CoolBrands International Inc.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In accordance with National Instrument 51-102 released by the Canadian
Securities Administrators, the Company discloses that its auditors
have not reviewed the unaudited financial statements for the period
ended November 30, 2005.
CoolBrands International Inc.
Consolidated Balance Sheets
as at November 30, and August 31, 2005
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(Unaudited)
(Amounts expressed in thousands of dollars)
November 30, August 31,
2005 2005
(Unaudited)
Assets
Current assets:
Cash $ 20,745 $ 24,062
Investments 7,500
Restricted cash 10,000 10,000
Receivables, net 39,196 54,526
Receivables - affiliates 1,745 1,840
Inventories 45,683 49,955
Income taxes recoverable 9,279 9,767
Prepaid expenses 1,693 2,413
Deferred income taxes 6,475 5,148
--------------------------------------
Total current assets 134,816 165,211
Deferred income taxes, net of valuation
allowance 14,839 14,799
Property, plant and equipment 46,852 47,639
Intangible and other assets 22,578 22,369
Goodwill 47,827 47,827
--------------------------------------
$266,912 $297,845
======================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 33,665 $ 53,300
Payables - affiliates 555 620
Accrued liabilities 26,500 30,015
Deferred income taxes 93 93
Short term borrowings 34,553 34,553
Current maturities of long-term debt 16,621 18,161
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Total current liabilities 111,987 136,742
Long-term debt 8,111 8,248
Other liabilities 2,687 2,881
Deferred income taxes 6,244 6,180
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Total liabilities 129,029 154,051
--------------------------------------
Minority interest 3,618 5,388
--------------------------------------
Commitments and contingencies
Shareholders' equity:
Capital stock 97,727 97,578
Additional paid-in-capital 46,582 46,376
Accumulated other comprehensive earnings (1,788) (1,696)
Retained earnings (8,256) (3,852)
--------------------------------------
Total shareholders' equity 134,265 138,406
--------------------------------------
$266,912 $297,845
======================================
CoolBrands International Inc.
Consolidated Statements of Operations
for the three months ended November 30, 2005 and 2004
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(Unaudited)
(Amounts expressed thousands of dollars, except for per share data)
For the three months ended
November 30, November 30,
2005 2004
Net revenues:
Net sales $ 89,103 $ 85,128
Royalties, licensing, and consumer products license revenue 1,208 1,699
Drayage and other income 1,217 2,465
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Total net revenues 91,528 89,292
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Cost of goods sold 85,294 75,824
Selling, general and administrative expenses 13,722 8,226
Stock-based compensation expense 263 80
Interest expense 1,297 355
-----------------------------------------
(Loss) earnings before income taxes and minority interest
(9,048) 4,807
Minority interest (1,770) (642)
-----------------------------------------
(Loss) earnings before income taxes (7,278) 5,449
(Recovery of) provision for income taxes (2,874) 1,116
----------------------------------------
Net (loss) earnings $ (4,404) $ 4,333
=========================================
Per share data:
(Loss) earnings per share:
Basic and diluted $ (0.08) $ 0.08
=========================================
Weighted average shares outstanding:
Shares used in per share calculation - basic 56,012 55,893
Shares used in per share calculation - diluted 56,012 56,109
CoolBrands International Inc.
Consolidated Statements of Shareholders' Equity
For the three months ended November 30, 2005
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(Unaudited)
(Amounts expressed in thousands of dollars)
Accumulated
other Total
Capital Additional comprehensive Retained stockholder
stock paid-in-capital earnings earnings equity
------------------------------------------------------------------------------------------
Balance at August 31, 2005 $97,578 $46,376 $(1,696) $(3,852) $138,406
Comprehensive loss:
Net loss (4,404) (4,404)
Other comprehensive earnings (loss),
net of income
taxes:
Stock-based
compensation
expense 263 263
Currency translation
adjustment (92) (92)
---------
Total other comprehensive earnings 171
---------
Total comprehensive loss (4,233)
Issuance of shares for stock options
exercised 149 (57) 92
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Balance at November 30, 2005 $97,727 $46,582 $(1,788) $(8,256) $134,265
==========================================================================================
CoolBrands International Inc.
Consolidated Statements of Cash Flows
for the three months ended November 30, 2005 and 2004
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(Unaudited)
(Amounts expressed thousands of dollars)
For the three months ended
November 30, November 30,
2005 2004
Cash and short term investments provided by (used in):
Operating activities:
Net (loss) earnings $ (4,404) $ 4,333
Adjustments to reconcile net earnings to net cash
flows from
operating activities
Depreciation and amortization 1,617 1,194
Stock-based compensation expense 263 80
Excess tax benefits from stock-based
compensation (104)
Deferred income taxes (1,303) (143)
Minority interest (1,770) (642)
Cash effect of changes
Receivables 15,432 711
Receivables - affiliates 96 949
Allowance for doubtful accounts (160) 25
Inventories 4,271 (1,414)
Income taxes recoverable 488
Prepaid expenses 720 (1,306)
Accounts payable (19,632) 4,768
Payables - affiliates (65) (451)
Accrued liabilities (3,514) 3,768
Income taxes payable (2,284)
Other assets (338) (146)
Other liabilities (194) 42
--------------------------
Cash (used in) provided by operating activities (8,597) 9,484
--------------------------
Investing activities:
Purchase of property, plant and equipment (705) (2,152)
Purchase of license agreements (14)
Redemption of investments 7,500
Increase in notes receivable (8)
Collection of notes receivable 66 4
--------------------------
Cash provided by (used in) investing activities 6,853 (2,162)
--------------------------
Financing activities:
Proceeds from issuance of Class A and B shares 92
Change in revolving line of credit, secured (770) 2,223
Repayment of long-term debt (907) (969)
Excess tax benefits from stock-based compensation 104
--------------------------
Cash (used in) provided by financing activities (1,481) 1,254
--------------------------
(Decrease) in cash flow due to changes in foreign exchange
rates (92) (2,100)
--------------------------
(Decrease) increase in cash and cash equivalents (3,317) 6,476
Cash and cash equivalents - beginning of period 24,062 36,277
--------------------------
Cash and cash equivalents - end of period $ 20,745 $ 42,753
==========================
CoolBrands International Inc.
Consolidated Notes to Interim Financial Statements
(Unaudited)
November 30, 2005 and 2004
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(Amounts are expressed in thousands of dollars)
1. Significant accounting policies
The financial statements of the Company have been prepared by
management in accordance with generally accepted accounting principles
in the United States of America for interim financial statements. The
financial statements have, in management's opinion, been properly
prepared using judgment within reasonable limits of materiality. These
interim financial statements do not include all the note disclosures
required for annual financial statements and therefore they should be
read in conjunction with the company's audited financial statements for
the year ended August 31, 2005. The significant accounting policies
follow those disclosed in the most recently reported annual financial
statements.
Certain amounts have been reclassified in the November 30, 2004
financial statements to conform to the presentation used at November
30, 2005.
2. Accounting estimates
The preparation of 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 financial statements. Actual results could differ from those
estimated.
3. Changes in accounting policy and restated financial statements
Adoption of U.S. 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.
CoolBrands International Inc.
Consolidated Notes to Interim Financial Statements
(Unaudited)
November 30, 2005 and 2004
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(Amounts are expressed in thousands of dollars)
Changes in accounting policy and restated financial statements (cont'd)
Accordingly, our Consolidated Statements of Operations for the three
months ended November 30, 2004 have been restated to reflect a
reduction in revenues and selling, general and administrative expenses
of $11,192. Our Consolidated Statements of Operations for the three
months ended November 30, 2005 reflects a decrease in revenue and
selling, general administrative expenses of $13,549.
The following summarizes the impact of restatement for the change from
Cnd to U.S. GAAP for consumer trade promotion expenditures in our
Consolidated Statements of Operations:
For the three months ended
November 30, November 30,
2005 2004
Total net revenues in accordance with Canadian GAAP $ 105,077 $ 100,484
Less consumer and trade promotion expenditures (13,549) (11,192)
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Total net revenues in accordance with U.S. GAAP $ 91,528 $ 89,292
==============================================
For the three months ended
November 30, November 30,
2005 2004
Total selling, general and administrative expenses in accordance
with Canadian GAAP $ 27,271 $ 19,418
Less consumer and trade promotion expenditures (13,549) (11,192)
----------------------------------------------
Total selling, general and administrative expenses in accordance
with U.S. GAAP $ 13,722 $ 8,226
==============================================
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 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. As a result of this change, our previously
reported net earnings for the three months ended November 30, 2004 have
been decreased by $923 when compared with the net income that would
have been reported using our historical accounting principles. Our
reported net loss for the three months ended November 30, 2005 has been
decreased by $1,725.
CoolBrands International Inc.
Consolidated Notes to Interim Financial Statements
(Unaudited)
November 30, 2005 and 2004
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(Amounts are expressed in thousands of dollars)
Changes in accounting policy and restated financial statements (cont'd)
The following summarizes the impact of restatement for the change from
Cnd to US GAAP for new product introduction expenditures (slotting
fees) in our Consolidated Statement of Operations:
For the three months ended
November 30, November 30,
2005 2004
Net (loss) earnings in accordance with Canadian GAAP $ (6,129) $ 5,256
Adjustment for new product introduction expenditures 1,725 (923)
-------------------------------------------
Net (loss) earnings in accordance with U.S. GAAP $ (4,404) $ 4,333
===========================================
Stock-based compensation
On September 1, 2004, 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 adoption of this accounting policy had no effect on the
Consolidated Statement of Operations for the three months ended
November 30, 2004.
On September 1, 2005 the Company adopted ("SFAS 123R"), Share-Based
Payment, using the modified prospective application transition method.
Because the fair value recognition provisions of SFAS No. 123,
Stock-Based Compensation, and SFAS No. 123(R) were materially
consistent under our equity plans, the adoption of SFAS No. 123(R) did
not have a significant impact on our financial position or our results
of operations. Prior to our adoption of SFAS No. 123(R), benefits of
tax deductions in excess of recognized compensation costs were reported
as operating cash flows. SFAS No. 123(R) requires excess tax benefits
be reported as a financing cash inflow rather than as a reduction of
taxes paid.
Our net income for the three months ended November 30, 2005 includes
$263 of compensation costs and $104 of income tax benefits related to
stock-based compensation arrangements. Our net income for the three
months ended November 30, 2004 included $80 of compensation costs and
$16 of income tax benefits related to our stock-based compensation
arrangements.
CoolBrands International Inc.
Consolidated Notes to Interim Financial Statements
(Unaudited)
November 30, 2005 and 2004
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(Amounts are expressed in thousands of dollars)
4. Segment information
Frozen Dairy Franchising
dessert Yogurt Foodservice components and licensing Corporate Consolidated
For the three months
Ended November 30, 2005
Net revenues $53,254 $25,850 $4,209 $5,383 $ 2,814 $ 18 $91,528
Inter-segment revenues 6,674 58 549 39 7,320
Segment (loss) earnings
before income taxes (8,326) 1,631 (230) 798 87 (1,238) (7,278)
For the three months
ended November 30, 2004
Net revenues $76,406 $4,611 $5,065 $ 3,166 $ 44 $89,292
Inter-segment revenues 11,794 115 597 44 12,550
Segment (loss) earnings
before income taxes 4,134 386 818 226 (115) 5,449
5. Capital stock
The Company had the following equity securities and stock options
outstanding as of January 6, 2006:
Class A Subordinate Class B Multiple
Voting Shares Voting Shares Stock Options
- ------------------------ --------------------- -----------------------
50,005 6,028 4,034
======================== ===================== =======================
6. Subsequent events
Effective December 23, 2005 the Company sold substantially all of its
franchising and licensing segment to International Franchise Corp. for
cash consideration of U.S. $8 million. International Franchise Corp. is
a company controlled by Mr. Aaron Serruya, a director of CoolBrands and
the senior executive who was responsible for the franchising division
at CoolBrands. Mr. Serruya resigned as executive vice president of
CoolBrands as a result of this transaction, but continues as a
director. The sale transaction was reviewed and unanimously recommended
to the board of directors of CoolBrands by a committee of independent
directors of CoolBrands, and was unanimously approved by the board of
directors of CoolBrands.
CoolBrands International Inc.
Consolidated Notes to Interim Financial Statements
(Unaudited)
November 30, 2005 and 2004
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Subsequent events (cont'd)
As a part of their review of the transaction, the independent committee
and the board of directors received a fairness opinion from Duff &
Phelps, LLC who acted as exclusive financial advisor to CoolBrands and
who assisted CoolBrands in marketing the division to potential buyers.
In connection with the sale of the franchising and licensing segment,
the Company was required to pay down $3,612 of its short term
borrowings and long-term debt from the cash consideration received.
Effective December 31, 2005 the Company obtained an extension of its
existing credit facilities with JP Morgan Chase Bank. The maturity date
of the existing facilities has been extended from January 3, 2006 to
April 3, 2006. All other terms and conditions of the existing
facilities remain the same.