10-Q 1 b313673_10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three months ended July 31, 2001 Commission File Number 1-13365 ----------- INTERCORP EXCELLE INC. (Exact name of Small Business Issuer as specified in its charter) Ontario, Canada N/A (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1880 Ormont Drive M9L 2V4 Toronto, Ontario, Canada (Zip Code) (Address of principal executive offices) (416) 744-2124 (Issuer's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Redeemable Common Stock Purchase Warrants (Title of Class) ----------- Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practical date: September 13, 2001 - 4,000,761 common shares, no par value. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

Item 1. Financial Statements INTERCORP EXCELLE INC. Interim Consolidated Balance Sheets As at July 31, 2001 AND January 31, 2001 (Amounts expressed in US Dollars) (Unaudited)

Page 1 INTERCORP EXCELLE INC. Interim Consolidated Statements Of Income For the three months and six months ended July 31, 2001 and 2000 (Amounts expressed in US Dollars) (Unaudited)

Page 2 INTERCORP EXCELLE INC. Interim Consolidated Statements Of Cash Flows For the six months ended July 31, 2001 and 2000 (Amounts expressed in US Dollars) (Unaudited)

Page 3 INTERCORP EXCELLE INC. Interim Consolidated Statements of Stockholders' Equity As at July 31, 2001 (Amounts expressed in US Dollars) (Unaudited)

Page 4 INTERCORP EXCELLE INC. Notes to Interim Consolidated Financial Statements (Amounts expressed in US Dollars) (Unaudited) 1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Basis of Presentation The consolidated financial statements include the accounts of Intercorp Excelle Inc. ("the Company") and its wholly owned subsidiary, Intercorp Excelle Foods Inc. The Company was incorporated on April 18, 1997. All significant transactions and balances among the consolidated entities have been eliminated in the preparation of these consolidated financial statements. In the opinion of management all adjustments that are necessary to a fair statement of results for the interim periods has been included. b) Principal Activities The Company is principally engaged in the production of food products in Canada and its distribution in Canada and the U.S. c) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amount due from banks, and any other highly liquid investments purchased with a maturity of three months or less. The carrying amount approximates fair value because of the short maturity of those instruments. d) Other Financial Instruments The carrying amount of the Company's accounts receivable and payable approximates fair value because of the short maturity of these instruments. e) Long-term Financial Instruments The fair value of each of the Company's long-term financial assets and debt instruments is based on the amount of future cash flows associated with each instrument discounted using an estimate of what the Company's current borrowing rate for similar instruments of comparable maturity would be. Accordingly, the carrying value approximates the fair value. f) Inventory Inventory is valued at the lower of cost or net realizable value. Cost is determined on the first-in, first-out basis. g) Property, Plant and Equipment Property, plant and equipment are recorded at cost and are amortized over their estimated useful lives at the undernoted rates and methods: Building 4% declining balance Equipment 20% declining balance Leasehold Improvement 10% straight line Vehicle 30% declining balance Computer Equipment 30% declining balance Office Furniture 20% declining balance Computer Software Straight-line over a year Amortization for assets acquired during the period are recorded at one-half of the indicated rates. Amortization has not been recorded on capital assets under construction. Page 5 INTERCORP EXCELLE INC. Notes to Consolidated Financial Statements (continued) (Amounts expressed in US Dollars) (Unaudited) h) Income Taxes The company accounts for income taxes under the provisions of Statement of Financial Accounting Standard No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recorded in the financial statements or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are measured using the enacted tax rates that would be in effect when these differences are expected to be reversed. Deferred income tax assets, if any, are recognized only to the extent that, in the opinion of management, it is more likely than not that the assets will be realized. i) Intangible Asset Intangible asset represents the cost of acquiring the Canadian trademark, brand name and proprietary information of A-1(TM) Sauce business. It is being amortized over a period of 30 years. j) Foreign Currency Translation The company maintains its books and records in Canadian dollars. Foreign currency transactions are translated using the temporal method. Under this method, all monetary items are translated into Canadian funds at the rate of exchange prevailing at balance sheet date. Non-monetary items are translated at historical rates. Income and expenses are translated at the rate in effect of the transaction dates. Transaction gains and losses are included in the determination of earnings for the year. The translation of the financial statements from Canadian dollars ("CDN $") into United States dollars is performed for the convenience of the reader. Balance sheet accounts are translated using closing exchange rates in effect at the balance sheet date and income and expenses accounts are translated using an average exchange prevailing during each reporting year. No representation is made that the Canadian dollar amounts could have been or could be, converted into United States dollars at the rates on the respective dates and or at any other certain rates. Adjustments resulting from the translation are included in the cumulative translation adjustments in stockholder's equity. k) Sales Sales represent the invoiced value of goods supplied to customers. Sales are recognized upon delivery of goods and passage of title to customers. l) Government Assistance and Investment Tax Credits Government Assistance and Investment Tax Credits are recorded on the accrual basis and are accounted for as a reduction of the related current expenditures. m) Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Page 6 INTERCORP EXCELLE INC. Notes to Consolidated Financial Statements (continued) (Amounts expressed in US Dollars) (Unaudited) n) Accounting Changes In 1998, the Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information. SFAS 130 requires companies to disclose comprehensive income in the financial statements. In addition to items included in net income, comprehensive income includes items currently charged or credited directly to stockholders' equity, such as the change in unrealized appreciation (depreciation) of securities and foreign currency translation adjustments. SFAS 131 established new standards for reporting operating segments, products and services, geographic areas and major customers. Segments are defined consistent with the basis management used internally to assess performance and allocate resources. o) Earnings per share The Company's basic earnings per share calculations are based upon the weighted average number of shares of common stock outstanding during each period. The number of shares outstanding for the computation of fully diluted earnings per share is calculated based upon the application of the treasury stock method for outstanding options and warrants. Fully diluted earnings per share was the same as basic net income per common share for the period ended July 31, 2001. p) Comparative Figures Certain figures in the 2000 financial statements have been reclassified to conform with the basis of presentation used in the current year. Page 7 INTERCORP EXCELLE INC. Notes to Consolidated Financial Statements (continued) (Amounts expressed in US Dollars) (Unaudited) 2.) STOCKHOLDERS' EQUITY a) Authorized An unlimited number of common and preference shares. The preference shares are issuable in series upon approval by the directors with the appropriate designation, rights, and conditions attaching to each share of such series. Issued: July 31, 2001 January 31, 2001 $ $ 4,000,761 common shares 3,344,522 3,344,522 ===================== ===================== b) Purchase Warrants Purchase Warrants ("Warrants") were issued pursuant to a Warrant Agreement between the company and Continental Stock Transfer & Trust Company. Each Warrant entitles its holder to purchase, during the four year period commencing on October 9, 1997, one share of common stock at an exercise price of $6 per share, subject to adjustment in accordance with the anti-dilution and other provision referred to below. The Warrants may be redeemed by the company at any time from October 9, 1998 (or earlier with the consent of the representative) and prior to their expiration, at a redemption price of $0.10 per Warrant, on not less than 30 days' prior written notice to the holders of such Warrants, provided that the closing bid price of the common stock if traded on the NASDAQ SmallCap Market or the OTC Bulletin Board, or the last sale price per share of the common stock, if listed on the NASDAQ National Market or on a national exchange, is at least 150% ($9 per share, subject to adjustment) of the exercise price of the Warrants for a period of 20 consecutive business days ending on the third day prior to the date the notice of redemption is given. Holders of Warrants shall have exercise rights until the close of the business day preceding the date fixed for redemption. The exercise price and the number of shares of common stock purchasable upon the exercise of the Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or classification of the common stock. The Warrants do not confer upon holders any voting or any other rights of shareholders of the company. Effective October 10, 2000 the exercise price of the Warrants has been amended to $2.50 for the purchase of each common share. No Warrant will be exercisable unless at the time of exercise the Company has filed with the Commission a current prospectus covering the issuance of common stock issuable upon the exercise of the Warrant and the issuance of shares has been registered or qualified or is deemed to be exempt from registration or qualification under the securities of the laws of the state of residence of the holder of the Warrant. The Company has undertaken to use its best efforts to maintain a current prospectus relating to the issuance of shares of common stock upon the exercise of the Warrants until the expiration of the Warrants, subject to the terms of the Warrant Agreement. While it is the Company's intention to maintain a current prospectus, there is no assurance that it will be able to do so. As at July 31, 2001, none of the Warrants have been exercised. Page 8 INTERCORP EXCELLE INC. Notes to Consolidated Financial Statements (continued) (Amounts expressed in US Dollars) (Unaudited) c) Bridge Warrants In May, 1997, the company issued an aggregate of 175,000 Warrants (the "Bridge Warrants"). The Bridge Warrants entitle the holder to purchase one share of common stock for $3.75 per share for a period of four years. Bridge Warrants are exchangeable at the option of the holder for a like number of warrants with identical terms as the Warrants. As at July 31, 2001, none of the Bridge Warrants has been exercised. d) Stock Option Plan In May, 1997, the board of directors and shareholders adopted the Intercorp Excelle Inc. Stock Option Plan (the "1997 Plan"), pursuant to which 500,000 shares of common stock are reserved for issuance. The 1997 Plan is administered by the compensation committee or the board of directors, who determine those individuals who shall receive options, the time period during which the options may be partially or fully exercised, the number of shares of common stock issuable upon the exercise of the options and the option exercise price. The 1997 Plan is for a period for ten years, expiring in May, 2007. Options may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide their skills and expertise to the company. Options granted under the 1997 Plan might be exercisable for up to ten years, may require vesting, and shall be at an exercise price as determined by the board. Options are non-transferable except by the laws of descent and distribution or a change in control of the company, as defined in the 1997 Plan, and are exercisable only by the participant during his or her lifetime. Change in control includes (I) the sale of substantially all of the assets of the company and merger or consolidated with another, or (ii) a majority of the board changes other than by the shareholders pursuant to board solicitation or by vacancies filled by the board caused by death or resignation of such person. If a participant ceases affiliation with the company by reason of death, permanent disability or retirement at or after age 70, the option remains exercisable for one year from such occurrence but not beyond the option's expiration date. Other termination gives the participant three months to exercise, except for termination for causes which results in immediate termination of the option. Options granted under the 1997 Plan, at the discretion of the compensation committee or the board, may be exercised either with cash, common stock having a fair market equal to the cash excisable price, the participant's personal recourse note, or with an assignment to the company of sufficient proceeds from the sale of the common stock acquired upon exercise of the options with an authorization to the broker or selling agent to pay that amount to the company, or any combination of the above. Any unexercised options that expire or terminate upon an employee's ceasing to be employed by the company become available again for issuance under the 1997 Plan. The 1997 Plan may be terminated or amended at any time by the board of directors, except that the number of shares of common stock reserved for issuance upon the exercise of options granted under the 1997 Plan may not be increased without the consent of the shareholders of the company. Page 9 INTERCORP EXCELLE INC. Notes to Consolidated Financial Statements (continued) (Amounts expressed in US Dollars) (Unaudited) d) Stock Option Plan (continue) In April 2000, the Board granted 12,000 options under the 1997 Plan to three of the company's independent directors, 56,000 options to five directors and 35,000 options to employees. Forty percent of the options are exercisable at January 31, 2001, an additional 30% become exercisable after April 26, 2001 and all of the remaining options are exercisable after April 26, 2001. In March 1999, the Board granted 10,000 options under the 1997 Plan to two of the company's independent directors. Thirty percent of these options are not exercisable until after March 3, 2001. In April 1999, the Board granted 26,500 options to employees and 20,000 options to five directors under the 1997 Plan, which are exercisable at January 31, 2001. On September 8, 1999, the Board of Directors approved a change to the exercise price of existing outstanding stock options to US$1.00. On May 17,2001 the Board of Directors approved a change to the exercise price of existing outstanding stock options to US$0.42. Options outstanding as at July 31, 2001 are as follows:

No options are exercised or granted during the quarter ended July 31, 2001 e.) Application of SFAS 123: Accounting for Stock-Based Compensation As all options granted are exercisable at $0.42 per share which approximates the fair value of the share using the Black-Schole option-pricing model. Accordingly, no stock-based compensation has been recognized in connection with these options. 3.) Treasury Stock On March 1, 1999, the Board of Directors approved a Company stock repurchase program to buy back up to 250,000 common shares of the Company at a market price per share not exceeding $2.00. As at July 31, 2001 the Company had repurchased 205,218 shares and of which 106,739 shares were cancelled in January 2000. As at July 31, 2001, the Company has on hand 98,479 common shares. Page 10 INTERCORP EXCELLE INC. Notes to Consolidated Financial Statements (continued) (Amounts expressed in US Dollars) (Unaudited) 4.) INCOME TAXES Income taxes for the three months ended July 31, 2001 have been reduced by approximately $44,000, representing the benefit of tax losses included in deferred tax assets, net of changes in the valuation allowance. 5.) COMPREHENSIVE INCOME The Company has adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income and its components in the financial statements. However, it does not affect net income or stockholders' equity. The components of comprehensive income are as follows:

Page 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The statements contained in this Filing that are not historical are forward looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including statements regarding the Company's expectations, intentions, beliefs or strategies regarding the future. All forward-looking statements include the Company's statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward looking statements included in this report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward looking statement. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. Results of Operations (All amounts expressed in US Dollars unless otherwise stated). Six months ended July 31, 2001 compared to the six months ended July 31, 2000. Sales for the six months ended July 31, 2001 were CDN$17.6 million ($11.5 million), a 20.2% increase over prior year six months sales of CDN$14.7 million ($9.9 million). This increase in sales reflected continued growth and distribution of Renee's Gourmet(TM) branded dressings primarily across Canada, as well as Private Label, Food Service and A1 Sauces(TM). Incremental US branded and Private Label business also contributed to strong second quarter results. Gross profit for the six month period ended July 31, 2001 of $3.3 million was 31.6% of net sales, which was only slightly higher than the same period one year ago $2.8 million (31.3% of net sales). Lower prime ingredient and plant operating costs were more than offset by higher distribution expenses due to heavier shipments to the Western marketplace. Selling and marketing expenses for the six month period ended July 31, 2001 of $1.88 million were 28.6% higher than the comparable six month period in 2000, reflecting additional consumer marketing and sales support expenditures behind Renee's Gourment(TM) dressings, sauces and marinades as well as Food Service business. General and Administrative expenses of $811,469 were 3.3% higher than prior year six month, primarily due to support sales growth and wage increases. R&D expenditures of $202,687 also reflect continuous commitment to innovation, product research and the development work necessary to support the company's continued aggressive growth over the last few years. Financial costs have been only partially offset by interest income on funds invested in USD interest bearing term accounts. Operating income (before income taxes and extraordinary items), decreased $35,494 over prior year to $252,332 for the six months ended July 31, 2001. Overall, gross margins were offset by higher distribution expenditures, and planned incremental investments in marketing and selling support behind new product launches. The Company also reported a net translation gain of $9,604 on US funds converted to Canadian dollars for the first six months of the current fiscal year. This reflects some strengthening of the US dollar versus the Canadian dollar since the beginning of current fiscal year. Net income was $212,732 or $0.05 per share for the six months ended July 31, 2001 versus $218,900 for the comparable prior year period. Page 12 Liquidity and Capital Resources The Company used cash in operations of $531,190 for the six months ending July 31, 2001. The principal use of cash traced to an increase in accounts receivable and inventories. This was partially offset by cash released from the increase in accounts payable at the end of the period. Capital spending during the first six months of 2001 reflected planned capital additions of $484,171. Capital additions in the current fiscal year to date are higher than prior year in part to the completion of a new 14,000 sq.ft. on-site cooler. The additional space is integral to support the current and future growth. The Company's secured credit arrangement with the National Bank of Canada includes a credit line of CDN$3.0 million that is due on demand and bears interest at National Bank's Prime plus 0.5%, which is not currently being used due to the Company's positive cash position in US dollars. The Company renegotiated its secured credit facility with the National Bank of Canada effective June 11, 2001. As part of that arrangement, the Company also has a CDN$1.5 million acquisition line available for future mergers or acquisitions which may be drawn down as an operating loan and bears interest at National Bank's Prime plus 1.0%, subject to certain conditions. As well, the Company has an additional CDN$1.79 million non-revolving demand loan available for current year capital expenditures and bears interest at National Bank's Prime plus 0.5%. All borrowings are collateralized by the assets of the Company. The Company currently intends to support its branded Renee's business through increased marketing, advertising and distribution throughout North America. As the Company continues to grow, bank borrowings and other debt placements may be considered, in part, or in combination, as the situation warrants. Page 13 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company made an initial public offering of its common stock, no par value ("Common Stock") and common stock purchase warrants ("Warrants") (the Common Stock and Warrants are collectively referred to as the "Securities") pursuant to a registration statement declared effective by the Securities and Exchange Commission on October 9, 1997, File No. 333-7202 ("Registration Statement"). Each Warrant permits the holder, upon exercise, to receive one share of the Company's common stock, no par value. The following are the Company's expenses incurred in connection with the issuance and distribution of the Securities in the offering from the effective date of the Registration Statement to the ending date of the reporting period of this 10-QSB: Expense Amount Underwriter's Discounts and Commissions $512,247 Expenses paid to or for the Underwriters 241,674 Other expenses 569,492 ----------------- Total Expenses $1,323,413 ================= None of the foregoing expenses were paid, directly or indirectly, to any director or officer of the Company or their associates, to any person who owns 10 percent or more of any class of equity securities of the Company, or to any affiliate of the Company. The net offering proceeds to the Company after deducting for the foregoing expenses are $3,799,062. The following are the application of the net proceeds by the Company from the sale of the Securities in the offering from the effective date of the Registration Statement to the ending date of the reporting period of this 10- QSB: Item Amount Purchase of Building $383,080 Temporary Investments (1) 1,533,791 Purchase of A1 Sauce business 1,227,191 Repayment of Indebtedness 655,000 ----------------- Total Application of Net Proceeds $3,799,062 ================= (1) Money market investments Temporary investments represent term deposits with the Company's bank for maturity terms less than 3 months. The application of the net proceeds to date is not a material change in the use of proceeds described in the prospectus in the Registration Statement. Page 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 17, 2001, the Company held its 2001 Annual Meeting of Stockholders. At the annual meeting, the Company's stockholders were asked to vote upon: (i) the election of eight directors to serve for the ensuing year; and (ii) the appointment of an independent accounting firm for the ensuing year. The following persons were elected as directors of the company for the ensuing year by the votes next to such persons name: For Withheld Against Arnold Unger 3,594,673 600 0 Renee Unger 3,594,673 600 0 Fred Burke 3,595,173 100 0 Lori Gutmann 3,595,173 100 0 Alysse Unger 3,593,673 1,6000 John Rothschild 3,594,673 600 0 Taketo Murata 3,595,173 100 0 Karen Unger 3,594,173 1,1000 Arnold Unger, Renee Unger, Fred Burke, Lori Gutmann, Alysse Unger, John Rothschild, Taketo Murata and Karen Unger were duly elected as Directors of the Corporation to serve until the Annual Meeting of Stockholders in the year 2002 or until their respective successors have been duly elected and qualified. Richter, Usher & Vineberg, Chartered Accountants was approved to act as the Company's independent chartered accountants for the ensuing year by the following vote: For Against Abstain 3,594,773 4,001 -0- Page 15 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit description 27. Financial Data Schedule (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the three-month period ended July 31, 2001. Page 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERCORP EXCELLE, INC. September 14, 2001 By: /s/ ARNOLD UNGER ---------------- ARNOLD UNGER Chief Executive Officer and Co-Chairperson September 14, 2001 By: /s/ RENEE UNGER --------------- RENEE UNGER President and Co-Chairperson September 14, 2001 By: /s/ FRED BURKE -------------- FRED BURKE Chief Financial Officer, Chief Operating Officer and Secretary Page 17

INTERCORP EXCELLE INC 10-Q