EX-99 4 ex2.txt EXHIBIT 2 Exhibit 2 AUDITORS' REPORT To the Directors of CoolBrands International Inc.: We have audited the consolidated balance sheets of CoolBrands International Inc. as at August 31, 2003 and 2002 and the consolidated statements of earnings and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2003 and 2002 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. BDO DUNWOODY LLP "BDO DUNWOODY LLP" Chartered Accountants Toronto, Ontario November 25, 2003 F-1 CoolBrands International Inc. Consolidated Balance Sheets as at August 31, 2003 and 2002 -------------------------------------------------------------------------------- (in thousands of dollars)
2003 2002 $ $ ------- ------- Assets Current Assets: Cash and short term investments 30,140 47,086 Receivables (note 3) 60,807 43,001 Receivables - affiliates (note 12) 3,185 3,792 Inventories 55,604 25,361 Prepaid expenses 9,722 6,752 Asset held for sale 3,432 Future income taxes (note 8) 1,930 2,415 ------- ------- Total current assets 161,388 131,839 Future income taxes (note 8) 2,977 3,433 Property, plant and equipment (note 4) 28,349 19,710 License agreements, net of accumulated amortization of $4,265 (2002 - $3,711) 12,357 13,438 Intangible and other assets (note 5) 9,084 7,332 Goodwill (note 1) 99,695 107,910 ------- ------- 313,850 283,662 ======= =======
See accompanying notes to consolidated financial statements. F-2 CoolBrands International Inc. Consolidated Balance Sheets as at August 31, 2003 and 2002 -------------------------------------------------------------------------------- (in thousands of dollars)
2003 2002 $ $ ------- ------- Liabilities and Shareholders' Equity Current Liabilities: Accounts payable 27,339 24,399 Payables - affiliates (note 12) 754 978 Accrued liabilities 33,530 32,880 Income taxes payable 5,204 7,347 Future income taxes (note 8) 3,144 2,566 Current maturities of long-term debt (note 6) 5,683 6,315 ------- ------- Total current liabilities 75,654 74,485 Long-term debt (note 6) 38,671 29,279 Other liabilities 3,984 4,940 Future income taxes (note 8) 4,722 3,950 ------- ------- Total liabilities 123,031 112,654 ------- ------- Minority interest 2,968 300 ------- ------- Commitments and contingencies (notes 10 and 11) Shareholders' Equity Capital stock (note 7) 122,406 122,378 Cumulative translation adjustment (8,904) 5,685 Retained earnings 74,349 42,645 ------- ------- Total shareholders' equity 187,851 170,708 ------- ------- 313,850 283,662 ======= =======
See accompanying notes to consolidated financial statements. Approved by the Board, "David J. Stein", Director ---------------- "Romeo DeGasperis", Director ------------------ F-3 CoolBrands International Inc. Consolidated Statements of Earnings and Retained Earnings for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (in thousands, except for earnings per share data)
2003 2002 $ $ ------- ------- Revenues: Sales 335,034 236,028 Franchising and licensing revenues: Royalty income 2,716 3,070 Franchise and license fees 1,804 1,213 Consumer products license fees 741 904 Drayage and other income 16,978 1,007 ------- ------- Total revenues 357,273 242,222 ------- ------- Operating expenses: Cost of goods sold 207,870 129,246 Selling, general and administrative expenses 95,088 77,558 Interest expense 1,990 2,544 ------- ------- Total operating expenses 304,948 209,348 ------- ------- Minority interest 541 ------- ------- Earnings before income taxes 51,784 32,874 ------- ------- Provision for income taxes (note 8): Current 17,536 9,715 Future 2,544 2,175 ------- ------- 20,080 11,890 ------- ------- Net earnings 31,704 20,984 Retained earnings - beginning of year 42,645 21,661 ------- ------- Retained earnings - end of year 74,349 42,645 ======= ======= Earnings per share: Basic 0.61 0.44 Diluted 0.59 0.42 Weighted average shares outstanding: Shares used in per-share calculation - basic 51,746 48,050 Shares used in per-share calculation - diluted 53,992 50,346
See accompanying notes to consolidated financial statements. F-4 CoolBrands International Inc. Consolidated Statements of Cash Flows for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (in thousands of dollars)
2003 2002 $ $ ------- ------- Cash and short term investments provided by (used in): Operating activities: Net earnings 31,704 20,984 Items not affecting cash Depreciation and amortization 4,801 4,646 Future income taxes 2,544 2,175 Loss on sale of asset held for sale 390 Minority interest 541 Changes in current assets and liabilities, net of businesses acquired Receivables (5,172) (8,156) Receivables - affiliates 844 (927) Allowance for doubtful accounts (1,087) (980) Inventories (9,065) (7,500) Prepaid expenses (2,900) (2,285) Accounts payable (7,476) 58 Payables - affiliates (240) 257 Accrued liabilities (2,293) 11,520 Income taxes payable (2,292) 4,587 Other assets 364 (336) Other liabilities (1,023) 19 ------- ------- Cash provided by operating activities 9,640 24,062 ------- ------- Investing activities: Increase in notes receivable (5) (44) Repayment of notes receivable 345 91 Purchase of leasehold improvements and equipment (5,736) (6,338) Purchase of intangible assets (113) (260) Purchase of license agreements (1,482) Acquisitions, net of cash acquired (13,409) (8,628) Proceeds from asset held for sale 3,283 ------- ------- Cash used in investing activities (17,117) (15,179) ------- ------- Financing activities: (Expense) proceeds from special warrants (144) 13,908 Proceeds from revolving line of credit, unsecured 2,770 Proceeds from issuance of Class A and B shares 172 2,507 Repayment of long-term debt (9,495) (6,662) ------- ------- Cash (used in) provided by financing activities (6,697) 9,753 ------- ------- (Decrease) in cash flows due to changes in foreign exchange rates (2,772) (3,118) ------- ------- (Decrease) increase in cash and short term investments (16,946) 15,518 Cash and short term investments - beginning of year 47,086 31,568 ------- ------- Cash and short term investments - end of year 30,140 47,086 ======= =======
See accompanying notes to consolidated financial statements. F-5 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 1. Description of business and summary of significant accounting policies CoolBrands International Inc. (the "Company") manufactures, markets, distributes, sub-licenses and sells a variety of branded frozen dessert products to supermarkets, grocery stores, club stores, convenience stores, gourmet shops and delicatessens in Canada, the United States and certain foreign countries and also franchises frozen yogurt and ice cream stores, dip shops and family style restaurants throughout Canada, the United States and over 80 foreign countries. The Company also manufactures and sells soft serve frozen yogurt and ice cream mixes, a variety of flavours and ingredients and flexible packaging. The Company also operates a "direct store delivery" (DSD) frozen distribution system in the United States that delivers the Company's frozen dessert products, as well as those of third party "partner brand" manufacturers, directly to retailers' store locations. The Company also manufactures frozen desserts and other food products on a contract basis, including "store brand" (private label) products for retailers. Basis of presentation The consolidated financial statements are prepared by management using accounting principles generally accepted in Canada 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 earnings from the date of acquisition. All amounts are reported in Canadian dollars unless otherwise indicated. Use of estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimated. Cash and short term investments 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. Inventories Inventories consist primarily of ice cream, frozen yogurt and frozen dessert 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 leasehold improvements 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 3 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. Trademarks, license agreements and franchise agreements and rights Trademarks, license agreements and franchise agreements and rights are stated at cost less accumulated amortization. Amortization is provided by the straight-line method using the terms of the agreements, which range from 3 to 20 years. F-6 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 1. Description of business and summary of significant accounting policies (cont'd) Goodwill Goodwill is evaluated annually for possible impairment. The Company uses an estimate of the related reporting units' discounted future cash flows in determining if the fair value of the reporting units is recoverable. Any permanent impairment in the value of goodwill would be written off against earnings. Based on the impairment tests performed, there was no impairment of goodwill in fiscal 2003. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. 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 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. Revenue from Drayage income is recognized at the time the product is delivered for the vendor to their customer by the Company. 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 $5,131,000 on advertising for the year ended August 31, 2003 (2002 - $5,991,000). Product introductory costs The Company capitalizes certain product introductory placement costs (i.e. slotting fees) paid to customers, which are incurred to develop new markets for new and existing products sold for the first time. The payment of such fees is common in the industry. These costs are expensed over a twelve month period. Product introductory expense was $11,713,000 for the year ended August 31, 2003 (2002 - $6,700,000). Financial instruments The carrying amount of financial instruments including cash and short term investments, receivables, receivables - affiliates, accounts payable, payables - affiliates and accrued liabilities approximates fair value at August 31, 2003, because of the relatively short maturity of these instruments. The Company is exposed to interest rate risk on its long-term debt, however, the Company mitigates some of this exposure through an interest rate swap as described in note 6. F-7 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 1. Description of business and summary of significant accounting policies (cont'd) Concentration of credit risk Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and short-term 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 per share The Company uses the treasury stock method to determine the dilutive earnings 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 Canadian dollars using the average exchange rate for the year for items included in the consolidated statements of operations. Foreign currencies are translated into Canadian 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. Future 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 substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. Stock Option Plan The Company has a stock option plan for directors, officers, consultants and key employees. No compensation expense is recognized in accounting for stock options in the Company's Consolidated Statements of Earnings, except for stock-based compensation expense for stock options granted to consultants which is measured at the estimated fair value at the date of grant and expensed. When options are exercised the amount received is credited to share capital. Pro forma stock based compensation expense information is included in note 7. Derivative Instruments Under an agreement expiring April 1, 2004, the U.S. based subsidiary of the Company entered into an interest-rate swap as a derivative to modify the interest characteristics on a portion of its outstanding float rate senior unsecured term loan, in an attempt to reduce its exposure to fluctuations in interest rates. The fair value of the contract has not been reflected in the Consolidated Financial Statements. The Company does not enter into such contracts for speculative purposes. Reclassifications Certain 2002 amounts have been reclassified to conform with the 2003 presentation. F-8 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 2. Acquisitions a. 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: $ Purchase Consideration: $ ---------------------- ------ ----------------------- ----- Current assets 22,396 Property, plant and equipment 7,879 ------ 30,275 Less: Liabilities 30,275 ------ ----- Nil Nil ====== =====
On July 6, 2003, the Company acquired the Dreamery'r' ice cream and Whole Fruite'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: $ Purchase consideration: $ ----------------------------- ------ ----------------------- ----- Current assets 10,971 Cash 13,409 Option to purchase City of Industry, CA. facility 2,438 ------ ------ 13,409 13,409 ====== ======
F-9 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 2. Acquisitions (cont'd) b. 2002 Acquisitions 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 1977, and was a pioneer in establishing the market for frozen novelties made from whole fruit and all natural ingredients. In its home market in Southern California, Fruit-a-Freeze products are consistently top ranked sellers among frozen novelties. The acquisition included the Fruit-a-Freeze leased frozen novelty manufacturing facility in Norwalk, CA, and Fruit-a-Freeze's frozen distribution center and direct store delivery route 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. The following is a summary of the assets acquired and the fair value assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase consideration: $ -------------------- ----- ----------------------- ----- Current assets 2,814 Cash 137 Equipment 970 Future payment Other assets 23 contingent upon year Intangible assets 153 one sales 2,280 Goodwill 4,921 ----- 8,881 Less: Liabilities 6,464 ----- ----- 2,417 2,417 ===== =====
In addition to the $2,280,000 cash payment contingent upon sales in year one, the Agreement specifies additional payments contingent upon the sales of Fruit-a-Freeze branded products in excess of U.S. $11,173,000 in both years two and three. However, since it is unlikely that any additional payments will be required for years two and three, the Company has not recorded a liability for such additional contingent consideration payments. On August 16, 2002, the Company purchased the business and assets of Chipwich, Inc., maker of the Chipwich Ice Cream Cookie Sandwich. A Chipwich is premium ice cream sandwiched between two specially formulated chocolate chip cookies and rolled in pure chocolate chips. When it was introduced in 1981, Chipwich created the adult premium ice cream novelty category. Since then, Chipwich has established itself as one of the best-known brand names for frozen novelties. The following is a summary of the assets acquired and the fair value assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase consideration: $ -------------------- ----- ------------------------ ----- Current assets 379 Cash 8,491 Plant equipment 550 Cash payment, Due: Intangible assets 156 January 15, 2003, Goodwill 8,187 subject to certain potential adjustments 391 Warrants issued 390 ----- ----- 9,272 9,272 ===== =====
F-10 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 3. Receivables
2003 2002 $ $ ------ ----- Trade accounts receivable 64,217 45,502 Franchise and license fees receivable 423 2,326 Notes receivable, current maturities 167 196 ------ ------ 64,807 48,024 Less: Allowance for doubtful accounts 4,000 5,023 ------ ------ 60,807 43,001 ====== ======
4. Property, plant and equipment
2003 2002 $ $ ------ ----- Land 1,280 1,032 Buildings 8,432 4,651 Machinery and equipment 25,290 19,438 Leasehold improvements 3,257 2,629 ------ ------ 38,259 27,750 Less: Accumulated depreciation and amortization Buildings 866 641 Machinery and equipment 8,057 6,612 Leasehold improvements 987 787 ------ ------ 28,349 19,710 ====== ======
5. Intangible and other assets
2003 2002 $ $ ------ ----- Trademarks 4,421 4,857 Franchise agreements and rights 756 825 Territorial agreements 425 479 Purchase option - land and building 2,495 Notes receivable 168 538 Other 2,715 2,374 ------ ----- 10,980 9,073 Less: Accumulated amortization Trademarks 1,203 1,103 Franchise agreements and rights 280 256 Territorial agreements 413 382 ------ ----- 9,084 7,332 ====== =====
F-11 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 6. Long-term debt
2003 2002 $ $ ------ ------ Term loan, unsecured 22,518 33,516 Term loans, secured 13,292 507 Revolving line of credit, unsecured 2,770 1,052 Revolving loan, secured 4,112 Capitalized leases 1,662 519 ------ ------ 44,354 35,594 Less: Current maturities 5,683 6,315 ------ ------ 38,671 29,279 ====== ======
In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary borrowed U.S. $30,000,000, to finance the acquisition. The unsecured term loan is payable in monthly installments of U.S. $250,000, 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 fixed through August 31, 2001 at the lower of prime plus 1/2% or libor plus 2 1/2% (3.125% at August 31, 2003). As of August 31, 2003, the term loan balance was U.S. $16,250,000. 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 U.S. $5 million during any fiscal year. The U.S. based subsidiary entered into an interest rate protection agreement on April 1, 2001 covering U.S. $15,000,000 of the then outstanding principal balance of the senior unsecured term loan with a fixed libor interest rate of 5.18%, plus applicable margin. This interest rate protection agreement terminates on April 1, 2004. At August 31, 2003, the fair value of this interest rate protection agreement was U.S. $413,000 in favor of the bank and is not reflected in the Consolidated Financial Statements. The subsidiary also has a U.S. $10 million unsecured revolving credit facility. The revolving credit facility is available for general corporate purposes and has a maturity date of November 30, 2004. Interest is payable monthly on the unpaid principal balance of borrowings under this facility with an interest rate of libor plus 2%. The subsidiary agreed to pay a fee of 1/4% per annum on the unused portion of the commitment. As of August 31, 2003, the subsidiary has U.S. $8 million of available credit under the revolving credit facility. A U.S. $750,000 revolving line of credit with a maturity date of June 1, 2003, certain term loans and capitalized leases were assumed by a U.S. subsidiary in connection with the June 2002 acquisition of the business and assets of Fruit-A-Freeze, Inc. The secured term loans are payable in monthly installments of U.S. $21,521. Interest at prime plus 1% is payable monthly on the unpaid principal balance with interest rates fluctuating with changes in the prime lending rate. The U.S. $750,000 revolving line of credit and certain term loans were paid off on December 2, 2002. F-12 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 6. Long term debt (cont'd) On November 19, 2002, a limited partnership, which is owned 50.1% by the Company, entered into a credit agreement with a financial institution that includes a term loan of U.S. $10,000,000, which is secured by the partnership's property, plant, and equipment. Principal payments are payable in fixed monthly installments of U.S. $80,739 and matures on February 1, 2016. The term of the loan bears interest at prime plus 0.5% (4.5% at August 31, 2003.) The partnership's credit agreement also includes a revolving loan up to U.S. $5 million, subject to a borrowing base calculation, which bears interest at prime plus 0.5% (4.5% at August 31, 2003) and is due on November 19, 2004. At August 31, 2003, approximately U.S. $2,031,000, was available to the partnership under this loan. The revolving loan is secured by the partnership's receivable and inventory. In April 2003, the partnership executed an amendment to the credit agreement. Pursuant to this amendment, the minimum tangible net worth requirement was raised to U.S. $6,000,0000 beginning June 29, 2003. In addition, the financial institution waived all other covenant requirements for the remaining term of the agreement. Repayments of long-term debt due in each of the next five years are as follows:
$ ------ 2004 5,683 2005 12,426 2006 15,262 2007 10,968 2008 15 ------ 44,354 ======
Interest paid during the year ended August 31, 2003 was $1,980,000 (2002 -$2,472,000). 7. Capital Stock Authorized number of shares: Class A Subordinate voting shares 200,000,000 Class B Multiple voting shares 200,000,000
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-13 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 7. Capital stock (cont'd) The Company had the following share transactions during the years ended August 31, 2003 and 2002:
Class A Class B subordinate multiple voting shares voting shares Warrants Amount # # # $ ------------- ------------- -------- ------- Balance at August 31, 2001 39,649 6,240 105,573 Shares issued upon the exercise of special warrants 3,750 13,908 Shares issued for cash for stock options exercised 1,894 173 2,507 Multiple voting shares converted to Subordinate voting shares 204 (204) Warrants issued in connection with acquisition 100 390 ------------- ------------- -------- ------- Balance at August 31, 2002 45,497 6,209 100 122,378 Expenses related to the exercise of special warrants (144) Shares issued for cash for stock options exercised 102 172 Multiple voting shares converted to Subordinate voting shares 30 (30) ------------- ------------- -------- ------- Balance at August 31, 2003 45,629 6,179 100 122,406 ============= ============= ======== ======= Paid-in-balance $ 104,716 $17,300 $390 ============= ============= ======
The Company has granted options to purchase subordinate and multiple voting shares to directors, officers, consultants and key employees under the Company's stock option plans. A summary of the activity of the Company's stock option plans for the years ended August 31, 2003 and 2002 is summarized below: F-14
2002 Stock 1998 Stock Integrated Option Option Brands Stock Plan Plan Option Plan ------------- ----------- --------------------------- Weighted Subordinate Multiple Subordinate Average Subordinate Voting Voting Voting Exercise Voting Shares Shares Shares Shares Price ------------- ----------- ------------ ----------- -------- Outstanding at August 31, 2001 4,807 300 236 2.57 Granted 55 1.24 Exercised (1,658) (173) (236) 1.21 Cancelled (28) 1.24 ----- ------ ---- ---- ---- Outstanding at August 31, 2002 3,176 127 3.41 Granted 1,298 5.40 Exercised (102) 1.69 Expired (127) 5.72 Cancelled (10) 1.25 ----- ------ ---- ---- ---- Outstanding at August 31, 2003 1,298 3,064 3.98 ===== ===== ==== ==== ==== Options exercisable at August 31, 2003 1,025 2,778 3.97 ===== ===== ==== ==== ====
F-15 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 7. Capital stock (cont'd) Stock options outstanding at August 31, 2003, aggregating 4,362,000 shares, have a weighted-average contractual life of 2.7 years and a weighted-average exercise price of $3.98 per share. Stock options exercisable at August 31, 2003 have a weighted-average exercise price of $3.97 per share. The price range was $1.15 to $1.35 (1,527,000 outstanding and 1,241,000 exercisable), $4.30 (1,000,000 options exercisable), $5.00 (1,238,000 outstanding and 1,025,000 exercisable), $7.80 (537,000 options exercisable) and $13.75 (60,000 options outstanding) at August 31, 2003. Stock options reserved for future grant at August 31, 2003 aggregated 4,048,502. 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. The Company records no compensation expense when options are issued to employees. The Company estimates the fair value of each share option on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.46%; expected volatility of 68.38%; expected live of 2.7 years; and no dividend payments. Pro forma net earnings and earnings per share if compensation expense had been recorded for stock options granted to employees would be as follows:
2003 For the year ended August 31, $ ------ Pro forma net earnings 30,351 ====== Pro forma earnings per share: Basic 0.59 Diluted 0.56
8. Income taxes The effective income tax rate on earnings is affected from year to year by the geographic mix of the consolidated earnings before income taxes. The following table reconciles income taxes computed by applying the combined Canadian federal/provincial statutory rate with the actual income tax provision:
2003 2002 % % ----- ----- Combined basic Canadian Federal and Provincial income tax rate 38.00 44.62 Impact of operating in foreign countries with different effective rates 0.04 (9.63) Permanent differences 0.74 1.18 ----- ----- 38.78 36.17 ===== =====
The Company's subsidiaries have operating loss carry-forwards for income tax purposes amounting to approximately $5,084,000 (2002 - $5,393,000). These losses expire in various amounts through the year 2019. F-16 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 8. Income taxes (cont'd) Significant components of the Company's future tax assets and liabilities as of August 31, 2003 are as follows:
Future Tax Assets $ Future Tax Liabilities $ ----------------- ----- ---------------------- ----- Non-capital loss carry-forwards 1,876 Tax amortization in excess of book amortization 2,731 Accounting allowances not deducted for tax 1,294 Tax depreciation in excess of book depreciation 123 Other 1,737 Product introductory costs 3,291 Other 1,721 ----- ----- Total Future Tax Assets 4,907 Total Future Tax Liabilities 7,866 ===== =====
Income taxes paid during the year ended August 31, 2003 were $17,268,000 (2002 - $4,739,000). 9. Retirement Plans Eskimo Pie Corporation had maintained two defined benefit pensions plans covering substantially all salaried employees. Upon the acquisition of Eskimo Pie Corporation by the Company all future participation and all benefits under the plans were frozen. These plans provide retirement benefits based primarily on employee compensation and years of service up to the acquisition of Eskimo Pie Corporation by the Company. The above mentioned plans are referred to as the "Pension Benefits". In addition, Eskimo Pie Corporation entered into an agreement with Reynolds Metals Company to indemnify the cost of retiree health care and life insurance benefits for salaried employees of Eskimo Pie Corporation who had retired prior to April 1992. Under this agreement, Eskimo Pie Corporation may elect to prepay its remaining obligation. Eskimo Pie Corporation did not provide 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 2003, and reconciles the funded status to accrued benefit cost at August 31, 2003:
Pension Benefits Other Benefits Benefit Obligation $ $ -------------------------------- ----- ----- Beginning balance 2,973 2,834 Interest cost 196 195 Actuarial loss 171 Lump sum purchase of obligations (12) Benefit payments (108) (463) Translation gain (328) (298) ----- ----- Ending balance 2,892 2,268 ===== ===== Plan assets - Basic value Beginning balance 2,806 Actual return on plan assets 243 Contributions 42 Benefit payments (120) Translation gain (305) ----- Ending balance 2,666 =====
F-17 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 9. 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 2,268 ===== Accrued benefit cost 2,268 =====
The accrued benefit cost of $2,268,000 is included in Other liabilities at August 31, 2003. The following table provides the components of the net periodic benefit cost:
Pension Benefits Other Benefits ---------------- -------------- $ $ ---- --- Interest cost 196 195 Expected return on Plan assets (243) Recognized net actuarial gain 43 ---- --- Net period benefit cost (income) (4) 195 ==== ===
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 6.75% 7.75% Expected return on plan assets, during the year 8.0%
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) is 5% for 2003 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 $232,500 and the net periodic postretirement benefit cost by approximately $23,250. 10. Commitments The majority of distribution warehouse, store and office facility leases are under non-cancelable leases. Substantially all of the leases are net leases, which require the payment of property taxes, insurance and maintenance costs in addition to minimum rental payments. Certain store leases provide for additional rentals based on a percentage of sales and have renewal options for one or more periods from five to twenty years. F-18 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 10. Commitments (cont'd) At August 31, 2003 the future minimum lease payments under operating leases with rental terms of more than one year, net of sub lease rents, amounted to:
Fiscal year ending: $ ------------------------- ------ 2004 8,011 2005 5,711 2006 4,760 2007 2,756 2008 2,351 Later years 2,067 ------ Total minimum obligations 25,656 ======
Total rental expense relating to all operating leases (including those with terms less than one year) was $2,973,000 (2002 - $1,302,000). 11. Contingencies 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. Several subsidiaries hold master store leases or have guaranteed 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 $410,000 at August 31, 2003. Aggregate minimum future rental payments under these leases approximated $10,691,000 at August 31, 2003 (2002 - $11,329,000). 12. Related party transactions and amounts Receivables - affiliates at August 31, 2002 were $266,000 in advances which are unsecured, non-interest bearing and due on demand. The affiliates include directors and officers of the Company. Calip Dairies, Inc. ("Calip"), an ice cream distributor owned by an officer, director and shareholder of the Company, has a management agreement with Integrated Brands Inc., which the Company acquired in March 1998. This agreement terminates on December 31, 2013 and thereafter shall automatically renew December 31 of each year for an additional one year term, unless terminated under certain conditions. Under the agreement, Calip provides management services to Integrated Brands for an annual fee of U.S.$1,300,000 effective July 1, 2003, prior to which the fee was U.S. $1,000,000. Such management fees incurred for the year ended August 31, 2003 were $1,556,000 (U.S. $1,050,000) (2002 - $1,559,000 (U.S.$1,000,000)). At August 31, 2003, the $754,000 (2002 - $978,000) 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 31st of each year while the agreement is in effect for an additional one year term, unless terminated under certain conditions. The distribution agreement is terminable by either party on sixty days notice. Sales of products to Calip were $12,624,000 for the year ending August 31, 2003 (2002 - $11,709,000). At August 31, 2003, $3,185,000 of the receivables - affiliates represent receivables from Calip (2002 - $3,526,000). 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. F-19 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 13. Segment information CoolBrands International's reportable segments are Prepackaged consumer products, Foodservice, Dairy components and Franchising and licensing, including Company-owned stores. Revenues and profits in the Prepackaged consumer products 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 Foodservice segment are generated from manufacturing and selling soft serve yogurt and premium ice cream mixes to broad-line foodservice distributors, yogurt shops and other foodservice establishments which, in turn, sell soft serve ice cream and yogurt products to consumers. Revenues and profits in the Dairy components segment are generated from the manufacturing and selling of various ingredients to the dairy industry and from the manufacturing and selling of flexible packaging, such as private label ice cream novelty wraps. Revenues and profits in the Franchising and licensing segment are generated by franchising activities, which generate initial and recurring revenues and the manufacture and sale of proprietary products to franchisees and licensees and from Company-owned stores selling ice cream and soft serve yogurt out of company-owned stores and outlets. CoolBrands International Inc. evaluates the performance of its segments and allocates resources to them based on their operating contribution, which represents segment revenues, less direct costs of operation, excluding the allocation of corporate expenses. F-20 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 13. Segment information (cont'd)
Year Ended August 31, 2003 ------------------------------------------------------------------------------ Prepackaged Franchising consumer Dairy and products Foodservice components licensing Corporate Consolidated INDUSTRY SEGMENTS: $ $ $ $ $ $ ----------------------------- ----------- ----------- --------- ----------- --------- ------------ Revenues 277,134 26,234 41,594 20,890 214 366,066 Interest income 575 126 43 744 Inter-segment revenues (5,389) (991) (2,943) (214) (9,537) ------- ------ ------ ------ ------ ------- Net revenues 272,320 25,243 38,651 21,016 43 357,273 ------- ------ ------ ------ ------ ------- Segment earnings 45,152 2,678 6,026 2,123 43 56,022 General corporate expenses (1,707) (1,707) Interest expense (1,970) (20) (1,990) Minority interest (541) (541) ------- ------ ------ ------ ------ ------- Earnings before income taxes 42,641 2,678 6,026 2,103 (1,664) 51,784 ======= ====== ====== ====== ====== Provision for income taxes 20,080 ------- Net earnings 31,704 ======= Assets 189,686 21,335 36,143 63,453 3,233 313,850 Capital expenditures 3,849 236 231 1,420 5,736 Depreciation and amortization 2,635 631 469 1,066 4,801
F-21 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 13. Segment information (cont'd)
Year Ended August 31, 2002 ------------------------------------------------------------------------------ Prepackaged Franchising consumer Dairy and products Foodservice components licensing Corporate Consolidated INDUSTRY SEGMENTS: $ $ $ $ $ $ ----------------------------- ----------- ----------- --------- ----------- --------- ------------ Revenues 157,337 26,285 37,743 24,702 286 246,353 Interest income 380 245 44 669 Inter-segment revenues (122) (1,218) (3,133) (92) (235) (4,800) ------- ------ ------ ------ ------ ------- Net revenues 157,595 25,067 34,610 24,855 95 242,222 ------- ------ ------ ------ ------ ------- Segment earnings 26,101 2,289 4,077 3,867 95 36,429 General corporate expenses (1,011) (1,011) Interest expense (2,526) (18) (2,544) ------- ------ ------ ------ ------ ------- Earnings before income taxes 23,575 2,289 4,077 3,849 (916) 32,874 ======= ====== ====== ====== ====== Provision for income taxes 11,890 ------- Net earnings 20,984 ======= Assets 176,937 15,249 44,118 42,070 5,288 283,662 Capital expenditures 5,236 397 78 627 6,338 Depreciation and amortization 2,212 823 492 1,119 4,646
F-22 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 13. Segment information (cont'd)
Year Ended August 31, 2003 ----------------------------------------------------- Canada United States International Consolidated GEOGRAPHIC SEGMENTS: $ $ $ $ ------------------------------- ------ ------------- ------------- ------------ Revenues 5,157 356,674 4,235 366,066 Interest income 103 595 46 744 Inter-segment revenues (214) (9,323) (9,537) ------ ------- ------ ------- Net revenues 5,046 347,946 4,281 357,273 ------ ------- ------ ------- Segment earnings 668 53,342 2,012 56,022 General corporate expenses (1,707) (1,707) Interest expense (1,990) (1,990) Minority interest (541) (541) ------ ------- ------ ------- Earnings before income taxes (1,039) 50,811 2,012 51,784 ====== ======= ====== Provision for income taxes 20,080 ------- Net earnings 31,704 ======= Assets 7,752 296,113 9,985 313,850 Capital expenditures 5,736 5,736 Depreciation and amortization 204 4,387 210 4,801
Year Ended August 31, 2002 ----------------------------------------------------- Canada United States International Consolidated GEOGRAPHIC SEGMENTS: $ $ $ $ ------------------------------- ------ ------------- ------------- ------------ Revenues 6,328 235,130 4,895 246,353 Interest income 72 559 38 669 Inter-segment revenues (316) (4,484) (4,800) ------ ------- ----- ------- Net revenues 6,084 231,205 4,933 242,222 ------ ------- ----- ------- Segment earnings 1,033 33,280 2,116 36,429 General corporate expenses (1,011) (1,011) Interest expense (2,544) (2,544) ------ ------- ----- ------- Earnings before income taxes 22 30,736 2,116 32,874 ====== ======= ===== Provision for income taxes 11,890 ------- Net earnings 20,984 ======= Assets 9,202 265,512 8,948 283,662 Capital expenditures 134 6,204 6,338 Depreciation and amortization 218 4,195 233 4,646
F-23 CoolBrands International Inc. Notes to Consolidated Financial Statements For the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 14. Differences between Canadian and United States generally accepted accounting principles The consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The following adjustments and/or additional disclosures, would be required in order to present the financial statements in accordance with U.S. GAAP, as required by the United States Securities Exchange Commission ("SEC"). (a) Comprehensive income Under United States GAAP, comprehensive income must be presented for certain items that are required by U.S. GAAP to be recognized directly in stockholders' equity rather than net income.
2003 2002 ------ ------ $ $ Net earnings 31,704 20,984 Unrealized gain (loss) on derivative investments (net of income tax of $(103) in 2003 and $44 in 2002) 164 (71) Foreign currency translation 14,589 178 ------ ------ Comprehensive earnings 17,279 21,091 ====== ======
(b) Accounting for consideration given by a vendor to a customer or reseller of the vendor's products 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 expenses classified as selling, general and administrative expenses, must be deducted from revenue. The reclassification for the year ended August 31, 2003 would be $31,057,000 (2002 - $26,979,000). Under U.S. GAAP, total revenues and selling, general and administrative expenses for the years ended August 31, 2003 and 2002 would be classified as follows:
Total Selling, general and revenues administrative expenses ----------------- ------------------------ 2003 2002 2003 2002 ------- ------- ------- ------- $ $ $ $ Canadian GAAP 357,273 242,222 95,088 77,558 Adjustment for consideration given to customers (31,057) (26,979) (31,057) (26,979) ------- ------- ------- ------- U.S. GAAP 326,216 215,243 64,031 50,579 ======= ======= ======= =======
F-24 CoolBrands International Inc. Notes to Consolidated Financial Statements For the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- 14. Differences between Canadian and United States generally accepted accounting principles (cont'd) (c) Stock based compensation Under United States GAAP, the Company accounts for stock options granted to employees under the intrinsic value method whereby compensation expense is recognized to the extent the market price exceeds the exercise price at the date of grant. Stock options grants to non-employees are recorded at fair value. In 2002 the application of the intrinsic value method would have resulted in an additional compensation expense, however the amount involved was not material. (d) Outlets The following is a schedule summarizing the number of franchised, licensed and other outlets and company-owned outlets:
Franchised, Licensed and Company-owned Total Other Outlets Outlets Outlets ------------- ------------- ------- Outlets - August 31, 2001 4,458 5 4,463 Outlets converted to franchised outlets Outlets opened (closed) (34) (34) ----- -- ----- Outlets - August 31, 2002 4,424 5 4,429 Outlets converted to franchised outlets Outlets opened (closed) 23 23 ----- -- ----- Outlets - August 31, 2003 4,447 5 4,452 ===== == =====
The number of outlets opened are net of those closed. Certain franchised outlets are subject to master area franchise agreements. The Company does not have the same control over licensed and other outlets as it does with franchised and company-owned outlets. F-25 CoolBrands International Inc. Notes to Consolidated Financial Statements For the years ended August 31, 2003 and 2002 -------------------------------------------------------------------------------- 14. Differences between Canadian and United States generally accepted accounting principles (cont'd) (e) Other items In December 2002, the FASB issued SFAS No. 148, " Accounting for Stock-Based Compensation-Transition and Disclosure- an amendment of FASB Statement No. 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensations and the effect of the method used on reported results. The Company intends to continue to account for stock-based compensation using the intrinsic value method. FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, was issued in November 2002. FIN 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. Implementation of this standard did not have a material effect in the current year. In January 2003, the FASB issued FASB Interpretation ("FIN") 46, "Consolidation of Variable Interest Entities an interpretation of ARB No. 51" (the "Interpretation"). The Interpretation introduces a new consolidation model -- the variable interests model -- which determines control [and consolidation] based on potential variability in gains and losses of the entity being evaluated for consolidation. The Interpretation requires disclosure of certain information in financial statements initially issued after January 31, 2003, if it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when Interpretation 46 becomes effective. For foreign private issuers, Interpretation 46 will be applicable from the beginning of their first standalone U.S. GAAP reporting period that begins after June 15, 2003. The Company has not determined the impact of this pronouncement, if any, on the reconciliation to U.S. GAAP. F-26 Management's Discussion and Analysis of Financial Condition and Results of Operations Comparison of 2003 and 2002 We manage our business based on four industry segments: Prepackaged consumer products, foodservice, dairy components, and franchising and licensing. Sales Sales for each segment are summarized in the following table:
Amount Percentage of Sales ----------------- ------------------- 2003 2002 2003 2002 Year Ended August 31, $ $ % % ------------------------- ------- ------- ----- ----- Prepackaged consumer products 255,197 156,691 76.2 66.4 Foodservice 25,243 25,067 7.5 10.6 Dairy components 38,651 34,610 11.5 14.7 Franchising and licensing 15,943 19,660 4.8 8.3 ------- ------- ----- ----- Total 335,034 236,028 100.0 100.0 ======= ======= ===== =====
Sales in fiscal 2003 increased by $99,006,000 or 41.9% from $236,028,000 in fiscal 2002 to $335,034,000. This increase was primarily related to an increase in sales of new prepackaged consumer products introduced for sale in fiscal 2003, expanded sales and distribution of our foodservice and dairy components products, sales generated by the brands and distribution assets acquired in July 2003 from Dreyer's Grand Ice Cream, Inc. and Nestle' and from the acquisition of 50.1% of Americana Food LP which was effective July 1, 2003. Gross profit margin The following table presents the gross profit margin dollars by industry segment and gross profit percentage for each industry segment:
Amount Percentage of Sales ----------------- ------------------- 2003 2002 2003 2002 Year Ended August 31, $ $ % % ------------------------- ------- ------- ---- ---- Prepackaged consumer products 104,594 83,030 41.0 53.0 Foodservice 9,898 10,297 39.2 41.1 Dairy components 8,921 7,135 23.1 20.6 Franchising and licensing 3,751 6,320 23.5 32.2 ------- ------- ----- ----- Total 127,164 106,782 38.0 45.2 ======= ======= ===== =====
Gross profit dollars increased to $127,164,000 in fiscal 2003 from $106,782,000 in fiscal 2002 due to the increased sales in 2003 versus 2002. However, the Company's overall gross profit percentage for fiscal 2003 decreased to 38% as compared with 45.2% for fiscal 2002, due to the impact of lower gross profit margins generated by Americana Foods' manufacturing operations and Eskimo Pie Frozen Distribution Inc's distribution operations. Franchising and licensing gross profit percentage for fiscal 2003 was adversely impacted by the losses of Company owned stores. Management's Discussion and Analysis of Financial Condition and Results of Operations Drayage and other income Drayage and other income increased to $16,978,000 in fiscal 2003 from $1,007,000 in fiscal 2002 due to drayage fees received from Dreyer's/Nestle for the delivery of their products to customers utilizing the Company's "Direct Store Delivery" (DSD) services. Selling, general and administrative expenses Selling, general and administrative expenses are summarized by industry segment in the following table:
Amount Percentage of Sales --------------- ------------------- 2003 2002 2003 2002 Year Ended August 31, $ $ % % ------------------------- ------ ------ ---- ---- Prepackaged consumer products 76,616 58,500 30.0 37.3 Foodservice 7,222 8,008 28.6 32.0 Dairy components 2,908 3,058 7.5 8.8 Franchising and licensing 6,639 6,981 41.6 35.5 Corporate 1,703 1,011 n/a n/a ------ ------ Total 95,088 77,558 ====== ======
Selling, general and administrative expenses increased by $17,530,000 from $77,558,000 in 2002 to $95,088,000 in 2003 due primarily to the increase in selling, general and administrative expenses in the prepackaged consumer products' segment due to the increased level of sales. Prepackaged consumer products selling, general and administrative expenses increased as a result of increased spending on promotions, marketing and advertising and an increase in product introductory expenses (slotting) associated with the sale of new products introduced in 2003. The Company continues to control spending over selling, general and administrative expenses, such that prepackaged consumer products selling, general and administrative expenses declined as a percentage of sales to 30% in fiscal 2003 from 37.3% in fiscal 2002, and selling, general and administrative expenses as a percentage of total revenues declined to 26.6% in fiscal 2003 from 32% in fiscal 2002. Interest expense Interest expense was $1,990,000 in fiscal 2003 compared with $2,544,000 in fiscal 2002. The decrease in interest expense was primarily due to the reduction in long-term debt associated with the acquisitions of Eskimo Pie Corporation in 2001 and the assets of Fruit-A-Freeze in 2002. Interest expense will increase in fiscal 2004 as a result of the Company's fourth quarter acquisition of 50.1% of Americana Foods LP which included U.S. $12,625,000 of secured term and revolver bank debt. Provision for income taxes The effective tax rate was 38.8% in fiscal 2003 and 36.2% for fiscal 2002. The effective tax rate differs from the Canadian Federal/Principal Statutory Rate primarily due to our operations in foreign countries with lower effective tax rates. Future effective tax rates could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates or changes in the valuation of our future income tax assets or liabilities. Management's Discussion and Analysis of Financial Condition and Results of Operations Net Earnings Net earnings improved to $31,704,000 in 2003 as compared to $20,984,000 in 2002 and improved to 8.9% of total revenues in 2003 as compared to 8.7% of total revenues in 2002. Liquidity and capital resources Working capital at August 31, 2003 was $85,734,000 compared with $57,354,000 at August 31, 2002. The increase was primarily due to an increase in receivables of $17,806,000 and inventory of $30,243,000, offset by a decrease in cash of $16,946,000. The Company believes its working capital plus internally generated funds and the funds available from a U.S. $10 million revolving credit facility will be sufficient to meet its cash and working capital requirements for its established operations for the current fiscal year. At August 31, 2003, the Company had $30,140,000 of cash and short-term investments as compared with $47,086,000 at August 31, 2002. The Company generated cash flow from operating activities before changes in working capital of $39,980,000 for the year ended August 31, 2003 as compared with $27,805,000 for the year ended August 31, 2002 due primarily to the increase in net earnings for 2003 as compared with 2002. Payment requirements In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary borrowed U.S. $30 million to finance the acquisition. The loan is payable in monthly installments of U.S. $250,000, 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. All borrowings under the above loan agreement are guaranteed by the Company and all of its significant subsidiaries. The principal balance outstanding at August 31, 2003 was U.S. $16,250,000. On November 19, 2002, Americana Foods LP, which is owned 50.1% by the Company, entered into a credit agreement with a financial institution that included a term loan of U.S. $10,000,000, which is secured by the Partnership's property, plant, and equipment. Principal payments are payable in fixed monthly installments of U.S. $80,739 and matures on November 19, 2007. The term of the loan bears interest at prime plus 0.5%( 4.5% at August 31, 2003.) The Partnership's credit agreement also included a revolving loan of up to U.S. $5 million, subject to a borrowing base calculation, which bears interest at prime plus 0.5% (4.5% at August 31, 2003) and is due on November 19, 2004. At August 31, 2003, approximately U.S. $2,031,000, was available to the partnership under this loan. The revolving loan is secured by the Partnership's receivables and inventory. Impact of inflation Inflation can significantly impact ice cream and frozen yogurt ingredients, including butterfat and packaging costs. In 2003 and 2002, the Company passed on ingredient, energy and freight cost increases by raising prices on selected product lines. In 2004, the Company believes that it will be able to pass on any cost increases, if any, in the normal course of business within a relatively short period of time. However, the ability of the Company to pass on cost increases will depend, to some extent, on whether its competitors have also done so. The Company believes that, in the past, its competitors have passed on cost increases in a relatively short period of time. Management's Discussion and Analysis of Financial Condition and Results of Operations Risk factors and uncertainties CoolBrands products are ultimately purchased by the global retail consumer, whose tastes and preferences are subject to variation and change. Although carefully monitored, these changes cannot be controlled and are difficult to predict. Management believes that CoolBrands' family of products is based on well established brand names and is easily adaptable to meet changes in consumer tastes and demands. CoolBrands operates in some countries that are subject to potential political and economic uncertainty. Such factors, beyond the control of CoolBrands, are lessened because of international diversification and the sharing of risks with Master and Sub-franchisees. CoolBrands is subject to currency exchange risks since most of its subsidiaries report and transact in U.S. dollars. Risks are minimized by the subsidiaries transacting purchases and recording the related sales in the same currency. From time to time, the Company has also used forward exchange contracts to minimize exchange risk exposure. The Corporation derives a substantial portion of its revenues from its operations in the United States. The U.S. market for frozen desserts 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 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 its other markets as its competitors expand their international operations. 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. Seasonality 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. Outlook In the past year, the Company acted through acquisition, internal expansion and pursuit of new strategic relationships to promote future profitable growth. The Company added new brands to its portfolio, including Dreamery and Whole-Fruit acquired from Dreyer's Grand Ice Cream, Inc., and the Godiva ice cream license assigned to the Company from Dreyer's in the fourth quarter of fiscal 2003. Management's Discussion and Analysis of Financial Condition and Results of Operations Outlook (cont'd) The Company also continued to increase its leverage and returns on its investment in brand equity through the vertical integration of our supply chain, including the acqusition from Nestle' of substanially all of the Haagen-Dazs frozen dessert direct store distribution assets in the U.S. and the acquisition of 50.1% of Americana Foods LP which owns one of the largest and most versatile frozen dessert manufacuring facilities in the U.S., both of which occurred in the fourth quarter of 2003. Management believes that the gains in revenues and earnings realized in 2003 continued to build a foundation to support continued profitable growth in 2004. Management will continue to monitor and assess its systems, controls and personnel to execute the Company's growth strategy and maximize returns.