<Page>
Exhibit 2
AUDITORS' REPORT
To the Directors of CoolBrands International Inc.:
We have audited the consolidated balance sheets of CoolBrands International Inc.
as at August 31, 2003 and 2002 and the consolidated statements of earnings and
retained earnings, and cash flows for the years 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 audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at August 31, 2003
and 2002 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
BDO DUNWOODY LLP
"BDO DUNWOODY LLP"
Chartered Accountants
Toronto, Ontario
November 25, 2003
F-1
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CoolBrands International Inc.
Consolidated Balance Sheets as at August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(in thousands of dollars)
2003 2002
$ $
------- -------
Assets
Current Assets:
Cash and short term investments 30,140 47,086
Receivables (note 3) 60,807 43,001
Receivables - affiliates (note 12) 3,185 3,792
Inventories 55,604 25,361
Prepaid expenses 9,722 6,752
Asset held for sale 3,432
Future income taxes (note 8) 1,930 2,415
------- -------
Total current assets 161,388 131,839
Future income taxes (note 8) 2,977 3,433
Property, plant and equipment (note 4) 28,349 19,710
License agreements, net of accumulated
amortization of $4,265 (2002 - $3,711) 12,357 13,438
Intangible and other assets (note 5) 9,084 7,332
Goodwill (note 1) 99,695 107,910
------- -------
313,850 283,662
======= =======
See accompanying notes to consolidated financial statements.
F-2
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CoolBrands International Inc.
Consolidated Balance Sheets as at August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(in thousands of dollars)
2003 2002
$ $
------- -------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable 27,339 24,399
Payables - affiliates (note 12) 754 978
Accrued liabilities 33,530 32,880
Income taxes payable 5,204 7,347
Future income taxes (note 8) 3,144 2,566
Current maturities of long-term debt (note 6) 5,683 6,315
------- -------
Total current liabilities 75,654 74,485
Long-term debt (note 6) 38,671 29,279
Other liabilities 3,984 4,940
Future income taxes (note 8) 4,722 3,950
------- -------
Total liabilities 123,031 112,654
------- -------
Minority interest 2,968 300
------- -------
Commitments and contingencies (notes 10 and 11)
Shareholders' Equity
Capital stock (note 7) 122,406 122,378
Cumulative translation adjustment (8,904) 5,685
Retained earnings 74,349 42,645
------- -------
Total shareholders' equity 187,851 170,708
------- -------
313,850 283,662
======= =======
See accompanying notes to consolidated financial statements.
Approved by the Board,
"David J. Stein", Director
- ----------------
"Romeo DeGasperis", Director
- ------------------
F-3
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CoolBrands International Inc.
Consolidated Statements of Earnings and Retained Earnings
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(in thousands, except for earnings per share data)
2003 2002
$ $
------- -------
Revenues:
Sales 335,034 236,028
Franchising and licensing revenues:
Royalty income 2,716 3,070
Franchise and license fees 1,804 1,213
Consumer products license fees 741 904
Drayage and other income 16,978 1,007
------- -------
Total revenues 357,273 242,222
------- -------
Operating expenses:
Cost of goods sold 207,870 129,246
Selling, general and administrative expenses 95,088 77,558
Interest expense 1,990 2,544
------- -------
Total operating expenses 304,948 209,348
------- -------
Minority interest 541
------- -------
Earnings before income taxes 51,784 32,874
------- -------
Provision for income taxes (note 8):
Current 17,536 9,715
Future 2,544 2,175
------- -------
20,080 11,890
------- -------
Net earnings 31,704 20,984
Retained earnings - beginning of year 42,645 21,661
------- -------
Retained earnings - end of year 74,349 42,645
======= =======
Earnings per share:
Basic 0.61 0.44
Diluted 0.59 0.42
Weighted average shares outstanding:
Shares used in per-share calculation - basic 51,746 48,050
Shares used in per-share calculation - diluted 53,992 50,346
See accompanying notes to consolidated financial statements.
F-4
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CoolBrands International Inc.
Consolidated Statements of Cash Flows
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(in thousands of dollars)
2003 2002
$ $
------- -------
Cash and short term investments provided by (used in):
Operating activities:
Net earnings 31,704 20,984
Items not affecting cash
Depreciation and amortization 4,801 4,646
Future income taxes 2,544 2,175
Loss on sale of asset held for sale 390
Minority interest 541
Changes in current assets and liabilities, net of businesses acquired
Receivables (5,172) (8,156)
Receivables - affiliates 844 (927)
Allowance for doubtful accounts (1,087) (980)
Inventories (9,065) (7,500)
Prepaid expenses (2,900) (2,285)
Accounts payable (7,476) 58
Payables - affiliates (240) 257
Accrued liabilities (2,293) 11,520
Income taxes payable (2,292) 4,587
Other assets 364 (336)
Other liabilities (1,023) 19
------- -------
Cash provided by operating activities 9,640 24,062
------- -------
Investing activities:
Increase in notes receivable (5) (44)
Repayment of notes receivable 345 91
Purchase of leasehold improvements and equipment (5,736) (6,338)
Purchase of intangible assets (113) (260)
Purchase of license agreements (1,482)
Acquisitions, net of cash acquired (13,409) (8,628)
Proceeds from asset held for sale 3,283
------- -------
Cash used in investing activities (17,117) (15,179)
------- -------
Financing activities:
(Expense) proceeds from special warrants (144) 13,908
Proceeds from revolving line of credit, unsecured 2,770
Proceeds from issuance of Class A and B shares 172 2,507
Repayment of long-term debt (9,495) (6,662)
------- -------
Cash (used in) provided by financing activities (6,697) 9,753
------- -------
(Decrease) in cash flows due to changes in foreign exchange rates (2,772) (3,118)
------- -------
(Decrease) increase in cash and short term investments (16,946) 15,518
Cash and short term investments - beginning of year 47,086 31,568
------- -------
Cash and short term investments - end of year 30,140 47,086
======= =======
See accompanying notes to consolidated financial statements.
F-5
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CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
1. Description of business and summary of significant accounting policies
CoolBrands International Inc. (the "Company") manufactures, markets,
distributes, sub-licenses and sells a variety of branded frozen dessert
products to supermarkets, grocery stores, club stores, convenience stores,
gourmet shops and delicatessens in Canada, the United States and certain
foreign countries and also franchises frozen yogurt and ice cream stores,
dip shops and family style restaurants throughout Canada, the United States
and over 80 foreign countries. The Company also manufactures and sells soft
serve frozen yogurt and ice cream mixes, a variety of flavours and
ingredients and flexible packaging. The Company also operates a "direct
store delivery" (DSD) frozen distribution system in the United States that
delivers the Company's frozen dessert products, as well as those of third
party "partner brand" manufacturers, directly to retailers' store
locations. The Company also manufactures frozen desserts and other food
products on a contract basis, including "store brand" (private label)
products for retailers.
Basis of presentation
The consolidated financial statements are prepared by management using
accounting principles generally accepted in Canada and include all wholly
and majority owned subsidiaries. All significant intercompany transactions
of consolidated subsidiaries are eliminated. Acquisitions recorded as
purchases are included in the statement of earnings from the date of
acquisition. All amounts are reported in Canadian dollars unless otherwise
indicated.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimated.
Cash and short term investments
All highly liquid commercial paper purchased with maturities of three
months or less is classified as a cash equivalent. Cash equivalents are
stated at cost, which approximates market value.
Inventories
Inventories consist primarily of ice cream, frozen yogurt and frozen
dessert products, food supplies and packaging. Inventories are valued at
the lower of cost and net realizable value, with cost determined
principally by the first-in, first-out (FIFO) method.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of buildings and leasehold improvements and
equipment is provided by the straight-line or declining balance methods,
using the estimated useful lives of the assets, principally 20 to 38 years
and 3 to 10 years, respectively. Store leasehold improvements are amortized
on a straight-line basis over the terms of the leases, principally 5 to 10
years.
Trademarks, license agreements and franchise agreements and rights
Trademarks, license agreements and franchise agreements and rights are
stated at cost less accumulated amortization. Amortization is provided by
the straight-line method using the terms of the agreements, which range
from 3 to 20 years.
F-6
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CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
1. Description of business and summary of significant accounting policies
(cont'd)
Goodwill
Goodwill is evaluated annually for possible impairment. The Company uses an
estimate of the related reporting units' discounted future cash flows in
determining if the fair value of the reporting units is recoverable. Any
permanent impairment in the value of goodwill would be written off against
earnings. Based on the impairment tests performed, there was no impairment
of goodwill in fiscal 2003. There can be no assurance that future goodwill
impairment tests will not result in a charge to earnings.
Revenue recognition
Revenue from sales of the Company's products is recognized at the time of
sale, which is generally when products are shipped to customers.
Revenue from sales by Company-owned and operated stores is recognized when
products are purchased by customers.
Master franchise fee revenues are recognized at the time the Company has
received the deposit specified in the master franchise agreement, has
substantially performed all significant services to be provided in
accordance with the terms of the agreement and when collectibility is
reasonably determinable.
Single store franchise fees are recognized as revenue when the franchise
application is approved, cash payments are received, and the Company has
performed substantially all services required under the agreement.
Continuing franchise royalties are based on a percentage of gross sales as
reported by the franchisees or gross products purchased by the franchisees.
These fees are recognized on an accrual basis as they are earned.
Revenue from Drayage income is recognized at the time the product is
delivered for the vendor to their customer by the Company.
Advertising
The Company spends a significant amount of its advertising dollars with its
supermarket customers in the form of co-operative advertising in the
chains' weekly circulars. The remainder of the Company's advertising is
spent on media and other direct advertising. All advertising costs are
expensed as incurred. The Company spent $5,131,000 on advertising for the
year ended August 31, 2003 (2002 - $5,991,000).
Product introductory costs
The Company capitalizes certain product introductory placement costs (i.e.
slotting fees) paid to customers, which are incurred to develop new markets
for new and existing products sold for the first time. The payment of such
fees is common in the industry. These costs are expensed over a twelve
month period. Product introductory expense was $11,713,000 for the year
ended August 31, 2003 (2002 - $6,700,000).
Financial instruments
The carrying amount of financial instruments including cash and short term
investments, receivables, receivables - affiliates, accounts payable,
payables - affiliates and accrued liabilities approximates fair value at
August 31, 2003, because of the relatively short maturity of these
instruments. The Company is exposed to interest rate risk on its long-term
debt, however, the Company mitigates some of this exposure through an
interest rate swap as described in note 6.
F-7
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CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
1. Description of business and summary of significant accounting policies
(cont'd)
Concentration of credit risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and short-term
investments and receivables. The Company attempts to minimize credit risk
with respect to receivables by reviewing customers' credit history before
extending credit, and by regularly monitoring customers' credit exposure.
The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical
trends and other information.
Earnings per share
The Company uses the treasury stock method to determine the dilutive
earnings per share.
Foreign currency translation
Translation gains or losses of accounts of foreign subsidiaries considered
financially and operationally self-sustaining are deferred as a separate
component of shareholders' equity until there has been a realized reduction
in the net investment.
Foreign currencies are translated into Canadian dollars using the average
exchange rate for the year for items included in the consolidated
statements of operations. Foreign currencies are translated into Canadian
dollars using the current rate for assets and liabilities included in the
consolidated balance sheets except for earnings reinvested in the business,
which are translated at historical rates.
Income taxes
Income taxes are calculated using the asset and liability method of
accounting for income taxes. Under this method, current income taxes are
recognized for the estimated income taxes payable for the current period.
Future income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the substantially enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Stock Option Plan
The Company has a stock option plan for directors, officers, consultants
and key employees. No compensation expense is recognized in accounting for
stock options in the Company's Consolidated Statements of Earnings, except
for stock-based compensation expense for stock options granted to
consultants which is measured at the estimated fair value at the date of
grant and expensed. When options are exercised the amount received is
credited to share capital. Pro forma stock based compensation expense
information is included in note 7.
Derivative Instruments
Under an agreement expiring April 1, 2004, the U.S. based subsidiary of the
Company entered into an interest-rate swap as a derivative to modify the
interest characteristics on a portion of its outstanding float rate senior
unsecured term loan, in an attempt to reduce its exposure to fluctuations
in interest rates. The fair value of the contract has not been reflected in
the Consolidated Financial Statements. The Company does not enter into such
contracts for speculative purposes.
Reclassifications
Certain 2002 amounts have been reclassified to conform with the 2003
presentation.
F-8
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CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
2. Acquisitions
a. 2003 Acquisitions
Effective July 1, 2003, the Company acquired the general partner interest
and majority of the total partnership interests in Americana Foods LP,
located in Dallas, Texas. Americana Foods is one of the largest and most
versatile frozen dessert manufacturing facilities in the U.S., and
currently supplies a wide variety of soft serve mixes, packaged ice cream,
frozen yogurt and sorbet products and frozen novelties to well known
national retailers, food companies and restaurant chains, including Sam's
Club, TCBY Enterprises and Silhouette Brands. Americana Foods also
manufactures and sells products for the foodservice channel such as dairy
mixes for preparing mashed potatoes which are extensively used to
standardize quality and reduce labor costs in on-site food preparations.
The following is a summary of the assets acquired and the fair value
assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase Consideration: $
---------------------- ------ ----------------------- -----
Current assets 22,396
Property, plant and
equipment 7,879
------
30,275
Less: Liabilities 30,275
------ -----
Nil Nil
====== =====
On July 6, 2003, the Company acquired the Dreamery'r' ice cream and Whole
Fruite'TM' sorbet brands from Dreyer's Grand Ice Cream, Inc., as well as
the right to the license for the Godiva'r' ice cream brand, which was
assigned by Dreyer's and substantially all of the Haagen-Dazs frozen
dessert distribution assets in the States of Washington, Oregon, Florida,
California, Pennsylvania, New Jersey, Utah, Minnesota, Georgia, Maryland,
and the District of Columbia from Nestle' Ice Cream Company, LLC.
The following is a summary of the assets acquired and the fair value
assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase consideration: $
----------------------------- ------ ----------------------- -----
Current assets 10,971 Cash 13,409
Option to purchase City of
Industry, CA. facility 2,438
------ ------
13,409 13,409
====== ======
F-9
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CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
2. Acquisitions (cont'd)
b. 2002 Acquisitions
On June 30, 2002, the Company acquired the business and assets of
Fruit-a-Freeze, Incorporated. Fruit-a-Freeze, Incorporated began making
frozen fruit bars in 1977, and was a pioneer in establishing the market for
frozen novelties made from whole fruit and all natural ingredients. In its
home market in Southern California, Fruit-a-Freeze products are
consistently top ranked sellers among frozen novelties.
The acquisition included the Fruit-a-Freeze leased frozen novelty
manufacturing facility in Norwalk, CA, and Fruit-a-Freeze's frozen
distribution center and direct store delivery route distribution system,
operated out of a frozen storage warehouse located at the Norwalk facility.
The Fruit-a-Freeze distribution system services supermarket chains, club
stores, independent grocers, convenience stores and independent
distributors throughout Southern California.
The following is a summary of the assets acquired and the fair value
assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase consideration: $
-------------------- ----- ----------------------- -----
Current assets 2,814 Cash 137
Equipment 970 Future payment
Other assets 23 contingent upon year
Intangible assets 153 one sales 2,280
Goodwill 4,921
-----
8,881
Less: Liabilities 6,464
----- -----
2,417 2,417
===== =====
In addition to the $2,280,000 cash payment contingent upon sales in year
one, the Agreement specifies additional payments contingent upon the sales
of Fruit-a-Freeze branded products in excess of U.S. $11,173,000 in both
years two and three. However, since it is unlikely that any additional
payments will be required for years two and three, the Company has not
recorded a liability for such additional contingent consideration payments.
On August 16, 2002, the Company purchased the business and assets of
Chipwich, Inc., maker of the Chipwich Ice Cream Cookie Sandwich. A Chipwich
is premium ice cream sandwiched between two specially formulated chocolate
chip cookies and rolled in pure chocolate chips. When it was introduced in
1981, Chipwich created the adult premium ice cream novelty category. Since
then, Chipwich has established itself as one of the best-known brand names
for frozen novelties.
The following is a summary of the assets acquired and the fair value
assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase consideration: $
-------------------- ----- ------------------------ -----
Current assets 379 Cash 8,491
Plant equipment 550 Cash payment, Due:
Intangible assets 156 January 15, 2003,
Goodwill 8,187 subject to certain
potential adjustments 391
Warrants issued 390
----- -----
9,272 9,272
===== =====
F-10
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CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
3. Receivables
2003 2002
$ $
------ -----
Trade accounts receivable 64,217 45,502
Franchise and license fees receivable 423 2,326
Notes receivable, current maturities 167 196
------ ------
64,807 48,024
Less: Allowance for doubtful accounts 4,000 5,023
------ ------
60,807 43,001
====== ======
4. Property, plant and equipment
2003 2002
$ $
------ -----
Land 1,280 1,032
Buildings 8,432 4,651
Machinery and equipment 25,290 19,438
Leasehold improvements 3,257 2,629
------ ------
38,259 27,750
Less: Accumulated depreciation and amortization
Buildings 866 641
Machinery and equipment 8,057 6,612
Leasehold improvements 987 787
------ ------
28,349 19,710
====== ======
5. Intangible and other assets
2003 2002
$ $
------ -----
Trademarks 4,421 4,857
Franchise agreements and rights 756 825
Territorial agreements 425 479
Purchase option - land and building 2,495
Notes receivable 168 538
Other 2,715 2,374
------ -----
10,980 9,073
Less: Accumulated amortization
Trademarks 1,203 1,103
Franchise agreements and rights 280 256
Territorial agreements 413 382
------ -----
9,084 7,332
====== =====
F-11
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CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
6. Long-term debt
2003 2002
$ $
------ ------
Term loan, unsecured 22,518 33,516
Term loans, secured 13,292 507
Revolving line of credit, unsecured 2,770 1,052
Revolving loan, secured 4,112
Capitalized leases 1,662 519
------ ------
44,354 35,594
Less: Current maturities 5,683 6,315
------ ------
38,671 29,279
====== ======
In connection with the acquisition of Eskimo Pie Corporation, a U.S.
subsidiary borrowed U.S. $30,000,000, to finance the acquisition. The
unsecured term loan is payable in monthly installments of U.S. $250,000,
with the remaining principal balance due November 1, 2005. Interest is
payable monthly on the unpaid principal balance with interest rates
fluctuating with changes in the prime lending or libor rate and the ratio
of funded debt to EBITDA. The interest rates, plus applicable margins were
fixed through August 31, 2001 at the lower of prime plus 1/2% or libor plus
2 1/2% (3.125% at August 31, 2003). As of August 31, 2003, the term loan
balance was U.S. $16,250,000.
All borrowings under the above unsecured term loan agreement are guaranteed
by the Company. The agreement contains restrictions relating to the payment
of dividends, rental obligations, liens, indebtedness, dispositions of
property, change in the nature of its business, change in ownership and
requires that the net proceeds from the sale (other than in the ordinary
course of business) of any assets of Eskimo Pie Corporation must be
utilized to reduce the then outstanding principal balance of the term loan.
In addition, the Company must maintain certain financial ratios and limit
capital expenditures to U.S. $5 million during any fiscal year.
The U.S. based subsidiary entered into an interest rate protection
agreement on April 1, 2001 covering U.S. $15,000,000 of the then
outstanding principal balance of the senior unsecured term loan with a
fixed libor interest rate of 5.18%, plus applicable margin. This interest
rate protection agreement terminates on April 1, 2004. At August 31, 2003,
the fair value of this interest rate protection agreement was U.S. $413,000
in favor of the bank and is not reflected in the Consolidated Financial
Statements.
The subsidiary also has a U.S. $10 million unsecured revolving credit
facility. The revolving credit facility is available for general corporate
purposes and has a maturity date of November 30, 2004. Interest is payable
monthly on the unpaid principal balance of borrowings under this facility
with an interest rate of libor plus 2%. The subsidiary agreed to pay a fee
of 1/4% per annum on the unused portion of the commitment. As of August 31,
2003, the subsidiary has U.S. $8 million of available credit under the
revolving credit facility.
A U.S. $750,000 revolving line of credit with a maturity date of June 1,
2003, certain term loans and capitalized leases were assumed by a U.S.
subsidiary in connection with the June 2002 acquisition of the business and
assets of Fruit-A-Freeze, Inc. The secured term loans are payable in
monthly installments of U.S. $21,521. Interest at prime plus 1% is payable
monthly on the unpaid principal balance with interest rates fluctuating
with changes in the prime lending rate. The U.S. $750,000 revolving line of
credit and certain term loans were paid off on December 2, 2002.
F-12
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
6. Long term debt (cont'd)
On November 19, 2002, a limited partnership, which is owned 50.1% by the
Company, entered into a credit agreement with a financial institution that
includes a term loan of U.S. $10,000,000, which is secured by the
partnership's property, plant, and equipment. Principal payments are
payable in fixed monthly installments of U.S. $80,739 and matures on
February 1, 2016. The term of the loan bears interest at prime plus 0.5%
(4.5% at August 31, 2003.)
The partnership's credit agreement also includes a revolving loan up to
U.S. $5 million, subject to a borrowing base calculation, which bears
interest at prime plus 0.5% (4.5% at August 31, 2003) and is due on
November 19, 2004. At August 31, 2003, approximately U.S. $2,031,000, was
available to the partnership under this loan. The revolving loan is secured
by the partnership's receivable and inventory.
In April 2003, the partnership executed an amendment to the credit
agreement. Pursuant to this amendment, the minimum tangible net worth
requirement was raised to U.S. $6,000,0000 beginning June 29, 2003. In
addition, the financial institution waived all other covenant requirements
for the remaining term of the agreement.
Repayments of long-term debt due in each of the next five years are as
follows:
$
------
2004 5,683
2005 12,426
2006 15,262
2007 10,968
2008 15
------
44,354
======
Interest paid during the year ended August 31, 2003 was $1,980,000 (2002
-$2,472,000).
7. Capital Stock
Authorized number of shares:
Class A Subordinate voting shares 200,000,000
Class B Multiple voting shares 200,000,000
Class A subordinate voting shares have a preferential right to receive cash
dividends when, as and if declared by the Board of Directors. Class B
multiple voting shares can be converted at any time into an equivalent
number of Class A subordinate voting shares. The Class A subordinate voting
shares are entitled to one vote per share and the Class B multiple voting
shares are entitled to ten votes per share.
F-13
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
7. Capital stock (cont'd)
The Company had the following share transactions during the years ended
August 31, 2003 and 2002:
Class A Class B
subordinate multiple
voting shares voting shares Warrants Amount
# # # $
------------- ------------- -------- -------
Balance at August 31, 2001 39,649 6,240 105,573
Shares issued upon the exercise of special
warrants 3,750 13,908
Shares issued for cash for stock options
exercised 1,894 173 2,507
Multiple voting shares converted to
Subordinate voting shares 204 (204)
Warrants issued in connection with
acquisition 100 390
------------- ------------- -------- -------
Balance at August 31, 2002 45,497 6,209 100 122,378
Expenses related to the exercise of special
warrants (144)
Shares issued for cash for stock options
exercised 102 172
Multiple voting shares converted to
Subordinate voting shares 30 (30)
------------- ------------- -------- -------
Balance at August 31, 2003 45,629 6,179 100 122,406
============= ============= ======== =======
Paid-in-balance $ 104,716 $17,300 $390
============= ============= ======
The Company has granted options to purchase subordinate and multiple voting
shares to directors, officers, consultants and key employees under the
Company's stock option plans. A summary of the activity of the Company's
stock option plans for the years ended August 31, 2003 and 2002 is
summarized below:
F-14
<Page>
2002 Stock 1998 Stock Integrated
Option Option Brands Stock
Plan Plan Option Plan
------------- ----------- ---------------------------
Weighted
Subordinate Multiple Subordinate Average
Subordinate Voting Voting Voting Exercise
Voting Shares Shares Shares Shares Price
------------- ----------- ------------ ----------- --------
Outstanding at August 31, 2001 4,807 300 236 2.57
Granted 55 1.24
Exercised (1,658) (173) (236) 1.21
Cancelled (28) 1.24
----- ------ ---- ---- ----
Outstanding at August 31, 2002 3,176 127 3.41
Granted 1,298 5.40
Exercised (102) 1.69
Expired (127) 5.72
Cancelled (10) 1.25
----- ------ ---- ---- ----
Outstanding at August 31, 2003 1,298 3,064 3.98
===== ===== ==== ==== ====
Options exercisable at August 31,
2003 1,025 2,778 3.97
===== ===== ==== ==== ====
F-15
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
7. Capital stock (cont'd)
Stock options outstanding at August 31, 2003, aggregating 4,362,000 shares,
have a weighted-average contractual life of 2.7 years and a
weighted-average exercise price of $3.98 per share. Stock options
exercisable at August 31, 2003 have a weighted-average exercise price of
$3.97 per share. The price range was $1.15 to $1.35 (1,527,000 outstanding
and 1,241,000 exercisable), $4.30 (1,000,000 options exercisable), $5.00
(1,238,000 outstanding and 1,025,000 exercisable), $7.80 (537,000 options
exercisable) and $13.75 (60,000 options outstanding) at August 31, 2003.
Stock options reserved for future grant at August 31, 2003 aggregated
4,048,502.
On November 1, 2002 The Company's shareholders approved The 2002 Stock
Option Plan, which reserved 5.17 million options for issuance and limited
the number of options that may be granted in any one fiscal year to 2.5% of
outstanding shares.
The Company records no compensation expense when options are issued to
employees. The Company estimates the fair value of each share option on the
date of grant using the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 3.46%; expected
volatility of 68.38%; expected live of 2.7 years; and no dividend payments.
Pro forma net earnings and earnings per share if compensation expense had
been recorded for stock options granted to employees would be as follows:
2003
For the year ended August 31, $
------
Pro forma net earnings 30,351
======
Pro forma earnings per share:
Basic 0.59
Diluted 0.56
8. Income taxes
The effective income tax rate on earnings is affected from year to year by
the geographic mix of the consolidated earnings before income taxes. The
following table reconciles income taxes computed by applying the combined
Canadian federal/provincial statutory rate with the actual income tax
provision:
2003 2002
% %
----- -----
Combined basic Canadian Federal and Provincial income
tax rate 38.00 44.62
Impact of operating in foreign countries with
different effective rates 0.04 (9.63)
Permanent differences 0.74 1.18
----- -----
38.78 36.17
===== =====
The Company's subsidiaries have operating loss carry-forwards for income
tax purposes amounting to approximately $5,084,000 (2002 - $5,393,000).
These losses expire in various amounts through the year 2019.
F-16
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
8. Income taxes (cont'd)
Significant components of the Company's future tax assets and liabilities
as of August 31, 2003 are as follows:
Future Tax Assets $ Future Tax Liabilities $
- ----------------- ----- ---------------------- -----
Non-capital loss carry-forwards 1,876 Tax amortization in excess of book amortization 2,731
Accounting allowances not deducted for tax 1,294 Tax depreciation in excess of book depreciation 123
Other 1,737 Product introductory costs 3,291
Other 1,721
----- -----
Total Future Tax Assets 4,907 Total Future Tax Liabilities 7,866
===== =====
Income taxes paid during the year ended August 31, 2003 were $17,268,000
(2002 - $4,739,000).
9. Retirement Plans
Eskimo Pie Corporation had maintained two defined benefit pensions plans
covering substantially all salaried employees. Upon the acquisition of
Eskimo Pie Corporation by the Company all future participation and all
benefits under the plans were frozen. These plans provide retirement
benefits based primarily on employee compensation and years of service up
to the acquisition of Eskimo Pie Corporation by the Company. The above
mentioned plans are referred to as the "Pension Benefits".
In addition, Eskimo Pie Corporation entered into an agreement with Reynolds
Metals Company to indemnify the cost of retiree health care and life
insurance benefits for salaried employees of Eskimo Pie Corporation who had
retired prior to April 1992. Under this agreement, Eskimo Pie Corporation
may elect to prepay its remaining obligation. Eskimo Pie Corporation did
not provide postretirement health and life insurance benefits for employees
who retired subsequent to April 1992. This indemnity agreement is referred
to as the "Other Benefits".
The following table reconciles the changes in benefit obligations and plan
assets in 2003, and reconciles the funded status to accrued benefit cost at
August 31, 2003:
Pension Benefits Other Benefits
Benefit Obligation $ $
- -------------------------------- ----- -----
Beginning balance 2,973 2,834
Interest cost 196 195
Actuarial loss 171
Lump sum purchase of obligations (12)
Benefit payments (108) (463)
Translation gain (328) (298)
----- -----
Ending balance 2,892 2,268
===== =====
Plan assets - Basic value
Beginning balance 2,806
Actual return on plan assets 243
Contributions 42
Benefit payments (120)
Translation gain (305)
-----
Ending balance 2,666
=====
F-17
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
9. Retirement Plans (cont'd)
The funded status for the post retirement health and life insurance
benefits is as follows:
Other Benefits
$
-----
Benefit obligations in excess of Plan assets 2,268
=====
Accrued benefit cost 2,268
=====
The accrued benefit cost of $2,268,000 is included in Other liabilities at
August 31, 2003.
The following table provides the components of the net periodic benefit
cost:
Pension Benefits Other Benefits
---------------- --------------
$ $
---- ---
Interest cost 196 195
Expected return on Plan assets (243)
Recognized net actuarial gain 43
---- ---
Net period benefit cost (income) (4) 195
==== ===
The assumptions used in the measurement of the Eskimo Pie Corporation's
benefit obligations are as follows:
Pension Benefits Other Benefits
---------------- --------------
Benefit obligation, beginning of year 6.75% 7.75%
Expected return on plan assets, during
the year 8.0%
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e. health care cost trend rate) is 5% for 2003 and
is assumed to remain at that level thereafter. A one percentage point
increase or decrease in the assumed health care cost trend rate would
change the accumulated postretirement benefit obligation by approximately
$232,500 and the net periodic postretirement benefit cost by approximately
$23,250.
10. Commitments
The majority of distribution warehouse, store and office facility leases
are under non-cancelable leases. Substantially all of the leases are net
leases, which require the payment of property taxes, insurance and
maintenance costs in addition to minimum rental payments. Certain store
leases provide for additional rentals based on a percentage of sales and
have renewal options for one or more periods from five to twenty years.
F-18
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
10. Commitments (cont'd)
At August 31, 2003 the future minimum lease payments under operating leases
with rental terms of more than one year, net of sub lease rents, amounted
to:
Fiscal year ending: $
------------------------- ------
2004 8,011
2005 5,711
2006 4,760
2007 2,756
2008 2,351
Later years 2,067
------
Total minimum obligations 25,656
======
Total rental expense relating to all operating leases (including those with
terms less than one year) was $2,973,000 (2002 - $1,302,000).
11. Contingencies
The Company is a party to legal proceedings and disputes with franchisees,
former franchisees and others, which arise in the ordinary course of
business. In the opinion of the Company, it is unlikely that the
liabilities, if any, arising from the legal proceedings and disputes will
have a material adverse effect on the consolidated financial position of
the Company or its operations.
Several subsidiaries hold master store leases or have guaranteed store
leases covering franchised locations. Such leases expire at varying dates
to 2013. Where a subsidiary holds the master lease, these premises have
been subleased to franchisees under terms and rental rates substantially
the same as those in master leases. In a majority of these instances,
franchisees make all lease payments directly to the landlords. The Company
provides an estimated liability for lease terminations in the event of a
default by a franchisee based on the expected costs of releasing or
settlement with the landlord. The liability was $410,000 at August 31,
2003. Aggregate minimum future rental payments under these leases
approximated $10,691,000 at August 31, 2003 (2002 - $11,329,000).
12. Related party transactions and amounts
Receivables - affiliates at August 31, 2002 were $266,000 in advances which
are unsecured, non-interest bearing and due on demand. The affiliates
include directors and officers of the Company.
Calip Dairies, Inc. ("Calip"), an ice cream distributor owned by an
officer, director and shareholder of the Company, has a management
agreement with Integrated Brands Inc., which the Company acquired in March
1998. This agreement terminates on December 31, 2013 and thereafter shall
automatically renew December 31 of each year for an additional one year
term, unless terminated under certain conditions. Under the agreement,
Calip provides management services to Integrated Brands for an annual fee
of U.S.$1,300,000 effective July 1, 2003, prior to which the fee was U.S.
$1,000,000. Such management fees incurred for the year ended August 31,
2003 were $1,556,000 (U.S. $1,050,000) (2002 - $1,559,000
(U.S.$1,000,000)). At August 31, 2003, the $754,000 (2002 - $978,000)
balance of payables - affiliates represents payables to Calip.
Integrated Brands Inc., also has a distribution agreement with Calip for
distribution of the Company's products in the New York Metropolitan Area,
Fairfield County in the state of Connecticut, and New Jersey. The
distribution agreement continues until December 31, 2007 and thereafter
shall automatically renew on December 31st of each year while the agreement
is in effect for an additional one year term, unless terminated under
certain conditions. The distribution agreement is terminable by either
party on sixty days notice. Sales of products to Calip were $12,624,000 for
the year ending August 31, 2003 (2002 - $11,709,000). At August 31, 2003,
$3,185,000 of the receivables - affiliates represent receivables from Calip
(2002 - $3,526,000). The transactions with Calip occur in the normal course
of operations and are measured at the amount of consideration established
and agreed to by the related parties.
F-19
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
13. Segment information
CoolBrands International's reportable segments are Prepackaged consumer
products, Foodservice, Dairy components and Franchising and licensing,
including Company-owned stores.
Revenues and profits in the Prepackaged consumer products segment are
generated from selling a variety of prepackaged frozen dessert products to
distributors and various retail establishments including supermarkets,
grocery stores, club stores, gourmet shops, delicatessens and convenience
stores.
Revenues and profits in the Foodservice segment are generated from
manufacturing and selling soft serve yogurt and premium ice cream mixes to
broad-line foodservice distributors, yogurt shops and other foodservice
establishments which, in turn, sell soft serve ice cream and yogurt
products to consumers.
Revenues and profits in the Dairy components segment are generated from the
manufacturing and selling of various ingredients to the dairy industry and
from the manufacturing and selling of flexible packaging, such as private
label ice cream novelty wraps.
Revenues and profits in the Franchising and licensing segment are generated
by franchising activities, which generate initial and recurring revenues
and the manufacture and sale of proprietary products to franchisees and
licensees and from Company-owned stores selling ice cream and soft serve
yogurt out of company-owned stores and outlets.
CoolBrands International Inc. evaluates the performance of its segments and
allocates resources to them based on their operating contribution, which
represents segment revenues, less direct costs of operation, excluding the
allocation of corporate expenses.
F-20
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
13. Segment information (cont'd)
Year Ended August 31, 2003
------------------------------------------------------------------------------
Prepackaged Franchising
consumer Dairy and
products Foodservice components licensing Corporate Consolidated
INDUSTRY SEGMENTS: $ $ $ $ $ $
- ----------------------------- ----------- ----------- --------- ----------- --------- ------------
Revenues 277,134 26,234 41,594 20,890 214 366,066
Interest income 575 126 43 744
Inter-segment revenues (5,389) (991) (2,943) (214) (9,537)
------- ------ ------ ------ ------ -------
Net revenues 272,320 25,243 38,651 21,016 43 357,273
------- ------ ------ ------ ------ -------
Segment earnings 45,152 2,678 6,026 2,123 43 56,022
General corporate expenses (1,707) (1,707)
Interest expense (1,970) (20) (1,990)
Minority interest (541) (541)
------- ------ ------ ------ ------ -------
Earnings before income taxes 42,641 2,678 6,026 2,103 (1,664) 51,784
======= ====== ====== ====== ======
Provision for income taxes 20,080
-------
Net earnings 31,704
=======
Assets 189,686 21,335 36,143 63,453 3,233 313,850
Capital expenditures 3,849 236 231 1,420 5,736
Depreciation and amortization 2,635 631 469 1,066 4,801
F-21
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
13. Segment information (cont'd)
Year Ended August 31, 2002
------------------------------------------------------------------------------
Prepackaged Franchising
consumer Dairy and
products Foodservice components licensing Corporate Consolidated
INDUSTRY SEGMENTS: $ $ $ $ $ $
- ----------------------------- ----------- ----------- --------- ----------- --------- ------------
Revenues 157,337 26,285 37,743 24,702 286 246,353
Interest income 380 245 44 669
Inter-segment revenues (122) (1,218) (3,133) (92) (235) (4,800)
------- ------ ------ ------ ------ -------
Net revenues 157,595 25,067 34,610 24,855 95 242,222
------- ------ ------ ------ ------ -------
Segment earnings 26,101 2,289 4,077 3,867 95 36,429
General corporate expenses (1,011) (1,011)
Interest expense (2,526) (18) (2,544)
------- ------ ------ ------ ------ -------
Earnings before income taxes 23,575 2,289 4,077 3,849 (916) 32,874
======= ====== ====== ====== ======
Provision for income taxes 11,890
-------
Net earnings 20,984
=======
Assets 176,937 15,249 44,118 42,070 5,288 283,662
Capital expenditures 5,236 397 78 627 6,338
Depreciation and amortization 2,212 823 492 1,119 4,646
F-22
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
for the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
13. Segment information (cont'd)
Year Ended August 31, 2003
-----------------------------------------------------
Canada United States International Consolidated
GEOGRAPHIC SEGMENTS: $ $ $ $
- ------------------------------- ------ ------------- ------------- ------------
Revenues 5,157 356,674 4,235 366,066
Interest income 103 595 46 744
Inter-segment revenues (214) (9,323) (9,537)
------ ------- ------ -------
Net revenues 5,046 347,946 4,281 357,273
------ ------- ------ -------
Segment earnings 668 53,342 2,012 56,022
General corporate expenses (1,707) (1,707)
Interest expense (1,990) (1,990)
Minority interest (541) (541)
------ ------- ------ -------
Earnings before income taxes (1,039) 50,811 2,012 51,784
====== ======= ======
Provision for income taxes 20,080
-------
Net earnings 31,704
=======
Assets 7,752 296,113 9,985 313,850
Capital expenditures 5,736 5,736
Depreciation and amortization 204 4,387 210 4,801
Year Ended August 31, 2002
-----------------------------------------------------
Canada United States International Consolidated
GEOGRAPHIC SEGMENTS: $ $ $ $
- ------------------------------- ------ ------------- ------------- ------------
Revenues 6,328 235,130 4,895 246,353
Interest income 72 559 38 669
Inter-segment revenues (316) (4,484) (4,800)
------ ------- ----- -------
Net revenues 6,084 231,205 4,933 242,222
------ ------- ----- -------
Segment earnings 1,033 33,280 2,116 36,429
General corporate expenses (1,011) (1,011)
Interest expense (2,544) (2,544)
------ ------- ----- -------
Earnings before income taxes 22 30,736 2,116 32,874
====== ======= =====
Provision for income taxes 11,890
-------
Net earnings 20,984
=======
Assets 9,202 265,512 8,948 283,662
Capital expenditures 134 6,204 6,338
Depreciation and amortization 218 4,195 233 4,646
F-23
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
For the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
(Tabular amounts are expressed in thousands of dollars)
14. Differences between Canadian and United States generally accepted
accounting principles
The consolidated financial statements of the Company have been prepared in
accordance with Canadian GAAP. The following adjustments and/or additional
disclosures, would be required in order to present the financial statements
in accordance with U.S. GAAP, as required by the United States Securities
Exchange Commission ("SEC").
(a) Comprehensive income
Under United States GAAP, comprehensive income must be presented for
certain items that are required by U.S. GAAP to be recognized directly
in stockholders' equity rather than net income.
2003 2002
------ ------
$ $
Net earnings 31,704 20,984
Unrealized gain (loss) on derivative investments
(net of income tax of $(103) in 2003
and $44 in 2002) 164 (71)
Foreign currency translation 14,589 178
------ ------
Comprehensive earnings 17,279 21,091
====== ======
(b) Accounting for consideration given by a vendor to a customer or
reseller of the vendor's products
In accordance with EITF No. 01-09 "Accounting for Consideration Given
by a Vendor to a Customer or Reseller of the Vendors Products" certain
payments made to customers by the Company, including promotional sales
allowances, cooperative advertising and product introductory expenses
classified as selling, general and administrative expenses, must be
deducted from revenue. The reclassification for the year ended August
31, 2003 would be $31,057,000 (2002 - $26,979,000).
Under U.S. GAAP, total revenues and selling, general and
administrative expenses for the years ended August 31, 2003 and 2002
would be classified as follows:
Total Selling, general and
revenues administrative expenses
----------------- ------------------------
2003 2002 2003 2002
------- ------- ------- -------
$ $ $ $
Canadian GAAP 357,273 242,222 95,088 77,558
Adjustment for consideration
given to customers (31,057) (26,979) (31,057) (26,979)
------- ------- ------- -------
U.S. GAAP 326,216 215,243 64,031 50,579
======= ======= ======= =======
F-24
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
For the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
14. Differences between Canadian and United States generally accepted
accounting principles (cont'd)
(c) Stock based compensation
Under United States GAAP, the Company accounts for stock options
granted to employees under the intrinsic value method whereby
compensation expense is recognized to the extent the market price
exceeds the exercise price at the date of grant. Stock options grants
to non-employees are recorded at fair value. In 2002 the application
of the intrinsic value method would have resulted in an additional
compensation expense, however the amount involved was not material.
(d) Outlets
The following is a schedule summarizing the number of franchised,
licensed and other outlets and company-owned outlets:
Franchised,
Licensed and Company-owned Total
Other Outlets Outlets Outlets
------------- ------------- -------
Outlets - August 31, 2001 4,458 5 4,463
Outlets converted to franchised outlets
Outlets opened (closed) (34) (34)
----- -- -----
Outlets - August 31, 2002 4,424 5 4,429
Outlets converted to franchised outlets
Outlets opened (closed) 23 23
----- -- -----
Outlets - August 31, 2003 4,447 5 4,452
===== == =====
The number of outlets opened are net of those closed. Certain
franchised outlets are subject to master area franchise agreements.
The Company does not have the same control over licensed and other
outlets as it does with franchised and company-owned outlets.
F-25
<Page>
CoolBrands International Inc.
Notes to Consolidated Financial Statements
For the years ended August 31, 2003 and 2002
- --------------------------------------------------------------------------------
14. Differences between Canadian and United States generally accepted
accounting principles (cont'd)
(e) Other items
In December 2002, the FASB issued SFAS No. 148, " Accounting for
Stock-Based Compensation-Transition and Disclosure- an amendment of
FASB Statement No. 123". This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensations and the effect of the method used on reported
results. The Company intends to continue to account for stock-based
compensation using the intrinsic value method.
FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, was issued in November 2002. FIN 45
requires a guarantor to include disclosure of certain obligations, and
if applicable, at the inception of the guarantee, recognize a
liability for the fair value of other certain obligations undertaken
in issuing a guarantee. The recognition requirement is effective for
guarantees issued or modified after December 31, 2002. Implementation
of this standard did not have a material effect in the current year.
In January 2003, the FASB issued FASB Interpretation ("FIN") 46,
"Consolidation of Variable Interest Entities an interpretation of ARB
No. 51" (the "Interpretation"). The Interpretation introduces a new
consolidation model -- the variable interests model -- which
determines control [and consolidation] based on potential variability
in gains and losses of the entity being evaluated for consolidation.
The Interpretation requires disclosure of certain information in
financial statements initially issued after January 31, 2003, if it is
reasonably possible that an enterprise will consolidate or disclose
information about a variable interest entity when Interpretation 46
becomes effective. For foreign private issuers, Interpretation 46 will
be applicable from the beginning of their first standalone U.S. GAAP
reporting period that begins after June 15, 2003. The Company has not
determined the impact of this pronouncement, if any, on the
reconciliation to U.S. GAAP.
F-26
<Page>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of 2003 and 2002
We manage our business based on four industry segments: Prepackaged consumer
products, foodservice, dairy components, and franchising and licensing.
Sales
Sales for each segment are summarized in the following table:
Amount Percentage of Sales
----------------- -------------------
2003 2002 2003 2002
Year Ended August 31, $ $ % %
- ------------------------- ------- ------- ----- -----
Prepackaged consumer
products 255,197 156,691 76.2 66.4
Foodservice 25,243 25,067 7.5 10.6
Dairy components 38,651 34,610 11.5 14.7
Franchising and licensing 15,943 19,660 4.8 8.3
------- ------- ----- -----
Total 335,034 236,028 100.0 100.0
======= ======= ===== =====
Sales in fiscal 2003 increased by $99,006,000 or 41.9% from $236,028,000 in
fiscal 2002 to $335,034,000. This increase was primarily related to an increase
in sales of new prepackaged consumer products introduced for sale in fiscal
2003, expanded sales and distribution of our foodservice and dairy components
products, sales generated by the brands and distribution assets acquired in July
2003 from Dreyer's Grand Ice Cream, Inc. and Nestle' and from the acquisition of
50.1% of Americana Food LP which was effective July 1, 2003.
Gross profit margin
The following table presents the gross profit margin dollars by industry segment
and gross profit percentage for each industry segment:
Amount Percentage of Sales
----------------- -------------------
2003 2002 2003 2002
Year Ended August 31, $ $ % %
- ------------------------- ------- ------- ---- ----
Prepackaged consumer
products 104,594 83,030 41.0 53.0
Foodservice 9,898 10,297 39.2 41.1
Dairy components 8,921 7,135 23.1 20.6
Franchising and licensing 3,751 6,320 23.5 32.2
------- ------- ----- -----
Total 127,164 106,782 38.0 45.2
======= ======= ===== =====
Gross profit dollars increased to $127,164,000 in fiscal 2003 from $106,782,000
in fiscal 2002 due to the increased sales in 2003 versus 2002. However, the
Company's overall gross profit percentage for fiscal 2003 decreased to 38% as
compared with 45.2% for fiscal 2002, due to the impact of lower gross profit
margins generated by Americana Foods' manufacturing operations and Eskimo Pie
Frozen Distribution Inc's distribution operations. Franchising and licensing
gross profit percentage for fiscal 2003 was adversely impacted by the losses of
Company owned stores.
<Page>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Drayage and other income
Drayage and other income increased to $16,978,000 in fiscal 2003 from $1,007,000
in fiscal 2002 due to drayage fees received from Dreyer's/Nestle for the
delivery of their products to customers utilizing the Company's "Direct Store
Delivery" (DSD) services.
Selling, general and administrative expenses
Selling, general and administrative expenses are summarized by industry segment
in the following table:
Amount Percentage of Sales
--------------- -------------------
2003 2002 2003 2002
Year Ended August 31, $ $ % %
- ------------------------- ------ ------ ---- ----
Prepackaged consumer
products 76,616 58,500 30.0 37.3
Foodservice 7,222 8,008 28.6 32.0
Dairy components 2,908 3,058 7.5 8.8
Franchising and licensing 6,639 6,981 41.6 35.5
Corporate 1,703 1,011 n/a n/a
------ ------
Total 95,088 77,558
====== ======
Selling, general and administrative expenses increased by $17,530,000 from
$77,558,000 in 2002 to $95,088,000 in 2003 due primarily to the increase in
selling, general and administrative expenses in the prepackaged consumer
products' segment due to the increased level of sales. Prepackaged consumer
products selling, general and administrative expenses increased as a result of
increased spending on promotions, marketing and advertising and an increase in
product introductory expenses (slotting) associated with the sale of new
products introduced in 2003. The Company continues to control spending over
selling, general and administrative expenses, such that prepackaged consumer
products selling, general and administrative expenses declined as a percentage
of sales to 30% in fiscal 2003 from 37.3% in fiscal 2002, and selling, general
and administrative expenses as a percentage of total revenues declined to 26.6%
in fiscal 2003 from 32% in fiscal 2002.
Interest expense
Interest expense was $1,990,000 in fiscal 2003 compared with $2,544,000 in
fiscal 2002. The decrease in interest expense was primarily due to the reduction
in long-term debt associated with the acquisitions of Eskimo Pie Corporation in
2001 and the assets of Fruit-A-Freeze in 2002. Interest expense will increase in
fiscal 2004 as a result of the Company's fourth quarter acquisition of 50.1% of
Americana Foods LP which included U.S. $12,625,000 of secured term and revolver
bank debt.
Provision for income taxes
The effective tax rate was 38.8% in fiscal 2003 and 36.2% for fiscal 2002. The
effective tax rate differs from the Canadian Federal/Principal Statutory Rate
primarily due to our operations in foreign countries with lower effective tax
rates. Future effective tax rates could be adversely affected by earnings being
lower than anticipated in countries that have lower statutory rates or changes
in the valuation of our future income tax assets or liabilities.
<Page>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Earnings
Net earnings improved to $31,704,000 in 2003 as compared to $20,984,000 in 2002
and improved to 8.9% of total revenues in 2003 as compared to 8.7% of total
revenues in 2002.
Liquidity and capital resources
Working capital at August 31, 2003 was $85,734,000 compared with $57,354,000 at
August 31, 2002. The increase was primarily due to an increase in receivables of
$17,806,000 and inventory of $30,243,000, offset by a decrease in cash of
$16,946,000. The Company believes its working capital plus internally generated
funds and the funds available from a U.S. $10 million revolving credit facility
will be sufficient to meet its cash and working capital requirements for its
established operations for the current fiscal year.
At August 31, 2003, the Company had $30,140,000 of cash and short-term
investments as compared with $47,086,000 at August 31, 2002. The Company
generated cash flow from operating activities before changes in working capital
of $39,980,000 for the year ended August 31, 2003 as compared with $27,805,000
for the year ended August 31, 2002 due primarily to the increase in net earnings
for 2003 as compared with 2002.
Payment requirements
In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary
borrowed U.S. $30 million to finance the acquisition. The loan is payable in
monthly installments of U.S. $250,000, which began December 1, 2000, with the
remaining principal balance due on November 1, 2005. Interest on the term loan
is payable monthly on the unpaid principal balance. All borrowings under the
above loan agreement are guaranteed by the Company and all of its significant
subsidiaries. The principal balance outstanding at August 31, 2003 was U.S.
$16,250,000.
On November 19, 2002, Americana Foods LP, which is owned 50.1% by the Company,
entered into a credit agreement with a financial institution that included a
term loan of U.S. $10,000,000, which is secured by the Partnership's property,
plant, and equipment. Principal payments are payable in fixed monthly
installments of U.S. $80,739 and matures on November 19, 2007. The term of the
loan bears interest at prime plus 0.5%( 4.5% at August 31, 2003.)
The Partnership's credit agreement also included a revolving loan of up to U.S.
$5 million, subject to a borrowing base calculation, which bears interest at
prime plus 0.5% (4.5% at August 31, 2003) and is due on November 19, 2004. At
August 31, 2003, approximately U.S. $2,031,000, was available to the partnership
under this loan. The revolving loan is secured by the Partnership's receivables
and inventory.
Impact of inflation
Inflation can significantly impact ice cream and frozen yogurt ingredients,
including butterfat and packaging costs. In 2003 and 2002, the Company passed on
ingredient, energy and freight cost increases by raising prices on selected
product lines. In 2004, the Company believes that it will be able to pass on any
cost increases, if any, in the normal course of business within a relatively
short period of time. However, the ability of the Company to pass on cost
increases will depend, to some extent, on
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whether its competitors have also done so. The Company believes that, in the
past, its competitors have passed on cost increases in a relatively short period
of time.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Risk factors and uncertainties
CoolBrands products are ultimately purchased by the global retail consumer,
whose tastes and preferences are subject to variation and change. Although
carefully monitored, these changes cannot be controlled and are difficult to
predict. Management believes that CoolBrands' family of products is based on
well established brand names and is easily adaptable to meet changes in consumer
tastes and demands.
CoolBrands operates in some countries that are subject to potential political
and economic uncertainty. Such factors, beyond the control of CoolBrands, are
lessened because of international diversification and the sharing of risks with
Master and Sub-franchisees.
CoolBrands is subject to currency exchange risks since most of its subsidiaries
report and transact in U.S. dollars. Risks are minimized by the subsidiaries
transacting purchases and recording the related sales in the same currency. From
time to time, the Company has also used forward exchange contracts to minimize
exchange risk exposure.
The Corporation derives a substantial portion of its revenues from its
operations in the United States. The U.S. market for frozen desserts is highly
competitive. As competitors introduce new products or revise their supply or
pricing strategies, the Corporation may encounter additional and more intense
competition. Such competitors have greater name recognition and more extensive
financial, technological, marketing and personnel resources than the
Corporation. In addition, the Corporation may experience increased competition
in its other markets as its competitors expand their international operations.
The Corporation is subject to risks with respect to its cost of raw materials,
some of which are subject to changes in commodity prices, particularly the cost
of butterfat, which is used to produce ice cream products. From time to time,
the Corporation has used hedging contracts to reduce its exposure to such risks
with respect to its raw material costs.
Seasonality
The ice cream and frozen yogurt industry generally experiences its highest
volume during the spring and summer months and its lowest volume in the winter
months.
Outlook
In the past year, the Company acted through acquisition, internal expansion and
pursuit of new strategic relationships to promote future profitable growth. The
Company added new brands to its portfolio, including Dreamery and Whole-Fruit
acquired from Dreyer's Grand Ice Cream, Inc., and the Godiva ice cream license
assigned to the Company from Dreyer's in the fourth quarter of fiscal 2003.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Outlook (cont'd)
The Company also continued to increase its leverage and returns on its
investment in brand equity through the vertical integration of our supply chain,
including the acqusition from Nestle' of substanially all of the Haagen-Dazs
frozen dessert direct store distribution assets in the U.S. and the acquisition
of 50.1% of Americana Foods LP which owns one of the largest and most versatile
frozen dessert manufacuring facilities in the U.S., both of which occurred in
the fourth quarter of 2003.
Management believes that the gains in revenues and earnings realized in 2003
continued to build a foundation to support continued profitable growth in 2004.
Management will continue to monitor and assess its systems, controls and
personnel to execute the Company's growth strategy and maximize returns.