SELECTED FINANCIAL DATA
(in thousands of dollars, except share data)
Year ended August 31,
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2005 2004 2003
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Total net revenues $ 385,070 $ 449,938 $ 214,272
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Net (loss) earnings (74,070) 23,512 16,833
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(Loss) earnings per share
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Basic (1.32) 0.42 0.33
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Diluted (1.32) 0.42 0.31
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Total assets 297,845 317,257 223,661
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Total debt 60,962 27,754 32,022
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TABLE OF CONTENTS
Pg3 - Letter to the Shareholders
pg7 - Management's Discussion and Analysis
pg22 - Auditor's Report
pg23 - Consolidated Financial Statements
pg27 - Notes to Consolidated Financial Statements
pg51 - Board of Directors and Officers
pg52 - Corporate Information and Manufacturing Plants
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Dear Fellow Shareholders:
2005 was a challenging year for CoolBrands International during which the
Company's financial results reflected the loss of two significant brands, as
well as unfavorable industry dynamics throughout the year. As we move forward,
our strategy is to aggressively rebuild and refocus our brand portfolio. We
began implementing this strategy during 2005 by acquiring Breyers Yogurt, an
established brand in a high growth category and a manufacturing platform for
further refrigerated products brand introductions. In 2006, we plan to continue
implementing this strategy by:
- Introducing a new all natural reformulation of Breyers "Fruit On The
Bottom" Yogurt and a nutritionally enhanced reformulation of Breyers
Light Yogurt with probiotic benefits;
- Launching a broad range of new Godiva Ice Cream offerings in pints
and, for the first time, chocolate coated ice cream bars;
- Building national distribution for Yoplait Frozen Yogurt and Cereal
Bars; and
- Rolling out an exciting new line of "better for you" frozen snacks
for kids featuring popular Disney characters under license from
Disney Consumer Products, our newest licensing partner.
Operating results
In 2005, the Company adopted generally accepted accounting principles in the
United States ("U.S. GAAP") and changed its reporting currency from Canadian
dollars to U.S. dollars. For comparative purposes, our historical financial
statements and amounts have been restated to reflect these changes.
For fiscal 2005, net revenues declined to $385,070,000 as compared with
$449,938,000 for fiscal 2004, a 14.4% decrease. The net loss for fiscal 2005 was
$74,070,000 ($1.32 basic and diluted loss per share) as compared with net
earnings of $23,512,000 ($0.42 basic and diluted earnings per share) for fiscal
2004.
Our 2005 results were adversely affected by the non-cash pre-tax asset
impairment charge of $55,525,000 (Nil in 2004), which resulted from the
impairment of goodwill and intangible assets related to the Company's frozen
dessert and franchising segments.
The decrease in net revenues for fiscal 2005 reflects the decrease in net sales
and the decreases in drayage income. Net sales for fiscal 2005 declined by 10.3%
to $364,686,000 in 2005 as compared with $406,470,000 for 2004. This decrease
reflects a reduction in sales volume, as well as an increase in trade promotion
payments to customers for promotions with consumers. The decline in net sales
came principally from the discontinuation of sales of Weight Watchers Smart Ones
brand products and the decline in sales of Atkins brand products, but declines
also came from our other frozen dessert brands. These sales declines were
partially offset by sales from newly introduced frozen dessert products, the
acquisition of the Breyers Yogurt business on March 27, 2005 and the increase in
sales as a result of the change in the business arrangement with Dreyer's Grand
Ice Cream Holding, Inc. ("Dreyer's"). Effective September 1, 2004, CoolBrands
began purchasing products from Dreyer's and selling those products to customers
at wholesale, instead of delivering products to customers on a drayage basis,
except for Dreyer's scanned based trading customers which continue to be
delivered on a drayage basis.
Gross profit percentage for fiscal 2005 declined to 0.8% as compared to 19% for
fiscal 2004, primarily due to (1) the increase in trade promotion payments to
customers, (2) write downs for obsolete and slow moving inventories, (3) the
impact of fixed overhead costs in our manufacturing and distribution operations
resulting from the decrease in sales, and (4) product mix changes. Selling,
general and administrative expenses for fiscal 2005 increased as a percentage of
revenues to 13.6% as compared to 11.5% for fiscal 2004 primarily due to the
decline in revenues and certain write offs related to inactive or expired
license agreements. In accordance with U.S. GAAP, the Company recognized
$1,918,000 and $30,983,000 in stock-based compensation expense representing the
estimated fair value of stock options earned during 2005 and 2004, respectively.
Cash and working capital
Cash, investments and restricted cash decreased to $41,562 at August 31, 2005
from $64,327 at August 31, 2004. Working capital declined to $28,469 at August
31, 2005 from $118,138. CoolBrands' current ratio declined to 1.2 to 1 at August
31, 2005 from 2.6 to 1 at August 31, 2004. These changes in current assets and
current liabilities are attributable to the use of cash and short term debt to
finance the Company's acquisitions and fixed asset purchases.
Comparability of results
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The Company's 2005 financial statements reflect the March 27, 2005 acquisition
of the Breyers Yogurt business. This acquisition was accounted for under the
purchase method of accounting and the 2005 Consolidated Statement of Operations
includes the results of this acquisition from the date of acquisition. In fiscal
2005, the revenues and operating results from the Breyers Yogurt business
represent five months of activity as compared with no activity in fiscal 2004.
The third quarter of fiscal 2006, ending May 31, 2006, will be the first quarter
following this acquisition in which the Consolidated Statement of Operations for
the quarter can be directly compared with the prior-year period.
Corporate Governance Changes
As previously announced, following the election of additional independent
directors at the last annual and special shareholders' meeting, the board of
directors of CoolBrands formed a Corporate Governance Committee consisting of
three independent directors to review CoolBrands' corporate governance practices
and to recommend changes with respect to these practices to the board of
directors.
Based on the recommendations of the Corporate Governance Committee, CoolBrands
is instituting the following changes and initiatives:
- - Collapse of Dual Class Structure - CoolBrands will propose a special
resolution to its holders of multiple voting shares and holders of
subordinate voting shares at the upcoming annual and special meeting
scheduled for February 27, 2006. If passed, the special resolution will
result in the change of each multiple voting share and each subordinate
voting share into one common share on May 31, 2007, unless the independent
directors of CoolBrands unanimously determine to effect the change
earlier. Aaron Serruya, Michael Serruya, David Smith and David Stein, and
entities affiliated with them (collectively, the "Management MVS
Holders"), have each entered into a voting agreement with the Corporation
pursuant to which they each agreed to vote all of the shares that they
beneficially own or control in favour of the special resolution. The
Management MVS Holders beneficially control, in the aggregate, 5,986,043
multiple voting shares (representing approximately 99% of the issued and
outstanding multiple voting shares) and 120,449 subordinate voting shares
(representing less than 1% of the issued and outstanding subordinate
voting shares). Currently, each multiple voting share carries 10 votes,
and each subordinate voting share carries one vote. Following the change
to the Corporation's dual class structure becoming effective, each common
share will carry one vote. The change will not result in any conversion
premium being paid to the holders of the multiple voting shares.
- - Board Representation Agreement and Trust Agreement - upon the change to
the Corporation's dual class structure becoming effective, these
agreements will terminate. In the meantime, the parties have agreed that
all nominations for membership on the board of directors of the
Corporation made by the Corporation will be made by the Corporate
Governance Committee. Copies of the Board Representation Agreement and the
Trust Agreement are available on the Internet at www.sedar.com.
- - Continuance under the Canada Business Corporations Act - at its upcoming
annual and special meeting, CoolBrands will propose a special resolution
to its holders of multiple voting shares and holders of subordinate voting
shares to continue the Corporation under the Canada Business Corporations
Act. If passed, this will allow the Corporation to be governed by a more
modern corporate statute than the Nova Scotia Companies Act, under which
the Corporation is currently organized.
- - Lead director - as previously announced, the Corporation has appointed
Robert E. Baker as lead director of the board of directors of CoolBrands.
The board of directors has also adopted written terms of reference for the
position of lead director and for the Co-Chairmen of the Corporation.
- - Committee Charters - the board of directors has adopted written charters
for each of the Audit Committee, Compensation Committee and Corporate
Governance Committee.
- - Code of Conduct - the board of directors has adopted a corporate Code of
Conduct which applies to all employees, officers and directors of the
Corporation.
As part of the Corporate Governance Committee's ongoing mandate, it will
continue to monitor the Corporation's corporate governance practices and those
of "best practices" with a view to making further recommendations from time to
time as it determines appropriate. Copies of the voting agreement entered into
by the Corporation and the Management MVS Holders, the terms of reference of the
Lead Director and the Co-Chairmen, the committee charters and CoolBrands' Code
of Conduct are all available at www.coolbrandsinc.com.
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I am pleased that our Company is continuing to act on the governance
recommendations of our Board of Directors. The Board's commitment to adoption of
better governance practices will help make CoolBrands better able to deliver the
best possible results for our shareholders. These best practice corporate
governance changes, and in particular the elimination of the dual class share
structure, are further steps in management's and the board of directors'
commitment to the partnership we are building with all our shareholders.
Although we considered an immediate collapse of the dual class share structure,
the board of directors and management, after careful consideration over several
months, determined that an immediate action could jeopardize the Company's
ability to stabilize the business and maximize value for our shareholders, given
the several extraordinary events of the past year, including the loss of the
Weight Watchers product line, the untimely death of our former Co-Chairman
Richard Smith, and the need to refocus and reinvigorate our business plan and
strategy.
Divestiture of Non-Core Business Assets
As part of these rebuilding efforts, CoolBrands continues to evaluate
disposition of various non-core business assets. As a result of this evaluation
process, on December 23, 2005, the Company divested substantially all of its
franchising division for cash consideration of $8,000,000 to International
Franchise Corp., a company headed by Mr. Aaron Serruya. As a result of this
transaction, Mr. Serruya is no longer an executive officer of CoolBrands but he
remains on the board of directors of CoolBrands.
After a very difficult 2005, during which our results fell far short of
expectations formed on the basis of our past record of success, all of us at
CoolBrands International are committed to returning the Company to an upward
trajectory of growth and profitability. We believe our strategy is sound and we
will spare no effort in 2006 and beyond as we work to achieve that objective.
David J. Stein
President, CEO and Co-Chairman
of CoolBrands International Inc.
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ESKIMO PIE
In 1921, Eskimo Pie created the frozen novelty industry with the invention of
the world's first chocolate covered ice cream bar.
GODIVA ICE CREAM
The world's best chocolate is also the world's best chocolate ice cream, and now
the world's best chocolate covered ice cream bar.
BREYERS YOGURT
America's second leading brand for "fruit-on-the-bottom" yogurt, with a strong
heritage of high quality, all natural dairy products.
NO PUDGE
New and delicious - low-fat, low-carb and no sugar added. Giant ice cream
novelties that uniquely fit everyone's diet plan. True indulgence without the
guilt.
WHOLE FRUIT SORBET
The leading brand nationwide for all natural fruit sorbet sold in pint sized
containers.
SNAPPLE ON ICE POPS
New Regular and No Sugar Added varieties, available in popular Snapple flavors.
The best flavors on earth made for some of the best people on earth.
CRAYOLA COLOR POPS
New Regular and No Sugar Added varieties naturally fat-free and with vitamins A,
C and E. A highly recognized, world-class brand trusted by moms and kids around
the world.
CHIPWICH
The chocolate chip cookie ice cream sandwich that created the premium frozen
snack category.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Tabular amounts expressed in thousands of dollars, except per share data)
This management's discussion and analysis ("MD&A") addresses the results of
operations and financial position of CoolBrands International Inc. ("CoolBrands"
or the "Company") for the fiscal year ended August 31, 2005 compared to the
fiscal year ended August 31, 2004. This MD&A is dated December 13, 2005 and has
been approved by the board of directors of CoolBrands on the recommendation of
the Audit Committee.
This MD&A should be read in conjunction with the Company's audited consolidated
financial statements and the related notes, which may be accessed on the
Internet at www.sedar.com. Additional information relating to the Company,
including the Company's Annual Information Form, can also be accessed on the
SEDAR website.
Unless otherwise indicated, all financial information herein is prepared in
accordance with United States generally accepted accounting principles and all
dollar amounts referred to herein are in thousands of United States dollars,
except per share data.
The information in this document contains certain forward-looking statements
with respect to CoolBrands International Inc., its subsidiaries and affiliates.
These statements are often, but not always made through the use of words or
phrases such as "expect", "should continue", "continue", "believe",
"anticipate", "estimate", "contemplate", "target", "plan", "budget" "may",
"will", "schedule" and "intend" or similar formulations. By their nature, these
forward-looking statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by management, are inherently
subject to significant, known and unknown, business, economic, competitive and
other risks, uncertainties and other factors affecting CoolBrands specifically
or its industry generally that could cause actual performance, achievements and
financial results to differ materially from those contemplated by the
forward-looking statements. These risks and uncertainties include the tastes and
preferences of the global retail consumer of CoolBrands' products; the ability
of CoolBrands to be competitive in the highly competitive U.S. market for frozen
dessert fluctuations in consumption of CoolBrands' products and services as a
result the seasonal nature of the frozen dessert industry; the ability of
CoolBrands to retain or acquire shelf space for its products in supermarkets,
club stores and convenience stores; the ability of CoolBrands to effectively
manage the risks inherent with mergers and acquisitions; the effect on foreign
operation of political, economic and regulatory risks; currency risk exposure;
the ability to recruit and retain qualified employees; changes in prices for raw
materials; the ability of CoolBrands to pass on cost increases resulting from
inflation and other risks described from time to time in publicly filed
disclosure documents of CoolBrands and its subsidiaries and affiliates. In view
of these uncertainties we caution readers not to place undue reliance on these
forward-looking statements. CoolBrands disclaims any intention or obligation to
update or revise any statements made herein, whether as a result of new
information, future events or otherwise.
Business strategy
The Company manufactures and distributes ice cream, sorbet, frozen yogurt and
fresh yogurt and other refrigerated and frozen dairy-based snacks. The Company's
line of ice cream and frozen dessert products is marketed throughout the United
States and select markets in Canada and Europe. The "Breyers Yogurt" line of
refrigerated yogurt products is marketed primarily in the eastern United States.
The Company also manufactures and/or distributes frozen and refrigerated
products for other companies (the "Partner Brands").
The Company's marketing strategy is based on management's belief that superior
brand image can be combined with high quality and product innovation to develop
products in the refrigerated and frozen snack food categories that will earn
consumers' loyalty and deliver attractive margins and long-term revenue growth
to the Company, and that brand licensing arrangements can help reduce costs,
accelerate growth and maximize opportunities for success in building significant
market share for the Company's products. The Company's objective is to develop
brands - both owned and licensed, in both the frozen and refrigerated snack
foods categories - that deliver these benefits to the Company and consumers of
the Company's products.
Brand portfolio
The Company's brands include, among others, the following:
Breyers Yogurt. America's second leading brand for "fruit-on-the-bottom" yogurt,
with a strong heritage of high quality, all natural dairy products. This brand,
which the Company acquired from Kraft Foods in March 2005, is manufactured and
distributed under license from Unilever. The Company's yogurt portfolio also
includes the "Creme Savers Yogurt" product line manufactured and sold under
license from Wm. Wrigley Jr. Company.
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Eskimo Pie. The original chocolate-coated ice cream bar, invented in 1921 and
still one of the nation's best known ice cream snack brands. Eskimo Pies come in
regular and no-sugar-added varieties, and have proven especially popular with
diabetic consumers. The Company acquired the Eskimo Pie brand when it acquired
Eskimo Pie Corporation in October 2000.
Chipwich. The chocolate chip cookie ice cream sandwich that created the premium
frozen snack category, Chipwich was acquired by the Company in July 2002.
Whole Fruit Sorbet. The leading brand nationwide for all natural fruit sorbet
sold in pint sized containers, Whole Fruit Sorbet was acquired from Dreyer's in
July 2003.
Godiva Ice Cream. The Company acquired the license rights to the Godiva
trademark for ice cream from Dreyer's in July 2003 and manufactures and
distributes Godiva Ice Cream in pints and ice cream bars under license from
Godiva Chocolatier, Inc.
No Pudge! Frozen Snacks. In 2005, the Company introduced its "No Pudge!" line of
low fat frozen snacks under license from No Pudge! Foods, Inc., marketers of the
popular low fat brownie mix.
Tropicana Fruit Bars. Since 1997, the Company has manufactured and distributed
Tropicana fruit bars under license from Tropicana Products, Inc.
Snapple On Ice Pops. In 2005, the Company introduced its "Snapple On Ice" line
of frozen juice pops, under license from Snapple Beverage Corp.
Crayola Color Pops. In 2005, the Company introduced its "Crayola Color Pops"
line of frozen snacks, under license from Binney & Smith Properties, Inc.
The Company has continuously pursued acquisitions and new brand licensing
partnerships in an effort to keep pace with rapid changes in consumer
preferences and new trends in the snack food industry. During 2002, the Company
acquired Chipwich and Fruit-a-Freeze. During 2003, the Company acquired three
super-premium brands from Dreyer's Grand Ice Cream: Dreamery Ice Cream, Whole
Fruit Sorbet and the license for Godiva Ice Cream. During 2004, as low-carb
dieting became a powerful force throughout the food industry, the Company
entered into a license with Atkins Nutritionals, Inc. to manufacture, sell and
distribute Atkins Endulge super premium ice cream products for carb-conscious
consumers. This license enabled the Company to realize significant revenue and
earnings growth in 2004. However, in 2005 the rapid decline in low-carb dieting
led to a similarly rapid decline in the Company's sales of Atkins Endulge Ice
Cream. In July 2004, the Company learned that our license for Weight Watchers
Smart Ones would not be extended beyond September 28, 2004, on which date our
license would expire, subject to a negotiated nine-month period ended May 1,
2005 to sell off and balance out inventories. Primarily due to the decline in
Atkins Endulge sales and the elimination of Weight Watchers Smart Ones from the
Company's portfolio, the Company experienced significant erosion of its sales
and market share in 2005, partially offset by several new product introductions,
specifically the No Pudge!, Snapple On Ice and Crayola Color Pops.
In 2005, the Company added significant diversity to its brand portfolio through
the acquisition of Breyers Yogurt from Kraft Foods Inc. in March 2005. The
Breyers brand gives the Company an established position in the market for
refrigerated yogurt, one of the fastest growing food categories, and a platform
for future brand development in the refrigerated snack foods category, including
via the Company's license-based strategy.
Distribution channels
The Company's products are offered for sale in a diverse range of retail
outlets, including supermarkets, mass merchants, drug stores, convenience stores
and club stores, as well as foodservice outlets, such as restaurants,
cafeterias, theme parks and ice cream parlors.
The Company also franchises and licenses ice cream parlors and frozen yogurt
shops that offer the Company's products for sale. CoolBrands' Franchising
division franchises and licenses frozen dessert outlets operated under a family
of brands including Tropicana Smoothies, Juices & More, Swensen's Ice Cream, I
Can't Believe It's Yogurt, Yogen Fruz, Bresler's Premium Ice Cream, Golden Swirl
and Ice Cream Churn, with company-owned, franchised and non-traditional
partnership locations around the world.
The Company distributes its products primarily by direct shipment to supermarket
owned warehouses, independent distributors and foodservice broad-line
distributors. In addition, the Company operates a proprietary
direct-store-distribution ("DSD") system that services all distribution channels
in selected U.S. markets, including out-of-home accounts such as convenience
stores, drug stores and gas station food marts. The Company also provides
distribution
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services through its DSD system for Partner Brands. Significant current Partner
Brands include Unilever, Masterfoods/M&M Mars and Dreyer's.
In 2004, the Company enhanced its DSD system by acquiring the assets of Kinnett
Distribution and integrating them into the Company's Atlanta, Georgia DSD
operation. In 2005, the Company increased its penetration of the out-of-home (or
"impulse") channel by introducing a complete line of single-serve frozen snacks
under our proprietary brands, primarily Eskimo Pie, for DSD distribution. Also
in 2005, the Company refocused its DSD operations in western states (California,
Oregon and Washington) to reduce supermarket distribution operations in those
markets in favor of increased focus on the impulse channel.
Manufacturing operations
The Company manufactures its frozen products primarily at Americana Foods in
Dallas, Texas, its 50.1% owned subsidiary. Americana Foods produces a diverse
range of high quality soft serve mixes, packaged ice cream, frozen snacks and
other similar products. In addition to Americana Foods, the Company manufactures
its frozen products in Russellville, Arkansas at its Eskimo Pie Foodservice
facility and in Norwalk, California at its Fruit-a-Freeze fruit bar plant. The
Company also contracts with other companies to manufacture certain of the
Company's frozen products.
The Company manufactures its refrigerated yogurt products at its 100% owned
subsidiary CoolBrands Dairy, Inc. in North Lawrence, New York.
Americana Foods and CoolBrands Dairy also manufacture products for Partner
Brands.
The Company's Dairy components division manufactures and sells a full line of
quality flavours, chocolate coatings, fudge sauces, powders for chocolate milk,
eggnog bases and other ingredients, and flexible packaging products for use in
private label dairy products, in addition to the Company's brands.
Overall performance
In 2005, the Company adopted generally accepted accounting principles in the
United States ("U.S. GAAP") and changed its reporting currency from Canadian
dollars to U.S. dollars. For comparative purposes, historical financial
statements and notes and Management's Discussion and Analysis have been restated
to reflect these changes.
For fiscal 2005, net revenues decreased to $385,070 as compared with $449,938,
for fiscal 2004, a 14.4% decrease. The net loss for fiscal 2005 was ($74,070)
(($1.32) basic and diluted loss per share) as compared with net earnings of
$23,512 ($0.42 basic and diluted earnings per share) for fiscal 2004.
The decrease in net revenues for fiscal 2005 reflects the decrease in sales,
primarily from the frozen dessert segment, the increase in trade promotion
payments made to customers, and the decline in drayage income. In fiscal 2005,
Net sales declined by 10.3% to $364,686 as compared with $406,470 for fiscal
2004. The decline in sales came from all of our frozen dessert brands, but
principally from the Weight Watchers and Atkins. These sales declines were
partially offset by the sales from newly introduced frozen dessert products,
acquisition of the Breyers yogurt business on March 27, 2005 and the increase in
distribution sales as a result of the change in the business arrangement with
Dreyer's Grand Ice Cream Holdings, Inc. ("Dreyer's"). Effective September 1,
2004, CoolBrands began the distribution of Dreyer's products as an independent
distributor, changing from the previously used drayage basis, except for
Dreyer's scanned based trading customers which continue to be delivered on a
drayage basis. As a result of this change, CoolBrands began purchasing products
from Dreyer's and selling those products to customers at wholesale. The sales
increase due to this change partially offset sales decline in our base frozen
dessert business. In fiscal 2005, drayage and other income decreased by 64.3% to
$14,246 as compared with $39,873 for fiscal 2004, primarily as a result of this
change.
Gross profit percentage for fiscal 2005 declined to 0.8% as compared with 19%
for fiscal 2004. The decline in gross profit percentage was primarily due to:
1. Increased trade promotion payments to customers, excluding the
yogurt segment, which amounted to $52,359 and $32,913 in 2005 and
2004 respectively;
2. The write down of obsolete and slow moving finished goods
inventories, packaging, and ingredients. This write down amounted to
$12,723 in 2005 and was the result of a settlement of litigation
with Weight Watchers International, a new labeling law which will
become effective January 1, 2006, and a provision for slow moving
inventories due to changes in consumer preferences;
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3. Our inability to cover fixed overhead costs in both our
manufacturing and distribution operations due to the lack of
production and sales; and
4. The change in mix of frozen dessert products being sold in 2005 with
lower gross profit margins as compared with 2004.
Selling, general and administrative expenses for fiscal 2005 increased as a
percentage of revenues to 13.6% as compared with 11.5% for fiscal 2004. This
increase occurred primarily due to the decline revenues. Selling, general and
administrative expenses increased by $484 or 0.9% from $51,688 in 2004 to
$52,172 in 2005. Selling, general and administrative expenses for 2005 and 2004
were adversely impacted by the write-off of certain license agreements and the
write-off of deferred package design costs, primarily related to Weight
Watchers, in 2005. These charges amounted to $2,358 and $3,684 in 2005 and 2004,
respectively.
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS123), the Company recognized
stock-based compensation expense of $1,918 and $30,983 in 2005 and 2004 which
represents the estimated fair value of stock options earned during the
respective fiscal years.
The 2005 fiscal year results were adversely affected by the non-cash pre-tax
asset impairment charge of $55,525 (Nil in 2004), which resulted from the
impairment of goodwill and intangible assets related to the Company's frozen
dessert and franchising segments.
Cash and working capital
Cash, investments and restricted cash decreased to $41,562 at August 31, 2005
from $64,327 at August 31, 2004. Working capital decreased to $28,469 at August
31, 2005 from $118,138. CoolBrands' current ratio declined to 1.2 to 1 at August
31, 2005 from 2.6 to 1 at August 31, 2004. These changes in current assets and
current liabilities are attributable primarily to the use of cash and short term
borrowings to finance the Company's acquisitions and fixed asset purchases. The
Company is currently negotiating the refinance of its long-term debt and short
term borrowings, including $40,000 due January 3, 2006 and $7,145 due January
10, 2006.
Selected annual information
The following chart shows selected annual information for the three most
recently completed fiscal years.
Year ended August 31,
2005 2004 2003
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Total net revenues $ 385,070 $ 449,938 $ 214,272
Net (loss) earnings (74,070) 23,512 16,833
(Loss) earnings per share
Basic (1.32) 0.42 0.33
Diluted (1.32) 0.42 0.31
Total assets 297,845 317,257 223,661
Total debt 60,962 27,754 32,022
CoolBrands' decline in total net revenues during fiscal 2005 reflects the
decrease in net sales, primarily from the frozen dessert segment, partially
offset by net sales gained from the acquisition of the Breyers yogurt business
in March 2005 and the decline in drayage income. In fiscal 2005, net sales
declined by 10.3% to $364,686 as compared with $406,470 for fiscal 2004. In
fiscal 2005, drayage and other income decreased by 64.3% to $14,246 as compared
with $39,873 for fiscal 2004. Revenue growth in fiscal 2004 and 2003 was the
result of the successful introduction of new frozen dessert products in the
Better for You category, the acquisition of 50.1% of Americana Foods effective
July 1, 2003 and acquisition of certain assets from Dreyer's Grand Ice Cream,
Inc. and Nestle Ice Cream Company LLC on July 6, 2003.
CoolBrands' net loss in 2005 was primarily due to the substantial decline in net
sales due to the loss of the Weight Watchers Smart Ones license agreement, the
decline in net sales of the Atkins Endulge and other frozen dessert product
lines and the resulting decrease in gross profit dollars, the $25,627 decline in
drayage and other income and the asset impairment charge of $55,525.
CoolBrands' net earnings in 2004 and 2003 reflected the growth in revenues and
effective control of selling, general and administrative expenses. During this
time, we developed and expanded our Better for You product lines, including
Weight Watchers Smart Ones and Atkins Endulge. We obtained higher than normal
gross profit margins and lower
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than normal promotion, marketing and advertising expenses due to the initial low
level of competition in this niche category.
Comparison of 2005 and 2004
We manage our business based on five industry segments: frozen dessert, yogurt,
foodservice, dairy components, and franchising and licensing.
Net sales
Net sales for each segment are summarized in the following table:
Year Ended August 31,
Percentage of sales
2005 2004 2005 2004
--------------------------------------------------
Frozen dessert $ 271,086 $ 356,399 74.3 87.7
Yogurt 44,007 12.1
Foodservice 17,736 15,679 4.9 3.9
Dairy components 19,538 23,184 5.4 5.7
Franchising and licensing 12,319 11,208 3.3 2.7
--------- --------- ----- -----
Total $ 364,686 $ 406,470 100.0 100.0
========= ========= ===== =====
The decrease in net sales for fiscal 2005 in the frozen dessert segment reflects
the deduction from sales for payments made to customers by the Company,
excluding the yogurt segment, of $52,359 in 2005 as compared with $32,913 in
2004 (a net reduction of $19,446). The decline in net sales in the frozen
dessert segment came from all of our frozen dessert brands, but principally from
the Weight Watchers and Atkins. In connection with the settlement of the Weight
Watchers litigation, CoolBrands agreed to discontinue the sale of all Weight
Watchers products on May 1, 2005, approximately five months sooner than required
by the Weight Watchers License Agreement. These declines in net sales were
partially offset by the net sales from newly introduced frozen dessert products
and the increase in distribution sales as a result of the change in the business
arrangement with Dreyer's. Effective September 1, 2004, CoolBrands began the
distribution of Dreyer's products as an independent distributor, changing from
the previously used drayage basis, except for Dreyer's scanned based trading
customers which continue to be delivered on a drayage basis. As a result of this
change, CoolBrands began purchasing products from Dreyer's and selling those
products to customers at wholesale. The sales increase due to this change
partially offset sales decline in our base frozen dessert business.
The net sales for the yogurt segment reflect the acquisition of the Breyers
yogurt business from Kraft Foods, Inc. on March 27, 2005.
The decline in sales by our Dairy components segment reflects the decrease in
sales due to the decline in the demand for Weight Watchers and Atkins
ingredients and packaging from the Company's various contract manufacturers.
Royalties, licensing, and consumer products license revenues
Royalties, licensing and consumer products license revenues increased by 70.7%
to $6,138 in fiscal 2005 from $3,595 in fiscal 2004 due primarily to the Whole
Fruit license revenues the Company earned from Dreyer's of $3,103. The Company
will continue to earn Whole Fruit license revenues through December 2005,
estimated to be approximately $850.
Drayage and other income
Drayage and other income decreased by 64.3% to $14,246 in fiscal 2005 from
$39,873 in fiscal 2004. This decline was due to the change in the business
arrangement with Dreyer's discussed above. Drayage income in 2005 represents the
fees paid to CoolBrands by Dreyer's for the delivery of products to Dreyer's
scanned based trading customers which continue to be delivered on a drayage
basis.
11
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Gross profit margin
The following table presents the gross profit margin dollars and gross profit
percentage for our segments:
Year Ended August 31
Percentage of sales
2005 2004 2005 2004
--------------------------------------------------
Frozen dessert $ (15,488) $ 64,779 (5.7) 18.2
Yogurt 7,369 16.7
Foodservice 3,626 3,439 20.4 21.9
Dairy components 4,287 5,975 21.9 25.8
Franchising and licensing 3,224 2,931 26.2 26.2
--------- --------- ----- -----
Total $ 3,018 $ 77,124 0.8 19.0
========= ========= ===== =====
Gross profit dollars declined to $3,018 in fiscal 2005 from $77,124 in fiscal
2004 primarily due to the decline in gross profit dollars in frozen dessert
segment of $80,267, partially offset by the $7,369 in gross profit dollars
generated by the yogurt segment. The decline in gross profit dollars in the
frozen dessert segment resulted from the decline in sales in 2005 versus 2004,
the impact on the segment for payments made to customers which as previously
discussed reduced net sales and gross profit dollars, excluding the yogurt
segment, in 2005 by $52,359 as compared with $31,337 in 2004 (a net reduction of
$19,446) and our inability to cover fixed overhead costs in both our
manufacturing and distribution operations due to the lack of production and
sales. Gross profit dollars in the frozen dessert segment were also adversely
affected by the write down of $12,723 of obsolete and slow moving finished goods
inventory, packaging, ingredients and finished goods inventory which could not
be used or sold resulting from the settlement of the Weight Watchers litigation
and the estimated impact on packaging which will not be used due to a new
labeling law which will become effective January 1, 2006.
Gross profit percentage for fiscal 2005 declined to 0.8% as compared with 19%
for fiscal 2004. The decline in gross profit percentage was primarily due to:
1. Increased trade promotion payments to customers, excluding the
yogurt segment, which amounted to $52,359 and $32,913 in 2005 and
2004 respectively;
2. The write down of obsolete and slow moving finished goods inventory,
packaging, and ingredients. This write down amounted to $12,723 in
2005 and was the result of a settlement of litigation with Weight
Watchers International, a new labeling law which will become
effective January 1, 2006, and a provision for slow moving
inventories due to changes in consumer preferences;
3. Our inability to cover fixed overhead costs in both our
manufacturing and distribution operations due to the lack of
production and sales; and
4. The change in mix of frozen dessert products being sold in 2005 with
lower gross profit margins as compared with 2004.
Selling, general and administrative expenses
Selling, general and administrative expenses are summarized by industry segment
in the following table:
Year Ended August 31,
Percentage of sales
2005 2004 2005 2004
--------------------------------------------------
Frozen dessert $ 38,818 $ 41,054 14.3 11.5
Yogurt 4,993 11.4
Foodservice 1,486 1,890 8.4 12.1
Dairy components 1,694 1,942 8.7 8.4
Franchising and licensing 5,109 4,934 41.5 44.0
Corporate 72 1,868
--------- ---------
Total $ 52,172 $ 51,688
========= =========
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Selling, general and administrative expenses increased by $484 from $51,688 in
2004 to $52,172 in 2005 due primarily to the increase in selling, general and
administrative expenses incurred by the yogurt segment which relate to the
Breyers yogurt business which was acquired March 27, 2005, partially offset by
the decrease in selling, general and administrative expenses in the frozen
dessert segment which resulted from a decline in expenses directly related to
the decline in sales The frozen dessert segment's selling, general and
administrative expenses were adversely impacted in fiscal 2005 by approximately
$2,358, including the write-off of deferred package design costs, primarily
related to Weight Watchers, and the write-off of certain license agreements with
General Mills. However, selling, general and administrative expenses increased
overall as a percentage of revenues to 13.6% for fiscal 2005 from 11.5% for
fiscal 2004 due primarily to the decline in revenues of $64,868 from 2004 to
2005. Selling, general and administrative expenses in 2004 were adversely
impacted by $3,684 for the pre-tax write-off of the Weight Watchers' intangible
license agreement asset. This write-off was required when Weight Watchers
International notified CoolBrands on July 28, 2004 that the license agreement
would not be extended.
Stock-based compensation expense
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS123), the Company recognized
stock-based compensation expense of $1,918 and $30,983 in 2005 and 2004 which
represents the estimated fair value of stock options earned during the
respective fiscal years.
Interest expense
Interest expense was $2,586 in fiscal 2005 compared with $1,498 in fiscal 2004.
The increase in interest expense in fiscal 2005 as compared with fiscal 2004 was
due to a $40,000 increase in short term borrowings related to the acquisition of
the Breyers yogurt business and a $7,214 increase in debt at Americana Foods
LLP, 50.1% owned by CoolBrands, offset by repayments of short term borrowings
and long-term debt of $14,007.
Asset impairment
The Company is required to conduct an annual review of goodwill and
non-amortizable intangible assets for potential impairment. Goodwill impairment
testing requires a comparison between the carrying value and fair value of each
reporting unit. If the carrying value exceeds the fair value, goodwill is
considered impaired. The amount of impairment loss is measured as the difference
between the carrying value and implied fair value of goodwill, which is
determined using discounted cash flows. Impairment testing for non-amortizable
intangible assets requires a comparison between fair value and carrying value of
the intangible asset. If the carrying value exceeds fair value, the intangible
asset is considered impaired and is reduced to fair value.
During 2005, the Company completed its annual review of goodwill and intangible
assets. This review resulted in a non-cash pre-tax charge related to a goodwill
impairment of $48,701 and in a non-cash pre-tax charge related to intangible
asset impairment related to the Company's frozen dessert segment of $1,401.
Also, this review resulted in a non-cash pre-tax charges related to goodwill and
intangible asset impairments related to the Company's franchise and licensing
segment of $4,940. Additionally, the Company wrote-off certain company-owned
store leasehold improvements and equipment related to the Company's franchise
and licensing segment of $483.
(Recovery of) provision for income taxes
The effective (benefit) tax rate was (10.2)% in fiscal 2005 and 37.1% for fiscal
2004. The effective tax rate differs from the Canadian Federal/Provincial
Statutory Rate primarily due to permanent differences related to the
non-deductible goodwill impairment charges recognized in 2005, a valuation
allowance established in 2005, and due to our operations in foreign countries
with lower effective tax rates. Future effective tax rates could be adversely
affected by earnings being lower than anticipated in countries that have lower
statutory rates or changes in the valuation of our future income tax assets or
liabilities.
Net loss
The net loss for fiscal 2005 was $(74,070) as compared with net earnings of
$23,512 for fiscal 2004. CoolBrands' net loss in 2005 was primarily due to the
substantial decline in net sales due to the loss of the Weight Watchers Smart
Ones license agreement, the decline in net sales of the Atkins Endulge products
and other frozen dessert product lines and the resulting decrease in gross
profit dollars, the $25,627 decline in drayage and other income and the asset
impairment charge of $58,250.
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Comparability of 2005 results with 2004
The Company's 2005 financial statements reflect the March 27, 2005 acquisition
of the Breyers yogurt business. This acquisition was accounted for under the
purchase method of accounting and the 2005 Consolidated Statements of Operations
include the results of this acquisition from the date of acquisition. In fiscal
2005, the revenues and operating results from the Breyers yogurt business
represent five months of activity as compared to no activity in fiscal 2004. The
third quarter of fiscal 2006, ended May 31, 2006, will be the first quarter
following this acquisition in which the Consolidated Statement of Operations for
the quarter can be directly compared with the prior-year period.
Summary of quarterly results
The following table presents a summary of our results for the last eight
quarters:
August 31, 2005 May 31, 2005 February 28, 2005 November 30, 2004
Quarter ended $ $ $ $
- -------------------------------------------------------------------------------------------
Total revenues 124,055 97,890 73,833 89,292
Net earnings (64,093) (6,233) (8,077) 4,333
Earnings per share
Basic (1.15) (.11) (0.14) 0.08
Diluted (1.15) (.11) (0.14) 0.08
August 31, 2004 May 31, 2004 February 29, 2004 November 30, 2004
Quarter ended $ $ $ $
- -------------------------------------------------------------------------------------------
Total revenues 129,052 128,140 99,946 92,800
Net earnings 12,484 (625) 8,465 3,188
Earnings per share
Basic 0.22 (0.01) 0.15 0.06
Diluted 0.22 (0.01) 0.15 0.06
The ice cream and frozen dessert industry generally experiences its highest
volume during the spring and summer months and its lowest volume in the winter
months.
Liquidity
The following sets forth certain measures of our liquidity:
Year Ended August 31,
2005 2004
-----------------------
Cash, investments and restricted cash $ 41,562 $ 64,327
Working capital $ 28,469 $ 118,138
Current ratio 1.2 to 1 2.6 to 1
The decrease in working capital of $89,669 was primarily due to a decrease in
cash, investments and restricted cash of $22,765 and a decrease in total
receivables of $14,669, an increase in current maturities of long-term debt and
short term borrowings of $44,222, an increase in accounts payable and accrued
liabilities of $25,185, and offset by the increase in income taxes recoverable
of $9,767 and the reduction the income tax payable of $4,938. CoolBrands is
currently negotiating the refinance of its long-term debt and short term
borrowings, including the $40,000 due on January 3, 2006 and $7,145 due January
10, 2006.
Cash flows from operating activities
The Company generated cash flow from operating activities of $11,239 for the
year ended August 31, 2005 as compared with $43,769 for the year ended August
31, 2004 due primarily to the decrease in net earnings (exclusive of
depreciation and amortization and asset impairment) for 2005 as compared with
2004. This was offset by changes in other operating assets and liabilities,
which were primarily driven by the timing of certain payments.
14
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Cash used in investing activities
The cash used in investing activities in 2005 was primarily due to the
acquisitions of the yogurt business and the Zipp flavors and ingredients
businesses which aggregated $59,609 and the purchase of property, plant and
equipment of $12,409, offset by the net redemption of investments of $20,550 and
the proceeds from the sale of our City of Industry facility for $5,434. The cash
used in investing activities in 2004 was primarily due to the purchase of
property, plant and equipment of $13,363 and the purchase of investments, net of
redemptions of $28,050.
Cash provided by financing activities
In 2005, $33,264 was provided by financing activities as compared with $14,926
provided by financing activities in 2004. In 2005, the proceeds from short term
borrowings of $44,553, and an increase in the revolving line of credit of $2,661
at Americana Foods. These additions were off set by the repayment of long-term
debt. The exercise of stock options in 2004 provided $12,286 and Americana
Foods' minority partner provided $6,907, net of a $2,000 repayment, as their
share for the expansion of production capacity at Americana Foods. These
additions were offset by the repayment of long-term debt of $5,781 and the
increase in the secured revolving line of credit at Americana Foods of $1,514.
Contractual obligations
The following table presents our contractual obligations:
Total Less than 1 - 3 4 - 5 After 5
1 year years years years
- -------------------------------------------------------------------------------------------------
Contractual obligations
- -------------------------------------------------------------------------------------------------
Long-term debt $ 60,808 $ 52,560 $ 8,248
Capital lease obligations 154 154
Operating leases 12,393 4,363 6,590 $ 554 $ 886
Other long-term obligations 2,881 2,881
-------------------------------------------------------
Total contractual obligations $ 76,236 $ 57,077 $ 17,719 $ 554 $ 886
=======================================================
Capital resources
The Company is planning to spend approximately $3,000 on capital projects during
fiscal 2006. The planned capital projects are primarily for the continuing
expansion of capacity at Americana Foods and certain information technology
infrastructure improvements. The Company will use existing cash on hand to fund
the planned capital expenditures. However, the Company has not ruled out the
possibility that it will fund the planned capital expenditures plus previous
capital spent by restructuring Americana Foods' long-term debt.
Additionally, CoolBrands is committed to the expansion of its frozen dessert
segment in 2006 with the introduction of new products to respond to the increase
in competition in the ice cream industry for shelf space and market share. As a
result, CoolBrands has made or will make offers to retailers for new product
introductory placement costs (slotting fees) of approximately $11,250.
Payment requirements
In connection with the acquisition of the yogurt business from Kraft in March
2005, a U.S. subsidiary borrowed $40,000 to finance the acquisition. The
unsecured term loan requires monthly payments of interest with the $40,000
principle balance due November 1, 2005. Interest is payable monthly on the
unpaid principle balance with interest rates fluctuating with changes in the
prime lending or libor rate and the ratio of funded debt to EBITDA. The interest
rates plus applicable margin were the lower of Prime plus 0.5% or LIBOR plus
2.5% (6.02% at August 31, 2005). The Company made a principal payment of $10,000
on August 23, 2005 in anticipation of the September 2, 2005 amendment as
discussed below. As of August 31, 2005 the term loan balance was $30,000.
In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary
borrowed U.S. $30,000 to finance the acquisition. The loan is payable in monthly
installments of U.S. $250, which began December 1, 2000, with the remaining
principal balance due on November 1, 2005. Interest on the term loan is payable
monthly on the unpaid principal balance. CoolBrands and all of its significant
subsidiaries guarantee all borrowings under the above loan agreement. The
principal balance outstanding at August 31, 2005 was U.S. $10,500.
15
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The Company was in default of its financial covenants at May 31, 2005 and August
31, 2005. On September 2, 2005 the Company entered into an amendment to its
existing credit facilities. The Amendment extends the maturity of the existing
facilities from November 1, 2005 until January 3, 2006 and waives defaults in
its financial covenants resulting from the Company's financial performance.
The Amendment eliminates all of the existing financial covenants from the loan
agreements through the remainder of the term and grants a security interest in
the personal property assets (other than certain excluded assets relating to the
operations of the company's 50.1% owned limited partnership), reduced its
outstanding indebtedness to the bank by $10,000 to a total of $40,500 and the
Company has agreed to an increase of the interest rate by 2.0% basis points on
all remaining outstanding balances to 4.5% basis points over LIBOR. In addition,
the amendment reduced the Company's $5,000 revolving credit facility to $925 and
requires the Company to maintain $20,000 of cash balances, of which $10,000 is
restricted to use as approved by the lender.
On April 27, 2005, Americana Foods LP, which is owned 50.1% by the Company,
borrowed $4,553 for use in purchasing a building and adjacent acreage. Loan
terms call for monthly, interest-only payments until anniversary date of the
note. The note bears interest at Prime plus 0.5% (7.0% at August 31, 2005). The
note provides a one-time right to extend the maturity date by two years. Monthly
payments during the extension period will be based on a 25-year period.
The Partnership may also at that time choose to continue any interest rate for
Prime plus 0.5% or convert to a fixed interest rate to be quoted by the lender.
Due to the one-year maturity date (before exercise of the extension option),
this note is classified as a current liability.
On November 19, 2002, Americana Foods LP, which is owned 50.1% by the Company,
entered into a credit agreement with a financial institution that included a
term loan of U.S. $10,000, which is secured by the Partnership's property,
plant, and equipment. Principal payments are payable in fixed monthly
installments of U.S. $80 and matures on November 19, 2007. The term of the loan
bears interest at Prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August
31, 2004).
The Partnership's amended credit agreement also includes a revolving loan of up
to U.S. $9,000, subject to a borrowing base calculation, which bears interest at
Prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004) and was
due on November 30, 2005. At August 31, 2005, approximately U.S. $1,855 was
available to the Partnership under this loan. The revolving loan is secured by
the Partnership's receivables and inventory and is classified as a current
liability.
On November 30, 2005 the Partnership executed an amendment to the credit
agreement which extended the maturity date for the revolving loan until January
10, 2006. Americana Foods must maintain compliance with certain financial
covenants, including fixed charge ratio, debt-to-tangible net worth ratio and
tangible net worth.
CoolBrands is currently negotiating the refinance of its long-term debt and
short term borrowings with its current lenders, including $40,000 due on January
3, 2006 and $7,145 due January 10, 2006.
Risk factors and uncertainties
Inflation can significantly impact ice cream and frozen yogurt ingredients,
including butterfat and packaging costs. In 2005 and 2004, CoolBrands passed on
ingredient, energy and freight cost increases by raising prices on selected
product lines. In 2006, CoolBrands believes that it will be able to pass on cost
increases, if any, in the normal course of business within a relatively short
period of time. However, the ability of CoolBrands to pass on cost increases
will depend, to some extent, on whether its competitors have also done so.
CoolBrands believes that, in the past, its competitors have passed on cost
increases in a relatively short period of time.
CoolBrands products are ultimately purchased by the global retail consumer,
whose tastes and preferences are subject to variation and change. Although
carefully monitored, these changes cannot be controlled and are difficult to
predict. Management believes that CoolBrands' family of products is based on
well-established brand names and is easily adaptable to meet changes in consumer
tastes and demands.
CoolBrands derives a substantial portion of its revenues from its operations in
the United States. The U.S. market for frozen dessert and yogurt is highly
competitive. As competitors introduce new products or revise their supply or
pricing strategies, CoolBrands may encounter additional and more intense
competition. Such competitors have greater name recognition and more extensive
financial, technological, marketing and personnel resources than CoolBrands. In
addition, CoolBrands may experience increased competition in its other markets
as its competitors expand their international operations.
16
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CoolBrands existing shelf space in supermarkets, club stores and convenience
stores for ice cream and frozen dessert treats and yogurt is at risk due to
decisions by CoolBrands' customers. The Company's existing shelf space for our
products, along with that of all other products, is reviewed at least annually
by our customers. Supermarket, club store and convenience store chains
reallocate their total shelf space taking into effect a number of variables,
including the number of new products being introduced at any given time, the
amount of new product placement fees (slotting fees) being offered by companies
in the ice cream and frozen dessert and yogurt segments and by changing consumer
tastes and fads. As a result, CoolBrands is subject, in any given year, to the
loss of shelf space with its customers and the loss in revenues associated with
the sale of those products. CoolBrands responds to this action by developing and
introducing new products annually which will either maintain or increase its
shelf space. There is also substantial risk that the sales of such new products
will not be as successful as CoolBrands had previously estimated or as
successful as new products introduced by CoolBrands in the past. The risks
associated with the reallocation of shelf space by our customers and the
development and introduction of new products could have a substantial adverse
impact upon CoolBrands' financial position and results of operations.
CoolBrands is subject to risks with respect to its cost of raw materials, some
of which are subject to changes in commodity prices, particularly the cost of
butterfat, which is used to produce ice cream products. From time to time,
CoolBrands has used hedging contracts to reduce its exposure to such risks with
respect to its raw material costs.
CoolBrands has made, and may in the future make acquisitions of, or significant
investments in, businesses or assets with complementary products or unrelated
industries. Acquisitions involve numerous risks, including but not limited to:
1) diversion of management's attention from other operational matters; 2) the
inability to realize expected synergies from the acquisition; 3) impairment of
acquired intangible assets as a result of worse-than-expected-performance of the
acquired operations; 4) integration and retention of key employees; and 5)
integration of operations. Mergers and acquisitions are inherently subject to
significant risks, and the inability to effectively manage these risks could
materially and adversely affect CoolBrands' business, financial condition and
results of operations.
CoolBrands operates in some countries that are subject to potential political
and economic uncertainty. Such factors, beyond the control of CoolBrands, are
lessened because of international diversification and the sharing of risks with
Master and Sub-franchises.
The Corporation is currently dependent upon a small number of key management
personnel and continued success will depend, in part, upon their abilities. The
loss of these key personnel may adversely affect the performance of the
Corporation.
The Company relies on major retailers in the U.S. for a substantial portion of
its sales. As a result of this concentration of sales and accounts receivable
the Company is subject to certain credit risks. Such risks are somewhat
mitigated by the fact that net sales to any one customer do not exceed ten
percent of the Company's consolidated net sales
CoolBrands is subject to interest rate risk as it long-term debt and short term
borrowings are based up the prime rate and/or Libor. If these bases rates
increase, CoolBrands will incur incremental interest expense.
The Company is subject to future legal proceedings and disputes with
franchisees, former franchisees and others, which arise in the ordinary course
of business.
Transactions with related parties
Integrated Brands, a wholly owned subsidiary of CoolBrands, has entered into a
distribution agreement with Calip Dairies, Inc. ("Calip") an ice cream
distribution company owned by Susan Smith and David M. Smith, the widow and son,
respectively, of Richard E. Smith, former Co-Chairman, Co-Chief Executive
Officer and Director of the Company. David M. Smith is currently Vice-Chairman
and Chief Operating Officer of the Company. Calip was previously owned by
Richard E. Smith and Susan Smith. Pursuant to the agreement, Integrated Brands
Inc. has appointed Calip as its exclusive distributor for any ice cream or other
frozen dessert product manufactured by, on behalf of, or under authority of,
Integrated Brands Inc., its subsidiaries, affiliates or successors in the State
of New Jersey and certain areas in the State of New York and the State of
Connecticut. The agreement continues until December 31, 2007 and thereafter
renews automatically on December 31 of each year for an additional one year
term, provided that as of such date at least 50% of the issued and outstanding
shares of Calip are beneficially owned by the Smith Family and/or David Stein,
unless Calip gives Integrated Brands written notice on or before September 30th
of that same year that Calip will not renew the agreement, in which event the
agreement terminates effective December 31 following such notice. CoolBrands has
agreed to guarantee the performance of the distribution agreement. Sales of
products to Calip were $9,781 for the year ending August 31, 2005 (2004 -
$9,482). At August 31, 2005, $1,840 of the receivables - affiliates represent
receivables from Calip (2004 - $3,883). The transactions with Calip occur in the
normal course of operations and are measured at the amount of consideration
established and agreed to by the related parties.
17
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Integrated Brands also entered into a management agreement effective July 1,
2003 with Calip pursuant to which Calip provided the full time management
services and certain other ancillary services of Mr. Richard Smith, CoolBrands'
former Co-Chairman and Co-Chief Executive Officer, for a fixed payment of $1,300
per year. The management agreement with Calip was terminated following the
passing of Mr. Smith on January 29, 2005. Management fees incurred under the
agreement were $542 and $1,300 for the years ended August 31, 2005 and 2004,
respectively. As at August 31, 2005, the $620 balance of payables - affiliates
(2004 - $850) represents payables to Calip.
Fourth quarter
Revenues for the fourth quarter of fiscal 2005 decreased to $124,055 from
$129,052 for the same quarter last year, a 3.9% decrease. Net (loss) for the
fourth quarter was ($64,093) (($1.15) basic and diluted loss per share) as
compared with net earnings of $12,484 ($0.22 basic and diluted earnings per
share) for the same quarter last year.
The decrease in net revenues for the fourth quarter of fiscal 2005 reflects the
decline in drayage income from $9,308 in 2005 to $3,409 in 2005 that was due to
the change in the business arrangement with Dreyer's. In the fourth quarter
2005, net sales increased by 0.4% to $118,893 as compared with $118,457 for
fiscal 2004. However, net sales declined in the frozen dessert segment which
reflects deduction from sales for payments made to customers by the Company,
excluding the yogurt segment, of $ 11,626 in 2005 as compared with $5,251 in
2004 (a net reduction $6,375). The decline in sales came from all of our frozen
dessert brands, but principally from a decline in sales in our Weight Watchers
and Atkins lines. The sales declines in the frozen dessert segment were
partially offset by the sales from newly introduced frozen dessert products and
the increase in distribution sales as a result of the change in the business
arrangement with Dreyer's. Effective September 1, 2004, CoolBrands began the
distribution of Dreyer's products as an independent distributor, changing from
the previously used drayage basis, except for Dreyer's scanned based trading
customers which continue to be delivered on a drayage basis. As a result of this
change, CoolBrands began purchasing products from Dreyer's and selling those
products to customers at wholesale. The sales increase due to this change
partially offset sales decline in our base frozen dessert business. The decline
in sales in the frozen dessert segment were substantially offset by an increase
in sales of $26,397 from the yogurt segment which resulted from the acquisition
of the Kraft yogurt business on March 27, 2005.
Gross profit percentage for the fourth quarter of fiscal 2005 declined to 2.3%
as compared to 20.9% for the fourth quarter of fiscal 2004. The decline in gross
profit percentage was primarily due to payments made to customers, including
sales price promotions and cooperative advertising, by the Company which as
previously discussed reduced sales and gross profits by $11,626 and $5,251 in
the fourth quarter of 2005 and 2004, respectively and our inability to cover
fixed overhead costs in both our manufacturing and distribution operations due
to the lack of sales. Gross profit percentage was also adversely affected by the
write down of $8,163 in connection with slow-moving and obsolete inventory and
packaging, ingredients and finished goods inventories which will not be used or
sold resulting from the settlement of the Weight Watchers litigation and the
change in mix of frozen dessert products being sold in the fourth quarter of
2005 with lower gross profit margins as compared with the fourth quarter of
2004. The fourth quarter of 2004 was impacted by the pre-tax operating losses at
Americana Foods LP (50.1% owned) of approximately $2,089. These losses were
primarily due to plant production losses incurred during the installation of new
production lines and the related start-up expenses which occurred in the fourth
quarter of fiscal 2004.
Selling, general and administrative expenses increased by $2,573 or 15% from
$17,115 in 2004 to $19,688 in 2005. However, selling, general and administrative
expenses for the fourth quarter of fiscal 2005 increased as a percentage of
revenues to 15.9% as compared to 13.3% for fiscal 2004 primarily due to the
decline revenues and the additional selling, general and administrative expenses
incurred by the yogurt segment which was acquired March 27, 2005. Selling,
general and administrative expenses for the fourth quarter of 2004 were
adversely impacted by $3,684 for the pre-tax write-off of the Weight Watchers'
agreement license. This write-off was required when Weight Watchers
International notified the Company on July 28, 2004 that the license agreement
would not be extended.
The 2005 fiscal fourth quarter results were adversely affected by the non-cash
pre-tax asset impairment charge of $54,124, which resulted from the impairment
of goodwill, intangible assets and property, plant and equipment related to the
Company's frozen dessert and franchising segments.
Critical accounting policies and related estimates
The accounting policies and related estimates discussed in this section are
those that we consider to be particularly critical to an understanding of our
financial statements because their application places the most significant
demands on our ability to judge the effect of inherently uncertain matters on
our financial results. For all of these policies, we caution that future events
rarely develop exactly as forecasted, and our management's best estimates may
require adjustment.
18
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Allowance for doubtful accounts
We have an allowance for doubtful accounts for estimated losses resulting from
customers' inability to pay amounts owed to us, for unresolved amounts that our
customers have refused to pay due to disputes over promotions, co-op advertising
and new product introductory allowances (slotting fees).
The allowance is a combination of specific and general reserves based upon our
evaluation of the customers' ability to pay determined by our assessment of
their liquidity and financial condition through credit rating agencies, or the
credibility of backup provided on disputed amounts. Write-offs against the
allowances generally occur after we assess the particular customer's liquidity,
financial condition and their basis for non-payment on disputed items and
conclude that collection is highly unlikely. Our estimates of losses bear the
risk of change due to the uncertainty of determining the likelihood of customer
non-payment. The general reserve includes an amount for our Foodservice
customers' price volume rebates.
Accrual for promotion and co-op advertising expenses
CoolBrands estimates promotion expenses for each of our customers, excluding our
DSD customers, who receive off invoice promotion allowances, using a detail
annual plan consisting of each promotion offered to each customer. The
promotional sales volume is estimated using the sales history of each customer
when the product or like product was previously promoted. An estimate of the
promotion expense is then calculated using the estimated sales volume and the
specific promotion dollar amount offered for each particular promotion. The
estimates for all promotions for all customers are accumulated and recorded as
expense in the accounting period in which the promotion runs. The results of all
promotions are updated monthly, after the fact, with actual sales promotion
volume. If actual sales were to be substantially higher than estimated, this
could cause an additional promotions expense to be recorded. The amounts of
these accruals are recognized by the Company as a reduction in sales and
accounts receivables.
Inventory valuation method
Inventory is valued at the individual item level using the cost method which
values inventory at the lower of cost or market. Cost is determined using the
FIFO (first-in, first-out) method. Market is determined based on the estimated
net realizable value, which is generally the inventory item's selling price.
CoolBrands reviews its inventory levels in order to identify slow-moving and
obsolete inventory, which requires adjustment and evaluates the potential for
slow-moving and obsolete inventory by analyzing historical and anticipated
demand. If actual demand were to be substantially lower than estimated, an
additional allowance for excess and obsolete inventory might be required.
Asset impairment
The Company is required to conduct an annual review of goodwill and
non-amortizable intangible assets for potential impairment. Goodwill impairment
testing requires a comparison between the carrying value and fair value of each
reporting unit. If the carrying value exceeds the fair value, goodwill is
considered impaired. The amount of impairment loss is measured as the difference
between the carrying value and implied fair value of goodwill, which is
determined using discounted cash flows. Impairment testing for non-amortizable
intangible assets requires a comparison between fair value and carrying value of
the intangible asset. If the carrying value exceeds fair value, the intangible
asset is considered impaired and is reduced to fair value.
Income taxes
We record reserves for estimates of probable settlements of foreign and domestic
tax audits. At any one time, many tax years are subject to audit by various
taxing jurisdictions. The results of these audits and negotiations with taxing
authorities may affect the ultimate settlement of these issues. We also record a
valuation allowance against our future tax assets arising from certain net
operating losses when it is more likely than not that some portion or all of
such net operating losses will not be realized.
Our effective tax rate in a given financial statement period may be materially
impacted by the changes in the mix and level of earnings, changes in the
expected outcome of audit controversies or changes in the deferred tax valuation
allowance. We currently expect the fiscal 2006 effective tax rate to be within
the range of 38 percent to 39 percent. The ultimate rate will depend on several
variables, including the future utilization of net operating losses, the mix of
earnings between domestic and international operations and the overall level of
earnings, and could also be affected by the resolution of tax contingencies for
amounts different from our current estimates.
19
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Legal matters
CoolBrands is subject to various legal proceedings and claims, either asserted
or unasserted, that arise in the ordinary course of business. CoolBrands
evaluates, among other things, the degree of probability of an unfavorable
outcome and reasonably estimates the amount of the loss. Significant judgment is
required in both the determination of the probability and as to whether an
exposure can be reasonably estimated. When CoolBrands determines that it is
probable that a loss has been incurred, the effect is recorded in the
Consolidated Financial Statements. Although the legal outcome of these claims
cannot be predicted with certainty, CoolBrands does not believe that any of the
existing legal matters will have a material adverse affect on its financial
condition or results of operations. However, significant changes in legal
proceedings and claims or the factors considered in the evaluation of those
matters could have a material adverse affect on CoolBrands business, financial
condition and results of operation.
Changes in accounting policies including initial adoption
The Company initially adopted the following new accounting policies for the year
ended August 31, 2005.
Change in reporting currency
Effective September 1, 2004, the Company has changed its reporting currency from
Canadian dollars to U.S. dollars since the majority of its business is conducted
in the United States and to make comparisons between current and prior periods
more meaningful to investors. For comparative purposes, historical financial
statements and notes have been restated into U.S. dollars in accordance with
generally accepted accounting principles.
Adoption of U.S. GAAP
During the fourth quarter of 2005, the Company adopted, on a retroactive basis,
U.S. GAAP. Previously, the Company prepared its annual and interim consolidated
financial statements in accordance with generally accepted accounting principals
in Canada ("Canadian GAAP"). As a result, the following adjustments have been
made to previously issued Consolidated Financial Statements.
The Company promotes its products with advertising, consumer incentive and trade
promotions. Such programs include, but are not limited to, cooperative
advertising, promotional discounts, coupons, rebates, in-store display
incentives, volume based incentives and product introductory payments (i.e.
slotting fees). Such consumer and trade promotion activities have been
historically accounted for as selling, general and administrative expenses. In
accordance with EITF No. 01-09 "Accounting for Consideration Given by a Vendor
to a Customer or Reseller of the Vendors Products" certain payments made to
customers by the Company, including promotional sales allowances, cooperative
advertising and product introductory expenditures must be deducted from revenue.
Accordingly, our Consolidated Statement of Operations for 2004 has been restated
to reflect a reduction in revenues and selling, general and administrative
expenses of $32,913. The reduction in revenues and selling, general and
administrative expenses in our 2005 Consolidated Statement of Operations is
$68,155.
The following summarizes the impact of restatement for the change from Canadian
GAAP to U.S. GAAP for consumer trade promotion expenses in our Consolidated
Statement of Operations:
2005 2004
Total net revenues in accordance with Canadian GAAP $ 453,225 $ 482,851
Less consumer and trade promotion expenses (68,155) (32,913)
---------------------
Total net revenues in accordance with U.S. GAAP $ 385,070 $ 449,938
=====================
2005 2004
Total selling, general and administrative expenses in
accordance with Canadian GAAP $ 120,327 $ 84,601
Less consumer and trade promotion expenses (68,155) (32,913)
---------------------
Total selling, general and administrative expenses in accordance
with U.S. GAAP $ 52,172 $ 51,688
=====================
20
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Product introduction expenditures (i.e. slotting fees) incurred by the Company
have been historically recognized as expense by amortizing the slotting fees
over the twelve months subsequent to the actual acceptance of product
introduction offers by our customers. Under U.S. GAAP, such expenditures are
recognized as reductions in revenues at the time product introduction offers are
accepted by our customers, which for measurement purposes is at the time of the
first shipment of the product to each customer. As a result of this change,
Retained Earnings as of August 31, 2003 has been reduced to reflect the
cumulative effect of this change through that date by $3,644. Our previously
reported net earnings for the year ended August 31, 2004 have been increased by
$756. Our reported net loss for the year ended August 31, 2005 was increased by
$553, when compared with the Net loss that would have been reported using our
historical accounting principles.
The following summarizes the impact of restatement for the change from Canadian
GAAP to U.S. GAAP for new product introduction expenditures (slotting fees) in
our Consolidated Statement of Operations:
2005 2004
Net (loss) income in accordance with Canadian GAAP $ (73,517) $ 22,756
Adjustment for new product introduction expense (553) 756
---------------------
Net (loss) income in accordance with U.S. GAAP $ (74,070) $ 23,512
========== =========
Stock-based compensation
On September 1, 2005, the Company adopted, on a retroactive basis without
restatement, the recommendation of CICA Handbook Section 3870, "Stock-based
compensation and other stock-based payments", which required companies to adopt
the fair value based method for all stock-based awards granted on or after
September 1, 2002. Previously, the Company was required to disclose only the
pro-forma effect of stock options issued to employees and employee directors in
the notes to the financial statements.
As a result of adopting U.S. GAAP during the fourth quarter of 2005, as
previously discussed, the Company adopted, on a modified prospective basis,
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS123).
Previously, the Company was required to disclose only the pro-forma effect of
stock options issued to employees and employee directors in the notes to the
financial statements. The effect of adopting this accounting policy increased
the loss before income taxes and minority interest for fiscal 2005 by $1,918
with a corresponding increase to additional paid-in capital and reduced earnings
before income tax and minority interest for fiscal 2004 by $24,270 with a
corresponding increase to additional paid-in capital.
Annual information form
Additional information relating to CoolBrands, including CoolBrands' Annual
Information Form, is available on the website for Canadian regulatory filings at
www.sedar.com.
Outstanding share data
As of December 13, 2005, the Company had 50,004,069 subordinate voting shares,
6,028,864 multiple voting shares and 3,840,517 stock options outstanding.
21
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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.
BDO DUNWOODY LLP
Chartered Accountants
Toronto, Ontario
December 9, 2005
22
- --------------------------------------------------------------------------------
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
======================
Liabilities and shareholders' equity
2005 2004
---------- ---------
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" "Romeo DeGasperis"
---------------- ------------------
David J. Stein Romeo DeGasperis
Director Director
23
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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.
24
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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 paid-in (losses) Retained shareholders'
stock 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
Comprehensive 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.
25
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CoolBrands International Inc.
Consolidated Statements of Cash Flows 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.
26
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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 dessert segment (formerly Prepackaged consumer products)
Revenues and profits in the Frozen dessert (formerly Prepackaged consumer
products) segment are generated from manufacturing and selling a variety of
prepackaged frozen desserts 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.
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.
27
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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)
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 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.
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 1. Description of business and summary of significant accounting policies
(cont'd)
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.
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.
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).
29
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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)
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
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.
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 1. Description of business and summary of significant accounting policies
(cont'd)
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.
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.
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 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
("CAN 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 CAN 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
=======================
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.
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 2. Changes in accounting policies (cont'd)
The following summarizes the impact of restatement for the change from CAN 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.
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 dessert 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: Purchase consideration:
Current assets $ 5,373 Cash $ 17,500
Property, plant and equipment 11,846 Acquisition costs 1,652
Trademark rights 15,000 Bank loan 40,000
----------
Goodwill 27,582 $ 59,152
----------- ==========
59,801
Less Liabilities (649)
-----------
$ 59,152
===========
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 3. Acquisitions (cont'd)
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: Purchase consideration:
Current assets $ 208 Cash $ 457
===========
Equipment 80
Goodwill 258
-----------
546
Less Liabilities (89)
-----------
$ 457
===========
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.
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 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
===================
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 dessert $ 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
===================
35
- --------------------------------------------------------------------------------
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)
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.
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.
36
- --------------------------------------------------------------------------------
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)
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 LLP, 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.
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.
37
- --------------------------------------------------------------------------------
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 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 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 Foods LLP ("Americana"), which is owned 50.1% by
the Company, 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 was 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).
38
- --------------------------------------------------------------------------------
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.
The paid-in-balance for each class of stock at August 31, 2005 was as follows:
Paid-In-balance
---------------
Class A Subordinate voting shares $ 85,659
Class B Multiple voting shares $ 11,919
Changes in Capital stock for the two years ended August 31, 2005 were as
follows:
Class A Class B
Subordinate Multiple
voting shares voting shares
outstanding 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.
39
- --------------------------------------------------------------------------------
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 contractual
exercise life
Shares CAD Price (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
The following table summarizes stock options outstanding, exercisable and
exercise price range at August 31, 2005:
Options Outstanding Options Exercisable
----------------------------------------------------------------
Weighted-
average Weighted- Weighted-
Outstanding remaining average Exercisable average
Range of as of contractual exercise as of exercise
exercise prices 08/31/2005 life price 08/31/2005 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.
40
- --------------------------------------------------------------------------------
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 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 CAD $4.03(2004 - CAD $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 Nil Nil
Risk-free interest rate (percentage) 3.92 2.98
Expected volatility 66.73 67.39
Expect life (in years) 10 4.2
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)
41
- --------------------------------------------------------------------------------
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
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".
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 post retirement
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
=========
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.
42
- --------------------------------------------------------------------------------
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 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 post retirement benefit obligation by approximately
$177 and the net periodic post retirement benefit cost by approximately $18.
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 expected long-term rate
allocation Percentage of 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%
----------------------------------------------------------------
43
- --------------------------------------------------------------------------------
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 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 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).
44
- --------------------------------------------------------------------------------
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 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 $291at August 31, 2005. Aggregate minimum
future rental payments under these leases approximated $6,074 at August 31, 2005
(2004 - $6,144).
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.
45
- --------------------------------------------------------------------------------
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
CoolBrands International's reportable segments are Frozen dessert, Yogurt,
Foodservice, Dairy components and Franchising and licensing, including
Company-owned stores.
Revenues and profits in the Frozen dessert 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 them based on their
operating contribution, which represents segment revenues, less direct costs of
operation, excluding the allocation of corporate expenses.
46
- --------------------------------------------------------------------------------
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, 2005
Franchising
Frozen Dairy and
dessert 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
47
- --------------------------------------------------------------------------------
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
Dairy and
Frozen dessert 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
48
- --------------------------------------------------------------------------------
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
United
Canada 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
49
- --------------------------------------------------------------------------------
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
United
Canada 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
50
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS AND OFFICERS
DIRECTORS OFFICERS
Michael Serruya Gary P. Stevens
Co-Chairman & Director Chief Financial Officer
David M. Smith Francis X. Orfanello
Vice Chairman, Vice President
Chief Operating Officer & Director
Timothy Timm
David J. Stein Vice President,
President, Chief Executive Officer, Manufacturing and Quality Assurance
Co-Chairman & Director
John M. Kaczynski
Robert E. Baker Senior Vice President,
Lead Director Sales & Marketing
Aaron Serruya J. Leo Glynn
Director President,
Eskimo Pie Frozen Distribution Inc.
Romeo DeGasperis
Director William J. Weiskopf
President,
Beth L. Bronner Value America Flavors and Ingredients
Director
Paul Samuel
L. Joshua Sosland Vice President,
Director Sam-Pak Flexible Packaging
Arthur Waldbaum John R. LeSauvage
Director Vice President, Operations
* Scheduled to retire from the Board
at 2006 Annual Meeting Matthew P. Smith
Vice President, Marketing
William R. McManaman
* Proposed for election to the Board Stacy L. Pugh
at 2006 Annual Meeting Senior Vice President
Operations, Americana Foods
Craig Hettrich
President, Eskimo Pie Food Service
Daniel C. Heschke
Chief Information Officer
51
- --------------------------------------------------------------------------------
CORPORATE INFORMATION MANUFACTURING PLANTS
Canadian Head Office
8300 Woodbine Avenue, 5th Floor
Markham, Ontario L3R 9Y7
Canada
Telephone: 905-479-8762
www.coolbrandsinc.com
U.S.A. Head Office
4175 Veterans Highway, 3rd Floor
Ronkonkoma, New York, 11779 U.S.A.
Telephone: 631-737-9700
www.coolbrandsinc.com
American Legal Representation
Blank Rome LLP
The Chrysler Building
405 Lexington Avenue
New York, New York
10174-0208 U.S.A.
Auditor
BDO Dunwoody LLP
Royal Bank Plaza, P.O. Box 32
Toronto, Ontario M5J 2J8
Canada
Listing of Subordinate Voting Shares
The Toronto Stock Exchange
Trading Symbol "COB.SV.A"
Canadian Legal Representation
Stikeman Elliott LLP
Commerce Court West, 53rd Floor
Toronto, Ontario M5L 1B9
Canada
Transfer Agent
Equity Transfer Services Inc
120 Adelaide Street West, Suite 420
Toronto, Ontario M5H 3V1
Canada
Americana Foods LP
3333 Dan Morton Drive
Dallas, TX 75236 U.S.A
Telephone: 972-709-7100
CoolBrands Foodservice
301 North El Paso
Russellville, AK 72811 U.S.A
Telephone: 501-968-1005
Value America Flavors and
Ingredients
2400 South Calhoun Rd.
New Berlin, WI 53151 U.S.A.
Telephone: 262-784-3010
Sam-Pak Flexible Packaging
118 JFK Drive North
Bloomfield, NJ 07003 U.S.A.
Telephone: 973-743-7100
Fruit-a-Freeze
CoolBrands Manufacturing
12919 Leyva St.
Norwalk, CA 90650 U.S.A.
Telephone: 562-407-2881
CoolBrands Dairy Inc.
22 County Route 52
North Lawrence, NY 12967 U.S.A.
Telephone: 315-389-5111
Annual Meeting
The Annual Meeting of Shareholders
will be held on Monday, February 27th,
2006 at 10:00a.m. Sheraton Parkway
Toronto North, (Thornhill Room)
600 Highway 7 East
Richmond Hill. Ontario L4B 1B2
52
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