-----------------------------
OMB APPROVAL
-----------------------------
OMB NUMBER: 3235-0288
-----------------------------
EXPIRES: JANUARY 31, 2008
-----------------------------
ESTIMATED AVERAGE
BURDEN
HOURS PER RESPONSE. . .
2631.00
-----------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
(Amendment No. 1)
(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT ___________
COMMISSION FILE NUMBER 000-27476
COOLBRANDS INTERNATIONAL INC.
--------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Not Applicable
--------------------------------------------------------
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
Province of Nova Scotia, Canada
--------------------------------------------------------
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
8300 Woodbine Avenue, 5th Floor
Markham, Ontario
Canada L3R 9Y7
--------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Not Applicable
------------------------ ----------------------
------------------------ ----------------------
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT.
Not Applicable
--------------------------------------------------------
(TITLE OF CLASS)
--------------------------------------------------------
(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT.
Subordinate Voting Shares
Multiple Voting Shares
--------------------------------------------------------
(TITLE OF CLASS)
INDICATE THE NUMBER OF OUTSTANDING SHARES OF EACH OF THE ISSUER'S CLASSES OF
CAPITAL OR COMMON STOCK AS OF THE CLOSE OF THE PERIOD COVERED BY THE ANNUAL
REPORT.
Subordinate Voting Shares: 50,004,069
Multiple Voting Shares: 6,028,864
INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS
DEFINED IN RULE 405 OF THE SECURITIES ACT.
[ ] YES [X] NO
IF THIS REPORT IS AN ANNUAL OR TRANSITION REPORT, INDICATE BY CHECK MARK IF THE
REGISTRANT IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1932.
[X] YES [ ] NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
[X] YES [ ] NO
INDICATE BY CHECK MARK WHICH FINANCIAL STATEMENT ITEM THE REGISTRANT HAS ELECTED
TO FOLLOW.
[X] ITEM 17 [ ] ITEM 18
IF THIS IS AN ANNUAL REPORT, INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A
SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT
[ ] YES [X] NO
TABLE OF CONTENTS
Item 1 Identity of Directors, Senior Management and Advisers........... 2
Item 2 Offer Statistics and Expected Timetable......................... 2
Item 3 Key Information................................................. 2
Item 4 Information on the Company...................................... 5
Item 5 Operating and Financial Review and Prospects.................... 20
Item 6 Directors, Senior Management and Employees...................... 40
Item 7 Major Shareholders and Related Party Transactions............... 56
Item 8 Financial Information........................................... 59
Item 9 The Offer and Listing........................................... 60
Item 10 Additional Information.......................................... 62
Item 11 Quantitative and Qualitative Disclosures About Market Risk...... 69
Item 12 Description of Securities other than Equity Securities.......... 70
Item 13 Defaults, Dividend Arrearages and Delinquencies................. 70
Item 14 Material Modifications to the Rights of Security Holders and
Use of Proceeds................................................. 70
Item 15 Controls and Procedures......................................... 70
Item 16 [Reserved]...................................................... 71
Item 17 Financial Statements............................................ 73
Item 18 Financial Statements............................................ 73
Item 19 Exhibits........................................................ 73
i
FORWARD-LOOKING STATEMENTS
The information in this document contains certain forward-looking
statements with respect to CoolBrands International Inc. (the "Corporation", the
"Company" or "CoolBrands"), its subsidiaries and affiliates. These statements
are often, but not always made through the use of words or phrases such as
"expect", "should continue", "continue", "believe", "anticipate", "estimate",
"contemplate", "target", "plan", "budget" "may", "will", "schedule" and "intend"
or similar formulations. By their nature, these forward-looking statements are
necessarily based upon a number of estimates and assumptions that, while
considered reasonable by management, are inherently subject to significant,
known and unknown, business, economic, competitive and other risks,
uncertainties and other factors affecting CoolBrands specifically or its
industry generally that could cause actual performance, achievements and
financial results to differ materially from those contemplated by the
forward-looking statements. These risks and uncertainties include the tastes and
preferences of the global retail consumer of CoolBrands' products; the ability
of CoolBrands to be competitive in the highly competitive U.S. market for frozen
desserts and fresh yogurt, 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 CoolBrands' foreign operations 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. Statements made in this
document are made as of February 28, 2006 and 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.
All dollar amounts referred to herein are in United States dollars unless
otherwise noted.
1
PART I
Item 1 Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2 Offer Statistics and Expected Timetable
Not applicable.
Item 3 Key Information
Item 3(A) Selected Financial Data
The following selected financial data for the five years ended August 31,
2005 are derived from the audited financial statements of CoolBrands. These
selected financial data should be read in conjunction with "Operating and
Financial Review and Prospects" and the financial statements and notes thereto.
In 2005, the Company adopted generally accepted accounting principles in the
United States and changed its reporting currency from Canadian dollars to U.S.
dollars. For comparative purposes, historical financial statements and notes
have been restated to reflect these changes.
Statement of Operations Data
(000 omitted, except for per share data)
For the year ended August 31,
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Revenues .................................. $ 385,070 $ 449,938 $ 214,020 $ 130,691 $ 101,451
Income (loss) from Operations ............. $ (33,274) $ 36,423 $ 30,925 $ 18,678 11,092
Net Earnings (loss) ....................... $ (74,070) $ 23,512 $ 18,826 $ 11,997 $ 7,157
Basic Earnings (loss) per share ........... $ (1.32) $ 0.42 $ 0.36 $ 0.25 $ 0.15
Fully Diluted Earnings (loss) per share ... $ (1.32) $ 0.42 $ 0.35 $ 0.24 $ 0.15
2
Balance Sheet Data:
(000 omitted, except for per share data)
As At August 31,
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Working Capital ........................... $ 28,469 $ 118,138 $ 58,985 $ 34,796 $ 27,400
Total Assets .............................. $ 297,845 $ 317,257 $ 223,684 $ 179,972 $ 145,292
Total Long-Term Liabilities ............... $ 17,309 $ 25,658 $ 34,205 $ 24,677 $ 27,595
Shareholders' Equity ...................... $ 138,406 $ 211,101 $ 132,714 $ 107,513 $ 85,051
Number of Shares issued and outstanding:
Class A Common ......................... 49,918 49,863 45,629 45,497 39,649
Class B Common ......................... 6,029 6,030 6,179 6,209 6,240
Item 3(B) Capitalization and Indebtedness
Not applicable.
Item 3(C) Reasons for the Offer and Use of Proceeds
Not applicable.
Item 3(D) Risk Factors
In addition to the other information contained and incorporated by
reference in this Annual Report on Form 20-F, the following risk factors should
be carefully considered in evaluating the Company and its business:
Consumer Tastes
CoolBrands products are ultimately purchased by the 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.
Competition
The Corporation derives a substantial portion of its revenues from its
operations in the United States. The U.S. market for frozen desserts and fresh
yogurt products is highly competitive. As competitors introduce new products or
revise their supply or pricing strategies, the Corporation may encounter
additional and more intense competition. Such competitors may have greater name
recognition and more extensive financial, technological, marketing and personnel
resources than the Corporation. In addition, the Corporation may experience
increased competition in other markets as its competitors expand their
international operations.
3
Seasonality
The frozen dessert industry generally experiences its highest volume
during the spring and summer months and its lowest volume in the winter months.
Shelf Space
The Corporation's existing shelf space for its products, along with that
of all other products, is reviewed at least annually by its 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,
frozen dessert treats and fresh yogurt industries 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 possibility by
developing and introducing new products annually. 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
CoolBrands' customers and the development and introduction of new products could
have a material adverse effect upon CoolBrands' financial position and results
of operations.
Mergers and Acquisitions
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: (i) diversion of management's attention from other operational
matters; (ii) the inability to realize expected synergies from the acquisition;
(iii) impairment of acquired intangible assets as a result of
worse-than-expected performance of the acquired operations; (iv) integration and
retention of key employees; and (v) 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.
Key Personnel
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.
Raw Materials
The Corporation is subject to risks with respect to its cost of raw
materials, some of which are subject to changes in commodity prices,
particularly the cost of butterfat, which is used to produce ice cream products.
From time to time, the Corporation has
4
used hedging contracts to reduce its exposure to such risks with respect to its
raw material costs.
Inflation
Inflation can significantly impact ice cream, frozen desserts and fresh
yogurt ingredients, including milk, butterfat and packaging costs. In the past,
the Corporation has been able to pass on ingredient, energy and freight cost
increases by raising prices on selected product lines. The ability of the
Corporation to pass on cost increases in the future will depend, to some extent,
on whether its competitors have also done so.
Credit Risk
The Corporation 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 Corporation 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 Corporation's consolidated net sales.
Interest Rate Risk
CoolBrands is subject to interest rate risk as its long-term debt and
short-term borrowings are based upon the prime rate and/or Libor. If these base
rates increase, CoolBrands will incur incremental interest expense.
Legal
The Corporation may be subject to legal proceedings in the ordinary course
of its business.
Item 4 Information on the Company
Item 4(A) History and development of the Company
The Corporation was formed under the Business Corporations Act (Ontario)
by articles of amalgamation dated September 7, 1994 under the name Yogen Fruz
World-Wide Inc. On March 18, 1998, the Corporation was continued under the
Companies Act (Nova Scotia) under the name Yogen Fruz World-Wide Inc. and
reorganized its share capital to provide for multiple voting shares and
subordinate voting shares. On March 15, 2000, the Corporation amended its
articles to change its name to CoolBrands International Inc. The principal
office of the Corporation is located at 8300 Woodbine Avenue, 5th Floor,
Markham, Ontario, L3R 9Y7. The registered address of the Corporation is Suite
800, 1959 Upper Water Street, Halifax, Nova Scotia, Canada, B3J 2X2 and its
registered agent is Charles S. Reagh. The Corporation's principal office in the
United States is located at 4175 Veterans Highway, 3rd Floor, Ronkonkoma, New
York 11779.
5
In March 1998, the Corporation acquired Integrated Brands Inc.
("Integrated Brands") which markets, sells and distributes a variety of branded
frozen dessert products under the brand names pursuant to long-term exclusive
license agreements.
Early in fiscal 1999, the Corporation began to explore the opportunity to
invest in Eskimo Pie Corporation ("Eskimo Pie") in order to benefit from Eskimo
Pie's strong brand names and U.S. based manufacturing facilities. On October 6,
2000, the acquisition of Eskimo Pie was completed by purchasing the 2.9 million
shares not owned by the Corporation for $10.25 a share or $29.7 million.
Integrated Brands Inc. borrowed $30 million to finance the acquisition.
Eskimo Pie created the frozen novelty industry in 1921 with the invention
of the Eskimo Pie ice cream bar. Eskimo Pie's strengths include national brand
recognition, quality products and the management of complex sales and
distribution networks. Eskimo Pie's growth has come primarily as a result of the
development and introduction of Eskimo Pie brand frozen dessert products, the
development and marketing of frozen dessert products under the licensing of
other well-known national brands and the use of a select group of
quality-oriented manufacturers who provide a cost effective means to manufacture
products. Integrated Brands then markets, sells and distributes the products.
Today, Integrated Brands markets a broad range of frozen novelties, ice cream
and sorbet products under the Eskimo Pie and Welch's brand names. The
Corporation engages in product/concept development and advertising and sales
promotion expense generally includes trade promotion and introductory costs,
price-off and feature price promotions, regional consumer promotion, couponing
and other trial purchase generating programs.
Certain key ingredients (such as chocolate coatings and powders) and
wrappers used in the manufacture of Eskimo Pie and other licensed frozen
novelties and ice cream products are produced at the Corporation's owned
facilities located in New Berlin, Wisconsin and Bloomfield, New Jersey. In
addition to products manufactured for use in its business, the Corporation sells
various other ingredients to the dairy industry produced at its New Berlin,
Wisconsin facility. This business involves blending, cooking and processing
basic flavours and fruits to produce products which subsequently are used by
customers to flavour frozen desserts, ice cream novelties and fluid dairy
products. The Corporation also manufactures flexible packaging, such as private
label ice cream novelty wraps, at its Bloomfield, New Jersey plant. These
products are sold to the dairy industry, including many of the Corporation's
manufacturers.
The Corporation also manufactures soft serve yogurt and premium ice cream
mixes in a leased facility in Russelville, Arkansas. Soft serve mix is sold
under the Eskimo Pie brand name to broad-line foodservice distributors, yogurt
shops and other foodservice establishments which, in turn, sell soft serve ice
cream and yogurt products to consumers. The sale of soft serve yogurt and ice
cream mixes is managed by a separate sales force working within Eskimo Pie's
wholly-owned subsidiary, Sugar Creek Foods, Inc.
On June 30, 2002, the Company acquired the business and assets of
Fruit-a-Freeze, Incorporated. Fruit-a-Freeze, Incorporated began making frozen
fruit bars in
6
1977, and was a pioneer in establishing the market for frozen novelties made
from whole fruit and all natural ingredients. The acquisition included the
Fruit-a-Freeze leased frozen novelty manufacturing facility in Norwalk, CA, and
Fruit-a-Freeze's frozen distribution system, operated out of a frozen storage
warehouse located at the Norwalk facility. The Fruit-a-Freeze distribution
system services supermarket chains, club stores, independent grocers,
convenience stores and independent distributors throughout Southern California.
On July 1, 2003 the Corporation completed its acquisition of 50.1% of the
equity in Americana Foods, L.P. ("Americana Foods") (the "Americana Foods
Acquisition"), a large and versatile frozen dessert manufacturing facility in
the United States which supplies a variety of soft serve mixes, packaged ice
cream, frozen yogurt and sorbet products and frozen novelties for the
Corporation and to national retailers, food companies and restaurant chains.
On July 7, 2003, the Corporation completed the acquisition of Dreamery(R)
ice cream and Whole Fruit(TM) sorbet brands from Dreyer's Grand Ice Cream, Inc.
("Dreyer's") as well as the rights to the license for the Godiva(R) ice cream
brand, which was assigned by Dreyer's (the "Dreyer's Acquisition"). The
Corporation also acquired substantially the entire Haagen-Dazs Ice Cream
distribution system in the United States from Nestle Ice Cream Company LLC
("Nestle"), including distribution assets in the states of Washington, Oregon,
Florida, California, Pennsylvania, New Jersey, Utah, Minnesota, Maryland, and
The District of Columbia.
The Corporation also continued to expand its production capabilities at
Americana Foods with a $15 million investment to install new production lines
and to upgrade existing production lines to accommodate growth.
In early 2005, the Corporation completed the acquisition of the yogurt
business of Kraft Foods, Inc. for approximately $59 million under which the
Corporation acquired licenses to brands including Breyers Fruit on the Bottom,
Light and Creme Savers cup yogurt varieties, Creme Savers Smoothie drinkable
yogurts, related intellectual property rights, and a manufacturing facility in
North Lawrence, New York.
In January 2005, the Corporation announced the untimely passing of Richard
E. Smith, its then Co-Chairman and Co-Chief Executive Officer and subsequent
appointment of David J. Stein, previously President and Co-Chief Executive
Officer, as Co-Chairman, President and Chief Executive Officer.
In addition, in 2005 the Corporation terminated by mutual agreement the
Corporation's management agreement with Calip Dairies, Inc. ("Calip"), pursuant
to which Calip provided Mr. Richard Smith's full time management services and
certain other ancillary services.
In 2005 four new independent directors, as such term is defined under
applicable securities laws, were elected to the board of directors of the
Corporation, following which the Corporation's board of directors now consists
of a majority of independent directors.
7
On September 2, 2005, the Corporation announced that it had entered into
an amendment to its existing credit facilities with JP Morgan Chase Bank (the
"Credit Amendment"). The Credit Amendment extended the maturity of the existing
facilities from November 1, 2005 until January 3, 2006 and waived defaults in
its financial covenants resulting from the Corporation's performance for the
quarters ended May 31, 2005 and August 31, 2005. The Credit Amendment also
eliminates all of the existing financial covenants from the loan agreements
through the remainder of the term. On December 30, 2005 the Corporation
announced that the maturity of the existing facilities was further extended from
January 3, 2006 until April 3, 2006. On January 12, 2006 the Company announced
that the term of the existing credit facility of Americana Food with Regions
Bank was extended to March 10, 2006.
On December 13, 2005, the Corporation announced that, on the
recommendations of the Corporate Governance Committee of the Corporation's board
of directors, the Corporation is instituting various changes and initiatives,
including the following:
o Collapse of Dual Class Structure - the Corporation will propose a special
resolution to its shareholders at the annual and special meeting scheduled
for February 27, 2006 which, if passed, will result in the change of each
Class A subordinate voting share (the "Subordinate Voting Shares") and
each Class B multiple voting share (the "Multiple Voting Shares") into one
common share on May 31, 2007, unless the independent directors unanimously
determine to effect the change earlier (the "Collapse of the Dual Class
Structure").
o Board Representation Agreement and Trust Agreement - upon the change to
the Corporation's dual class structure becoming effective, these
agreements will terminate. Prior to termination, the parties have agreed
that the Corporate Governance Committee will make all nominations for
membership to the board of directors of the Corporation. Copies of the
Board Representation Agreement and Trust Agreement are available on the
Internet at www.sedar.com.
o Continuance under the Canada Business Corporations Act - at the annual and
special meeting of shareholders scheduled for February 27, 2006, the
Corporation will propose a special resolution 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.
During the fourth quarter of 2005, the Corporation adopted, on a
retroactive basis, accounting principles generally accepted in the United
States. Previously, the Corporation prepared its annual and interim consolidated
financial statements in accordance with generally accepted accounting principles
in Canada.
Effective December 23, 2005 the Corporation sold substantially all of its
franchising and licensing segment for cash consideration of $8 million. In
connection with the sale of the franchising and licensing segment, the
Corporation was required to
8
pay down $3,612,000 of its short term borrowings and long term debt from the
cash consideration received.
At the annual and special meeting of shareholders of the Corporation held
on February 27, 2006, the shareholders approved the following actions: (i) the
election of directors; (ii) the appointment of BDO Seidman, LLP as the auditor
of the Corporation; (iii) the adoption of a resolution approving the
discontinuance of the Corporation pursuant to section 133(5) of the Companies
Act (Nova Scotia) and the continuance of the Corporation pursuant to section 187
of the Canada Business Corporations Act (the "Continuance Resolution") and (iv)
the adoption of a resolution approving the Collapse of the Dual Class Structure
(the "Share Capital Restructuring Resolution"). The Continuance Resolution and
the Share Capital Restructuring Resolution are required be confirmed by a
majority of the votes cast by shareholders present in person or by proxy at a
confirmatory meeting to be held on March 20, 2006.
Item 4(B) Business Overview
CoolBrands businesses primarily consist of the marketing and selling of
frozen desserts and the related vertically integrated manufacturing and
distribution operations in the U.S. and, the manufacturing and selling of fresh
yogurt products, foodservice sales and manufacturing of frozen yogurt and ice
cream mixes and the manufacture and sales of ingredients and packaging to the
dairy industry. CoolBrands markets a diverse range of frozen desserts and fresh
yogurt products under nationally and internationally recognized brand names.
Prior to the sale of substantially all of the Franchising and Licensing Segment
effective December 23, 2005, the Corporation managed and evaluated its
operations in five segments: the Frozen Dessert Segment (formerly the
Pre-packaged Consumer Products Segment), the Yogurt Segment, the Foodservice
Segment, the Dairy Components Segment, and the Franchising and Licensing
Segment.
9
The following table sets forth the contribution to revenue of each of the
above-mentioned segments by geographic region for the periods indicated:
Revenue by Industry Segments and Classes of Product and Services
Year ended August 31, 2005 (in thousands of dollars)
Operating Segments
----------------------------------------------------------------------
Franchising
Frozen Dairy and
Desserts Yogurt Foodservice Components Licensing Corporate
Revenue Source $ $ $ $ $ $
- ------------------------- -------- ------ ----------- ---------- ----------- ---------
United States ........... 330,039 44,007 18,397 22,589 7,914 --
Canada .................. 528 -- -- -- 4,054 280
International ........... 405 -- -- -- 3,232 --
Inter-segment revenues .. (43,665) -- (661) (3,051) -- (230)
Other revenues .......... 797 -- -- -- 303 132
Total consolidated net
revenues ............. 288,104 44,007 17,736 19,538 15,503 182
Year ended August 31, 2004 (in thousands of dollars)
Operating Segments
-------------------------------------------------------------
Franchising
Frozen Dairy and
Desserts Foodservice Components Licensing Corporate
Revenue Source $ $ $ $ $
- ---------------------------------- -------- ----------- ---------- ----------- ---------
United States .................... 461,580 16,382 29,516 8,526 --
Canada ........................... 901 -- -- 2,999 219
International .................... 361 -- -- 2,663 --
Inter-segment revenues ........... (66,533) (703) (6,332) -- (172)
Other revenues ................... 261 -- -- 162 108
Total consolidated net revenues .. 396,570 15,679 23,184 14,350 155
Year ended August 31, 2003 (in thousands of dollars)
Operating Segments
-------------------------------------------------------------
Franchising
Frozen Dairy and
Desserts Foodservice Components Licensing Corporate
Revenue Source $ $ $ $ $
- ---------------------------------- -------- ----------- ---------- ----------- ---------
United States .................... 161,914 14,599 28,063 9,041 --
Canada ........................... 639 -- -- 2,696 144
International .................... 500 -- -- 2,357 --
Inter-segment revenues ........... (3,636) (669) (1,986) -- (144)
Other revenues ................... 388 -- -- 85 29
Total consolidated net revenues .. 159,805 13,930 26,077 14,179 29
10
Frozen Dessert Segment
The Corporation manufactures, distributes and sells a variety of
pre-packaged frozen dessert to distributors, and various retail establishments,
throughout Canada and the United States, including supermarkets, grocery stores,
club stores, gourmet shops, delicatessens and convenience stores.
The Corporation's products for wholesale sale include: Tropicana(R) frozen
novelties and frozen dessert specialties; Eskimo Pie(R) frozen novelties and
frozen dessert specialties, Godiva(R) ice cream, Whole Fruit(TM) sorbet,
Dreamery(R) ice cream, No Pudge! novelties, Chipwich(R) novelties,
Fruit-A-Freeze(R) novelties, Atkins(R) Endulge(TM) super premium ice cream
products, Yoplait(R) ready to eat frozen yogurt products; Trix(R) frozen
novelties, and a variety of other novelties, including those sold under the
"Great American", "Tropical", "Chilly Things" and "Bullet" trademarks. Many of
the Yoplait(R), No Pudge! and Atkins(R), products appeal to the healthier
consumer lifestyle and eating trends toward lower and no fat and lower and no
cholesterol products. The marketing, distribution and sale of pre-packaged
frozen dessert products under the, Godiva(R), Tropicana(R), No Pudge!,
Yoplait(R), Trix(R), Crayola, Snapple, Justice League, Care Bears and Atkins(R)
Endulge(TM) trademarks are accomplished pursuant to exclusive long-term license
agreements. The Corporation, through its subsidiary, Integrated Brands, has the
right to develop and on an on-going basis is developing additional products
under the foregoing trademarks. Integrated Brands incurs significant expenses to
obtain shelf space in connection with the introduction of its new products.
Integrated Brands purchases packaging and ingredients for its products
directly from unaffiliated suppliers. Integrated Brands then sells the packaging
and ingredients to unaffiliated manufacturers. Certain of these manufacturers
also manufacture other ice cream and related frozen dessert products for other
companies, including companies affiliated with David M. Smith, the Vice-Chairman
and Chief Operating Officer of the Corporation. Mr. Smith and his father's
estate are significant CoolBrands shareholders. The unaffiliated manufacturers
produce Integrated Brands' products according to Integrated Brands'
specifications and formulas under quality control supervision by Integrated
Brands. Integrated Brands then purchases the finished products from the
unaffiliated manufacturers at a formula price based upon the manufacturers'
actual cost of ingredients and packaging plus an agreed upon processing fee
which includes a profit for the manufacturers. Integrated Brands believes there
are many alternative ice cream and novelty manufacturers available on comparable
terms.
Americana Foods also manufactures numerous products that are sold by
Integrated Brands and distributed by Eskimo Pie Frozen Distribution.
David M. Smith, the Vice-Chairman and Chief Operating Officer of the
Corporation, is the sole stockholder of Calip which has the exclusive right to
distribute products of Integrated Brands and its subsidiaries, affiliates and
associates in the State of New Jersey and certain areas in the State of New
York, and the State of Connecticut pursuant to a distribution agreement with
Integrated Brands. The distribution agreement
11
is to remain in effect as long as the Smith family controls Calip, unless Calip
gives notice that it will not renew the agreement
Yogurt Segment
CoolBrands subsidiary, CoolBrands Dairy Inc., manufactures cup yogurt at
its plant located in North Lawrence, New York, under the Breyers brand pursuant
to a trademark rights agreement, which grants the right in perpetuity, and under
the Creme Savers brand pursuant to a long term license agreement.
Breyers yogurt is distributed and sold across the United States,
internationally through the United States military complex and throughout the
Caribbean. Finished goods are shipped refrigerated freight to strategic
refrigerated warehouses for distribution to key accounts.
CoolBrands Yogurt Segment has a variety of third party sources for key raw
materials and packaging supplies for its entire line of yogurt products. In
addition to its core operations of manufacturing and selling fresh yogurt,
CoolBrands' North Lawrence facility manufactures retail snack cottage cheese
which it sells to Kraft Foods for national sales and distribution. In addition,
the manufacturing processes of the North Lawrence facility generate excess fresh
sweet cream, a valuable fresh dairy product. This excess fresh sweet cream is
also sold to Kraft Foods. The geographic location of North Lawrence, New York is
a strong compliment to other dairy processors which also require fresh sweet
cream in their manufacturing operations.
Foodservice Segment
In addition to products manufactured for use in its business, the
Corporation manufactures soft serve frozen yogurt and premium ice cream mixes in
a leased facility in Russellville, Arkansas. Soft serve mix is sold under the
Eskimo Pie brand name to broad-line foodservice distributors, yogurt shops and
other foodservice establishments which, in turn, sell soft serve ice cream and
frozen yogurt products to consumers. A separate sales force working within
Eskimo Pie's wholly-owned subsidiary, Sugar Creek Foods, Inc., manages the sale
of soft serve yogurt and ice cream mixes.
Dairy Components Segment
In addition to products manufactured for use in its business, the
Corporation sells various other ingredients to the dairy industry produced at
its New Berlin, Wisconsin facility. This business involves blending, cooking and
processing basic flavours and fruits to produce products, which subsequently are
used by customers to flavour frozen desserts, ice cream novelties and fluid
dairy products. Products are manufactured in three distinct manners: Chocolate
coatings are blended and milled through ball mills; dairy powders are dry
blended in ribbon blenders; and variegates and flavour bases are cooked in
stainless steel kettles. The Corporation also manufactures flexible packaging,
such as private label ice cream novelty wraps, at its Bloomfield, New Jersey
plant. These products are sold to the dairy industry, including many of the
Corporation's independent
12
contract manufacturers and Americana Foods. Dairy components products are
distributed via common carrier truck lines.
The Dairy Components Segment's primary raw materials include major
commodity items such as sugar, corn syrup, cocoa powder, coconut oil, eggs and
strawberries. These raw materials are available from multiple suppliers. Other
than increased inflationary pressures on the cost of these raw materials, we do
not foresee any issues with pricing or availability for these items in 2006.
Franchising and Licensing Segment
Prior to the sale of substantially all of the Franchising and Licensing
business, a full franchising program had been developed for each of the
Tropicana(R) Smoothies, Juices & More!, Yogen Fruz(R), Bresler's(R),
Swensen's(R), Java Coast(R) Fine Coffees and Golden Swirl(R) chains. Although
developed separately, each of the programs (except for Golden Swirl(R)) was
substantially similar and was organized on two levels: master franchising,
pursuant to which master franchises were sold for specific regions, countries or
other geographical areas; and retail franchising and licensing, pursuant to
which franchises were sold, and licenses were granted, by master franchisees to
retail outlet operators in the master franchisee's territory. Generally, retail
franchising is used for larger locations such as traditional stores or kiosks,
which offer a full range of products. Licensing is used primarily for smaller
locations such as mini-counters or carts, which are located within the premises
of strategic partners and typically offer a more limited selection of products.
CoolBrands, either directly or through master franchisees, entered into a
license agreement with each licensee for each location. The license agreement
authorized the licensee to operate a Swensen's(R), Yogen Fruz(R), I Can't
Believe It's Yogurt(R), Bresler's(R) or Java Coast(R) Fine Coffees mini-counter
or similar outlet within the licensee's place of business. The licensee was
required to operate the outlet in accordance with the methods, standards,
specifications and procedures prescribed by CoolBrands. Generally, the licensee
was required purchase products used within the outlet from CoolBrands or from
suppliers and manufacturers designated by it.
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 distributes its products primarily by direct shipment to
super-market owned warehouses, independent distributors and foodservice
broad-line distributors. In addition, the Company operates a proprietary
direct-store-distribution ("DSD") system that services all distribution channels
in selected U.S. markets, including out-of-home accounts such as convenience
stores, drug stores and gas station food marts. The Company also provides
distribution services through its DSD system for partner
13
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.
Regulation
CoolBrands' frozen dessert and fresh yogurt products are subject to
licensing and regulation (including good manufacturing practices) by federal,
state and municipal authorities at its facilities in North Lawrence, New York,
Dallas, Texas, Russellville, Arkansas and Norwalk, California and in the states
to which they ship their products.
Seasonality
The ice cream and frozen snacks industry is highly seasonal with more
frozen yogurt and ice cream consumed in warmer months. As a result, the
operating results of all our operating segments, except for the Yogurt Segment,
are subject to the same seasonality. The Corporation's fourth quarter, during
the summer, has historically been the strongest quarter of the year. The fourth
quarter accounted for 32.2% and 87.7% of the Corporation's net revenues and net
loss, respectively, for the fiscal year ended August 31, 2005 and 28.7% and
52.7% of the total revenues and net earnings, respectively, for the fiscal year
ended August 31, 2004.
The Dairy Components Segment is seasonal with the strongest periods from
February to August as we sell in to the summer ice cream season and from October
to November as we sell an eggnog base for the holiday season. These two seasonal
demands tend to balance out and provide consistent manufacturing volume
throughout the year for our Dairy Components Segment.
Competitive Conditions
CoolBrands competes in the frozen dessert retail market against a large
number of competitors. In the novelty market, Integrated Brands faces
substantial competition in connection with the marketing and sales of its
products. Among its competitors are Klondike, Popsicle, Breyer's, Good Humor and
Sealtest, owned by Unilever PLC and Dreyer's Grand Ice Cream which either owns
or licenses the Dreyer's, Edy's, Nestle, Haagen-Dazs, Skinny Cow, and Starbuck's
brands. In the super premium ice cream and sorbet pint markets, Integrated
Brands faces substantial competition from Haagen-Dazs and Ben & Jerry's.
Integrated Brands' products may also be considered to be competing with all ice
cream and other frozen desserts for discretionary food dollars. While the ice
14
cream and frozen yogurt manufacturing and distribution business is relatively
easy to enter due to low entry costs, achieving wide distribution may be more
difficult because of the high cost of a national marketing program and
limitations on space available in retail freezer compartments.
CoolBrands Dairy's Breyers yogurt competes in the refrigerated yogurt
section with Yoplait and Dannon on a national basis. Competition exists
regionally from lesser brands, from private label manufacturers and store
brands. The competitive position changes across the marketing regions between
the aforementioned brands. Breyers yogurt provides a value added choice with our
8 oz serving size as compared with the 6 oz offered by the competition.
The Dairy Components Segment's main competitors include Senscient and
Givadaun. The market is very competitive with excess capacity available for the
types of dairy component products we offer to our customers.
Trademarks
CoolBrands relies upon copyright, trademark and trade secret laws to
protect its proprietary rights in its trademarks and products. CoolBrands has
obtained registrations for a number of trademarks in Canada, the United States
and internationally, including registrations for the trademarks and related
symbols Eskimo Pie(R), Dreamery(R), Whole Fruit(R), Chipwich(R) and
Fruit-A-Freeze(R). Integrated Brands holds long-term trademark license
agreements for use in certain countries of the Atkins(R) Endulge(TM), No
Pudge!(TM), Tropicana(R), Yoplait(R), Trix(R), Crayola(TM), Justice League(TM),
Snapple(TM) and Care Bears(TM) trademarks in connection with the manufacture,
sale and distribution of frozen novelties and other frozen dessert products. The
Corporation holds licenses to brands including Breyers Fruit on the Bottom,
Light and Creme Savers cup yogurt varieties and Creme Savers Smoothie drinkable
yogurts.
15
Item 4(C) Organizational Structure
The following chart illustrates the principal direct and indirect
subsidiaries of the Corporation, jurisdiction of incorporation and the
percentage ownership by the Corporation of the voting and non-voting securities
of each subsidiary or other entity.
-----------------------------
COOLBRANDS INTERNATIONAL INC.
(Nova Scotia)
-----------------------------
|
| 100%
|
----------------------
INTEGRATED BRANDS INC.
(New Jersey)
----------------------
|
|
|
------------------------------------------------------------
100% | 50.1% | 100% | | 100%
- ---------------- ------------------ ----------------- -----------
COOLBRANDS DAIRY AMERICANA FOODS LP ESKIMO PIE FROZEN ESKIMO PIE
INC. (Texas) DISTRIBUTION INC. CORPORATION
(Delaware) (Delaware) (Virginia)
- ---------------- ------------------ ----------------- -----------
Item 4(D) Property, Plants and Equipment
CoolBrands' headquarters are located at 8300 Woodbine Avenue, 5th Floor,
Markham, Ontario, Canada, L3R 9Y7 in 1,000 square feet of space, which space is
occupied on a month-to-month basis. Rental payments are CDN$24,000 per annum and
are paid to Yogen Fruz Canada Inc., a company owned by Aaron Serruya, a director
and former executive vice president of the Corporation.
CoolBrands' U.S. headquarters and Integrated Brands' executive offices are
located at 4175 Veterans Highway, Ronkonkoma, New York, 11779. Rental payments
are $184,460 per annum for 10,779 square feet. The lease expires on April 30,
2006, with an option to extend it through April 30, 2007. A portion of this
space is subleased to Calip Dairies Inc., a company owned by David M. Smith, a
director and an executive officer of the Corporation. The sublease payments
received from Calip are $48,843 per annum.
16
Integrated Brands' subsidiary, Eskimo Pie Frozen Distribution Inc.'s
leases 2,799 square feet of office space located at 4175 Veterans Highway,
Ronkonkoma, New York, 11779. Rental payments are $55,000 per annum. The lease
expires April 30,2006, with an option to extend it through April 30, 2007.
Integrated Brands' subsidiary, CoolBrands Manufacturing Inc., leases a
25,000 square foot production and storage facility located in Norwalk,
California. Rental payments are $211,000 per annum. The lease expires November
30, 2010
Integrated Brands owns a building in Paradise Valley, Arizona. The
building is subject to a ground lease, which expires on December 31, 2010 and
contains three five-year renewal options. The premises are leased to an
unrelated third party. Integrated Brands' only company operated store lease
expires November 1, 2012.
Eskimo Pie Corporation owns an ingredients manufacturing plant in New
Berlin, Wisconsin which consists of approximately 73,820 square feet on 4.0
acres. Eskimo Pie expanded its New Berlin plant by 18,000 square feet in 1990
and purchased certain new equipment at that time. Eskimo Pie completed $800,000
of capital improvements in the New Berlin facility during 1998 (consisting
primarily of equipment additions) in connection with the consolidation of its
flavours production at the New Berlin facility which was completed in 1997.
Eskimo Pie Corporation also owns a printing and packaging plant in
Bloomfield, New Jersey, which consists of approximately 71,583 square feet on
2.0 acres. The Bloomfield plant was expanded and modernized in 1985 with a
35,000 square foot addition.
Eskimo Pie Corporation's subsidiary, Sugar Creek Foods, Inc., is leasing
from the former owner of the business a soft serve yogurt and ice cream mix
production facility, consisting of approximately 23,805 square feet, and a
packaging facility, consisting of approximately 16,000 square feet, both located
in Russellville, Arkansas. The lease expires on December 31, 2006. Rental
payments under these leases are $244,000 per annum. In addition, Sugar Creek
Foods, Inc. owns a freezer facility, consisting of approximately 5,013 square
feet, adjacent to the production facility in Russellville. In 1999, Eskimo Pie
purchased a small parcel of land adjacent to the freezer facility for future
potential expansion of the freezer facility.
Eskimo Pie Frozen Distribution leases a 3,026 square foot office trailer
and loading docks facility located in Tampa, Florida. Rental payments are
$63,578 per annum. The lease expires September 1, 2006.
Eskimo Pie Frozen Distribution leases a 5,800 square foot freezer and
distribution facility located in Boca Raton Florida. Rental payments are $45,223
per annum. The lease expires December 31, 2007.
Eskimo Pie Frozen Distribution leases a 5,500 square foot freezer and
distribution facility located in Novato, California. Rental payments are
$101,724 per annum. The
17
lease expires December 31, 2006. Additional parking is leased in Ignacio,
California at $13,200 per annum. This lease expires on March 31, 2007.
Additional parking is also leased in Novato, California at $24,000 per annum.
Eskimo Pie Frozen Distribution leases a 2,400 square foot freezer and
distribution facility located in San Diego, California. Rental payments are
$123,611 per annum. The lease expires July 1, 2006
Eskimo Pie Frozen Distribution leases a 500 square foot of office space
and operates a cross-dock facility in Watsonville, California. Rental payments
are $21,304 per annum. The lease expires December 1, 2006.
Eskimo Pie Frozen Distribution leases a 12,677 square foot distribution
facility located in Moorestown, New Jersey operating as a cross-dock operation.
Rental payments are $97,613 per annum. The lease expires March 31, 2009.
Eskimo Pie Frozen Distribution leases a 34,607 square foot freezer and
distribution facility located in Seattle, Washington. Rental payments are
$356,064 per annum. The lease expires December 1, 2008.
Eskimo Pie Frozen Distribution leases a 9,700 square foot freezer and
distribution facility located in Tualatin, Oregon. Rental payments are $144,000
per annum. The lease expires June 7, 2006.
Eskimo Pie Frozen Distribution leases a 29,318 square foot freezer and
distribution facility located in Miramar, Florida. Rental payments are $294,277
per annum. The lease expires June 30, 2007.
Eskimo Pie Frozen Distribution leases a 22,798 square foot of freezer and
distribution facilities located in Atlanta, Georgia. Rental payments are
$247,212 per annum. The lease expires July 31, 2006.
Eskimo Pie Frozen Distribution leases office space and truck parking
facility located in Apopka, Florida (Orlando). Rental payments are $49,842 per
annum. The lease expires April 30, 2006
Eskimo Pie Frozen Distribution leases a 12,300 square foot freezer and
distribution facility located in Plymouth, Florida. Rental payments are $163,052
per annum. The lease expires March 31, 2006.
Eskimo Pie Frozen Distribution leases 11,413 square feet for truck parking
located in Riverside, California. Rental payments are $21,600 per annum. Lease
expired December 31, 2005; currently running month to month.
Eskimo Pie Frozen Distribution leases 400 square foot of office space
located in Jessup, Maryland. Rental payments are $43,956.00 per annum. The lease
expires September 30, 2008.
18
Eskimo Pie Frozen Distribution leases truck parking located in Jessup,
Maryland. Rental payments are $28,620 per annum. The lease expires September 30,
2008.
Eskimo Pie Frozen Distribution leases 15,000 square feet for truck parking
located in Ft. Myers, Florida. Rental payments are $22,260 per annum. The lease
expires September 30, 2006.
Eskimo Pie Frozen Distribution leases a 400 square foot office space and
operates a cross-dock facility in Oxnard, California. Rental Payments are
$21,889 per annum. The lease expires January 18, 2007.
Eskimo Pie Frozen Distribution leases a 400 square foot office space
located in Paterson, New Jersey. Rental payments are $16,800 per annum. Also
included is cross docking and truck parking for $42,000 per annum. The lease
expires October 31, 2006.
Eskimo Pie Frozen Distribution also leases a remote location with office
space and truck parking in Neptune, New Jersey for $52,200 per annum. The lease
is month to month.
Eskimo Pie Frozen Distribution leases a remote location for office space
and truck parking located in Brooklyn, New York. Rental payments are $15,600 per
annum. The lease is month to month.
Eskimo Pie Frozen Distribution leases a 1500 square foot freezer facility
located in Milwaukee, OR. Rental payments are $72,000 per annum. The lease
expires June 21, 2006.
Eskimo Pie Frozen Distribution leases a 1,994 square foot facility located
in Tacoma, WA for $25,910 per annum. The lease expires March 31, 2007.
Americana Foods LP owns an ice cream and yogurt mix manufacturing plant in
Dallas, Texas which consists of approximately 220,000 square feet on 12 acres.
Americana Foods owns a warehouse adjacent to its manufacturing facility which
consists of approximately 262,000 square free on 17 acres.
Several CoolBrands subsidiaries hold master store leases expiring at
varying dates to 2013 covering franchised locations. 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. These leases had an aggregate future base rental liability, without
regard to percentage rentals or consumer price index increases of approximately
$6,074,000 at August 31, 2005. CoolBrands' current policy is not to lease or
sublease premises nor to provide guarantees on leases in any manner with respect
to its franchisees and it has not done so except for renewals or in special
circumstances.
19
Item 5 Operating and Financial Review and Prospects
Item 5(A)- Item 5(F)
The numbers for this item are stated in thousands of dollars.
2005 Compared with 2004
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, certain historical financial
statements and the notes thereto have been restated to reflect these changes.
For fiscal 2005, net revenues decreased to $385,070 as compared with
$449,938, for fiscal 2004, a 14.4% decrease. The net loss for fiscal 2005 was
($74,070) ($1.32) basic and diluted loss per share) as compared with net
earnings of $23,512 ($0.42 basic and diluted earnings per share) for fiscal
2004.
The decrease in net revenues for fiscal 2005 reflects the decrease in
sales, primarily from the frozen dessert segment, the increase in trade
promotion payments made to customers, and the decline in drayage income. In
fiscal 2005, net sales declined by 10.3% to $364,686 as compared with $406,470
for fiscal 2004. The decline in sales came from all of our frozen dessert
brands, but principally from the Weight Watchers and Atkins. These sales
declines were partially offset by the sales from newly introduced frozen dessert
products, acquisition of the Breyers yogurt business on March 27, 2005 and the
increase in distribution sales as a result of the change in the business
arrangement with Dreyer's Grand Ice Cream Holdings, Inc. ("Dreyer's"). Effective
September 1, 2004, CoolBrands began the distribution of Dreyer's products as an
independent distributor, changing from the previously used drayage basis, except
for Dreyer's scanned based trading customers which continue to be delivered on a
drayage basis. As a result of this change, CoolBrands began purchasing products
from Dreyer's and selling those products to customers at wholesale. The sales
increases due to this change partially offset sales declines in the Company's
base frozen desserts business. In fiscal 2005, drayage and other income
decreased by 64.3% to $14,246 as compared with $39,873 for fiscal 2004,
primarily as a result of this change.
Gross profit percentage for fiscal 2005 declined to 0.8% as compared with
19% for fiscal 2004. Gross profit percentage for the periods presented has been
calculated by dividing gross profit margin by net sales. Gross profit margin is
calculated by subtracting cost of goods sold from net sales. The decline in
gross profit percentage was primarily due to:
o Increased trade promotion payments to customers, excluding the
yogurt segment, which amounted to $52,359 and $32,913 in 2005
and 2004 respectively; Trade promotion payments increased as a
result of an increase in new product introductory allowances
and an increase in promotional activity necessary to support
the newly introduced products and in response to increased
promotional activity by our competition;
o 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 became effective January 1, 2006, and a
provision for slow moving inventories due to changes in
consumer preferences. A new labeling law effective January 1,
2006 required new disclosure of trans fat information in the
nutrition facts statement on all of the Company's frozen
dessert segment packaging used in production after January 1,
2006. In connection with this required disclosure, the Company
estimated that it had on hand approximately $1,000 of
packaging that it would not consume in production prior to
January 1, 2006. As a result, the Company recognized a $1,000
write down;
20
o The Company's inability to cover fixed overhead costs in both
our manufacturing and distribution operations due to the lack
of production and sales; and
o 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 decreased as
a percentage of revenues to 14.0% as compared with 18.4% for fiscal 2004.
Selling, general and administrative expenses decreased by $28,581 or 34.6% from
$82,671 in 2004 to $54,090 in 2005. This decrease occurred primarily due to a
decrease in 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. 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.
The 2005 fiscal year results were adversely affected by the non-cash
pre-tax asset impairment charge of $55,525 (Nil in 2004), which resulted from
the impairment of goodwill and intangible assets related to the Company's frozen
desserts and franchising segments.
Cash and working capital
Cash, investments and restricted cash decreased to $41,562 at August 31,
2005 from $64,327 at August 31, 2004. Working capital decreased to $28,469 at
August 31, 2005 from $118,138. CoolBrands' current ratio declined to 1.2 to 1 at
August 31, 2005 from 2.6 to 1 at August 31, 2004. These changes in current
assets and current liabilities are attributable primarily to the use of cash and
short-term borrowings to finance the Company's acquisitions and fixed asset
purchases. The Company is currently negotiating the refinance of its long-term
debt and short-term borrowings, including $40,000 due January 3, 2006 and $7,145
due January 10, 2006, which were extended to April 3, 2006 and March 10, 2006,
respectively. The Corporation believes its working capital plus internally
generated funds will be sufficient to meets its cash and working capital
requirements for its established operations for the current fiscal year.
21
Selected Annual Information
The following chart shows selected annual information for the three most
recently completed fiscal years.
Year ended August 31
(in 000's except per share data)
2005 2004 2003
- -------------------------------------------------------------
Total net revenues $ 385,070 $ 449,938 $ 214,020
Net (loss) earnings (74,070) 23,512 18,826
Earnings (loss) per share
Basic (1.32) 0.42 0.36
Diluted (1.32) 0.42 0.35
Total assets 297,845 317,257 223,684
Total long-term debt 60,962 27,754 32,023
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 the equity in 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, the Company developed and expanded its Better for You product lines,
including Weight Watchers Smart Ones and Atkins Endulge. The Company obtained
higher than normal gross profit margins and lower than normal promotion,
marketing and advertising expenses due to the initial low level of competition
in this niche category.
Comparison of 2005 and 2004
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
22
operating results from the Breyers yogurt business represent five months of
activity as compared no activity in fiscal 2004. The third quarter of fiscal
2006, ended May 31, 2006, will be the first quarter following this acquisition
in which the Consolidated Statement of Operations for the quarter can be
directly compared with the prior-year period.
The Company manages its business based on five industry segments: frozen
desserts, yogurt, foodservice, dairy components, and franchising and licensing.
Net sales
Net sales for each segment are summarized in the following table:
Year Ended August 31
Percentage of Sales
2005 2004 2005 2004
--------------------------------------------------
Frozen desserts $ 271,086 $ 356,399 74.3 87.7
Yogurt 44,007 12.1
Foodservice 17,736 15,679 4.9 3.9
Dairy components 19,538 23,184 5.4 5.7
Franchising and licensing 12,319 11,208 3.3 2.7
--------- --------- ----- -----
Total $ 364,686 $ 406,470 100.0 100.0
========= ========= ===== =====
The decrease in net sales for fiscal 2005 in the frozen dessert segment
reflects the deduction from sales for payments made to customers by the Company,
excluding the yogurt segment, of $52,359 in 2005 as compared with $32,913 in
2004 (a net reduction of $19,446). The decline in net sales in the frozen
desserts segment of approximately $145,200 came from all of our frozen dessert
brands, but principally from the Weight Watchers and Atkins of approximately
$75,300. 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 of approximately $59,900 from newly introduced frozen dessert products and
the increase in distribution sales as a result of the change in the business
arrangement with Dreyer's. Effective September 1, 2004, CoolBrands began the
distribution of Dreyer's products as an independent distributor, changing from
the previously used drayage basis, except for Dreyer's scanned based trading
customers which continue to be delivered on a drayage basis. As a result of this
change, CoolBrands began purchasing products from Dreyer's and selling those
products to customers at wholesale. The sales increases due to this change
partially offset sales declines in our base frozen desserts business.
The net sales for the yogurt segment reflect the acquisition of the
Breyers yogurt business from Kraft Foods, Inc. on March 27, 2005.
23
The decline in sales by the Company's 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 continued to earn Whole Fruit license revenues through December 2005,
estimated to be approximately $850.
Drayage and other income
Drayage and other income decreased by 64.3% to $14,246 in fiscal 2005 from
$39,873 in fiscal 2004. This decline was due to the change in the business
arrangement with Dreyer's discussed above. Drayage income in 2005 represents the
fees paid to CoolBrands by Dreyer's for the delivery of products to Dreyer's
scanned based trading customers which continue to be delivered on a drayage
basis.
Gross profit margin
Gross profit percentage for the periods presented has been calculated by
dividing gross profit margin by net sales. Gross profit margin is calculated by
subtracting cost of goods sold from net sales. The following table presents the
gross profit margin dollars and gross profit percentage for the Company's
segments:
Year Ended August 31
Percentage of Sales
2005 2004 2005 2004
--------------------------------------------------
Frozen Dessert $ (15,488) $ 64,779 (5.7) 18.2
Yogurt 7,369 16.7
Foodservice 3,626 3,439 20.4 21.9
Dairy Components 4,287 5,975 21.9 25.8
Franchising and Licensing 3,224 2,931 26.2 26.2
--------- ---------
Total $ 3,018 $ 77,124 0.8 19.0
========= =========
Gross profit dollars declined to $3,018 in fiscal 2005 from $77,124 in
fiscal 2004 primarily due to the decline in gross profit dollars in frozen
desserts segment of $80,267, partially offset by the $7,369 in gross profit
dollars generated by the yogurt segment. The decline in gross profit dollars in
the frozen desserts segment resulted from the decline in sales in 2005 versus
2004, the impact on the segment for payments made to customers which as
previously discussed reduced net sales and gross profit dollars, excluding the
yogurt segment, in 2005 by $52,359 as compared with $31,337 in 2004 (a net
reduction of $19,446) and the Company's inability to cover fixed overhead costs
in both our manufacturing and distribution operations due to the lack of
production and sales. Gross profit dollars in the frozen desserts segment were
also adversely affected by the write down of $12,723 of obsolete and slow moving
finished goods inventories,
24
packaging, ingredients and finished goods inventories which could not be used or
sold resulting from the settlement of the Weight Watchers litigation and the
estimated impact on packaging which will not be used due to a new labeling law
which became effective January 1, 2006.
Gross profit percentage for fiscal 2005 declined to 0.8% as compared with
19% for fiscal 2004. Gross profit percentage for the periods presented has been
calculated by dividing gross profit margin by net sales. Gross profit margin is
calculated by subtracting cost of goods sold from net sales. 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. Trade promotion payments increased as a result of
an increase in new product introductory allowances and an increase
in promotional activity necessary to support the newly introduced
products and in response to increased promotional activity by the
Company's competitors.
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 became
effective January 1, 2006, and a provision for slow moving
inventories due to changes in consumer preferences. A new labeling
law effective January 1, 2006 required new disclosure of trans fat
information in the nutrition facts statement on all of the Company's
frozen dessert segment packaging used in production after January 1,
2006 In connection with this required disclosure, the Company
estimated that it had on hand approximately $1,000 of packaging that
it would not consume in production prior to January 1, 2006. As a
result, the Company recognized a $1,000 write down.
3. The Company's inability to cover fixed overhead costs in both its
manufacturing and distribution operations due to the lack of
production and sales; and
4. The change in mix of frozen dessert products being sold in 2005 with
lower gross profit margins as compared with 2004.
Selling, general and administrative expenses
Selling, general and administrative expenses are summarized by industry
segment in the following table:
Year Ended August 31
Percentage of Sales
2005 2004 2005 2004
-----------------------------------------------
Frozen desserts $ 40,736 $ 72,037 15.0 20.2
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 $ 54,090 $ 82,671
========== ==========
Selling, general and administrative expenses decreased by $28,581 from
$82,671 in 2004 to $54,090 in 2005 due primarily to a decrease in stock-based
compensation expense in 2005 compared to 2004. 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. Stock based compensation
expense was higher in 2004 as a result of the 3,328,000 options granted to five
executive officers who are also members of the Board of Directors of the
Company. These options vested immediately and the fair value of the options was
recognized as expense in 2004 as determined by the Black-Scholes model. Also, an
increase in selling, general and administrative expenses was incurred by the
yogurt segment which relate to the Breyers yogurt business which was acquired on
March 27, 2005, partially offset by the decrease in selling, general and
administrative expenses in the frozen desserts segment which resulted from a
decline in expenses directly related to the decline in sales. The frozen
25
desserts segment's selling, general and administrative expenses were adversely
impacted in fiscal 2005 by approximately $2,358, including the write-off of
deferred package design costs, primarily related to Weight Watchers, and the
write-off of certain license agreements with General Mills. However, selling,
general and administrative expenses decreased overall as a percentage of
revenues to 14.0% for fiscal 2005 from 18.4% for fiscal 2004 due primarily to a
decrease in stock based compensation expense and a 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.
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, 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 is tested
for impairment using a two step process that begins with an estimation of the
fair value of each reporting unit. The fair value of each reporting unit is
determined using a combination of valuation approaches including an approach
consisting of discounted cash flow analysis, and a market multiple approach. The
fair value of the reporting unit is compared to its carrying value. 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. 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. A goodwill impairment of $48,701 was taken related to the
Company's frozen dessert segment and an intangible asset impairment charge of
$1,401 was also recognized in the Company's frozen dessert segment. This
impairment charge is the result of the loss of Weight Watchers licensing
agreement as well as declining sales of the Atkins and our base business product
lines and the resulting decline in cash flows. Also, this review resulted in a
goodwill and intangible asset impairment charge related to the Company's
franchise and licensing segment of $4,940. Significant assumptions used in
measuring the impairments included the timing and the amount of estimated future
cash flows for reporting units and intangible assets, and where applicable, an
analysis of guideline transaction market multiples. Additionally, the Company
wrote-off certain company-owned store leasehold improvements and equipment
related to the Company's franchise and licensing segment of $483.
26
(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 the Company's 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 its 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.
27
Summary of quarterly results
The following table presents a summary of our results for the last eight
quarters ended August 31, 2005:
(in 000's except per share data)
August 31, 2005 May 31, 2005 February 29, 2005 November 30, 2004
Quarter ended $ $ $ $
- -----------------------------------------------------------------------------------------------
Total revenues 124,055 97,890 73,833 89,292
Net earnings (loss) (64,093) (6,233) (8,077) 4,333
Earnings (loss) 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, 2003
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 the Company's 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, which were extended to April 3, 2006 and March 10, 2006, respectively.
28
Cash flows from operating activities
The Company generated cash flow from operating activities of $11,239 for
the year ended August 31, 2005 as compared with $43,769 for the year ended
August 31, 2004 due primarily to the decrease in net earnings (exclusive of
depreciation and amortization and asset impairment) for 2005 as compared with
2004. This was offset by changes in other operating assets and liabilities,
which were primarily driven by the timing of certain payments. Cash was
generated by collection of accounts receivable offset by purchases of
inventories and payment against accounts payable and other liabilities. With a
decrease in sales, drayage and other income in fiscal year 2005, the Company
realized net outflows of cash which were greater than outflows in fiscal 2004.
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 the Company's 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 of capital, net of
a $2,000 return of capital, 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 the Company's contractual obligations:
Less than 1 1 - 3 After 5
Total year years 4 - 5 years years
- ------------------------------------------------------------------------------------------------
Contractual obligations
- ------------------------------------------------------------------------------------------------
Long-term debt obligations $ 60,808 $ 52,560 $ 8,248 -- --
Capital lease obligations $ 154 $ 154 -- -- --
Operating lease obligations $ 12,393 $ 4,363 $ 6,590 $ 554 $ 886
Other Long-Term Liabilities $ 2,881 -- $ 2,881 -- --
----------------------------------------------------------------
Total contractual obligations $ 76,236 $ 57,077 $ 17,719 $ 554 $ 886
================================================================
29
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 required 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 $30,000 to finance the acquisition. The loan is payable in
monthly installments of $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 $10,500.
The Company was in default of its financial covenants pursuant to this
loan agreement 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, which was extended to April 3, 2006, and waives defaults
in its financial covenants resulting from the Company's financial performance.
30
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 200 basis points on
all remaining outstanding balances to 450 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, 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 for the first year 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
principal and interest payments during the extension period will be based on a
25-year amortization with the remaining balance due in full at the end of year
three.
Americana Foods 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 entered into a credit agreement with
a financial institution that included a term loan of $10,000, which is secured
by the Partnership's property, plant, and equipment. Principal payments are
payable in fixed monthly installments of $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).
Americana Foods' amended credit agreement also includes a revolving loan
of up to $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 $1,855 was available
to Americana Foods under this loan. The revolving loan is secured by Americana
Foods' receivables and inventory and is classified as a current liability.
On November 30, 2005 Americana Foods 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, which were extended to April 3,
2006 and March 10, 2006, respectively.
31
2004 Compared to 2003
Overall performance
For fiscal 2004, revenues increased to $449,938 as compared with $214,020
for fiscal 2003, an 110% increase. Net earnings for fiscal 2004 increased to
$23,512 ($0.42 basic and diluted earnings per share) as compared with net
earnings of $18,826 ($0.36 basic and $0.35 diluted earnings per share) for
fiscal 2003, a 25% increase.
The growth in revenues for fiscal 2004 reflected increased revenues,
primarily from the prepackaged consumer product segment attributable to
Americana Foods LP (50.1% owned), Eskimo Pie Frozen Distribution and the
Company's Super Premium Dreamery, Godiva and WholeFruit pints. In fiscal 2004,
sales increased by 104% to $406,470 as compared with $199,015 for fiscal 2003.
In fiscal 2004, drayage and other income increased by 248% to $39,873 as
compared with $11,455 for fiscal 2003. Drayage income represents the fees paid
to CoolBrands by Dreyer's/Nestle to deliver products invoiced to customers by
Dreyer's/Nestle. In fiscal 2004, revenues from Americana Foods, Eskimo Pie
Frozen Distribution and Super Premium pints represent a full year's activity as
compared with approximately two months in fiscal 2003.
Gross profit percentage for fiscal 2004 declined to 19% as compared to 30%
for fiscal 2003. Gross profit percentage for the periods presented has been
calculated by dividing gross profit margin by net sales. Gross profit margin is
calculated by subtracting cost of goods sold from net sales. The percentage
decline was due to the impact of normally lower margins generated by Americana
Foods' manufacturing operations and Eskimo Pie Frozen Distribution's
distribution operations. The full-year results of 2004 were additionally
impacted by the pre-tax operating losses at Americana Foods (50.1% owned) of
approximately $1,180. This loss was primarily due to plant production losses of
$2,089 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 for fiscal 2004 declined as a
percentage of revenues to 18.4% as compared to 19.3% for fiscal 2003 in spite of
the increased spending in selling, general and administrative expenses, as a
result of the substantial increase in revenues. In accordance with FAS123, the
Company recognized stock-based compensation expense of $30,983 and $1,649 in
2004 and 2003 which represents the estimated fair value of stock options earned
during the respective fiscal years. Stock based compensation expense was higher
in 2004 as a result of the 3,328,000 options granted to five executive officers
who are also members of the Board of Directors of the Company. These options
vested immediately and the fair value of the options was recognized as expense
in 2004 as determined by the Black-Scholes model. The full-year results of 2004
were adversely impacted by $3,684 for the pre-tax write-off of the Weight
Watchers' intangible license asset. This write-off was required when the Company
was notified by Weight Watchers International on July 28, 2004 that the license
agreement would not be extended.
32
Selected annual information
Year ended August 31
(in 000's except per share data)
2004 2003 2002
- ---------------------------------------------------------------------------
Total revenues $ 449,938 $ 214,020 $ 130,691
Net earnings 23,512 18,826 11,997
Earnings per share
Basic 0.42 0.36 0.25
Diluted 0.42 0.35 0.24
Total assets 317,257 223,684 179,972
Total long-term liabilities 25,658 34,205 24,677
CoolBrands' growth in revenues from fiscal 2002 through fiscal 2004 was
the result of the successful introduction of new products in the Better for You
category, the acquisition of 50.1% of the equity in 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' improvement in net earnings from fiscal 2002 through fiscal
2004 reflected the growth in revenues and our ability to contain selling,
general and administrative expenses in the light of such growth. During this
time, the Company successfully developed our Better for You product lines,
including Weight Watchers Smart Ones and Atkins Endulge. The Company obtained
higher than normal gross profit margins and controlled promotion, marketing and
advertising spending due to the initial lack of competition in this niche
category. Our results reflect the higher profitability from the Better for You
category niche because it was relatively undiscovered by the competition and the
Company was the first of many entrants with a superior lineup of brand names and
products.
Comparison of 2004 and 2003
The Company manages its business based on four industry segments: frozen
desserts, foodservice, dairy components, and franchising and licensing.
33
Sales
Sales for each segment are summarized in the following table:
Year Ended August 31
Percentage of Sales
2004 2003 2004 2003
----------------------------------------------
Frozen desserts $ 356,399 $ 148,251 87.7 74.5
Foodservice 15,679 13,930 3.9 7.0
Dairy components 23,184 26,077 5.7 13.1
Franchising and licensing 11,208 10,757 2.7 5.4
---------- ---------- ------- ------
Total $ 406,470 $ 199,015 100.0 100.0
========== ========== ======= ======
Sales in fiscal 2004 increased by $207,455 or 104% from $199,015 in fiscal
2003 to $406,470. The growth in sales from the frozen desserts segment was
attributable to Americana Foods (50.1% owned), Eskimo Pie Frozen Distribution's
distribution assets and the Company's Super Premium Dreamery, Godiva and
WholeFruit pints. In fiscal 2004, sales from Americana Foods, Eskimo Pie Frozen
Distribution and Super Premium pints represented a full year's activity as
compared with approximately two months in fiscal 2003. The decline in sales by
our dairy components segment reflected the increase in intercompany sales
primarily to Americana Foods in 2004, which were eliminated in consolidation,
whereas in 2003 the sales were made to the Company's independent contract
manufacturers.
Drayage and other income
Drayage and other income increased by 248% to $39,873 in fiscal 2004 from
$11,455 in fiscal 2003 due to drayage fees received from Dreyer's/Nestle for the
delivery of their products to customers utilizing Eskimo Pie Frozen
Distribution, the Company's "Direct Store Delivery" (DSD) services. In fiscal
2004, drayage income represented a full year's activity as compared with
approximately two months in fiscal 2003.
34
Gross profit margin
Gross profit percentage for the periods presented has been calculated by
dividing gross profit margin by net sales. Gross profit margin is calculated by
subtracting cost of goods sold from net sales. The following table presents the
gross profit margin dollars and gross profit percentage for the Company's
segments:
Year Ended August 31
Percentage of Sales
2004 2003 2004 2003
------------------------------------------
Frozen desserts $ 64,779 $ 44,754 18.2 30.2
Foodservice 3,439 5,461 21.9 39.2
Dairy Components 5,975 6,019 25.8 23.1
Franchising and Licensing 2,931 2,531 26.2 23.5
-------- --------
Total $ 77,124 $ 58,765 19.0 29.5
======== ========
Gross profit dollars increased to $77,124 in fiscal 2004 from $58,765 in
fiscal 2003 due to the increased sales in 2004 versus 2003. However, the
Company's overall gross profit percentage for fiscal 2004 declined to 19% as
compared to 29.5% for fiscal 2003. The overall percentage decline was due
primarily to the decline in the Frozen desserts gross profit percentage which
was impacted by the normally lower margins generated by Americana Foods'
manufacturing operations and Eskimo Pie Frozen Distribution's distribution
operations. The gross profit margin for 2004 was additionally impacted by the
pre-tax operating losses at Americana Foods LP (50.1% owned) of approximately
$1,180. 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. Foodservice's
gross profit percentage declined to 21.9% in 2004 from 47.9% in 2003 due to
higher butterfat costs and freight expenses.
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
2004 2003 2004 2003
------- ------- ------ ------
Frozen desserts $72,037 $28,776 20.2 19.4
Foodservice 1,890 4,873 12.1 34.9
Dairy Components 1,942 1,962 8.4 7.5
Franchising and Licensing 4,934 4,479 44.0 41.6
Corporate 1,868 1,1,49 n/a n/a
------- -------
Total $82,671 $41,239
======= =======
35
Selling, general and administrative expenses increased by $41,432 from
$41,239 in 2003 to $82,671 in 2004 due primarily to the increase in selling,
general and administrative expenses in the frozen desserts' segment due to the
increased level of sales and stock based compensation expense. In accordance
with FAS123, the Company recognized stock-based compensation expense of $30,983
and $1,649 in 2004 and 2003 which represents the estimated fair value of stock
options earned during the respective fiscal years. Stock based compensation
expense was higher in 2004 as a result of the 3,328,000 options granted to five
executive officers who are also members of the Board of Directors of the
Company. These options vested immediately and the fair value of the options was
recognized as expense in 2004 as determined by the Black-Scholes model. However,
the Company continued to control spending over selling, general and
administrative expenses such that selling, general and administrative expenses
declined overall as a percentage of revenues to 18.4% for fiscal 2004 from 19.3%
for fiscal 2003. Frozen desserts selling, general and administrative expenses
increased in 2004 primarily as a result of increased spending on trade
promotions, marketing and advertising, and an increase in royalties associated
with the sales of Atkins Endulge products and Godiva ice cream pints. The
full-year results of 2004 were adversely impacted by $2,767 for the pre-tax
write-off of the Weight Watchers' intangible license agreement asset. This
write-off was required when CoolBrands was notified by Weight Watchers
International on July 28, 2004 that the license agreement would not be extended.
Interest expense
Interest expense was $1,498 in fiscal 2004 compared with $1,343 in fiscal
2003.
Provision for income taxes
The effective tax rate was 37.1% in fiscal 2004 and 38.4% for fiscal 2003.
The effective tax rate differs from the Canadian Federal/Principal Statutory
Rate primarily due to the Company's 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 the Company's future income tax assets or
liabilities.
Net earnings
Net earnings improved 25% to $23,512 in 2004 as compared to $18,826 in 2003, but
declined to 5.2% of total revenues in 2004 as compared to 8.8% of total revenues
in 2003 due primarily to the normally lower margins generated by Americana
Foods' manufacturing business and Eskimo Pie Frozen Distribution's distribution
business.
36
Comparability of 2004 results with 2003
The Company's 2004 financial statements reflect the July 1, 2003 acquisition of
the general partner interest and majority of the total partnership interest in
Americana Foods LP (50.1% owned) and the July 6, 2003 acquisition of Dreamery
ice cream and WholeFruit sorbet brands from Dreyer's Grand Ice Cream, Inc., as
well as the right to the license for the Godiva ice cream brand, which was
assigned to the Company and substantially all of the Haagen-Dazs frozen dessert
distribution assets from Nestle Ice Cream Company, LLC. These acquisitions were
accounted for under the purchase method of accounting and the 2004 Consolidated
Statements of Earnings included the results of these acquisitions from the date
of acquisition. In fiscal 2004, the revenues and operating results from
Americana Foods, Eskimo Pie Frozen Distribution, and Super Premium pints
represent a full year's activity as compared with approximately two months in
fiscal 2003. In the fourth quarter of fiscal 2004, the revenues and operating
results represent a full quarter's activity as compared with approximately two
months in fiscal 2003. The first quarter of fiscal 2005, ended November 30,
2004, was the first quarter following these acquisitions in which the
Consolidated Statement of Earnings for the quarter can be directly compared with
the prior-year period.
Summary of quarterly results
The following table presents a summary of the Company's results for the last
eight quarters:
(in 000's except per share data)
Quarter ended August 31, 2004 May 31, 2004 February 29, 2004 November 30, 2003
- -------------------------------------------------------------------------------------------
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
Quarter ended August 31, 2003 May 31, 2003 February 29, 2003 November 30, 2002
- -------------------------------------------------------------------------------------------
Total revenues $ 97,155 $ 48,505 $ 31,735 $ 36,625
Net earnings 7,446 6,043 3,500 1,837
Earnings per share
Basic 0.15 0.11 0.07 0.03
Diluted 0.14 0.11 0.07 0.03
The ice cream and frozen yogurt industry generally experiences its highest
volume during the spring and summer months and its lowest volume in the winter
months.
Fourth quarter of 2004
Revenues for the fourth quarter of fiscal 2004 increased to $129,052 from
$97,155 for the same quarter last year, a 33% increase. Net earnings for the
quarter were
37
$12,484 ($0.22 basic and diluted earnings per share) as compared with net
earnings of $7,446 ($0.15 basic and $0.14 diluted earnings per share) for the
same quarter last year.
The growth in revenues for the fourth quarter of fiscal 2004 reflected
increased revenues, primarily from the prepackaged consumer product segment
attributable to Americana Foods, Eskimo Pie Frozen Distribution and the
Company's Super Premium Dreamery, Godiva and WholeFruit pints, offset by a
marginal decline in sales from the Company's base prepackaged consumer products.
In the fourth quarter of fiscal 2004, sales increased by 37% to $118,872 from
$86,850 for fiscal 2003. In the fourth quarter of fiscal 2004, drayage and other
income declined by 6% to $8,943 as compared with $9,457 for fiscal 2003. In the
fourth quarter of fiscal 2004, revenues from Americana Foods, Eskimo Pie Frozen
Distribution and the Company's Super Premium pints represent a full quarter's
activity as compared with approximately two months in fiscal 2003.
Gross profit percentage for the fourth quarter of fiscal 2004 declined to
24% as compared to 34% for the fourth quarter of fiscal 2003. Gross profit
percentage for the periods presented has been calculated by dividing gross
profit margin by net sales. Gross profit margin is calculated by subtracting
cost of goods sold from net sales. The percentage decline was due to the impact
of normally lower margins generated by Americana Foods' manufacturing operations
and Eskimo Pie Frozen Distribution's distribution operations. The fourth quarter
of 2004 was additionally impacted by the pre-tax operating losses at Americana
Foods (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 for the fourth quarter of
fiscal 2004 declined as a percentage of revenues to 18% from 24% for the fourth
quarter of fiscal 2003. The fourth quarter results of 2004 were adversely
impacted by $2,767 for the pre-tax write-off of the Weight Watchers' intangible
license asset. This write-off was required when the Company was notified by
Weight Watchers International on July 28, 2004 that the license agreement would
not be extended.
On July 28, 2004, CoolBrands was notified that Weight Watchers
International would not extend their license agreement with the Company. The
loss of the Weight Watchers' license agreement will have a significant effect
upon the Company's revenues and net earnings in fiscal 2005. Weight Watcher
Smart Ones accounted for approximately $100 million in sales for the Company in
fiscal 2004.
During the fourth quarter of 2004, the sales of the Company's base
business (excluding sales from the fourth quarter 2003 acquisitions) declined
approximately $22,478 when compared with sales in the fourth quarter of fiscal
2003. The Company attributes this decline primarily to the Better for You
segment becoming mainstream. As a result, substantial competition increased in
both product offerings and pricing strategies.
38
Cash flows from operating activities
The Company generated cash flow from operating activities of $43,769 for
the year ended August 31, 2004 as compared with $5,066 for the year ended August
31, 2004 due primarily to the increase in net earnings (exclusive of
depreciation and amortization) for 2004 as compared with 2003, an increase in
receivables and inventories. This was offset by changes in other operating
assets and liabilities, which were primarily driven by the timing of certain
payments.
Cash used in investing activities
For fiscal 2004 net cash used for investing activities increased by
$29,407 to $41,766 in 2004 from $12,359 in 2003.
The spending in 2004 was primarily to expand production capacity at
Americana Foods and the purchase of short-term investments whereas the majority
of the spending or $9,681 in 2003 was for the acquisition of the Dreamery ice
cream and WholeFruit sorbet brands from Dreyer's Grand Ice Cream, Inc., as well
as the right for the Godiva ice cream brand, which was assigned by Dreyer's and
substantially all of the Haagen-Dazs frozen distribution assets in the states of
Washington, Oregon, Florida, California, Pennsylvania, New Jersey, Utah,
Minnesota, Georgia, Maryland, and the District of Columbia from Nestle Ice Cream
Company, LLC.
Cash provided by (used in) financing activities
In 2004, $14,926 was provided by financing activities as compared with
$4,835 used in 2003. The exercise of stock options in 2004 provided $12,286 and
Americana Foods' minority partner provided $6,907, net of the $2,000 returned,
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.
In 2003, the cash used in financing activities resulted primarily from the
repayment of long-term debt of $6,855, offset by an increase in the secured
revolving line of credit at Americana Foods of $2,000.
Critical Accounting Policies and Related Estimates
The accounting policies and related estimates discussed in this section
are those that the Company considers to be particularly critical to an
understanding of the Company's financial statements because their application
places the most significant demands on the Company's ability to judge the effect
of inherently uncertain matters on its financial results. For all of these
policies, the Company cautions that future events rarely develop exactly as
forecast, and the Company's management's best estimates may require adjustment.
Allowance for doubtful accounts
The Company has an allowance for doubtful accounts for estimated losses
resulting from customers' inability to pay amounts owed to the Company, for
unresolved amounts that the Company's 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
the Company's evaluation of the customers' ability to pay determined by the
Company's 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 the Company assesses the
particular customer's liquidity, financial condition and their basis for
nonpayment on disputed items and conclude that collection is highly unlikely.
The Company's 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.
Historically, this methodology has been a fairly reliable means of
assessing the recoverability of trade accounts receivable at each balance sheet
date. The Company therefore believes that there is a low likelihood that the use
of different assumptions or estimates would result in a material change to the
bad debt provision or allowance for doubtful accounts. However, lack of
information about the financial deterioration of a major customer could result
in a material change in the bad debt provision.
At August 31, 2005 and 2004, the allowance for doubtful accounts totaled
$3,108 and $3,164 respectively.
Accrual for promotion and variable expenditures
CoolBrands estimates promotion expenditures for each of its customers,
excluding its DSD customers, who receive off invoice promotion allowances, using
a detailed 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 expenditure 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 reductions in revenues and accounts receivable 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 reduction in
revenues to be recorded.
While accruals for trade promotions are recorded in the period in which
the trade promotion occurs, settlement of these liabilities can take up to a
year. The amounts of these are recognized by the company as a reduction in sales
and accounts receivable. Settlement of variable promotion typically takes place
at the time the sales invoice is prepared (i.e., invoice includes discounts) or
when the customer takes a deduction from a subsequent remittance. Settlement of
fixed trade promotion typically takes place when the customer takes a deduction
from a subsequent remittance and, to a lesser extent, through a payment made to
the customer. Due to the high volume of trade promotion activity and the
difficulty of coordinating trade promotion pricing with its customers,
differences between the Company's accrual and the subsequent settlement amount
occur frequently. Usually these differences are individually insignificant.
However, in rare situations these differences can be large within a single
fiscal quarter. These large differences occur so infrequently that the Company
cannot reliably include them in its estimating methodology. Under the
circumstances, the Company believes its methodology has been reasonably reliable
in recording its trade promotion expenditures and period-end accruals. The
Company therefore believes that there is a low to moderate likelihood that the
use of different assumptions or estimates would result in a material change to
its trade promotion expenditures or its accrual for future trade promotion
settlements.
The accrual for future trade promotion settlements as of August 31, 2005
and 2004 was $10,721 and $5,491 respectively. A variation of five percent in the
2005 accrual would change the 2005 trade promotion expense by approximately
$536.
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. The
allowance for excess and obsolete inventory at August 31, 2005 and 2004 totaled
$6,858 and $1,976 respectively.
Goodwill and non-amortizable intangible assets
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 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 carrying value and implied fair value of goodwill, which is determined
using discounted cash flows. Goodwill at August 31, 2005 and 2004 totaled
$47,827 and $72,088 respectively.
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. Non- amortizable intangible assets at August 31,
2005 and 2004 totaled $15,000 and $ 0 respectively.
Income taxes
The Company records 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. The Company also records 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.
The Company's 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. 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 the Company's current estimates.
Legal matters
CoolBrands is subject to various legal proceedings and claims, either
asserted or unasserted, that arise in the ordinary course of business.
CoolBrands evaluates, among other things, the degree of probability of an
unfavorable outcome and reasonably estimates the amount of the loss. Significant
judgment is required in both the determination of the probability and as to
whether an exposure can be reasonably estimated. When CoolBrands determines that
it is probable that a loss has been incurred, the effect is recorded in the
Consolidated Financial Statements. Although the legal outcome of these claims
cannot be predicted with certainty, CoolBrands does not believe that any of the
existing legal matters will have a material adverse affect on its financial
condition or results of operations. However, significant changes in legal
proceedings and claims or the factors considered in the evaluation of those
matters could have a material adverse affect on CoolBrands business, financial
condition and results of operation.
New accounting pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") 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 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.
39
Item 6 Directors, Senior Management and Employees
Item 6(A) Directors and Senior Management
The following table sets forth the name, age, municipality of residence,
position held with the Corporation and principal occupation of each of the
officers and directors of the Corporation as of February 27, 2006.
Each director holds office until the close of business of the annual
meeting of shareholders of the Corporation following his election unless his
office is earlier vacated in accordance with the Corporation's articles of
association.
Age Positions with the Corporation Principal Occupation(1)
--- ------------------------------ -----------------------
Michael Serruya 41 Co-Chairman and Director Co-Chairman of the Board of
Thornhill, Ontario the Corporation
David J. Stein 45 Co-Chairman, President, Chief Officer of the Corporation
Southampton, New York Executive Officer and Director
Aaron Serruya 40 Director President and Chief
Thornhill, Ontario Executive Officer,
International Franchise
Corp.
David M. Smith 39 Vice-Chairman, Chief Operating Officer of the Corporation
Manhasset, New York Officer and Director
Romeo DeGasperis(2) 39 Director Vice President, Con-Drain
Toronto, Ontario Company Limited
Robert E. Baker(3)(4) 59 Lead Director President, Puroast Coffee,
Smyrna, Georgia Inc.
Beth L. Bronner(2)(4) 54 Director Senior Vice President and
Deefield, Illinois Chief Marketing Officer,
Jim Beam Brands Co.
L. Joshua Sosland 45 Director Vice Chairman, Sosland
Kansas City, Missouri Publishing Co.
William R. McManaman 58 Director Business Consultant
La Grange, Illinois(5)
Gary P. Stevens 60 Chief Financial Officer Officer of the Corporation
Las Vegas, Nevada
Timothy Timm 56 Vice-President, Manufacturing and Officer of the Corporation
Green Bay, Wisconsin Quality Assurance
John M. Kaczynski 44 Senior Vice-President, Sales and Officer of the Corporation
Marshfield, Massachusetts Marketing
40
Marshfield, Massachusetts Marketing
William J. Weiskopf 45 President, Value America Flavors Officer of the Corporation
Midlothian, Virginia and Ingredients
J. Leo Glynn 48 President, Eskimo Pie Frozen Officer of the Corporation
Mahwah, New Jersey Distribution, Inc.
Craig Hettrich 46 President, Foodserivce, Impulse and Officer of the Corporation
Lincoln, Rhode Island Copack
John R. LeSauvage 55 Vice President Operations Officer of the Corporation
Chappaqua, New York
Francis X. Orfanello 47 Vice President Officer of the Corporation
East Taunton, Massachusetts
Paul Samuel 47 Vice President, Sam-Pak Flexible Officer of the Corporation
Randolph, New Jersey Packaging
Matthew P. Smith 45 Vice President, Marketing Officer of the Corporation
Fairfield, Connecticut
Stacy L. Pugh 41 Senior Vice President Operations, Officer of the Corporation
Midlothian, Texas Americana Foods
Daniel C. Heschke 43 Chief Information Officer Officer of the Corporation
Belle Terre, New York
- ----------
(1) The employment history of the above-noted directors and officers is
disclosed below.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Member of Corporate Governance Committee.
(5) It is anticipated that Mr. McManaman will join the Audit and Compensation
Committees.
Michael Serruya - Co-Chairman of the Board and Director of the
Corporation. Mr. Michael Serruya is a co-founder of the Corporation and has been
actively involved in its development since its inception in 1986. Mr. Michael
Serruya has been a Director of the Corporation since 1994 when the Corporation
first went public. Mr. Serruya is primarily involved in the identification of
potential acquisitions and review of the Corporation's business plan. Michael
Serruya was the co-recipient in 1992 and 1993 of the Academy of Collegiate
Entrepreneurs Award for North America. Michael Serruya is the brother of Aaron
Serruya.
David J. Stein - Co-Chairman, President, Chief Executive Officer and
Director of the Corporation. Mr. David J. Stein is also Vice Chairman and Chief
Operating Officer of Integrated Brands, and has been a Vice President of
Integrated Brands Inc. since December 1989. Mr. David J. Stein has been a
Director of the Corporation since March 1998. Mr. Stein is responsible for
development and execution of the Corporation's business plan.
41
Aaron Serruya - Director of the Corporation. Mr. Aaron Serruya is a
co-founder of the Corporation and was actively involved in its development since
its inception in 1986. Mr. Aaron Serruya has been President of International
Franchise Corp. since December 2005. Mr. Aaron Serruya has been a Director of
the Corporation since 1994 when the Corporation first went public. Mr. Serruya
was Executive Vice-President of the Corporation and Secretary from 1994 until
2005. Aaron Serruya was the co-recipient in 1992 and 1993 of the Academy of
Collegiate Entrepreneurs Award for North America. Aaron Serruya is the brother
of Michael Serruya.
David M. Smith - Vice-Chairman, Chief Operating Officer of the
Corporation. Mr. David M. Smith has been a Vice President of Integrated Brands
since December 1989 and a Director of Integrated Brands Inc. since September
1993. Mr. David M. Smith has been a Director of the Corporation since March
1998. Mr. David M. Smith manages the overall operations of the Corporation and
directly oversees the information systems for the Corporation and the marketing
and new product development functions of the Corporation.
Romeo DeGasperis - Director of the Corporation. Mr. DeGasperis is Vice
President of Con-Drain Company Limited, a family business in which he has worked
for over 18 years. Mr. DeGasperis manages the operations and personnel of the
company and is responsible for tendering new projects as well as all the
networking and communications for the company. Mr. Romeo DeGasperis has been a
Director of the Corporation since 2000.
Robert E. Baker - Lead Director of the Corporation. Mr. Baker is currently
President of The Baker Group, a private marketing consulting firm. >From 1999
until 2003, he was Vice President, Market Strategy at ConAgra Foods Retail
Products Company. From 1997 to 1999, he was Vice President of Strategic Planning
at Dean Foods Company and from 1994 to 1997, Vice President of
Marketing/Strategy at Specialty Foods Corporation. From 1984 to 1989, he held a
number of marketing positions with Kraft Foods Dairy Division including Vice
President of Marketing. He currently serves as a Board member of the Milk
Processors Education Program (MilkPEP) and Continental Custom Ingredients (CCI).
He was previously a Board member of The National Cheese Institute and Calgene,
Inc. Mr. Baker has a Bachelor of Science in Electrical Engineering from Tuskegee
University and an MBA in Marketing from Columbia University and spent four years
in the U.S. Air Force, attaining the rank of Captain.
Beth L. Bronner - Director of the Corporation. Ms. Bronner is Senior Vice
President & Chief Marketing Officer of Jim Beam Brands Co., a division of
Fortune Brands, Inc. (NYSE: FO). From 1985 to 1990, Ms. Bronner served in a
variety of positions with The Haagen-Dazs Company including Senior Vice
President of Business Development and Strategic Planning and President of The
Haagen-Dazs Shoppes Company. From 1991 to 1992, she was Vice President of
Marketing for Slim-Fast Foods Company. From 1992 to 1994, she was President of
Revlon Professional Products in North America. From 1996 to 1998, Ms. Bronner
was Senior Vice President of Citibank, where she headed marketing for Citibank's
retail banking operations in the U.S. and
42
Europe. From 1998 to 2000, she was President of the Health Division of Sunbeam,
Inc. From 2000 to 2001, Ms. Bronner was President and Chief Operating Officer of
ADVO, Inc. Ms. Bronner holds a Bachelor of Arts degree from Vassar College and
an MBA from the University of Chicago. She is currently a member of the board of
directors of Assurant, Inc., Reddy Ice Holding, Inc. and The Hain Celestial
Group.
L. Joshua Sosland - Director of the Corporation. Mr. Sosland is
vice-chairman of Sosland Publishing Co., a publisher of business-to-business
periodicals for the grain-based foods and food processing industries. Mr.
Sosland is a director of UMB Financial Corp. and UMB Bank N.A., a regional
financial holding company and its Kansas City bank, respectively. He serves on
the UMB board as chairman of the compensation committee and as a member of the
governance and trust policy committees. He is vice-chairman of the Kemper Museum
of Contemporary Art, vice-president of the Kansas City Symphony and the
immediate past president of the Community Blood Center of Kansas City. Mr.
Sosland is also a director of Agriculture Future of America and a trustee of the
Jewish Community Foundation of Kansas City. Mr. Sosland graduated from Harvard
College with an A.B. in economics.
William R. McManaman - Director of the Corporation. From March 2004 to
January 2005, Mr. McManaman was Senior Vice President and Chief Financial
Officer of First Health Group Corp., a national health-benefits services
company. Prior thereto, Mr. McManaman was Executive Vice President and Chief
Financial Officer of Aurora Foods, Inc., a manufacturer, marketer and
distributor of dry and frozen branded food products from 2002. From 1995 to 2002
Mr. McManaman was also Vice President, Finance and Chief Financial Officer of
Dean Foods Company, a dairy products company. Mr. McManaman serves on the board
of Amcore Financial, Inc.
Gary P. Stevens - Chief Financial Officer of the Corporation. Mr. Stevens
has been President of Integrated Brands Inc. since June 1990 and Treasurer and
Chief Financial Officer since April 1989. He was a Vice Chairman of the Board of
Integrated Brands from August 1988 until June 1990. Mr. Stevens became a
Director of Swensen's Inc. in October 1987 and served as President of Swensen's
Inc. from October 1987 until June 1990. He joined Swensen's in August 1986 as
Senior Executive Vice President - Finance and Administration.
Timothy Timm - Vice-President, Manufacturing and Quality Assurance. Mr.
Timm has been Vice-President, Manufacturing and Quality Assurance since March
1998. He was Vice-President of Manufacturing with Integrated Brands Inc. since
1988. Prior to 1988, Mr. Timm held various manufacturing relations positions in
the ice cream industry.
John M. Kaczynski - Senior Vice-President, Sales and Marketing. Mr.
Kaczynski has been Senior Vice-President, Sales and Marketing since March 1998.
From 1997 to 1998, Mr. Kaczynski was Vice-President, Sales for Integrated
Brands. From 1988 to 1998, Mr. Kaczynski was Division Sales Manager with Nestle.
William J. Weiskopf - President, Value American Flavors and Ingredients.
Mr. Weiskopf became President of Value American Flavors and Ingredients in
October 2000.
43
Since August 1997, Mr. Weiskopf was Vice-President and General Manager, Flavors
Division of Eskimo Pie Corporation. From November 1995 to August 1997, Mr.
Weiskopf was National Sales Manager, Flavors.
J. Leo Glynn - President, Eskimo Pie Frozen Distribution, Inc. Mr. Glynn
has been president of Eskimo Pie Frozen Distribution, Inc. since June 2003, when
he joined the Corporation. Prior to joining Eskimo Pie, Mr. Glynn was employed
by Dreyer's Grand Ice Cream since 1992 in various roles with his last position
being General Manger of New York, New Jersey and Pennsylvania. Prior to
Dreyer's, Mr. Glynn spent five years as Director of Sales for Stroehmann
Bakeries for Metro New York and prior to that was at Drake Bakeries for a period
of twelve years in a variety of positions beginning as a Route Salesman and
progressively advancing to Regional Manager of Metro New York.
Craig Hettrich - President, Foodservice, Impulse and CoPack. Mr. Hettrich
has been President, Foodservice, Impulse and CoPack since July 2005. Prior to
this, from January 2002 through July 2005, Mr. Hettrich was Principal of The
Hale Group. From October 2000 to August 2002 Mr. Hettrich was President of
American Seafoods International. From February 1998 to October 2000 Mr. Hettrich
was Vice President and General Manager for Eskimo Pie Foodservice and from
February 1996 to February 1998 Mr. Hettrich was Vice President of Sales and
Marketing for American Seafoods International. Prior to American Seafoods
International, Mr. Hettrich was Director of Sales for Yoplait/Colombo
Foodservice at General Mills for five years and held various sales and marketing
roles at Nestle Foodservice for eight years.
John R. LeSauvage - Vice-President, Operations. Mr. LeSauvage has been
Vice-President, Operations since June 1999, when he joined the Corporation.
Since 1974, Mr. LeSauvage has held various sales and marketing related
positions in the frozen dessert industry.
Francis X. Orfanello - Vice President. Mr. Orfanello has been Vice
President since September 30, 2005, when he joined the Corporation. Prior to
joining the Corporation, Mr. Orfanello was employed by Veryfine Products Inc. a
leading beverage company from July 1999 to September 2005 in various positions,
including Vice President of Vending and Foodservice Sales, Vice President of
Finance, Chief Financial Officer, and Chief Operating Officer. Prior to joining
Veryfine Products Mr. Orfanello was a partner in the Boston based regional
accounting firm, Parent, McLaughlin, & Nangle.
Matthew P. Smith - Vice President, Marketing. Mr. Smith has been Vice
President, Marketing since August 1, 2003, when he joined the Corporation. Prior
to joining the Corporation, Mr. Smith was employed by Unilever from September
1988 to April 2003 in various positions, with his last position being Director
of Marketing, Frozen Novelty Brands
Stacy L. Pugh - President, Americana Foods. Ms. Pugh has been President of
Americana Foods since 2005. Prior to joining Americana Foods, Ms. Pugh was
employed by General Mills since 1991 in various roles with her last position
being Vice
44
President Bakeries and Food Service and Contract Operations. Prior to General
Mills, Ms. Pugh was employed in various positions by Proctor and Gamble.
Daniel C. Heschke - Chief Information Officer. Mr. Heschke has been Chief
Information Officer since May, 2005. Prior to this, Mr. Heschke was the Chief
Information Officer at Otis Spunkmeyer from January 2005 through May 2005 and
was Chief Information Officer at Nestle Ice Cream Company from January 2000
through July, 2003. Prior to Nestle, Mr. Heschke was employed by The Pillsbury
Company in various Information Systems positions.
Paul C. Samuel - Vice-President, Sam-Pak Flexible Packaging. Mr. Samuel
has been Vice-President, Sam-Pack Flexible Packaging since October 2000. Since
July 1998, Mr. Samuel was Plant/General Manager of the packaging operation.
The Corporation does not have an executive committee of its Board of
Directors.
45
Item 6(B) Compensation
The aggregate amount of remuneration paid or accrued by the Company on a
worldwide basis during the year ended August 31, 2005 as compensation to its
Directors and its executive officers named above was $3,581,000.
The following table sets forth all compensation earned for the years ended
August 31, 2005, August 31, 2004 and August 31, 2003 by the Corporation's
Co-Chief Executive Officers, its Chief Financial Officer and the Corporation's
next three highest paid executive officers whose salary and bonus during the
fiscal year ended August 31, 2005 was equal to or greater than $150,000. Amounts
are in U.S. dollars, except for amounts related to Michael Serruya and Aaron
Serruya which are stated in Canadian dollars.
Long-Term
Annual Compensation Compensation
-------------------------------------- ------------------
Fiscal Other Annual Securities Under All Other
Name and Year Salary Bonus Compensation(1) Options Granted(2) Compensation(3)
Principal Position End ($) ($) ($) # ($)
- ------------------ ------ ----------- ------ --------------- ------------------ ---------------
Richard E. Smith 2005 (4) - - - -
Co-Chairman & 2004 (4) - 8,350,678 709,983 -
Co-Chief Executive 2003 (4) - - 225,000 -
Officer(4)
- -----------------------------------------------------------------------------------------------------------
David J. Stein 2005 520,000 - 7,571 - 2,100
President, Chief 2004 490,000 60,000 10,604,365 709,983 1,950
Executive Officer 2003 326,442 60,000 7,571 225,000 1,820
- -----------------------------------------------------------------------------------------------------------
Gary P. Stevens 2005 185,000 50,000 134,363 1,958
Chief Financial 2004 145,800 20,000 10,363 - 1,312
Officer 2003 145,800 20,000 10,363 20,000 1,604
- -----------------------------------------------------------------------------------------------------------
Michael Serruya 2005 CDN$420,000 - CDN$ 59,588 - -
Co-Chairman 2004 CDN$408,461 - CDN$ 4,695,312 CDN$599,275 -
2003 CDN$320,000 - CDN$ 26,031 CDN$191,666 -
- -----------------------------------------------------------------------------------------------------------
Aaron Serruya 2005 CDN$420,000 - CDN$ 30,222 - -
Secretary(5) 2004 CDN$408,461 - CDN$ 4,700,550 CDN$599,275 -
2003 CDN$320,000 - CDN$ 31,269 CDN$191,666 -
- -----------------------------------------------------------------------------------------------------------
J. Leo Glynn 2005 245,577 92,000 16,000 100,000 -
President, Eskimo 2004 230,00 39,100 16,000 - -
Pie Frozen 2003 17,692 - - 50,000 -
Distribution Inc.
- -----------------------------------------------------------------------------------------------------------
1) These amounts also include the difference in value between the exercise
price of options and the fair market value of the shares at the time of
purchase, for options exercised in the fiscal years ended August 31, 2004
and 2005. Certain amounts are paid in U.S. dollars, and have been
converted for purposes of the table presentation based upon $1.00
purchasing CDN$1.2040 and CDN$1.3166 at August 31, 2005 and 2004,
respectively.
2) Options to purchase subordinate voting shares granted pursuant to the
Corporation's stock option plan.
3) These amounts represent the Corporation's contribution to employee's 401K
plans.
46
4) Mr. Richard E. Smith, the former Co-Chairman and Co-Chief Executive
Officer of the Corporation who passed away on January 29, 2005, was paid
by Calip Dairies, Inc. ("Calip") (an ice cream distributor owned then by
Mr. Richard E. Smith and members of his family) pursuant to the terms of a
management agreement effective July 1, 2003 between Calip and Integrated
Brands. Calip received a fixed fee of $1,300,000 per year for providing a
variety of management services, including making available Mr. Richard
Smith for the positions of Co-Chairman and Co-Chief Executive Officer of
the Corporation. The management agreement was terminated following the
passing of Mr. Smith on January 29, 2005. The fees paid to Calip in fiscal
2005 prior to its termination amounted to $542,000.
5) Mr. Aaron Serruya resigned from the position of Executive Vice President
of the Corporation in connection with sale by the Corporation in December
2005 of its franchise division to International Franchise Corp., a company
controlled by Mr. Aaron Serruya.
Compensation of Directors
Non-independent directors of the Corporation did not receive any fees
and/or any other type of compensation in fiscal 2005 for acting as such.
Independent directors each received a $25,000 retainer and $2,000 for each board
or committee meeting attended in person and $250 for each board or committee
meeting attended via telephone. The independent directors are Mr. Robert E.
Baker, Ms. Beth L. Bronner, Mr. Romeo DeGasperis and Mr. L. Joshua Sosland, Mr.
William McManaman, as well as Mr. Arthur Waldbaum who retired from the board of
directors at the 2006 annual meeting. In respect of fiscal 2006, the Lead
Director, Robert E. Baker receives a retainer of $50,000. Directors also
received a $5,000 retainer ($10,000 in the case of the Chair of each committee)
for being a member of a committee. Each independent director also received
10,000 stock options during the fiscal year ended August 31, 2005. The aggregate
amount of remuneration paid by the Company on a worldwide basis during the year
ended August 31, 2005 as compensation to its Directors named above was $129,000.
47
Option Grant Table
The following table sets for information concerning the grant of stock
options to purchase Subordinate Voting Shares to each of the Company's officers
and directors during the fiscal year ending August 31, 2005.
Market Value
Securities % of Total of Securities
Under Options Underlying
Options Granted to Exercise or Options on
Granted Employees In Base price Date of Grant
Name (#) Fiscal Year ($/Security) ($/Security) Expiration Date
- ------------------ ---------- ------------ ------------ ------------- ---------------
Romeo DeGasperis 10,000 0.98 4.03 4.03 June 7, 2015
Bob Baker 10,000 0.98 4.03 4.03 June 7, 2015
Beth Bronner 10,000 0.98 4.03 4.03 June 7, 2015
Josh Sosland 10,000 0.98 4.03 4.03 June 7, 2015
Arthur Waldbaum(1) 10,000 0.98 4.03 4.03 June 7, 2015
William Weiskopf 30,000 2.9 4.03 4.03 June 7, 2015
Craig Hettrich 50,000 4.9 4.03 4.03 June 7, 2015
John Kaczynski 75,000 7.3 4.03 4.03 June 7, 2015
Gary P Stevens 75,000 7.3 4.03 4.03 June 7, 2015
Timothy Timm 75,000 7.3 4.03 4.03 June 7, 2015
J. Leo Glynn 100,000 9.7 4.03 4.03 June 7, 2015
John LeSauvage 100,000 9.7 4.03 4.03 June 7, 2015
- ----------
(1) Mr. Waldbaum retired from the Board of Directors at the 2006 Annual
Meeting.
Item 6(C) Board Practices
Each director holds office until the close of business of the next annual
meeting of shareholders of the Corporation unless his or her office is earlier
vacated in accordance with the Corporation's articles of association. Officers
are appointed to serve at the discretion of the Board of Directors.
Board Representation Agreement
In connection with the acquisition on March 18, 1998 of Integrated Brands
by a wholly-owned subsidiary of the Corporation, Messrs. Richard E. Smith,
David M. Smith and David J. Stein ("Integrated Brands Principal Shareholders"
and Integrated Brands Inc., on the one hand, and the Corporation and The Serruya
Family Trust, 1082272 Ontario Inc., Michael Serruya and Aaron Serruya
("CoolBrands Principal Shareholders"), on the other hand, entered into the Board
Representation Agreement.
Each of the CoolBrands Principal Shareholders and the Integrated Brands
Principal Shareholders have agreed to vote against: (i) the sale of all or
substantially all of the Corporation's assets; (ii) a merger, consolidation or
similar transaction involving the Corporation; or (iii) an amendment to the
Memorandum of the Association and/or the Articles of Association of the
Corporation which would adversely affect the rights of the Integrated Brands
Principal Shareholders or the CoolBrands Principal Shareholders, unless
48
the Integrated Brands Principal Shareholders and the CoolBrands Principal
Shareholders agree in writing to vote for any such matters.
Pursuant to the terms of the Board Representation Agreement, each of the
CoolBrands Principal Shareholders and the Integrated Brands Principal
Shareholders agreed to certain restrictions relating to resales of voting
securities of the Corporation. Subject to certain exemptions, until the first to
occur of: (i) the termination of the Board Representation Agreement; or (ii) the
21st anniversary of the Board Representation Agreement; the CoolBrands Principal
Shareholders and the Integrated Brands Principal Shareholders have each agreed
not to sell any voting securities of the Corporation to an unrelated third party
without the prior written consent of the CoolBrands Principal Shareholders or
the Integrated Brands Principal Shareholders, as the case may be, and to first
offer such voting securities to the CoolBrands Principal Shareholders or the
Integrated Brands Principal Shareholders, as the case may be, at the market
price for such voting securities as of the date of the offer. Pursuant to the
Board Representation Agreement, prior to any sale to a third party, any Multiple
Voting Shares must be converted to Subordinate Voting Shares. In addition, the
CoolBrands Principal Shareholders and the Integrated Brands Principal
Shareholders have agreed not to convert, or cause to be converted, any Multiple
Voting Shares into Subordinate Voting Shares, without the prior written consent
of the CoolBrands Principal Shareholders or the Integrated Brands Principal
Shareholders, as the case may be. The CoolBrands Principal Shareholders and the
Integrated Brands Principal Shareholders have deposited with an escrow agent the
multiple voting shares held by them.
Each of the CoolBrands Principal Shareholders and the Integrated Brands
Principal Shareholders have agreed not to accept an offer to sell any voting
securities at a price in excess of the market price of the voting securities on
the date of such offer, except: (i) sales made on The Toronto Stock Exchange or
any other regional or national exchange, outside or inside Canada, on which such
securities are regularly traded; (ii) to another principal shareholder; or (iii)
pursuant to an offer made proportionately and at the same price to all other
shareholders of the Corporation.
The Board Representation Agreement may be terminated: (i) by the
CoolBrands Principal Shareholders in the event that the Integrated Brands
Principal Shareholders are the beneficial owners, in the aggregate, of fewer
than 750,000 voting securities (including voting securities issuable upon the
conversion or exercise of convertible securities); and (ii) by the Integrated
Brands Principal Shareholders, in the event the CoolBrands Principal
Shareholders are the beneficial owners, in the aggregate, of fewer than
1,500,000 voting securities (including voting securities issuable upon the
conversion or exercise of convertible securities).
Voting Agreement
Notwithstanding the Board Representation Agreement, Aaron Serruya, Michael
Serruya, David Smith and David Stein, and entities affiliated with them
(collectively, the "Management MVS Holders"), have each entered into the Voting
Agreement with the Corporation pursuant to which they each agreed to vote all of
the shares that they
49
beneficially own or control in favour of the Continuance Resolution and in
favour of the Share Capital Restructuring Resolution. Further notwithstanding
the Board Representation Agreement, the parties to the Voting Agreement agreed
pursuant to the terms of the Voting Agreement, the Management MVS Holders have
agreed that (i) the Board Representation Agreement shall be terminated on the
date on which articles of amendment in respect of the Share Capital
Restructuring have become effective; and (ii) from the date of the Voting
Agreement until the termination of the Board Representation Agreement, all
nominations for membership on the Board made in the Corporation's management
information circulars or otherwise will be made by the Corporate Governance
Committee of the Board.
The Corporation has no director service contracts.
Committees
The Board and its committees (consisting of an Audit Committee, a
Compensation Committee and Corporate Governance Committee) are available to
consider the views of management and investors concerning their needs and
decisions affecting the Company. The Company does not have an executive
committee of its Board of Directors.
Audit Committee
The Board has adopted a charter for the Audit Committee to follow in
carrying out its audit and financial review functions. The Audit Committee
reviews all financial statements of the Company prior to their publication,
reviews audits, considers the adequacy of audit procedures, recommends the
appointment of independent auditors, reviews and approves the professional
services to be rendered by them and reviews fees for audit services. The Board
has established definitions for "financial literacy" and has determined that all
members of the Audit Committee are financially literate. The Audit Committee
consists of Romeo DeGasperis and Beth L. Bronner. It is anticipated that William
McManaman who was elected at the 2006 Annual Meeting will be appointed to
replace Arthur Waldbaum as a member of the Audit Committee.
Compensation Committee
During the most recently completed financial year, the Compensation
Committee was comprised of the following independent directors: L. Joshua
Sosland (Chair) and Robert E. Baker. It is anticipated that William McManaman
who was elected at the 2006 Annual Meeting will be appointed to replace Arthur
Waldbaum as a member of the Compensation Committee. The Compensation Committee
was reconstituted with independent directors on April 1, 2005 and held one
meeting in the last fiscal year.
The Compensation Committee's primary function is to assist the Board of
Directors in fulfilling its responsibilities by overseeing the Corporation's
compensation of senior officers and preparing an annual report on executive
compensation for the Board
50
of Directors and for inclusion in the Corporation's annual proxy circular.
Specific responsibilities of the Compensation Committee include:
(1) in consultation with senior management of the Corporation,
establishing the Corporation's compensation policies and/or
practices, seeking to ensure such policies and practices are
designed to recognize and reward performance and establish a
compensation framework which is industry competitive, and which
results in the creation of shareholder value over the long-term;
(2) reviewing and approving corporate goals and objectives relevant to
the compensation of the Chief Executive Officer, evaluating the
performance of the Chie Executive Officer in light of these goals
and objectives, and setting the Chief Executive Officer's total
compensation level based on this evaluation and other factors as the
Committee deems appropriate and in the best interests of the
Corporation;
(3) reviewing the evaluation of other senior officers' performance and
setting the compensation of these senior officers, based on their
evaluations and other factors as the Committee deems appropriate and
in the best interests of the Corporation;
(4) overseeing the Corporation's incentive compensation plans and
equity-based plans;
(5) reviewing and recommending to the Board of Directors the
compensation of the members of the Board of Directors, including any
annual retainer, committee membership fees, meeting fees, and other
benefits conferred upon the directors; and
(6) reviewing the Compensation Committee's charter and recommending to
the Board of Directors changes to it, as considered appropriate from
time to time.
Corporate Governance Committee
The Company's Corporate Governance Committee has the general
responsibility for developing the Company's approach to governance issues. At
present, Board approval is required for any transaction which is out of the
ordinary course of business or could be considered to be "material" to the
business of the Company. As a matter of practice, all significant decisions
affecting the Company and its subsidiaries are approved by the Board of
Directors prior to their implementation.
51
Item 6(D) Employees
As of August 31, 2003, CoolBrands had 1,305 full-time and part-time
employees. Of these, 151 performed contract labor at Americana Foods through a
temporary employment agency and 667 who are employed by Nestle Ice Cream Company
Inc. that perform services for Eskimo Pie Frozen Distribution. All such Nestle
Ice Cream Company employees were transferred to Eskimo Pie Frozen Distribution
effective January 1, 2004. As of August 31, 2004, CoolBrands had 1,305
full-time and part-time employees. Of these, 151 performed contract labor at
Americana Foods through a temporary employment agency. As of August 31, 2005,
CoolBrands had 1,361 full-time and part-time employees. Of these, 219 perform
contract labour at Americana foods through a temporary employment agency.
CoolBrands believes that its employee relations are good. Approximately 140
hourly employees at the CoolBrands Dairy facility in North Lawrence, New York
are represented by the local Teamsters Union and are covered by a collective
bargaining agreement. The collective bargaining agreement is effective through
September 2006. The following is a breakdown of employees by segment for the
year ended August 31, 2005:
Frozen Dessert Segment 1,051
Yogurt Segment 170
Foodservice Segment 36
Dairy Components Segment 37
Franchise and Licensing Segment 67
52
Item 6(E) Share Ownership
The following table sets forth as of January 9, 2006, information with
respect to officers and directors of the Company listed in 6(B) who are the
direct or indirect beneficial owners of any class of the Company's voting
securities:
Amount Owned and
Identity of Nature of Beneficial Percent of
Title of Class Person or Group Ownership Class**
- ---------------------------- ------------------------ -------------------- ----------
Subordinate Voting Shares The Estate of
and Multiple Voting Shares Richard E. Smith 7,305,042 shares(1) 12.8%
Subordinate Voting Shares David M. Smith 7,305,042 shares(2) 12.8%
and Multiple Voting Shares
Subordinate Voting Shares David Stein 7,305,042 shares(3) 12.8%
and Multiple Voting Shares
Subordinate Voting Shares Michael Serruya 7,305,042 shares(4) 12.8%
and Multiple Voting Shares
Subordinate Voting Shares Aaron Serruya 7,305,042 shares(5) 12.8%
and Multiple Voting Shares
Subordinate Voting Shares The Serruya Family Trust 7,305,042 shares 12.8%
and Multiple Voting Shares
Subordinate Voting Shares 1082272 Ontario, Inc.(6) 7,305,042 shares(7) 12.8%
and Multiple Voting Shares
Subordinate Voting Shares Gary P. Stevens 130,127 shares(8) *
Subordinate Voting Shares J. Leo Glynn 150,000 shares(9) *
- ----------
* Less than 1%
** Based on 6,027,864 Multiple Voting Shares and 50,005,069 Subordinate
Voting Shares outstanding as of January 9, 2006 and stock options held by
each beneficial holder exercisable within 60 days.
53
(1) The Estate of Richard E. Smith beneficially owns 7,305,042 shares of Class
A Stock, consisting of 8,300 shares of Class A Stock and 1,419,467 shares
of Class B Stock for an aggregate of 1,427,767 shares which are owned by
it individually, and 5,877,275 shares of Class A Stock (including those
shares convertible from Class B Stock) which are owned by the other
Integrated Brand Principal Shareholders and the CoolBrands Principal
Shareholders, comprising 12.8% of the issued and outstanding shares of
Class A Stock; and for voting purposes 51.3% of voting stock. The parties
to the Board Representation Agreement constitute a "group" within the
meaning of 13(d)(3) of the Exchange Act, pursuant to their execution of
the Board Representation Agreement and pursuant to the agreement the
parties hold an aggregate of 99.3% of the Class B Stock.
(2) Mr. Smith beneficially owns 7,305,042 shares of Class A Stock, consisting
of 288,106 shares of Class B Stock which are owned by him individually,
and 7,016,936 shares of Class A Stock (including those shares convertible
from Class B Stock) which are owned by the other Integrated Brand
Principal Shareholders and the CoolBrands Principal Shareholders,
comprising 12.8% of the issued and outstanding shares of Class A Stock;
and for voting purposes 51.3% of voting stock. The parties to the Board
Representation Agreement constitute a "group" within the meaning of
13(d)(3) of the Exchange Act, pursuant to their execution of the Board
Representation Agreement and pursuant to the agreement the parties hold an
aggregate of 99.3% of the Class B Stock.
(3) Mr. Stein beneficially owns 7,305,042 shares of Class A Stock, consisting
of 45,138 shares of Class B Stock which are owned by him individually, and
7,259,904 shares of Class A Stock (including those shares convertible from
Class B Stock) which are owned by the other Integrated Brand Principal
Shareholders and the CoolBrands Principal Shareholders, comprising 12.8%
of the issued and outstanding shares of Class A Stock; and for voting
purposes 51.3% of voting stock. The parties to the Board Representation
Agreement constitute a "group" within the meaning of 13(d)(3) of the
Exchange Act, pursuant to their execution of the Board Representation
Agreement and pursuant to the agreement the parties hold an aggregate of
99.3% of the Class B Stock.
(4) Mr. Serruya beneficially owns 7,305,042 shares of Class A Stock, of which
56,000 shares of Class A Stock are owned by his retirement account,
599,275 options to purchase shares of Class A Stock which are exercisable
within 60 days and 6,649,618 shares of Class A Stock (including those
shares convertible from Class B Stock) which are owned by the other
Integrated Brand Principal Shareholders and the CoolBrands Principal
Shareholders, comprising 12.8% of the issued and outstanding shares of
Class Stock; and for voting purposes 51.3% of voting stock. The parties
to the Board Representation Agreement constitute a "group" within the
meaning of 13(d)(3) of the Exchange Act, pursuant to their execution of
the Board Representation Agreement and pursuant to the agreement the
parties hold an aggregate of 99.3% of the Class B Stock.
(5) Mr. Serruya beneficially owns 7,305,042 shares of Class A Stock, of which
56,149 shares of Class A Stock are owned by his retirement account,
599,275 options to purchase shares of Class A Stock which are exercisable
within 60 days and 6,050,343 shares of Class A Stock (including those
shares convertible from Class B Stock) which are owned by the other
Integrated Brand Principal Shareholders and the CoolBrands Principal
Shareholders, comprising 12.8% of the issued and outstanding shares of
Class A Stock; and for voting purposes 51.3% of voting stock. The parties
to the Board Representation Agreement constitute a "group" within the
meaning of 13(d)(3) of the Exchange Act, pursuant to their execution of
the Board Representation Agreement and pursuant to the agreement the
parties hold an aggregate of 99.3% of the Class B Stock.
(6) 1082272 Ontario Inc., a corporation organized under the laws of the
Province of Ontario, Canada ("1082272"), of which The Serruya Family Trust
(the "Trust") is the sole shareholder. The Trust was created and settled
for the benefit of certain members of the Serruya family, including
Messrs. Michael and Aaron Serruya, a director and executive officer of the
Company, respectively.
(7) 1082272 Ontario, Inc., of which The Serruya Family Trust is the sole
shareholder, and the Serruya Family Trust, collectively, beneficially own
7,305,042 shares of Class A Stock of which 4,078,301 shares of Class B
Stock are owned by 1082272 Ontario, Inc. and 155,031 shares of Class B
Stock are owned by the Serruya Family Trust, each for the benefit of
Michael Serruya and Aaron Serruya, 599,275 options to purchase Class A
Stock for each of Michael and Aaron Serruya and 1,873,160 shares of
Class A Stock (including those shares convertible from
54
Class B Stock) which are owned by the other Integrated Brand Principal
Shareholders and the CoolBrands Principal Shareholders, comprising 12.8%
of the issued and outstanding shares of Class A Stock; and for voting
purposes 51.3% of voting stock. The parties to the Board Representation
Agreement constitute a "group" within the meaning of 13(d)(3) of the
Exchange Act, pursuant to their execution of the Board Representation
Agreement and pursuant to the agreement the parties hold an aggregate of
99.3% of the Class B Stock.
(8) Mr. Stevens owns 29,127 shares of Class A stock and 101,000 options to
purchase shares of Class A Stock exercisable within 60 days.
(9) Mr. Glynn has 150,000 options to purchase shares of Class A Stock
exercisable within 60 days.
Stock Option Plan
The Corporation established a stock option plan in 1998 (the "1998 Stock
Option Plan") as a means of attracting, retaining and rewarding directors,
officers, consultants and key employees. Under the 1998 Stock Option Plan,
options to purchase Subordinate Voting Shares ("Options") may be granted to
eligible participants from time to time by the Board of Directors at an exercise
price fixed by the Board of Directors in compliance with the 1998 Stock Option
Plan, applicable law and with the rules of The Toronto Stock Exchange. The
maximum number of Subordinate Voting Shares available for issuance to any one
person is 5% of the aggregate number of Shares issued and outstanding on a
non-diluted basis at the time of the grant. The maximum number of Subordinate
Voting Shares reserved for issuance to insiders cannot exceed 10% of the total
number of issued and outstanding voting securities of the corporation. Options
granted pursuant to the Stock Option Plan are non-transferable and
non-assignable. Options are subject to earlier termination in the event that an
optionee ceases to be an officer, director, consultant or employee of the
Corporation.
The number of Subordinate Voting Shares that may be issued under the 1998
Stock Option Plan fluctuate due to the granting, termination and expiry of
Options. In 2001, the Corporation amended the 1998 Stock Option Plan to increase
the maximum number of Subordinate Voting Shares reserved for issuance under the
Stock Option Plan by 2 million Shares to an aggregate of 5 million Shares.
The Corporation established another stock option plan in 2002 (the "2002
Stock Option Plan") as a means of attracting, retaining and rewarding directors,
officers, consultants and key employees. Under the 2002 Stock Option Plan,
options to purchase Shares ("Options") may be granted to eligible participants
from time to time by the Board of Directors at an exercise price fixed by the
Board of Directors in compliance with the 2002 Stock Option Plan, applicable law
and with the rules of The Toronto Stock Exchange. The maximum number of
Subordinate Voting Shares available for issuance to any one person is 5% of the
aggregate number of Subordinate Voting Shares issued and outstanding on a
non-diluted basis at the time of the grant. The maximum number of Subordinate
Voting Shares reserved for issuance to insiders cannot exceed 10% of the total
number of issued and outstanding voting securities of the corporation. Options
granted pursuant to the 2002 Stock Option Plan are non-transferable and
non-assignable. Options are subject to earlier termination in the event that an
optionee ceases to be an officer, director, consultant or employee of the
Corporation.
55
Item 7 Major Shareholders and Related Party Transactions
Item 7(A) Major Shareholders
The following table sets forth as of January 9, 2006, information with
respect to shareholders of the Company that directly or indirectly beneficially
own 5% or more of any class of the Company's voting securities:
Identity of
Title of Class Person or Group Amount Owned Percent of Class
- --------------------------- ------------------------------ ----------------------- ----------------
Subordinate Voting Shares Apex Capital, LLC 5,032,000 shares 10.1%
Subordinate Voting Shares Sanford J. Colen(1) 5,105,000 shares 10.2%
Subordinate Voting Shares
and Multiple Voting Shares The Estate of Richard E. Smith 7,305,042 shares(2) 12.8%
Subordinate Voting Shares
and Multiple Voting Shares David M. Smith 7,305,042 shares(3) 12.8%
Subordinate Voting Shares
and Multiple Voting Shares David J. Stein 7,305,042 shares(4) 12.8%
Subordinate Voting Shares
and Multiple Voting Shares Michael Serruya 7,305,042 shares(5) 12.8%
Subordinate Voting Shares
and Multiple Voting Shares Aaron Serruya 7,305,042 shares(6) 12.8%
Subordinate Voting Shares
and Multiple Voting Shares The Serruya Family Trust 7,305,042 shares(8) 12.8%
Subordinate Voting Shares
and Multiple Voting Shares 1082272 Ontario, Inc.(7) 7,305,042 shares(8) 12.8%
Subordinate Voting Shares Krevlin Advisors, 5,074,000 shares 10.15%
L.L.C.(11)
56
- ----------
** Based on 6,027,864 Multiple Voting Shares and 50,005,069 Subordinate
Voting Shares outstanding as of January 9, 2006 and stock options held by
each beneficial holder exercisable within 60 days.
(1) Sanford Colen is the controlling member of Apex Capital, LLC.
(2) The Estate of Richard E. Smith beneficially owns 7,305,042 shares of Class
A Stock, consisting of 8,300 shares of Class A Stock and 1,419,467 shares
of Class B Stock for an aggregate of 1,427,767 shares which are owned by
it individually, and 5,877,275 shares of Class A Stock (including those
shares convertible from Class B Stock) which are owned by the other
Integrated Brand Principal Shareholders and the CoolBrands Principal
Shareholders, comprising 12.8% of the issued and outstanding shares of
Class A Stock; and for voting purposes 51.3% of voting stock. The parties
to the Board Representation Agreement constitute a "group" within the
meaning of 13(d)(3) of the Exchange Act, pursuant to their execution of
the Board Representation Agreement, and pursuant to the agreement the
parties hold an aggregate of 99.3% of the Class B Stock.
(3) Mr. Smith beneficially owns 7,305,042 shares of Class A Stock, consisting
of 288,106 shares of Class B Stock which are owned by him individually,
and 7,016,936 shares of Class A Stock (including those shares convertible
from Class B Stock) which are owned by the other Integrated Brand
Principal Shareholders and the CoolBrands Principal Shareholders,
comprising 12.8% of the issued and outstanding shares of voting stock; and
for voting purposes 51.3% of voting stock. The parties to the Board
Representation Agreement constitute a "group" within the meaning of
13(d)(3) of the Exchange Act, pursuant to their execution of the Board
Representation Agreement, and pursuant to the agreement the parties hold
an aggregate of 99.3% of the Class B Stock.
(4) Mr. Stein beneficially owns 7,305,042 shares of Class A Stock, consisting
of 45,138 shares of Class B Stock which are owned by him individually, and
7,259,904 shares of Class A Stock (including those shares convertible from
Class B Stock) which are owned by the other Integrated Brand Principal
Shareholders and the CoolBrands Principal Shareholders, comprising 12.8%
of the issued and outstanding shares of Class A Stock; and for voting
purposes 51.3% of voting stock. The parties to the Board Representation
Agreement constitute a "group" within the meaning of 13(d)(3) of the
Exchange Act, pursuant to their execution of the Board Representation
Agreement, and pursuant to the agreement the parties hold an aggregate of
99.3% of the Class B Stock.
(5) Mr. Serruya beneficially owns 7,305,042 shares of Class A Stock, of which
56,000 shares of Class A Stock are owned by his retirement account,
599,275 options to purchase shares of Class A Stock which are exercisable
within 60 days and 6,649,618 shares of Class A Stock (including those
shares convertible from Class B Stock) which are owned by the other
Integrated Brand Principal Shareholders and the CoolBrands Principal
Shareholders, comprising 12.8% of the issued and outstanding shares of
Class Stock; and for voting purposes 51.3% of voting stock. The parties to
the Board Representation Agreement constitute a "group" within the meaning
of 13(d)(3) of the Exchange Act, pursuant to their execution of the Board
Representation Agreement, and pursuant to the agreement the parties hold
an aggregate of 99.3% of the Class B Stock.
(6) Mr. Serruya beneficially owns 7,305,042 shares of Class A Stock, of which
56,149 shares of Class A Stock are owned by his retirement account,
599,275 options to purchase shares of Class A Stock which are exercisable
within 60 days and 6,050,343 shares of Class A Stock (including those
shares convertible from Class B Stock) which are owned by the other
Integrated Brand Principal Shareholders and the CoolBrands Principal
Shareholders, comprising 12.8% of the issued and outstanding shares of
Class A Stock; and for voting purposes 51.3% of voting stock. The parties
to the Board Representation Agreement constitute a "group" within the
meaning of 13(d)(3) of the Exchange Act, pursuant to their execution of
the Board Representation Agreement, and pursuant to the agreement the
parties hold an aggregate of 99.3% of the Class B Stock.
(7) 1082272 Ontario Inc., a corporation organized under the laws of the
Province of Ontario, Canada ("1082272"), of which The Serruya Family Trust
(the "Trust") is the sole shareholder. The Trust was created and settled
for the benefit of certain members of the Serruya family, including
Messrs. Michael and Aaron Serruya, a director and executive officer of the
Company respectively.
(8) 1082272 Ontario, Inc., of which The Serruya Family Trust is the sole
shareholder, and the Serruya Family Trust, collectively, beneficially own
7,305,042 shares of Class A Stock of which 4,078,301 shares of Class B
Stock are owned by 1082272 Ontario, Inc. and 155,031 shares of Class B
Stock are owned by the Serruya Family Trust, each for the benefit of
Michael Serruya and Aaron Serruya, 599,275 options to purchase Class A
Stock for each of Michael and Aaron Serruya and 1,873,160 shares of Class
A Stock (including those shares convertible from Class B Stock) which are
owned by the other Integrated Brand Principal Shareholders and the
CoolBrands Principal Shareholders, comprising 12.8% of the issued and
outstanding shares of Class A Stock; and for voting purposes 51.3% of
voting stock. The parties to the Board Representation Agreement constitute
a "group" within the meaning of 13(d)(3) of the Exchange Act, pursuant to
their execution of the Board Representation Agreement, and pursuant to the
agreement the parties hold an aggregate of 99.3% of the Class B Stock.
57
(9) Krevlin Advisors, L.L.C. acts as investment advisor to Glenhill Capital,
LP, Glenhill Capital Overseas Master Fund, LP and Glenhill Concentrated
Long Absolute Fund, LP. This information is based on a report dated
December 9, 2005 filed by Krevlin Advisors, L.L.C. with Canadian
securities regulators under National Instrument 62-103.
Each major shareholder of the Company holding Multiple Voting Shares is
entitled to ten votes per share, whereas the holders of Subordinate Voting
Shares are entitled to one vote per share. There are no disproportionate or
weighted voting privileges.
As of February 15, 2006, approximately 85% of the outstanding Subordinate
Voting Shares were held in Canada by approximately 88 holders and approximately
10% of the outstanding Multiple Voting Shares were held in Canada by
approximately 3 holders.
Item 7(B) Related Party Transactions
The only material transactions within the last three years in which a
director, executive officer or principal shareholder of the Corporation or any
associate or affiliate of the foregoing have had a material interest, direct or
indirect, which has materially affected or will materially affect the
Corporation are as follows:
(a) 701587 Ontario Ltd., a corporation whose sole shareholder is The
Serruya Family Trust, a significant shareholder of the Corporation, routinely
enters into leases with commercial landlords for the premises used by the
Corporation's Canadian franchisees and sublets such premises to such
franchisees. Yogen Fruz International Ltd
58
does not earn any fees or premium on such leases. Subsequent to the year ended
August 31, 2005, the Corporation sold substantially all of its franchising
division;
(b) Effective December 23, 2005 the Corporation sold substantially
all of its franchising and licensing segment for cash consideration of $8
million to International Franchise Corp., a company owned by Aaron Serruya, a
director and former executive vice president of CoolBrands;
(c) Integrated Brands, a wholly owned subsidiary of the Corporation,
has entered into a distribution agreement with Calip, a company controlled by
David M. Smith, a Vice-Chairman and Chief Operating Officer of the Corporation.
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. The Corporation has agreed to
guarantee the performance of the distribution agreement; and
(d) Prior to his death on January 29, 2005, Mr. Richard E. Smith,
the former Co-Chairman and Co-Chief Executive Officer of the Corporation, was
paid by Calip (an ice cream distributor owned then by Mr. Richard E. Smith and
members of his family) pursuant to the terms of a management agreement effective
July 1, 2003 between Calip and Integrated Brands. Calip received a fixed fee of
$1,300,000 per year for providing a variety of management services, including
making available Mr. Richard Smith for the positions of Co Chairman and Co-Chief
Executive Officer of the Corporation. The management agreement was terminated
following the passing of Mr. Smith on January 29, 2005. The fees paid to Calip
in fiscal 2005 prior to its termination amounted to $542,000.
No individual who was a director, executive officer or senior officer of
the Company at any time during the fiscal year ended August 31, 2005, or any
associate or affiliate thereof is indebted to the Company.
Item 7(C) Interest of Experts and Counsel
Not applicable.
Item 8 Financial Information
Item 8(A) Consolidated Statements and Other Financial Information.
See attached consolidated Financial Statements of the Company. See Item 17
below.
59
Export Sales
See "Business Overview."
Legal Proceedings
The Corporation is not a party to, nor is any of its property subject to,
any legal proceeding that may be material to it and no such proceeding is known
to be contemplated.
Dividends
The Corporation's constating documents provide that holders of Subordinate
Voting Shares are entitled to receive such dividends as may be declared by the
board of directors prior to the holders of the Multiple Voting Shares. However,
the Corporation has not paid cash dividends on its common stock since its
inception and it is not contemplated that any dividends will be paid on any
shares of the Corporation in the immediate future, as it is anticipated that all
available funds will be reinvested in CoolBrands to support current operations
and to finance the growth of its business. Any decision to pay dividends in the
future will be made by the Corporation's board of directors on the basis of the
earnings, financial requirements and other conditions existing at such time and
will be subject to any restrictions imposed by the terms of any debt financing
instruments.
Item 8(B) Significant Changes
Effective December 23, 2005 the Corporation sold substantially all of its
franchising and licensing segment for cash consideration of $8 million to
International Franchise Corporation, a company owned by Aaron Serruya, a
director and former executive vice president of the Corporation. In connection
with the sale of the franchising and licensing segment, the Corporation was
required to pay down $3,612,000 of its short term borrowings and long-term debt
from the cash consideration received.
Item 9 The Offer and Listing
Item 9(A)(1) - (3)
Not applicable.
60
Item 9(A)(4) Information Regarding Stock Price History
The Subordinate Voting Shares of the Corporation are listed and posted for
trading on the Toronto Stock Exchange under the trading symbol "COB.SV.A".
5 most recent financial years
Period High (Cdn $) Low (Cdn $)
- ----------------------------------------- ------------ -----------
Sept. 2004 - Aug. 2005 .................. 10.25 2.55
Sept. 2003 - Aug. 2004 .................. 27.00 8.75
Sept. 2002 - Aug. 2003 .................. 18.54 4.25
Sept. 2001 - Aug. 2002 .................. 8.15 1.60
Sept. 2000 - Aug. 2001 .................. 2.55 0.70
Each full financial quarter for the 2 most recent full financial years
Period High (Cdn $) Low (Cdn $)
- ----------------------------------------- ------------ -----------
Sept. 2004 - Nov. 2004 .................... 10.25 6.39
Dec. 2004 - Feb. 2005 .................... 9.95 7.00
Mar. 2005 - May. 2005 .................... 9.69 3.91
Jun. 2005 - Aug. 2005 .................... 4.75 2.55
Sept. 2003 - Nov. 2003 .................... 18.98 15.56
Dec. 2003 - Feb. 2004 .................... 25.34 14.85
Mar. 2004 - May. 2004 .................... 27.00 19.80
Jun. 2004 - Aug. 2004 .................... 25.60 8.75
Each month for the most recent six months
Period High (Cdn $) Low (Cdn $)
- ----------------------------------------- ------------ -----------
Feb. 2006 (through February 27) ........ 3.00 2.60
Jan. 2006 .............................. 3.18 2.61
Dec. 2005 .............................. 3.13 2.30
Nov. 2005 .............................. 2.84 2.25
Oct. 2005 .............................. 2.70 2.11
Sept. 2005 .............................. 3.07 2.37
Item 9(A)(5)-(7)
Not applicable.
Item 9(B) Plan of Distribution
Not applicable.
61
Item 9(C) Markets
Subordinate Voting Shares are listed for trading on The Toronto Stock
Exchange in Ontario, Canada under the symbol "COB.SV.A". The Multiple Voting
Shares are not listed for trading but may be converted into Subordinate Voting
Shares on a share for share basis.
Item 9(D) Selling Shareholders
Not applicable.
Item 9(E) Dilution
Not applicable.
Item 9(F) Expenses of the Issue
Not applicable.
Item 10 Additional Information
Item 10(A) Share Capital
Not applicable.
Item 10(B) Memorandum and Articles of Association
The Company was amalgamated under the laws of the Province of Ontario,
Canada, pursuant to a certificate of amalgamation dated September 7, 1994. The
Company was continued under the laws of the Province of Nova Scotia, Canada by
its registration on March 18, 1998 with the office of the Registrar of Joint
Stock Companies, Registry Number 3017246.
Capital Stock
The authorized capital of the Company consists of 200 million Subordinate
Voting Shares, without par value and 200 million Multiple Voting Shares, without
par value. Each share of Subordinate Voting Shares entitles the holder thereof
to one vote at all meetings of the shareholders of the Company and each Multiple
Voting Share entitles the holder thereof to ten votes at all meetings of the
shareholders of the Company. The board of directors may from time-to-time
declare and authorize payment of dividends. The Subordinate Voting Shares rank
prior to the Multiple Voting Shares as to the payment of cash dividends. No
dividends may be declared or paid on the Multiple Voting Shares in any fiscal
year of the Company unless in such fiscal year dividends shall have been
declared or paid on the Subordinate Voting Shares in an amount per share at
least equal to or equivalent to the amount of the dividend per share proposed to
be declared or paid on the Multiple Voting Share.
62
Each outstanding Subordinate Voting Share is convertible into one Multiple
Voting Share at the option of the holder thereof upon certain offers to purchase
Multiple Voting Shares as more particularly described in the Memorandum of
Association of the Company. Each outstanding Multiple Voting Share is
convertible into one Subordinate Voting Share at any time and from time to time
at the option of the holder thereof.
Neither the holders of Multiple Voting Shares nor the holders of
Subordinate Voting Shares may dissent in respect of any amendment referred to in
clauses 2(2)(a), (b) or (e) of the Third Schedules to the Companies Act (Nova
Scotia).
Upon dissolution of the Company, the holders of Multiple Voting Shares and
the holders of Subordinate Voting Shares are entitled to receive the remaining
assets of the Company in equal amounts per share.
Subject to the Companies Act (Nova Scotia), the Company may by special
resolution of its shareholders: consolidate or subdivide its share capital;
convert all or any of its paid-up shares into stock and reconvert such stock
into paid-up shares of any denomination; exchange shares of one denomination for
another; cancel shares which have not be taken or agreed to be taken by any
person; convert any part of its issued or unissued share capital into preference
shares redeemable or purchasable by the Company; or change or eliminate the par
value of its shares (other than preferred shares).
Subject to the Companies Act (Nova Scotia) and any provisions attached to
such shares, the Company may redeem, purchase or acquire any of its shares and
the directors may determine the manner and the terms for redeeming, purchasing
or acquiring such shares and may provide a sinking fund on such terms as they
think fit for the redemption, purchase or acquisition of shares of any class or
series.
There are no limitations on the rights to own securities; including the
rights of non-resident or foreign shareholders to hold or exercise voting rights
on the securities, imposed by the Companies Act (Nova Scotia) or the Company's
Memorandum of Association.
Objects and Powers of the Company
The Company's Memorandum of Association does not contain any restrictions
on the objects and purpose of the Company.
Borrowing Power of Directors
The directors on behalf of the Company may:
1. raise or borrow money for the purposes of the Company or any of then;
2. secure, subject to the sanction of a special resolution where acquired
by the Companies Act (Nova Scotia), the repayment of funds so raised or borrowed
in such manner and upon such terms and conditions in all respects as they think
fit, and in particular by the execution and delivery of mortgages of the
Company's real or personal
63
property, or by the issue of bonds, debentures or other securities of the
Company secured by mortgage or other charge upon all or any part of the property
of the Company, both present and future;
3. sign or endorse bills, notes, acceptance, cheques, contracts, and other
evidence of or securities for funds borrowed or to be borrowed for the purposes
aforesaid;
4. pledge debentures as security for loans; and
5. guarantee obligations of any person.
Interested Director Transactions
A director who is a party to, or who is a director or officer of or has a
material interest in any person who is a party to, a material contract or
transaction or proposed material contract or transaction with the Corporation
shall disclose to the Corporation the nature and extent of his interest at the
time and in the manner provided by the Companies Act (Nova Scotia). Such
director may not vote on any resolution to approve the same except as provided
by the Companies Act (Nova Scotia).
Shareholder Meetings
Ordinary general meetings of the Company are required to be held at least
once in every calendar year at time and place as may be determined by the
directors, but in no event later than 15 months after the last general meeting.
Either of the Co-Chairman of the Company or any two of the directors may at any
time convene a special general meeting, and the directors, upon the requisition
of the shareholders in accordance with the Companies Act (Nova Scotia) are
required to convene such meeting(s) at such time and place as the directors
determine. At least seven days' notice, or such longer period as may be required
by the Companies Act (Nova Scotia), of every special general meeting, specifying
the place, day and hour of the meeting and, when special business is to be
considered, the general nature of such business, must be given to the
shareholders entitled to vote at such meeting, or such notice may be waived.
Notice of ordinary general meetings must be given not less than 21 nor more than
50 days before the date of the meeting. No business may be transacted at any
general meeting unless a quorum is present, which quorum consists of holders of
shares representing at least 10% of the votes which could be cast as the
meeting, present in person or by proxyholder or authorized representative and
entitled to vote.
At the annual and special meeting of shareholders of the Corporation held
on February 27, 2006, the shareholders approved the adoption of a resolution
approving the discontinuance of the Corporation pursuant to section 133(5) of
the Companies Act (Nova Scotia) and the continuance of the Corporation pursuant
to section 187 of the Canada Business Corporations Act ("CBCA"). At that time
the shareholders also approved the adoption of a new By-Law, containing
provision similar to some of those in the current Articles of Association. The
Continuance Resolution is required be confirmed by a majority of votes cast by
shareholders in person or by proxy at a confirmatory meeting to be held on March
20, 2006. If the Continuance Resolution is confirmed, the Corporation intends to
file with the director under the articles of continuance. Once the requisite
regulatory approvals are received and the requisite filings to effect the
continuance are made, the Corporation will continue its corporate existence
governed by the laws of the CBCA rather than the Companies Act (Nova Scotia).
Item 10(C) Material Contracts
Loan Agreement dated as of December 23, 1994 and as amended and restated
as of September 20, 2000, as amended, between Integrated Brands, Inc.,
CoolBrands, Kayla Foods Int'l (Barbados) Inc., Swensen's, Inc., Swensen's Ice
Cream Company, Eskimo Pie Acquisition Corp., Eskimo Pie Frozen Distribution,
Inc., Sugar Creek Foods, Inc., Yogen Fruz Acquisitions Inc., Bresler's
Industries, Inc., Northern Lights Frozen Desserts, Inc., Golden Swirl Management
Company, I Can't Believe It's Yogurt, Ltd., Yogen Fruz
64
Canada, Inc. and The Chase Manhattan Bank. The principal balances outstanding as
of February 23, 2006 total $35,387,500.
Asset Purchase Agreement dated as of December 22, 2004 between Kraft Foods
Global, Inc. ("Kraft") and Integrated Brands, Inc., a wholly owned subsidiary of
the Corporation, whereby the Corporation acquired all of Kraft's yogurt business
for $57,500,000. See "History and Development of the Company" in Item 4(A).
Transition Services Agreement dated as of March 27, 2005 between Kraft
Foods Global, Inc. and the Corporation, whereby Kraft provides the Corporation
with certain services to facilitate the Corporation's purchase of the Kraft
yogurt business for the period of 12 to 18 months, depending upon the service.
The cost of such services varies with the type of service provided and the
totals approximately $1 million to $1.1 million per month.
Stock Purchase and Sale Agreement dated December 23, 2005 between
International Franchise Corp. and CoolBrands and Integrated Brands, Inc., a
wholly owned subsidiary, pursuant to which the Corporation sold substantially
all of its franchising and licensing segment to International Franchise Corp.
for cash consideration of $8 million.
Voting Agreement, dated December 13, 2005, among CoolBrands International
Inc., Integrated Brands, Inc., the Serruya Family Trust, 1082272 Ontario Inc.,
the Estate of Richard Smith, David M. Smith, David J. Stein, Aaron Serruya and
Michael Serruya. See "Voting Agreement" in Item 6(C).
Employment Agreement, dated July 1 1997, between Integrated Brands, Inc.
and David J. Stein, as amended on July 1, 1997 and July 1, 2003. The amended
agreement provides for an annual salary of $520,000 in calendar 2005, and
provides for an annual $20,000 increase in each calendar year through 2013,
and for an annual salary of $700,000 in any calendar year subsequent to 2013.
The contract also provides for annual bonuses at the discretion of the Board.
No bonus was paid in fiscal 2005 under the employment agreement. The agreement
may be terminated after December 31, 2013, with or without cause, on 90 days'
notice. In the event that the agreement is terminated by Integrated Brands
after December 31, 2013 without cause, Integrated Brands must pay Mr. Stein a
severance amount equal to 36 months salary at the annual rate in effect as of
the date of termination. The obligations of Integrated Brands under the
agreement are guaranteed by the Corporation.
Employment Agreement, dated April 1, 1999, between CoolBrands
International, Inc. and Michael Serruya, as amended in 2004. The Corporation has
entered into five-year employment agreement with Michael Serruya dated April 9,
1999, which was amended in fiscal 2004. The amended agreement provides for a
base salary of CDN$420,000 per annum, increasing by the rate of inflation
annually on the anniversary of the employment agreement, and a bonus of up to
CDN$100,000 per year, paid on the anniversary of the employment agreement,
determined as follows: (A) 50% of
65
such bonus based on earnings of the Corporation; and (B) 50% of such bonus based
on reasonable standards of personal performance and earnings performance of the
Corporation. The employment agreement provides for a severance payment in the
amount of CDN$500,000 to be made to Mr. Serruya on the termination for any
reason of the employment agreement or on the failure of the Corporation to renew
the employment agreement upon the expiration of its term. In fiscal 2005, the
base salary for Mr. Serruya was CAD$420,000. No bonus was paid for in fiscal
2005 under the employment agreement.
Item 10(D) Exchange Controls
There is no law or governmental regulation in Canada that restricts the
import or export of capital, including the availability of cash and cash
equivalents for use by the company's group, or affects the remittance of
dividends, interest or other payments to nonresident holders of the company's
securities, other than tax withholding requirements. See "Taxation."
Item 10(E) Taxation
Certain Canadian Federal Income Tax Consequences Applicable to United States
Shareholders
The following general discussion sets forth a summary of the material
Canadian federal income tax consequences of acquiring, holding and disposing of
common stock for a shareholder of the Company who, for purposes of the Income
Tax Act (Canada) (the "Tax Act") and the Canada - United States Income Tax
Convention (1980) (the "Convention"), is a resident, or deemed to be resident in
the United States; has never been and never will be resident, or deemed to be
resident, in Canada at any time when such shareholder has held or will hold the
common stock; deals at arm's length with the Company; holds and will hold his or
her shares of common stock as capital property; is not affiliated within the
meaning of the Tax Act with the Company; does not use or hold and is not deemed
to use or hold such shares in or in the course of carrying on a business through
a permanent establishment or in connection with a fixed base in Canada; and is
not a financial institution as defined by section 142.2 of the Tax Act (a "U.S.
Resident"). common stock will generally constitute capital property unless any
such shares are held in the course of a business of buying and selling shares or
such shares are acquired in a transaction considered to be an adventure in the
nature of trade. This summary assumes that the Subordinate Voting Shares
continue to be listed on The Toronto Stock Exchange and the Multiple Voting
Shares are not listed on a prescribed stock exchange for the purpose of the Tax
Act.
The following discussion is based on the current provisions of the Tax
Act, the regulations thereunder, and the Convention, and on the Company's
understanding of the current administrative practices of the Canada Revenue
Agency (the "CRA"), and takes into account all specific proposals to amend the
Tax Act or regulations publicly released by the Minister of Finance of Canada
before the date hereof (the "Proposed Amendments"). Except as provided in the
preceding sentence, this summary does not take into account or anticipate any
changes in law, whether by judicial, governmental or
66
legislative decision or action or other changes in administrative or assessing
policies of the CRA, nor does it take into account tax legislation of countries
other than Canada or any relevant provincial or territorial tax legislation or
considerations.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR SHAREHOLDER.
Dividends on Common Shares
Under the Tax Act, a U.S. Resident is generally subject to Canadian
withholding tax at the rate of 25% on the gross amount of dividends paid or
credited or deemed to have been paid or credited to such U.S. Resident on the
Common stock. The Convention limits the rate to 15% of the gross amount of
dividends if the U.S. Resident is the beneficial owner of the dividends. The
rate of withholding tax is reduced to 5% of the gross amount of dividends if the
U.S. Resident is a company that beneficially owns at least 10% of the voting
stock of the Company. Subject to certain limitations, the Canadian withholding
tax will be treated as a foreign income tax that may be claimed in whole or in
part as a deduction from income or as a credit against the United States income
tax liability of a U.S. Resident. The particular circumstances of each holder
will affect the holder's ability to use the foreign tax credit. U.S. Resident
should consult with their own tax advisors about the availability of the foreign
tax credit.
Distributions paid in Canadian dollars, inclusive of any Canadian
withholding taxes paid by the Company with respect thereto, will be included in
gross income of a U.S. Resident in a U.S. dollar amount calculated by reference
to the exchange rate in effect on the day the distributions are received by such
U.S. Resident, regardless of whether the Canadian dollars are converted into
U.S. dollars at that time. The U.S. Resident's tax basis in those Canadian
dollars will be equal to their fair market value used in determining the amount
of the dividend. Generally, any gain or loss recognized by a resident in the
United States on the conversion of Canadian dollars into U.S. dollars will be
treated as U.S. source ordinary income or loss.
The Convention generally exempts from Canadian withholding tax any
dividends paid to a U.S. Resident that is a religious, scientific, literary,
educational or charitable organization or to an organization exclusively
administering a pension, retirement or employee benefit fund or plan, if such
U.S. Resident is exempt from income tax under the laws of the United States.
Disposition of Common Stock
If common stock is disposed of to the Company other than in an open market
in the manner in which shares would normally be purchased by the public in the
open market, proceeds of disposition will be limited to the paid-up capital of
the common stock and the balance of the price paid will be deemed to be a
dividend which will be subject to withholding tax as described above under
"Dividends on Common Shares."
67
Any capital gain or capital loss will be subject to Canadian income tax as
described below.
Disposition of Multiple Voting Shares
Capital gains realized on the disposition or deemed disposition of
Multiple Voting Shares by a U.S. Resident will not be subject to taxation under
the Tax Act unless such Multiple Voting Shares are "taxable Canadian property",
as defined in the Tax Act, to such holder. Under the Tax Act, Multiple Voting
Shares will be "taxable Canadian property" to a U.S. Resident and will, subject
to the provisions of the Convention, be subject to Canadian income tax in
respect of any capital gain realized on a disposition of Multiple Voting Shares
as described in the following paragraph. The Convention provides an exemption
from Canadian tax arising on the disposition of common stock by a U.S. Resident
unless such shares form part of the business property of a permanent
establishment in Canada or pertain to a fixed base in Canada of the U.S.
Resident at any time in the 12-month period preceding the disposition, or unless
the value of the shares of the Company derived principally from real property
situated in Canada. In the Company's opinion, the common stock as of the date
hereof does not derive its value principally from real property situated in
Canada. A U.S. Resident will be required to obtain a clearance certificate under
section 116 of the Tax Act, with respect to any disposition of Multiple Voting
Shares, failing which the purchaser will be entitled to withhold an amount equal
to 25% of the consideration payable thereof to the purchaser and remit the same
to the CRA.
A U.S. Resident's capital gain or capital loss from a disposition of
common stock is the amount, if any, by which the proceeds of disposition less
any reasonable costs of disposition exceed (or are exceeded) by the adjusted
cost base of the common stock to the U.S. Resident at such time. Under the Tax
Act, one-half of any capital gain realized upon the disposition will be included
as a "taxable gain" in computing the U.S. Resident's income for Canadian income
tax purposes and one-half of any such capital loss may be deducted from the U.S.
Resident's taxable capital gains subject to be determined under the rules
contained in the Tax Act.
Conversions of Multiple Voting Shares
A. U.S. Resident who converts Multiple Voting Shares into Subordinate
Voting Shares will generally not realize a capital gain or sustain a capital
loss upon such conversion.
Disposition of Subordinate Voting Shares
Capital gains realized on the disposition or deemed disposition of
Subordinate Voting Shares by a U.S. Resident will not be subject to taxation
under the Tax Act unless such Subordinate Voting Shares are "taxable Canadian
property", as defined in the Tax Act, to such holder. Under the Tax Act,
Subordinate Voting Shares will generally not constitute taxable Canadian
property to such a holder unless, at any time during the five-year period
immediately preceding the disposition or deemed disposition of the
68
Subordinate Voting Shares, the holder, persons with whom the holder did not deal
at arm's length, or any combination thereof owned (or had under option) 25% or
more of the issued shares of any class or series of the capital stock of
CoolBrands. However, where a U.S. Resident acquires Subordinate Voting Shares
upon a conversion of Multiple Voting Shares, such Subordinate Voting Shares will
be deemed to be taxable Canadian property to such holder. Even if the
Subordinate Voting Shares are "taxable Canadian property" to a U.S. Resident,
the Convention may provide an exemption from Canadian tax, as discussed above
under "Disposition of Multiple Voting Shares."
Item 10(F) Dividends and Paying Agents
Not applicable.
Item 10(G) Statement by Experts
Not applicable.
Item 10(H) Documents on Display
Any documents referenced herein may be inspected upon request at the
Company's offices located at 8300 Woodbine Avenue, 5th Floor, Markham, Ontario,
L3R 9Y7.
Item 10(I) Subsidiary Information
Not applicable.
Item 11 Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
The Company is subject to currency exchange risks since certain of its
subsidiaries report and transact business in Canadian dollars. The Company seeks
to minimize exchange risks by transacting purchases and the related sales in the
same currency.
Commodity Price Risk
The Corporation is subject to risks with respect to its cost of raw
materials, some of which are subject to changes in commodity prices,
particularly the cost of butterfat, which is used to produce ice cream products.
From time to time, the Corporation has used hedging contracts to reduce its
exposure to such risks with respect to its raw material costs. The Corporation
currently does not have any contracts in effect.
Market Risk Sensitive Instruments
The Company's investment portfolio consisted of investments in Auction
rate securities and are held for the purpose of funding current operations.
Auction rate securities are long-term bonds that resemble short-term instruments
and provide liquidity because their interest rates are reset periodically,
usually every 7, 28 or 35 days. The rate is reset by a modified Dutch auction
process and investors can sell or buy the securities on those auction dates.
These investments are classified as available for sale as short-term investments
on the consolidated balance sheets and are recorded at cost, which approximates
market value.
Cost Interest Rate Market Value
Name of Security Purchase Date (000 omitted) at August 31, 2005 Reset Date at August 31, 2005
- ------------------------ --------------- ------------- ------------------ ------------------ ------------------
Jefferson County Alabama May 4, 2004 $2,000 2.50% September 6, 2005 $2,000
Sewer Revenue Capital
Jefferson County Alabama May 5, 2004 $3,000 2.70% September 7, 2005 $3,000
Sewer Revenue Capital
PSE&G New Jersey August 17, 2004 $2,500 2.24% September 22, 2005 $2,500
69
Interest Rate Risk
CoolBrands is subject to interest rate risk as its long-term debt and
short-term borrowings are based upon the prime rate and/or Libor. If these base
rates increase, CoolBrands will incur incremental interest expense.
Equity Price Risk
Not applicable.
Item 12 Description of Securities other than Equity Securities
Not applicable.
PART II
Item 13 Defaults, Dividend Arrearages and Delinquencies
None.
Item 14 Material Modifications to the Rights of Security Holders and Use of
Proceeds
On February 27, 1998, the Company's shareholders approved a reorganization
of the Company whereby all shares of capital stock were converted at the
shareholders' election, into either Subordinate Voting Shares or Multiple Voting
Shares. Multiple Voting Shares have a preferential right to receive cash
dividends when, as and if declared by the Board of Directors. Multiple Voting
Shares can be converted at any time into an equivalent number of Subordinate
Voting Shares. The Subordinate Voting Shares are entitled to one (1) vote per
share and the Multiple Voting Shares are entitled to ten (10) votes per share.
See the Company's Report on Form 6-K for the month of March 1998 previously
filed with the Securities and Exchange Commission. See also the discussion of
the Collapse of the Dual Class Structure in Item 4(A) "History and development
of the Company."
In connection with the Company's secured debt, the Company may not declare
or pay any dividends, purchase, redeem, retire or otherwise acquire for value
any of its capital stock now or hereafter outstanding, or make any distribution
of assets to its stockholders as such, whether in cash or assets.
Item 15 Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on the evaluation of
the Registrant's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the fiscal year ended
70
August 31, 2005, the Registrant's chief executive officer and its chief
financial officer have concluded that the Registrant's disclosure controls and
procedures are designed to provide reasonable assurance that information
required to be disclosed by the Registrant in the reports that the Registrant
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the U.S. Securities and Exchange Commission and are operating
in an effective manner.
(b) Changes in internal control. During the fiscal year ended August 31, 2005,
there were no changes in the Registrant's internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect the Registrant's internal control over financial reporting.
Item 16 [Reserved]
Item 16(A) Audit Committee Financial Expert
The Registrant's board of directors has determined that it has at least
one audit committee financial expert serving on its audit committee. Mr. Romeo
DeGasperis and Ms. Beth L. Bronner have each been determined to be audit
committee financial experts. Mr. DeGasperis and Ms. Bronner are each
independent, as that term is defined by the Nasdaq listing standards. The SEC
has indicated that the designation of Mr. DeGasperis and Ms. Bronner as an audit
committee financial expert does not make Mr. DeGasperis or Ms. Bronner an
"expert" for any purpose, impose any duties, obligations or liability on any of
Mr. DeGasperis or Ms. Bronner that are greater than those imposed on members of
the audit committee and board of directors who do not carry this designation or
affect the duties, obligations or liability of any other member of the audit
committee.
Item 16(B) Code of Ethics
The Corporation has adopted a code of ethics (the "Code of Business
Conduct and Ethics") that applies to all employees and officers, including its
principal executive officers, principal financial officer and principal
accounting officer. The Code of Business Conduct and Ethics was previously filed
with the Commission as an exhibit to its report on Form 6-K filed on December 2,
2005, and is hereby incorporated by reference into this annual report on Form
20-F.
71
Item 16(C) Principal Accountant Fees and Services
BDO Dunwoody LLP has served as the Registrant's auditing firm for the
previous two fiscal years. Fees payable for the years ended August 31, 2005 and
August 31, 2004 to BDO Dunwoody LLP and its affiliates are $468,550 and $403,700
respectively. Fees payable to BDO Dunwoody LLP in 2005 and 2004 are detailed
below.
Year Ended August 31, 2005 Year Ended August 31, 2004
-------------------------- --------------------------
Audit fees ........... $ 430,000 $ 380,500
Audit-related fees ... $ 27,750 $ 17,000
Tax fees ............. $ 10,800 $ 6,200
All other fees ....... -- --
--------- ---------
Total ................ $ 468,630 $ 403,200
The nature of each category of fees is described below.
Audit Fees
Audit fees were paid for professional services rendered by the auditors
for the audit of the Registrant's annual financial statements or services
provided in connection with statutory and regulatory filings or engagements.
Audit-Related Fees
Audit-related fees were paid which related to the performance of the audit
or review of the annual financial statements and not reported under the audit
fees item above. These services consisted of reviewing the Company's financial
statements and the audit of a subsidiary's 401K plan.
Tax Fees
Tax fees were paid for tax compliance. These services consisted of tax
compliance including the preparation of original tax returns.
All Other Fees
No accountant's fees were paid for products and services other than the
audit fees, audit-related fees and tax fees described above.
Pre-Approval Policies and Procedures
The Audit Committee has considered whether the provision of services other
than audit services is compatible with maintaining the auditors' independence
and has adopted a policy of pre-approving all of the provision of these
services. For the year ended August 31, 2005, all of the services described
above were approved by the Audit Committee.
72
Approximately 90% of the hours expended on the principal accountant's
engagement to audit the Registrant's financial statements for the fiscal year
ended August 31, 2005 were attributed to work performed by BDO Seidman LLP, a
member firm of BDO International, of which BDO Dunwoody is also a member.
Item 16(D) Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16(E) Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
None.
PART III
Item 17 Financial Statements
The following financial statements and schedules are filed as part of this
annual report:
Page
-----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of August 31, 2005 and 2004 F-3
Consolidated Statements of Operations for the years ended August
31, 2005, 2004 and 2003 F-5
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 2005 and 2004 F-6
Consolidated Statements of Cash Flow for the years ended August
31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8
Item 18 Financial Statements
Not applicable. Financial Statements are provided under Item 17.
Item 19 Exhibits
1.1 Agreement and Plan of Merger, dated October 13, 1997, among the
Company, Merger Sub and Integrated Brands, as amended.(1)
1.2 Memorandum and Articles of Association of the Company, as amended.(2)
3.1 Board Representation Agreement dated October 13, 1997, among the
Company, The Integrated Principal Integrated Brands Shareholders and CoolBrands
Principal Integrated Brands Shareholders, as amended and restated.(2)
3.2 Amendment No. 1 to the Board of Representation Agreement dated January
12, 2001.(3)
73
4.1 Management Agreement, dated October 13, 1997, between Integrated
Brands and Calip Dairies, Inc.(1)
4.2 Distribution Agreement, dated October 13, 1997, between Integrated
Brands and Calip Dairies, Inc.(1)
4.3 Merger Agreement by and among Eskimo Pie Corporation, CoolBrands
International Inc. and EP Acquisition Corp. dated May 3, 2000, as amended June
3, 2000.(3)
4.4 Loan Agreement between Integrated Brands, Inc., CoolBrands
International Inc., Kayla Foods Int'l (Barbados) Inc., Swensen's, Inc.,
Swensen's Ice Cream Company, EP Acquisition Corp., Yogen Fruz Acquisitions Inc.,
Bresler's Industries, Inc., Northern Lights Frozen Desserts, Inc., Golden Swirl
Management Company, I Can't Believe It's Yogurt, Ltd. and The Chase Manhattan
Bank dated as of December 23, 1994 and as amended and restated as of September
20, 2000, as further amended.(4)
4.5 Asset Purchase Agreement dated as of December 22, 2004 between Kraft
Foods Global, Inc. and Integrated Brands, Inc.(5)
4.6 Transition Services Agreement dated March 27, 2005 between Kraft Foods
Global, Inc. and CoolBrands Global, Inc.(2)
4.7 Stock Purchase and Sale Agreement between International Franchise
Corp., CoolBrands International Inc. and Integrated Brands, Inc. dated December
23, 2005.(6)
4.8 Voting Agreement, dated December 13, 2005, among CoolBrands
International Inc., Integrated Brands, Inc., the Serruya Family Trust, 1082272
Ontario Inc., the Estate of Richard Smith, David M. Smith, David J. Stein, Aaron
Serruya and Michael Serruya.(8)
4.9 Employment Agreement, dated July 1, 1997, between Integrated Brands,
Inc. and David J. Stein, as amended by Amendment No. 1 dated July 1, 1997 and
Amendment No. 2 dated July 1, 2003.(8)
4.10 Employment Agreement, dated April 1, 1999, between CoolBrands
International, Inc. and Michael Serruya.(8)
4.11 Amendment No. 1 to the Employment Agreement of Michael Serruya, dated
October 24, 2003.
8.1 List of Subsidiaries.(8)
11.1 Code of Business Ethics.(7)
12.1 Exchange Act Rule 13a-14(a)/15(d)-14(a) Certification of David D.
Stein, Chief Executive Officer.(9)
12.2 Exchange Act rule 13a-14(a)/15(d)-14(a) Certification of Gary P.
Stevens, Chief Financial Officer.(9)
74
13.1 18 U.S.C. Section 1350 Joint Certification of David J. Stein, Chief
Executive Officer, and Gary P. Stevens, Chief Financial Officer.(9)
15.1 Consent of BDO Dunwoody LLP, Independent Auditors.(9)
- ----------
(1) Incorporated by reference to the corresponding exhibit filed with the
Corporation's Registration Statement on Form F-4 (no. 333-8078) and
amendments thereto, as previously filed with the Securities and Exchange
Commission on February 19, 1998.
(2) Incorporated by reference to the corresponding exhibit filed with the
Corporation's report on Form 6-K (no. 000-27476), previously filed with
the Securities and Exchange Commission on December 2, 2005.
(3) Incorporated by reference to the corresponding exhibit filed with the
Corporation's report of the fiscal year ended August 31, 2000 on Form 20-F
(no. 000-27476), as previously filed with the Securities and Exchange
Commission on March 15, 2001.
(4) Incorporated by reference to the corresponding exhibit filed with the
Corporation's report on Form 6-K (no. 000-27476), previously filed with
the Securities and Exchange Commission on September 21, 2005.
(5) Incorporated by reference to the corresponding exhibit filed with the
Corporation's report on Form 6-K (no. 000-27476), previously filed with
the Securities and Exchange Commission on January 6, 2005.
(6) Incorporated by reference to the corresponding exhibit filed with the
Corporation's report on Form 6-K (no. 000-27476), previously filed with
the Securities and Exchange Commission on December 29, 2005.
(7) Incorporated by reference to the corresponding exhibit filed with the
Corporation's report on Form 6-K (no. 000-27476), previously filed with
the Securities and Exchange Commission on December 2, 2005.
(8) Incorporated by reference to the corresponding exhibit filed with the
Corporation's report on Form 20-F (no. 000-27476), previously filed with
the Securities and Exchange Commission on February 28, 2006.
(9) Filed herewith.
75
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
COOLBRANDS INTERNATIONAL INC.
(Registrant)
By: /s/ David J. Stein
-------------------------
Name: David J. Stein
Title: President and CEO
Date: July 17, 2006
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of August 31, 2005 and 2004 F-3
Consolidated Statements of Operations for the years ended
August 31, 2005, 2004 and 2003 F-5
Consolidated Statements of Shareholders' Equity for the
years ended August 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Cash Flow for the years ended
August 31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8
F-1
[BDO LOGO] BDO Dunwoody Royal Bank Plaza
LLP P.O. Box 32
Chartered Accountants Toronto Ontario Canada M5J 2J8
And Advisors Telephone: (416) 865-0200
Telefax: (416) 865-0887
www.bdo.ca
AUDITORS' REPORT
To the Shareholders of CoolBrands International Inc.:
We have audited the consolidated balance sheets of CoolBrands International Inc.
as at August 31, 2005 and 2004 and the consolidated statements of operations,
shareholders' equity, and cash flows for the years ended August 31, 2005, 2004
and 2003. 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 and the standards of the Public Company Accounting Oversight Board
(United States). 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
ended August 31, 2005, 2004 and 2003 in accordance with United States generally
accepted accounting principles.
/s/ BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
December 9, 2005 (except for Note 17, which is as of December 23, 2005)
BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
F-2
CoolBrands International Inc.
Consolidated Balance Sheets as at August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars)
2005 2004
Assets
Current Assets:
Cash $ 24,062 $ 36,277
Investments 7,500 28,050
Restricted cash 10,000
Receivables, net 54,526 67,152
Receivables - affiliates 1,840 3,883
Inventories 49,955 49,076
Income taxes recoverable 9,767
Prepaid expenses 2,413 1,203
Deferred income taxes 5,148 4,907
----------------------
Total current assets 165,211 190,548
Deferred income taxes, net of valuation allowance 14,799 13,711
Property, plant and equipment 47,639 28,730
Intangible and other assets 22,369 12,180
Goodwill 47,827 72,088
----------------------
$ 297,845 $ 317,257
======================
F-3
CoolBrands International Inc.
Consolidated Balance Sheets as at August 31, 2005 and 2004
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars)
2005 2004
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 53,300 $ 37,506
Payables - affiliates 620 850
Accrued liabilities 30,015 20,624
Income taxes payable 4,938
Deferred income taxes 93
Short term borrowings 34,553
Current maturities of long-term debt 18,161 8,492
-----------------------
Total current liabilities 136,742 72,410
Long-term debt 8,248 19,262
Other liabilities 2,881 2,758
Deferred income taxes 6,180 3,638
-----------------------
Total liabilities 154,051 98,068
-----------------------
Minority interest 5,388 8,088
-----------------------
Commitments and contingencies
Shareholders' Equity
Capital stock 97,578 97,485
Additional paid-in capital 46,376 44,494
Accumulated other comprehensive earnings (1,696) (1,096)
Retained earnings (3,852) 70,218
-----------------------
Total shareholders' equity 138,406 211,101
-----------------------
$ 297,845 $ 317,257
=======================
See accompanying notes to consolidated financial statements.
Approved by the Board,
"David J. Stein", Director "Romeo DeGasperis", Director
-------------- ------------------
F-4
CoolBrands International Inc.
Consolidated Statements of Operations for the years ended August 31, 2005, 2004
and 2003
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars, except for per share data)
2005 2004 2003
Net revenues:
Net sales $ 364,686 $ 406,470 $ 199,015
Royalties, licensing, and consumer products license revenues 6,138 3,595 3,550
Drayage and other income 14,246 39,873 11,455
------------------------------------
Total net revenues 385,070 449,938 214,020
------------------------------------
Cost of goods sold 361,668 329,346 140,250
Selling, general and administrative expenses (Revised) 54,090 79,883 41,239
Interest expense 2,586 1,498 1,343
Asset impairment 55,525 2,788
Loss on sale of building 263
Gain on sale of building (3,634)
------------------------------------
(Loss) earnings before income taxes and minority interest (85,165) 36,423 30,925
Minority interest (2,700) (958) 365
------------------------------------
(Loss) earnings before income taxes (82,465) 37,381 30,560
------------------------------------
(Recovery of) provision for income taxes:
Current (10,193) 29,183 11,832
Deferred 1,798 (15,314) (98)
------------------------------------
(8,395) 13,869 11,734
------------------------------------
Net (loss) earnings $ (74,070) $ 23,512 18,826
====================================
Per share data:
(Loss) earnings per share:
Basic $ (1.32) $ .42 $ .36
Diluted $ (1.32) $ .42 $ .35
====================================
Weighted average shares outstanding:
Shares used in per share calculation - basic 55,924 55,441 51,746
Shares used in per share calculation - diluted 55,924 56,329 53,992
See accompanying notes to consolidated financial statements
F-5
CoolBrands International Inc.
Consolidated Statements of Shareholders' Equity for the years ended August 31,
2005, 2004 and 2003
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars)
Accumulated
other Total
Capital Additional comprehensive Retained Shareholders'
Stock paid-in capital (losses) earnings earnings equity
--------------------------------------------------------------------------
Balance at August 31, 2002 $ 85,175 $ - $ (981) $ 27,880 $ 112,074
Comprehensive earnings
Net earnings 18,826
Other comprehensive earnings, net of
income taxes:
Currency translation adjustment 141
Total comprehensive earnings (Revised) 18,967
Issuance of shares for stock options 24 24
Stock-based compensation expense 1,649 1,649
--------------------------------------------------------------------------
Balance at August 31, 2003 85,199 1,649 (840) 46,706 132,714
Comprehensive earnings:
Net earnings 23,512
Other comprehensive earnings, net of income
taxes:
Currency translation adjustment (256)
Total comprehensive earnings (Revised) 23,256
Issuance of shares for stock options exercised 11,779 11,779
Tax benefit relating to exercise of non-
qualified stock options 11,862 11,862
Stock-based compensation expense 30,983 30,983
Issuance of shares for warrants exercised 507 507
--------------------------------------------------------------------------
Balance at August 31, 2004 97,485 44,494 (1,096) 70,218 211,101
Compressive losses:
Net loss (74,070)
Other comprehensive (losses), net of income
taxes:
Currency translation adjustment (600)
Total comprehensive loss (Revised) (74,670)
Issuance of shares for stock options exercised 93 (36) 57
Stock-based compensation expense 1,918 1,918
--------------------------------------------------------------------------
Balance at August 31, 2005 $ 97,578 $ 46,376 $ (1,696) $ (3,852) $ 138,406
==========================================================================
See accompanying notes to consolidated financial statements.
F-6
CoolBrands International Inc.
Consolidated Statements of Cash Flow for the years ended August 31, 2005, 2004
and 2003
- --------------------------------------------------------------------------------
(Amounts expressed in thousands of dollars)
2005 2004 2003
Cash and short-term investments provided by (used in):
Operating activities:
Net (loss) earnings $(74,070) $ 23,512 $ 18,826
Adjustments to reconcile net (loss) net earnings to net cash flows from
operating activities
Depreciation and amortization 5,042 4,526 3,239
Asset impairment 55,525 2,788
Stock-based compensation expense 1,918 30,983 1,649
Deferred income taxes 1,798 (15,314) 1,716
Gain on sale of building (3,634)
Loss on sale of asset held for sale 263
Minority interest (2,700) (958) 365
Cash effect of changes, net of the effects from businesses acquired
Receivables 13,815 (21,115) (3,734)
Receivables - affiliates 2,043 (1,464) 609
Allowance for doubtful accounts (56) 126 (785)
Inventories 4,500 (6,845) (6,545)
Prepaid expenses (2,207) 6,252 (1,179)
Income taxes recoverable (9,767)
Accounts payable 15,842 16,740 (5,398)
Payables - affiliates (230) 277 (173)
Accrued liabilities 8,744 (4,843) (1,656)
Income taxes payable (4,935) 9,319 (1,655)
Other assets (513) 53 263
Other liabilities 124 (268) (739)
-------------------------------
Cash provided by operating activities 11,239 43,769 5,066
-------------------------------
Investing activities:
Purchase of property, plant and equipment (12,409) (13,363) (4,141)
Purchase of intangible assets (76) (82)
Purchase of license agreements (26) (300) (1,070)
Proceeds from sale of building 5,434
Proceeds from asset held for sale 2,370
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) (9,681)
Increase in notes receivable (28) (4)
Collection of notes receivable 65 23 249
-------------------------------
Cash used in investing activities (56,023) (41,766) (12,359)
-------------------------------
Financing activities:
Expense from special warrants (104)
Change in revolving line of credit, secured 2,661 1,514
Change in revolving line of credit, unsecured 2,000
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 12,286 124
Repayment of short term borrowings (10,000)
Repayment of long-term debt (4,007) (5,781) (6,855)
-------------------------------
Cash provided (used) by financing activities 33,264 14,926 (4,835)
-------------------------------
Increase (decrease) in cash flows due to changes in foreign exchange rates (695) (2,412) (1,870)
-------------------------------
(Decrease) increase in cash and cash equivalents (12,215) 14,517 (13,998)
Cash and cash equivalents - beginning of year 36,277 21,760 35,758
-------------------------------
Cash and cash equivalents - end of year $ 24,062 $ 36,277 21,760
===============================
See accompanying notes to consolidated financial statements.
F-7
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
Frozen desserts segment (formerly Prepackaged consumer products)
Revenues and profits in the Frozen desserts (formerly Prepackaged consumer
products) segment are generated from manufacturing and selling a variety of
prepackaged frozen dessert to distributors, including Eskimo Pie Frozen
Distribution, and various retail establishments including supermarkets, grocery
stores, club stores, gourmet shops, delicatessens and convenience stores.
CoolBrands competes in the fast-growing Better for You ice cream category
with offerings such as fat-free, non-dairy WholeFruit Sorbet and Atkins Endulge
controlled-carbohydrate super premium ice cream. New Better for You offerings by
CoolBrands include No Pudge! branded frozen snacks and a line of Better for Kids
frozen snacks sold under the Crayola, Justice League, Snapple, Care Bears and
Trix Pops brands. CoolBrands also competes in the super premium ice cream
category with the Dreamery Ice Cream and Godiva Ice Cream brands. In addition,
CoolBrands markets a wide variety of "all family" premium ice creams and frozen
snacks under brand names including Eskimo Pie, Chipwich, Tropicana and Yoplait.
CoolBrands' subsidiary, Eskimo Pie Frozen Distribution, operates a direct
store door ice cream distribution system in selected markets in the U.S.,
serving these CoolBrands products and a growing family of Partner Brands to
supermarkets, convenience stores and other retail customers.
CoolBrands' 50.1% owned subsidiary, Americana Foods, is a leading U.S.
manufacturer and supplier of packaged ice cream, frozen yogurt and sorbet
products, frozen snacks, soft-serve mixes and other food products to well-known
national retailers, food companies and restaurant chains.
Yogurt segment
CoolBrands' subsidiary, CoolBrands Dairy Inc., manufactures cup yogurt at
its plant located in North Lawrence, New York and markets the products under the
Breyers brand pursuant to a trademark rights agreement, which grants the rights
in perpetuity, and under the Creme Savers brand pursuant to a long-term license
agreement.
Foodservice segment
Revenues and profits in the Foodservice segment are generated from
manufacturing and selling soft-serve yogurt and premium ice cream mixes to
broad-line foodservice distributors, yogurt shops and other foodservice
establishments which, in turn, sell soft-serve ice cream and yogurt products to
consumers.
F-8
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
Dairy components segment
Revenues and profits in the Dairy components segment are generated from
the manufacturing and selling of various ingredients to the dairy industry and
from the manufacturing and selling of flexible packaging, such as private label
ice cream novelty wraps. CoolBrands' Dairy Components division manufactures and
sells a full line of quality flavours, chocolate coatings, fudge sauces, powders
for chocolate milk, eggnog bases and other ingredients, and flexible packaging
products for use in private label dairy products, in addition to the Company's
brands.
Franchising and licensing segment
Revenues and profits in the Franchising and licensing segment are
generated by franchising activities, which generate initial and recurring
franchise revenues, and from the sale of proprietary products to franchisees and
licensees and from Company-owned stores selling ice cream and soft-serve yogurt
out of Company-owned stores and outlets. CoolBrands' Franchising division
franchises and licenses frozen dessert outlets operated under a Family of Brands
including Tropicana Smoothies, Juices & More, Swensen's Ice Cream, I Can't
Believe It's Yogurt, Yogen Fruz, Bresler's Premium Ice Cream, Golden Swirl and
Ice Cream Churn, with company-owned, franchised and non-traditional partnership
locations around the world.
Basis of presentation
The consolidated financial statements are prepared by management using
accounting principles generally accepted in the United States and include all
wholly and majority owned subsidiaries. All significant intercompany
transactions of consolidated subsidiaries are eliminated. Acquisitions recorded
as purchases are included in the statement of operations from the date of
acquisition. All amounts are reported in U.S. dollars unless otherwise
indicated.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimated.
Cash
All highly liquid commercial paper purchased with maturities of three
months or less is classified as a cash equivalent. Cash equivalents are stated
at cost, which approximates market value.
Investments
The Company's investment portfolio consisted of investments in Auction
Rate Securities. Auction rate securities are variable rate bonds tied to
short-term interest rates with maturities on the face of the securities in
F-9
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
excess of 90 days. The Company evaluates whether to redeem or rollover each
security no later than every 35 days. At August 31, 2005 and 2004 the Company
had investment balances of $7,500 and $28,050, respectively.
Inventories
Inventories consist primarily of ice cream, frozen yogurt and frozen
dessert products, cup yogurt products, food supplies and packaging. Inventories
are valued at the lower of cost and net realizable value, with cost determined
principally by the first-in, first-out (FIFO) method.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of buildings and machinery and equipment is provided
by the straight-line or declining balance methods, using the estimated useful
lives of the assets, principally 20 to 38 years and 2 to 10 years, respectively.
Store leasehold improvements are amortized on a straight-line basis over the
terms of the leases, principally 5 to 10 years.
Intangible and other assets
Intangible and other assets consist of license agreements, trademarks,
trademark rights, franchise agreements and rights and other assets. Amortizing
intangibles are stated at cost less accumulated amortization. Amortization is
provided by the straight-line method using the terms of the agreements, which
range from 4 to 20 years.
Goodwill and Other Non-Amortizable Asset
In accordance with Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142"), goodwill and
intangible assets deemed to have indefinite lives are no longer amortized, but
instead are to be tested for impairment at least annually or earlier if there
are impairment indicators. Other intangible assets continue to be amortized over
their estimated useful lives. Goodwill is tested for impairment using a two step
process that begins with an estimation of the fair value of each reporting unit.
The fair value of each reporting unit is determined using a combination of
valuation Approaches including an income approach consisting of a discounted
cash flow analysis And a market multiple approach. The fair value of the
reporting unit is compared to its carrying value. 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 impairment testing of
goodwill and intangible assets. A goodwill impairment charge of $ 48,701 was
taken in the Company's frozen dessert segment and a $3,400 goodwill impairment
charge was taken in the Company's franchise business segment. The impairment
charge in the frozen dessert product segment is the result of the loss of the
Weight Watchers licensing agreement as well as declining sales of the Atkins and
the Company's base business product line and the resulting decline in cash
flows. The impairment charge in the franchising segment was the result of
evaluating the potential sale and the potential sales price of the franchising
segments. Also this review resulted in a $ 1,401 and $ 1,540 intangible asset
impairment charge for the Company's frozen dessert segment and franchise
business segment, respectively. Significant assumptions used in measuring the
impairments included the timing and amount of estimated future cash flows for
reporting units and intangible assets, and where applicable, an analysis of
guideline transaction market multiples.
F-10
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 1. Description of business and summary of significant accounting policies
(cont'd)
Long-Lived Assets
The Company's other long-lived assets include property, plant and
equipment and amortizable intangibles. The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying value of any of these assets may not be recoverable, the Company will
assess the recoverability of such assets based upon estimated undiscounted cash
flow forecasts, in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". When any such impairment exists, the related assets will be written
down to fair value.
During the fourth quarter, due to the presence of indicators, the Company
completed impairment testing of other long-lived assets. This review resulted in
a $ 483 impairment of property, plant and equipment.
Revenue recognition
Revenue from sales of the Company's products is recognized at the time of
sale, which is generally when products are shipped to customers.
Revenue from drayage income is recognized at the time the product is
delivered for the vendor to their customer by the Company. Effective September
1, 2004, Coolbrands began the distribution of Dreyer's Grand Ice Cream Holdings,
Inc. ("Dreyer's") products as an independent distributor, changing from the
previously used drayage basis. As a result of this change, Coolbrands began
purchasing products from Dreyer's and selling those products to customers at
wholesale, except for Dreyer's scanned based trading customers which continue to
be delivered on a drayage basis.
Revenue from sales by Company-owned and operated stores is recognized when
products are purchased by customers.
Master franchise fee revenues are recognized at the time the Company has
received the deposit specified in the master franchise agreement, has
substantially performed all significant services to be provided in accordance
with the terms of the agreement and when collectibility is reasonably
determinable.
Single store franchise fees are recognized as revenue when the franchise
application is approved, cash payments are received, and the Company has
performed substantially all services required under the agreement.
Continuing franchise royalties are based on a percentage of gross sales as
reported by the franchisees or gross products purchased by the franchisees.
These fees are recognized on an accrual basis as they are earned.
Product introduction expenses
Product introduction expenditures (i.e. slotting fees) are recognized as
reductions of 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.
F-11
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
ADVERTISING
The Company spends a significant amount of its advertising dollars with
its supermarket customers in the form of co-operative advertising in the chains'
weekly circulars. The remainder of the Company's advertising is spent on media
and other direct advertising. All advertising costs are expensed as incurred.
The Company spent $7,165 on advertising for the year ended August 31, 2005 (2004
- - $5,600, 2003 - $3,462).
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 2003
Numerator
Net (loss) earnings $ (74,070) $ 23,512 $ 18,826
================================
Denominator
Basic weighted average shares outstanding 55,924 55,441 51,746
Dilutive effect of stock awards 888 2,246
--------------------------------
55,924 56,329 53,992
================================
Net (loss) earnings
Basic $ (1.32) $ .42 $ .36
Diluted $ (1.32) $ .42 $ .35
F-12
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
Diluted net loss per share for 2005 is equal to basic net loss per share
because the effect of common stock equivalents is anti-dilutive. Potentially
dilutive securities, calculated in terms of weighted-average share equivalent of
stock options outstanding, are excluded from the calculations of diluted net
loss per share when their inclusion would have anti-dilutive effect. During
2005,145,000 shares of potentially dilutive securities were excluded from
weighted-average share calculation for purposes of calculating weighted-average
diluted shares and diluted loss per share.
FOREIGN CURRENCY TRANSLATION
Translation gains or losses of accounts of foreign subsidiaries considered
financially and operationally self-sustaining are deferred as a separate
component of shareholders' equity until there has been a realized reduction in
the net investment.
Foreign currencies are translated into U.S. dollars using the average
exchange rate for the year for items included in the Consolidated Statements of
Earnings. Foreign currencies are translated into U.S. dollars using the current
rate for assets and liabilities included in the consolidated balance sheets
except for earnings reinvested in the business, which are translated at
historical rates.
INCOME TAXES
Income taxes are calculated using the asset and liability method of
accounting for income taxes. Under this method, current income taxes are
recognized for the estimated income taxes payable for the current period.
Deferred income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
This interpretation, which was subsequently revised in December 2003 (FIN 46-R),
clarifies certain issues related to Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" and addresses consolidation by business
enterprises of the assets, liabilities, and results of the activities of a
variable interest entity. The Company has determined that it does not hold a
variable interest in a variable interest entity under FIN 46-R at August 31,
2005.
In November 2004, the FASB issued SFAS No.151, "Inventory Costs", which is
an amendment of Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing". This Statement clarifies that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current period charges. The provisions of this statement are
effective for inventory costs incurred during the fiscal year beginning after
June 15, 2005 and are applied on a prospective basis. The Company does not
expect the impact of implementing this Statement to have a material effect on
its financial statements.
F-13
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
In December 2004, the FASB issued Statement No. 153, "Exchange of
Nonmonetary Assets" ("SFAS 153"). SFAS 153 eliminates prior guidance for
nonmonetary transactions by eliminating the exception for nonmonetary exchanges
of similar production assets and replaces it with a general exception for
exchange of nonmonetary assets lacking commercial substance. The provisions of
SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal years
beginning after June 15, 2005. The Company does not believe that the adoption of
SFAS 153 will have a material effect on its financial position or results of
operations.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections" ("SFAS 154"). SFAS 154 requires companies to recognize
changes in accounting principle, including changes required by a new accounting
pronouncement when the pronouncement does not include specific transition
provisions, retrospectively to prior periods' financial statements. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not expect that the adoption
of SFAS 154 will have a material effect on its financial position or results of
operations.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces "Accounting for Stock-Based
Compensation," ("SFAS 123") and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first annual reporting period that begins after June 15,
2005. Under SFAS 123R, the pro forma disclosures previously permitted under SFAS
123 will no longer be an alternative to financial statement recognition. The
Company has not at this time evaluated the impact of implementing this statement
on its financial statements.
RECLASSIFICATIONS
Certain 2004 and 2003 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.
REVISED PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company, based on SEC comments and recommendations, has revised the
amounts shown for selling, general, and administrative expenses to include stock
based compensation expense on the consolidated statements of operations, has
revised the consolidated statements of shareholders' equity to appropriately
present other comprehensive earnings, and has added the pro forma results of
operations for 2005 and 2004 for the acquisition of the yogurt business from
Kraft Foods.
F-14
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
NOTE 2. CHANGES IN ACCOUNTING POLICIES
CHANGE IN REPORTING CURRENCY
Effective September 1, 2004, the Company changed its reporting currency
from Canadian dollars to U.S. dollars since the majority of its business is
conducted in the United States and to make comparisons between current and prior
periods more meaningful to investors. For comparative purposes, historical
financial statements and notes have been restated into U.S. dollars.
ADOPTION OF US GAAP
During the fourth quarter of 2005, the Company adopted, on a retroactive
basis, accounting principles generally accepted in the United States of America.
Previously the Company prepared its annual and interim consolidated financial
statements in accordance with generally accepted accounting principals in Canada
("Cnd GAAP"). As a result, the following adjustments have been made to
previously issued Consolidated Financial Statements.
The Company promotes its products with advertising, consumer incentive and
trade promotions. Such programs include, but are not limited to, cooperative
advertising, promotional discounts, coupons, rebates, in-store display
incentives, volume based incentives and product introductory payments (i.e.
slotting fees). Such consumer and trade promotion activities have been
historically accounted for as selling, general and administrative expenses. In
accordance with EITF No. 01-09 "Accounting for Consideration Given by a Vendor
to a Customer or Reseller of the Vendors Products" certain payments made to
customers by the Company, including promotional sales allowances, cooperative
advertising and product introductory expenditures must be deducted from revenue.
Accordingly, our Consolidated Statement of Operations for 2004 and 2003
have been restated to reflect a reduction in revenues and selling, general and
administrative expenses of $32,913 and $ 27,032, respectively. The reduction in
revenues and selling, general and administrative expenses in our 2005
Consolidated Statement of Operations is $68,155.
The following summarizes the impact of restatement for the change from CDN
to US GAAP for consumer trade promotion expenses in our Consolidated Statement
of Operations:
2005 2004 2003
Total net revenues in accordance with Canadian GAAP $ 453,225 $ 482,851 $ 226,047
Less consumer and trade promotion expenditures (68,155) (32,913) (27,032)
----------------------------------------------
Total net revenues in accordance with U.S. GAAP $ 385,070 $ 449,938 $ 199,015
==============================================
2005 2004 2003
Total selling, general and administrative expenses in accordance
with Canadian GAAP (Revised) $ 122,245 $ 115,584 $ 68,271
Less consumer and trade promotion expenditures (68,155) (32,913) (27,032)
----------------------------------------------
Total selling, general and administrative expenses in accordance
with U.S. GAAP (Revised) $ 54,090 $ 82,671 $ 41,239
==============================================
F-15
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
NOTE 2. CHANGES IN ACCOUNTING POLICIES (CONT'D)
Product introduction expenditures (i.e. slotting fees) incurred by the
Company have been historically recognized as expense by amortizing the slotting
fees over the twelve months subsequent to the actual acceptance of product
introduction offers by our customers. Under U.S. GAAP, such expenditures are
recognized as reductions in revenues at the time product introduction offers are
accepted by our customers, which for measurement purposes is at the time of the
first shipment of the product to each customer. As a result of this change,
Retained Earnings as of August 31, 2002 has been reduced to reflect the
cumulative effect of this change through that date by $ 1,997. Our previously
reported Net earnings for the year ended August 31, 2004 and 2003 have been
increased by $756 and decreased by $ 2,564, respectively. Our reported net loss
for the year ended August 31, 2005 was increased by $553, when compared with the
Net loss that would have been reported using our historical accounting
principles.
The following summarizes the impact of restatement for the change from CDN
to US GAAP for new product introduction expenditures (slotting fees) in our
Consolidated Statement of Operations:
2005 2004 2003
Net (loss) earnings income in accordance with Canadian GAAP $ (73,517) $ 22,756 $ 21,390
Adjustment for new product introduction expenditures (553) 756 (2,564)
--------------------------------------
Net (loss) earnings income in accordance with U.S. GAAP $ (74,070) $ 23,512 $ 18,826
======================================
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 and 2003, $24,270 and $1,649,
respectively, with a corresponding increase to additional paid-in capital.
F-16
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 3. Acquisitions
2005 Acquisitions
On March 27, 2005, the Company completed the acquisition of the yogurt
business of Kraft Foods, Inc. The acquired brands included Breyers Fruit on the
Bottom, Light and Creme Savers cup yogurt varieties and Cream Savers Smoothie
drinkable yogurt and included substantially all of Kraft's assets related to its
yogurt business, including a license for the Breyers trademark, a license for
the Creme Savers trademark, a license for the Light 'n Lively trademark and
Kraft's manufacturing facility in North Lawrence, New York. The purpose of this
acquisition was to diversify CoolBrands business and to reduce its concentration
of operations in the frozen desserts segment. Factors that contributed to the
purchase price and resulting goodwill, were based upon negotiations with the
seller and the valuation of the business based upon future contributions to net
earnings and cash flow.
The following is a summary of the assets and liabilities acquired and the fair
value assigned thereto, and the purchase consideration given:
Fair value acquired:
Current assets $ 5,373
Property, plant and equipment 11,846
Trademark rights 15,000
Goodwill 27,582
--------
59,801
Less: Liabilities (649)
--------
$ 59,152
========
Purchase consideration:
Cash $ 17,500
Acquisition costs 1,652
Bank loan 40,000
--------
$ 59,152
========
Pro forma results of operations (Revised)
The following table summarizes unaudited pro forma financial information
assuming the acquisition of the Breyer's yogurt business had occurred at the
beginning of 2004. This pro forma financial information is for the informational
purposes only and does not reflect any operating inefficiencies which may result
from the acquisition of the Breyer's yogurt business transaction and, therefore,
is not necessarily indicative of results that would have been achieved had the
businesses been combined during the periods presented. In addition, the
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
pro forma adjustments use estimates and assumptions based on currently available
information.
Management believes that the estimates and assumptions are reasonable and that
the significant effects of the acquisition of Breyer's yogurt business are
reasonable and significant effects of the acquisition of Breyer's yogurt
business are properly reflected. However, actual results may differ from these
estimates and assumptions.
2005 2004
(In thousands, except per share amounts)
Pro forma total net revenues $ 434,728 $ 558,360
================= ====================
Pro forma net (loss) earnings $ (69,908) $ 34,681
================= ====================
Pro forma net (loss) earnings per share Basic $ (1.25) $ 0.63
================= ====================
Diluted $ (1.25) $ 0.62
================= ====================
In April 2005, the Company acquired the assets of Zipp Manufacturing,
Inc., a manufacturer of flavors and ingredients. The assets and related business
of Zipp Manufacturing were acquired to provide additional volume to our dairy
components segment which has excess capacity. The primary factors that
contributed to the purchase price and resulting goodwill were based upon
negotiations with the seller, CoolBrands' desire for additional production
volume and the resulting projected incremental earnings and cash flow.
The following is a summary of the assets and liabilities acquired and the
fair value assigned thereto, and the purchase consideration given:
Fair value acquired:
Current assets $ 208
Equipment 80
Goodwill 258
--------
546
Less: Liabilities (89)
--------
$ 457
========
Purchase consideration:
Cash $ 457
========
F-17
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
2003 Acquisitions
Effective July 1, 2003, the Company acquired the general partner interest
and majority of the total partnership interests in Americana Foods LP, located
in Dallas, Texas. Americana Foods is one of the largest and most versatile
frozen dessert manufacturing facilities in the U.S., and currently supplies a
wide variety of soft-serve mixes, packaged ice cream, frozen yogurt and sorbet
products and frozen novelties to well-known national retailers, food companies
and restaurant chains, including Sam's Club, TCBY Enterprises and Silhouette
Brands. Americana Foods also manufactures and sells products for the foodservice
channel such as dairy mixes for preparing mashed potatoes which are extensively
used to standardize quality and reduce labor costs in on-site food preparations.
The following is a summary of the assets acquired and the fair value assigned
thereto, and the purchase consideration given:
Fair value acquired: $
Current assets $ 16,170
Property, plant and
equipment 5,689
--------
21,859
Less: Liabilities 21,859
--------
$ Nil
========
Purchase Consideration:
--------
$ Nil
========
On July 6, 2003, the Company acquired the Dreamery(R) ice cream and
WholeFruit(TM) sorbet brands from Dreyer's Grand Ice Cream, Inc., as well as the
right to the license for the Godiva(R) ice cream brand, which was assigned by
Dreyer's and substantially all of the Haagen-Dazs frozen dessert distribution
assets in the States of Washington, Oregon, Florida, California, Pennsylvania,
New Jersey, Utah, Minnesota, Georgia, Maryland and the District of Columbia from
Nestle Ice Cream Company, LLC.
The following is a summary of the assets acquired and the fair value assigned
thereto, and the purchase consideration given:
Fair value acquired:
Current assets $ 7,921
Option to purchase City of
Industry, CA. facility 1,760
--------
$ 9,681
========
Purchase consideration:
Cash $ 9,681
--------
$ 9,681
========
F-18
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 4. Receivables, net
2005 2004
Trade accounts receivable $ 57,213 $ 69,692
Franchise and license fees receivable 324 516
Notes receivable, current maturities 97 108
---------------------
57,634 70,316
Less Allowance for doubtful accounts (3,108) (3,164)
---------------------
$ 54,526 $ 67,152
=====================
Allowance for doubtful accounts:
Year ended August 31, 2003 $ 2,888
Charges to costs and expenses 818
Reserve utilized (542)
---------
Ending balance August 31, 2004 3,164
Charges to costs and expenses 1,846
Reserve utilized (1,902)
---------
Ending balance August 31, 2005 $ 3,108
=========
No customer accounted for 10 percent or more of Total net revenues in
2005, 2004 and 2003.
Note 5. Inventories
2005 2004
Raw materials and packaging $ 35,304 $ 32,484
Finished goods 14,651 16,592
---------------------
$ 49,955 $ 49,076
=====================
Write-downs of obsolete and slow moving inventories in 2005 and 2004 were
$12,723 and $1,165, respectively.
Note 6. Property, plant and equipment
2005 2004
Land $ 1,577 $ 924
Buildings 19,292 10,826
Machinery and equipment 35,412 24,341
Leasehold improvements 1,740 2,342
---------------------
58,021 38,433
Less Accumulated depreciation and amortization
Buildings 1,906 1,030
Machinery and equipment 7,497 7,769
Leasehold improvements 979 904
---------------------
$ 47,639 $ 28,730
=====================
F-19
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 7. Intangible and other assets and Goodwill
Definite life intangible assets are amortized over their estimated useful
lives. The Company is required to conduct an annual review of goodwill and
intangible assets for potential impairment. Goodwill impairment testing requires
a comparison between the carrying value and fair value of each reporting unit.
If the carrying value exceeds the fair value, goodwill is considered impaired.
The amount of impairment loss is measured as the difference between the carrying
value and implied fair value of goodwill, which is determined using discounted
cash flows. Impairment testing for non-amortizable intangible assets requires a
comparison between fair value and carrying value of the intangible asset. If the
carrying value exceeds fair value, the intangible asset is considered impaired
and is reduced to fair value. During the fourth quarter of 2005, the Company
completed its annual review of goodwill and intangible assets. This review
resulted in a $ 2,941 non-cash pre tax charge related to intangible asset
impairment and a non-cash pre tax charge of $52,101 related to goodwill
impairment. After receiving notification on July 28, 2004 that the license
agreement with Weight Watchers International would not be extended, the Company
evaluated certain intangible assets directly related to the Weight Watchers
license agreement. Based on this evaluation, the Company determined that these
intangible assets were fully impaired and as a result recorded an impairment
charge of approximately $2,788 during the fourth quarter ended August 31, 2004.
At August 31, 2005 and 2004 goodwill by reportable segment was as follows:
2005 2004
--------- ----------
Frozen desserts $ 3,752 $ 52,461
Yogurt 27,582
Foodservice 11,302 11,302
Dairy components 745 488
Franchising and licensing 4,446 7,837
--------- ----------
Total Goodwill $ 47,827 $ 72,088
========= ==========
Intangible assets at August 31, 2005 and 2004 were as follows:
2005 2004
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Non-amortizable intangible assets $ 15,000 $ $ $
Amortizable intangible assets 8,126 3,362 12,567 4,305
Other assets 2,605 3,918
-------- ------------ -------- ------------
Total Intangible assets and other assets $ 25,731 $ 3,362 $ 16,485 $ 4,305
======== ============ ======== ============
Non-amortizable intangible assets are substantially comprised of trademark
rights purchased through the acquisitions. Amortizable intangible assets consist
primarily of certain trademarks, license agreements and franchise agreements and
rights. Pre-tax amortization expense for intangible assets was $745 and $872 for
the years ended August 31, 2005 and 2004 respectively. Amortization expense for
each of the next five years is currently estimated to be $745 or less.
F-20
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 7. Intangible and other assets and Goodwill (cont'd)
The movement in goodwill and gross carrying amounts of intangible and
other assets is as follows:
2005 2004
------------------------- -------------------------
Intangible and Intangible and
Goodwill other assets Goodwill other assets
-------- -------------- -------- --------------
Balance at August 31 $ 72,088 $ 16,485 $ 71,977 $ 19,928
Changes due to:
Acquisitions 27,840 15,000 111
Goodwill impairment (52,101)
Intangible asset impairment (2,941) (2,788)
Other (2,813) (655)
-------- -------------- -------- --------------
Balance at August 31 $ 47,827 $ 25,731 $ 72,088 $ 16,485
=====================================================
Note 8. Short-term borrowings
2005
Unsecured $ 30,000
Secured 4,553
--------------
$ 34,553
==============
There were no short term borrowings during the year ended August 31, 2004.
Unsecured
In connection with the acquisition of the Breyer's yogurt business from
Kraft in March 2005, a U.S. subsidiary borrowed $40,000 to finance the
acquisition. The unsecured term loan requires monthly payments of interest and
repayment of the $40,000 principle balance on November 1, 2005. Interest is
payable monthly with interest rates fluctuating with changes in the prime
lending or libor rate and the ratio of funded debt to EBITDA. The interest rates
plus applicable margin are the lower of prime plus 0.5% or libor plus 2.5%
(6.02% at August 31, 2005). On August 23, 2005, the Company made a principal
payment of $10,000 in anticipation of the September 2, 2005 amendment as
discussed in Note 9. As of August 31, 2005 the term loan balance was $30,000.
Secured
On April 27, 2005 Americana Foods LP ("Americana"), which is owned 50.1%
by the Company, borrowed $4,553 to purchase a building and adjacent acreage. The
loan terms requires monthly, interest-only payments until the April 27, 2006
anniversary date of the note. The note bears interest at Prime plus 0.5% (7.0%
at August 31, 2005). The agreement provides a one-time right to extend the
maturity date by two years until April 27, 2008. Monthly payments during the two
year extension period will be based on a 25-year amortization period.
F-21
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 8. Short-term borrowings (Cont'd)
Americana may also at the extension date choose to continue an interest
rate at Prime plus 0.5% or convert to a fixed interest rate to be quoted by the
lender. Due to the one year maturity date of April 27, 2006 (before exercise of
the extension option), this note is classified as a current liability.
Note 9. Long-term debt
2005 2004
Term loan, unsecured $ 10,500 $ 13,587
Term loan, secured 8,610 9,117
Revolving loan, secured 7,145 4,483
Capitalized leases 154 567
------------------------
26,409 27,754
Less: Current maturities 18,161 8,492
------------------------
$ 8,248 $ 19,262
========================
In connection with the acquisition of Eskimo Pie Corporation, a subsidiary
borrowed $30,000, to finance the acquisition. The unsecured term loan is payable
in monthly installments of $250, with the remaining principal balance due
November 1, 2005. Interest is payable monthly on the unpaid principal balance
with interest rates fluctuating with changes in the prime lending or libor rate
and the ratio of funded debt to EBITDA. The interest rates, plus applicable
margins were the lower of prime plus 0.5% or libor plus 2.0% (5.49% at August
31, 2005). As of August 31, 2005 and 2004, the term loan balance was $10,500 and
$13,500, respectively.
All borrowings under the above unsecured term loan agreement are
guaranteed by the Company. The agreement contains restrictions relating to the
payment of dividends, rental obligations, liens, indebtedness, dispositions of
property, change in the nature of its business, change in ownership and requires
that the net proceeds from the sale (other than in the ordinary course of
business) of any assets of Eskimo Pie Corporation must be utilized to reduce the
then outstanding principal balance of the term loan. In addition, the Company
must maintain certain financial ratios and limit capital expenditures to $5,000
during any fiscal year.
The company was in default of 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 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
F-22
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 9. Long-term debt (cont'd)
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 entered into a credit agreement with a
financial institution that includes a term loan of $10,000. This term loan is
secured by Americana's property, plant and equipment. Principal payments are
payable in fixed monthly installments of $81 based upon a fifteen-year
amortization and matures on November 19, 2007. The loan bears interest at prime
plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004). As of August
31, 2005 and 2004 the term loan balance was $8,610 and $9,117, respectively.
On March 19, 2005 Americana executed an amendment to the credit agreement.
Pursuant to this amendment, a fixed charge coverage ratio of 1.25:1 and a
debt-to-tangible net worth ratio of 2:1 must be maintained. The minimum tangible
net worth requirement was increased to $20,500 effective March 19, 2005. The
partnership is in compliance with its loan covenants at August 31, 2005.
Revolving loan, secured
Americana's credit agreement includes a revolving loan up to $9,000,
subject to a borrowing base calculation, and bears interest at Prime plus 0.5%
(7.0% at August 31, 2005 and 5.0% at August 31, 2004) and is due on November 30,
2005. At August 31, 2005 approximately $1,855 was available to the Partnership
under this loan. The revolving loan is secured by Americana's accounts
receivable and inventory and is classified as a current liability.
On November 30, 2005 Americana executed an amendment to the credit
agreement which extends the maturity date of the revolving note to January 10,
2006.
Repayments of long-term debt due in each of the next five years are as
follows
2006 $ 18,161
2007 416
2008 7,832
2009 -
2010 -
--------
$ 26,409
========
F-23
CoolBrands International Inc.
Interest paid during the year ended August 31, 2005 was $2,350 (2004 -
$1,461, 2003 - $1,343).
F-24
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 10. Shareholders' equity and stock options
(thousands of shares)
Capital Stock
The Company's articles of incorporation authorize 200,000 shares of both
Class A Subordinate and Class B Multiple voting no par value shares. Changes in
Capital stock for the two years ended August 31, 2005 were as follows:
Paid-In-Balance
---------------
Class A Subordinate voting shares $ 85,659
Class B Multiple voting shares $ 11,919
Class A Class B
Subordinate Multiple
voting shares outstanding voting shares outstanding
# #
------------------------------------------------------
Balance at August 31, 2003 45,629 6,179
Issuance of shares for stock options exercised 3,985
Issuance of shares for warrants exercised 100
Multiple voting shares converted to
subordinate voting shares 149 (149)
------------------------------------------------------
Balance at August 31, 2004 49,863 6,030
Multiple voting shares converted to
subordinate voting shares 1 (1)
Issuance of shares for stock
options exercised 54
------------------------------------------------------
Balance at August 31, 2005 49,918 6,029
======================================================
Class A subordinate voting shares have a preferential right to receive
cash dividends when, as and if declared by the Board of Directors. Class B
multiple voting shares can be converted at any time into an equivalent number of
Class A subordinate voting shares. The Class A subordinate voting shares are
entitled to one vote per share and the Class B multiple voting shares are
entitled to ten votes per share.
F-25
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(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. Subject to the Board of Director's sole discretion to
modify the vesting schedule of options granted, options granted normally vest,
and become exercisable, as to one-third (1/3) on each of the first, second and
third anniversaries of the date of grant.
The following table summarizes stock option activity for all stock option plans:
Weighted
Weighted Average
Average Contractual
Exercise Life (in
Shares Cnd Price 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
F-26
Coolbrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 10. Shareholders' equity and stock options (cont'd)
The following table summarizes stock options outstanding, exercisable and
exercise price range at August 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------
Weighted-
Outstanding average Weighted-
Range of as of remaining average Exercisable as Weighted-average
exercise prices 08/31/2005 contractual life exercise price of 08/31/2005 exercise price
- ------------------------------------------------------------------------------------------------------------
$ 1.15 - $ 1.35 128 0.2 $ 1.27 63 $ 1.26
$ 4.03 - $ 5.00 1,083 9.2 $ 4.10 393 $ 4.09
$ 13.75 - $ 15.93 1,096 3.1 $ 15.74 1,037 $ 15.80
$ 22.65 - $ 22.65 1,610 3.5 $ 22.65 1,610 $ 22.65
----- -----
3,917 4.9 $ 14.89 3,103 $ 17.57
===== =====
Stock options reserved for future grant at August 31, 2005 aggregated 452,985.
The Company accounts for stock-based compensation using the fair value method of
accounting. Stock-based compensation expense was recognized in the amount of
$1,918 (2004 - $30,983, 2003 - $ 1,649) in the Consolidated Statements of
Operation. Under the Black-Scholes option pricing model, the weighted-average
fair value of the stock options granted during fiscal 2005 was Cnd $4.03(2004 -
Cnd $10.21, 2003 - Cnd $ 3.03) 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
F-27
Coolbrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 11. Income taxes
The effective income tax rate on (loss) earnings is affected from year to
year by the geographic mix of the consolidated (loss) earnings before income
taxes. The following table reconciles income tax (recovery) expense computed by
applying the combined Canadian Federal/Provincial statutory rate with the actual
income tax provision:
2005 2004 2003
Combined basic Canadian Federal and Provincial income tax rate (36.12)% 36.21% 38.00%
Impact of operating in foreign countries with
different effective rates (1.00) 1.93 .04
Permanent differences:
Non-deductible goodwill impairment 24.39
Valuation allowance 5.89
Other (3.34) (1.04) .36
-------------------------
(10.18)% 37.10% 38.40%
=========================
In 2005 the Company established an allowance for non-capital loss
carry-forwards as the Company considers it more likely than not that such loss
carry-forwards will not be utilized.
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, 2003 - $11,651)
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
F-28
Coolbrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 12. Retirement Plans (cont'd)
benefits based primarily on employee compensation and years of service up to the
acquisition of Eskimo Pie Corporation by the Company. The above mentioned plans
are referred to as the "Pension Benefits".
In addition, Eskimo Pie Corporation entered into an agreement with
Reynolds Metals Company to indemnify the cost of retiree health care and life
insurance benefits for salaried employees of Eskimo Pie Corporation who had
retired prior to April 1992. Under this agreement, Eskimo Pie Corporation may
elect to prepay its remaining obligation. Eskimo Pie Corporation did not provide
postretirement health and life insurance benefits for employees who retired
subsequent to April 1992. This indemnity agreement is referred to as the "Other
Benefits".
The following table reconciles the changes in benefit obligations and plan
assets in 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
================
F-29
Coolbrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 12. Retirement Plans (cont'd)
The funded status for the post retirement health and life insurance benefits is
as follows:
Other Benefits
--------------
Benefit obligations in excess of Plan assets $ 1,803
==============
Accrued benefit cost $ 1,803
==============
The accrued benefit cost of $1,803 is included in Other liabilities at
August 31, 2005.
The following table provides the components of the net periodic benefit
cost:
Pension Benefits Other Benefits
---------------- --------------
Interest cost $ 139 $ 200
Expected return on Plan assets (337)
Recognized net actuarial gain 187
----------------------------------
Net period benefit cost (income) $ (11) $ 200
==================================
The assumptions used in the measurement of the Eskimo Pie Corporation's
benefit obligations are as follows:
Pension Benefits Other Benefits
---------------- --------------
Benefit obligation, beginning
of year 6.00% 7.75%
Expected return on plan assets,
during the year 8.00%
The weighted average annual assumed rate of increase in the per capita
cost of covered benefits for the Other Benefits Plan (i.e., health care cost
trend rate) is 5% for 2005 and is assumed to remain at that level thereafter. A
one percentage point increase or decrease in the assumed health care cost trend
rate would change the accumulated postretirement benefit obligation by
approximately $177 and the net periodic postretirement benefit cost by
approximately $18.
F-30
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 12. Retirement Plans (cont'd)
The Company's allocation of Pension Benefit assets at August 31, 2005 and
2004, target allocations for fiscal 2006 and expected long-term rate of return
by asset category are as follows:
- ------------------------------------------------------------------------------------------------
Weighted-average
Target 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%
-------------------------------------------------------------------
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
F-31
CoolBrand International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 13. Commitments (Cont'd)
maintenance costs in addition to minimum rental payments. Certain store leases
provide for additional rentals based on a percentage of sales and have renewal
options for one or more periods from five to twenty years.
At August 31, 2005 the future minimum lease payments under operating
leases with rental terms of more than one year, net of sublease rents, amounted
to:
Fiscal year ending:
2006 $ 4,363
2007 3,004
2008 2,226
2009 1,360
2010 554
Later years 886
--------
Total minimum obligations $ 12,393
========
Total rental expense relating to all operating leases (including those
with terms less than one year) was $7,698 (2004 - $7,203, 2003 - $2,973).
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, 2003 - $7,719).
F-32
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 15. Related party transactions and amounts
Calip Dairies, Inc. ("Calip"), an ice cream distributor owned by an
officer, director and shareholder of the Company, had a management agreement
with Integrated Brands Inc., a subsidiary of the Company which the Company
acquired in March 1998. This management agreement was terminated in January 2005
by the mutual agreement of the parties. Under the agreement, Calip provided
management services to Integrated Brands for an annual fee of $1,300. Such
management fees incurred for the year ended August 31, 2005 were $542 (2004 -
$1,300, 2003 - $1,050). 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 a sixty-day notice.
Sales of products to Calip were $9,781 for the year ending August 31, 2005 (2004
- - $9,482, 2003 - $8,517). At August 31, 2005, $1,840 of the receivables -
affiliates represent receivables from Calip (2004 - $3,883). The transactions
with Calip occur in the normal course of operations and are measured at the
amount of consideration established and agreed to by the related parties.
Note 16. Segment information
CoolBrands International's reportable segments are Frozen desserts,
Yogurt, Foodservice, Dairy components and Franchising and licensing, including
Company-owned stores.
Revenues and profits in the Frozen desserts segment are generated from
selling a variety of prepackaged frozen dessert products to distributors and
various retail establishments including supermarkets, grocery stores, club
stores, gourmet shops, delicatessens and convenience stores.
Revenues and profits in the Yogurt segment are generated from selling a
variety of prepackaged Yogurt products to distributors and various retail
establishments including supermarkets, grocery stores, club stores, gourmet
shops, delicatessens and convenience stores.
Revenues and profits in the Foodservice segment are generated from
manufacturing and selling soft-serve yogurt and premium ice cream mixes to
broad-line foodservice distributors, yogurt shops and other foodservice
establishments which, in turn, sell soft-serve ice cream and yogurt products to
consumers.
Revenues and profits in the Dairy components segment are generated from
the manufacturing and selling of various ingredients to the dairy industry and
from the manufacturing and selling of flexible packaging, such as private label
ice cream novelty wraps.
Revenues and profits in the Franchising and licensing segment are
generated by franchising activities, which generate initial and recurring
revenues and the manufacture and sale of proprietary products to franchisees and
licensees and from Company-owned stores selling ice cream and soft-serve yogurt
out of Company-owned stores and outlets. CoolBrands International Inc. evaluates
the performance of its segments and allocates resources to
F-33
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (Cont'd)
them based on their operating contribution, which represents segment revenues,
less direct costs of operation, excluding the allocation of corporate expenses.
Industry Segments:
Year Ended August 31, 2005
Frozen Dairy Franchising
desserts Yogurt Foodservice components and 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
F-34
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (cont'd)
Industry Segments:
Year Ended August 31, 2004
Frozen Dairy Franchising
desserts Foodservice components and 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
F-35
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (cont'd)
Industry Segments:
Year Ended August 31, 2003
Frozen Dairy Franchising
desserts Foodservice components and licensing Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 163,053 $ 14,599 $ 28,063 $ 14,094 $ 144 $ 219,953
Interest income 388 85 29 502
Inter-segment revenues (3,636) (669) (1,986) (144) (6,435)
--------------------------------------------------------------------------------
Net revenues 159,805 13,930 26,077 14,179 29 214,020
--------------------------------------------------------------------------------
Segment earnings 26,086 1,807 4,066 1,432 29 33,420
General corporate expenses (1,152) (1,152)
Interest expense (1,329) (14) (1,343)
Minority interest (365) (365)
--------------------------------------------------------------------------------
Earnings before income taxes $ 24,392 1,807 $ 4,066 $ 1,418 $ (1,123) 30,560
=================================================================
Provision for income taxes 11,734
------------
Net earnings 18,826
============
Assets $ 136,953 $ 15,404 $ 26,095 $ 45,813 $ 2,334 $ 226,599
Capital expenditures 2,779 170 167 1,025 4,141
Depreciation and amortization 1,778 426 316 719 3,239
F-36
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (cont'd)
Geographic Segments:
Year Ended August 31, 2005
Canada United States International Consolidated
- -----------------------------------------------------------------------------------------------
Revenues $ 4,862 $ 422,946 $ 3,637 $ 431,445
Interest income 262 800 170 1,232
Inter-segment revenues (339) (47,268) (47,607)
--------------------------------------------------------
Net revenues 4,785 376,478 3,807 385,070
--------------------------------------------------------
Segment (loss) earnings 849 (33,467) 2,002 (30,616)
General corporate expenses (72) (72)
Interest expense (2,586) (2,586)
Asset impairment (55,024) (501) (55,525)
Gain on sale of building 3,634 3,634
Minority interest 2,700 2,700
--------------------------------------------------------
Earnings (loss) before income taxes $ 777 $ (84,743) $ 1,501 (82,465)
=========================================
Recovery of income taxes (8,395)
------------
Net (loss) $ (74,070)
============
Assets $ 8,526 $ 279,210 $ 10,109 $ 297,845
Capital expenditures 737 11,650 22 12,409
Depreciation and amortization 142 4,719 181 5,042
F-37
CoolBrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (cont'd)
Geographic Segments:
Year Ended August 31, 2004
Canada United States International Consolidated
- -----------------------------------------------------------------------------------------------
Revenues $ 4,119 $ 516,004 $ 3,024 $ 523,147
Interest income 216 264 51 531
Inter-segment revenues (172) (73,568) (73,740)
--------------------------------------------------------
Net revenues 4,163 442,700 3,075 449,938
--------------------------------------------------------
Segment earnings 609 37,509 1,671 39,789
General corporate expenses (1,868) (1,868)
Interest expense (1,498) (1,498)
Minority interest 958 958
--------------------------------------------------------
(Loss) earnings before income taxes $ (1,259) $ 36,969 $ 1,671 37,381
========================================
Provision for income taxes 13,869
------------
Net earnings $ 23,512
============
Assets $ 19,061 $ 289,323 $ 8,873 $ 317,257
Capital expenditures 20 13,339 4 13,363
Depreciation and amortization 153 7,016 145 7,314
F-38
Coolbrands International Inc.
Notes to Consolidated Financial Statements for the years ended August 31, 2005,
2004 and 2003
- --------------------------------------------------------------------------------
(Amounts are expressed in thousands of dollars)
Note 16. Segment information (cont'd)
Geographic Segments:
Year Ended August 31, 2003
Geographic Segments:
Canada United States International Consolidated
- -------------------------------------------------------------------------------------------
Revenues $ 3,479 $ 213,617 $ 2,857 $ 219,953
Interest income 69 402 31 502
Inter-segment revenues (144) (6,291) (6,435)
---------------------------------------------------------
Net revenues 3,404 207,728 2,888 214,020
---------------------------------------------------------
Segment earnings 451 31,611 1,358 33,420
General corporate expenses (1,152) (1,152)
Interest expense (1,343) (1,343)
Minority interest (365) (365)
---------------------------------------------------------
Earnings before income taxes $ (701) $ 29,903 $ 1,358 30,560
=========================================
Provision for income taxes 11,734
------------
Net earnings $ 18,826
============
Assets $ 5,597 $ 213,793 $ 7,209 $ 226,599
Capital expenditures 4,141 4,141
Depreciation and amortization 138 2,959 142 3,239
NOTE 17. Subsequent event
Effective December 23, 2005 the Corporation sold substantially all of its
franchising and licensing segment for cash consideration of $8 million to
International Franchise Corp., a Company owned by Aaron Serruya, a director
and former executive vice president of the Corporation. The sale of the
transaction was reviewed and unanimously recommended to the board of directors
of the Corporation by a committee of independent directors and was unanimously
approved by the board of directors. As part of the independent director
committee's review, it received a fairness opinion from Duff & Phelps, LLC. In
connection with the sale of the franchising and licensing segment, the
Corporation was required to pay down $3,612 of its short term borrowings and
long term debt from the cash consideration received.
F-39