MANAGEMENT'S DISCUSSION AND ANALYSIS
This management's discussion and analysis ("MD&A") addresses the results of
operations and financial position of CoolBrands International Inc. ("CoolBrands"
or the "Company") for the fiscal year ended August 31, 2005 compared to the
fiscal year ended August 31, 2004. This MD&A is dated December 13, 2005 and has
been approved by the board of directors of CoolBrands on the recommendation of
the Audit Committee.
This MD&A should be read in conjunction with the Company's audited consolidated
financial statements and the related notes, which may be accessed on the
Internet at www.sedar.com. Additional information relating to the Company,
including the Company's Annual Information Form, can also be accessed on the
SEDAR website.
Unless otherwise indicated, all financial information herein is prepared in
accordance with United States generally accepted accounting principles and all
dollar amounts referred to herein are in thousands of United States dollars,
except per share data.
The information in this document contains certain forward-looking statements
with respect to CoolBrands International Inc., its subsidiaries and affiliates.
These statements are often, but not always made through the use of words or
phrases such as "expect", "should continue", "continue", "believe",
"anticipate", "estimate", "contemplate", "target", "plan", "budget" "may",
"will", "schedule" and "intend" or similar formulations. By their nature, these
forward-looking statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by management, are inherently
subject to significant, known and unknown, business, economic, competitive and
other risks, uncertainties and other factors affecting CoolBrands specifically
or its industry generally that could cause actual performance, achievements and
financial results to differ materially from those contemplated by the
forward-looking statements. These risks and uncertainties include the tastes and
preferences of the global retail consumer of CoolBrands' products; the ability
of CoolBrands to be competitive in the highly competitive U.S. market for frozen
desserts fluctuations in consumption of CoolBrands' products and services as a
result the seasonal nature of the frozen dessert industry; the ability of
CoolBrands to retain or acquire shelf space for its products in supermarkets,
club stores and convenience stores; the ability of CoolBrands to effectively
manage the risks inherent with mergers and acquisitions; the effect on foreign
operation of political, economic and regulatory risks; currency risk exposure;
the ability to recruit and retain qualified employees; changes in prices for raw
materials; the ability of CoolBrands to pass on cost increases resulting from
inflation and other risks described from time to time in publicly filed
disclosure documents of CoolBrands and its subsidiaries and affiliates. In view
of these uncertainties we caution readers not to place undue reliance on these
forward-looking statements. CoolBrands disclaims any intention or obligation to
update or revise any statements made herein, whether as a result of new
information, future events or otherwise.
Business Strategy
The Company manufactures and distributes ice cream, sorbet, frozen yogurt and
fresh yogurt and other refrigerated and frozen dairy-based snacks. The Company's
line of ice cream and frozen dessert products is marketed throughout the United
States and select markets in Canada and Europe. The "Breyers Yogurt" line of
refrigerated yogurt products is marketed primarily in the eastern United States.
The Company also manufactures and/or distributes frozen and refrigerated
products for other companies (the "Partner Brands").
The Company's marketing strategy is based on management's belief that superior
brand image can be combined with high quality and product innovation to develop
products in the refrigerated and frozen snack food categories that will earn
consumers' loyalty and deliver attractive margins and long-term revenue growth
to the Company, and that brand licensing arrangements can help reduce costs,
accelerate growth and maximize opportunities for success in building significant
market share for the Company's products. The Company's objective is to develop
brands - both owned and licensed, in both the frozen and refrigerated snack
foods categories - that deliver these benefits to the Company and consumers of
the Company's products.
Brand Portfolio
The Company's brands include, among others, the following:
Breyers Yogurt. America's second leading brand for "fruit-on-the-bottom" yogurt,
with a strong heritage of high quality, all natural dairy products. This brand,
which the Company acquired from Kraft Foods in March 2005, is manufactured and
distributed under license from Unilever. The Company's yogurt portfolio also
includes the "Creme Savers Yogurt" product line manufactured and sold under
license from Wm. Wrigley Jr. Company.
Eskimo Pie. The original chocolate-coated ice cream bar, invented in 1921 and
still one of the nation's best known ice cream snack brands. Eskimo Pies come in
regular and no-sugar-added varieties, and have proven especially popular with
diabetic consumers. The Company acquired the Eskimo Pie brand when it acquired
Eskimo Pie Corporation in October 2000.
Chipwich. The chocolate chip cookie ice cream sandwich that created the premium
frozen snack category, Chipwich was acquired by the Company in July 2002.
Whole Fruit Sorbet. The leading brand nationwide for all natural fruit sorbet
sold in pint sized containers, Whole Fruit Sorbet was acquired from Dreyer's in
July 2003.
Godiva Ice Cream. The Company acquired the license rights to the Godiva
trademark for ice cream from Dreyer's in July 2003 and manufactures and
distributes Godiva Ice Cream in pints and ice cream bars under license from
Godiva Chocolatier, Inc.
No Pudge! Frozen Snacks. In 2005, the Company introduced its "No Pudge!" line of
low fat frozen snacks under license from No Pudge! Foods, Inc., marketers of the
popular low fat brownie mix.
Tropicana Fruit Bars. Since 1997, the Company has manufactured and distributed
Tropicana fruit bars under license from Tropicana Products, Inc.
Snapple On Ice Pops. In 2005, the Company introduced its "Snapple On Ice" line
of frozen juice pops, under license from Snapple Beverage Corp.
Crayola Color Pops. In 2005, the Company introduced its "Crayola Color Pops"
line of frozen snacks, under license from Binney & Smith Properties, Inc.
The Company has continuously pursued acquisitions and new brand licensing
partnerships in an effort to keep pace with rapid changes in consumer
preferences and new trends in the snack food industry. During 2002, the Company
acquired Chipwich and Fruit-a-Freeze. During 2003, the Company acquired three
super-premium brands from Dreyer's Grand Ice Cream: Dreamery Ice Cream, Whole
Fruit Sorbet and the license for Godiva Ice Cream. During 2004, as low-carb
dieting became a powerful force throughout the food industry, the Company
entered into a license with Atkins Nutritionals, Inc. to manufacture, sell and
distribute Atkins Endulge super premium ice cream products for carb-conscious
consumers. This license enabled the Company to realize significant revenue and
earnings growth in 2004. However, in 2005 the rapid decline in low-carb dieting
led to a similarly rapid decline in the Company's sales of Atkins Endulge Ice
Cream. In July 2004, the Company learned that our license for Weight Watchers
Smart Ones would not be extended beyond September 28, 2004, on which date our
license would expire, subject to a negotiated nine-month period ended May 1,
2005 to sell off and balance out inventories. Primarily due to the decline in
Atkins Endulge sales and the elimination of Weight Watchers Smart Ones from the
Company's portfolio, the Company experienced significant erosion of its sales
and market share in 2005, partially offset by several new product introductions,
specifically the No Pudge!, Snapple On Ice and Crayola Color Pops.
In 2005, the Company added significant diversity to its brand portfolio through
the acquisition of Breyers Yogurt from Kraft Foods Inc. in March 2005. The
Breyers brand gives the Company an established position in the market for
refrigerated yogurt, one of the fastest growing food categories, and a platform
for future brand development in the refrigerated snack foods category, including
via the Company's license-based strategy.
Distribution Channels
The Company's products are offered for sale in a diverse range of retail
outlets, including supermarkets, mass merchants, drug stores, convenience stores
and club stores, as well as foodservice outlets, such as restaurants,
cafeterias, theme parks and ice cream parlors.
The Company also franchises and licenses ice cream parlors and frozen yogurt
shops that offer the Company's products for sale. CoolBrands' Franchising
division franchises and licenses
frozen dessert outlets operated under a family of brands including Tropicana
Smoothies, Juices & More, Swensen's Ice Cream, I Can't Believe It's Yogurt,
Yogen Fruz, Bresler's Premium Ice Cream, Golden Swirl and Ice Cream Churn, with
company-owned, franchised and non-traditional partnership locations around the
world.
The Company distributes its products primarily by direct shipment to
super-market owned warehouses, independent distributors and foodservice
broad-line distributors. In addition, the Company operates a proprietary
direct-store-distribution ("DSD") system that services all distribution channels
in selected U.S. markets, including out-of-home accounts such as convenience
stores, drug stores and gas station food marts. The Company also provides
distribution services through its DSD system for Partner Brands. Significant
current Partner Brands include Unilever, Masterfoods/M&M Mars and Dreyer's.
In 2004, the Company enhanced its DSD system by acquiring the assets of Kinnett
Distribution and integrating them into the Company's Atlanta, Georgia DSD
operation. In 2005, the Company increased its penetration of the out-of-home (or
"impulse") channel by introducing a complete line of single-serve frozen snacks
under our proprietary brands, primarily Eskimo Pie, for DSD distribution. Also
in 2005, the Company refocused its DSD operations in western states (California,
Oregon and Washington) to reduce supermarket distribution operations in those
markets in favor of increased focus on the impulse channel.
Manufacturing Operations
The Company manufactures its frozen products primarily at Americana Foods in
Dallas, Texas, its 50.1% owned subsidiary. Americana Foods produces a diverse
range of high quality soft serve mixes, packaged ice cream, frozen snacks and
other similar products. In addition to Americana Foods, the Company manufactures
its frozen products in Russellville, Arkansas at its Eskimo Pie Foodservice
facility and in Norwalk, California at its Fruit-a-Freeze fruit bar plant. The
Company also contracts with other companies to manufacture certain of the
Company's frozen products.
The Company manufactures its refrigerated yogurt products at its 100% owned
subsidiary CoolBrands Dairy, Inc. in North Lawrence, New York.
Americana Foods and CoolBrands Dairy also manufacture products for Partner
Brands.
The Company's Dairy Components division manufactures and sells a full line of
quality flavours, chocolate coatings, fudge sauces, powders for chocolate milk,
eggnog bases and other ingredients, and flexible packaging products for use in
private label dairy products, in addition to the Company's brands.
Overall Performance
In 2005, the Company adopted generally accepted accounting principles in the
United States ("U.S. GAAP") and changed its reporting currency from Canadian
dollars to U.S. dollars. For comparative purposes, historical financial
statements and notes and Management's Discussion and Analysis have been restated
to reflect these changes.
For fiscal 2005, net revenues decreased to $385,070 as compared with $449,938,
for fiscal 2004, a 14.4% decrease. The net loss for fiscal 2005 was ($74,070)
(($1.32) basic and diluted loss per share) as compared with net earnings of
$23,512 ($0.42 basic and diluted earnings per share) for fiscal 2004.
The decrease in net revenues for fiscal 2005 reflects the decrease in sales,
primarily from the frozen dessert segment, the increase in trade promotion
payments made to customers, and the decline in drayage income. In fiscal 2005,
net sales declined by 10.3% to $364,686 as compared with $406,470 for fiscal
2004. The decline in sales came from all of our frozen dessert brands, but
principally from the Weight Watchers and Atkins. These sales declines were
partially offset by the sales from newly introduced frozen dessert products,
acquisition of the Breyers yogurt business on March 27, 2005 and the increase in
distribution sales as a result of the change in the business arrangement with
Dreyer's Grand Ice Cream Holdings, Inc. ("Dreyer's"). Effective September 1,
2004, CoolBrands began the distribution of Dreyer's products as an independent
distributor, changing from the previously used drayage basis, except for
Dreyer's scanned based trading customers which continue to be delivered on a
drayage basis. As a result of this change, CoolBrands began purchasing products
from Dreyer's and selling those products to customers at wholesale. The sales
increases due to this change partially offset sales declines in our base frozen
desserts business. In fiscal 2005, drayage and other income decreased by 64.3%
to $14,246 as compared with $39,873 for fiscal 2004, primarily as a result of
this change.
Gross profit percentage for fiscal 2005 declined to 0.8% as compared with 19%
for fiscal 2004. The decline in gross profit percentage was primarily due to:
1. Increased trade promotion payments to customers, excluding the yogurt
segment, which amounted to $52,359 and $32,913 in 2005 and 2004
respectively;
2. The write down of obsolete and slow moving finished goods inventories,
packaging, and ingredients. This write down amounted to $12,723 in
2005 and was the result of a settlement of litigation with Weight
Watchers International, a new labeling law which will become effective
January 1, 2006, and a provision for slow moving inventories due to
changes in consumer preferences;
3. Our inability to cover fixed overhead costs in both our manufacturing
and distribution operations due to the lack of production and sales;
and
4. The change in mix of frozen dessert products being sold in 2005 with
lower gross profit margins as compared with 2004.
Selling, general and administrative expenses for fiscal 2005 increased as a
percentage of revenues to 13.6% as compared with 11.5% for fiscal 2004. This
increase occurred primarily due to the decline revenues. Selling, general and
administrative expenses increased by $484 or 0.9% from $51,688 in 2004 to
$52,172 in 2005. Selling, general and administrative expenses for 2005 and 2004
were adversely impacted by the write-off of certain license agreements and the
write-off of deferred package design costs, primarily related to Weight
Watchers, in 2005. These charges amounted to $2,358 and $3,684 in 2005 and 2004,
respectively.
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS123), the Company recognized
stock-based compensation expense of $1,918 and $30,983 in 2005 and 2004 which
represents the estimated fair value of stock options earned during the
respective fiscal years.
The 2005 fiscal year results were adversely affected by the non-cash pre-tax
asset impairment charge of $55,525 (Nil in 2004), which resulted from the
impairment of goodwill and intangible assets related to the Company's frozen
desserts and franchising segments.
Cash and working capital
Cash, investments and restricted cash decreased to $41,562 at August 31, 2005
from $64,327 at August 31, 2004. Working capital decreased to $28,469 at August
31, 2005 from $118,138. CoolBrands' current ratio declined to 1.2 to 1 at August
31, 2005 from 2.6 to 1 at August 31, 2004. These changes in current assets and
current liabilities are attributable primarily to the use of cash and short-term
borrowings to finance the Company's acquisitions and fixed asset purchases. The
Company is currently negotiating the refinance of its long-term debt and
short-term borrowings, including $40,000 due January 3, 2006 and $7,145 due
January 10, 2006.
Selected Annual Information
The following chart shows selected annual information for the three most
recently completed fiscal years.
Year ended August 31
------------------------------
2005 2004 2003
-------- -------- --------
Total net revenues $385,070 $449,938 $214,272
Net (loss) earnings (74,070) 23,512 16,833
Earnings per share
Basic (1.32) 0.42 0.33
Diluted (1.32) 0.42 0.31
Total assets 297,845 317,257 223,661
Total long-term debt 60,962 27,754 32,022
CoolBrands' decline in total net revenues during fiscal 2005 reflects the
decrease in net sales, primarily from the frozen dessert segment, partially
offset by net sales gained from the acquisition of the Breyers yogurt business
in March 2005 and the decline in drayage income. In fiscal 2005, net sales
declined by 10.3% to $364,686 as compared with $406,470 for fiscal 2004. In
fiscal 2005, drayage and other income decreased by 64.3% to $14,246 as compared
with $39,873 for fiscal 2004. Revenue growth in fiscal 2004 and 2003 was the
result of the successful introduction of new frozen dessert products in the
Better for You category, the acquisition of 50.1% of Americana Foods effective
July 1, 2003 and acquisition of certain assets from Dreyer's Grand Ice Cream,
Inc. and Nestle Ice Cream Company LLC on July 6, 2003.
CoolBrands' net loss in 2005 was primarily due to the substantial decline in net
sales due to the loss of the Weight Watchers Smart Ones license agreement, the
decline in net sales of the Atkins Endulge and other frozen dessert product
lines and the resulting decrease in gross profit dollars, the $25,627 decline in
drayage and other income and the asset impairment charge of $55,525.
CoolBrands' net earnings in 2004 and 2003 reflected the growth in revenues and
effective control of selling, general and administrative expenses. During this
time, we developed and expanded our Better for You product lines, including
Weight Watchers Smart Ones and Atkins Endulge. We obtained higher than normal
gross profit margins and lower than normal promotion, marketing and advertising
expenses due to the initial low level of competition in this niche category.
Comparison of 2005 and 2004
We manage our business based on five industry segments: frozen desserts, yogurt,
foodservice, dairy components, and franchising and licensing.
Net sales
Net sales for each segment are summarized in the following table:
Year Ended August 31
-----------------------------------------
Percentage of Sales
-------------------
2005 2004 2005 2004
-------- -------- ----- -----
Frozen desserts $271,086 $356,399 74.3 87.7
Yogurt 44,007 12.1
Foodservice 17,736 15,679 4.9 3.9
Dairy components 19,538 23,184 5.4 5.7
Franchising and licensing 12,319 11,208 3.3 2.7
-------- -------- ----- -----
Total $364,686 $406,470 100.0 100.0
======== ======== ===== =====
The decrease in net sales for fiscal 2005 in the frozen dessert segment reflects
the deduction from sales for payments made to customers by the Company,
excluding the yogurt segment, of $52,359 in 2005 as compared with $32,913 in
2004 (a net reduction of $19,446). The decline in net sales in the frozen
desserts segment came from all of our frozen dessert brands, but principally
from the Weight Watchers and Atkins. In connection with the settlement of the
Weight Watchers litigation, CoolBrands agreed to discontinue the sale of all
Weight Watchers products on May 1, 2005, approximately five months sooner than
required by the Weight Watchers License Agreement. These declines in net sales
were partially offset by the net sales from newly introduced frozen dessert
products and the increase in distribution sales as a result of the change in the
business arrangement with Dreyer's. Effective September 1, 2004, CoolBrands
began the distribution of Dreyer's products as an independent distributor,
changing from the previously used drayage basis, except for Dreyer's scanned
based trading customers which continue to be delivered on a drayage basis. As a
result of this change, CoolBrands began purchasing products from Dreyer's and
selling those products to customers at wholesale. The sales increases due to
this change partially offset sales declines in our base frozen desserts
business.
The net sales for the yogurt segment reflect the acquisition of the Breyers
yogurt business from Kraft Foods, Inc. on March 27, 2005.
The decline in sales by our Dairy components segment reflects the decrease in
sales due to the decline in the demand for Weight Watchers and Atkins
ingredients and packaging from the Company's various contract manufacturers.
Royalties, licensing, and consumer products license revenues
Royalties, licensing and consumer products license revenues increased by 70.7%
to $6,138 in fiscal 2005 from $3,595 in fiscal 2004 due primarily to the Whole
Fruit license revenues the Company earned from Dreyer's of $3,103. The Company
will continue to earn Whole Fruit license revenues through December 2005,
estimated to be approximately $850.
Drayage and other income
Drayage and other income decreased by 64.3% to $14,246 in fiscal 2005 from
$39,873 in fiscal 2004. This decline was due to the change in the business
arrangement with Dreyer's discussed above. Drayage income in 2005 represents the
fees paid to CoolBrands by Dreyer's for the delivery of products to Dreyer's
scanned based trading customers which continue to be delivered on a drayage
basis.
Gross profit margin
The following table presents the gross profit margin dollars and gross profit
percentage for our segments:
Year Ended August 31
-----------------------------------------
Percentage of Sales
-------------------
2005 2004 2005 2004
-------- -------- ---- ----
Frozen Dessert $(15,488) $64,779 (5.7) 18.2
Yogurt 7,369 16.7
Foodservice 3,626 3,439 20.4 21.9
Dairy Components 4,287 5,975 21.9 25.8
Franchising and Licensing 3,224 2,931 26.2 26.2
------ ------- ---- ----
Total $3,018 $77,124 0.8 19.0
====== ======= ==== ====
Gross profit dollars declined to $3,018 in fiscal 2005 from $77,124 in fiscal
2004 primarily due to the decline in gross profit dollars in frozen desserts
segment of $80,267, partially offset by the $7,369 in gross profit dollars
generated by the yogurt segment. The decline in gross profit dollars in the
frozen desserts segment resulted from the decline in sales in 2005 versus 2004,
the impact on the segment for payments made to customers which as previously
discussed reduced net sales and gross profit dollars, excluding the yogurt
segment, in 2005 by $52,359 as compared with $31,337 in 2004 (a net reduction of
$19,446) and our inability to cover fixed overhead costs in both our
manufacturing and distribution operations due to the lack of production and
sales. Gross profit dollars in the frozen desserts segment were also adversely
affected by the write down of $12,723 of obsolete and slow moving finished goods
inventories, packaging, ingredients and finished goods inventories which could
not be used or sold resulting from the settlement of the Weight Watchers
litigation and the estimated impact on packaging which will not be used due to a
new labeling law which will become effective January 1, 2006.
Gross profit percentage for fiscal 2005 declined to 0.8% as compared with 19%
for fiscal 2004. The decline in gross profit percentage was primarily due to:
1. Increased trade promotion payments to customers, excluding the yogurt
segment, which amounted to $52,359 and $32,913 in 2005 and 2004
respectively;
2. The write down of obsolete and slow moving finished goods inventories,
packaging, and ingredients. This write down amounted to $12,723 in
2005 and was the result of a
settlement of litigation with Weight Watchers International, a new labeling
law which will become effective January 1, 2006, and a provision for slow
moving inventories due to changes in consumer preferences;
3. Our inability to cover fixed overhead costs in both our manufacturing and
distribution operations due to the lack of production and sales; and
4. The change in mix of frozen dessert products being sold in 2005 with lower
gross profit margins as compared with 2004.
Selling, general and administrative expenses
Selling, general and administrative expenses are summarized by industry segment
in the following table:
Year Ended August 31
---------------------------------------
Percentage of Sales
-------------------
2005 2004 2005 2004
------- ------- ---- ----
Frozen desserts $38,818 $41,054 14.3 11.5
Yogurt 4,993 11.4
Foodservice 1,486 1,890 8.4 12.1
Dairy Components 1,694 1,942 8.7 8.4
Franchising and Liscensing 5,109 4,934 41.5 44.0
Corporate 72 1,868
------- -------
Total $52,172 $51,688
======= =======
Selling, general and administrative expenses increased by $484 from $51,688 in
2004 to $52,172 in 2005 due primarily to the increase in selling, general and
administrative expenses incurred by the yogurt segment which relate to the
Breyers yogurt business which was acquired March 27, 2005, partially offset by
the decrease in selling, general and administrative expenses in the frozen
desserts segment which resulted from a decline in expenses directly related to
the decline in sales The frozen desserts segment's selling, general and
administrative expenses were adversely impacted in fiscal 2005 by approximately
$2,358, including the write-off of deferred package design costs, primarily
related to Weight Watchers, and the write-off of certain license agreements with
General Mills. However, selling, general and administrative expenses increased
overall as a percentage of revenues to 13.6% for fiscal 2005 from 11.5% for
fiscal 2004 due primarily to the decline in revenues of $64,868 from 2004 to
2005. Selling, general and administrative expenses in 2004 were adversely
impacted by $3,684 for the pre-tax write-off of the Weight Watchers' intangible
license agreement asset. This write-off was required when Weight Watchers
International notified CoolBrands on July 28, 2004 that the license agreement
would not be extended.
Stock-based compensation expense
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS123), the Company recognized
stock-based compensation expense of $1,918 and $30,983 in 2005 and 2004 which
represents the estimated fair value of stock options earned during the
respective fiscal years.
Interest expense
Interest expense was $2,586 in fiscal 2005 compared with $1,498 in fiscal 2004.
The increase in interest expense in fiscal 2005 as compared with fiscal 2004 was
due to a $40,000 increase in short term borrowings related to the acquisition of
the Breyers yogurt business and a $7,214 increase in debt at Americana Foods
LLP, 50.1% owned by CoolBrands, offset by repayments of short-term borrowings
and long-term debt of $14,007.
Asset impairment
The Company is required to conduct an annual review of goodwill and
non-amortizable intangible assets for potential impairment. Goodwill impairment
testing requires a comparison between the carrying value and fair value of each
reporting unit. If the carrying value exceeds the fair value, goodwill is
considered impaired. The amount of impairment loss is measured as the difference
between the carrying value and implied fair value of goodwill, which is
determined using discounted cash flows. Impairment testing for non-amortizable
intangible assets requires a comparison between fair value and carrying value of
the intangible asset. If the carrying value exceeds fair value, the intangible
asset is considered impaired and is reduced to fair value.
During 2005, the Company completed its annual review of goodwill and intangible
assets. This review resulted in a non-cash pre tax charge related to a goodwill
impairment of $48,701 and in a non-cash pre tax charge related to intangible
asset impairment related to the Company's frozen dessert segment of $1,401.
Also, this review resulted in a non-cash pre tax charges related to goodwill and
intangible asset impairments related to the Company's franchise and licensing
segment of $4,940. Additionally, the Company wrote-off certain company-owned
store leasehold improvements and equipment related to the Company's franchise
and licensing segment of $483.
(Recovery of) provision for income taxes
The effective (benefit) tax rate was (10.2)% in fiscal 2005 and 37.1% for fiscal
2004. The effective tax rate differs from the Canadian Federal/Provincial
Statutory Rate primarily due to permanent differences related to the
non-deductible goodwill impairment charges recognized in 2005, a valuation
allowance established in 2005, and 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.
Net Loss
The net loss for fiscal 2005 was $(74,070) as compared with net earnings of
$23,512 for fiscal 2004. CoolBrands' net loss in 2005 was primarily due to the
substantial decline in net sales due to the loss of the Weight Watchers Smart
Ones license agreement, the decline in net sales of the Atkins Endulge products
and other frozen dessert product lines and the resulting decrease in gross
profit dollars, the $25,627 decline in drayage and other income and the asset
impairment charge of $58,250.
Comparability of 2005 results with 2004
The Company's 2005 financial statements reflect the March 27,2005 acquisition of
the Breyers yogurt business. This acquisition was accounted for under the
purchase method of accounting and the 2005 Consolidated Statements of Operations
include the results of this acquisition from the date of acquisition. In fiscal
2005, the revenues and operating results from the Breyers yogurt business
represent five months of activity as compared no activity in fiscal 2004. The
third quarter of fiscal 2006, ended May 31, 2006, will be the first quarter
following this acquisition in which the Consolidated Statement of Operations for
the quarter can be directly compared with the prior-year period.
Summary of quarterly results
The following table presents a summary of our results for the last eight
quarters:
August 31, 2005 May 31, 2005 February 29, 2005 November 30, 2004
Quarter ended $ $ $ $
- ------------------ --------------- ------------ ----------------- -----------------
Total revenues 124,055 97,890 73,833 89,292
Net earnings (64,093) (6,233) (8,077) 4,333
Earnings per share
Basic (1.15) (.11) (0.14) 0.08
Diluted (1.15) (.11) (0.14) 0.08
August 31, 2004 May 31, 2004 February 29, 2004 November 30, 2004
Quarter ended $ $ $ $
- ------------------ --------------- ------------ ----------------- -----------------
Total revenues 129,052 128,140 99,946 92,800
Net earnings 12,484 (625) 8,465 3,188
Earnings per share
Basic 0.22 (0.01) 0.15 0.06
Diluted 0.22 (0.01) 0.15 0.06
The ice cream and frozen dessert industry generally experiences its highest
volume during the spring and summer months and its lowest volume in the winter
months.
Liquidity
The following sets forth certain measures of our liquidity:
Year Ended August 31
--------------------
2005 2004
-------- ---------
Cash, investments and restricted cash $41,562 $ 64,327
Working Capital $28,469 $118,138
Current Ratio 1.2 to 1 2.6 to 1
The decrease in working capital of $89,669 was primarily due to a decrease in
cash, investments and restricted cash of $22,765 and a decrease in total
receivables of $14,669, an increase in current maturities of long-term debt and
short term borrowings of $44,222, an increase in accounts payable and accrued
liabilities of $25,185, and offset by the increase in income taxes recoverable
of $9,767 and the reduction the income tax payable of $4,938. CoolBrands is
currently negotiating the refinance of its long-term debt and short-term
borrowings, including the $40,000 due on January 3, 2006 and $7,145 due January
10, 2006.
Cash flows from operating activities
The Company generated cash flow from operating activities of $11,239 for the
year ended August 31, 2005 as compared with $43,769 for the year ended August
31, 2004 due primarily to the decrease in net earnings (exclusive of
depreciation and amortization and asset impairment) for 2005 as compared with
2004. This was offset by changes in other operating assets and liabilities,
which were primarily driven by the timing of certain payments.
Cash used in investing activities
The cash used in investing activities in 2005 was primarily due to the
acquisitions of the yogurt business and the Zipp flavors and ingredients
businesses which aggregated $59,609 and the purchase of property, plant and
equipment of $12,409, offset by the net redemption of investments of $20,550 and
the proceeds from the sale of our City of Industry facility for $5,434. The cash
used in investing activities in 2004 was primarily due to the purchase of
property, plant and equipment of $13,363 and the purchase of investments, net of
redemptions of $28,050.
Cash provided by financing activities
In 2005, $33,264 was provided by financing activities as compared with $14,926
provided by financing activities in 2004. In 2005, the proceeds from short term
borrowings of $44,553, and an increase in the revolving line of credit of $2,661
at Americana Foods. These additions were off set by the repayment of long-term
debt. The exercise of stock options in 2004 provided $12,286 and Americana
Foods' minority partner provided $6,907, net of a $2,000 repayment, as their
share for the expansion of production capacity at Americana Foods. These
additions were offset by the repayment of long-term debt of $5,781 and the
increase in the secured revolving line of credit at Americana Foods of $1,514.
Contractual obligations
The following table presents our contractual obligations:
Less than 1 1 - 3 After 5
Total year years 4 - 5 years years
------- ----------- ------- ----------- -------
Contractual obligations
Long-term debt $60,808 $52,560 $ 8,248
Capital lease obligations 154 154
Operating leases 12,393 4,363 6,590 $554 $886
Other long-term obligations 2,881 2,881
------- ------- ------- ---- ----
Total contractual obligations $76,236 $57,077 $17,719 $554 $886
======= ======= ======= ==== ====
Capital resources
The Company is planning to spend approximately $3,000 on capital projects during
fiscal 2006. The planned capital projects are primarily for the continuing
expansion of capacity at Americana Foods and certain information technology
infrastructure improvements. The Company will use existing cash on hand to fund
the planned capital expenditures. However, the Company has not ruled out the
possibility that it will fund the planned capital expenditures plus previous
capital spent by restructuring Americana Foods' long-term debt.
Additionally, CoolBrands is committed to the expansion of its frozen dessert
segment in 2006 with the introduction of new products to respond to the increase
in competition in the ice cream industry for shelf space and market share. As a
result, CoolBrands has made or will make offers to retailers for new product
introductory placement costs (slotting fees) of approximately $11,250.
Payment requirements
In connection with the acquisition of the yogurt business from Kraft in March
2005, a U.S. subsidiary borrowed $40,000 to finance the acquisition. The
unsecured term loan requires monthly payments of interest with the $40,000
principle balance due November 1, 2005. Interest is payable monthly on the
unpaid principle 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 margin were the lower of prime plus 0.5% or LIBOR plus
2.5% (6.02% at August 31, 2005). The Company made a principal payment of $10,000
on August 23, 2005 in anticipation of the September 2, 2005 amendment as
discussed below. As of August 31, 2005 the term loan balance was $30,000.
In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary
borrowed U.S. $30,000 to finance the acquisition. The loan is payable in monthly
installments of U.S. $250, 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. CoolBrands and all of its significant
subsidiaries guarantee all borrowings under the above loan agreement. The
principal balance outstanding at August 31, 2005 was U.S. $10,500.
The Company was in default of its financial covenants at May 31, 2005 and August
31, 2005. On September 2, 2005 the Company entered into an amendment to its
existing credit facilities. The Amendment extends the maturity of the existing
facilities from November 1, 2005 until January 3, 2006 and waives defaults in
its financial covenants resulting from the Company's financial performance.
The amendment eliminates all of the existing financial covenants from the loan
agreements through the remainder of the term and grants a security interest in
the personal property assets (other than certain excluded assets relating to the
operations of the company's 50.1% owned limited partnership), reduced its
outstanding indebtedness to the bank by $10,000 to a total of $40,500 and the
Company has agreed to an increase of the interest rate by 2.0% basis points on
all remaining outstanding balances to 4.5% basis points over LIBOR. In addition,
the amendment reduced the Company's $5,000 revolving credit facility to $925 and
requires the Company to maintain $20,000 of cash balances, of which $10,000 is
restricted to use as approved by the lender.
On April 27, 2005, Americana Foods LP, which is owned 50.1% by the Company,
borrowed $4,553 for use in purchasing a building and adjacent acreage. Loan
terms call for monthly, interest-only payments until anniversary date of the
note. The note bears interest at Prime plus 0.5% (7.0% at August 31, 2005). The
note provides a one-time right to extend the maturity date by two years. Monthly
payments during the extension period will be based on a 25-year period.
The Partnership may also at that time choose to continue any interest rate for
Prime plus 0.5% or convert to a fixed interest rate to be quoted by the lender.
Due to the one-year maturity date (before exercise of the extension option),
this note is classified as a current liability.
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, which is secured by the Partnership's property,
plant, and equipment. Principal payments are payable in fixed monthly
installments of U.S. $80 and matures on November 19, 2007. The term of the loan
bears interest at prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August
31, 2004).
The Partnership's amended credit agreement also includes a revolving loan of up
to U.S. $9,000, subject to a borrowing base calculation, which bears interest at
prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004) and was
due on November 30, 2005. At August 31, 2005, approximately U.S. $1,855 was
available to the Partnership under this loan. The revolving loan is secured by
the Partnership's receivables and inventory and is classified as a current
liability.
On November 30, 2005 the Partnership executed an amendment to the credit
agreement which extended the maturity date for the revolving loan until January
10, 2006. Americana Foods must maintain compliance with certain financial
covenants, including fixed charge ratio, debt-to-tangible net worth ratio and
tangible net worth.
CoolBrands is currently negotiating the refinance of its long-term debt and
short term borrowings with its current lenders, including $40,000 due on January
3, 2006 and $7,145 due January 10, 2006.
Risk Factors and Uncertainties
Inflation can significantly impact ice cream and frozen yogurt ingredients,
including butterfat and packaging costs. In 2005 and 2004, CoolBrands passed on
ingredient, energy and freight cost increases by raising prices on selected
product lines. In 2006, CoolBrands believes that it will be able to pass on cost
increases, if any, in the normal course of business within a relatively short
period of time. However, the ability of CoolBrands to pass on cost increases
will depend, to some extent, on whether its competitors have also done so.
CoolBrands believes that, in the past, its competitors have passed on cost
increases in a relatively short period of time.
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 derives a substantial portion of its revenues from its operations in
the United States. The U.S. market for frozen desserts and yogurt is highly
competitive. As competitors introduce new products or revise their supply or
pricing strategies, CoolBrands may encounter additional and more intense
competition. Such competitors have greater name recognition and more extensive
financial, technological, marketing and personnel resources than CoolBrands. In
addition, CoolBrands may experience increased competition in its other markets
as its competitors expand their international operations.
CoolBrands existing shelf space in supermarkets, club stores and convenience
stores for ice cream and frozen dessert treats and yogurt is at risk due to
decisions by CoolBrands' customers. The Company's existing shelf space for our
products, along with that of all other products, is reviewed at least annually
by our customers. Supermarket, club store and convenience store chains
reallocate their total shelf space taking into effect a number of variables,
including the number of new products being introduced at any given time, the
amount of new product placement fees (slotting fees) being offered by companies
in the ice cream and frozen dessert and yogurt segments and by changing consumer
tastes and fads. As a result, CoolBrands is subject, in any given year, to the
loss of shelf space with its customers and the loss in revenues associated with
the sale of those products. CoolBrands responds to this action by developing and
introducing new products annually which will either maintain or increase its
shelf space. There is also substantial risk that the sales of such new products
will not be as successful as CoolBrands had previously estimated or as
successful as new products introduced by CoolBrands in the past. The risks
associated with the reallocation of shelf space by our customers and the
development and introduction of new products could have a substantial adverse
impact upon CoolBrands' financial position and results of operations.
CoolBrands 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,
CoolBrands has used hedging contracts to reduce its exposure to such risks with
respect to its raw material costs.
CoolBrands has made, and may in the future make acquisitions of, or significant
investments in, businesses or assets with complementary products or unrelated
industries. Acquisitions involve numerous risks, including but not limited to:
1) diversion of management's attention from other operational matters; 2) the
inability to realize expected synergies from the acquisition; 3) impairment of
acquired intangible assets as a result of worse-than-expected-performance of the
acquired operations; 4) integration and retention of key employees; and 5)
integration of operations. Mergers and acquisitions are inherently subject to
significant risks, and the inability to effectively manage these risks could
materially and adversely affect CoolBrands' business, financial condition and
results of operations.
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-franchises.
The Corporation is currently dependent upon a small number of key management
personnel and continued success will depend, in part, upon their abilities. The
loss of these key personnel may adversely affect the performance of the
Corporation.
The Company relies on major retailers in the U.S. for a substantial portion of
its sales. As a result of this concentration of sales and accounts receivable
the Company is subject to certain credit risks. Such risks are somewhat
mitigated by the fact that net sales to any one customer do not exceed ten
percent of the Company's consolidated net sales
CoolBrands is subject to interest rate risk as it long-term debt and short term
borrowings are based up the prime rate and/or Libor. If these bases rates
increase, CoolBrands will incur incremental interest expense.
The Company is subject to future legal proceedings and disputes with
franchisees, former franchisees and others, which arise in the ordinary course
of business.
Transactions with Related Parties
Integrated Brands, a wholly owned subsidiary of CoolBrands, has entered into a
distribution agreement with Calip Dairies, Inc. ("Calip") an ice cream
distribution company owned by Susan Smith and David M. Smith, the widow and son,
respectively, of Richard E. Smith, former Co-Chairman, Co-Chief Executive
Officer and Director of the Company. David M. Smith is currently Vice-Chairman
and Chief Operating Officer of the Company. Calip was previously owned by
Richard E. Smith and Susan Smith. Pursuant to the agreement, Integrated Brands
Inc. has appointed Calip as its exclusive distributor for any ice cream or other
frozen dessert product manufactured by, on behalf of, or under authority of,
Integrated Brands Inc., its subsidiaries,
affiliates or successors in the State of New Jersey and certain areas in the
State of New York and the State of Connecticut. The agreement continues until
December 31, 2007 and thereafter renews automatically on December 31 of each
year for an additional one year term, provided that as of such date at least 50%
of the issued and outstanding shares of Calip are beneficially owned by the
Smith Family and/or David Stein, unless Calip gives Integrated Brands written
notice on or before September 30th of that same year that Calip will not renew
the agreement, in which event the agreement terminates effective December 31
following such notice. CoolBrands has agreed to guarantee the performance of the
distribution agreement. Sales of products to Calip were $9,781 for the year
ending August 31, 2005 (2004 - $9,482). At August 31, 2005, $1,840 of the
receivables - affiliates represent receivables from Calip (2004 - $3,883). 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.
Integrated Brands also entered into a management agreement effective July 1,
2003 with Calip pursuant to which Calip provided the full time management
services and certain other ancillary services of Mr. Richard Smith, CoolBrands'
former Co-Chairman and Co-Chief Executive Officer, for a fixed payment of $1,300
per year. The management agreement with Calip was terminated following the
passing of Mr. Smith on January 29, 2005. Management fees incurred under the
agreement were $542 and $1,300 for the years ended August 31, 2005 and 2004,
respectively. As at August 31, 2005, the $620 balance of payables - affiliates
(2004 - $850) represents payables to Calip.
Fourth Quarter
Revenues for the fourth quarter of fiscal 2005 decreased to $124,055 from
$129,052 for the same quarter last year, a 3.9% decrease. Net (loss) for the
fourth quarter was ($64,093) (($1.15) basic and diluted loss per share) as
compared with net earnings of $12,484 ($0.22 basic and diluted earnings per
share) for the same quarter last year.
The decrease in net revenues for the fourth quarter of fiscal 2005 reflects the
decline in drayage income from $9,308 in 2005 to $3,409 in 2005 that was due to
the change in the business arrangement with Dreyer's. In the fourth quarter
2005, net sales increased by 0.4% to $118,893 as compared with $118,457 for
fiscal 2004. However, net sales declined in the frozen dessert segment which
reflects deduction from sales for payments made to customers by the Company,
excluding the yogurt segment, of $ 11,626 in 2005 as compared with $5,251 in
2004 (a net reduction $6,375). The decline in sales came from all of our frozen
dessert brands, but principally from a decline in sales in our Weight Watchers
and Atkins lines. The sales declines in the frozen desserts segment were
partially offset by the sales from newly introduced frozen dessert products and
the increase in distribution sales as a result of the change in the business
arrangement with Dreyer's. Effective September 1, 2004, CoolBrands began the
distribution of Dreyer's products as an independent distributor, changing from
the previously used drayage basis, except for Dreyer's scanned based trading
customers which continue to be delivered on a drayage basis. As a result of this
change, CoolBrands began purchasing products from Dreyer's and selling those
products to customers at wholesale. The sales increases due to this change
partially offset sales declines in our base frozen desserts business. The
decline in sales in the
frozen desserts segment were substantially offset by an increase in sales of
$26,397 from the yogurt segment which resulted from the acquisition of the Kraft
yogurt business on March 27, 2005.
Gross profit percentage for the fourth quarter of fiscal 2005 declined to 2.3%
as compared to 20.9% for the fourth quarter of fiscal 2004. The decline in gross
profit percentage was primarily due to payments made to customers, including
sales price promotions and cooperative advertising, by the Company which as
previously discussed reduced sales and gross profits by $11,626 and $5,251 in
the fourth quarter of 2005 and 2004, respectively and our inability to cover
fixed overhead costs in both our manufacturing and distribution operations due
to the lack of sales. Gross profit percentage was also adversely affected by the
write down of $8,163 in connection with slow-moving and obsolete inventory and
packaging, ingredients and finished goods inventories which will not be used or
sold resulting from the settlement of the Weight Watchers litigation and the
change in mix of frozen dessert products being sold in the fourth quarter of
2005 with lower gross profit margins as compared with the fourth quarter of
2004. The fourth quarter of 2004 was impacted by the pre-tax operating losses at
Americana Foods LP (50.1% owned) of approximately $2,089. These losses were
primarily due to plant production losses incurred during the installation of new
production lines and the related start-up expenses which occurred in the fourth
quarter of fiscal 2004.
Selling, general and administrative expenses increased by $2,573 or 15% from
$17,115 in 2004 to $19,688 in 2005. However, selling, general and administrative
expenses for the fourth quarter of fiscal 2005 increased as a percentage of
revenues to 15.9% as compared to 13.3% for fiscal 2004 primarily due to the
decline revenues and the additional selling, general and administrative expenses
incurred by the yogurt segment which was acquired March 27, 2005. Selling,
general and administrative expenses for the fourth quarter of 2004 were
adversely impacted by $3,684 for the pre-tax write-off of the Weight Watchers'
agreement license. This write-off was required when Weight Watchers
International notified the Company on July 28, 2004 that the license agreement
would not be extended.
The 2005 fiscal fourth quarter results were adversely affected by the non-cash
pre-tax asset impairment charge of $54,124, which resulted from the impairment
of goodwill, intangible assets and property, plant and equipment related to the
Company's frozen desserts and franchising segments.
Critical Accounting Policies and Related Estimates
The accounting policies and related estimates discussed in this section are
those that we consider to be particularly critical to an understanding of our
financial statements because their application places the most significant
demands on our ability to judge the effect of inherently uncertain matters on
our financial results. For all of these policies, we caution that future events
rarely developed exactly as forecast, and our management's best estimates may
require adjustment.
Allowance for doubtful accounts
We have an allowance for doubtful accounts for estimated losses resulting from
customers' inability to pay amounts owed to us, for unresolved amounts that our
customers have refused to pay due to disputes over promotions, co-op advertising
and new product introductory allowances (slotting fees).
The allowance is a combination of specific and general reserves based upon our
evaluation of the customers' ability to pay determined by our assessment of
their liquidity and financial condition through credit rating agencies, or the
credibility of backup provided on disputed amounts. Write-offs against the
allowances generally occur after we assess the particular customer's liquidity,
financial condition and their basis for non-payment on disputed items and
conclude that collection is highly unlikely. Our estimates of losses bear the
risk of change due to the uncertainty of determining the likelihood of customer
non-payment. The general reserve includes an amount for our Foodservice
customers' price volume rebates.
Accrual for promotion and co-op advertising expenses
CoolBrands estimates promotion expenses for each of our customers, excluding our
DSD customers, who receive off invoice promotion allowances, using a detail
annual plan consisting of each promotion offered to each customer. The
promotional sales volume is estimated using the sales history of each customer
when the product or like product was previously promoted. An estimate of the
promotion expense is then calculated using the estimated sales volume and the
specific promotion dollar amount offered for each particular promotion. The
estimates for all promotions for all customers are accumulated and recorded as
expense in the accounting period in which the promotion runs. The results of all
promotions are updated monthly, after the fact, with actual sales promotion
volume. If actual sales were to be substantially higher than estimated, this
could cause an additional promotions expense to be recorded. The amounts of
these accruals are recognized by the Company as a reduction in sales and
accounts receivables.
Inventory valuation method
Inventory is valued at the individual item level using the cost method which
values inventory at the lower of cost or market. Cost is determined using the
FIFO (first-in, first-out) method. Market is determined based on the estimated
net realizable value, which is generally the inventory item's selling price.
CoolBrands reviews its inventory levels in order to identify slow-moving and
obsolete inventory, which requires adjustment and evaluates the potential for
slow-moving and obsolete inventory by analyzing historical and anticipated
demand. If actual demand were to be substantially lower than estimated, an
additional allowance for excess and obsolete inventory might be required.
Asset Impairment
The Company is required to conduct an annual review of goodwill and
non-amortizable intangible assets for potential impairment. Goodwill impairment
testing requires a comparison
between the carrying value and fair value of each reporting unit. If the
carrying value exceeds the fair value, goodwill is considered impaired. The
amount of impairment loss is measured as the difference between the carrying
value and implied fair value of goodwill, which is determined using discounted
cash flows. Impairment testing for non-amortizable intangible assets requires a
comparison between fair value and carrying value of the intangible asset. If the
carrying value exceeds fair value, the intangible asset is considered impaired
and is reduced to fair value.
Income taxes
We record reserves for estimates of probable settlements of foreign and domestic
tax audits. At any one time, many tax years are subject to audit by various
taxing jurisdictions. The results of these audits and negotiations with taxing
authorities may affect the ultimate settlement of these issues. We also record a
valuation allowance against our future tax assets arising from certain net
operating losses when it is more likely than not that some portion or all of
such net operating losses will not be realized.
Our effective tax rate in a given financial statement period may be materially
impacted by the changes in the mix and level of earnings, changes in the
expected outcome of audit controversies or changes in the deferred tax valuation
allowance. We currently expect the fiscal 2006 effective tax rate to be within
the range of 38 percent to 39 percent. The ultimate rate will depend on several
variables, including the future utilization of net operating losses, the mix of
earnings between domestic and international operations and the overall level of
earnings, and could also be affected by the resolution of tax contingencies for
amounts different from our current estimates.
Legal matters
CoolBrands is subject to various legal proceedings and claims, either asserted
or unasserted, that arise in the ordinary course of business. CoolBrands
evaluates, among other things, the degree of probability of an unfavorable
outcome and reasonably estimates the amount of the loss. Significant judgment is
required in both the determination of the probability and as to whether an
exposure can be reasonably estimated. When CoolBrands determines that it is
probable that a loss has been incurred, the effect is recorded in the
Consolidated Financial Statements. Although the legal outcome of these claims
cannot be predicted with certainty, CoolBrands does not believe that any of the
existing legal matters will have a material adverse affect on its financial
condition or results of operations. However, significant changes in legal
proceedings and claims or the factors considered in the evaluation of those
matters could have a material adverse affect on CoolBrands business, financial
condition and results of operation.
Changes in Accounting Policies Including Initial Adoption
The Company initially adopted the following new accounting policies for the year
ended August 31, 2005.
Change in reporting currency
Effective September 1, 2004, the Company has changed its reporting currency from
Canadian dollars to U.S. dollars since the majority of its business is conducted
in the United States and to make comparisons between current and prior periods
more meaningful to investors. For comparative purposes, historical financial
statements and notes have been restated into U.S. dollars in accordance with
generally accepted accounting principles.
Adoption of U.S. GAAP
During the fourth quarter of 2005, the Company adopted, on a retroactive basis,
U.S. GAAP. Previously, the Company prepared its annual and interim consolidated
financial statements in accordance with generally accepted accounting principals
in Canada ("Canadian GAAP"). As a result, the following adjustments have been
made to previously issued Consolidated Financial Statements.
The Company promotes its products with advertising, consumer incentive and trade
promotions. Such programs include, but are not limited to, cooperative
advertising, promotional discounts, coupons, rebates, in-store display
incentives, volume based incentives and product introductory payments (i.e.
slotting fees). Such consumer and trade promotion activities have been
historically accounted for as selling, general and administrative expenses. 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 expenditures must be deducted from revenue.
Accordingly, our Consolidated Statement of Operations for 2004 has been restated
to reflect a reduction in revenues and selling, general and administrative
expenses of $32,913. The reduction in revenues and selling, general and
administrative expenses in our 2005 Consolidated Statement of Operations is
$68,155.
The following summarizes the impact of restatement for the change from Canadian
GAAP to U.S. GAAP for consumer trade promotion expenses in our Consolidated
Statement of Operations:
2005 2004
-------- --------
Total net revenues in accordance with Canadian GAAP $453,225 $482,851
Less consumer and trade promotion expenses (68,155) (32,913)
-------- --------
Total net revenues in accordance with U.S. GAAP $385,070 $449,938
======== ========
2005 2004
-------- --------
Total Selling, general and administrative expenses in
accordance with Canadian GAAP $120,327 $ 84,601
Less consumer and trade promotion expenses (68,155) (32,913)
-------- --------
Total Selling, general and administrative expenses in
accordance with U.S. GAAP $ 52,172 $ 51,688
======== ========
Product introduction expenditures (i.e. slotting fees) incurred by the Company
have been historically recognized as expense by amortizing the slotting fees
over the twelve months subsequent to the actual acceptance of product
introduction offers by our customers. Under U.S. GAAP, such expenditures are
recognized as reductions in revenues at the time product introduction offers are
accepted by our customers, which for measurement purposes is at the time of the
first shipment of the product to each customer. As a result of this change,
Retained Earnings as of August 31, 2003 has been reduced to reflect the
cumulative effect of this change through that date by $3,644. Our previously
reported net earnings for the year ended August 31, 2004 have been increased by
$756. Our reported net loss for the year ended August 31, 2005 was increased by
$553, when compared with the Net loss that would have been reported using our
historical accounting principles.
The following summarizes the impact of restatement for the change from Canadian
GAAP to U.S. GAAP for new product introduction expenditures (slotting fees) in
our Consolidated Statement of Operations:
2005 2004
-------- -------
Net (loss) income in accordance with Canadian GAAP $(73,517) $22,756
Adjustment for new product introduction expense (553) 756
-------- -------
Net (loss) income in accordance with U.S. GAAP $(74,070) $23,512
======== =======
Stock-based compensation
On September 1, 2005, the Company adopted, on a retroactive basis without
restatement, the recommendation of CICA Handbook Section 3870, "Stock-based
compensation and other stock-based payments", which required companies to adopt
the fair value based method for all stock-based awards granted on or after
September 1, 2002. Previously, the Company was required to disclose only the
pro-forma effect of stock options issued to employees and employee directors in
the notes to the financial statements.
As a result of adopting U.S. GAAP during the fourth quarter of 2005, as
previously discussed, the Company adopted, on a modified prospective basis,
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS123).
Previously, the Company was required to disclose only the pro-forma effect of
stock options issued to employees and employee directors in the notes to the
financial statements. The effect of adopting this accounting policy increased
the loss before income taxes and minority interest for fiscal 2005 by $1,918
with a corresponding increase to additional paid-in capital and reduced earnings
before income tax and minority interest for fiscal 2004 by $24,270 with a
corresponding increase to additional paid-in capital.
Annual Information Form
Additional information relating to CoolBrands, including CoolBrands' Annual
Information Form, is available on the website for Canadian regulatory filings at
www.sedar.com.
Outstanding share data
As of December 13, 2005, the Company had 50,004,069 subordinate voting shares,
6,028,864 multiple voting shares and 3,840,517 stock options outstanding.