1. The shareholders' equity section for The Second Cup Ltd is shown in the Consolidated Balance Sheets in Appendix A. You will also find data related to this problem in the notes to the financial statements. Answer the following questions. a) Does The Second Cup have preferred shares? If so, how many preferred shares is the company authorized to issue? How many shares were issued at June 24, 2000? b) What was the average issue price of the common shares as at June 24, 2000 and June 30, 1999? c) Did The Second Cup repurchase any shares in fiscal 2000? Fiscal 1999? If so, identify how many shares and at what amount. d) Calculate The Second Cup's return on equity for fiscal 1999, using its pro forma 1999 results. Shareholders' equity at June 27, 1998 was $10,950,000. How does this compare to the 2000 return on equity of 9.50%? e) Calculate the book value per share for fiscal 1999, using its pro formal 1999 results. How has the book value changed from fiscal 1999 to 2000? The book value per share for 2000 was $0.18. f) How many common shares were issued for cash to employees and directors during the year ended June 24, 2000? g) As at June 24, 2000, what percentage of the company assets was financed by shareholders' equity? h) Did the company report and discontinued operations or extraordinary items during the years ended June 24, 2000 and June 30, 1999? i) How much were the earnings (loss) per share for the years ended June 24, 2000 and June 30. 1999? j) How much (if anything) was paid in dividends during the years ended June 24, 2000 and June 30, 1999? A12 APPENDIX A. Specimen Financial Statements CONSOLIDATED BALANCE SHEETS Pro Forma (Note 1) (unaudited) 1999 2000 1999 $ 1,446 $ 822 ASSETS Current assets Cash and cash equivalents Accounts receivable (notes) Inventories (Note 4 Prepaid expenses and sundry assets (Note 13) Income taxes receivable 2,294 107 25,525 103 $ 20,942 2,494 103 419 934 934 517 1,150 5,416 1,768 27,384 2,308 24,990 2,308 235 125 235 753 674 758 1.838 5,960 Capital assets (Note) Deferred financing charges (Note 7) Loans to directors and officers (Note 13) Investment in Diedrich Coffee, Inc. (Note 3) Investment in The Great Canadian Bagel, Ltd. (Note 5) Future income taxes (Note 10) Goodwill, less accumulated amortization of $3,304 (1999 - $3,004) 5,960 3,495 295 700 700 8.449 8.749 8.749 $ 18,565 $ 49,584 $ 43,696 $ 2,718 8 2,528 LIABILITIES Current liabilities Accounts payable and accrued liabilities Current portion, long-term debt (Note?) Deposits Income taxes payable 3,000 $ 3.415 6,600 923 467 3,000 923 687 6,405 10.250 Long-term debt (Note) Other deferred liabilities 11,305 19,300 219 6,451 19,300 219 212 SHAREHOLDERS' EQUITY Share capital (Note 8) Deficit 62.355 61,670 61.670 (43,945) (60,657) (42,910) 1,698 18,760 17.725 $ 18,565 $ 49,584 $ 43,695 Approved by the Board 2 Comparative Financial Statements. All CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT Pro Forma (Note 1) (unaudited) 1999 2000 1900 $159.198 $340,753 $148,070 Systemwide sales Revenue Franchise revenue Sales from corporate stores Product sales Total revenue $ 28,163 $19.021 1.750 61,645 25,549 $ 17,673 3,607 385 73 $ 20,844 8105,857 $ 21,465 $ 10,086 $ 10,895 1,897 1,490 $ 8,180 430 621 300 300 7.005 9,165 (4.122) 7.450 (16,233) 5,043 (9,225) 3,350 7.450 (557) EBITDA Depreciation of capital assets Amortization of goodwill Barnings before the undernoted Write down of investment (note >> Lon on disposition of investments (notes) and 5) Barnings (los) before interent, taxes and minority interest Net interest and other investment income (expense) (Note Earnings (los) before income taxes and minority interest Income taxes (Note 10) Earnings (love) before minority interest Minority interest Net earnings (losa) Retained earning (deficit), beginning of period Special dividend (nere) Share repurchase in excess of book value (Mote *) Deficit, end of period Weighted average shares outstanding during the focal period Earnings (100) per share 5,030 4,058 (0,875) 4,240 3,102 972 (10,124) 3,791 972 (42.910) (18,719) (10,095) 14.875 3,791 (47.736) (47,690) 5 (60,657 $(42,010) $(43.945) 9.347,389 13,944,99 9,320,004 30.41 30.10 30.72) Pro Forma (Note 1) (unaudited) 1999 2000 1999 S 972 $(10,095) $ 3,791 921 3,387 730 (29) (99) 154 CASH PROVIDED BY (USED IN) Operating activities Net earnings (loss) for the fiscal period Items not involving cash: Amortization and depreciation Minority interest Future income taxes Loss (gain) on disposal of capital assets and investments Shares reserved for issue to directors Forgiveness of loan to officer Amortization of deferred financing charges Write down of investment (Note 3) Cash flow from operations Increase in non-cash working capital items related to operations (72) (940) (120) 15.293 172 81 250 250 250 110 4,122 -- 6,581 8,788 3,840 (1.557) (2,335) (1,055) 5,024 6,453 2,785 (727) (2,078) 1.943 766 Investing activities Purchase of capital assets Proceeds from disposal of capital assets Proceeds from The Great Canadian Bagel, Ltd. debenture (Note 5) Proceeds from the sale of Coffee People, Inc. (Note 3) Net cash position divested on sale of Coffee People, Inc. (Note >> Cumulative foreign exchange translation adjustments (3,503) 3,455 1.650 3,495 23,000 (1,954) (13) 26,534 (135) T (81,078) Financing activities Repurchase of common shares (Note 8) Payment of special dividend (Note 8) Proceeds from issuance (repayment) of long term debt Proceeds on issuance of shares (Note #) Loans to directors and officers (Note 13) Other deferred liabilities (18.719) (12,550) 24,742 (26.921) 513 143 (171) (654) (988) (7) (7) (89) (30,934) (56,936) (27,979) 624 Increase (decrease) in ensh and cash equivalents during the fiscal period Cash and cash equivalents, beginning of fiscal period Cash and cash equivalents, end of fiscal period (50,948) 51,770 (25,329) 46,271 822 $ 1,446 8 $ 20,942 8. SHARE CAPITAL Authorized share capital consists of an unlimited number of common shares and an unlimited number of first preference shares issuable in one or more series of which none are issued. Details of share transactions during the year are as follows: Common Shares Shares Amount 14,329,500 $ 94,833 16,599 143 81 Balance as at June 27, 1998 Issued for cash to employees and directors 6,441 shares reserved for issue to directors Repurchase of shares Balance as at June 30, 1999 Issued for cash to employees and directors 14,480 shares reserved for issue to directors Balance as at June 24, 2000 (5,035,800) 9,310,389 (33,387) $ 61,670 513 49,170 172 9,359,559 $ 62,355 On April 26, 2000, the Company declared a special dividend of $2.00. This dividend was paid on May 31, 2000 to share holders of record on May 19, 2000. On May 14, 1999, the Company offered to purchase for cancellation a maximum of five million of its then issued and out- standing common shares at a price of $16.00 per common share. Five million common shares were tendered by sharehold- ers prior to the June 7, 1999 expiration of the offer and on June 11, 1999, the Company purchased and cancelled these shares at a cost of $80,700, including transaction costs. The common stock account of the Company was reduced by the weighted average original issue cost of the purchased common shares and the balance of the transaction cost was applied to retained earnings On September 18, 1998, The Toronto Stock Exchange approved the Company's Notice of Intention to make a Normal Course Issuer Bid. This Bid permitted the Company to repurchase, for cancellation, through the facilities of the Exchange up to a total of 716,622 common shares, representing approximately 5% of the outstanding common shares. During the year ended June 30, 1999, 35,800 common shares were repurchased and cancelled at a cost of $429. The Toronto Stock Exchange's approval for the Company to make a Normal Course Issuer Bid expired September 21, 1999. No common shares were repurchased and cancelled in fiscal 2000 prior to the expiration date. The Company has a Directors Share Plan, an Amended Director, Officer and Employee Stock Option Plan, and a Share Purchase Plan under which shares are reserved for future issue. Up to 147,876 shares may be issued under the Directors Share Plan, which was approved by the shareholders at the October 16, 1996 Annual and Special Meeting. During the year ended June 24, 2000, 3,399 shares at prices ranging from $7.21 to $14.09 were issued to directors of the Company under this Plan. Also during the current fiscal year, 14,480 shares have been allotted for future issue to directors at prices ranging from $7.21 to $15.12. Under the Directors Share Plan at June 24, 2000, a total of 10,984 shares have been issued and 35,272 shares have been reserved for issue, and 101,620 shares remain available for future issue or allotment. The compensation liability related to shares allotted and reserved for issue is recorded in share capital. Up to 1.360,775 shares have been authorized for issue under the Amended Director, Officer and Employee Stock Option Plan (the "Option Plan"). To June 24, 2000, 141,475 shares have been issued upon exercise of stock options under the Option Plan. Options granted under the Option Plan prior to June 24, 1998 are exercisable commencing three years after the date granted and expire seven years thereafter. Options granted on or after June 24, 1998 vest in equal annual install- ments over three years following the date of grant and expire ten years from the grant date. Options to purchase 524,513 shares remain available to be granted in the future. During the current year the exercise price of all outstanding share options was reduced by $1.03. This was done in consideration of the impact of the special dividend of $2.00 per common share paid May 31, 2000. Details of the Option Plan activity are as follows: Weighted Average Exercise Price Number 554,907 242.819 $10.26 $13.20 $11.12 Outstanding at June 27, 1998 Issued Cancelled Exercised Outstanding at June 30, 1999 Issued Cancelled Exercised Outstanding at June 24, 2000 (78,825) (12,300) 706,601 Exercise Option Price $ 6.75 - $17.19 $11.35 - $15.97 $9.97 - $15.97 $ 6.75 - $8.00 $ 6.75 - $17.19 $ 7.21 - $14.09 $6.97 - $16.16 $ 5.72 $12.50 $ 5.72 - $16.16 $ 7.17 $11.60 99,561 (66,100) $12.66 $13,13 $10.01 (45,275) 694,787 $10,67 The details of share options outstanding at June 24, 2000 are as follows: Vested Non-Vested Fiscal Year of Expiry Number of Shares Weighted Average Exercise Price Number of Shares 2003 Weighted Average Exercise Price $ 5.97 $ 5.72 S 6.81 2004 2005 65,000 12,400 16,000 15,000 59,594 2006 $10.97 $10.54 $9.98 535 2007 2008 $ 9.73 235,978 2009 $13.04 67,947 $13.04 135,272 87,061 $12.63 $ 9.52 235,941 $11.26 458,846 2010 Total Total number of vested and non-vested shares and weighted average exercise price $10.67 694,787 1. The shareholders' equity section for The Second Cup Ltd is shown in the Consolidated Balance Sheets in Appendix A. You will also find data related to this problem in the notes to the financial statements. Answer the following questions. a) Does The Second Cup have preferred shares? If so, how many preferred shares is the company authorized to issue? How many shares were issued at June 24, 2000? b) What was the average issue price of the common shares as at June 24, 2000 and June 30, 1999? c) Did The Second Cup repurchase any shares in fiscal 2000? Fiscal 1999? If so, identify how many shares and at what amount. d) Calculate The Second Cup's return on equity for fiscal 1999, using its pro forma 1999 results. Shareholders' equity at June 27, 1998 was $10,950,000. How does this compare to the 2000 return on equity of 9.50%? e) Calculate the book value per share for fiscal 1999, using its pro formal 1999 results. How has the book value changed from fiscal 1999 to 2000? The book value per share for 2000 was $0.18. f) How many common shares were issued for cash to employees and directors during the year ended June 24, 2000? g) As at June 24, 2000, what percentage of the company assets was financed by shareholders' equity? h) Did the company report and discontinued operations or extraordinary items during the years ended June 24, 2000 and June 30, 1999? i) How much were the earnings (loss) per share for the years ended June 24, 2000 and June 30. 1999? j) How much (if anything) was paid in dividends during the years ended June 24, 2000 and June 30, 1999? A12 APPENDIX A. Specimen Financial Statements CONSOLIDATED BALANCE SHEETS Pro Forma (Note 1) (unaudited) 1999 2000 1999 $ 1,446 $ 822 ASSETS Current assets Cash and cash equivalents Accounts receivable (notes) Inventories (Note 4 Prepaid expenses and sundry assets (Note 13) Income taxes receivable 2,294 107 25,525 103 $ 20,942 2,494 103 419 934 934 517 1,150 5,416 1,768 27,384 2,308 24,990 2,308 235 125 235 753 674 758 1.838 5,960 Capital assets (Note) Deferred financing charges (Note 7) Loans to directors and officers (Note 13) Investment in Diedrich Coffee, Inc. (Note 3) Investment in The Great Canadian Bagel, Ltd. (Note 5) Future income taxes (Note 10) Goodwill, less accumulated amortization of $3,304 (1999 - $3,004) 5,960 3,495 295 700 700 8.449 8.749 8.749 $ 18,565 $ 49,584 $ 43,696 $ 2,718 8 2,528 LIABILITIES Current liabilities Accounts payable and accrued liabilities Current portion, long-term debt (Note?) Deposits Income taxes payable 3,000 $ 3.415 6,600 923 467 3,000 923 687 6,405 10.250 Long-term debt (Note) Other deferred liabilities 11,305 19,300 219 6,451 19,300 219 212 SHAREHOLDERS' EQUITY Share capital (Note 8) Deficit 62.355 61,670 61.670 (43,945) (60,657) (42,910) 1,698 18,760 17.725 $ 18,565 $ 49,584 $ 43,695 Approved by the Board 2 Comparative Financial Statements. All CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT Pro Forma (Note 1) (unaudited) 1999 2000 1900 $159.198 $340,753 $148,070 Systemwide sales Revenue Franchise revenue Sales from corporate stores Product sales Total revenue $ 28,163 $19.021 1.750 61,645 25,549 $ 17,673 3,607 385 73 $ 20,844 8105,857 $ 21,465 $ 10,086 $ 10,895 1,897 1,490 $ 8,180 430 621 300 300 7.005 9,165 (4.122) 7.450 (16,233) 5,043 (9,225) 3,350 7.450 (557) EBITDA Depreciation of capital assets Amortization of goodwill Barnings before the undernoted Write down of investment (note >> Lon on disposition of investments (notes) and 5) Barnings (los) before interent, taxes and minority interest Net interest and other investment income (expense) (Note Earnings (los) before income taxes and minority interest Income taxes (Note 10) Earnings (love) before minority interest Minority interest Net earnings (losa) Retained earning (deficit), beginning of period Special dividend (nere) Share repurchase in excess of book value (Mote *) Deficit, end of period Weighted average shares outstanding during the focal period Earnings (100) per share 5,030 4,058 (0,875) 4,240 3,102 972 (10,124) 3,791 972 (42.910) (18,719) (10,095) 14.875 3,791 (47.736) (47,690) 5 (60,657 $(42,010) $(43.945) 9.347,389 13,944,99 9,320,004 30.41 30.10 30.72) Pro Forma (Note 1) (unaudited) 1999 2000 1999 S 972 $(10,095) $ 3,791 921 3,387 730 (29) (99) 154 CASH PROVIDED BY (USED IN) Operating activities Net earnings (loss) for the fiscal period Items not involving cash: Amortization and depreciation Minority interest Future income taxes Loss (gain) on disposal of capital assets and investments Shares reserved for issue to directors Forgiveness of loan to officer Amortization of deferred financing charges Write down of investment (Note 3) Cash flow from operations Increase in non-cash working capital items related to operations (72) (940) (120) 15.293 172 81 250 250 250 110 4,122 -- 6,581 8,788 3,840 (1.557) (2,335) (1,055) 5,024 6,453 2,785 (727) (2,078) 1.943 766 Investing activities Purchase of capital assets Proceeds from disposal of capital assets Proceeds from The Great Canadian Bagel, Ltd. debenture (Note 5) Proceeds from the sale of Coffee People, Inc. (Note 3) Net cash position divested on sale of Coffee People, Inc. (Note >> Cumulative foreign exchange translation adjustments (3,503) 3,455 1.650 3,495 23,000 (1,954) (13) 26,534 (135) T (81,078) Financing activities Repurchase of common shares (Note 8) Payment of special dividend (Note 8) Proceeds from issuance (repayment) of long term debt Proceeds on issuance of shares (Note #) Loans to directors and officers (Note 13) Other deferred liabilities (18.719) (12,550) 24,742 (26.921) 513 143 (171) (654) (988) (7) (7) (89) (30,934) (56,936) (27,979) 624 Increase (decrease) in ensh and cash equivalents during the fiscal period Cash and cash equivalents, beginning of fiscal period Cash and cash equivalents, end of fiscal period (50,948) 51,770 (25,329) 46,271 822 $ 1,446 8 $ 20,942 8. SHARE CAPITAL Authorized share capital consists of an unlimited number of common shares and an unlimited number of first preference shares issuable in one or more series of which none are issued. Details of share transactions during the year are as follows: Common Shares Shares Amount 14,329,500 $ 94,833 16,599 143 81 Balance as at June 27, 1998 Issued for cash to employees and directors 6,441 shares reserved for issue to directors Repurchase of shares Balance as at June 30, 1999 Issued for cash to employees and directors 14,480 shares reserved for issue to directors Balance as at June 24, 2000 (5,035,800) 9,310,389 (33,387) $ 61,670 513 49,170 172 9,359,559 $ 62,355 On April 26, 2000, the Company declared a special dividend of $2.00. This dividend was paid on May 31, 2000 to share holders of record on May 19, 2000. On May 14, 1999, the Company offered to purchase for cancellation a maximum of five million of its then issued and out- standing common shares at a price of $16.00 per common share. Five million common shares were tendered by sharehold- ers prior to the June 7, 1999 expiration of the offer and on June 11, 1999, the Company purchased and cancelled these shares at a cost of $80,700, including transaction costs. The common stock account of the Company was reduced by the weighted average original issue cost of the purchased common shares and the balance of the transaction cost was applied to retained earnings On September 18, 1998, The Toronto Stock Exchange approved the Company's Notice of Intention to make a Normal Course Issuer Bid. This Bid permitted the Company to repurchase, for cancellation, through the facilities of the Exchange up to a total of 716,622 common shares, representing approximately 5% of the outstanding common shares. During the year ended June 30, 1999, 35,800 common shares were repurchased and cancelled at a cost of $429. The Toronto Stock Exchange's approval for the Company to make a Normal Course Issuer Bid expired September 21, 1999. No common shares were repurchased and cancelled in fiscal 2000 prior to the expiration date. The Company has a Directors Share Plan, an Amended Director, Officer and Employee Stock Option Plan, and a Share Purchase Plan under which shares are reserved for future issue. Up to 147,876 shares may be issued under the Directors Share Plan, which was approved by the shareholders at the October 16, 1996 Annual and Special Meeting. During the year ended June 24, 2000, 3,399 shares at prices ranging from $7.21 to $14.09 were issued to directors of the Company under this Plan. Also during the current fiscal year, 14,480 shares have been allotted for future issue to directors at prices ranging from $7.21 to $15.12. Under the Directors Share Plan at June 24, 2000, a total of 10,984 shares have been issued and 35,272 shares have been reserved for issue, and 101,620 shares remain available for future issue or allotment. The compensation liability related to shares allotted and reserved for issue is recorded in share capital. Up to 1.360,775 shares have been authorized for issue under the Amended Director, Officer and Employee Stock Option Plan (the "Option Plan"). To June 24, 2000, 141,475 shares have been issued upon exercise of stock options under the Option Plan. Options granted under the Option Plan prior to June 24, 1998 are exercisable commencing three years after the date granted and expire seven years thereafter. Options granted on or after June 24, 1998 vest in equal annual install- ments over three years following the date of grant and expire ten years from the grant date. Options to purchase 524,513 shares remain available to be granted in the future. During the current year the exercise price of all outstanding share options was reduced by $1.03. This was done in consideration of the impact of the special dividend of $2.00 per common share paid May 31, 2000. Details of the Option Plan activity are as follows: Weighted Average Exercise Price Number 554,907 242.819 $10.26 $13.20 $11.12 Outstanding at June 27, 1998 Issued Cancelled Exercised Outstanding at June 30, 1999 Issued Cancelled Exercised Outstanding at June 24, 2000 (78,825) (12,300) 706,601 Exercise Option Price $ 6.75 - $17.19 $11.35 - $15.97 $9.97 - $15.97 $ 6.75 - $8.00 $ 6.75 - $17.19 $ 7.21 - $14.09 $6.97 - $16.16 $ 5.72 $12.50 $ 5.72 - $16.16 $ 7.17 $11.60 99,561 (66,100) $12.66 $13,13 $10.01 (45,275) 694,787 $10,67 The details of share options outstanding at June 24, 2000 are as follows: Vested Non-Vested Fiscal Year of Expiry Number of Shares Weighted Average Exercise Price Number of Shares 2003 Weighted Average Exercise Price $ 5.97 $ 5.72 S 6.81 2004 2005 65,000 12,400 16,000 15,000 59,594 2006 $10.97 $10.54 $9.98 535 2007 2008 $ 9.73 235,978 2009 $13.04 67,947 $13.04 135,272 87,061 $12.63 $ 9.52 235,941 $11.26 458,846 2010 Total Total number of vested and non-vested shares and weighted average exercise price $10.67 694,787