Combined Financial Statements
CONCORD CONFECTIONS INC.,
TERRA ROUGE ESTATES INC. AND
ALPHARETTA CONFECTIONS INC.
June 27, 2004
(unaudited)
CONCORD CONFECTIONS INC., TERRA ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
TABLE OF CONTENTS
JUNE 27, 2004
- --------------------------------------------------------------------------------
Page
----
Combined Balance Sheet 1
Combined Statement of Income 2
Combined Statement of Stockholders' Equity 3
Combined Statement of Cash Flows 4
Notes to the Combined Financial Statements 5-6
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
COMBINED BALANCE SHEET
JUNE 27, 2004
(IN CANADIAN DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 497,506
Accounts receivable (net of $139,580 allowance
for doubtful accounts) 12,389,648
Inventories (Note 3) 12,253,950
Current portion of lease receivable (Note 4) 471,826
Other assets 1,238,755
Due from related party 472,906
- --------------------------------------------------------------------------------
27,324,591
LONG-TERM INVESTMENTS 7,736,387
CAPITAL ASSETS 44,512,025
INTANGIBLES 7,308,462
DERIVATIVE INSTRUMENTS 7,307,062
LEASE RECEIVABLE (Note 4) 2,253,951
DEFERRED FINANCING COSTS 23,191
- --------------------------------------------------------------------------------
$ 96,465,669
================================================================================
LIABILITIES
CURRENT
Bank indebtedness $ 6,221,168
Accounts payable and accruals 13,114,735
Income taxes payable 179,550
Deferred income taxes 2,643,185
Current portion of long-term debt 24,397,254
- --------------------------------------------------------------------------------
46,555,892
LONG-TERM DEBT 2,072,616
DEFERRED INCOME TAXES 2,086,605
- -------------------------------------------------------------------------------
50,715,113
- -------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK 270,949
RETAINED EARNINGS 45,279,454
ACCUMULATED OTHER COMPREHENSIVE INCOME 200,153
- -------------------------------------------------------------------------------
45,750,556
- -------------------------------------------------------------------------------
$ 96,465,669
================================================================================
See accompanying notes to the combined financial statements
Page 1 of 6
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
COMBINED STATEMENT OF INCOME
179-DAY PERIOD ENDED JUNE 27, 2004
(IN CANADIAN DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
SALES $52,327,395
COST OF GOODS SOLD 38,493,391
- --------------------------------------------------------------------------------
GROSS PROFIT 13,834,004
- --------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 11,010,550
Foreign exchange losses 296,506
Interest and bank charges, net 695,264
- --------------------------------------------------------------------------------
12,002,320
- --------------------------------------------------------------------------------
INCOME BEFORE UNDERNOTED ITEMS 1,831,684
EQUITY INCOME IN LONG-TERM INVESTMENTS 710,321
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,542,005
- --------------------------------------------------------------------------------
INCOME TAXES
Current 2,092,627
Deferred (1,475,000)
- --------------------------------------------------------------------------------
617,627
- --------------------------------------------------------------------------------
NET INCOME $ 1,924,378
================================================================================
See accompanying notes to the combined financial statements
Page 2 of 6
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
179-DAY PERIOD ENDED JUNE 27, 2004
(IN CANADIAN DOLLARS)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Retained Comprehensive Common
TOTAL Income Earnings Income Stock
-------------- ------------------ --------------- ------------- ----------
Beginning of period $ 43,838,589 $ - $ 43,355,076 $ 212,564 $ 270,949
Comprehensive income
Net income 1,924,378 1,924,378 1,924,378 - -
Other comprehensive loss, net of tax
Foreign currency translation adjustments (12,411) (12,411) - -
----------------
Other comprehensive loss - (12,411) - (12,411) -
----------------
Comprehensive income - $ 1,911,967 - - -
-------------- -------------------------------------------
End of period $ 45,750,556 $ 45,279,454 $ 200,153 $ 270,949
============== ===========================================
See accompanying notes to the combined fintements
Page 3 of 6
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
COMBINED STATEMENT OF CASH FLOWS
179-DAY PERIOD ENDED JUNE 27, 2004
(IN CANADIAN DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES
OPERATING
Net income $ 1,924,378
Items not affecting cash
Depreciation and amortization 2,035,083
Equity income in long-term investments (710,321)
Derivative instruments 4,495,446
Deferred income taxes (1,475,000)
Foreign exchange (12,411)
Accounts receivable (6,353,137)
Income tax recoverable 678,098
Inventories 4,419,882
Other assets (140,701)
Due from related party (93,492)
Account payable and accruals (10,015)
- --------------------------------------------------------------------------------
4,757,810
- --------------------------------------------------------------------------------
INVESTING
Lease receivable (2,725,777)
Purchase of capital assets (849,425)
- --------------------------------------------------------------------------------
(3,575,202)
- --------------------------------------------------------------------------------
FINANCING
Repayment of mortgage payable (267,951)
Repayment of term bank loans (2,570,746)
Increase in term bank loans 1,942,750
Bank indebtedness (440,406)
Due to Fleer Espanola, S.A. (46,108)
- --------------------------------------------------------------------------------
(1,382,461)
- --------------------------------------------------------------------------------
CHANGE IN CASH (199,853)
CASH, BEGINNING OF PERIOD 697,359
- --------------------------------------------------------------------------------
CASH, END OF PERIOD $ 497,506
================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 667,546
Income taxes paid $ 1,447,405
See accompanying notes to the combined financial statements
Page 4 of 6
CONCORD CONFECTIONS INC., TERRA ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
JUNE 27, 2004
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited combined interim financial statements include
the accounts of Concord Confections Inc., Terra Rouge Estates Inc. and
Alpharetta Confections Inc. ("the Company") and have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information and in
accordance with the rules and regulations of the United States Securities
and Exchange Commission ("SEC"). Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. These unaudited combined interim financial statements reflect
all adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the interim period. These unaudited
combined interim financial statements should be read in conjunction with
the December 31, 2003 combined financial statements and the related notes
thereto. The accounting policies presented in Note 2 to the annual
financial statements have been consistently applied in these interim
financial statements. Operating results for the 179-day period ended June
27, 2004 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2004. The Company traditionally
recognizes a larger percentage of its sales in the third quarter. All
significant intercompany transactions have been eliminated in combination.
These unaudited combined interim financial statements have been prepared in
conformity with GAAP, and include estimates and assumptions by management
that affect the amounts reported in the combined financial statements.
Actual results could differ from these estimates.
2. INVENTORIES
Raw materials $ 5,908,296
Work-in-process 2,243,245
Finished goods 4,102,409
---------------------------------------------------------------------------
$ 12,253,950
===========================================================================
Page 5 0f 6
CONCORD CONFECTIONS INC., TERRA ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
JUNE 27, 2004
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
(UNAUDITED)
- --------------------------------------------------------------------------------
3. SEGMENTED INFORMATION
The Company operates in the manufacturing sales of confectionery products
with three distinct operating segments. The three segments are Concord
Confections Inc. ("Concord"), Terra Rouge Estates Inc. ("Terra Rouge") and
Alpharetta Confections Inc. ("Alpharetta").
Concord manufactures and sells confectionery products, Terra Rouge holds
real estate investments, some of which are used by Concord in their
operations and Alpharetta functions as a marketing and sales company
selling Concord products in the United States.
Operating segments TERRA
CONCORD ROUGE ALPHARETTA COMBINED
------------ ------------ ------------ -------------
Sales $ 51,709,318 $ 1,347,827 $ 5,734,836 $ 58,791,981
Intercompany sales - (729,750) (5,734,836) 6,464,586)
--------------------------------------------------------------------------------
$ 51,709,318 $ 618,077 $ - $ 52,327,395
================================================================================
Net income (loss) $ 7,546,025 $(440,852) $(5,180,795) $ 1,924,378
================================================================================
4. MARS CONTRACT
On October 17, 2003, the Company entered into a co-manufacturing Agreement
(the "Agreement") with Masterfoods USA, a division of Mars, Incorporated
("Mars"). The Agreement stipulates that the Company will purchase and
install agreed upon equipment (the "Equipment"), which will be exclusively
used to manufacture product for Mars for the duration of the term of the
Agreement, that being twenty-four months unless terminated early by either
party. In addition to paying an agreed upon price for the products, Mars
will repay the Company the total cost of the equipment based on an even
five year monthly payment schedule and 7% interest per annum. Upon
expiration or any termination of the Agreement, Mars will purchase the
Equipment for a purchase price equal to the aggregate amount of all then
remaining principal payments.
As required under EITF 01-8 "Determining whether an arrangement contains a
lease", the Company has treated the principal payments receivable from Mars
as a direct financing lease under SFAS No. 13 "Accounting for Leases".
5. SUBSEQUENT EVENTS
On August 2, 2004, the Company settled certain forward foreign exchange
contracts prior to their stated maturity for gains of $6,285,600.
On August 30, 2004, Tootsie Roll Industries, Inc. and it affiliate
companies completed an asset purchase transaction of the Company pursuant
to a purchase agreement dated August 11, 2004 and as amended by a purchase
agreement dated August 27, 2004.
On August 30, 2004, the Company fully repaid its long-term debt.
Page 6 of 6
Combined Financial Statements
CONCORD CONFECTIONS INC.,
TERRA ROUGE ESTATES INC. AND
ALPHARETTA CONFECTIONS INC.
December 31, 2003
Deloitte Deloitte & Touche LLP
1 City Centre Drive
Suite 500
Mississauga ON L5B 1M2
Canada
Tel: (416) 601-6150
Fax: (416) 601-6151
www.deloitte.ca
REPORT OF INDEPENDENT REGISTERED
CHARTERED ACCOUNTANTS FIRM
To the Board of Directors of
Tootsie Roll Industries, Inc.
We have audited the accompanying combined balance sheet of Concord Confections
Inc., Terra Rouge Estates Inc. and Alpharetta Confections Inc. ("the Company")
as at December 31, 2003 and the combined statements of income, stockholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). These 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. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and the results of its operations and its cash flows for the year then ended in
accordance with accounting principles generally accepted in the United States of
America.
Chartered Accountants
Toronto, Ontario
October 12, 2004
Member of
Deloitte Touche Tohmatsu
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
TABLE OF CONTENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Page
----
Combined Balance Sheet 1
Combined Statement of Income 2
Combined Statement of Changes in Stockholders' Equity 3
Combined Statement of Cash Flows 4
Notes to the Combined Financial Statements 5-16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
COMBINED BALANCE SHEET
DECEMBER 31, 2003
(IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 697,359
Accounts receivable (net of $318,564 allowance for
doubtful accounts) 6,036,511
Income taxes recoverable 498,548
Inventories (Note 5) 16,673,832
Other assets 1,098,054
Due from related party (Note 13) 379,414
- --------------------------------------------------------------------------------
25,383,718
LONG-TERM INVESTMENTS (Note 6) 6,979,958
CAPITAL ASSETS (Note 7) 45,675,483
INTANGIBLES (Note 8) 7,325,412
DERIVATIVE INSTRUMENTS (Note 11) 11,802,508
DEFERRED FINANCING COSTS 28,441
- --------------------------------------------------------------------------------
$ 97,195,520
================================================================================
LIABILITIES
CURRENT
Bank indebtedness (Note 9) $ 6,661,574
Accounts payable and accruals 13,124,750
Deferred income taxes (Note 10) 2,298,826
Current portion of long-term debt (Note 9) 25,005,860
- --------------------------------------------------------------------------------
47,091,010
LONG-TERM DEBT (Note 9) 2,359,957
DEFERRED INCOME TAXES (Note 10) 3,905,964
- --------------------------------------------------------------------------------
53,356,931
- --------------------------------------------------------------------------------
COMMITMENTS (Note 11)
STOCKHOLDERS' EQUITY
CAPITAL STOCK (Note 12) 270,949
RETAINED EARNINGS 43,355,076
ACCUMULATED OTHER COMPREHENSIVE INCOME 212,564
- --------------------------------------------------------------------------------
43,838,589
- --------------------------------------------------------------------------------
$ 97,195,520
================================================================================
See accompanying notes to the combined financial statements
Page 1 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2003
(IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
SALES $104,723,370
COST OF GOODS SOLD 73,903,551
- --------------------------------------------------------------------------------
GROSS PROFIT 30,819,819
- --------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 34,302,418
Foreign exchange gains (Note 14) (24,509,149)
Interest and bank charges, net 1,434,684
- --------------------------------------------------------------------------------
11,227,953
- --------------------------------------------------------------------------------
INCOME BEFORE UNDERNOTED ITEMS 19,591,866
EQUITY INCOME IN LONG-TERM INVESTMENTS 762,918
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 20,354,784
- --------------------------------------------------------------------------------
INCOME TAXES
Current 1,486,000
Deferred 5,065,000
- --------------------------------------------------------------------------------
6,551,000
- --------------------------------------------------------------------------------
NET INCOME $ 13,803,784
================================================================================
See accompanying notes to the combined financial statements
Page 2 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2003
(IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Retained Comprehensive Common
TOTAL Income Earnings Income Stock
-------------- ------------- --------------- -------------- -----------
Balance at beginning of year $ 30,847,335 $ - $ 30,051,292 $525,094 $270,949
Comprehensive income
Net income 13,803,784 13,803,784 13,803,784 - -
Other comprehensive loss, net of tax
Foreign currency translation adjustments (312,530) (312,530) - -
-------------
Other comprehensive loss - (312,530) - (312,530) -
-------------
Comprehensive income - $ 13,491,254 - - -
Dividends (500,000) (500,000) - -
-------------- --------------- -------------- -----------
Balance at end of year $ 43,838,589 $ 43,355,076 $212,564 $270,949
============== =============== ============== ===========
See accompanying notes to the combined financial statements
Page 3 of 16
AND ALPHARETTA CONFECTIONS INC.
Combined Statement of Cash Flows
YEAR ENDED DECEMBER 31, 2003
(IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES
OPERATING
Net income $13,803,784
Items not affecting cash
Depreciation and amortization 4,187,208
Equity income in long-term investments (762,918)
Derivative instruments (14,308,598)
Deferred income taxes 5,065,000
Foreign exchange (391,444)
Change in accounts receivable 1,026,179
Change in income tax recoverable 5,754
Change in inventories (4,160,874)
Change in other assets 50,669
Change in due from related party (339,424)
Change in account payable and accruals 679,879
Dividends received from long-term investments 1,000,212
- --------------------------------------------------------------------------------
5,855,427
- --------------------------------------------------------------------------------
INVESTING
Acquisition (Note 4) (10,811,346)
Disposal of capital assets 52,900
Purchase of capital assets (1,772,854)
Purchase of trademarks (75,000)
- --------------------------------------------------------------------------------
(12,606,300)
- --------------------------------------------------------------------------------
FINANCING
Repayment of mortgage payable (508,619)
Repayment of term bank loans (3,944,271)
Increase in term bank loans 13,781,795
Bank indebtedness (1,822,218)
Due to Fleer Espanola, S.A. (71,144)
Dividends paid (500,000)
- --------------------------------------------------------------------------------
6,935,543
- --------------------------------------------------------------------------------
CHANGE IN CASH 184,670
CASH, BEGINNING OF YEAR 512,689
- --------------------------------------------------------------------------------
CASH, END OF YEAR $ 697,359
================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 1,507,530
Income taxes paid $ 1,623,964
See accompanying notes to the combined financial statements
Page 4 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS
The combined company which includes Concord Confections Inc. ("Concord"),
Terra Rouge Estates Inc. ("Terra Rouge") and Alpharetta Confections Inc.
("Alpharetta") (collectively the "Company"), all companies that are
commonly owned, is engaged in the business of manufacturing and selling
various confectionery products.
2. BASIS OF PRESENTATION
Combination
These combined financial statements combine the accounts of Concord, Terra
Rouge and Alpharetta. The accounts of Concord include the accounts of its
wholly-owned subsidiaries, Concord Wax LLC and Impel Movie Line Inc.
All significant intercompany balances and transactions have been eliminated
in the combined financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
Inventories
Raw materials, work-in-process and finished goods are valued at the lower
of cost and net realizable value. Cost is determined on a first-in,
first-out basis.
Capital assets
Capital assets are stated at cost net of accumulated amortization.
Amortization is provided using the following rates:
Machinery and equipment - 10% straight-line
Dies and plates - 50% straight-line
Leasehold improvements - 10% straight-line
Office equipment - 20% straight-line
Building - 4% declining balance
The Company reviews capital assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. An impaired asset is written down to its estimated fair value
based upon most recent information available. Estimated fair value is
generally measured by discounting estimated cash flows developed by
Company's management.
Page 5 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangibles
Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangibles" ("SFAS 142") which addresses the recognition and measurement
of goodwill and other intangibles subsequent to a business combination.
Intangibles consist of trademarks acquired by the Company and a
non-competition agreement entered into by the Company. Management has
determined that the trademarks have indefinite useful lives. They are
generally renewable every 10 years. The cost of renewal is considered to be
minimal and the Company intends to renew the trademarks continuously,
consistent with prior renewals of the trademarks. Management has analyzed
the trademarks and has concluded that they will generate positive cashflows
for the Company for an indefinite period of time. As a result, upon
adoption of SFAS 142 the Company ceased amortizing the trademarks. The
non-competition agreement is amortized on a straight-line basis over 5
years.
Intangible assets with an indefinite life are reviewed annually for
impairment, unless events or changes in circumstances indicate that the
carrying value may not be recoverable. The impairment is determined by
comparing the expected future discounted cash flows to be generated by the
intangible assets with its carrying amount. If the carrying value exceeds
the sum of the future discounted cash flows, the asset will be adjusted to
its fair value and an impairment loss would be charged to operations in the
period identified. Intangible assets with a finite life are tested for
recoverability whenever events or changes in circumstances indicate that
their carrying amount may not be recovered.
Revenue recognition
Revenue, net of applicable provisions for discounts, returns, allowances,
and volume rebates, is recognized when title of goods is passed to the
customer and collectibility is reasonably assured. Freight costs are
recorded as cost of sales.
Foreign exchange transactions
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at the rate of exchange prevailing at the
balance sheet date. Revenues and expenses are translated using the average
rate of exchange for the period. Exchange gains and losses are included in
income.
The functional currency of entities located in Spain is the Euro. Assets
and liabilities of this entity are translated into Canadian dollars using
the exchange rate at the balance sheet date while associated revenues and
expenses are translated at the average rate for the period. Exchange gains
and losses resulting from this translation are included in other
comprehensive income.
Page 6 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
The Company has adopted the asset and liability method of accounting for
income taxes. Under this standard, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the consolidated financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. In addition, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that included the enactment date.
Financial instruments
All derivative financial instruments are recognized in the financial
statements and measured at fair value regardless of the purpose or intent
for holding them. Changes in the fair value of derivative financial
instruments are recognized in income.
New accounting policies
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143"), which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. As
the Company does not have asset retirement obligation, there is no impact,
upon adoption of this standard on the Company's financial position and
results of operations in the current year.
Effective January 1, 2003, the Company adopted the accounting requirements
of FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"). FIN 45 defines guarantees to include
indemnifications granted pursuant to contractual arrangements as well as
contingent consideration. The Company does not have any guarantees other
than those already disclosed in the financial statements.
Use of estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingencies at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Estimates are used when accounting for items
including but not limited to allowance for doubtful accounts, inventory
obsolescence, amortization, asset valuations, accruals and other provisions
and contingencies.
Page 7 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
4. ACQUISITION
On June 26, 2003, the Company purchased certain assets from Philadelphia
Chewing Gum Corporation and Gum Base International, Inc. for cash
consideration of $10,811,346. This purchase was accounted for using the
purchase method as follows:
Assets acquired at fair value
Inventory $ 4,262,832
Equipment 1,443,194
Intangibles 5,105,320
---------------------------------------------------------------------------
Consideration $ 10,811,346
===========================================================================
The intangibles acquired are trademarks of $4,766,370 and a non-competition
agreement of $338,950. The trademarks have an indefinite life and are not
amortized, and the non-competition is amortized on a straight-line basis
over its life of five years.
5. INVENTORIES
Raw materials $ 4,000,852
Work-in-process 711,517
Finished goods 11,961,463
---------------------------------------------------------------------------
$ 16,673,832
===========================================================================
6. LONG-TERM INVESTMENTS
Fleer Espanola, S.A. $ 6,875,269
Dr. Torrents, S.A. 121,156
---------------------------------------------------------------------------
6,996,425
Due to Fleer Espanola, S.A. (16,467)
---------------------------------------------------------------------------
$ 6,979,958
===========================================================================
The Company effectively has a 50% investment in the common shares of each
of Fleer Espanola, S.A. and Dr. Torrents, S.A. These shares are held
through a wholly owned subsidiary and are accounted for in these combined
financial statements using the equity method of accounting.
Page 8 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
7. CAPITAL ASSETS
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
--------------- --------------- -------------
Land $ 8,529,798 $ - $ 8,529,798
Machinery and equipment 30,138,195 14,280,938 15,857,257
Dies and plates 2,988,604 2,631,668 356,936
Leasehold improvements 4,265,207 2,152,890 2,112,317
Office equipment 2,138,182 1,866,019 272,163
Building 21,110,808 3,565,903 17,544,905
Deposits on capital assets 1,002,107 - 1,002,107
---------------------------------------------------------------------------
$ 70,172,901 $ 24,497,418 $ 45,675,483
===========================================================================
8. INTANGIBLES
Indefinite life intangibles
Trademarks $ 7,020,357
---------------------------------------------------------------------------
Finite life intangibles
Non-competition agreement 338,950
Accumulated amortization 33,895
---------------------------------------------------------------------------
305,055
---------------------------------------------------------------------------
$ 7,325,412
===========================================================================
9. LONG-TERM DEBT
Term loan A (i) $ 12,145,333
Term loan B (ii) 12,315,101
Mortgage payable (iii) 2,905,383
---------------------------------------------------------------------------
Total debt 27,365,817
Less current portion 25,005,860
---------------------------------------------------------------------------
Long-term debt $ 2,359,957
===========================================================================
(i) The Company entered into a banking facility (the "Term Loan A") dated
May 27, 2003. Term Loan A provides the Company with secured facilities
of up to $13,500,000 and U.S. $10,700,000, and up to $45,000,000
available by the way of forward foreign exchange content exposure. It
is secured by a general security agreement with specific charges on
equipment, inventories, a general assignment of book debts, a pledge
of all issued and outstanding shares of each subsidiary and
Page 9 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
commitments by the shareholders. The Banker's Acceptance rate as at
December 31, 2003 was 2.74%. Term Loan A consists of the following:
9. LONG-TERM DEBT (CONTINUED)
(i) (continued)
(a) A demand reducing credit facility for up to U.S. $2,700,000. This
facility bears interest at the Banker's Acceptance rate plus
1.25%. Dependent on the Company's ability to meet prescribed
ratios as set out in the Term Loan A agreement, the interest rate
on this facility may be increased up to the Banker's Acceptance
rate plus 2.125%. As at December 31, 2003, the utilized amount of
this facility is $2,593,000 (U.S. $2,000,000).
(b) A demand revolving reducing credit facility for up to $5,000,000
to fund capital expenditures. This facility bears interest at the
Banker's Acceptance rate plus 1.25%. Dependent on the Company's
ability to meet prescribed ratios as set out in the credit
agreement, the interest rate on this facility may be increased up
to the Banker's Acceptance rate plus 2.125%. As at December 31,
2003, $600,000 has been utilized.
(c) A treasury risk management facility for up to $15,000,000 in
notional risk content as determined by the bank. As at December
31, 2003, the utilized amount of this facility is nil.
(d) A demand reducing credit facility of up to U.S. $8,000,000 to
acquire certain assets of Philadelphia Chewing Gum Corporation
and Gum Base International, Inc. The term bank loan bears
interest at LIBOR plus 1.25%. Dependent on the Company's ability
to meet prescribed ratios as set out in the credit agreement, the
interest rate on the term bank loan may be increased up to LIBOR
plus 2.125%. The outstanding balance at December 31, 2003 is
$8,952,333 (U.S. $6,905,000).
Also included in this banking facility is a demand uncommitted credit
facility for up to $8,500,000, which bears interest at the bank's
prime rate. As at December 31, 2003, $6,661,574 of the facility was
utilized. This amount is accounted for as bank indebtedness.
(ii) The Company entered into a banking facility (the "Term Loan B") dated
June 10, 2002. Term Loan B provides the Company with secured
facilities of up to $14,431,538 and a treasury risk management line
for a maximum of $1,500,000 in notional risk content as determined by
the bank. It is secured by a general security agreement with mortgages
on 519 North Rivermede Road, Concord, ON, Canada and 345 Courtland
Avenue, Vaughan, ON, Canada and specific charges on capital assets and
rent receivable. The Bankers Acceptance rate as at December 31, 2003
was 2.74%. Term Loan B consists of the following:
(a) A committed non-revolving credit facility for up to $365,538,
which bears interest at 6.89%. As at December 31, 2003, the
utilized amount of this facility is nil.
Page 10 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
(b) A demand non-revolving reducing credit facility for up to
$2,800,000 which bears interest at the Banker's Acceptance rate
plus 1.25%. Dependent on the Company's ability to meet prescribed
ratios as set out in the Term Loan B agreement, the interest rate
on this facility may be increased up to the Banker's Acceptance
rate plus 2.125%. As at December 31, 2003, the utilized amount of
this facility is $2,265,101.
Page 11 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT (CONTINUED)
(ii) (continued)
(c) A demand non-revolving reducing facility for up to $11,266,000,
which bears interest at the Banker's Acceptance rate plus 1.25%,
Dependent on the Company's ability to meet prescribed ratios as
set out in the Term Loan B agreement, the interest rate on this
facility may be increased up to the Banker's Acceptance rate plus
2.125%. As at December 31, 2003, the utilized amount of this
facility is $10,050,000.
(d) A treasury risk management facility up to $1,500,000 in notional
risk content as determined by the bank. As at December 31, 2003,
this facility remains unutilized.
(iii) The Company entered into a mortgage facility (the "Mortgage
Facility") dated July 23, 1998. The Mortgage Facility is secured by
the land and building of 345 Courtland Avenue, which bears interest
at 7.11%. The outstanding balance at December 31, 2003 is $2,905,383,
o fwhich $545,426 is current.
During the year ended December 31, 2003, $1,344,795 of interest expense was
incurred on the bank loans.
At December 31, 2003, the prime rate was 4.50% and LIBOR rate was 1.12%.
The long-term debt is repayable as follows:
2004 $ 25,005,860
2005 584,895
2006 627,220
2007 672,608
2008 475,234
-----------------------------------
$ 27,365,817
===================================
On August 30, 2004, the Company repaid all amounts, under Term Loan A, Term
Loan B and the Mortgage Facility.
Page 12 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
10. INCOME TAXES
The provision for income taxes reflects an effective tax rate which differs
from the statutory corporate tax rates as follows:
Combined basic statutory Canadian rate 34.00%
===========================================================================
Tax provision on combined basic
statutory Canadian rate $ 6,920,627
Differences in foreign tax rates (369,627)
---------------------------------------------------------------------------
$ 6,551,000
===========================================================================
The components of the Company's net deferred income tax liability are as
follows:
Fair value of derivative instruments not recognized
for tax until realized $ 4,000,000
Carrying value of property, plant and equipment in
excess of tax value 1,991,940
Other 212,850
---------------------------------------------------------------------------
$ 6,204,790
===========================================================================
11. COMMITMENTS
As part of the Company's foreign currency risk management strategy, the
Company hedges a portion of its anticipated monthly future U.S. dollar
revenues with the use of foreign currency contracts to protect against
potential declines in the Canadian dollar equivalent amounts due to changes
in exchange rates. As at December 31, 2003 the Company had foreign exchange
contracts to sell U.S. $46,000,000 over a period ending October 31, 2005 at
exchange rates varying from Canadian $1.3476 to $1.6114. At December 31,
2003, the fair value of these contracts is $11,802,508.
Page 13 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
12. CAPITAL STOCK
Capital stock consists of the following:
Authorized
Unlimited number of Class A and Class B
Concord Confections Inc. common shares
Unlimited number of Terra Rouge Estates Inc. first
preference shares of no par value, voting,
15% cumulative
Unlimited number of Terra Rouge Estates Inc. second
preference shares of no par value, non-voting,
12% non-cumulative
Unlimited number of Terra Rouge Estates Inc. third
preference shares of no par value, non-voting,
10% non-cumulative
Unlimited number of Terra Rouge Estates Inc. and
Alpharetta Confections Inc. common shares
Issued and outstanding
10,000 Class A common shares (Concord Confections Inc.) $ 269,528
99 common shares (Terra Rouge Estates Inc.) 99
100 common shares (Alpharetta Confections Inc.) 1,322
---------------------------------------------------------------------------
$ 270,949
===========================================================================
13. RELATED PARTY TRANSACTIONS AND COMMITMENTS
During the year, the Company paid consulting expenses to a company under
common control in the amount of $1,798,574 (U.S. $1,283,779). The Company
paid on behalf of this company $1,997,990 (U.S. $1,426,117) of various
expenses. As at December 31, 2003, $184,541 (U.S. $142,338) was receivable
from this company. This advance is due upon demand and bears no interest.
During the year, the Company paid $14,505,733 (including U.S.$2,170,372) in
compensation to the shareholder group. As at December 31, 2003, $194,873
(U.S.$150,307) was receivable from this group. This advance is due upon
demand and bears no interest.
Page 14 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
(a) Foreign currency rate risk
The Company realizes a significant portion of its sales in U.S.
dollars. The Company also has U.S. purchases of inventory and capital
assets that require repayment in U.S. dollars. Potential currency
fluctuations could have a significant impact on the profitability of
the Company. The risk is partially reduced by the natural hedge of
U.S. dollar revenues and purchases. The Company has also entered into
forward sales contracts for U.S. dollars (see Note 11). The Company
had foreign exchange gains of $24,509,149 in 2003. A gain of
$14,308,598 results from the change in the fair value in forward
foreign exchange contracts outstanding at December 31, 2003,
$3,815,000 results from the early settlement of outstanding hedges in
December 2003, $6,026,225 relates to net foreign exchange gains on
settlement of derivatives on their maturity date and the remaining
balance of $359,326 relates to net foreign exchange adjustments to
assets and liabilities held in U.S. dollars.
On August 2, 2004 the Company settled certain forward foreign exchange
contracts prior to their stated maturity dates for gains of
$6,285,600.
(b) Credit risk
Credit risk arises from potential that counterparties will fail to
perform their obligations. The Company is exposed to credit risk from
customers, however the risk is mitigated by proactive credit
management policies.
(c) Interest rate risk
The Company has long-term debt which bears interest at floating rates.
As a result, the Company's cash flow is exposed to changes in floating
rates.
(d) Commodity price risk
The Company's cash flow is subject to changes in commodity prices.
(e) Fair value of financial instruments
The carrying amount of cash, accounts receivable, income taxes, bank
indebtedness and accounts payable and accruals approximates their fair
value because of the near-term maturity of those instruments.
The estimated fair values of the due from related parties and term
bank loans approximate their carrying amounts in the financial
statement as their stated interest rates approximate market interest
rates.
Page 15 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
15. ECONOMIC DEPENDENCE
During the year ended December 31, 2003, there was one customer with sales
exceeding 10% of total sales and one customer with accounts receivable
exceeding 10% of the total trade accounts receivable balance.
In 2003, greater than 95% of the Company's sales are to customers in the
United States.
During the year, there were two suppliers from whom the Company made
purchases that exceeded 10% of the total raw material and packaging
purchases.
16. SEGMENTED INFORMATION
The Company operates in the manufacturing sales of confectionery products
with three distinct operating segments. The three segments are Concord,
Terra Rouge and Alpharetta.
Concord manufactures and sells confectionery products, Terra Rouge holds
real estate investments, some of which are used by Concord in its
operations. Alpharetta functions as a marketing and sales company selling
Concord products in the United States.
The accounting policies used in the segmented entities is consistent with
those in Note 3.
Operating segments Terra
Concord Rouge Alpharetta Combined
------------------ ---------------- ----------------- ------------------
Sales $ 103,474,300 $ 2,708,570 $9,947,879 $ 116,130,749
Intercompany sales - (1,459,500) (9,947,879) (11,407,379)
-------------------------------------------------------------------------------------------------------------
$ 103,474,300 $ 1,249,070 $ - $ 104,723,370
=============================================================================================================
Assets $ 78,069,182 $ 19,032,344 $ 93,994 $ 97,195,520
=============================================================================================================
Capital assets $ 19,969,444 $ 25,690,033 $ 16,006 $ 45,675,483
=============================================================================================================
Net income (loss) $ 25,335,187 $ (1,583,200) $ (9,948,203) $ 13,803,784
=============================================================================================================
Geographic information United States
and
Canada International Combined
---------------- ----------------- ------------------
Sales $ 7,249,198 $ 97,474,172 $ 104,723,370
=============================================================================================================
Capital assets and intangibles $ 51,190,296 $ 1,810,599 $ 53,000,895
=============================================================================================================
Page 16 of 16
CONCORD CONFECTIONS INC., TERRA ROUGE ESTATES INC.
AND ALPHARETTA CONFECTIONS INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN CANADIAN DOLLARS, UNLESS OTHERWISE SPECIFIED)
- --------------------------------------------------------------------------------
17. SUBSEQUENT EVENT
On August 30, 2004, Tootsie Roll Industries, Inc. and its affiliate
companies completed an asset purchase transaction of the Company, pursuant
to a purchase agreement dated August 11, 2004 and as amended by a purchase
agreement dated August 27, 2004.
18. PENDING ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 - Consolidated Financial Statements to
those entities defined as "Variable Interest Entities" in which equity
investors do not have the characteristics of a "controlling financial
interest" or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support
from other parties. In December 2003, the FASB issued a revision to FIN 46
("FIN 46R") to clarify certain provisions of FIN 46. FIN 46R applies
immediately to all Variable Interest Entities created after December 31,
2003, and by the beginning of the first annual reporting period commencing
after December 15, 2004 for all other variable interest entities. FIN 46R
is not expected to have an impact on the financial position or results of
the Company.
The Company has considered other pending accounting standards but none are
expected to have a material impact on the financial position or results of
the Company.
Page 17 of 16