Exhibit 2
AUDITORS' REPORT
To the Shareholders of CFM Corporation
We have audited the consolidated statement of financial position of CFM Corporation as of September 27, 2003 and September 28, 2002 and the consolidated statements of operations and retained earnings and cash flows for each of the yearsended September 27, 2003, September 28, 2002 and September 29, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about 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 of September 27, 2003 and September 28, 2002 and the results of its operations and its cash flows for each of the years ended September 27, 2003, September 28, 2002 and September 29, 2001 in conformity with Canadian generally accepted accounting principles.
| Toronto, Canada, | ERNST & YOUNG LLP |
| November 7, 2003. | Chartered Accountants |
Consolidated Financial Statements
CFM Corporation
September 27, 2003
CFM Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
[in thousands of Canadian dollars except earnings per share]
| For the | For the | For the | ||
| year ended | year ended | year ended | ||
| September 27, 2003 | September 28, 2002 | September 29, 2001 | ||
| $ | $ | $ | ||
| Sales | 685,663 | 576,232 | 416,332 | |
| Cost of sales | 498,017 | 402,534 | 278,892 | |
| Gross profit | 187,646 | 173,698 | 137,440 | |
| Expenses | ||||
| Selling and administrative, research and development [note 6] | 100,892 | 91,734 | 68,096 | |
| Amortization | 17,253 | 13,319 | 10,382 | |
| Amortization of goodwill | - | - | 7,512 | |
| Interest income | (188) | (282) | (539) | |
| Interest expense | 8,382 | 7,127 | 8,363 | |
| Restructuring costs [note 13] | 7,986 | - | - | |
| 134,325 | 111,898 | 93,814 | ||
| Income before income taxes | 53,321 | 61,800 | 43,626 | |
| Provision for income taxes [note 11] | 17,464 | 19,719 | 12,228 | |
| Net income for the year | 35,857 | 42,081 | 31,398 | |
| Retained earnings, beginning of year | 156,501 | 119,942 | 94,465 | |
| Options repurchased [2002 - net of taxes of $1,584] [note 10] | - | (2,598) | (539) | |
| Premium on repurchased common shares [note 10] | (5,363) | (1,076) | (5,382) | |
| Goodwill impairment on transition [2002 - net of taxes of $166] [note 7] | - | (1,848) | - | |
| Retained earnings, end of year | 186,995 | 156,501 | 119,942 | |
| Earnings per share [note 15] | $0.89 | 1.06 | 0.82 | |
| Diluted earnings per share [note 15] | $0.88 | 1.03 | 0.81 | |
See accompanying notes
CFM Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
[in thousands of Candian dollars]
As at September 27, 2003 and at September 28, 2002
| 2003 | 2002 | |
| $ | $ | |
| ASSETS | ||
| Current | ||
| Cash and cash equivalents | 18,110 | 11,720 |
| Accounts receivable, net of allowance for doubtful | ||
| accounts of $2,238 [2002 - $1,485] [note 3] | 144,111 | 156,064 |
| Inventory [note 4] | 107,694 | 118,232 |
| Prepaid and other expenses | 2,632 | 4,123 |
| Future income taxes [note 11] | 17,665 | 9,588 |
| Total current assets | 290,212 | 299,727 |
| Capital assets, net [note 5] | 101,776 | 116,376 |
| Other assets [notes 6 & 12c] | 7,184 | 6,780 |
| Goodwill [note 7a] | 217,665 | 232,716 |
| Intangible assets [note 7b] | 7,305 | 8,298 |
| Future income taxes [note 11] | 1,013 | 888 |
| 625,155 | 664,785 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||
| Current | ||
| Bank indebtedness | 14,271 | 19,279 |
| Accounts payable | 41,005 | 49,242 |
| Accrued employee compensation | 9,689 | 7,844 |
| Other accrued liabilities | 32,722 | 22,066 |
| Current portion of long-term debt [note 9] | 11,091 | 16,338 |
| Current portion of note payable [notes 8c & 8d] | 6,689 | 14,722 |
| Income taxes payable | 3,095 | 1,370 |
| Future income taxes [note 11] | 1,978 | 205 |
| Total current liabilities | 120,540 | 131,066 |
| Long-term debt [note 9] | 145,334 | 157,695 |
| Note payable [notes 8c & 8d] | 2,842 | 4,978 |
| Future income taxes [note 11] | 25,233 | 27,662 |
| Total liabilities | 293,949 | 321,401 |
| Minority interest | 40 | 8 |
| Contingencies and commitments [note 14] | ||
| Shareholders' equity | ||
| Share capital [note 10] | 163,586 | 161,498 |
| Retained earnings | 186,995 | 156,501 |
| Cumulative translation adjustment [note 16] | (19,415) | 25,377 |
| Total shareholders' equity | 331,166 | 343,376 |
| 625,155 | 664,785 |
See accompanying notes
On behalf of the Board:
| Director | Director |
CFM Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
[in thousands of Canadian dollars]
| For the | For the | For the | |
| year ended | year ended | year ended | |
| September 27, 2003 | September 28, 2002 | September 29, 2001 | |
| $ | $ | $ | |
| CASH FLOWS FROM OPERATING ACTIVITIES | |||
| Net income for the year | 35,857 | 42,081 | 31,398 |
| Add (deduct) items not involving cash | |||
| Amortization | 17,253 | 13,319 | 17,894 |
| Future income taxes | (2,967) | 6,432 | 6,015 |
| Non-cash interest on Keanall note payable [note 8d] | 284 | 357 | - |
| Loss / (gain) on disposal of capital assets | 85 | 144 | (175) |
| Restructuring costs | 7,690 | - | |
| Minority interest | 32 | (11) | (93) |
| 58,234 | 62,322 | 55,039 | |
| Changes in non-cash working capital [note 17] | 8,141 | (12,141) | (20,646) |
| Cash flows provided by operating activities | 66,375 | 50,181 | 34,393 |
| CASH FLOWS FROM INVESTING ACTIVITIES | |||
| Acquisitions [note 8] | (4,404) | (29,421) | (23,363) |
| Purchase of capital assets | (12,307) | (20,854) | (16,525) |
| Development costs | (655) | (584) | (1,459) |
| Proceeds on disposal of capital assets | 46 | 64 | 328 |
| Cash flows used in investing activities | (17,320) | (50,795) | (41,019) |
| CASH FLOWS FROM FINANCING ACTIVITIES | |||
| Proceeds from senior notes | 82,061 | - | - |
| Repayment of non-revolving term facilities | (26,811) | (11,280) | (15,074) |
| Revolving term facility, net | (69,876) | 31,645 | 17,747 |
| Bank indebtedness | (4,193) | 3,445 | 3,574 |
| Repayment of note payable [note 8] | (15,000) | (10,000) | - |
| Repurchase of common shares [note 10] | (8,090) | (1,705) | (10,537) |
| Options repurchased [note 10] | - | (4,182) | (870) |
| Issuance of common shares [note 10] | 2,951 | 114 | 151 |
| Deferred financing costs [note 6] | (2,411) | - | - |
| Cash flows provided by (used in) financing activities | (41,369) | 8,037 | (5,009) |
| Effect of foreign currency translation on cash and cash equivalents | (1,296) | 31 | (572) |
| Net increase (decrease) in cash and cash equivalents | |||
| during the year | 6,390 | 7,454 | (12,207) |
| Cash and cash equivalents, beginning of year | 11,720 | 4,266 | 16,473 |
| Cash and cash equivalents, end of year | 18,110 | 11,720 | 4,266 |
| Supplementary cash flow information | |||
| Cash taxes paid | 18,367 | 1,068 | 11,552 |
| Cash interest paid | 6,838 | 6,424 | 7,582 |
See accompanying notes
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
1. NATURE OF OPERATIONS
CFM Corporation (the "Company") is amalgamated under the laws of the Province of Ontario. The Company is a vertically integrated manufacturer of hearth and home products in North America and the United Kingdom. The Company designs, develops, manufactures and distributes hearth and space heating products, barbecue and outdoor products and water dispensing and purification products. The Company maintains an ongoing program of research and development aimed at continually improving the quality, design, features and efficiency of its products. The Company began operating in 1987 in Mississauga, Ontario and now has seven facilities in Ontario, nine facilities in the United States and one in Stoke-on-Trent, England.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies are in accordance with Canadian generally accepted accounting principles.
Consolidation
These consolidated financial statements include the accounts of the Company, its subsidiaries from the dates of their acquisition and the proportionate share of the assets, liabilities and results of operations from its joint venture interest. All significant intercompany amounts and transactions have been eliminated upon consolidation.
Use of estimates
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent; however, actual results could differ from these estimates.
Translation of foreign currencies
The accounts of self-sustaining foreign operations are translated into Canadian dollars using the current rate method, under which all assets and liabilities are translated at the exchange rate prevailing at year end, and revenue and expenses at average rates of exchange during the year. Gains and losses on the translation of these account balances are not included in the consolidated statement of operations and retained earnings but are deferred and shown as a separate item of shareholders' equity.
Foreign currency denominated monetary assets and liabilities of Canadian operations are translated at the exchange rate prevailing at year end, and revenue and expenses at average rates of exchange during the year. Exchange gains and losses arising on the translation of the accounts are included in income. Long-
1
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
term debt payable in foreign currency is translated at the exchange rate prevailing at the year end, with the resulting adjustment included as a separate item in shareholders' equity if the related debt has been designated as a hedge against the net investment in foreign operations.
Cash and cash equivalents
All highly liquid investments with original maturities of three months or less are classified as cash and cash equivalents.
Inventory
Inventory is carried at the lower of cost, as determined on a first-in, first-out basis, and market value. Market value is defined as net realizable value for finished goods and work-in-process, and replacement cost for raw materials.
Capital assets
Capital assets are recorded at cost less accumulated amortization. Amortization is provided on the original cost less estimated salvage value of buildings and equipment using the straight-line method based on estimated useful lives as follows:
| Buildings | 31 years |
| Leasehold improvements | over lease term |
| Machinery and equipment | 4 to 20 years |
| Computer hardware and software | 4 to 7 years |
| Automotive equipment | 4 to 7 years |
| Office furniture and equipment | 10 years |
Amortization commences on capital assets under construction once the construction has been completed.
Other assets
Deferred charges are carried at cost less accumulated amortization.
Research and development costs
Research and development costs are expensed as incurred unless the development costs meet the criteria for deferral. Deferred development costs are amortized over the estimated product life not longer than three years and are subject to an annual impairment assessment.
2
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
Deferred start-up costs
Costs incurred during the start-up period prior to commencement of commercial operations of new facilities or businesses are deferred. Amortization of these deferred costs commences when the pre-operating period ends. Amortization is provided on a straight line basis over five years.
Deferred financing costs
Deferred financing costs are amortized on a straight-line basis over the remaining term of the corresponding debt.
Goodwill
Goodwill comprises the excess of cost over fair values of the underlying net assets acquired arising from business combinations accounted for using the purchase method. Goodwill is subject to an assessment of impairment by applying a fair value based test on an annual basis.
Intangible assets
Intangible assets with finite useful lives are amortized over their useful lives.
Income taxes
The Company uses the liability method of tax allocation for accounting for income taxes. Under the liability method of tax allocation, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Revenue recognition
Revenue from sales of manufactured products, net of allowances for potential returned merchandise which are determined by reference to past experience and expectations, is recognized either at the date of shipment or delivery, depending on the shipping terms. Commission revenue is earned when an exclusive manufacturer ships product directly to the customer.
Stock-based compensation
Effective fiscal 2003, the Company adopted the recommendations of the CICA Section 3870, "Stock-Based Compensation and Other Stock-Based Payments". This change was applied prospectively and had
3
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
no impact on the financial position or results of operations of the Company. The new recommendations were applied to awards granted after the date of adoption.
Compensation expense is not recognized when stock options are issued to employees. Consideration received on the exercise of stock options is charged to share capital. Proforma disclosure of net income and earnings per share will be provided as if all awards were accounted for using the fair value method. Proforma compensation expense is recognized over the vesting period of the option.
Earnings per share
Basic earnings per share has been determined by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated in accordance with the treasury stock method and is based on the weighted average number of common shares and dilutive common share equivalents outstanding.
Derivative financial instruments
Interest rate swap contracts are used to hedge current and anticipated interest rate risks. Interest paid or received under such swap contracts is recognized over the life of the contracts as adjustments to interest expense. Unrealized gains or losses resulting from market movements are not recognized.
3. ACCOUNTS RECEIVABLE
The combined accounts receivable of three customers represent 33% of the total receivable outstanding at September 27, 2003 (three customers represented 52% of the total receivable outstanding at September 28, 2002).
For the year ended September 27, 2003, three customers (2002 - three customers) accounted for 41% (2002 - 38%) of annual sales.
4. INVENTORY
Inventory consists of the following:
| 2003 | 2002 | |
| $ | $ | |
| Raw materials | 26,811 | 40,466 |
| Work-in-process | 9,442 | 13,520 |
| Finished goods | 71,441 | 64,246 |
| 107,694 | 118,232 |
4
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
5. CAPITAL ASSETS
Capital assets consist of the following:
2003 | |||
| Accumulated | Net book | ||
| Cost | amortization | value | |
| $ | $ | $ | |
| Land | 6,761 | - | 6,761 |
| Buildings | 31,672 | 5,778 | 25,894 |
| Leasehold improvements | 8,145 | 1,810 | 6,335 |
| Machinery and equipment | 96,247 | 46,159 | 50,088 |
| Computer hardware and software | 18,482 | 10,532 | 7,950 |
| Automotive equipment | 1,051 | 846 | 205 |
| Office furniture and equipment | 6,009 | 3,014 | 2,995 |
| Capital assets under construction | 1,548 | - | 1,548 |
| 169,915 | 68,139 | 101,776 | |
| 2002 | |||
| Accumulated | Net book | ||
| Cost | amortization | value | |
| $ | $ | $ | |
| Land | 6,987 | - | 6,987 |
| Buildings | 33,788 | 4,989 | 28,799 |
| Leasehold improvements | 10,356 | 1,258 | 9,098 |
| Machinery and equipment | 95,783 | 37,787 | 57,996 |
| Computer hardware and software | 13,719 | 8,046 | 5,673 |
| Automotive equipment | 1,008 | 709 | 299 |
| Office furniture and equipment | 7,393 | 2,322 | 5,071 |
| Capital assets under construction | 2,453 | - | 2,453 |
| 171,487 | 55,111 | 116,376 | |
5
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
6. OTHER ASSETS
Other assets consists of the following (net of amortization):
| 2003 | 2002 | |
| $ | $ | |
| Deferred barbeque facility start-up costs | 2,364 | 3,195 |
| Deferred development costs | 1,590 | 1,792 |
| Deferred financing costs | 2,976 | 1,442 |
| Other | 254 | 351 |
| 7,184 | 6,780 |
Changes in the carrying amount of other assets for the year ended September 27, 2003 were:
| Deferred | ||||
| barbecue | Deferred | Deferred | Other | |
| facility start-up | development | financing | deferred | |
| costs | costs | costs | costs | |
| Balance as at September 28, 2002 | 3,195 | 1,792 | 1,442 | 351 |
| Additions | - | 655 | 2,411 | - |
| Amortization | (831) | (626) | (877) | (78) |
| Impairment of development costs | - | (158) | - | - |
| Foreign currency translation | - | (73) | - | (19) |
| Balance as at September 27, 2003 | 2,364 | 1,590 | 2,976 | 254 |
Research and development expenses for the year ended September 27, 2003 were $8,388 (2002 - $6,976; 2001 - $4,292).
Amortization of deferred barbeque facility start up costs in the year was $831 (2002 - $623; 2001 - nil).
Additions to deferred development costs in the year were $655 (2002 - $584; 2001 - $1,459). Amortization of deferred development costs in the year was $626 (2002 - $659; 2001 - $102).
Additions to deferred financing costs include interest paid under swap contracts expired on August 20, 2003 of $2,063 and $348 of financing fees associated with other long-term debt.
6
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
7. GOODWILL AND INTANGIBLE ASSETS
(a) Goodwill
In 2002, it was determined that the goodwill of the United Kingdom subsidiary was impaired. In accordance with the transition rules, the net write-down, including goodwill and deferred tax liabilities, of $1,848 was charged to opening retained earnings. In implementing the recommendations of the CICA with respect to accounting for business combinations, goodwill and intangibles, future tax liabilities of $2,752 recorded at the time of a prior year acquisition, were reclassified against goodwill.
Changes in the carrying amount of goodwill are as follows:
| $ | |
| Balance as at September 29, 2001 | 172,051 |
| Goodwill acquired on the purchase of The Great Outdoors (note 8c) | 12,859 |
| Goodwill acquired on the purchase of Keanall (note 8d) | 51,508 |
| Transitional impairment loss | (2,014) |
| Adjustment of future tax liabilities | (2,752) |
| Foreign currency translation | 336 |
| Other | 728 |
| Balance as at September 28, 2002 | 232,716 |
| Goodwill acquired on the purchase of The Great Outdoors (note 8c) | 4,547 |
| Adjustments to purchase price allocation of The Great Outdoors (note 8c) | (57) |
| Adjustments to purchase price allocation of Keanall (note 8d) | (636) |
| Goodwill acquired on the purchase of Greenway (note 8b) | 3,535 |
| Foreign currency translation | (22,396) |
| Other | (44) |
| Balance as at September 27, 2003 | 217,665 |
The change in policy with respect to the amortization of goodwill has been applied prospectively. The consolidated financial statements for the year ended September 28, 2002 have been prepared in accordance with the new policy. The consolidated financial statements for the year ended September 29, 2001 have not been adjusted. The pro forma impact on the prior period is as follows:
7
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
| For the year ended | For the year ended | For the year ended | |
| September 27, 2003 | September 28, 2002 | September 29, 2001 | |
| $ | $ | $ | |
| Reported net income | 35,857 | 42,081 | 31,398 |
| Add back: goodwill amortization (net of income taxes) - | - | 4,983 | |
| Adjusted net income | 35,857 | 42,081 | 36,381 |
| Basic earnings per share | 0.89 | 1.06 | 0.82 |
| Goodwill amortization | - | - | 0.13 |
| Adjusted earnings per share | 0.89 | 1.06 | 0.95 |
| Diluted earnings per share | 0.88 | 1.03 | 0.81 |
| Goodwill amortization | - | - | 0.13 |
| Adjusted diluted earnings per share | 0.88 | 1.03 | 0.94 |
(b) Intangible Assets
As part of the asset purchase of Harris Systems Inc. on November 1, 1997, the Company purchased a long-term facility operating lease. The market value of the lease exceeded the present value of the future lease commitments. This leasehold right was recognized as an asset at the time of the acquisition and has been amortized over the lease term of which seventeen years remain.
Trademarks include the British hearth trademarks acquired on April 9, 2002 (Note 8e).
| September 27, 2003 | September 28, 2002 | |
| $ | $ | |
| Leasehold rights | 4,817 | 5,964 |
| Trademarks | 1,518 | 1,655 |
| Other | 970 | 679 |
| 7,305 | 8,298 |
Amortization expense of intangible assets for the year ended September 27, 2003 was $789 (2002 - $349; 2001 - $340).
8
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
8. ACQUISITIONS
a) Century Heating
Effective June 17, 2003, the Company acquired substantially all of the net assets of a manufacturer of wood stove products sold under the Century Heating Product brand, located in Orillia, Ontario, for cash consideration including acquisition costs, of $2,267.
The results of operations from the date of acquisition are included in the Company's consolidated statement of operations for the year ended September 27, 2003. The acquisition was accounted for using the purchase method with the purchase price allocated to net identifiable assets at their fair values. The purchase price allocation is subject to change based on final determination of these fair value amounts.
The following is a summary of the acquisition representing the estimated values assigned and consideration given:
| $ | |
| Current assets acquired | 2,660 |
| Long term assets acquired | 552 |
| Current liabilities assumed | (926) |
| Long term liabilities assumed | (19) |
| 2,267 | |
| Consideration: | |
| Cash, including acquisition costs | 2,267 |
9
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
b) Greenway Home Products Inc.
Effective October 3, 2002, the Company acquired all the issued and outstanding shares of Greenway Home Products Inc. ("Greenway") of Guelph, Ontario. Greenway is a participant in the residential water dispensing, purification and air treatment products market, offering a line of innovative water dispensing, water purification and air treatment appliances. In October 2002, the Company satisfied the purchase price by a cash payment, including acquisition costs of $1,365. Additional contingent consideration not to exceed $35,000 will be paid based on the earnings performance of Greenway over a number of specified periods. The first such payment was earned based on the earnings performance for the year ended December 31, 2002 and was satisfied on April 24, 2003 with a $1,771 cash payment and the issuance of 126,494 shares of the Company valued at $1,866. The fair value of the Company's common shares was $14.75 each representing the average market price on the payment date. The remaining contingent consideration will be payable only once the earnings of Greenway have reached a stipulated level and any such consideration will not exceed $31,458. All future contingent consideration paid will be recorded to goodwill.
The results of operations of Greenway from the date of acquisition are included in the Company's consolidated statement of operations for the year ended September 27, 2003. The acquisition was accounted for using the purchase method with the purchase price allocated to net identifiable assets at their estimated fair values.
The following is a summary of the acquisition representing the estimated values assigned and consideration given:
| $ | |
| Current assets acquired | 4,988 |
| Long term assets acquired | 139 |
| Current liabilities assumed | (5,002) |
| Goodwill | 3,535 |
| 3,660 | |
| Consideration: | |
| Cash, including acquisition costs (net of cash acquired of $1,342) | 1,794 |
| Share capital issued | 1,866 |
| 3,660 |
None of the goodwill is tax deductible.
10
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
c) The Great Outdoors Grill Company
Effective May 30, 2002, the Company acquired all the issued and outstanding shares of The Great Outdoors Grill Company ("TGO") of Joplin, Missouri. TGO is a North American manufacturer and distributor of quality cast aluminum barbecues. The Company satisfied the purchase price by a cash payment, including acquisition costs, of $15,765 and the issuance of 195,366 common shares of the Company valued at $3,102. The fair value of CFM shares was $15.88 representing the average market price on the announcement date. Additional contingent consideration of US$3,361, in the form of a non-interest bearing promissory note, will be paid in equal installments over a two-year period commencing on January 2, 2004. The discounted value of the contingent consideration has been recorded as goodwill. The results of the operations of TGO from the date of acquisition are included in the Company's consolidated statement of operations from the date of acquisition.
The following is a summary of the acquisition representing the final values assigned and consideration given:
| $ | |
| Current assets acquired | 17,036 |
| Long term assets acquired | 2,837 |
| Current liabilities assumed | (13,808) |
| Goodwill | 17,349 |
| 23,414 | |
| Consideration: | |
| Cash, including acquisition costs | 15,765 |
| Unsecured note payable | 4,547 |
| Share capital issued | 3,102 |
| 23,414 |
It is estimated that goodwill of $9,012 is tax deductible.
d) Keanall Holdings Limited
Effective January 2, 2002, the Company acquired all the issued and outstanding shares of Keanall Holdings Limited ("Keanall") of Mississauga, Ontario. Keanall is a leading manufacturer and distributor of quality after-market gas grill products to many of North America's largest retailers that serve the recreational and home improvement market. Under the terms of the transaction, the Company satisfied the purchase price with a combination of a cash payment, including acquisition costs, of $10,848, the issuance of a $30,000 face value non-interest bearing note repayable monthly over 24 months with a fair value of $29,343, and a further $30,366, paid by the issuance of 2,526,314 common shares of the Company. The fair value of the Company's common shares was $12.02 representing the average market price on the announcement date. The results of the operations of Keanall from the date of acquisition are included in the Company's consolidated statement of operations.
11
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
The following is a summary of the acquisition representing the final values assigned and consideration given:
| $ | |
| Current assets acquired | 24,576 |
| Long term assets acquired | 12,224 |
| Intangible assets acquired | 212 |
| Current liabilities assumed | (17,327) |
| Goodwill | 50,872 |
| 70,557 | |
| Consideration: | |
| $ | |
| Cash, including acquisition costs | 10,848 |
| Unsecured note payable | 29,343 |
| Share capital issued | 30,366 |
| 70,557 |
It is estimated that goodwill of $15,000 is tax deductible.
e) Other
Effective April 9, 2002, the Company acquired substantially all of the net assets of a British hearth fireplace business for cash consideration, including acquisition costs of $2,718.
The results of operations from the date of acquisition are included in the Company's consolidated statement of operations. The acquisition was accounted for using the purchase method with the purchase price allocated to net identifiable assets at their fair values.
The following is a summary of the assets purchased:
| $ | |
| Current assets acquired | 685 |
| Long term assets acquired | 114 |
| Intangible assets | 1,563 |
| Liabilities assumed | (68) |
| Goodwill | 424 |
| 2,718 |
12
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
9. BANK INDEBTEDNESS AND LONG-TERM DEBT
| Long-term debt consists of the following: | ||
| 2003 | 2002 | |
| $ | $ | |
| Senior Unsecured Notes Series A issued September 12, 2003 for a | ||
| ten-year period at a fixed interest rate of 6.1%. The principal | ||
| repayment of US$60,000 is due on September 12, 2013. Semi- | ||
| annual interest payments due in arrears on March 12 and | ||
| September 12 of each year. | 81,174 | - |
| Non-revolving term credit facility currently advanced at fixed and | ||
| floating rates not exceeding 90 days (2002 - 90 days) with a | ||
| weighted average rate of 4.74% (2002 - 4.47%) repayable over | ||
| quarterly installments beginning September 28, 2000 and is to be | ||
| fully paid by July 26, 2005. As at September 27, 2003 the | ||
| Company may borrow up to $28,775 (2002 - $55,000) with Pound | ||
| Sterling advances not to exceed 5,000. Included in the amount | ||
| outstanding at September 27, 2003 was U.S. dollar debt of | ||
| US$6,500 (2002 - US$4,035) and U.K. pound sterling debt of | ||
| 2,050 (2002 - 3,400). | 26,155 | 53,703 |
| Revolving operating loans currently advanced at fixed and floating | ||
| rates not exceeding 90 days (2002 - 90 days) with a weighted | ||
| average rate of 4.52% (2002 - 4.50%) under which the Company | ||
| may borrow up to $111,862 (2002 - $130,000). Letters of credit | ||
| totaling $21,405 (2002 - $8,549) have been issued against this | ||
| facility. Included in the amount outstanding at September 27, | ||
| 2003 was U.K. pound sterling debt of 1,050 (2002 - nil). The | ||
| credit facility expires on July 26, 2005. | 44,909 | 54,000 |
| Revolving term credit facility of up to $40,426 (2002 - $80,000) | ||
| advanced at fixed rates and/or floating rates not exceeding 90 days | ||
| (2002 - 90 days) with a weighted average rate in 2002 of 4.31%. | ||
| Included in the amount outstanding at September 28, 2002 was | ||
| U.S. dollar debt of $8,000. The credit facility expires on July 26, | ||
| 2005. | - | 60,468 |
| Other long-term debt bearing interest at 4.88% (2002 - 4.94%). | 4,187 | 5,862 |
| 156,425 | 174,033 | |
| Less current portion | 11,091 | 16,338 |
| 145,334 | 157,695 |
Senior Unsecured Notes Series B were issued on September 12, 2003 with the US$65,000 of the proceeds not received until November 21, 2003 for a ten-year period with a fixed interest rate of 6.1%. Principal
13
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
repayment of US$65,000 is due on November 21, 2013. Semi-annual interest payments are due in arrears on May 21 and November 21 of each year.
The Company's syndicated credit agreement, which consists of the non-revolving and revolving term facility and the revolving operating loan expires on July 26, 2005 with the revolving facilities extended annually for an additional 364-day period. As at September 27, 2003, the Company's total available line of credit was $203,562 (2002 - $265,000).
In accordance with the syndicated credit agreement, the Company may borrow in Canadian, U.S. dollars and U.K. pounds sterling by way of prime rate based loans, Bankers' Acceptances, LIBOR loans or any combination thereof. Fair values of the committed long-term facilities and other long-term debt are not materially different from the carrying values.
Effective September 12, 2003, the Senior Unsecured Notes Series A proceeds were used to repay the non-revolving term credit facility and this facility, excluding UK Pound Sterling advances, was cancelled.
The credit agreement includes certain restrictive covenants and undertakings.
The future minimum annual principal repayments of long-term debt over the next five years and thereafter are as follows:
| $ | |
| 2004 | 11,091 |
| 2005 | 60,550 |
| 2006 | 230 |
| 2007 | 230 |
| 2008 | 230 |
| Thereafter | 84,094 |
| 156,425 |
Interest on long-term debt amounted to $7,506 for the year ended September 27, 2003 (2002 - $6,845; 2001 - $7,245).
Bank Indebtedness
As part of the total available credit facility of $203,562, the Company has available operating lines totaling $106,454, which includes bank overdraft facilities in Canada and the U.S..
14
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
10. SHARE CAPITAL
The Company's authorized share capital consists of an unlimited number of common shares without nominal or par value.
[a] Issued and outstanding
| Number of shares | Amount | |
| # | $ | |
| [in thousands] | ||
| Balance September 30, 2000 | 39,532 | 133,549 |
| Options exercised | 14 | 56 |
| Employee share purchase plan [i] | 15 | 95 |
| Shares repurchased and cancelled [ii] | (1,525) | (5,155) |
| Balance September 29, 2001 | 38,036 | 128,545 |
| Shares cancelled [iii] | (6,000) | (23,870) |
| Shares issued [iii] | 6,000 | 23,870 |
| Share consideration for Keanall acquisition | 2,526 | 30,366 |
| Share consideration for The Great Outdoors acquisition | 195 | 3,102 |
| Options exercised | - | 3 |
| Employee share purchase plan [i] | 10 | 111 |
| Shares repurchased and cancelled [ii] | (179) | (629) |
| Balance September 28, 2002 | 40,588 | 161,498 |
| Share consideration for Greenway acquisition | 127 | 1,866 |
| Options exercised | 359 | 2,826 |
| Employee share purchase plan [i] | 12 | 124 |
| Shares repurchased and cancelled [ii] | (686) | (2,728) |
| Balance September 27, 2003 | 40,400 | 163,586 |
The Company has established an Employee Share Purchase Plan ("ESPP") in order to encourage employees to participate in the growth and development of the Company. Annually, all eligible employees may contribute to the ESPP an amount up to 20% of their aggregate base cash compensation received in the previous year. Throughout the year, the administrator, on behalf of each participating employee, purchases shares from the Company at market price less a 15% discount. Employees can sell 85% of these share accounts at any time. The remaining 15% of the employee's share account vests equally over four quarters after the quarter in which shares were purchased. During fiscal 2003, 11,877 [2002 - 9,520; 2001 - 15,202] shares were issued under the ESPP for $124 [2002 - $111; 2001 - $95].
On October 3, 2002, the Company filed a Normal Course Issuer Bid enabling it to make market purchases of up to 2,800,000 of its common shares commencing October 9, 2002 during the next twelve-month period. As at October 8, 2003, the expiry date of the Normal Course Issuer Bid, a total of 685,600 shares had been repurchased and cancelled at an average price of $11.78.
15
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
Details of fiscal 2003 repurchases are as follows:
| Number of | Price paid | |
| Month of purchase | shares purchased | per share |
| # | $ | |
| November 2002 | 410,400 | 11.6449 |
| December 2002 | 53,300 | 11.6243 |
| January 2003 | 221,900 | 12.0000 |
| 685,600 |
On October 9, 2001, the Company filed a Normal Course Issuer Bid enabling it to make market purchases of up to 2,800,000 of its common shares during the next twelve-month period. As at October 8, 2002, the expiry date of the Normal Course Issuer Bid, a total of 179,500 shares had been repurchased and cancelled at an average price of $9.48.
Details of fiscal 2002 repurchases are as follows:
| Number of | Price paid | |
| Month of purchase | shares purchased | per share |
| # | $ | |
| October 2001 | 95,000 | 8.0000 |
| November 2001 | 44,400 | 8.0000 |
| July 2002 | 40,100 | 14.5145 |
| 179,500 |
On September 27, 2000, the Company filed a Normal Course Issuer Bid enabling it to make market purchases of up to 2,987,000 of its common shares during the next twelve-month period. As at September 26, 2001, the expiry date of the Normal Course Issuer Bid, a total of 1,525,200 shares had been repurchased and cancelled at an average price of $6.92.
Details of fiscal 2001 repurchases are as follows:
| Number of | Price paid | |
| Month of purchase | shares purchased | per share |
| # | $ | |
| October 2000 | 211,100 | 6.8976 |
| November 2000 | 693,300 | 6.5870 |
| December 2000 | 359,300 | 6.4491 |
| January 2001 | 100,800 | 7.2812 |
| February 2001 | 10,300 | 8.1403 |
| March 2001 | 18,200 | 8.7280 |
| April 2001 | 2,100 | 9.0952 |
| July 2001 | 30,100 | 8.6997 |
| September 2001 | 100,000 | 9.0000 |
| 1,525,200 |
16
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
During 2002, the Company purchased from and issued to an Officer and shareholder of the Company an equivalent number of common shares. This transaction, which was subject to regulatory approval, was reviewed and approved by the Board.
[b] Stock options
Under the terms of the Stock Option Plan, all options are granted for a term of seven years commencing on the date of grant. All options granted prior to January 10, 2000 are exercisable six years and three hundred and sixty days from the date upon which such options were granted. For all options granted after January 10, 2000 and before July 24, 2002, one-third of such options will become exercisable as of each of the first, second and third anniversaries, respectively, of the date such options are granted. For all options granted after July 24, 2002, one-fourth of such options will become exercisable as of each of the first, second, third and fourth anniversaries, respectively, of the date such options are granted.
Options granted prior to September 15, 1999, may vest early if certain stock price performance criteria are met, being, one-third of the options granted in each fiscal year will become exercisable as of the first day of each of the three immediately following fiscal years, provided that the cumulative percentage increase in the market value of the common shares of the Company since the first day of the fiscal year in which the options were granted has been at least equal to 110% of the cumulative increase of the Toronto Stock Exchange 300 Index during the same period.
Options granted after September 15, 1999 but prior to January 10, 2000 may vest early if certain stock price performance criteria are met, being one-third of the options granted in each fiscal year will become exercisable as of the first day of each of the three immediately following fiscal years, provided that the cumulative percentage increase in the market value of the common shares of the Company since the first day of the fiscal year in which the options were granted has been at least equal to the cumulative percentage increase of the Toronto Stock Exchange Industrial Products Index during the same period.
Under the Stock Option Plan, the Company is authorized to issue a maximum of 5,624,500 common shares. As at September 27, 2003, a total of 835,752 common shares are available for future grants and options.
17
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
A summary of the Stock Option Plan as of September 27, 2003 and September 28, 2002 and changes during the years ended on these dates is presented below:
| Weighted | Number | ||
| Options | average | of vested | |
| outstanding | price | options | |
| # | $ | # | |
| Outstanding at September 30, 2000 | 2,702,610 | 8.20 | 339,949 |
| Granted | 1,162,000 | 9.62 | |
| Exercised | (14,000) | 4.00 | |
| Repurchased | (306,471) | 7.12 | |
| Forfeited | (215,468) | 9.11 | |
| Outstanding at September 29, 2001 | 3,328,671 | 8.75 | 379,700 |
| Granted | 1,049,000 | 13.99 | |
| Exercised | (333) | 9.50 | |
| Repurchased | (625,470) | 8.33 | |
| Forfeited | (189,832) | 9.20 | |
| Outstanding at September 28, 2002 | 3,562,036 | 10.37 | 297,582 |
| Granted | 1,035,000 | 9.99 | |
| Exercised | (358,840) | 7.88 | |
| Repurchased | - | - | |
| Forfeited | (774,622) | 10.98 | |
| Outstanding at September 27, 2003 | 3,463,574 | 10.37 | 1,205,999 |
The following table outlines stock options outstanding at September 27, 2003:
| Options | |||
| Options outstanding | Exercise price | exercisable | Expiry date |
| # | $ | # | |
| 12,000 | 8.375 | 12,000 | November 27, 2003 |
| 129,341 | 12.625 | - | October 1, 2004 |
| 134,992 | 7.800 | 5,675 | October 1, 2005 |
| 254,657 | 11.250 | 133,340 | October 4, 2006 |
| 435,981 | 6.250 | 435,981 | July 26, 2007 |
| 33,333 | 6.700 | - | November 21, 2007 |
| 656,770 | 9.500 | 419,461 | July 25, 2008 |
| 10,000 | 9.750 | 6,667 | September 10, 2008 |
| 755,000 | 14.000 | 191,250 | July 24, 2009 |
| 6,500 | 12.500 | 1,625 | September 25, 2009 |
| 1,035,000 | 9.990 | - | August 1, 2010 |
The Stock Option Plan was amended on September 26, 2002 removing the repurchase alternative [2002 - 625,470 options were repurchased for $4,182; 2001 - 306,471 options were repurchased for $870]. During fiscal 2003, 358,840 options [2002 - 333; 2001 - 14,000] were exercised for common shares.
18
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
A summary of options outstanding at September 27, 2003 is as follows:
| Total Options Outstanding | Total Options Exercisable | ||||
| Number of | Range of | Weighted | Weighted | Number of | Weighted |
| Options | Exercise Prices | Average | Average | Exercisable | Average |
| Outstanding | Exercise | Remaining | Options | Exercise | |
| Price | Life | Price | |||
| 2,318,076 | 6.250 -10.000 | 8.96 | 5.34 | 879,784 | 7.87 |
| 1,145,498 | 10.000 - 14.000 | 13.22 | 4.66 | 326,215 | 12.87 |
The closing market value of the Company's common stock at September 27, 2003 was $11.04.
The Company does not apply the fair value method of accounting for stock-based compensation awards granted to employees. Accordingly, no compensation expense has been recognized for stock options issued under this plan for 2003. Section 3870, "Stock-based Compensation and Other Stock-based Payments" provides that companies should also disclose, on a proforma basis, net earnings and earnings per share had the Company adopted the fair value method for accounting for stock options. Had compensation expense been determined based on the fair value at the grant date for stock options granted in fiscal 2003, the Company's results would have been as follows:
For the year ended September 27, 2003 | |
| Net income for the year: | |
| As reported | 35,857 |
| Proforma | 35,740 |
| Net income per share as reported: | |
| Basic | 0.89 |
| Diluted | 0.88 |
| Proforma net income per share: | |
| Basic | 0.89 |
| Diluted | 0.88 |
The fair value of the options granted during the year was $4.37 per option. The fair value of the stock option grant was determined using the Black-Scholes option pricing model, based on the following assumptions:
| For the year ended September 27, 2003 | |
| Risk-free interest rate | 3.86% |
| Average expected life (years) | 5 |
| Expected volatility | 0.441 |
| Expected dividend yield | - |
19
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
11. INCOME TAXES
[a] Rate reconciliation
The Company's effective income tax rates for the years ended September 27, 2003, September 28, 2002 and September 29, 2001 are derived as follows:
| 2003 | 2002 | 2001 | |
| % | % | % | |
| Combined Canadian federal and provincial tax rate | 37.14 | 38.62 | 43.31 |
| Manufacturing and processing profits deduction | (.40) | (.16) | (.80) |
| Income taxes at different rates in foreign jurisdictions | (7.52) | (7.46) | (15.04) |
| Permanent differences and other | 3.53 | .91 | .56 |
| 32.75 | 31.91 | 28.03 |
[b] Provision for (recovery of) income taxes
The components of income before income taxes by jurisdiction are as follows:
| 2003 | 2002 | 2001 | |
| $ | $ | $ | |
| Income before income taxes and amortization of goodwill | 53,321 | 61,800 | 51,138 |
| Amortization of goodwill, net of tax | - | - | (4,983) |
| Income tax on amortization of goodwill | - | - | (2,529) |
| Income before income taxes | 53,321 | 61,800 | 43,626 |
| Domestic | 1,425 | 2,224 | 3,111 |
| Foreign | 51,896 | 59,576 | 40,515 |
| 53,321 | 61,800 | 43,626 |
The provision for income taxes consists of the following:
| 2003 | 2002 | 2001 | |
| $ | $ | $ | |
| Income taxes before the undernoted | 17,464 | 19,719 | 14,757 |
| Income taxes on amortization of goodwill | - | - | (2,529) |
| Income taxes | 17,464 | 19,719 | 12,228 |
| Current | 20,431 | 13,287 | 2,728 |
| Future | (2,967) | 6,432 | 9,500 |
| 17,464 | 19,719 | 15,257 |
20
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
The details of the provision for current income taxes are as follows:
| 2003 | 2002 | 2001 | |
| $ | $ | $ | |
| Canadian federal taxes | 555 | (444) | (117) |
| Provincial taxes | 184 | (437) | (63) |
| Foreign taxes | 19,692 | 14,168 | 2,908 |
| 20,431 | 13,287 | 2,728 |
The details of the provision (recovery of) for future income taxes are as follows:
| 2003 | 2002 | 2001 | |
| $ | $ | $ | |
| Canadian federal taxes | 107 | 1,028 | 488 |
| Provincial taxes | 169 | 463 | 251 |
| Foreign taxes | (3,243) | 4,941 | 8,761 |
| (2,967) | 6,432 | 9,500 |
[c] Provision for (recovery of) future income taxes
Future income taxes have been provided on temporary differences consisting of the following:
| 2003 | 2002 | 2001 | |
| $ | $ | $ | |
| Reserves and allowances | (6,231) | 1,100 | 813 |
| Inventory | (1,336) | (835) | 1,368 |
| Capital assets | (295) | 2,085 | 1,673 |
| Goodwill | 4,000 | 4,137 | 634 |
| Financing | 21 | 13 | 14 |
| Compensation | 427 | 44 | 25 |
| Tax deferred income | 1,103 | 111 | - |
| Net operating losses | (535) | (326) | 4,660 |
| Other | (121) | 103 | 313 |
| (2,967) | 6,432 | 9,500 |
21
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
[d]Future income tax assets and liabilities
Future income taxes have been provided on temporary differences consisting of the following:
| 2003 | 2002 | 2001 | |
| $ | $ | $ | |
| Current future income tax assets | |||
| Reserves and allowances | 11,308 | 6,115 | 3,531 |
| Net operating losses | 3,005 | 632 | 1,717 |
| Inventory | 2,723 | 2,041 | 843 |
| Compensation | 757 | 618 | 556 |
| Stock options | - | 404 | |
| Other | (128) | (222) | (200) |
| Total current future income tax assets | 17,665 | 9,588 | 6,447 |
| Current future income tax liabilities | (1,978) | (205) | (231) |
| Net current future income tax assets | 15,687 | 9,383 | 6,216 |
| Long-term future income tax assets | |||
| Net operating losses | 110 | 595 | 467 |
| Other | 903 | 293 | 163 |
| Total long-term future income tax assets | 1,013 | 888 | 630 |
| Long-term future income tax liabilities | |||
| Goodwill | 13,257 | 11,099 | 7,578 |
| Capital assets | 9,038 | 10,407 | 7,584 |
| Reserves and allowances | 1,244 | 1,238 | 2,674 |
| Tax deferred income | 1,033 | 604 | - |
| Financing | 99 | 4,117 | 78 |
| Other | 562 | 197 | 730 |
| Total long-term future income tax liabilities | 25,233 | 27,662 | 18,644 |
| Net long-term future income tax liabilities | 24,220 | 26,774 | 18,014 |
The Company has recognized the full amount of its future income tax assets with no valuation allowance for each of the years presented.
As at September 27, 2003, the Company has combined income tax losses of approximately $9,176 (2002 - $3,485; 2001 - $2,989) which can be applied against future years' taxable income, the benefit of which has been recorded in the consolidated financial statements. $2,130 of these income tax losses do not expire. The remainder of the income tax losses of $7,046 may be carried forward to 2010.
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
22
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
a) Fair value of financial statements
The following methods and assumptions were used in estimating the fair values of financial instruments:
Current financial assets and liabilities: Terms are such that their carrying amounts approximate fair values.
Variable rate bank facilities: The carrying amounts of variable rate debt approximate fair value because the rates are reflective of the current market.
Committed long-term bank facilities and other long-term debt: Fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates for similar borrowing arrangement.
b) Credit risk
The Company's financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents consist of short-term investments, primarily overnight deposits, and are invested with recognized Canadian and U.S. banks.
c) Interest rate risk
Long-term debt bears interest at fluctuating and fixed rates.
The Company entered into an interest swap contract to hedge against exposures to increases in interest rates prior to the coupon rate being set for the Senior Unsecured Notes. On August 6, 2003 the Company entered into a series of interest swap contracts at an average of 4.37% covering $125,000 U.S. of long-term debt. These contracts expired on August 20, 2003.
The coupon rate set on August 20, 2003 for this fixed rate debt was based on U.S. ten year Treasury rate of 4.50% resulting in prepaid interest of $2,062. This prepaid interest is included in deferred financing costs (note 6) and amortized to interest expense over the ten-year term to maturity.
d) Foreign currency risk
A significant portion of the Company's operations relates to subsidiaries located in the United States that are considered self-sustaining.
The parent Company and subsidiaries located in Canada maintain their accounts in Canadian dollars. The foreign currency risk associated with the Company's foreign currency denominated accounts receivable and payable balances as at September 27, 2003 is not material.
23
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
13. RESTRUCTURING COSTS
The Company intends to proceed with a restructuring of its operations to streamline operating processes and consolidate facilities which serve the Company's mass merchant customers and improve its manufacturing operations through anticipated product line rationalization and through the movement of certain product lines to lower wage cost locations. The restructuring will be completed in stages and will involve the closure of certain of the Company's manufacturing locations and the transfer of manufacturing and administrative activities, as well as certain assets, to other CFM facilities. In addition, as part of this restructuring, several of the Company's warehouses in the United States will be closed and distribution centralized into two larger distribution centres to more efficiently serve the Company's mass merchant customers. Currently management expects the restructuring activities to be completed by the end of fiscal 2004.
As at September 27, 2003, the following restructuring costs had been incurred:
| Provision for severance and benefits | 296 |
| Assets impairment: | |
| Inventory | 3,978 |
| Capital assets | 3,712 |
| 7,986 |
As at September 27, 2003, none of the restructuring charges had been paid. The impairment charges were determined by using the expected present value method.
24
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
14. CONTINGENCIES AND COMMITMENTS
[a] Lease commitments
The Company is committed to premises and equipment leases with terms expiring at various dates during the next five years and thereafter. Future minimum annual payments under non-cancelable operating leases consist of the following at September 27, 2003:
| $ | |
| 2004 | 3,718 |
| 2005 | 3,380 |
| 2006 | 3,219 |
| 2007 | 2,997 |
| 2008 | 2,882 |
| Thereafter | 6,797 |
| 22,993 |
For the year ended September 27, 2003, payments under operating leased amounted to approximately $6,169 (2002 - $4,475; 2001 - $2,585).
[b] Legal
During the normal course of business, there are various claims and proceedings that have been or may be instituted against the Company. There are claims that are at the early stages of legal proceedings and thus the outcome of these matters are not determinable. These claims could have a material adverse affect on the consolidated financial position of the Company or its results of operations.
[c] Other
Pursuant to certain acquisitions, including a joint venture investment, the minority shareholders and joint venture partner have the option to cause the Company to purchase their interests. The Company has similar options to require the minority shareholders to sell their shares. The purchase price in both cases would be based upon a prescribed valuation formula.
25
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
15. EARNINGS PER SHARE
Basic earnings per share has been determined by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed in accordance with the treasury stock method and is based on the weighted average number of common shares and dilutive common share equivalents outstanding.
| For the year ended | For the year ended | For the year ended | |
| September 27, 2003 | September 28, 2002 | September 29,2001 | |
| $ | $ | $ | |
| Earnings for period | 35,857 | 42,081 | 31,398 |
| Weighted average number of shares outstanding | 40,215 | 39,836 | 38,346 |
| Basic earnings per share | 0.89 | 1.06 | 0.82 |
| Diluted earnings per share | |||
| Weighted average number of shares outstanding | 40,215 | 39,836 | 38,346 |
| Add: Dilutive effect of stock options | 436 | 1,048 | 386 |
| Adjusted weighted average number of shares outstanding | 40,651 | 40,884 | 38,732 |
| Diluted earnings per share | 0.88 | 1.03 | 0.81 |
16. CUMULATIVE TRANSLATION ADJUSTMENT
For the year ended September 27, 2003, the change in the cumulative translation adjustment balance on the Company's net investment in self-sustaining foreign operations of $44,792 related primarily to the strengthening of the Canadian dollar against the U.S. dollar during the year.
26
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
17. CONSOLIDATED STATEMENTS OF CASH FLOWS
The net change in non-cash working capital balances consists of the following:
| For the year ended | For the year ended | For the year ended | |
| September 27, 2003 | September 28, 2002 | September 29, 2001 | |
| $ | $ | $ | |
| Accounts receivable | 1,445 | (16,238) | (14,535) |
| Inventory | (2,613) | (16,929) | (2,769) |
| Prepaid and other expenses | 980 | (2,062) | (1,094) |
| Other assets | (265) | (3,093) | (368) |
| Accounts payable and accrued liabilities | 8,244 | 14,428 | 3,695 |
| Income taxes recoverable (payable) | 350 | 11,753 | (5,575) |
| 8,141 | (12,141) | (20,646) |
18. EMPLOYEE BENEFIT PLANS
The Company maintains various employee benefit plans which include a defined contribution plan and a multi-employer defined benefit plan. Contributions to the multi-employer defined benefit plan are predetermined based on agreements. During the year, the Company's benefit plan expenditures were $1,641 [2002 - $1,750; 2001 - $1,457].
27
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
19. SEGMENTED INFORMATION
The Company operates in one business segment, home products, which includes the development, manufacture, and sale of hearth and heating products, barbecue and outdoor products and water dispensing and purification products. In light of the growth and significance of barbecue and outdoor products to the overall revenue of CFM, the Company's revenue has been disclosed by product category.
The Chief Executive and Operating Officers of CFM review consolidated operating results to assess the performance of the business. The Company's business organization structure and performance measurement systems are not based on product categories.
| For the year ended | For the year ended | For the year ended | |
| September 27, 2003 | September 28, 2002 | September 29, 2001 | |
| $ | $ | $ | |
| Net external sales: | |||
| Hearth and heating products | 452,548 | 443,250 | 397,586 |
| Barbecue and outdoor products | 216,431 | 132,982 | 18,746 |
| Water | 16,684 | - | - |
| 685,663 | 576,232 | 416,332 |
Geographic information:
The Company conducts substantially all of its business activities in North America. External sales are allocated on the basis of sales to external customers.
External sales:
| U.S. | Canada | Other | Total | |
| $ | $ | $ | $ | |
| Year ended September 27, 2003 | 534,752 | 118,733 | 32,178 | 685,663 |
| Year ended September 28, 2002 | 472,824 | 81,614 | 21,794 | 576,232 |
| Year ended September 29, 2001 | 345,904 | 51,552 | 18,876 | 416,332 |
Capital assets, goodwill and intangibles:
| U.S. | Canada | Other | Total | |
| $ | $ | $ | $ | |
| Year ended September 27, 2003 | 243,835 | 73,091 | 9,820 | 326,746 |
| Year ended September 28, 2002 | 277,841 | 68,510 | 11,039 | 357,390 |
| Year ended September 29, 2001 | 229,770 | 32,287 | 10,437 | 272,494 |
28
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
20. FOREIGN EXCHANGE
Foreign exchange gains for the year ended September 27, 2003 of $366 (2002 - losses of $999; 2001 - losses of $467) are included in selling and administrative, research and development expenses on the Statement of Operations.
21. RELATED PARTY TRANSACTION
During 2001, the Company purchased for $307 an exclusive perpetual license to manufacture, market and sell products. The license was purchased from an entity in which officers of the Company had a non-controlling interest.
22. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2003 financial statements.
23. SUBSEQUENT EVENT
On October 8, 2003, the Company acquired substantially all of the assets of Temtex Industries Inc., and certain assets of its subsidiary, Temco Fireplace Products Inc., as well as all of the shares of its subsidiary Temcomex S.A. de C.V. a Mexican corporation for U.S.$7 million. Temcomex, located in Mexicali, Mexico manufactures wood-burning and gas fireplaces.
24. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles ["GAAP"] as applied in Canada which are different in some respects from those applicable in the United States, as described below.
29
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
Consolidated statements of income and comprehensive income (loss)
The following table presents net income, comprehensive net income and earnings per share information following United States GAAP:
| 2003 | 2002 | 2001 | |
| $ | $ | $ | |
| Net income for the year based on Canadian GAAP | 35,857 | 42,081 | 31,398 |
| Integration costs of business combination and amortization thereof [a] | - | - | 126 |
| Deferred charges and amortization thereof [b] | 683 | (949) | (1,892) |
| Stock-based compensation [c] | 323 | (9,067) | (377) |
| Net income for the year based on U.S. GAAP | 36,863 | 32,065 | 29,255 |
| Change in cumulative translation adjustment | (44,719) | (3,748) | 13,686 |
| Comprehensive income (loss), U.S. GAAP | (7,856) | 28,317 | 42,941 |
| Basic earnings per share based on U.S. GAAP | 0.92 | 0.80 | 0.76 |
| Diluted earnings per share based on U.S. GAAP | 0.91 | 0.78 | 0.76 |
| Weighted average number of shares outstanding [in thousands] | |||
| Basic | 40,215 | 39,836 | 38,346 |
| Diluted | 40,651 | 40,884 | 38,724 |
(a) Integration costs of business combination
Under Canadian GAAP, companies are allowed to recognize integration and restructuring costs of the acquiring entity under the purchase method if it can be demonstrated that the costs are a direct substitute for costs that would otherwise be incurred with respect to the acquired business. The acquiring entity's restructuring costs were incurred as a direct result of an acquisition. However, for purposes of U.S. GAAP such restructuring costs have been expensed to the extent they qualify as exit costs or as incurred.
(b) Deferred charges
Under Canadian GAAP, the Company capitalized certain development costs and costs to start up a barbeque facility. Under U.S. GAAP, these costs are expensed during the year. As a result, during the year, $655 ($406 net of income taxes) of deferred charges have been expensed and $1,601 ($991 net of income taxes) of amortization and write-downs of $158 ($98 net of income taxes) relating to prior years' adjustments have been reversed. In 2002, $2,806 ($1,740 net of income taxes) of deferred charges have been expensed (2001 - - $3,251; $2,016 net of income taxes) and $1,287 ($791 net of income taxes) of amortization relating to prior years has been reversed (2001 - $183; $124 net of income taxes).
30
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
(c) Share issue costs
Under Canadian GAAP, the Company records stock issue costs as an adjustment to retained earnings. Under U.S. GAAP, the carrying amount of capital stock is shown net of issue costs.
(d) Warranty provision
In late 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
In February 2003, the CICA issued Accounting Guideline No. 14, Disclosure of Guarantees ("AcG-14"). AcG-14 requires a guarantor to disclose significant additional information about guarantees it has provided, without regard to whether it will have to make any payments under the guarantees. This guideline is generally consistent with the disclosure requirements for guarantees in FIN 45, except that it does not apply to product warranties.
FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying liability that is related to an asset, a liability, or an equity security of the guaranteed party; or another entity's failure to perform under an obligating agreement. Under FIN 45, guarantors are not required to disclose the maximum potential amount of future payments under product warranties. Rather, they are required to disclose their accounting policy and method used in determining the liability for product warranties and a reconciliation of the changes in the product warranty liability for the reporting period. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.
CFM Corporation offers warranties on merchandise for specific periods ranging from one year to lifetime warranties on certain replacement parts and merchandise. The specific terms and conditions of those warranties vary depending upon the product sold. The Company estimates the costs that may be incurred under its warranty programs based on its historical experience and expectations and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company's warranty liability include the mix of products sold and historical warranty claims experience.
Changes in the Company's product warranty liability during the year ended September 27, 2003 are as follows:
| 2003 | 2002 | |
| $ | $ | |
| Balance, beginning of year | 2,315 | 1,965 |
| Warranty costs accrued during the year | 7,928 | 5,168 |
| Warranty claims paid during the year | (6,217) | (4,818) |
| Balance, end of year | 4,026 | 2,315 |
31
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
(e) Stock-based compensation
Under U.S. GAAP, the Company accounts for stock options granted to employees using the intrinsic method under APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Prior to September 26, 2002, it was the Company's practice to settle stock options in cash at the request of the holder. As such, the Company recorded compensation expense relating to its stock options in accordance with the provisions of FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans - An Interpretation of APB Opinions No. 15 and 25" ("FIN 28"). FIN 28 requires compensation to be continually re-measured based on the current market value of the underlying share and the resulting accrual is recognized as a liability on the balance sheet.
On September 26, 2002, the Company's Board of Directors approved a resolution stating that the Company would no longer settle stock options in cash. As it is the Company's policy to grant stock options with an exercise price equal to the fair value of the underlying share on the date of grant, the Company does not expect to record compensation expense under the provisions of APB 25 for options granted to employees subsequent to September 26, 2002. Compensation expense has been recorded for variable stock option plans.
Under Canadian GAAP, the Company does not record compensation expense relating to stock options. Consideration paid by employees on the exercise of stock options for shares is credited to capital stock. Consideration paid by the Company on the cash settlement of stock options is debited to retained earnings.
The required accounting under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ["SFAS 123"] is consistent with that required under APB 25 for stock options that can be settled in cash at the option of the holder.
Under U.S. GAAP, the Company is required to make proforma disclosures of basic and diluted earnings per share for those options granted subsequent to September 26, 2002 as if the fair value method of accounting has been applied. The required disclosure would be the same as those disclosed under Canadian GAAP.
The proforma effects of applying the provisions of SFAS 123 on net income and earnings per share on options granted subsequent to September 26, 2002 are:
| For the year ended | |
| September 27, 2003 | |
| Net income for the year under US GAAP: | |
| As reported | 36,863 |
| Proforma | 36,423 |
| Proforma earnings per share under U.S. GAAP: | |
| Basic | 0.91 |
| Diluted | 0.90 |
32
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
(f) Comprehensive income
For purposes of reconciliation to U.S. GAAP, the Company presents the disclosure requirements of Statement of Financial Accounting Standards No. 130 ["SFAS 130"] in these consolidated financial statements. SFAS 130 requires the presentation of comprehensive income and its components. Comprehensive income includes all changes in equity during a period except shareholder transactions. Other comprehensive income is comprised of the cumulative foreign exchange gains or losses.
Recently issued pronouncements
Canadian GAAP Standards
The CICA has amended CICA 3870, Stock Based Compensation and other Stock Based Payments, to require equity instruments awarded to employees be measured and expensed, eliminating the current provisions which permit a company to only disclose the fair value. The transitional provisions for the amendments include both retroactive and prospective alternatives, and are dependent upon whether the Company applies the amended provisions in fiscal 2004 or 2005.
United States GAAP Standards
Statement of Financial Accounting Standard no. 149 ("SFAS 149"), which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133 was issued in the United States. SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cashflows. This statement is effective for the Company in the upcoming fiscal year but is not expected to have any significant impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation ["FIN"] 46, "Consolidation of Variable Interest Entities an interpretation of ARB No. 51" [the "Interpretation"]. The Interpretation introduces a new consolidation model - the variable interests model - which determines control [and consolidation] based on potential variability in gains and losses of the entity being evaluated for consolidation. The Interpretation requires disclosure of certain information in financial statements initially issued after January 31, 2003, if it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when Interpretation 46 becomes effective. As the Company is a foreign private issuer, Interpretation 46 will be effective for the Company in the upcoming fiscal year but is not expected to have a significant impact on the Company's consolidated financial statements.
In May 2003, the FASB issued FAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". FAS 150 establishes standards for the measurement and classification of certain financial instruments with characteristics of both liabilities and equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003. This standard is effective for the Company in the upcoming fiscal year but is not expected to have a significant impact on the Company's consolidated financial statements.
33
CFM Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in thousands of Canadian dollars]
September 27, 2003
Consolidated balance sheet items
The following summarizes the consolidated statements of financial position in accordance with U.S. GAAP where different from the amounts reported under Canadian GAAP:
| 2003 | 2002 | |
| $ | $ | |
| Assets | ||
| Prepaid and other expenses | 2,141 | 3,559 |
| Future income taxes - current | 18,581 | 10,533 |
| Capital assets, net | 101,437 | 116,037 |
| Other assets | 3,032 | 1,524 |
| Goodwill, net | 212,974 | 228,025 |
| Liabilities | ||
| Accrued employee compensation | 9,168 | 7,844 |
| Income taxes payable | 2,661 | 960 |
| Future income taxes - current | 1,920 | 147 |
| Future income taxes - non-current | 22,219 | 24,034 |
| Shareholders' equity | ||
| Share capital | 165,340 | 163,266 |
| Accumulated other comprehensive income (loss) | (19,342) | 25,377 |
| Retained earnings | 180,438 | 148,924 |
34
