10-K 1 a2061150z10-k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: JUNE 30, 2001 ------------- Commission file number 0-21418 TREATS INTERNATIONAL ENTERPRISES, INC. Delaware 13-3495199 -------- ---------- 418 Preston Street, Ottawa, Ontario, Canada K1S 4N2 (613) 563-4073 Securities registered pursuant to Section 12(g) of the Act. Common Stock $.001 par value FORM 10-K SECURITIES & EXCHANGE COMMISSION -------------------------------- Washington, D.C. 20549 TREATS INTERNATIONAL ENTERPRISES, INC. -------------------------------------- ADDRESS OF PRINCIPAL EXECUTIVE OFFICER: 418 Preston Street Ottawa, Ontario Canada, K1S 4N2 Telephone No.: (613) 563-4073 U.S. ADDRESS OF TREATS INTERNATIONAL ENTERPRISES INC. c/o Vincent J. Profaci Attorney at law Vincent J. Profaci, P.A. 932 Center Circle, Suite 1000 Altamonte Springs, Florida 32714 United States of America Telephone No.: (407) 673-1144 Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part 111 of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant is U.S. $1,851,203. The aggregate market value held by non affiliates was $1,018,145. The aggregate market value was computed by reference to the average bid and asked prices as of October 12, 2001. (US $0.12) It was assumed for determination of affiliates, that all principal shareholders over 10% and officers are affiliated. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE 3 TREATS INTERNATIONAL ENTERPRISES, INC. FORM 10-K FOR THE YEAR ENDED JUNE 30, 2001

4 FORWARD-LOOKING STATEMENTS The forward-looking statements included in the "Business", "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections, which reflect management's best judgment based on factors currently known, involve risks and uncertainties. Words such as "expects", "anticipates", "believes", "intends", "hopes" and variations of such words and similar expressions are intended to identify such forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including but not limited to, the factors discussed in such sections and those set forth in the cautionary statements contained in the Safe Harbor Statement in this Form 10-K. (See Item 7 - Safe Harbor Statement) Forward-looking information provided by the Company in such sections pursuant to the Safe Harbor Statement established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. PART I 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. ("TI") 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 5, 2001, there are 109 retail units in North America utilizing the Treats System. 104 of these units are owned and operated by franchisees; 5 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. 5 ITEM 1 BUSINESS (CONT'D) -------------------------------------------------------------------------------- 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. 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. 6 ITEM 1 BUSINESS (CONT'D) -------------------------------------------------------------------------------- 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 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 4,500 corporately 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 also with approximately 400 locations. However there are a number of other large chains with strong national, 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 an 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 more than 30% of total coffee sales in the United States from 1989 through 2000. According to the National Coffee Association's 2000 study, 54% of Americans drink, on average 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). 7 ITEM 1 BUSINESS (CONT'D) -------------------------------------------------------------------------------- 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 2000. 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, are dominated by Tim Horton's with more than 2,000 outlets. 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 exceed 200 Lbs. by the year 2002. 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 has shown positive, often double digit, growth since 1995. 8 ITEM 1 BUSINESS (CONT'D) -------------------------------------------------------------------------------- TRAINING AND DEVELOPMENT The Company's strategy is to place strong emphasis on identifying and retaining qualified franchisees and employees, and invest substantial resources in training them in customer service, beverage and food preparation, and sales skills. The Company believes that the friendliness, speed and consistency of service and the product knowledge of the Company's franchisees and employees are critical factors in developing the Company's quality brand identity and to building a loyal customer base. EXPANSION The Company plans to open approximately 8 franchised stores in Canada in the current fiscal year, primarily in existing markets. The Company has adopted a policy of not developing stores for its own operation and is in the process of franchising all stores currently operated by the Company. The ability of the Company to open new stores is affected by a number of factors. These factors include, the ability to attract suitable and qualified franchise owners, constraints among other things, selection and availability of suitable store locations, negotiation of suitable lease or financing terms, and construction of stores. Accordingly, there can be no assurance that the Company will be able to meet planned growth targets. The Company's expansion strategy is to cluster stores in targeted markets, thereby increasing consumer awareness and enabling the Company to take advantage of operational, distribution and advertising efficiencies. The Company believes that market penetration through the opening of multiple stores within a particular market should result in increased average store sales in that market. In determining which new markets to develop, the Company considers many factors, including its existing store base, the size of the market, demographic and population trends, competition, availability and cost of real estate, and the ability to supply product efficiently. 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 and distributors 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: 9 ITEM 1 BUSINESS (CONT'D) -------------------------------------------------------------------------------- - TREETS - CHOCOLATE GOURMET TREATS - CHOCOLATE GOURMET TREATS & design - LESBONS TREATS - TREATS & design - TREATS - TREATS BAKERY CAFE - NOBODY TREATS YOU BETTER - MONOGRAM COOKIES - TREATS BAKERY AND YOGURT EMPORIUM - CREPE ETC. - TREATS FROZEN YOGURT...HALF THE CALORIES, TWICE THE FUN - TREATS INTERNATIONAL COFFEE EMPORIUM & design - TREATSATIONS - BAGUETTE EXPRESS - TREATS (Word) These trademarks are registered in Canada and some of these trademarks are registered in foreign countries including the U.S.A. The Company is aware of a number of companies which use various combinations of the word Treats in their names and/or services, none of which, either individually or in the aggregate, are considered to materially impair the use by the Company of its mark. It is the Company's policy to vigorously oppose any infringement of its trademarks. The Company generally intends to renew trademarks and service marks as they 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 have not been material. 10 ITEM 1 BUSINESS (CONT'D) -------------------------------------------------------------------------------- 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. EMPLOYEES At June 30, 2001, the Company had 46 employees, of whom 33 were store personnel and 13 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 PROPERTIES -------------------------------------------------------------------------------- The Company owns the land and building of its head office at 418 Preston Street, Ottawa. ITEM 3 LEGAL PROCEEDINGS -------------------------------------------------------------------------------- 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. 11 ITEM 3 LEGAL PROCEEDINGS (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. 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 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, 2001 was 1,530 and at June 30, 1999, was 1,522. The number of issued and outstanding Common Shares as at September 30, 2001 was 15,426,692. 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. 12 ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (CONT'D) -------------------------------------------------------------------------------- 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.

(1) 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. 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, 2001, have been converted into U.S. dollars, at the prevailing rate of exchange as indicated below the chart.

(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, 2001 Conversion rate: One (1) (US) Dollar equals: 1.5145 (2) The Company has 15,426,692 shares outstanding. Earnings per share is calculated based on the weighted average number of shares outstanding for the period. As described in this filing, the Company restructured its capital with a 1:3 reverse split of its common stock on July 10, 2000. 14 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, 2001 COMPARED TO THE YEAR ENDED JUNE 30, 2000 During the 12 month period ending June 30, 2001, Treats International Enterprises, Inc. ("TIEI" or the "Company") through its wholly owned subsidiaries derived 39% of its Revenue from royalties, 20% from retail sales of corporately managed stores, 24% from supplier incentives, commissions and other, 4% from franchising activities and 13% from the sale of certain proprietary products. The Company's results for the fiscal year ended June 30, 2001 reflect the reshaping of TIEI. The significant factors impacting the Company's results for the last fiscal year include the loss incurred on the operation of Managed franchise stores. Other factors impacting this fiscal year's results were limited Franchising and, as a consequence, Construction revenue. These factors resulted in lower than expected revenues and higher than anticipated expenses. Net Income for the Fiscal Year ended June 30, 2001 was $13,703 compared to $1,001,600 for fiscal 2000. It should be noted that the previous fiscal year included a one time gain of $534,600. Comprised of $273,400 in Interest forgiveness and a Legal settlement provision reversal of $261,200. Other influences on the Company's Revenue and Expenses are described in detail in "Results Of Operations" below. 15 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) GENERAL (CONT'D) The past year has been eventful for TIEI. The Company negotiated a number of amendments to existing loan agreements with several secured creditors and effectuated a 1 for 3 reverse split of its issued and outstanding common shares. With this significant realignment successfully completed, TIEI intends to conduct a strategic evaluation to review opportunities that will enhance shareholder value. 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. In February of 2001 the Company renewed the terms of the first mortgage on its head office building, from monthly principal payments of $5,000. plus interest at a fixed rate of 6.8%, to weekly principal payments of $671. plus interest at a fixed rate of 8.5%. The term was extended from the 80 months remaining to 780 weeks (180 months). The Company, in March of 2001, amended a loan agreement with one of its lenders, the Business development Bank of Canada ("BDC") Under the previous terms of the loan agreement, the Company made monthly principal payments of $4,200 plus a fixed interest rate of 11%. At that time there were 47 months left in the term. Under the loan amending agreement, the term was extended to 60 months and principal payments were reduced to $1,960 plus a fixed interest rate of 10.4%. Management believes that TIEI continues to be well positioned for the continued quality growth of its core franchise concept "Treats" while at the same time entertaining other growth opportunities, including acquisition(s) of related concepts which match well defined predetermined criteria. The Company's fiscal year end is the Saturday closest to June 30. The 2000 fiscal year end had 53 weeks. The fiscal year ending June 30, 2001 includes 52 weeks of operation. 16 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) RESULTS OF OPERATIONS REVENUE. Revenue for the year ended June 30, 2001 decreased $414,000 or 10.1% to $3,667,000 from $4,081,000 for the same period last year. The decrease in revenue can be primarily attributed to a decrease of $135,000 or 100% in construction revenue and a decrease of $134,000 or 13.4% in Supplier incentives, commissions and other to $867,000 from $1,001,000 in the previous fiscal year. Other factors which impacted revenue were: - Royalties decreased $33,000 or 2.3% to $1,414,000 compared to $1,447,000 for the same period last year. - Franchising decreased $16,000 or 9.1% to $159,000 compared to $175,000 for the same period last year. - Proprietary products sold to distributors for distribution to the franchised and corporately managed locations increased $51,000 or 11.5% to $494,000 compared to $443,000 for the same period last year. EXPENSES. Expenses for the fiscal year ended June 30, 2001 increased by $574,000. There are a number of unusual events in the previous fiscal year that caused this variance. The most significant ones were: In the previous fiscal year a decision was made to reverse $261,000 in provisions for Legal settlements as management was of the opinion that the Company had over provided. There was no charge to Legal settlements in this fiscal year. Similarly, the Company was able to record a reversal of interest charges in the amount of $273,000. As described in detail in the Management's Discussion and Analysis of Financial Condition and Results of Operations for the previous fiscal year, which ended June 30, 2000. Additionally expenses were impacted by the following factors: - Cost associated with Managed franchised stores increased $137,000 or 19.7% to $831,000 from $694,000. 17 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) RESULTS OF OPERATIONS (CONT'D) EXPENSES (CONT'D) - Head office and administration expenses decreased $103,000 or 5.7% to $1,714,000 from $1,817,000 for the same period last year. - The cost of purchasing certain proprietary products for resale to distributors increased $52,000 or 13.4% to $439,000 compared to $387,000 for the same period last year. - Interest expense increased by $6,000 or 6.1% to $105,000 compared to $99,000 for the same period last year. - Amortization increased by $61,000 or 13.5% to $513,000 from $452,000 in the previous fiscal year. CAPITAL RESOURCES - June 30, 2001 The Company's projected capital asset requirements for the current fiscal year, are not very demanding. LIQUIDITY AND CASH FLOW - June 30, 2001 The working capital deficit at the year end was $4,000 compared to a working capital of $121,000 for the same period last year. The cash flow from operations during fiscal 2001 decreased by $121,000 to $810,000 compared to $931,000 in the previous fiscal year. DEBT TO EQUITY RATIO The ratio of debt to equity as at June 30, 2001 was 2.18 to 1 compared to 2.49 to 1 in the previous fiscal year. 18 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) IN THE YEAR: 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. 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. The Company also continued to refine the new design appearance for its stores which has been very well received by customers, franchise owners and landlords alike. The updated interior and exterior decor provides for a more comfortable and relaxing atmosphere. It is extremely well suited for stores located in office complexes and educational facilities. The Company continues to invest in computer hardware and software to improve efficiency in analysis, reporting, planning and new store design. Prior to the fiscal year end, TIEI concluded negotiations and renewed the contracts with the Quaker Oats Company of Canada, for the manufacturing and supply of dry bakery mixes to the Treats franchises as well as with Nestle Foodservice for the supply of roasted coffee. The combined annual value of these contracts is approximately $2.5 million. As a result of a new franchise law, proclaimed in the province of Ontario, the Company has prepared and filed a disclosure document, not unlike the Uniform Franchise Offering Circular required in many of the states. A similar disclosure document has been required for the province of Alberta. 19 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) 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. On February 29, 2000, the Company was notified by Riverdale Capital Group Inc. (formerly 3722121 Canada Inc.), ("Riverdale") 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. 20 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) GENERAL (CONT'D) 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. 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. 21 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) RESULTS OF OPERATIONS (CONT'D) REVENUE (CONT'D) - 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. 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: 22 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) RESULTS OF OPERATIONS (CONT'D) EXPENSES (CONT'D) - 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. 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 $975,000 to $931,000 compared to $(44,000) 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. 23 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) 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. 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. 24 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) -------------------------------------------------------------------------------- (All amounts are in Canadian $ unless otherwise stated) IN THE YEAR (CONT'D) 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-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 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------------------------------------------- TREATS INTERNATIONAL ENTERPRISES, INC. Consolidated Financial Statements 2001 compared to 2000 Page 26 to 43 25 CONSOLIDATED FINANCIAL STATEMENTS TREATS INTERNATIONAL ENTERPRISES, INC. JUNE 30, 2001 AND 2000 26 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS) INDEX

27 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, 2001 and 2000 and the consolidated statements of income and deficit, cash flows and stockholders' equity for the years ended June 30, 2001, 2000 and 1999. 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 in Canada. 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, 2001 and 2000 and the results of its operations and its cash flows for the years ended June 30, 2001, 2000 and 1999 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 5, 2001 28 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS)

Approved on behalf of the Board: ____________________________Director See the accompanying notes 29 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS)

See the accompanying notes 30

See the accompanying notes 31 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (EXPRESSED IN CANADIAN DOLLARS)

See the accompanying notes 32 TREATS INTERNATIONAL ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED JUNE 30, 2001, 2000 AND 1999 (EXPRESSED IN CANADIAN DOLLARS)

See the accompanying notes 33 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (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 September 5, 2001, there are 109 retail units in Canada utilizing the Treats System. 104 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. 34 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (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. 35 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) REVENUE RECOGNITION (CONT'D) 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. 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:

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. 36 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) 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. 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. 37 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS)

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. 38 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS)

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. 39 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS)

40 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS)

41 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (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:

42 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS) 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. 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:

43 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS) 8. COMMITMENTS AND CONTINGENCIES (CONT'D) * Minimum payments have not been reduced by minimum sublease rentals for $11,033,048 due in future under non-cancellable subleases.

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.

44 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS) 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. (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 $55,100 (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. 45 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN 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. Earnings (loss) per share of common stock in 2001, 2000 and 1999 were based on the weighted average number of shares outstanding during those periods, after giving effect to a 1:3 reverse stock split effective July 10, 2000 and retroactively applied. 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 (note 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. 46 TREATS INTERNATIONAL ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (EXPRESSED IN CANADIAN DOLLARS) 14. FINANCIAL STATEMENTS (CONT'D) FAIR VALUE (CONT'D) Lease security deposits are not current; however, in the case of deposits, no defined maturity exists. As such, the carrying value and the fair value 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. 47 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------------------------------------------------- - No Disagreements or changes. 48 PART III 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 2000 he has served Bell Intrigna (Calgary) as Acting Director, retail products. From1998 to 200 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. 49 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 reaches 5 years of consecutive service, he/she is entitled to a minimum of 2 years full compensation. 50 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------------------------- The following sets forth as of the date of September 18, 2001, 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.

51 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. Paul J. Gibson. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------------------------------------- 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. Management fees of $25,000 were paid during the year. (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. (c) Included in accounts payable is an amount due to the Chief Executive Officer in the amount of $55,100 (2000 - nil). 52 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -------------------------------------------------------------------------------- INDEX

53 ITEM 14 SCHEDULES (CONT'D) -------------------------------------------------------------------------------- COMPUTATION OF EARNINGS PER SHARE - U.S. GAAP - TREASURY SHARE METHOD

54 ITEM 14 SCHEDULES (CONT'D) -------------------------------------------------------------------------------- COMPUTATION OF EARNINGS PER SHARE - U.S. GAAP - TREASURY SHARE METHOD

55 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, 2001, 2000 and the consolidated statements of income and deficit, cash flow and stockholders' equity for the years ended June 30, 2001, 2000 and 1999 and have issued our report thereon dated September 5, 2001; 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 Toronto, Canada November 12, 2001 56 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. November 12, 2001 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. November 12, 2001 By: \S\ ------------------------- JOHN DEKNATEL Chief Operating Officer November 12, 2001 By: \S\ ------------------------- FRANCOIS TURCOT Director of Finance 57

TREATS INTERNATIONAL ENTERPRISES INC 10-K