1,807,000 for the same period last year.
-- Supplier incentives increased $180,000 or 17.8% to $1,190,000 compared to $1,010,000 for the same period last year.
-- Franchising increased $41,000 or 30.5% to $175,000 compared to $134,000 for the same period last year.
-- Proprietary products sold to distributors for distribution to the franchised and corporately managed locations increased $10,000 or 2.2% to $443,000 compared to $433,000 for the same period last year.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
EXPENSES. Expenses for the fiscal year ended June 30, 2000 decreased by $9,980,000. There are a number of unusual events that caused this variance.
In the fiscal year ended June 30, 1999 the Company had unusual expenses in the amount of $8,945,000 as a result of the Company's decision to write down the value of its Franchise Rights, its investment in a public Company, and the value of stores and equipment acquired from franchisees. In addition the Company in that year made a significant one-time provisions for legal settlements and bad debts. Some of these transactions resulted in a lower than usual amortization expense in the year ended June 30, 1999. This is described in more detail in the MD & A for the year ended June 30, 1999 in this section page (23).
As described in detail above, the holdings of the Royal Bank of Canada in the Company were acquired by Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.) in the fiscal year ended June 30, 2000. This transaction resulted, inter-alia, that a portion of interest owing on a debenture was reversed. This one-time reversal of interest expense amounted to $273,000.
Excluding the unusual events described above, for the fiscal year ended June 30, 2000 expenses decreased $146,000. This was primarily the result of a decreased of $214,000 in the construction expenses.
Additionally expenses were impacted by the following factors:
-- Cost associated with Managed franchised stores increased $32,000 or 4.9% to $694,000 from $662,000 as a direct result of the increase in the number of corporately managed stores.
-- Head office and administration expenses increased $21,000 or 1.0% to $2,190,000 from $2,170,000 for the same period last year.
-- The cost of purchasing certain proprietary products for resale to distributors increased $15,000 or 3.9% to $387,000 compared to $372,000 for the same period last year.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
CAPITAL RESOURCES - June 30, 2000
The Company's projected capital asset requirements for the current fiscal year, are not very demanding.
LIQUIDITY AND CASH FLOW - June 30, 2000
The working capital at the year end was $121,000 compared to a working capital deficit of $2,609,000 for the same period last year. The primary reason for the significant change in the working capital resulted from the recent transaction in which Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.) acquired the holdings and debt by RBCC in Treats and the subsequent restructuring of the terms and conditions of the debt instrument.
The cash flow from operations during fiscal 2000 increased by $759,000 to $1,240,000 compared to $481,000 in the previous fiscal year this was primarily due to the Company incurring a net loss for the year ended June 30, 1999 in the amount of $8,945,000 compromised largely of non-cash write-downs as reflected in the statement of cash flows (see page 34).
DEBT TO EQUITY RATIO:
The ratio of debt to equity as at June 30, 2000 was 2.49 to 1 compared to 6.56 to 1 in the previous fiscal year.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
IN THE YEAR:
In February the Company was notified by Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.), ("Riverdale") that it had acquired the holdings of the Royal Bank of Canada and its wholly owned subsidiary ("RBCC") in TIEI. RBCC was until that time the single largest shareholder of TIEI as well as it largest creditor. Specifically Riverdale acquired from RBCC a subordinated debenture in the amount of $1,129,562 plus accrued and unpaid interest of approximately $370,000 as well as 5,409,825 non-voting, convertible, series A preference shares and 7,207,760 common shares.
This transaction resolved a number of issues which were before the courts and TIEI and RBCC executed mutual releases pertaining to those actions.
Riverdale restructured the terms and conditions of the debt instrument it acquired by forgiving the accrued and unpaid interest and adjusting the interest rate from 8% to 4% per annum and exercised the conversion rights on the preference shares and accrued dividend it acquired. This resulted in the number of issued and outstanding common shares of the Company to increase from approximately 19 million to almost 46.3 million common shares.
In May of 2000, Riverdale notified the Company that it intended to exercise the conversion rights of the Series A preference shares it had acquired in the transaction with RBC based on the original formula contemplated in the conversion rights. As a result the Company issued 27,255,251 common stock to Riverdale. This increased the number of issued and outstanding shares from slightly more than 19,000,000 to approximately 46,280,000 common shares. The Company's common stock underwent a 1 for 3 reverse split at the end of June, resulting in approximately 15.4 million issued and outstanding common shares.
The implementation of the "direct bank transfer" system which automatically withdraws royalty, advertising fund and receivable payments from franchise owners' bank accounts on a weekly basis has continued over the year. Virtually all franchise owners now use this system to make weekly payments of royalties, ad fund contributions and promissory note installments.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
The Company continued to actively encourage franchise owners to update the appearance of existing stores using the new design criteria developed. This year 6 stores underwent renovations. These renovations have in virtually every instance resulted in increased sales performance. The company intends to continue to actively encourage franchise owners to adopt the new design criteria.
In January of 2000 the Company introduced the second component of the TreatSations line, a variety of oatmeal bars. Even though the test results were very positive, the introduction of the new line was not well received and the Company has ceased to actively promote the new line of oatmeal bars. The Company intends to continue to develop high end products under the TreatSations banner.
The Company terminated the National Licensing Agreement for Chile and Argentina it had entered into because of non-performance.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All amounts are in Canadian $ unless otherwise stated)
GENERAL
-- THE YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
System-wide retail sales for the twelve months ended June 30, 1999 were $24,121,000 compared to $24,667,000 a decrease of $546,000 or 2.2% for the same period last year. The Company closed down 13 primarily non-performing locations or locations where the Company could not establish satisfactory lease terms with the landlord, during the past fiscal year. On average same store sales showed an increase in sales performance in excess of 5%.
RESULTS OF OPERATIONS
Total revenue for the year ended June 30, 1999 decreased $491,000 or 9.9% to $4,486,000 from $4,977,000 for the same period last year. The decrease in revenue resulted primarily from:
-- The sales of corporately managed stores decreased by $127,000 or 15.5% to $690,000 from $817,000 for the same period last year. This is the result of the company's ongoing commitment to divest itself from corporately owned locations.
-- Royalties increased $24,000 or 1.3% to $1,807,000 compared to $1,783,000 for the same period last year.
-- Supplier incentives decreased $87,000 or 7.9% to $1,010,000 compared to $1,097,000 the same period last year.
-- Franchising decreased $84,000 or 38.5% to $134,000 compared to $218,000 for the same period last year.
-- Proprietary products sold to distributors for distribution to the franchised and corporately managed locations decreased $16,000 or 3.6% to $433,000 compared to $449,000 for the same period last year.
-- Revenues from construction decreased $202,000 or 33.0% to $411,000 compared to $613,000 for the same period last year.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
The Company made a number of fiscal decisions in the past fiscal year that have significantly impacted expenses and as a direct consequence the profitability of the Company. All of these changes were one-time charges and most represent non-cash charges. (See Management Plan note 15, page 43). The total increase in expenses is $8,660,000. However excluding the one-time charges which are described in detail below, the Company's expenses decreased by $778,000 or 16.3%. The variance in expenses relate to the following:
-- Costs associated with Managed franchised stores decreased $52,000 or 7.3% to $662,000 from $714,000 as a direct result of the decrease in the number of corporately managed stores.
-- Head office and administration expenses decreased $22,000 or 1.0% to $2,170,000 from $2,192,000 for the same period last year.
-- The cost of purchasing certain proprietary products for resale to distributors decreased $25,000 or 6.3% to $372,000 from $397,000 for the same period last year.
-- The cost of construction and renovation of stores decreased by $202,000 or 38.0% to $330,000 compared to $532,000 for the same period last year.
-- As a result of the write-down of franchise rights to their estimated fair market value, amortization was $nil compared to $664,000 in the previous year.
-- Interest expense increased by $135,000 or 121.6% to $246,000 from $111,000 last year. This was the result of interest on a mortgage on the building which houses the offices of the Company and which the Company acquired. In addition the Company recorded interest on a loan from 3193853 Canada Inc. In the previous year the interest portion of the funds owed to 3193853 Canada Inc. had been forgiven.
-- There was a write-down of $1,525,000 of an investment in a US public company which had acquired the rights to develop the Treats concept in the U.S.A. for consideration of convertible preference shares. That company, however, has not been profitable, has not raised sufficient capital nor has it made the required number of new store openings. Management does not believe that there will be any improvement in the foreseeable future and that the asset has been permanently impaired.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS (CONT'D)
-- In addition, management has permanently closed unprofitable stores it reacquired from franchisees in Canada. Accordingly, capital assets were written down to their estimated fair market value.
The write-downs have been recorded as non-cash restructuring costs, allocated as follows:
$
Franchise rights 5,228,388 Stores and equipment reacquired from franchisees 978,210 --------- 6,206,598 --------- ---------
-- The Company is a defendant in several actions arising in the normal course of business. The Company settled most claims subject to certain terms in the amount of $1,250,000, which has been reflected in the statement of income. As management is of the opinion that the remaining claims, counterclaims or appeals is not determinable at this time, no additional provision has been recorded.
CAPITAL RESOURCES - June 30, 1999
The Company's projected capital asset requirements for the current fiscal year, are not very demanding and the Company does not anticipate having trouble meeting any of its obligations arising out of the normal course of business.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
LIQUIDITY AND CASH FLOW - June 30, 1999
The working capital deficit at the year end increased by $41,000 to $(2,609,000). This was primarily due to the Company being in default of their loan covenants with 3193853 Canada Inc. and the Royal Bank of Canada. In addition, 3193853 Canada Inc. and the Royal Bank of Canada have not waived their rights to call the term loan and subordinated debenture at a future date and accordingly the debts are classified as current. (See note 7 (a) page 38)
The cash flow from operations during fiscal 1999 decreased by $2,469,000 to $(1,294,000) compared to $1,175,000 in the previous fiscal year this was primarily due to the Company incurring a net loss for the year in the amount of $8,945,000 compromised largely of non-cash write-downs as reflected in the statement of cash flows (see page 29) and in note 10 (see page 40-41). Management believes that these are one-time write-downs and will not be repeated in future years. As well the Company has taken actions to close a number of locations that were unprofitable and not considered likely to become profitable in the near future, and to reduce general and administrative expenses. Management has prepared cash flow projections for the next five years indicating positive cash flows and profitability. The projected cash flows were not audited, reviewed or compiled by the auditors, but were used by the independent appraiser (see note 6 page 35) in arriving at the valuation of franchise rights.
As well, Management is actively pursuing alternative financing to replace the subordinated debenture and term loan with more favourable terms.
Accordingly, based on actions taken and the company's operating plans for the year, the company expects that it will have sufficient cash to be able to continue operations and meet its long-term obligations due within the next fiscal year. (See note 15, Management Plan, page 43)
DEBT TO EQUITY - June 30, 1999
-- As a result of the write-downs described above, as well as in various notes to the audited financial statements included, the debt to equity ratio is not included, as the ratio does not represent meaningful information.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
IN THE YEAR:
The implementation of the "direct bank transfer" system which automatically withdraws royalty, advertising fund and receivable payments from franchise owners' bank accounts on a weekly basis has continued over the year. Currently 78% of the franchise owners use this method to make their weekly payments. By the end of this fiscal year the Company expects that more than 95% of all franchise owners will have been converted to the direct transfer system.
The Company also introduced a new design appearance for its stores. The new look has been well received by customers, landlords and franchise owners. The updated interior and exterior decor provides for a more comfortable and relaxing atmosphere.
The Company has upgraded most of its computer hardware and software as part of an effort to ensure that the Company will be able to address any issues pertaining to the Year 2000. The Year 2000 issue arises because many computerized systems use two digits rather than four to identify a year. The Company is making every effort to make sure that there will be no significant impact on operations as a result of any Year 2000 issue however it is not possible to be certain that all aspects of the Year 2000 issue affecting the Company, including those related to the efforts of entities the Company does business with or any third parties, will be fully resolved.
The Company renewed its long standing contract with Quaker Oats of Canada to supply all of its dry bakery mixes.
ITEM 7 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
ITEM 7 - A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has a line of credit of $150,000 with its financial institution where the interest rate is fixed to the prime interest rate charged which fluctuates weekly. There are no commodity price risks.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TREATS INTERNATIONAL ENTERPRISES, INC.
Consolidated Financial Statements 2000 compared to 1999 Page 28 to 48
FINANCIAL STATEMENTS
CONSOLIDATED
TREATS INTERNATIONAL ENTERPRISES, INC
June 30, 2000 and 1999
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
INDEX
Page
30 Auditors' Report
31 - 32 Consolidated Balance Sheets
33 Consolidated Statements of Income and Deficit
34 Consolidated Statements of Cash Flows
35 Consolidated Statements of Stockholders' Equity
36 - 48 Notes to the Consolidated Financial Statements
AUDITORS' REPORT
TO THE STOCKHOLDERS OF TREATS INTERNATIONAL ENTERPRISES, INC.
We have audited the consolidated balance sheets of TREATS INTERNATIONAL ENTERPRISES, INC. as at June 30, 2000 and 1999 and the consolidated statements of income and deficit, cash flows and stockholders' equity for the years ended June 30, 2000, 1999 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2000 and 1999 and the results of its operations and its cash flows for the years ended June 30, 2000, 1999 and 1998 in accordance with accounting principles generally accepted in Canada (which also conform in all material respects with accounting principles generally accepted in the United States).
Chartered Accountants
Toronto, Canada September 7, 2000
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
Approved on behalf of the Board:
____________________________Director
See the accompanying notes
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT
YEARS ENDED JUNE 30. 2000, 1999 AND 1998 (CANADIAN DOLLARS)
See the accompanying notes
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 2000, 1999 AND 1998 (CANADIAN DOLLARS)
See the accompanying notes
TREATS INTERNATIONAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (CANADIAN DOLLARS)
See the accompanying notes
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 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.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 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, all material conditions relating to the sale have been substantially completed by the Company or the franchise store has commenced operations. Revenue from national and area franchise agreements is recognized when the area development agreement has been signed or all substantial obligations of the Company have been completed.
When payment for the sale of a national or area franchise is based on a contract over a period longer than twelve months, the Company recognizes revenue based on the assessment of collectibility. The total contract is recorded as deferred revenue, and revenue recognition commences when payments in excess of 25% of the total contract have been received and management has ascertained that there is a sufficient level of certainty that the balance of the contract is collectible.
Deposits that are non-refundable under the franchising agreement are recognized as franchising revenue when received.
Royalties are recognized when they are earned, based on a percentage of the franchisees' sales on a weekly basis.
Supplier incentives are recognized in the period to which they apply.
INVESTMENT IN PUBLIC COMPANY
The investment in public company is accounted for at cost. Under the cost method, the investment is recorded at its original cost, and earnings from the investment are recognized only to the extent of dividends received or receivable. When evidence indicates a permanent decline in value, the investment is written down.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 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.
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.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
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 current fiscal year.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
6. FRANCHISE RIGHTS
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.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
(a) On March 1, 2000, Appleford Capital Inc. (formerly 3193853 Canada Inc.), whose President is a member of the family of the Chief Executive Officer of the Company amended the interest of the loan to 4%.
(b) On March 1, 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 53% by family members of the Chief Executive Officer of the Company, acquired the subordinated debenture of the Royal Bank of Canada and forgave the interest portion of the debenture in the amount of $273,414. Riverdale Capital Group Inc. issued a new debenture in the amount of $1,200,000.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT (CONT'D)
Interest expense for the year related to long-term debt was $99,016.
The minimum future principal repayments required over the next five years are as follows:
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.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (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:
* Minimum payments have not been reduced by minimum sublease rentals for $11,487,431 due in future under non-cancellable subleases.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
9. CAPITAL STOCK
On April 14, 2000 the Company amended its share capital structure as follows:
The Company issued dividends of $1,172,757 on the preference shares held by Riverdale Capital Group Inc. The dividends were converted into 6,517,590 common shares of the Company. The Company also converted its 5,409,825 series A preference shares into 20,737,661 common shares of the Company, in accordance with the debenture agreement dated June 30, 1994.
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 53% by family members of the Chief Executive Officer of the Company, acquired the debenture of Royal Bank of Canada and forgave interest in the amount of $273,414.
(b) The President of Appleford Capital Inc. (formerly 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 $13,222 (1999 - $nil). Appleford Capital Inc. forgave interest payable of $35,423.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
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.
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.
TREATS INTERNATIONAL ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 (CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
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) and (b) do not approximate their fair value because the term loans do not bear interest (note 14).
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.
14. SUBSEQUENT EVENT
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. These financial statements do not reflect the effect of the reverse split and the basic earnings per share on a post-split is $.06.
On July 2, 2000, Riverdale Capital Group Inc. and Appleford Capital Inc. amended the terms of the term loans which became interest free. Accordingly the fair values of these term loans are not disclosed at June 30, 2000.
15. COMPARATIVE FIGURES
Prior year's figures have been reclassified to conform with the current year's presentation.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - --------------------------------------------------------------------------------
- No Disagreements or changes.
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - --------------------------------------------------------------------------------
The following sets forth the names of the Company's Directors and Officers.
PAUL J. GIBSON
Mr. Gibson is President, C.E.O. Chairman of the Board of The Company. Mr. Gibson has served as President and C.E.O. of TCC since its formation in 1988 and of Treats Inc. since July 1990. Mr. Gibson also serves in various capacities of The Company's wholly owned subsidiaries. From its formation in 1986 until the amalgamation of certain companies in 1993, he was President and C.E.O. of TMG, a predecessor company of Treats Inc.
JOHN A. DEKNATEL
Mr. Deknatel is C.O.O. of The Company. He also serves in various capacities for The Company's wholly owned subsidiaries. Prior to joining The Company in 1991, Mr. Deknatel served as Vice President and General Manager of Manchu Wok U.S.A., a division of Scott's Hospitality, of Toronto, Ontario.
PETER-MARK BENNETT
Mr. Bennett was appointed Director December 16, 1994. Since 1998 he has served TELUS Advanced Communications (Calgary) as Manager of Internetworking Services. From August 1997 to October 1998 Mr. Bennett was Director of Marketing for Neptec Design Group Ltd. of Ottawa. From July 1994 to July 1997 Mr. Bennett was Director of Operations for Network Xcellence Ltd. (Ottawa). From July 1990 to June 1992 he was Vice-President of Treats Inc. Prior to July 1990 he was Managing Director of Widely Held Northern & Eastern Investments Ltd.
FRANCOIS TURCOT
Mr. Turcot has been Comptroller of The Company since May 1991 and has been promoted to Director of Finance in August 1996. Prior to joining The Company, Mr. Turcot held the position of Comptroller with a Transport Company in Hull, Quebec. From October 1986 to November 1989, Mr. Turcot was Comptroller at the Ramada Hotel in Hull, Quebec.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION - --------------------------------------------------------------------------------
Set forth in the table below, is the cash compensation paid to the C.E.O. of the Company and the total to all Executive Officers as a group:
- - There are no options or warrants granted to the present officers.
EMPLOYMENT AGREEMENT
On February 14, 1997 by way of a resolution of the Board of Directors severances for the three officers of The Company were amended to reflect the years of service, specifically 2 months of base compensation for every year of service. Once a Senior Officer reached 5 years of consecutive service, they are entitled to a minimum of 2 years compensation.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - --------------------------------------------------------------------------------
The following sets forth as of the date of October 18, 2000, the number and percentage owned of record and beneficially, by each Officer and Director of the Company and by any other person owning 5% or more of the outstanding shares.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONT'D) - --------------------------------------------------------------------------------
NOTES
1. Paul J. Gibson may be deemed to be a promoter as such terms are defined under the Securities Act of 1933.
2. Access Investment Group Ltd. is a company controlled by Mr. P. J. Gibson and his immediate family.
3. 882793 Ontario Ltd is a company whose President is a member of the family of the Chief Executive Officer of the Company.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------------------------------
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 53% by family members of the Chief Executive Officer of the Company, acquired the debenture of Royal Bank of Canada and forgave interest in the amount of $273,414.
(b) The President of Appleford Capital Inc. (formerly 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 $13,222 (1999 - $nil). Appleford Capital Inc. forgave interest payable of $35,423.
(c) The Company owed $21,525 owed to 764719 Ontario Inc. whose owner is a member of the family of the Chief Executive Officer of the Company. The debt was forgiven during the year.
(d) The office premises, land and building at 418 Preston Street, Ottawa, was purchased from a trust of which the beneficiaries are the family of the Chief Officer of the Company whose family owns approximately 56.10% of the common stock of the Company.
PART IV
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------------
INDEX
- - Computation of Earnings Per Share - U.S. GAAP - Treasury Share Method.....................Page 56
- - Computation of Earnings Per Share - Treasury Share Method..................................Page 57
- - Auditors' Report on Financial Statement Schedules...............Page 58
ITEM 14 SCHEDULES (CONT'D)
COMPUTATION OF EARNINGS PER SHARE - U.S. GAAP - TREASURY SHARE METHOD
ITEM 14 SCHEDULES (CONT'D)
COMPUTATION OF EARNINGS PER SHARE - U.S. GAAP - TREASURY SHARE METHOD
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
TO THE BOARD OF DIRECTORS OF TREATS INTERNATIONAL ENTERPRISES INC.
We have audited the consolidated balance sheet of Treats International Enterprises Inc. as at June 30, 2000, 1999 and the consolidated statements of income and deficit, cash flow and stockholders' equity for the years ended June 30, 2000, 1999 and 1998 and have issued our report thereon dated October 29, 1999; such consolidated financial statements and our report thereon are included elsewhere herein. Our examinations also comprehended the financial statement schedules of Treats International Enterprises Inc. listed in Item 14 in its Report on Form 10-K. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements, present fairly in all material respects the information shown therein.
Horwath Orenstein LLP
Chartered Accountants
October 29, 2000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TREATS INTERNATIONAL ENTERPRISES, INC.
October 30, 2000
By: /s/ ----------------------------------- PAUL J. GIBSON Chairman of the Board President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
October 30, 2000
By: /s/ ----------------------------------- JOHN DEKNATEL Chief Operating Officer
October 30, 2000
By: /s/ ----------------------------------- FRANCOIS TURCOT Director of Finance