[BDO LOGO] BDO Dunwoody Royal Bank Plaza
LLP P.O. Box 32
Chartered Accountants Toronto Ontario Canada M5J 2J8
Telephone: (416) 865-0200
Telefax: (416) 865-0887
www.bdo.ca
AUDITORS' REPORT
To the Shareholders of CoolBrands International Inc.:
We have audited the consolidated balance sheets of CoolBrands International Inc.
as at August 31, 2005 and 2004 and the consolidated statements of operations,
shareholders' equity, 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 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, 2005
and 2004 and the results of its operations, and its cash flows for the years
then ended in accordance with United States generally accepted accounting
principles.
/s/ BDO Dunwoody LLP
- ---------------------------
Chartered Accountants
Toronto, Ontario
December 9, 2005
BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
-2-
CoolBrands International Inc.
Consolidated Balance Sheets as at August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars)
2005 2004
-------- --------
Assets
Current Assets:
Cash $ 24,062 $ 36,277
Investments 7,500 28,050
Restricted cash 10,000
Receivables, net 54,526 67,152
Receivables - affiliates 1,840 3,883
Inventories 49,955 49,076
Income taxes recoverable 9,767
Prepaid expenses 2,413 1,203
Deferred income taxes 5,148 4,907
-------- --------
Total current assets 165,211 190,548
Deferred income taxes, net of valuation allowance 14,799 13,711
Property, plant and equipment 47,639 28,730
Intangible and other assets 22,369 12,180
Goodwill 47,827 72,088
-------- --------
$297,845 $317,257
======== ========
-3-
CoolBrands International Inc.
Consolidated Balance Sheets as at August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars)
2005 2004
-------- --------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 53,300 $ 37,506
Payables - affiliates 620 850
Accrued liabilities 30,015 20,624
Income taxes payable 4,938
Deferred income taxes 93
Short term borrowings 34,553
Current maturities of long-term debt 18,161 8,492
-------- --------
Total current liabilities 136,742 72,410
Long-term debt 8,248 19,262
Other liabilities 2,881 2,758
Deferred income taxes 6,180 3,638
-------- --------
Total liabilities 154,051 98,068
-------- --------
Minority interest 5,388 8,088
-------- --------
Commitments and contingencies
Shareholders' Equity
Capital stock 97,578 97,485
Additional paid-in capital 46,376 44,494
Accumulated other comprehensive earnings (1,696) (1,096)
Retained earnings (3,852) 70,218
-------- --------
Total shareholders' equity 138,406 211,101
-------- --------
$297,845 $317,257
======== ========
See accompanying notes to consolidated financial statements.
Approved by the Board,
"David J. Stein", Director "Romeo DeGasperis", Director
- ---------------- ------------------
-4-
CoolBrands International Inc.
Consolidated Statements of Operations for the years ended August 31, 2005 and
2004
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars, except for per share data)
2005 2004
-------- --------
Net revenues:
Net sales $364,686 $406,470
Royalties, licensing, and consumer products license revenues 6,138 3,595
Drayage and other income 14,246 39,873
-------- --------
Total net revenues 385,070 449,938
-------- --------
Cost of goods sold 361,668 329,346
Selling, general and administrative expenses 52,172 51,688
Stock-based compensation expense 1,918 30,983
Interest expense 2,586 1,498
Asset impairment 55,525
Gain on sale of building (3,634)
-------- --------
(Loss) earnings before income taxes and minority interest (85,165) 36,423
Minority interest (2,700) (958)
-------- --------
(Loss) earnings before income taxes (82,465) 37,381
-------- --------
(Recovery of) provision for income taxes:
Current (10,193) 29,183
Deferred 1,798 (15,314)
-------- --------
(8,395) 13,869
-------- --------
Net (loss) earnings $(74,070) $ 23,512
======== ========
Per share data:
(Loss) earnings per share:
Basic and diluted $ (1.32) $ .42
======== ========
Weighted average shares outstanding:
Shares used in per share calculation - basic 55,924 55,441
Shares used in per share calculation - diluted 55,924 56,329
See accompanying notes to consolidated financial statements
-5-
CoolBrands International Inc.
Consolidated Statements of Shareholders' Equity for the years ended August 31,
2005 and 2004
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars)
Accumulated
other
comprehensive Total
Capital Additional (losses) Retained Shareholders'
Stock paid-in capital earnings earnings equity
------- --------------- ------------- -------- -------------
Balance at August 31, 2003 $85,199 $ 1,649 $ (840) $ 46,706 $132,714
Comprehensive earnings:
Net earnings 23,512 23,512
Other comprehensive earnings, net of income
taxes:
Currency translation adjustment (256) (256)
Tax benefit relating to exercise of non-
qualified stock options 11,862 11,862
Stock-based compensation expense 30,983 30,983
--------
Total other comprehensive earnings 42,589
--------
Total comprehensive earnings 66,101
--------
Issuance of shares for stock options exercised 11,779 11,779
Issuance of shares for warrants exercised 507 507
------- ------- ------- -------- --------
Balance at August 31, 2004 97,485 44,494 (1,096) 70,218 211,101
Compressive losses:
Net loss (74,070) (74,070)
Other comprehensive earnings (losses), net of
income taxes:
Currency translation adjustment (600) (600)
Stock-based compensation expense 1,918 1,918
--------
Total other comprehensive earnings 1,318
--------
Total comprehensive loss (72,752)
--------
Issuance of shares for stock options exercised 93 (36) 57
------- ------- ------- -------- --------
Balance at August 31, 2005 $97,578 $46,376 $(1,696) $ (3,852) $138,406
======= ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
-6-
CoolBrands International Inc.
Consolidated Statements of Cash Flow for the years ended August 31, 2005 and
2004
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars)
2005 2004
-------- --------
Cash and short-term investments provided by (used in):
Operating activities:
Net (loss) earnings $(74,070) $ 23,512
Adjustments to reconcile net (loss) net earnings to
net cash flows from operating activities
Depreciation and amortization 5,042 7,314
Asset impairment 55,525
Stock-based compensation expense 1,918 30,983
Deferred income taxes 1,798 (15,314)
Gain on sale of building (3,634)
Minority interest (2,700) (958)
Cash effect of changes, net of the effects from
businesses acquired
Receivables 13,815 (21,115)
Receivables - affiliates 2,043 (1,464)
Allowance for doubtful accounts (56) 126
Inventories 4,500 (6,845)
Prepaid expenses (2,207) 6,252
Income taxes recoverable (9,767)
Accounts payable 15,842 16,740
Payables - affiliates (230) 277
Accrued liabilities 8,744 (4,843)
Income taxes payable (4,935) 9,319
Other assets (513) 53
Other liabilities 124 (268)
-------- --------
Cash provided by operating activities 11,239 43,769
-------- --------
Investing activities:
Purchase of property, plant and equipment (12,409) (13,363)
Purchase of intangible assets (76)
Purchase of license agreements (26) (300)
Proceeds from sale of building 5,434
Increase in restricted cash (10,000)
Purchase of investments (2,500) (33,050)
Redemption of investments 23,050 5,000
Acquisitions, net of cash acquired (59,609)
Increase in notes receivable (28)
Collection of notes receivable 65 23
-------- --------
Cash used in investing activities (56,023) (41,766)
-------- --------
Financing activities:
Change in revolving line of credit, secured 2,661 1,514
Capital contributions from minority interest 8,907
Proceeds from short term borrowings 44,553
Return of capital contribution to minority interest (2,000)
Proceeds from issuance of Class A and B shares 57 12,286
Repayment of short term borrowings (10,000)
Repayment of long-term debt (4,007) (5,781)
-------- --------
Cash provided by financing activities 33,264 14,926
-------- --------
Increase (decrease) in cash flows due to changes in
foreign exchange rates (695) (2,412)
-------- --------
(Decrease) increase in cash and cash equivalents (12,215) 14,517
Cash and cash equivalents - beginning of year 36,277 21,760
-------- --------
Cash and cash equivalents - end of year $ 24,062 $ 36,277
======== ========
See accompanying notes to consolidated financial statements.
-7-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
Frozen desserts segment (formerly Prepackaged consumer products)
Revenues and profits in the Frozen desserts (formerly Prepackaged consumer
products) segment are generated from manufacturing and selling a variety of
prepackaged frozen dessert to distributors, including Eskimo Pie Frozen
Distribution, and various retail establishments including supermarkets, grocery
stores, club stores, gourmet shops, delicatessens and convenience stores.
CoolBrands competes in the fast-growing Better for You ice cream category
with offerings such as fat-free, non-dairy WholeFruit Sorbet and Atkins Endulge
controlled-carbohydrate super premium ice cream. New Better for You offerings by
CoolBrands include No Pudge! branded frozen snacks and a line of Better for Kids
frozen snacks sold under the Crayola, Justice League, Snapple, Care Bears and
Trix Pops brands. CoolBrands also competes in the super premium ice cream
category with the Dreamery Ice Cream and Godiva Ice Cream brands. In addition,
CoolBrands markets a wide variety of "all family" premium ice creams and frozen
snacks under brand names including Eskimo Pie, Chipwich, Tropicana and Yoplait.
CoolBrands' subsidiary, Eskimo Pie Frozen Distribution, operates a direct
store door ice cream distribution system in selected markets in the U.S.,
serving these CoolBrands products and a growing family of Partner Brands to
supermarkets, convenience stores and other retail customers.
CoolBrands' 50.1% owned subsidiary, Americana Foods, is a leading U.S.
manufacturer and supplier of packaged ice cream, frozen yogurt and sorbet
products, frozen snacks, soft-serve mixes and other food products to well-known
national retailers, food companies and restaurant chains.
Yogurt segment
CoolBrands' subsidiary, CoolBrands Dairy Inc., manufactures cup yogurt at
its plant located in North Lawrence, New York and markets the products under the
Breyers brand pursuant to a trademark rights agreement, which grants the rights
in perpetuity, and under the Creme Savers brand pursuant to a long-term license
agreement.
Foodservice segment
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.
-8-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
Dairy components segment
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. CoolBrands' 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.
Franchising and licensing segment
Revenues and profits in the Franchising and licensing segment are generated
by franchising activities, which generate initial and recurring franchise
revenues, and from the 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' 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.
Basis of presentation
The consolidated financial statements are prepared by management using
accounting principles generally accepted in the United States 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 operations from the date of
acquisition. All amounts are reported in U.S. dollars unless otherwise
indicated.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimated.
Cash
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.
Investments
The Company's investment portfolio consisted of investments in Auction Rate
Securities. Auction rate securities are variable rate bonds tied to short-term
interest rates with maturities on the face of the securities in
-9-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
excess of 90 days. The Company evaluates whether to redeem or rollover each
security no later than every 35 days. At August 31, 2005 and 2004 the Company
had investment balances of $7,500 and $28,050, respectively.
Inventories
Inventories consist primarily of ice cream, frozen yogurt and frozen
dessert products, cup yogurt 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 machinery 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 2 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.
Intangible and other assets
Intangible and other assets consist of license agreements, trademarks,
trademark rights, franchise agreements and rights and other assets. Amortizing
intangibles are stated at cost less accumulated amortization. Amortization is
provided by the straight-line method using the terms of the agreements, which
range from 4 to 20 years.
Goodwill and Other Non-Amortizable Asset
In accordance with Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142"), goodwill and
intangible assets deemed to have indefinite lives are no longer amortized, but
instead are to be tested for impairment at least annually or earlier if there
are impairment indicators. Other intangible assets continue to be amortized over
their estimated useful lives. 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.
The Company completed its annual impairment testing of goodwill and
intangible assets. This review resulted in a $48,701 non-cash pre tax charge
related to a goodwill impairment in the Company's frozen dessert segment and a
$3,400 non-cash pre tax goodwill impairment in the Company's franchise business
segment. Also this review resulted in a $1,401 and $ 1,540 non-cash pre tax
charge related to intangible asset impairment for the Company's frozen dessert
segment and franchise business segment, respectively.
-10-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
Long-Lived Assets
The Company's other long-lived assets include property, plant and equipment
and amortizable intangibles. The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of any of these assets may not be recoverable, the Company will
assess the recoverability of such assets based upon estimated undiscounted cash
flow forecasts, in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". When any such impairment exists, the related assets will be written
down to fair value.
During the fourth quarter, due to the presence of indicators, the Company
completed impairment testing of other long-lived assets. This review resulted in
a $ 483 impairment of property, plant and equipment.
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 drayage income is recognized at the time the product is
delivered for the vendor to their customer by the Company. Effective September
1, 2004, Coolbrands began the distribution of Dreyer's Grand Ice Cream Holdings,
Inc. ("Dreyer's") products as an independent distributor, changing from the
previously used drayage basis. As a result of this change, Coolbrands began
purchasing products from Dreyer's and selling those products to customers at
wholesale, except for Dreyer's scanned based trading customers which continue to
be delivered on a drayage basis.
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.
Product introduction expenses
Product introduction expenses (i.e. slotting fees) are recognized as
expenses 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.
-11-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
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 $7,165 on advertising for the year ended August 31, 2005 (2004
- - $5,600).
Financial instruments
The carrying amount of financial instruments including cash, investments,
restricted cash, receivables, receivables - affiliates, accounts payable,
payables - affiliates, accrued liabilities and income taxes payable and income
taxes recoverable approximates fair value at August 31, 2005 because of the
relatively short maturity of these instruments. The fair value of short term
borrowings and long-term debt are disclosed in Note 9. The carrying amount of
the remaining long-term debt approximates fair value at August 31, 2005 because
of their fluctuating interest rates. The carrying amount of other liabilities
approximates fair value at August 31, 2005 because the fair value estimates are
based upon pertinent information available to management at August 31, 2005.
Concentration of credit risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash, 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 (loss) per share
The Company uses the treasury stock method to determine the dilutive
earnings per share. The following table presents the numerators and denominators
used in the basic and diluted (loss) earnings per share calculations:
2005 2004
-------- -------
Numerator
Net (loss) earnings $(74,070) $23,512
======== =======
Denominator
Basic weighted average shares outstanding 55,924 55,441
Dilutive effect of stock awards 888
-------- -------
55,924 56,329
======== =======
Net (loss) earnings
Basic $ (1.32) $ .42
Diluted $ (1.32) $ .42
-12-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
Diluted net loss per share for 2005 is equal to basic net loss per share
because the effect of common stock equivalents is anti-dilutive. Potentially
dilutive securities, calculated in terms of weighted-average share equivalent of
stock options outstanding, are excluded from the calculations of diluted net
loss per share when their inclusion would have anti-dilutive effect. During
2005,145,000 shares of potentially dilutive securities were excluded from
weighted-average share calculation for purposes of calculating weighted-average
diluted shares and diluted loss 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 U.S. dollars using the average
exchange rate for the year for items included in the Consolidated Statements of
Earnings. Foreign currencies are translated into U.S. 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.
Deferred 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 enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
New accounting pronouncements
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
This interpretation, which was subsequently revised in December 2003 (FIN 46-R),
clarifies certain issues related to Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" and addresses consolidation by business
enterprises of the assets, liabilities, and results of the activities of a
variable interest entity. The Company has determined that it does not hold a
variable interest in a variable interest entity under FIN 46-R at August 31,
2005.
In November 2004, the FASB issued SFAS No.151, "Inventory Costs", which is
an amendment of Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing". This Statement clarifies that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current period charges. The provisions of this statement are
effective for inventory costs incurred during the fiscal year beginning after
June 15, 2005 and are applied on a prospective basis. The Company does not
expect the impact of implementing this Statement to have a material effect on
its financial statements.
-13-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
In December 2004, the FASB issued Statement No. 153, "Exchange of
Nonmonetary Assets" ("SFAS 153"). SFAS 153 eliminates prior guidance for
nonmonetary transactions by eliminating the exception for nonmonetary exchanges
of similar production assets and replaces it with a general exception for
exchange of nonmonetary assets lacking commercial substance. The provisions of
SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal years
beginning after June 15, 2005. The Company does not believe that the adoption of
SFAS 153 will have a material effect on its financial position or results of
operations.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections" ("SFAS 154"). SFAS 154 requires companies to recognize
changes in accounting principle, including changes required by a new accounting
pronouncement when the pronouncement does not include specific transition
provisions, retrospectively to prior periods' financial statements. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not expect that the adoption
of SFAS 154 will have a material effect on its financial position or results of
operations.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces "Accounting for Stock-Based
Compensation," ("SFAS 123") and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first annual reporting period that begins after June 15,
2005. Under SFAS 123R, the pro forma disclosures previously permitted under SFAS
123 will no longer be an alternative to financial statement recognition. The
Company has not at this time evaluated the impact of implementing this statement
on its financial statements.
Reclassifications
Certain 2004 amounts have been reclassified to conform with the 2005
presentation. Certain auction rate securities have been reclassified from cash
to investments. Auction rate securities are variable rate bonds tied to
short-term interest rates with maturities on the face of the securities in
excess of 90 days. The Company historically classified these instruments as cash
if the period between interest rate resets was 90 days or less, which was based
on the Company's ability to either liquidate its holdings or roll the investment
over to the next reset period. The Company has classified its auction rate
securities at August 31, 2005 of $7,500 and $28,050 at August 31, 2004 as
investments. In addition, "Purchase of investments" and "Redemption of
investments" included in the accompanying consolidated statements of cash flows,
have been revised to reflect the purchase and sale of auction rate securities
for the year ended August 31, 2004.
-14-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 2. Changes in accounting policies
Change in reporting currency
Effective September 1, 2004, the Company 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.
Adoption of US GAAP
During the fourth quarter of 2005, the Company adopted, on a retroactive
basis, accounting principles generally accepted in the United States of America.
Previously the Company prepared its annual and interim consolidated financial
statements in accordance with generally accepted accounting principals in Canada
("Cnd 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 CDN
to US 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 expenditures (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 expenditures (68,155) (32,913)
-------- --------
Total selling, general and administrative expenses
in accordance with U.S. GAAP $ 52,172 $ 51,688
======== ========
-15-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 2. Changes in accounting policies (cont'd)
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 has 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 CDN
to US GAAP for new product introduction expenditures (slotting fees) in our
Consolidated Statement of Operations:
2005 2004
-------- -------
Net (loss) earnings income in accordance with Canadian GAAP $(73,517) $22,756
Adjustment for new product introduction expenditures (553) 756
-------- -------
Net (loss) earnings 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, the
recommendations of Financial Accounting Standards Board ("FASB") issued SFAS No.
123 "Accounting for Stock Based Compensation." This statement superseded
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and amends FASB Statement No. 95, "Statement of Cash Flows".
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.
-16-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 3. Acquisitions
2005 Acquisitions
On March 27, 2005, the Company completed the acquisition of the yogurt
business of Kraft Foods, Inc. The acquired brands included Breyers Fruit on the
Bottom, Light and Creme Savers cup yogurt varieties and Cream Savers Smoothie
drinkable yogurt and included substantially all of Kraft's assets related to its
yogurt business, including a license for the Breyers trademark, a license for
the Creme Savers trademark, a license for the Light 'n Lively trademark and
Kraft's manufacturing facility in North Lawrence, New York. The purpose of this
acquisition was to diversify CoolBrands business and to reduce its concentration
of operations in the frozen desserts segment. Factors that contributed to the
purchase price and resulting goodwill were based upon negotiations with the
seller and the valuation of the business based upon future contributions to net
earnings and cash flow.
The following is a summary of the assets and liabilities acquired and the fair
value assigned thereto, and the purchase consideration given:
Fair value acquired:
- --------------------
Current assets $ 5,373
Property, plant and equipment 11,846
Trademark rights 15,000
Goodwill 27,582
-------
59,801
Less: Liabilities (649)
-------
$59,152
=======
Purchase consideration:
- -----------------------
Cash $17,500
Acquisition costs 1,652
Bank loan 40,000
-------
$59,152
=======
In April 2005, the Company acquired the assets of Zipp Manufacturing, Inc.,
a manufacturer of flavors and ingredients. The assets and related business of
Zipp Manufacturing were acquired to provide additional volume to our dairy
components segment which has excess capacity. The primary factors that
contributed to the purchase price and resulting goodwill were based upon
negotiations with the seller, CoolBrands' desire for additional production
volume and the resulting projected incremental earnings and cash flow.
The following is a summary of the assets and liabilities acquired and the
fair value assigned thereto, and the purchase consideration given:
Fair value acquired:
- --------------------
Current assets $208
Equipment 80
Goodwill 258
----
546
Less: Liabilities (89)
----
$457
====
Purchase consideration:
- -----------------------
Cash $457
====
-17-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 4. Receivables, net
2005 2004
------- --------
Trade accounts receivable $57,213 $69,692
Franchise and license fees receivable 324 516
Notes receivable, current maturities 97 108
------- -------
57,634 70,316
Less Allowance for doubtful accounts (3,108) (3,164)
------- -------
$54,526 $67,152
======= =======
Allowance for doubtful accounts:
Year ended August 31, 2003 $ 2,888
Charges to costs and expenses 818
Reserve utilized (542)
-------
Ending balance August 31, 2004 3,164
Charges to costs and expenses 1,846
Reserve utilized (1,902)
-------
Ending balance August 31, 2005 $ 3,108
=======
No customer accounted for 10 percent or more of Total net revenues in 2005
and 2004.
Note 5. Inventories
2005 2004
------- -------
Raw materials and packaging $35,304 $32,484
Finished goods 14,651 16,592
------- -------
$49,955 $49,076
======= =======
Write-downs of obsolete and slow moving inventories in 2005 and 2004 were
$12,723 and $1,165, respectively.
Note 6. Property, plant and equipment
2005 2004
------- -------
Land $ 1,577 $ 924
Buildings 19,292 10,826
Machinery and equipment 35,412 24,341
Leasehold improvements 1,740 2,342
------- -------
58,021 38,433
Less Accumulated depreciation and amortization
Buildings 1,906 1,030
Machinery and equipment 7,497 7,769
Leasehold improvements 979 904
------- -------
$47,639 $28,730
======= =======
-18-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 7. Intangible and other assets and Goodwill
Definite life intangible assets are amortized over their estimated useful
lives. The Company is required to conduct an annual review of goodwill and
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 the fourth quarter of 2005, the Company
completed its annual review of goodwill and intangible assets. This review
resulted in a $2,941 non-cash pre tax charge related to intangible asset
impairment and a non-cash pre tax charge of $52,101 related to goodwill
impairment.
At August 31, 2005 and 2004 goodwill by reportable segment was as follows:
2005 2004
------- -------
Frozen desserts $ 3,752 $52,461
Yogurt 27,582
Foodservice 11,302 11,302
Dairy components 745 488
Franchising and licensing 4,446 7,837
------- -------
Total Goodwill $47,827 $72,088
======= =======
Intangible assets at August 31, 2005 and 2004 were as follows:
2005 2004
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Non-amortizable intangible assets $15,000 $ $ $
Amortizable intangible assets 8,126 3,362 12,567 4,305
Other assets 2,605 3,918
------- ------ ------- ------
Total Intangible assets and other assets $25,731 $3,362 $16,485 $4,305
======= ====== ======= ======
Non-amortizable intangible assets are substantially comprised of trademark
rights purchased through the acquisitions. Amortizable intangible assets consist
primarily of certain trademarks, license agreements and franchise agreements and
rights. Pre-tax amortization expense for intangible assets was $745 and $872 for
the years ended August 31, 2005 and 2004 respectively. Amortization expense for
each of the next five years is currently estimated to be $745 or less.
-19-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended
August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 7. Intangible and other assets and Goodwill (cont'd)
The movement in goodwill and gross carrying amounts of intangible and other
assets is as follows:
2005 2004
------------------------- -------------------------
Intangible and Intangible and
Goodwill other assets Goodwill other assets
-------- -------------- -------- --------------
Balance at August 31 $ 72,088 $16,485 $71,977 $19,928
Changes due to:
Acquisitions 27,840 15,000 111
Goodwill impairment (52,101)
Intangible asset impairment (2,941)
Other (2,813) (3,443)
-------- ------- ------- -------
Balance at August 31 $ 47,827 $25,731 $72,088 $16,485
======== ======= ======= =======
Note 8. Short-term borrowings
2005
-------
Unsecured $30,000
Secured 4,553
-------
$34,553
=======
There were no short term borrowings during the year ended August 31, 2004.
Unsecured
In Connection with the acquisition of the Breyer's 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 and
repayment of the $40,000 principle balance on November 1, 2005. Interest is
payable monthly 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 are the lower of prime plus 0.5% or libor plus 2.5%
(6.02% at August 31, 2005). On August 23, 2005, the Company made a principal
payment of $10,000 in anticipation of the September 2, 2005 amendment as
discussed in Note 9. As of August 31, 2005 the term loan balance was $30,000.
Secured
On April 27, 2005 Americana Foods LP ("Americana"), which is owned 50.1% by
the Company, borrowed $4,553 to purchase a building and adjacent acreage. The
loan terms requires monthly, interest-only payments until the April 27, 2006
anniversary date of the note. The note bears interest at Prime plus 0.5% (7.0%
at August 31, 2005). The agreement provides a one-time right to extend the
maturity date by two years until April 27, 2008. Monthly payments during the two
year extension period will be based on a 25-year amortization period.
-20-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended
August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 8. Short-term borrowings (Cont'd)
Americana may also at the extension date choose to continue an interest
rate at Prime plus 0.5% or convert to a fixed interest rate to be quoted by the
lender. Due to the one year maturity date of April 27, 2006 (before exercise of
the extension option), this note is classified as a current liability.
Note 9. Long-term debt
2005 2004
------- -------
Term loan, unsecured $10,500 $13,587
Term loan, secured 8,610 9,117
Revolving loan, secured 7,145 4,483
Capitalized leases 154 567
------- -------
26,409 27,754
Less: Current maturities 18,161 8,492
------- -------
$ 8,248 $19,262
======= =======
In connection with the acquisition of Eskimo Pie Corporation, a subsidiary
borrowed $30,000, to finance the acquisition. The unsecured term loan is payable
in monthly installments of $250, 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 the lower of prime plus 0.5% or libor plus 2.0% (5.49% at August
31, 2005). As of August 31, 2005 and 2004, the term loan balance was $10,500 and
$13,500, respectively.
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 $5,000
during any fiscal year.
The company was in default of it's 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 September 2, 2005 amendment eliminated all of the 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 to $40,500, including short
term borrowings of $30,000. The Company agreed to an increase of the interest
rate from libor plus 2.0% on all remaining outstanding balances to libor plus
4.5%. In addition, the amendment reduced the Company's $5,000 revolving credit
facility to $925 and required
-21-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended
August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 9. Long-term debt (cont'd)
the Company to maintain $20,000 of cash balances, of which $10,000 is restricted
to use as approved by the lender. The increases in interest rates as a result of
this amendment increases the fair value of the related short term borrowings and
long-term debt by approximately $331.
Term loan, secured
On November 19, 2002, Americana entered into a credit agreement with a
financial institution that includes a term loan of $10,000. This term loan is
secured by Americana's property, plant and equipment. Principal payments are
payable in fixed monthly installments of $81 based upon a fifteen-year
amortization and matures on November 19, 2007. The loan bears interest at prime
plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004). As of August
31, 2005 and 2004 the term loan balance was $8,610 and $9,117, respectively.
On March 19, 2005 Americana executed an amendment to the credit agreement.
Pursuant to this amendment, a fixed charge coverage ratio of 1.25:1 and a
debt-to-tangible net worth ratio of 2:1 must be maintained. The minimum tangible
net worth requirement was increased to $20,500 effective March 19, 2005. The
partnership is in compliance with its loan covenants at August 31, 2005.
Revolving loan, secured
Americana's credit agreement includes a revolving loan up to $9,000,
subject to a borrowing base calculation, and bears interest at Prime plus 0.5%
(7.0% at August 31, 2005 and 5.0% at August 31, 2004) and is due on November 30,
2005. At August 31, 2005 approximately $1,855 was available to the Partnership
under this loan. The revolving loan is secured by Americana's accounts
receivable and inventory and is classified as a current liability.
On November 30, 2005 Americana executed an amendment to the credit
agreement which extends the maturity date of the revolving note to January 10,
2006.
Repayments of long-term debt due in each of the next five years are as
follows
2006 $18,161
2007 416
2008 7,832
2009 --
2010 --
-------
$26,409
=======
Interest paid during the year ended August 31, 2005 was $2,350 (2004 -
$1,461).
-22-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended
August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 10. Shareholders' equity and stock options
(thousands of shares)
Capital Stock
The Company's articles of incorporation authorize 200,000 shares of both
Class A Subordinate and Class B Multiple voting no par value shares. Changes in
Capital stock for the two years ended August 31, 2005 were as follows:
Paid-In-Balance
---------------
Class A Subordinate voting shares $ 85,659
Class B Multiple voting shares $ 11,919
Class A Class B
Subordinate Multiple
voting shares outstanding voting shares outstanding
# #
------------------------- -------------------------
Balance at August 31, 2003 45,629 6,179
Issuance of shares for stock options
exercised 3,985
Issuance of shares for warrants
exercised 100
Multiple voting shares converted to
subordinate voting shares 149 (149)
------ -----
Balance at August 31, 2004 49,863 6,030
Multiple voting shares converted to
subordinate voting shares 1 (1)
Issuance of shares for stock
options exercised 54
------ -----
Balance at August 31, 2005 49,918 6,029
====== =====
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.
-23-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 10. Shareholders' equity and stock options (cont'd)
Stock options
Under the Company's stock option plans, non-qualified options to purchase
subordinate voting shares are granted to directors, officers, consultants and
key employees at exercise prices equal to the fair market value of the stock at
the date of grant. 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. On February 27, 2004 the Company's shareholders approved
the elimination of the limitation on the number of options that may be granted
in any one fiscal year.
The following table summarizes stock option activity for all stock option plans:
Weighted Weighted
Average Average
Exercise Contractual
Shares Cnd Price Life (in years)
------ --------- ---------------
Outstanding at August 31, 2003 4,362 $ 3.98 2.7
Granted 3,420 $20.03
Exercised (3,986) $ 4.00
Cancelled (20) $ 8.35
------
Outstanding at August 31, 2004 3,776 $18.47 4.2
Granted 1,024 $ 4.03
Exercised (54) $ 1.27
Cancelled (829) $18.69
------
Outstanding at August 31, 2005 3,917 $14.89 4.9
======
Options exercisable at August 31, 2005 3,103 $17.58
-24-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- ------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 10. Shareholders' equity and stock options (cont'd)
The following table summarizes stock options outstanding, exercisable and
exercise price range at August 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
Weighted-average
Range of exercise Outstanding as remaining Weighted-average Exercisable as Weighted-average
prices of 08/31/2005 contractual life exercise price of 08/31/2005 exercise price
- ----------------- -------------- ---------------- ---------------- -------------- ----------------
$ 1.15 - $ 1.35 128 0.2 $ 1.27 63 $ 1.26
$ 4.03 - $ 5.00 1,083 9.2 $ 4.10 393 $ 4.09
$13.75 - $15.93 1,096 3.1 $15.74 1,037 $15.80
$22.65 - $22.65 1,610 3.5 $22.65 1,610 $22.65
----- -----
3,917 4.9 $14.89 3,103 $17.57
===== =====
Stock options reserved for future grant at August 31, 2005 aggregated 452,985.
The Company accounts for stock-based compensation using the fair value method of
accounting. Stock-based compensation expense was recognized in the amount of
$1,918 (2004 - $30,983) in the Consolidated Statements of Operation. Under the
Black-Scholes option pricing model, the weighted-average fair value of the stock
options granted during fiscal 2005 was Cnd $4.03(2004 - Cnd $10.21) per option.
The value of each option granted is estimated on the date of the grant
using the Black-Scholes options pricing model with the following
"weighted-average assumptions":
For the year ended August 31,
2005 2004
----- -----
Expected dividend yield
Risk-free interest rate (percentage) 3.92 2.98
Expected volatility 66.73 67.39
Expect life (in years) 10 4.2
-25-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 11. Income taxes
The effective income tax rate on (loss) earnings is affected from year to
year by the geographic mix of the consolidated (loss) earnings before income
taxes. The following table reconciles income tax (recovery) expense computed by
applying the combined Canadian Federal/Provincial statutory rate with the actual
income tax provision:
2005 2004
------- -----
Combined basic Canadian Federal and Provincial income tax rate (36.12)% 36.21%
Impact of operating in foreign countries with different
effective rates (1.00) 1.93
Permanent differences:
Non-deductible goodwill impairment 24.39
Valuation allowance 5.89
Other (3.34) (1.04)
------ -----
(10.18)% 37.10%
====== =====
In 2005 the Company established an allowance for non-capital loss carry-forwards
as the utilization of such loss carry-forwards was considered unlikely.
Significant components of the Company's deferred tax assets and liabilities as
of August 31, 2005 are as follows:
Deferred Tax Assets
- -------------------
Stock options $10,241
Federal net operating loss carry forwards 5,100
Intangible assets 4,201
Accrued liabilities 1,639
Inventory 2,188
State net operating loss carry forwards 995
Bad debts 467
Inventory reserve 124
Property, plant and equipment 92
-------
25,047
Valuation allowance (5,100)
-------
Total deferred tax assets $19,947
=======
Deferred Tax Liabilities
- ------------------------
Intangible assets $3,761
Property, plant and equipment 2,423
Other 89
------
Total deferred tax liabilities $6,273
======
Income taxes paid during the year ended August 31, 2005 was approximately
$4,731 (2004 - $16,299)
Note 12. Retirement Plans
A subsidiary of the Company, Eskimo Pie Corporation, had maintained two
defined benefit pension plans covering substantially all salaried and executive
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".
-26-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 12. Retirement Plans (cont'd)
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 2005 and 2004, and reconciles the funded status to accrued benefit
cost at August 31, 2005 and August 31, 2004:
Pension Benefits Other Benefits
---------------- --------------
Benefit Obligation
Beginning balance at August 31, 2003 $2,088 $1,637
Interest cost 135 166
Actuarial loss 94
Benefit payments (78) (200)
------ ------
Balance at August 31, 2004 2,239 1,603
Interest cost 139 200
Actuarial loss 277
Benefit payments (85)
------ ------
Ending balance at August 31, 2005 $2,570 $1,803
====== ======
Plan assets - Basic value
Beginning balance at August 31, 2003 $1,925
Actual return on plan assets 219
Contributions 20
Benefit payments (78)
------
Balance at August 31, 2004 2,086
Actual return on plan assets 338
Contributions 20
Benefit payments (85)
------
Ending balance at August 31, 2005 $2,359
======
-27-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 12. 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 $1,803
======
Accrued benefit cost $1,803
======
The accrued benefit cost of $1,803 is included in Other liabilities at
August 31, 2005.
The following table provides the components of the net periodic benefit
cost:
Pension Benefits Other Benefits
---------------- --------------
Interest cost $ 139 $200
Expected return on Plan assets (337)
Recognized net actuarial gain 187
----- ----
Net period benefit cost (income) $ (11) $200
===== ====
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 6.00% 7.75%
Expected return on plan assets,
during the year 8.00%
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits for the Other Benefits Plan (i.e., health care cost trend
rate) is 5% for 2005 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
$177 and the net periodic postretirement benefit cost by approximately $18.
-28-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 12. Retirement Plans (cont'd)
The Company's allocation of Pension Benefit assets at August 31, 2005 and
2004, target allocations for fiscal 2006 and expected long-term rate of return
by asset category are as follows:
Weighted-average
Target Percentage of expected long-term rate
allocation Plan Assets of return
---------- ------------- -----------------------
Fiscal Year 2006 2005 2004 2006
- ----------------------------- ---- ---- ---- ----
Asset category
Large capitalization equities 35.0 35.8 36.9 2.8
Mid capitalization equities 15.0 13.0 10.4 1.8
Small Capitalization equities 9.0 7.1 8.6 1.8
International equities 25.0 27.3 28.0 .6
Fixed income bonds 12.0 12.0 12.4 2.0
Cash and cash equivalents 4.0 4.8 3.7 --
---- ---- ---- ---
100% 100% 100% 9%
---- ---- ---- ---
The Company's investment strategy is to obtain the highest possible return
commensurate with the level of assumed risk. Investments are well diversified
within each of the major asset categories.
The expected long-term rate of return is figured by using the target
allocation and expected returns for each asset class as in the table above. The
actual historical returns are also relevant. Annualized returns for periods
ending August 31, 2005 have been as follows: 16.7% for one year and 16.4% for
three years.
The Company expects that there will be no minimum regulatory funding
requirements that will need to be made during the fiscal year ending August 31,
2006.
Expected benefit payments are as follows over future years:
Fiscal year Pension benefits Other benefits
- ----------- ---------------- --------------
2006 88 200
2007 96 200
2008 94 200
2009 97 200
2010 94 200
2011 - 2015 548 1,000
Note 13. 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 Notes to
-29-
CoolBrands International Inc.
Consolidated Financial Statements for the years ended August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 13. Commitments (Cont'd)
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.
At August 31, 2005 the future minimum lease payments under operating leases
with rental terms of more than one year, net of sublease rents, amounted to:
Fiscal year ending:
2006 $ 4,363
2007 3,004
2008 2,226
2009 1,360
2010 554
Later years 886
-------
Total minimum obligations $12,393
=======
Total rental expense relating to all operating leases (including those with
terms less than one year) was $7,698 (2004 - $7,203).
Note 14. Contingencies
Legal matters
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.
Subleases
Several subsidiaries hold master 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 $291 at August 31, 2005.
Aggregate minimum future rental payments under these leases approximated $6,074
at August 31, 2005 (2004 - $6,144).
-30-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 15. Related party transactions and amounts
Calip Dairies, Inc. ("Calip"), an ice cream distributor owned by an
officer, director and shareholder of the Company, had a management agreement
with Integrated Brands Inc., a subsidiary of the Company which the Company
acquired in March 1998. This management agreement was terminated in January 2005
by the mutual agreement of the parties. Under the agreement, Calip provided
management services to Integrated Brands for an annual fee of $1,300. Such
management fees incurred for the year ended August 31, 2005 were $542 (2004 -
$1,300). At August 31, 2005, the $620 (2004 - $850) 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 31 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 $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.
Note 16. Segment information
CoolBrands International's reportable segments are Frozen desserts, Yogurt,
Foodservice, Dairy components and Franchising and licensing, including
Company-owned stores.
Revenues and profits in the Frozen desserts 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 Yogurt segment are generated from selling a
variety of prepackaged Yogurt 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
-31-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (Cont'd)
them based on their operating contribution, which represents segment revenues,
less direct costs of operation, excluding the allocation of corporate expenses.
Industry Segments:
Year Ended August 31, 2005
Franchising
Frozen Dairy and
desserts Yogurt Foodservice components licensing Corporate Consolidated
- ----------------------------------- -------- ------- ----------- ---------- ----------- --------- ------------
Revenues $330,972 $44,007 $18,397 $22,589 $15,200 $ 280 $431,445
Interest income 797 303 132 1,232
Inter-segment revenues (43,665) (661) (3,051) (230) (47,607)
-------- ------- ------- ------- ------- ------ --------
Net revenues 288,104 44,007 17,736 19,538 15,503 182 385,070
-------- ------- ------- ------- ------- ------ --------
Segment (loss) earnings (37,139) 2,376 2,142 2,593 (770) 182 (30,616)
General corporate expenses (72) (72)
Interest expense (1,687) (891) (8) (2,586)
Asset impairment (50,102) (5,423) (55,525)
Gain on sale of building 3,634 3,634
Minority interest 2,700 2,700
-------- ------- ------- ------- ------- ------ --------
(Loss) earnings before income taxes $(82,594) $ 1,485 $ 2,142 $ 2,593 $(6,201) $ 110 (82,465)
======== ======= ======= ======= ======= ======
Recovery of income taxes (8,395)
--------
Net loss $(74,070)
========
Assets $157,418 $69,877 $20,593 $33,556 $14,659 $1,742 $297,845
Capital expenditures 10,784 764 325 536 12,409
Depreciation and amortization 3,439 420 328 328 510 17 5,042
-32-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (cont'd)
Industry Segments:
Year Ended August 31, 2004
Franchising
Frozen Dairy and
desserts Foodservice components licensing Corporate Consolidated
-------- ----------- ---------- ----------- --------- ------------
Revenues $462,842 $16,382 $29,516 $14,188 $ 219 $523,147
Interest income 261 162 108 531
Inter-segment revenues (66,533) (703) (6,332) (172) (73,740)
-------- ------- ------- ------- ------- --------
Net revenues 396,570 15,679 23,184 14,350 155 449,938
-------- ------- ------- ------- ------- --------
Segment earnings 32,168 1,551 3,868 2,047 155 39,789
General corporate expenses (1,868) (1,868)
Interest expense (1,491) (7) (1,498)
Minority interest 958 958
-------- ------- ------- ------- ------- --------
Earnings (loss) before income
taxes $ 31,635 $ 1,551 $ 3,868 $ 2,040 $(1,713) 37,381
======== ======= ======= ======= =======
Provision for income taxes 13,869
--------
Net earnings $ 23,512
========
Assets $240,817 $17,375 $30,433 $16,425 $12,207 $317,257
Capital expenditures 13,009 110 146 98 13,363
Depreciation and amortization 5,850 335 322 807 7,314
-33-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (cont'd)
Geographic Segments:
Year Ended August 31, 2005
Canada United States International Consolidated
------ ------------- ------------- ------------
Revenues $4,862 $ 422,946 $ 3,637 $431,445
Interest income 262 800 170 1,232
Inter-segment revenues (339) (47,268) (47,607)
------ --------- ------- --------
Net revenues 4,785 376,478 3,807 385,070
------ --------- ------- --------
Segment (loss) earnings 849 (33,467) 2,002 (30,616)
General corporate expenses (72) (72)
Interest expense (2,586) (2,586)
Asset impairment (55,024) (501) (55,525)
Gain on sale of building 3,634 3,634
Minority interest 2,700 2,700
------ --------- ------- --------
Earnings (loss) before income taxes $ 777 $ (84,743) $ 1,501 (82,465)
====== ========= =======
Recovery of income taxes (8,395)
--------
Net (loss) $(74,070)
========
Assets $8,526 $ 279,210 $10,109 $297,845
Capital expenditures 737 11,650 22 12,409
Depreciation and amortization 142 4,719 181 5,042
-34-
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005
and 2004
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (cont'd)
Geographic Segments:
Year Ended August 31, 2004
Canada United States International Consolidated
------- ------------- ------------- ------------
Revenues $ 4,119 $516,004 $3,024 $523,147
Interest income 216 264 51 531
Inter-segment revenues (172) (73,568) (73,740)
------- -------- ------ --------
Net revenues 4,163 442,700 3,075 449,938
------- -------- ------ --------
Segment earnings 609 37,509 1,671 39,789
General corporate expenses (1,868) (1,868)
Interest expense (1,498) (1,498)
Minority interest 958 958
------- -------- ------ --------
(Loss) earnings before income taxes $(1,259) $ 36,969 $1,671 37,381
======= ======== ======
Provision for income taxes 13,869
--------
Net earnings $ 23,512
========
Assets $19,061 $289,323 $8,873 $317,257
Capital expenditures 20 13,339 4 13,363
Depreciation and amortization 153 7,016 145 7,314